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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 OR
 o
    
    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: 1-12014
 POWERSECURE INTERNATIONAL, INC.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    84-1169358
(I.R.S. Employer Identification No.)
 1609 Heritage Commerce Court,
Wake Forest, North Carolina 27587
 (919) 556-3056
  Title of each class
    
    Name of each exchange on which registeredCommon Stock, par value $.01 per share
    
    The Nasdaq Stock Market LLC
(Nasdaq Global Select Market)
 None
 o þ
 o þ
 þ o
 o
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company o o þ
   
 DOCUMENTS INCORPORATED BY REFERENCE




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##### 



POWERSECURE INTERNATIONAL, INC.
 Form 10-K
For the Fiscal Year Ended December 31, 2008
 TABLE OF CONTENTS
 PageCautionary Note Regarding Forward-Looking Statements
    
    
    1PART IItem 1.
    
    Business
    
    
    2Item 1A.
    
    Risk Factors
    
    
    15Item 1B.
    
    Unresolved Staff Comments
    
    
    35Item 2.
    
    Properties
    
    
    35Item 3.
    
    Legal Proceedings
    
    
    35Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    36PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    37Item 6.
    
    Selected Financial Data
    
    
    38Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    40Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    71Item 8.
    
    Financial Statements and Supplementary Data
    
    
    72Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    72Item 9A.
    
    Controls and Procedures
    
    
    72Item 9B.
    
    Other Information
    
    
    73PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    74Item 11.
    
    Executive Compensation
    
    
    74Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    74Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    74Item 14.
    
    Principal Accountant Fees and Services
    
    
    74PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    75Index to Financial Statements
    
    
    F-1Signatures
    
    
    S-1Exhibit Index
    
    
    X-1EX-10.28EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2




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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    our prospects, including our future revenues, expenses, net income, margins,
profitability, cash flow, liquidity, financial condition and results of operations and
our expectations about realizing our backlog;
    
    the effects on our business, financial condition and results of operations of
current and future economic, business, market and regulatory conditions, including the
current downturn in the economy and the adverse effects of the credit crisis on our
customers and their capital spending and ability to finance purchases of our products,
services, technologies and systems;
    
    our products and services, including their quality and performance, their benefits
to our customers and their ability to meet our customers requirements;
    
    our markets, including market position, market share, market demand;
    
    our ability to successfully develop, operate, grow and diversify our operations and
businesses;
    
    our business plans, strategies, goals and objectives, and our ability to
successfully achieve them;
    
    the sufficiency of our capital resources, including our cash and cash equivalents,
funds generated from operations, availability of borrowings under our credit and
financing arrangements and other capital resources, to meet our future working capital,
capital expenditure, lease and debt service and business growth needs;
    
    industry trends and customer preferences;
    
    the nature and intensity of our competition, and our ability to successfully compete
in our markets;
    
    business acquisitions, combinations, sales, alliances, ventures and other similar
business transactions and relationships; and
    
    the effects on our business, financial condition and results of operations of
litigation and other claims and proceedings that arise from time to time.
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PART I
 
 Item 1. Business
 Background
 ®
 ® ® ®
 ®
    www.powersecure.com
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Business Overview
 ®
  
    
    In 2000, we formed our core Interactive Distributed Generation® business.
    
    In 2001, we acquired a process control and switchgear design and manufacturing firm,
which provided the foundation for our sophisticated NexGear® switchgear
solutions, a major strategic component of our Interactive Distributed
Generation® systems.
    
    In 2005, we launched two new complementary businesses to serve our utility clients
by providing regulatory consulting, energy system engineering and design, and energy
conservation services. These engineering and consulting capabilities are operated
under the brand names UtilityEngineering and PowerServices and constitute the beginning
of our Utility Infrastructure business.
    
    In 2006, we formed a new business to provide energy efficiency services to
industrial and commercial customers, primarily involving efficient lighting products.
This business operates under the brand name EnergyLite, and now operates under our
Energy Efficiency business.
    
    Also in 2006, we launched a business unit focused on marketing the services of our
businesses to federal customers, primarily in conjunction with our utility alliances.
This investment represented the next step in the evolution and development of our
Utility Infrastructure business, and provided us the capability to do larger-scale
power projects for utilities and their federal customers.
    
    In late 2006, we acquired a business that provides us with the capability to build
trailers and enclosures for our distributed generation and switchgear equipment. This
business has now been fully incorporated into our Interactive Distributed
Generation® business primarily as a source of enclosures to house our
IDG® systems, and operates as part of our NexGear® operation.
    
    In mid-2007, we launched a business unit focused on providing utilities with
solutions involving building and servicing utility infrastructure. This business
operates under the brand name UtilityServices, and its capabilities further enhanced
and complemented our Utility Infrastructure business, strengthening the breadth of our
overall offerings in this area.
    
    In late 2007, we organized a new business to design and manufacture lighting
solutions, including initially solutions specifically aimed at substantially reducing
the energy consumed in lighting cooler and freezer cases in grocery, convenience, and
retail drug stores. This business operates under the brand name EfficientLights and is
the cornerstone of our Energy Efficiency business.
  3




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Overview of our Business Operations
 ®
 Business Segment
    
    Strategic Growth Area
    
    Subsidiary
    
    Business Unit
    
    Description of Products and ServicesEnergy and Smart
Grid Solutions
    
    Interactive
Distributed
Generation®
    
    PowerSecure, Inc.
    
    Interactive
Distributed
Generation®
    
    Smart grid proactive grid monitoring, distributed generation power
systems, peak shaving and demand response, standby power dispatch
and controlPowerSecure, Inc.
    
    NexGear
    

Switchgear systemsUtility Infrastructure
    
    PowerSecure, Inc.
    
    UtilityEngineering
and PowerServices
    
    Regulatory consulting, engineering and grid system designUtilityServices
    
    Construction and servicing of utility infrastructure, including
federal projectsEnergy Efficiency
    

PowerSecure, Inc.
    
    EnergyLite
    

Lighting efficiency products for commercial and industrial customersPowerSecure, Inc.
    
    EfficientLights
    
    State of the art LED lighting solution for refrigerated cases in
grocery and drug storesEnergy Services
    

Energy Services
    

Southern Flow
Companies, Inc.
    
    SouthernFlow
    

Oil and natural gas measurement products and servicesWaterSecure
Holdings, Inc.
    
    WaterSecure
    

Oil and natural gas water processing services
 ®
  Interactive Distributed Generation ® Background
 ®
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##### Table of Contents



Interactive Distributed Generation ® (IDG ® ) Systems
 ®
 ®
 
    
    designing and engineering the distributed generation system;
    
    obtaining the required regulatory approvals and permits;
    
    establishing the electricity inter-connect between the utility and the customer to
take advantage of preferred rates;
    
    acquiring and installing the generators and other system equipment and controls;
    
    designing, engineering, constructing and installing the switchgear and process
controls; and
    
    providing continuous 24 x 7 monitoring and servicing of the system.
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Smart Grid IDG ®
 ® ® ® ®
 ®
  Interactive Distributed Generation ® Business Model
 ®
  6




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Utility Infrastructure
   Energy Efficiency
    Energy Services
  7




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Backlog
  Metretek Florida
  Customers
 ®
 8




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Sales and Marketing
 ® ®
 Competition
  ®
     
    
    the performance and features functionality and benefits of our, and of our
competitors, products and services;
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
    
    the value to our customers for the price they pay for our products and services;
    
    the timing and market acceptance of new products and services and enhancements to
existing products and services developed by us and by our competitors, including the
effects of environmental initiatives on new technologies and customer preferences;
    
    our responsiveness to the needs of our customers;
    
    the ease of use of our, and of our competitors, products and services;
    
    the quality and reliability of our, and of our competitors, products and services;
    
    our reputation and the reputation of our competitors;
    
    our sales and marketing efforts;
    
    our ability to develop and maintain our strategic relationships; and
    
    the price of our, and of our competitors, products and services, as well as other
technological alternatives in the marketplace.
   Regulation
  10




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Regulation of Electricity.
 Regulation of Environment.
 Employees
  Research and Development
   Raw Materials
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Intellectual Property
    
    
    the technological and creative skills of our personnel;
    
    the development of new products, services and technologies;
    
    frequent product, service and technology enhancements;
    
    the return on investment that our products and services deliver to our customers;
    
    name recognition and reputation in the marketplace;
    
    customer and employee training and development; and
    
    reliable products and service support.
 
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Segment Information
  
    
    Through our PowerSecure subsidiary, we serve utilities and commercial, institutional
and industrial customers in our Energy and Smart Grid Solutions segment, including the
specific areas of Interactive Distributed Generation®, Utility Infrastrucure
and Energy Efficiency.
    
    Through our Southern Flow and WaterSecure subsidiaries, we serve customers in the
natural gas business in our Energy Services segment, with our measurement services and
products, as well as our water processing services.
  Available Information
 www.powersecure.com http://www.sec.gov.
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Executive Officers of the Registrant
  Name
    
    Age
    
    PositionsSidney Hinton
    
    
    46
    
    
    President, Chief Executive Officer and DirectorChristopher T. Hutter
    
    
    42
    
    
    Vice President, Chief Financial Officer and TreasurerGary J. Zuiderveen
    
    
    50
    
    
    Vice President of Financial Reporting, Controller,
Principal Accounting Officer, Assistant Treasurer
and Secretary
  Sidney Hinton
 Christopher T. Hutter
 Gary J. Zuiderveen
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Item 1A. Risk Factors
  Risks Related to Our Business and Industry
 The current crisis in general economic and market conditions and the volatility and disruption
in the financial and capital markets has impacted us and could materially and adversely affect
our business and financial results in future periods.
    Our operating results can fluctuate significantly from period to period, which makes our
operating results difficult to predict and can cause our operating results to fall short of
expectations from time to time.
  
    
    the size, timing and terms of sales and orders, especially large customer orders
such as the significant orders from Publix in recent years, and the effects of the
timing of project phases of completion, customers delaying, deferring or canceling
purchase orders or making smaller purchases than expected;
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
    
    the effects of economic and market conditions on our business and revenues,
especially the effects of the current financial crisis and economic recession,
including the length thereof and the timing of subsequent economic recovery and its
effects on our markets, and the volatility and disruption of the capital and the credit
markets on the demand for our products, services and technologies;
    
    our ability to continue to grow our business and generate increased revenues from
customers other than Publix, our largest customer during the past three fiscal years,
and our ability to replace revenues previously generated by Publix with new revenue
streams;
    
    our ability to increase our revenues through long-term recurring revenue projects,
and the capital required to finance equipment for recurring revenue projects in any
particular period, as well as our ability to sell, complete and recognize satisfactory
levels of quarterly revenue and profits related to our project-based sales, in order to
generate revenues, net income and cash flow, to satisfy covenants related to our credit
facility and to successfully finance the recurring portion of our business model;
    
    our near-term ability to control our costs and expenses in light of potential future
reductions in demand and revenues;
    
    our ability to obtain adequate supplies of key components and materials of suitable
quality for our products on a timely and cost-effective basis, including the impact of
potential supply line constraints, substandard parts and fluctuations in the cost of
raw materials and commodity prices;
    
    the performance of our products, services and technologies, and the ability of our
systems to meet the performance standards they are designed and built to deliver to our
customers, including but not limited to our recurring revenue projects for which we
retain the on-going risks associated with ownership of the systems;
    
    our ability to access significant capital resources on a timely basis in order to
fulfill large customer orders and to obtain the financing required for recurring
revenue projects;
    
    our ability to implement our business plans and strategies and the timing of such
implementation;
    
    the pace of revenue, income and cash flow realization from our new businesses and
the development and growth of their markets;
    
    the timing, pricing and market acceptance of our new products and services;
    
    changes in our pricing policies and those of our competitors;
    
    variations in the length of our sales cycle and of the product and service delivery
construction process;
    
    changes in the mix of products and services having differing margins;
    
    changes in our operating expenses, including unforeseen or unanticipated expenses;
    
    changes in our valuation allowance for our net deferred tax asset, and the resulting
impact on current tax expense, future tax expense and balance sheet account balances;
    
    the effects of severe weather conditions, such as hurricanes, on the demand
requirements of our customers and our ability to serve them;
    
    the life cycles of our products and services, and competitive alternatives in the
marketplace;
    
    budgeting cycles of utilities and other industrial, commercial and institutional
customers, including impacts of the current downturn of the economy and the crisis in
the financial markets on capital projects and other spending items;
    
    changes and uncertainties in the lead times required to obtain the necessary permits
and other governmental and regulatory approvals for projects;
    
    the development and maintenance of business relationships with strategic partners;
    
    economic conditions in the energy industry, including the effects of changes in
energy prices;
    
    changes in the prices charged by our suppliers;
    
    the effects of governmental regulations and regulatory changes in our markets;
    
    the effects of litigation, claims and other proceedings; and
    
    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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We may not be able to remain profitable or return to or exceed the levels of growth and
profitability that we had experienced in prior years.
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We may require a substantial amount of additional funds to finance our capital requirements
and the growth of our business, but we may not be able to raise a sufficient amount of funds
to do so on terms favorable to us and our stockholders or at all.
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Restrictions imposed on us by the terms of our credit facility limit how we conduct our
business and our ability to raise additional capital.
  
    
    incur additional indebtedness;
    
    create liens or other encumbrances;
    
    issue or redeem our securities;
    
    make dividend payments, stock repurchases and investments;
    
    incur capital expenditures above certain limits;
    
    amend our charter documents;
    
    sell or otherwise dispose of our or our subsidiaries stock or assets;
    
    liquidate or dissolve;
    
    acquire other businesses and companies;
    
    merge or consolidate with other companies; or
    
    reorganize, recapitalize or engage in a similar business transaction.
  
    
    limited in how we conduct our business;
    
    unable to raise additional capital, through debt or equity financings, when needed
for our operations and growth; and
    
    unable to compete effectively, make desired acquisitions or to take advantage of new
business opportunities.
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Our growth and operating results in recent years were largely the result of significant
purchase commitments from one customer, and if we do not receive additional significant
purchase commitments in the future from this or other customers, our business and operating
results could be materially and adversely affected.
   
    
    the loss of one or more large customers;
    
    any cancellation of orders by, or any reduction or delay in sales to, these
customers;
    
    the failure of large purchase commitments to be renewed or to recur;
    
    delays in timing of future projects with existing and new customers;
    
    our inability to successfully develop relationships with additional customers; or
    
    future price concessions that we may have to make to these customers.
 We do not have long-term commitments for significant revenues with most of our customers and
may be unable to retain existing customers, attract new customers or replace departing
customers with new customers that can provide comparable revenues.
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The quality and performance of our distributed generation systems and related products and
services is, in part, dependent on the quality of component parts we source from various
manufacturers, which makes us susceptible to performance issues that could materially and
adversely affect our business and financial results.
   Because our future success depends, in part, upon the success of our recurring revenue project
business model, which requires us to make up-front investments in capital for distributed
generation equipment that we will continue to own, and therefore to incur risks associated
with ownership, if we do not receive substantially all of the benefits anticipated by those
projects or if one or more of the risks associated with those projects materializes, then our
financial condition and results of operations could be materially and adversely affected.
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
    
    disputes arising with a customer about the project that ultimately results in either
the customer requiring us, or in us determining, to remove the equipment from the
customers site, which could result in a significant loss in revenues and cash flow
until the equipment can be re-deployed in a new project or, if the equipment is not
re-usable, a significant write-down in our assets;
    
    our inability to receive the intended benefits from the project due to changes
associated with the distributed generation model, such as due to changes in tariff
structures or customer requirements;
    
    our inability to receive recurring revenues due to customer issues, such as
deterioration in the customers ability to pay our ongoing fees or a dispute with the
customer delaying, deferring or reducing the project fees payable to us;
    
    the failure of the equipment to properly function and to perform and to deliver the
intended benefits, which could result in claims by the customer for damages to its
equipment, lost revenues and profits or safety issues and in the attempt by the
customer to cancel the contract related to the project or to refuse or to delay making
payments in amounts we believe are due to us under those contracts;
    
    new regulations, or changes in the interpretation of existing regulations, such as
those pertaining to air emissions or those relating to the requirements and conditions
for the ownership of power generation systems, that could render our projects no longer
economically viable, or technically obsolete, or legally impractical;
    
    injuries to persons caused by problems or failures of equipment owned by us; and
    
    environmental effects, such as fuel spills, requiring costly and time-consuming
remediation efforts and potentially subjecting us to fines and penalties related to
environmental requirements and regulations.
  If we were to lose the services of one or more of our executive officers, we might not be able
to execute our business strategy and our business could be materially and adversely affected.
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If we are unable to continue to attract and retain key personnel, our business could be
materially and adversely affected.
  Price increases in some of the key components in our products could materially and adversely
affect our operating results and cash flows.
  We depend on sole source and limited source suppliers for some of the key components and
materials in our products and systems, which makes us susceptible to supply shortages or price
increases that could materially and adversely affect our business.
  Our business is subject to the risk of changes in utility tariff structures, which changes
could materially and adversely affect our business as well as our financial condition and
results of operations.
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Our business is subject to the risk of changes in environmental requirements, which changes
could materially and adversely affect our business as well as our financial condition and
results of operations.
  Some of our long-term turn-key contracts subject us to risks.
  Utility companies or governmental entities could place barriers to our entry into the
marketplace
  We could become subject to burdensome government regulation that affects our ability to offer
our products and services or that affects demand for our products and services.
   We face some risks that are inherent in energy operations.
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Because some of our business and product offerings have limited histories and their business
strategies are still being developed and are unproven, limited information is available to
evaluate their future prospects.
   
    
    anticipate and adapt to the changing regulatory climate for energy and technology
products, services and technology;
    
    attract customers to our new businesses;
    
    anticipate and adapt to the changing energy markets and end-user preferences;
    
    attract, retain and motivate qualified personnel;
    
    respond to actions taken by our competitors;
    
    integrate acquired businesses, technologies, products and services;
    
    generate revenues, gross margins, cash flow and profits from sales of new products
and services; and
    
    implement an effective marketing strategy to promote awareness of our new
businesses, products and services.
  Changes in our product mix could materially and adversely affect our business.
  Severe, adverse weather conditions, such as hurricanes, can cause a severe disruption in the
business of Southern Flow by significantly reducing the short and mid-term demand requirements
of its customers.
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We are subject to lawsuits, claims and proceedings from time to time, and in the future we
could become subject to new proceedings, and if any of those proceedings are material and are
successfully prosecuted against us, our business, financial condition and results of
operations could be materially and adversely affected.
   We extend product warranties which could adversely affect our operating results
  If we fail to successful educate our potential customers, including utility customers,
regarding the benefits of our distributed generation solutions or if the market otherwise
fails to continue to develop and expand the need for our solutions, or if new technologies
become viable alternatives, then our business could be limited and adversely affected.
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Because we are dependent upon the utility industry for a growing portion of our revenues,
reductions or deferrals of purchases of our products and services by utilities or their
customers could materially and adversely affect our business.
  Many of our products and services experience long and variable sales cycles, which could have
a negative impact on our results of operations for any given quarter or year.
  If we are unable to develop new and enhanced products and services that achieve market
acceptance in a timely manner, our operating results and competitive position could be harmed.
  
    
    the changing requirements of customers;
    
    the accurate prediction of market requirements, including regulatory issues;
    
    the timely completion and introduction of new products and services;
    
    the quality, price and performance of new products and services;
    
    the availability, quality, price and performance of competing products, services and
technologies;
    
    our customer service and support capabilities and responsiveness;
    
    the successful development of our relationships with existing and potential
customers; and
    
    changes in technology, industry standards or end-user preferences.
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Rapid technological changes may prevent us from remaining current with our technological
resources and maintaining competitive product and service offerings.
  
    
    effectively use and develop leading technologies;
    
    continue to develop our technical expertise;
    
    enhance our current products and services;
    
    develop new products and services that meet changing customer needs; and
    
    respond to emerging industry and regulatory standards and technological changes in a
cost-effective manner.
    Failures in the integrity of our current systems and future system upgrades could materially
affect our business performance and our ability to accurately and timely report our financial
results.
  We face intense competition in the markets for our products, services and technology, and if
we cannot successfully compete in those markets, our business could be materially and
adversely affected.
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If we fail to effectively manage our anticipated long-term future growth, our ability to
market and sell our products and services and to provide quality service to our customers may
be adversely affected.
  Our management of the WaterSecure operations, a private energy program, presents risks to us.
  
    
    material adverse changes in the business, results of operations and financial
condition of the program due to events, conditions and factors outside of our control,
such as changes in the price of oil and other general and local conditions affecting
the oil and gas market generally, which could reduce the revenues, net income and cash
flows of the program and, because we receive distributions from the program based upon
its financial results and available cash, adversely affect our financial results and
cash flow;
    
    potential new market entrants and competition resulting from the current oil and gas
market generally and the specific oil and gas market served by our WaterSecure
operations, which could adversely affect the financial results of our WaterSecure
operations and, accordingly, our results of operations;
    
    hazards of oil production water processing and disposal facilities, including fires,
such as the fires that occurred at the programs facilities in early 2008, that can
result in loss of life, personal injuries, damages to facilities that may not be
insured and lost business, revenues, net income and cash flows;
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
    
    the possibility of environmental contamination and the costs associated with fixing
any environmental problems and the risk of damages due to such contamination;
    
    lawsuits by investors in this program who become dissatisfied with the results of
the program;
    
    risks inherent in managing a program and taking significant actions that affect its
investors;
    
    changes in the regulatory environment relating to the program;
    
    reliance upon significant suppliers and customers by the program; and
    
    changes in technology.
  We may be unable to acquire other businesses, technologies or companies or engage in other
strategic transactions, or to successfully realize the benefits or avoid the difficulties of
any such strategic transactions.
   
    
    difficulties in assimilating and integrating the operations, personnel, systems,
technologies, products and services of the acquired business;
    
    the technologies, products or businesses that we acquire may not achieve expected
levels of revenue, profitability, benefits or productivity;
    
    difficulties in retaining, training, motivating and integrating key personnel;
    
    diversion of managements time and resources away from our normal daily operations;
    
    difficulties in successfully incorporating licensed or acquired technology and
rights into our product and service offerings;
    
    difficulties in maintaining uniform standards, controls, procedures and policies
within the combined organizations;
    
    difficulties in retaining relationships with customers, employees and suppliers of
the acquired company;
    
    risks of entering markets in which we have no or limited direct prior experience;
    
    potential disruptions of our ongoing businesses; and
    
    unexpected costs and unknown risks and liabilities associated with the acquisitions.
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If we fail to adequately protect our intellectual property rights, we could lose important
proprietary technology, which could materially and adversely affect our business.
    If we face claims of intellectual property infringement by third parties, we could encounter
expensive litigation, be liable for significant damages or incur restrictions on our ability
to sell our products and services.
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
    
    stop selling, incorporating or using our products and services that use the
infringed intellectual property;
    
    obtain from the owner of the infringed intellectual property right a license to sell
or use the relevant technology, which license may not be available on commercially
reasonable terms, or at all; or
    
    redesign the products and services that use the technology.
  Our business could suffer if we cannot maintain and expand our current strategic alliances and
develop new alliances.
  When we become unable to use net operating loss carryforwards to offset future taxable income
for U.S. federal income tax purposes, either because we exhaust them or because we lose the
ability to use them for any reason, we would face exposure to significant tax liabilities in
the future, adversely affecting our net income and cash flow
   We may have exposure to greater than anticipated tax liabilities.
  We are subject to the risks of owning real property.
  32




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##### Table of Contents




    
    the possibility of environmental contamination and the costs associated with fixing
any environmental problems and the risk of damages resulting from such contamination;
    
    averse changes in the value of this property, due to interest rate changes, change
in the neighborhood in which the property is located, or other factors;
    
    the possible need for structural improvements in order to complying with zoning,
seismic, disability act or other requirements; and
    
    possible disputes with neighboring owners or others.
 Risks Related to the Ownership of our Shares
 Our charter documents, as well as Delaware law, contain anti-takeover provisions that could
discourage or prevent a third-party acquisition of our common stock, even if an acquisition
would be beneficial to our stockholders.
  
    
    a classified board of directors in which only approximately one-third of the total
board members are elected at each annual meeting;
    
    limitations on the ability of stockholders to change the authorized number of
directors or to fill vacancies on the board of directors;
    
    prohibition of cumulative voting in the election of directors;
    
    provisions permitting a director to be re-elected in an uncontested election even if
less than a majority of the shares voted in that election vote in favor of that
director;
    
    authority for our board of directors to issue shares of our common stock and our
preferred stock, and to determine the price, voting and other rights, preferences,
privileges and restrictions of undesignated shares of preferred stock, without any vote
by or approval of our stockholders;
    
    super-majority voting requirements to effect material amendments to our second
restated certificate and by-laws;
    
    a limitation on which persons may call a special meeting of stockholders;
    
    a prohibition on stockholders acting by written consent without a meeting;
    
    a fair price provision that sets minimum price requirements for potential acquirers
under certain conditions;
    
    anti-greenmail provisions which limit our ability to repurchase shares of common
stock from significant stockholders;
    
    restrictions under Delaware law on mergers and other business combinations between
us and any 15% stockholders; and
    
    advance notice requirements for director nominations and for stockholder proposals.
  33




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##### Table of Contents



Our stockholder rights agreement makes effecting a change of control more difficult, which may
discourage offers for shares of our common stock.
  We have not in the past and we do not currently intend to pay dividends on our common stock.
  The market for our common stock is volatile and subject to extreme trading price and volume fluctuations.
  
    
    the effects of economic and market conditions on our business and revenues,
especially the effects of the current financial crisis and economic recession,
including the length thereof and the timing of subsequent economic recovery and its
effects on our markets, and the volatility and disruption of the capital and the credit
markets on the demand for our products, services and technologies;
    
    actual or anticipated variations in our results of operations or those of our
competitors;
    
    announcements by us or our competitors of acquisitions, significant technical
innovations, new products or services, product improvements, significant contracts,
strategic relationships or capital commitments;
    
    the receipt, deferral or loss of significant customer orders, including replacing,
sustaining and growing revenues from customers other than Publix, our largest customer;
    
    the introduction of new products and services by us or our competitors;
    
    the commencement of, or our involvement in, litigation or other legal or regulatory
proceedings;
    
    announcements by us or our competitors about the success or status of business;
    
    conditions or trends in the energy and technology industries in general, and in the
particular markets we serve;
    
    potential favorable or unfavorable regulatory and legislative impacts, including
provisions and spending which may or may not be included in federal economic stimulus
legislation;
    
    changes by us in revenue or earnings guidance;
    
    recommendations by securities analysts;
    
    changes in, or the failure by us to meet, securities analysts estimates and
expectations;
    
    the lower coverage by securities analysts and the media of smaller issuers like us;
 34




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##### Table of Contents




    
    changes in the market valuation of other energy or technology companies;
    
    additions or departures of key personnel;
    
    purchases or sales of our common stock by our directors, executive officers and
significant stockholders; and
    
    general economic, business and market conditions.
   
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
     
 Item 3. Legal Proceedings
  35




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  36




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##### Table of Contents



PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
 Market Information
   High
    
    LowFiscal Year 2008 Quarters Ended:March 31
    
    $
    13.87
    
    
    $
    10.50June 30
    
    
    12.70
    
    
    
    6.41September 30
    
    
    10.72
    
    
    
    5.65December 31
    
    
    6.41
    
    
    
    2.70Fiscal Year 2007 Quarters Ended:March 31
    
    $
    13.98
    
    
    $
    10.60June 30
    
    
    16.00
    
    
    
    10.77September 30
    
    
    16.35
    
    
    
    11.60December 31
    
    
    14.88
    
    
    
    10.34
  Holders
  Dividends
  37




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##### Table of Contents



Item 6. Selected Financial Data
  Consolidated Statement of
    
    Year Ended December 31,Operations Data:
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(In thousands, except per share amounts)Sales and services
    
    $
    135,440
    
    
    $
    111,112
    
    
    $
    115,702
    
    
    $
    43,507
    
    
    $
    31,388Cost of sales and services
    
    
    91,731
    
    
    
    76,805
    
    
    
    84,104
    
    
    
    31,242
    
    
    
    22,289Gross profit on sales and services
    
    
    43,709
    
    
    
    34,307
    
    
    
    31,598
    
    
    
    12,265
    
    
    
    9,099Operating expenses:General and administrative
    
    
    28,903
    
    
    
    22,489
    
    
    
    19,011
    
    
    
    8,581
    
    
    
    6,681Selling, marketing and service
    
    
    5,348
    
    
    
    3,575
    
    
    
    2,860
    
    
    
    1,457
    
    
    
    1,271Depreciation and amortization
    
    
    2,031
    
    
    
    1,500
    
    
    
    885
    
    
    
    432
    
    
    
    290Research and development
    
    
    118
    
    
    
    148
    
    
    
    73
    
    
    
    
    
    
    
    Restructuring charges
    
    
    
    
    
    
    14,139
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    36,400
    
    
    
    41,851
    
    
    
    22,829
    
    
    
    10,470
    
    
    
    8,242Operating income (loss)
    
    
    7,309
    
    
    
    (7,544
    )
    
    
    8,769
    
    
    
    1,795
    
    
    
    857Other income and (expenses):Management fees
    
    
    556
    
    
    
    423
    
    
    
    365
    
    
    
    428
    
    
    
    404Interest and other income
    
    
    490
    
    
    
    1,541
    
    
    
    1,059
    
    
    
    57
    
    
    
    53Interest and finance charges
    
    
    (287
    )
    
    
    (57
    )
    
    
    (144
    )
    
    
    (570
    )
    
    
    (364
    )Equity income
    
    
    3,490
    
    
    
    2,774
    
    
    
    2,221
    
    
    
    1,690
    
    
    
    1,255Minority interest
    
    
    
    
    
    
    30
    
    
    
    (72
    )
    
    
    (211
    )
    
    
    (238
    )Income (loss) before income taxes
    
    
    11,558
    
    
    
    (2,833
    )
    
    
    12,198
    
    
    
    3,189
    
    
    
    1,967Income tax benefit (provision)
    
    
    (823
    )
    
    
    1,834
    
    
    
    (465
    )
    
    
    (46
    )
    
    
    (48
    )Income (loss) from continuing
operations
    
    
    10,735
    
    
    
    (999
    )
    
    
    11,733
    
    
    
    3,143
    
    
    
    1,919Discontinued Operations (1):Loss on disposal
    
    
    (42
    )
    
    
    (1,261
    )
    
    
    
    
    
    
    (300
    )
    
    
    (3,356
    )Income (loss) from operations
    
    
    (35
    )
    
    
    652
    
    
    
    (28
    )
    
    
    (509
    )
    
    
    (1,807
    )Loss on discontinued operations
    
    
    (77
    )
    
    
    (609
    )
    
    
    (28
    )
    
    
    (809
    )
    
    
    (5,163
    )Net income (loss)
    
    $
    10,658
    
    
    $
    (1,608
    )
    
    $
    11,705
    
    
    $
    2,334
    
    
    $
    (3,244
    )Basic earnings (loss) per share (2):Income (loss) from continuing
operations
    
    $
    0.66
    
    
    $
    (0.06
    )
    
    $
    0.78
    
    
    $
    0.26
    
    
    $
    0.07Loss from discontinued operations
    
    
    (0.00
    )
    
    
    (0.04
    )
    
    
    (0.00
    )
    
    
    (0.07
    )
    
    
    (0.54
    )Net income (loss)
    
    $
    0.65
    
    
    $
    (0.10
    )
    
    $
    0.78
    
    
    $
    0.19
    
    
    $
    (0.47
    )Diluted earnings (loss) per share (2):Income (loss) from continuing
operations
    
    $
    0.63
    
    
    $
    (0.06
    )
    
    $
    0.71
    
    
    $
    0.24
    
    
    $
    0.07Loss from discontinued operations
    
    
    (0.00
    )
    
    
    (0.04
    )
    
    
    (0.00
    )
    
    
    (0.06
    )
    
    
    (0.52
    )Net income (loss)
    
    $
    0.63
    
    
    $
    (0.10
    )
    
    $
    0.71
    
    
    $
    0.18
    
    
    $
    (0.45
    )Weighted average common shares
outstanding:Basic
    
    
    16,374
    
    
    
    16,045
    
    
    
    15,063
    
    
    
    12,287
    
    
    
    9,531Diluted
    
    
    17,021
    
    
    
    16,045
    
    
    
    16,477
    
    
    
    13,361
    
    
    
    10,036
 
 (1)
    
    During fiscal 2007, our board of directors approved a plan to discontinue the business of
Metretek Florida and substantially all of its assets and operations were sold in March, 2008.
During fiscal 2004, our board of directors approved a plan to discontinue the business of
MCM and all of its manufacturing assets were sold in 38




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##### Table of Contents



2005 and 2006. The operations of the
discontinued Metretek Florida and MCM disposal group have been reclassified to discontinued
operations for all periods presented. In addition, certain other amounts prior to fiscal
2008 have been reclassified to conform to fiscal 2008 presentation. Such reclassifications
had no impact on our net income (loss) or stockholders equity.(2)
    
    Per share amounts presented for fiscal 2004 include the effects of preferred stock deemed
distributions. Consolidated Balance
    
    December 31,Sheet Data:
    
    2008
    
    2007
    
    2006
    
    2005
    
    2004(In thousands)Cash and cash equivalents
    
    $
    24,316
    
    
    $
    28,710
    
    
    $
    15,916
    
    
    $
    2,188
    
    
    $
    2,951Working capital
    
    
    42,554
    
    
    
    41,278
    
    
    
    38,988
    
    
    
    4,911
    
    
    
    5,117Total assets
    
    
    110,834
    
    
    
    113,023
    
    
    
    89,699
    
    
    
    33,319
    
    
    
    30,211Long-term capital lease obligations
    
    
    5,201
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    Long-term notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,594
    
    
    
    6,075Total stockholders equity
    
    
    72,811
    
    
    
    59,240
    
    
    
    58,000
    
    
    
    16,230
    
    
    
    12,917
 39




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The discussion in this item, as well as in other items in this report, contains
forward-looking statements within the meaning of and made under the safe harbor provisions of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements
are all statements other than statements of historical facts, including statements that refer to
plans, intentions, objectives, goals, strategies, hopes, beliefs, projections and expectations or
other characterizations of future events or performance, and assumptions underlying the foregoing.
See Cautionary Note Regarding Forward-Looking Statements at the beginning of this report.
Forward-looking statements are not guarantees of future performance or events, but are subject to
and qualified by known and unknown risks, uncertainties and other factors that could cause actual
results to differ materially from those expressed, anticipated or implied by such forward-looking
statements, including those risks, uncertainties and other factors described above in Item 1A.
Risk Factors, as well as other risks, uncertainties and factors discussed elsewhere in this
report, in documents that we include as exhibits to or incorporate by reference in this report, and
in other reports and documents that we from time to time file with or furnish to the SEC. You are
cautioned not to place undue reliance on any forward-looking statements, any of which could turn
out to be materially wrong. Any forward-looking statements made in this report speak only as of
the date of this report.
  Overview
 ®
 ® ® ®
 ®
    40




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##### Table of Contents



Recent Developments
 ®
       41




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##### Table of Contents



Backlog
  Revenue backlog to be recognized after December 31, 2008
 Anticipated
    
    
    Estimated PrimaryDescription
    
    Revenue
    
    
    Recognition PeriodProject-based RevenueNear term
    
    $
    34 Million
    
    
    1Q09-3Q09Project-based RevenueLong term
    
    $
    21 Million
    
    
    Q409-2011Recurring Revenue
    
    $
    32 Million
    
    
    1Q09 through 2015Backlog to be recognized after December 31, 2008
    
    $
    87 Million
   Operating Segments
  Energy and Smart Grid Solutions
 ®
 Energy Services
  42




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##### Table of Contents



Results of Operations
  2008 Compared to 2007
 Revenues
  Year-over-YearYear Ended December 31,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %Segment Revenues:Energy and Smart Grid Solutions
    
    $
    115,993
    
    
    $
    94,923
    
    
    $
    21,070
    
    
    
    22.2
    %Energy Services
    
    
    19,447
    
    
    
    16,190
    
    
    
    3,257
    
    
    
    20.1
    %Total
    
    $
    135,440
    
    
    $
    111,113
    
    
    $
    24,327
    
    
    
    21.9
    %
  ® ®
  43




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##### Table of Contents



Year Ended December 31,2008
    
    
    2007Revenues from Publix projects
    
    $
    45,211
    
    
    $
    52,001Revnues from all other customers
    
    
    70,782
    
    
    
    42,922Total
    
    $
    115,993
    
    
    $
    94,923Publix as a percentage of totalEnergy and Smart Grid Solutions segment revenues
    
    
    39.0
    %
    
    
    54.8
    %
   Gross Profit and Gross Profit Margins
  Year-over-YearYear Ended December 31,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %Segment Cost of Sales and Services:Energy and Smart Grid Solutions
    
    $
    77,550
    
    
    $
    65,015
    
    
    $
    12,535
    
    
    
    19.3
    %Energy Services
    
    
    14,181
    
    
    
    11,790
    
    
    
    2,391
    
    
    
    20.3
    %Total
    
    $
    91,731
    
    
    $
    76,805
    
    
    $
    14,926
    
    
    
    19.4
    %Segment Gross Profit:Energy and Smart Grid Solutions
    
    $
    38,443
    
    
    $
    29,908
    
    
    $
    8,535
    
    
    
    28.5
    %Energy Services
    
    
    5,266
    
    
    
    4,400
    
    
    
    866
    
    
    
    19.7
    %Total
    
    $
    43,709
    
    
    $
    34,308
    
    
    $
    9,401
    
    
    
    27.4
    %Segment Gross Profit Margins:Energy and Smart Grid Solutions
    
    
    33.1
    %
    
    
    31.5
    %Energy Services
    
    
    27.1
    %
    
    
    27.2
    %Total
    
    
    32.3
    %
    
    
    30.9
    %
 44




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##### Table of Contents




    
    Our ability to improve our operating efficiency and benefit from economies of scale,
including anticipated reductions in gross profit margins when sales are lower;
    
    Our ability to manage our materials and labor costs;
    
    The geographic density of our projects;
    
    The mix of higher and lower margin products and services;
    
    The selling price of our products and services;
    
    The rate of growth of our new businesses, which tend to incur costs in excess of
revenues in their earlier phases and then become profitable and more efficient over
time if they are successful; and
    
    Other factors described below under Fluctuations.
  Operating Expense
  45




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##### Table of Contents



Year-over-YearYear Ended December 31,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %Consolidated Operating Expenses:General and administrative
    
    $
    28,903
    
    
    $
    22,489
    
    
    $
    6,414
    
    
    
    28.5
    %Selling, marketing and service
    
    
    5,348
    
    
    
    3,575
    
    
    
    1,773
    
    
    
    49.6
    %Depreciation and amortization
    
    
    2,031
    
    
    
    1,500
    
    
    
    531
    
    
    
    35.4
    %Research and development
    
    
    118
    
    
    
    148
    
    
    
    (30
    )
    
    
    -20.3
    %Restructuring charges
    
    
    
    
    
    
    14,139
    
    
    
    (14,139
    )
    
    
    -100.0
    %Total
    
    $
    36,400
    
    
    $
    41,851
    
    
    $
    (5,451
    )
    
    
    -13.0
    %
  General and Administrative Expenses.
 Year-over-YearYear Ended December 31,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %Segment G&A Expenses:Energy and Smart Grid Solutions:Personnel costs
    
    $
    14,311
    
    
    $
    11,141
    
    
    $
    3,170
    
    
    
    28.5
    %Vehicle lease and rental
    
    
    2,449
    
    
    
    1,568
    
    
    
    881
    
    
    
    56.2
    %Insurance
    
    
    941
    
    
    
    878
    
    
    
    63
    
    
    
    7.2
    %Rent-office and equipment
    
    
    844
    
    
    
    711
    
    
    
    133
    
    
    
    18.7
    %Professional fees and consulting
    
    
    504
    
    
    
    618
    
    
    
    (114
    )
    
    
    -18.4
    %Travel
    
    
    864
    
    
    
    388
    
    
    
    476
    
    
    
    122.7
    %Other
    
    
    2,082
    
    
    
    1,443
    
    
    
    639
    
    
    
    44.3
    %Energy Services
    
    
    1,900
    
    
    
    1,581
    
    
    
    319
    
    
    
    20.2
    %Unallocated Corporate Costs
    
    
    5,008
    
    
    
    4,161
    
    
    
    847
    
    
    
    20.4
    %Total
    
    $
    28,903
    
    
    $
    22,489
    
    
    $
    6,414
    
    
    
    28.5
    %
  46




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##### Table of Contents



Selling, Marketing and Service Expenses.
 Year-over-YearYear Ended December 31,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %Segment Selling, Marketing and Service:Energy and Smart Grid Solutions:Salaries
    
    $
    2,140
    
    
    $
    1,181
    
    
    $
    959
    
    
    
    81.2
    %Commission
    
    
    2,025
    
    
    
    1,704
    
    
    
    321
    
    
    
    18.8
    %Travel
    
    
    614
    
    
    
    376
    
    
    
    238
    
    
    
    63.3
    %Advertising and promotion
    
    
    323
    
    
    
    247
    
    
    
    76
    
    
    
    30.8
    %Bad debt expense
    
    
    204
    
    
    
    12
    
    
    
    192
    
    
    
    1600.0
    %Other business development costs
    
    
    19
    
    
    
    18
    
    
    
    1
    
    
    
    5.6
    %Energy Services
    
    
    23
    
    
    
    37
    
    
    
    (14
    )
    
    
    -37.8
    %Total
    
    $
    5,348
    
    
    $
    3,575
    
    
    $
    1,773
    
    
    
    49.6
    %
  Depreciation and Amortization Expenses.
 47




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##### Table of Contents



®
 Research and Development Expenses.
 Restructuring Charges.
 Other Income and Expenses
  Year-over-YearYear Ended December 31,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %Other Segment Income and (Expenses):Energy and Smart Grid Solutions:Interest and other income
    
    $
    82
    
    
    $
    305
    
    
    $
    (223
    )
    
    
    -73.1
    %Interest and finance charges
    
    
    (140
    )
    
    
    (7
    )
    
    
    (133
    )
    
    
    1900.0
    %Minority interest
    
    
    
    
    
    
    30
    
    
    
    (30
    )
    
    
    -100.0
    %Segment total
    
    
    (58
    )
    
    
    328
    
    
    
    (386
    )Energy Services:Management fees
    
    
    556
    
    
    
    423
    
    
    
    133
    
    
    
    31.4
    %Equity income
    
    
    3,490
    
    
    
    2,774
    
    
    
    716
    
    
    
    25.8
    %Interest and other income
    
    
    26
    
    
    
    409
    
    
    
    (383
    )
    
    
    -93.6
    %Interest and finance charges
    
    
    
    
    
    
    (7
    )
    
    
    7
    
    
    
    -100.0
    %Segment total
    
    
    4,072
    
    
    
    3,599
    
    
    
    473Unallocated Corporate:Interest and other income
    
    
    382
    
    
    
    827
    
    
    
    (445
    )
    
    
    -53.8
    %Interest and finance charges
    
    
    (147
    )
    
    
    (43
    )
    
    
    (104
    )
    
    
    -241.9
    %Income tax benefit (provision)
    
    
    (823
    )
    
    
    1,834
    
    
    
    (2,657
    )
    
    
    144.9
    %Segment total
    
    
    (588
    )
    
    
    2,618
    
    
    
    (3,206
    )Total
    
    $
    3,426
    
    
    $
    6,545
    
    
    $
    (3,119
    )
 Interest and Other Income.
 48




---



##### Table of Contents



Interest and Finance Charges.
 Minority Interest
 Management Fees.
 Equity Income.
 Income Taxes.
  49




---



##### Table of Contents



2007 Compared to 2006
 Revenues
  Year-over-YearYear Ended December 31,
    
    
    Difference2007
    
    
    2006
    
    
    $
    
    
    %Segment Revenues:Energy and Smart Grid Solutions
    
    $
    94,923
    
    
    $
    99,543
    
    
    $
    (4,620
    )
    
    
    -4.6
    %Energy Services
    
    
    16,190
    
    
    
    16,160
    
    
    
    30
    
    
    
    0.2
    %Total
    
    $
    111,113
    
    
    $
    115,703
    
    
    $
    (4,590
    )
    
    
    -4.0
    %
    Year Ended December 31,2007
    
    
    2006Revenues from Publix projects
    
    $
    52,001
    
    
    $
    61,359Revnues from all other customers
    
    
    42,922
    
    
    
    38,184Total
    
    $
    94,923
    
    
    $
    99,543Publix as a percentage of total
Energy and Smart Grid Solutions segment revenues
    
    
    54.8
    %
    
    
    61.6
    %
  Gross Profit and Gross Profit Marg
  50




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##### Table of Contents



Year-over-YearYear Ended December 31,
    
    
    Difference2007
    
    
    2006
    
    
    $
    
    
    %Segment Costs of Sales and Services:Energy and Smart Grid Solutions
    
    $
    65,015
    
    
    $
    72,318
    
    
    $
    (7,303
    )
    
    
    -10.1
    %Energy Services
    
    
    11,790
    
    
    
    11,786
    
    
    
    4
    
    
    
    0.0
    %Total
    
    $
    76,805
    
    
    $
    84,104
    
    
    $
    (7,299
    )
    
    
    -8.7
    %Segment Gross Profit:Energy and Smart Grid Solutions
    
    $
    29,908
    
    
    $
    27,225
    
    
    $
    2,683
    
    
    
    9.9
    %Energy Services
    
    
    4,400
    
    
    
    4,374
    
    
    
    26
    
    
    
    0.6
    %Total
    
    $
    34,308
    
    
    $
    31,599
    
    
    $
    2,709
    
    
    
    8.6
    %Segment Gross Profit Margins:Energy and Smart Grid Solutions
    
    
    31.5
    %
    
    
    27.3
    %Energy Services
    
    
    27.2
    %
    
    
    27.1
    %Total
    
    
    30.9
    %
    
    
    27.3
    %
    Operating
Expenses
  Year-over-YearYear Ended December 31,
    
    
    Difference2007
    
    
    2006
    
    
    $
    
    
    %Consolidated Operating Expenses:General and administrative
    
    $
    22,489
    
    
    $
    19,011
    
    
    $
    3,478
    
    
    
    18.3
    %Selling, marketing and service
    
    
    3,575
    
    
    
    2,860
    
    
    
    715
    
    
    
    25.0
    %Depreciation and amortization
    
    
    1,500
    
    
    
    885
    
    
    
    615
    
    
    
    69.5
    %Research and development
    
    
    148
    
    
    
    73
    
    
    
    75
    
    
    
    102.7
    %Restructuring charges
    
    
    14,139
    
    
    
    
    
    
    
    14,139
    
    
    
    *Total
    
    $
    41,851
    
    
    $
    22,829
    
    
    $
    19,022
    
    
    
    83.3
    %
 
 *
    
    Not meaningful.  51




---



##### Table of Contents



General and Administrative Expenses.
 Year-over-YearYear Ended December 31,
    
    
    Difference2007
    
    
    2006
    
    
    $
    
    
    %Segment G&A ExpenseEnergy and Smart Grid Solutions:Personnel costs
    
    $
    11,141
    
    
    $
    9,812
    
    
    $
    1,329
    
    
    
    13.5
    %Vehicle lease and rental
    
    
    1,568
    
    
    
    1,145
    
    
    
    423
    
    
    
    36.9
    %Insurance
    
    
    878
    
    
    
    704
    
    
    
    174
    
    
    
    24.7
    %Rent-office and equipment
    
    
    711
    
    
    
    315
    
    
    
    396
    
    
    
    125.7
    %Professional fees and consulting
    
    
    618
    
    
    
    521
    
    
    
    97
    
    
    
    18.6
    %Travel
    
    
    388
    
    
    
    497
    
    
    
    (109
    )
    
    
    -21.9
    %Other
    
    
    1,443
    
    
    
    169
    
    
    
    1,274
    
    
    
    753.8
    %Energy Services
    
    
    1,581
    
    
    
    1,624
    
    
    
    (43
    )
    
    
    -2.6
    %Unallocated Corporate Costs
    
    
    4,161
    
    
    
    4,224
    
    
    
    (63
    )
    
    
    -1.5
    %Total
    
    $
    22,489
    
    
    $
    19,011
    
    
    $
    3,478
    
    
    
    18.3
    %
    Selling, Marketing and Service Expenses.
 Depreciation and Amortization Expenses.
 Research and Development Expenses.
 Restructuring Charges.
 52




---



##### Table of Contents



Other Income and Expenses
  Year-over-YearYear Ended December 31,
    
    
    Difference2007
    
    
    2006
    
    
    $
    
    
    %Other Segment Income and (Expenses)Energy and Smart Grid Solutions:Interest and other income
    
    $
    305
    
    
    $
    97
    
    
    $
    208
    
    
    
    214.4
    %Interest and finance charges
    
    
    (7
    )
    
    
    (63
    )
    
    
    56
    
    
    
    -88.9
    %Minority interest
    
    
    30
    
    
    
    
    
    
    
    30
    
    
    naSegment total
    
    
    328
    
    
    
    34
    
    
    
    294Energy Services:Management fees
    
    
    423
    
    
    
    365
    
    
    
    58
    
    
    
    15.9
    %Equity income
    
    
    2,774
    
    
    
    2,221
    
    
    
    553
    
    
    
    24.9
    %Interest and other income
    
    
    409
    
    
    
    23
    
    
    
    386
    
    
    
    1678.3
    %Interest and finance charges
    
    
    (7
    )
    
    
    (23
    )
    
    
    16
    
    
    
    -69.6
    %Minority interest
    
    
    
    
    
    
    (72
    )
    
    
    72
    
    
    
    -100.0
    %Segment total
    
    
    3,599
    
    
    
    2,514
    
    
    
    1,085Unallocated Corporate:Interest and other income
    
    
    827
    
    
    
    939
    
    
    
    (112
    )
    
    
    -11.9
    %Interest and finance charges
    
    
    (43
    )
    
    
    (58
    )
    
    
    15
    
    
    
    25.9
    %Income tax benefit (provision)
    
    
    1,834
    
    
    
    (465
    )
    
    
    2,299
    
    
    
    494.4
    %Segment total
    
    
    2,618
    
    
    
    416
    
    
    
    2,202Total
    
    $
    6,545
    
    
    $
    2,964
    
    
    $
    3,581
 Interest and Other Income.
 Interest and Finance Charges.
 Management Fees.
 Equity Income.
 Minority Interest.
 53




---



##### Table of Contents



Income Taxes.
 Fluctuations
  
    
    the size, timing and terms of sales and orders, including large customer orders, as
well as the effects of
the timing of project phases of completion, customers delaying, deferring or canceling
purchase orders or making smaller purchases than expected;
    
    our ability to continue to grow our business and generate increased revenues from
customers other than Publix, our largest customer from 2006-2008, and our ability to
replace the revenues from Publix with new revenue streams;
    
    our ability to increase our revenues through long-term recurring revenue projects,
recognizing that increased revenues from recurring revenue projects requires
significant up-front capital expenditures and protracts revenue and profit recognition,
while increasing gross margins over the long-term; as well as our ability to sell,
complete, and recognize satisfactory levels of quarterly revenue and profits related to
our project-based sales, in order to maintain current profits, cash flow, and covenants
related to our debt facilities and successfully finance the recurring portion of our
business model;
    
    the effects general economic and political conditions, including the current
significant downturn in the economy and financial crisis in the capital and credit
markets, and the strong likelihood of continuing future economic and market challenges
negatively impacting our business and our revenues and profit, including the negative
impact these challenging market conditions will have on the timing of and amounts of
orders from our customers, and on our access to capital to finance our business;
    
    our ability to obtain adequate supplies of key components and materials of suitable
quality for our products on a timely and cost-effective basis, including the impact of
potential supply line constraints, substandard parts, and fluctuations in the cost of
raw materials and commodity prices;
    
    the performance of our products, services and technologies, and the ability of our
systems to meet the performance standards they are designed and built to deliver to our
customers, including but not limited to our recurring revenue projects for which we
retain the on-going risks associated with ownership of the systems;
    
    our ability to access significant capital resources on a timely basis in order to
fulfill large customer orders and finance capital required for recurring revenue
projects;
    
    our ability to implement our business plans and strategies and the timing of such
implementation;
    
    the pace of revenue and profit realization from our new businesses and the
development and growth of their markets;
    
    the timing, pricing and market acceptance of our new products and services;
    
    changes in our pricing policies and those of our competitors;
    
    variations in the length of our sales cycle and product and service delivery and
construction process;
    
    changes in the mix of products and services having differing margins;
    
    changes in our operating expenses, including unforeseen or unanticipated expenses;
    
    changes in our valuation allowance for our net deferred tax asset, and the resulting
impact on current
 54




---



##### Table of Contents



tax expense, future tax expense, and balance sheet account balances;
    
    the effects of severe weather conditions, such as hurricanes, on the business
operations of our customers and the potential effect on our results of operations;
    
    the life cycles of our products and services, and competitive alternatives in the
marketplace;
    
    budgeting cycles of utilities and other industrial, commercial, and institutional
customers, including impacts of the current downturn in the economy and capital markets
crisis on capital projects and other spending items;
    
    changes and uncertainties in the lead times required to obtain the necessary permits
and other governmental and regulatory approvals for projects;
    
    the development and maintenance of business relationships with strategic partners;
    
    economic conditions in the energy industry, especially in the natural gas and
electricity sectors including the effect of changes in energy prices;
    
    changes in the prices charged by our suppliers;
    
    the effects of governmental regulations and regulatory changes in our markets;
    
    the effects of litigation, claims and other proceedings; and
    
    our ability to make and obtain the expected benefits from acquisitions of technology
or businesses, and the costs related to such acquisitions.
      55




---



##### Table of Contents



Liquidity and Capital Resources
 Overview
  
    
    operations;
    
    inventory;
    
    accounts receivable;
    
    property and equipment expenditures, including capital expenditures related to
recurring revenue projects;
    
    additional equity investments in our WaterSecure operations;
    
    software purchases or development;
    
    debt service requirements;
    
    lease obligations;
    
    restructuring obligations;
    
    deferred compensation obligations; and
    
    business and technology acquisitions and other growth transactions.
 Working Capital
  Cash Flows
  Year Ended December 31,2008
    
    
    2007
    
    
    2006Net cash flows provided by (used in)
operating activities
    
    $
    8,447
    
    
    $
    16,607
    
    
    $
    (5,741
    )Net cash flows used in investing activities
    
    
    (19,017
    )
    
    
    (4,692
    )
    
    
    (5,042
    )Net cash provided by financing activities
    
    
    6,176
    
    
    
    879
    
    
    
    24,511Net increase (decrease) in cash and
cash equivalents
    
    $
    (4,394
    )
    
    $
    12,794
    
    
    $
    13,728
 Cash Flows Provided by (Used in) Operating Activities
  56




---



##### Table of Contents




    
    our net income of $10.7 million;
    
    non-cash charges of $2.0 million in depreciation and amortization;
    
    stock-based compensation expense of $2.6 million;
    
    cash distributions from our WaterSecure operations of $3.7 million partially offset
by non-cash equity income from those operations of $3.5 million;
    
    a decrease of $11.5 million in accounts receivable;
    
    a decrease of $1.4 million in inventories;
    
    a net $1.7 million decrease in assets and liabilities of discontinued operations;
    
    a decrease of $5.5 million of accounts payable;
    
    a decrease of $12.0 million of accrued expenses; and
    
    cash payments of $4.0 million on our restructuring obligations.
  
    
    our net loss of $1.6 million;
    
    non-cash restructuring charges, net of cash payments, of $5.7 million;
    
    non-cash charges of $1.5 million in depreciation and amortization;
    
    non-cash deferred income tax benefit of $2.3 million;
    
    stock-based compensations expense of $2.1 million;
    
    non-cash equity income from our WaterSecure operations of $2.8 million partially
offset by cash distributions from those operations of $2.6 million
    
    a decrease of $3.5 million in accounts receivable;
    
    an increase of $7.9 million in inventories;
    
    a net $0.6 million decrease in assets and liabilities of discontinued operations;
    
    a decrease of $3.8 million of accounts payable; and
    
    an increase of $19.3 million of accrued expenses.
  
    
    our net income of $11.7 million;
    
    non-cash charges of $1.0 million in depreciation and amortization;
    
    stock-based compensations expense of $0.7 million;
    
    non-cash equity income from our WaterSecure operations of $2.2 million partially
offset by cash distributions from those operations of $1.8 million;
    
    an increase of $28.1million in accounts receivable;
    
    an increase of $9.4 million in inventories;
    
    an increase of $11.7 million of accounts payable; and
    
    an increase of $7.4 million of accrued expenses.
 Cash Used in Investing Activities
  57




---



##### Table of Contents



Cash Provided by Financing Activities
  Capital Spending
   Indebtedness
 Working Capital Credit Facility.
    58




---



##### Table of Contents



59




---



##### Table of Contents



Lease Financing
   Restructuring Obligations.
 Equipment Line of Credit.
 60




---



##### Table of Contents



Preferred Stock Redemption
 Contractual Obligations and Commercial Commitments
  Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    

1
year
    
    
    1 - 3 Years
    
    
    4 - 5 Years
    
    
    5 YearsContractual ObligationsCredit facility (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Restructuring obligations
    
    
    1,704
    
    
    
    1,349
    
    
    
    355
    
    
    
    
    
    
    
    Capital lease obligations (2)
    
    
    7,114
    
    
    
    1,017
    
    
    
    2,034
    
    
    
    2,032
    
    
    
    2,031Operating leases
    
    
    3,355
    
    
    
    988
    
    
    
    1,281
    
    
    
    974
    
    
    
    112Deferred compensation (3)
    
    
    2,661
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,661Liabilities of discontinued
operations
    
    
    53
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    Series B preferred stock
    
    
    104
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    14,991
    
    
    $
    3,511
    
    
    $
    3,670
    
    
    $
    3,006
    
    
    $
    4,804
 
 (1)
    
    Total repayments are based upon borrowings outstanding as of December 31, 2008, not actual
or projected borrowings after such date. Repayments do not include interest that may become
due and payable in any future period.(2)
    
    Repayment amounts include interest on the capital lease obligation.(3)
    
    Total amount represents our expected obligation on the deferred compensation arrangement and
does not include the value of the restricted annuity contract, or interest earnings thereon,
that we purchased to fund our obligation. Off-Balance Sheet Arrangements
  Liquidity
  61




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##### Table of Contents



Critical Accounting Policies
   
    
    revenue recognition;
    
    allowance for doubtful accounts;
    
    inventories;
    
    warranty reserve;
 62




---



##### Table of Contents




    
    impairment of long-lived assets;
    
    deferred tax valuation allowance;
    
    uncertain tax positions;
    
    costs of exit or disposal activities and similar nonrecurring charges; and
    
    stock-based compensation.
        63




---



##### Table of Contents



Allowance for Doubtful Accounts
 Inventories
  Warranty Reserve
 64




---



##### Table of Contents



Balance at
    
    Reserve
    
    Utilized/
    
    Balance atJanuary 1
    
    Additions
    
    Deductions
    
    December 312006
    
    $
    71
    
    
    $
    49
    
    
    $
    (4
    )
    
    $
    1162007
    
    
    116
    
    
    
    305
    
    
    
    
    
    
    
    4212008
    
    
    421
    
    
    
    326
    
    
    
    (50
    )
    
    
    697
  Impairment of Long-Lived Assets
  Deferred Tax Valuation Allowance
 Uncertain Tax Positions
  65




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##### Table of Contents



Costs of Exit or Disposal Activities and Similar Nonrecurring Charges.
 Share-Based Compensation.
 Stock Option Expense
    WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2007
    
    
    1,728
    
    
    $
    5.34Granted-Directors
    
    
    
    
    
    
    Granted-Employees
    
    
    232
    
    
    
    4.31Exercised
    
    
    (169
    )
    
    
    2.68Canceled
    
    
    
    
    
    
    Forfeited
    
    
    (83
    )
    
    
    10.85Balance, December 31, 2008
    
    
    1,708
    
    
    $
    5.21
    
    
    
    5.71
    
    
    $
    (1.92
    )Exercisable, December 31, 2008
    
    
    1,306
    
    
    $
    4.49
    
    
    
    4.80
    
    
    $
    (1.20
    )
 66




---



##### Table of Contents



WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2006
    
    
    2,085
    
    
    $
    4.61Granted-Directors
    
    
    38
    
    
    
    12.73Granted-Employees
    
    
    30
    
    
    
    12.67Exercised
    
    
    (411
    )
    
    
    2.68Canceled
    
    
    
    
    
    
    Forfeited
    
    
    (14
    )
    
    
    10.28Balance, December 31, 2007
    
    
    1,728
    
    
    $
    5.34
    
    
    
    5.96
    
    
    $
    8.22Exercisable, December 31, 2007
    
    
    1,358
    
    
    $
    3.89
    
    
    
    5.37
    
    
    $
    9.69
  WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2005
    
    
    2,289
    
    
    $
    2.98Granted-Directors
    
    
    23
    
    
    
    14.78Granted-Employees
    
    
    306
    
    
    
    12.64Exercised
    
    
    (514
    )
    
    
    2.51Canceled
    
    
    
    
    
    
    Forfeited
    
    
    (19
    )
    
    
    6.49Balance, December 31, 2006
    
    
    2,085
    
    
    $
    4.61
    
    
    
    6.55
    
    
    $
    7.71Exercisable, December 31,
2006
    
    
    1,546
    
    
    $
    3.07
    
    
    
    5.78
    
    
    $
    9.25
  2008
    
    2007
    
    2006Expected stock price volatilility
    
    
    65.0
    %
    
    
    75.7
    %
    
    
    88.0
    %Risk Free interest rate
    
    
    1.84
    %
    
    
    5.07
    %
    
    
    4.72
    %Annual dividends
    
    $
    
    
    
    $
    
    
    
    $
    Expected life  employees
    
    5 years
    
    5 years
    
    4.3 yearsExpected life  directors
    
    na
    
    5 years
    
    6 years
  67




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##### Table of Contents



Restricted Stock Awards
   WeightedUnvested
    
    
    AverageRestricted
    
    
    Grant DateShares
    
    
    Fair ValueBalance, January 1, 2006
    
    
    30
    
    
    $
    2.20Granted-Directors
    
    
    
    
    
    
    Granted-Officers
    
    
    
    
    
    
    Granted-Employees
    
    
    
    
    
    
    Vested
    
    
    (30
    )
    
    
    2.20Forfeited
    
    
    
    
    
    
    Balance, December 31, 2006
    
    
    
    
    
    $
    Granted-Directors
    
    
    
    
    
    
    Granted-Officers
    
    
    645
    
    
    
    12.49Granted-Employees
    
    
    
    
    
    
    Vested
    
    
    (4
    )
    
    
    14.50Forfeited
    
    
    
    
    
    
    Balance, December 31, 2007
    
    
    641
    
    
    $
    12.48Granted-Directors
    
    
    34
    
    
    
    6.98Granted-Officers
    
    
    
    
    
    
    Granted-Employees
    
    
    28
    
    
    
    7.45Vested
    
    
    (75
    )
    
    
    11.62Forfeited
    
    
    
    
    
    
    Balance, December 31, 2008
    
    
    628
    
    
    $
    12.06
  68




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
    
    A total of 300,000 restricted shares granted to one officer will cliff vest in
their entirety on August 15, 2012, provided the officer remains employed with us
through that date.
    
    A total of 22,500 restricted shares granted to two officers will cliff vest in
their entirety on December 10, 2012, provided the officers remain employed with us
through that date.
    
    The remaining 258,000 restricted shares granted to the three officers will vest in
four equal annual installments, commencing when this report is filed is filed and in
future years upon the filing of future annual reports on Form 10-K, but only upon the
achievement of performance targets each year relating to our net income for fiscal
years 2008 through 2012.
    
    All restricted and unvested shares will automatically vest upon a change in control.
  Recent Accounting Pronouncements
      69




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70




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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk.
  Commodity Price Risk
 Foreign Exchange Risk
  71




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Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  Managements Report on Internal Control Over Financial Reporting
 Internal ControlIntegrated Framework
  Limitations in Control Systems
  72




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated Framework Managements Report on Internal Control Over Financial
Reporting
  (a) (b) (c)
  Internal ControlIntegrated Framework
   
 
 Item 9B. Other Information
  73




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PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
   
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accounting Fees and Services
  74




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PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 (a)
    
    We have filed the following documents as part of this Annual Report on Form 10-K:
 1.
    
    Financial StatementsThe following consolidated financial statements of PowerSecure International, Inc.
are included on pages F-1 to F-42 of this report:Report of Management
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial StatementsThe following consolidated financial statements of Marcum Midstream 1995-2 Business
Trust are included on pages G-1 to G-12 of this report:Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Income for the Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements2.
    
    Financial Statement SchedulesThe following financial statement schedule is filed as a part of this report:Schedule II  Valuation and Qualifying AccountsAll other financial statement schedules have been omitted because they are not
applicable or required or because the required information is presented in our
consolidated financial statements and notes thereto.3.
    
    ExhibitsThe exhibits required by this item are listed on the Exhibit Index immediately
following the signature page of this report.
 (b)
    
    Item 601 ExhibitsThe exhibits required by this item are listed on the accompanying Exhibit Index
immediately following the signature page of this report.(c)
    
    Financial Statement SchedulesThe financial statement schedules required by this item are listed under Item 15(a)(2) of this
report, above.
 75




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2008 and 2007
    
    F-3Consolidated Statements of Operations for the Years Ended
December 31, 2008, 2007 and 2006
    
    F-5Consolidated Statements of Stockholders Equity for the Years
Ended December 31, 2008, 2007 and 2006
    
    F-6Consolidated Statements of Cash Flows for the Years Ended
December 31, 2008, 2007 and 2006
    
    F-7Notes to Consolidated Financial Statements
    
    F-8
 F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal
ControlIntegrated Framework
 HEIN & ASSOCIATES LLP
 
 F-2




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 December 31,2008
    
    
    2007AssetsCurrent Assets:Cash and cash equivalents
    
    $
    24,316
    
    
    $
    28,710Trade receivables, net of allowance for doubtful accounts
of $276 and $263, respectively
    
    
    25,215
    
    
    
    36,753Other receivables
    
    
    567
    
    
    
    376Inventories
    
    
    19,713
    
    
    
    20,785Deferred income taxes
    
    
    2,919
    
    
    
    2,529Prepaid expenses and other current assets
    
    
    1,113
    
    
    
    1,091Assets of discontinued operations held for sale
    
    
    
    
    
    
    2,400Total current assets
    
    
    73,843
    
    
    
    92,644Property, plant and equipment:Equipment
    
    
    20,297
    
    
    
    6,663Furniture and fixtures
    
    
    650
    
    
    
    615Land, building and improvements
    
    
    4,674
    
    
    
    1,013Total property, plant and equipment, at cost
    
    
    25,621
    
    
    
    8,291Less accumulated depreciation and amortization
    
    
    3,739
    
    
    
    2,640Property, plant and equipment, net
    
    
    21,882
    
    
    
    5,651Other assets:Goodwill
    
    
    7,256
    
    
    
    7,256Restricted annuity contract
    
    
    2,133
    
    
    
    2,001Intangible rights and capitalized software costs, net of
accumulated amortization of $1,453 and $1,227, respectively
    
    
    1,276
    
    
    
    1,661Investment in unconsolidated affiliate
    
    
    4,106
    
    
    
    3,652Other assets
    
    
    338
    
    
    
    158Total other assets
    
    
    15,109
    
    
    
    14,728Total Assets
    
    $
    110,834
    
    
    $
    113,023
 See accompanying notes to consolidated financial statements.
 F-3




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 December 31,2008
    
    
    2007Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    5,817
    
    
    $
    11,322Accrued and other liabilities
    
    
    23,094
    
    
    
    35,157Restructuring charges payable
    
    
    1,349
    
    
    
    4,048Current income taxes payable
    
    
    181
    
    
    
    Liabilities of discontinued operations held for sale
    
    
    53
    
    
    
    754Current unrecognized tax benefit
    
    
    79
    
    
    
    84Capital lease obligations
    
    
    716
    
    
    
    1Total current liabilities
    
    
    31,289
    
    
    
    51,366Long-term liabilites:Capital lease obligations
    
    
    5,201
    
    
    
    5Unrecognized tax benefit
    
    
    790
    
    
    
    674Deferred compensation
    
    
    388
    
    
    
    55Restructuring charges
    
    
    355
    
    
    
    1,683Total long-term liabilities
    
    
    6,734
    
    
    
    2,417Commitments and contingencies (Note 11)Stockholders equityPreferred stock  undesignated, $.01 par value; 2,000,000 shares
authorized; none issued and outstandingPreferred stock  Series C, $.01 par value; 500,000 shares
authorized; none issued and outstandingCommon stock, $.01 par value; 25,000,000 shares
authorized; 17,071,889 and 16,860,267 shares issued
and outstanding, respectively
    
    
    171
    
    
    
    169Additional paid-in-capital
    
    
    108,384
    
    
    
    105,473Accumulated deficit
    
    
    (35,744
    )
    
    
    (46,402
    )Total stockholders equity
    
    
    72,811
    
    
    
    59,240Total Liabilities and Stockholders Equity
    
    $
    110,834
    
    
    $
    113,023
 See accompanying notes to consolidated financial statements.
 F-4




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 Year Ended December 31,2008
    
    
    2007
    
    
    2006Revenues
    
    $
    135,440
    
    
    $
    111,112
    
    
    $
    115,702Cost of sales
    
    
    91,731
    
    
    
    76,805
    
    
    
    84,104Gross profit
    
    
    43,709
    
    
    
    34,307
    
    
    
    31,598Operating expenses:General and administrative
    
    
    28,903
    
    
    
    22,489
    
    
    
    19,011Selling, marketing and service
    
    
    5,348
    
    
    
    3,575
    
    
    
    2,860Depreciation and amortization
    
    
    2,031
    
    
    
    1,500
    
    
    
    885Research and development
    
    
    118
    
    
    
    148
    
    
    
    73Restructuring charges
    
    
    
    
    
    
    14,139
    
    
    
    Total operating expenses
    
    
    36,400
    
    
    
    41,851
    
    
    
    22,829Operating income (loss)
    
    
    7,309
    
    
    
    (7,544
    )
    
    
    8,769Other income and (expenses):Management fees
    
    
    556
    
    
    
    423
    
    
    
    365Interest and other income
    
    
    490
    
    
    
    1,541
    
    
    
    1,059Interest and finance charges
    
    
    (287
    )
    
    
    (57
    )
    
    
    (144
    )Equity income
    
    
    3,490
    
    
    
    2,774
    
    
    
    2,221Minority interest (Note 6)
    
    
    
    
    
    
    30
    
    
    
    (72
    )Income (loss) before income taxes
    
    
    11,558
    
    
    
    (2,833
    )
    
    
    12,198Income tax benefit (provision)
    
    
    (823
    )
    
    
    1,834
    
    
    
    (465
    )Income (loss) from continuing operations
    
    
    10,735
    
    
    
    (999
    )
    
    
    11,733Discontinued operationsMetretek FloridaLoss on disposal
    
    
    (42
    )
    
    
    (1,261
    )
    
    
    Income (loss) from operations, including tax benefit
of $2 and $11 in 2008 and 2007, respectively
    
    
    (35
    )
    
    
    652
    
    
    
    (28
    )Loss on discontinued operations
    
    
    (77
    )
    
    
    (609
    )
    
    
    (28
    )Net income (loss)
    
    $
    10,658
    
    
    $
    (1,608
    )
    
    $
    11,705Basic earnings (loss) per share:Income (loss) from continuing operations
    
    $
    0.66
    
    
    $
    (0.06
    )
    
    $
    0.78Loss from discontinued operations
    
    
    (0.00
    )
    
    
    (0.04
    )
    
    
    (0.00
    )Net income (loss)
    
    $
    0.65
    
    
    $
    (0.10
    )
    
    $
    0.78Diluted earnings (loss) per share:Income (loss) from continuing operations
    
    $
    0.63
    
    
    $
    (0.06
    )
    
    $
    0.71Loss from discontinued operations
    
    
    (0.00
    )
    
    
    (0.04
    )
    
    
    (0.00
    )Net income (loss)
    
    $
    0.63
    
    
    $
    (0.10
    )
    
    $
    0.71
 See accompanying notes to consolidated financial statements.
 F-5




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(in thousands)
 AdditionalCommon Stock
    
    
    Paid-In
    
    
    AccumulatedShares
    
    
    Value
    
    
    Capital
    
    
    Deficit
    
    
    TotalBalance at January 1, 2006
    
    
    12,577
    
    
    $
    126
    
    
    $
    72,255
    
    
    $
    (56,151
    )
    
    $
    16,230Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,705
    
    
    
    11,705Stock option compensation
    
    
    
    
    
    
    
    
    
    
    712
    
    
    
    
    
    
    
    712Private placement, net
    
    
    2,013
    
    
    
    20
    
    
    
    26,201
    
    
    
    
    
    
    
    26,221Stock warrant and option
exercises
    
    
    1,219
    
    
    
    12
    
    
    
    3,054
    
    
    
    
    
    
    
    3,066Amortization of restricted
stock awards
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    66Balance at December 31, 2006
    
    
    15,809
    
    
    
    158
    
    
    
    102,288
    
    
    
    (44,446
    )
    
    
    58,000Adoption of FIN 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (348
    )
    
    
    (348
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,608
    )
    
    
    (1,608
    )Stock option compensation
    
    
    
    
    
    
    
    
    
    
    972
    
    
    
    
    
    
    
    972Issuance and amortization of
restricted stock awards
    
    
    645
    
    
    
    7
    
    
    
    1,113
    
    
    
    
    
    
    
    1,120Stock option exercises, including
tax benefit of $52
    
    
    407
    
    
    
    4
    
    
    
    1,100
    
    
    
    
    
    
    
    1,104Balance at December 31, 2007
    
    
    16,861
    
    
    
    169
    
    
    
    105,473
    
    
    
    (46,402
    )
    
    
    59,240Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,658
    
    
    
    10,658Stock option compensation
    
    
    
    
    
    
    
    
    
    
    657
    
    
    
    
    
    
    
    657Issuance and amortization of
restricted stock awards
    
    
    42
    
    
    
    
    
    
    
    1,492
    
    
    
    
    
    
    
    1,492Stock option exercises, including
tax benefit of $263
    
    
    169
    
    
    
    2
    
    
    
    762
    
    
    
    
    
    
    
    764Balance at December 31, 2008
    
    
    17,072
    
    
    $
    171
    
    
    $
    108,384
    
    
    $
    (35,744
    )
    
    $
    72,811
 See accompanying notes to consolidated financial statements.
 F-6




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Year Ended December 31,2008
    
    
    2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    10,658
    
    
    $
    (1,608
    )
    
    $
    11,705Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    2,031
    
    
    
    1,500
    
    
    
    992Minority interest in subsidiary
    
    
    
    
    
    
    (30
    )
    
    
    72Deferred income taxes
    
    
    (390
    )
    
    
    (2,297
    )
    
    
    278Loss on disposal of miscellaneous assets
    
    
    209
    
    
    
    90
    
    
    
    43Equity in income of unconsolidated affiliate
    
    
    (3,491
    )
    
    
    (2,774
    )
    
    
    (2,221
    )Distributions from unconsolidated affiliate
    
    
    3,679
    
    
    
    2,575
    
    
    
    1,812Stock compensation expense
    
    
    2,647
    
    
    
    2,092
    
    
    
    778Changes in operating assets and liabilities, net of
effect of aquisitons:Trade receivables, net
    
    
    11,538
    
    
    
    3,502
    
    
    
    (28,181
    )Inventories
    
    
    1,361
    
    
    
    (7,903
    )
    
    
    (9,390
    )Other current assets
    
    
    (30
    )
    
    
    (786
    )
    
    
    (686
    )Assets of discontinued operations held for sale
    
    
    2,400
    
    
    
    (184
    )
    
    
    48Other noncurrent assets
    
    
    (180
    )
    
    
    (7
    )
    
    
    (91
    )Accounts payable
    
    
    (5,505
    )
    
    
    (3,840
    )
    
    
    11,719Restructuring charges, net of cash payments
    
    
    (4,027
    )
    
    
    5,729
    
    
    
    Accrued and other liabilities
    
    
    (12,063
    )
    
    
    19,350
    
    
    
    7,381Liabilities of discontinued operations held for sale
    
    
    (701
    )
    
    
    755Unrecognized tax benefits
    
    
    110
    
    
    
    411
    
    
    
    Deferred compensation obligation
    
    
    333
    
    
    
    55
    
    
    
    Restricted annuity contract
    
    
    (132
    )
    
    
    (23
    )
    
    
    Net cash provided by (used in) operating activities
    
    
    8,447
    
    
    
    16,607
    
    
    
    (5,741
    )Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (18,032
    )
    
    
    (2,147
    )
    
    
    (1,356
    )Investment in unconsolidated affiliate
    
    
    (710
    )
    
    
    
    
    
    
    (1,260
    )Additions to intangible rights and software development
    
    
    (281
    )
    
    
    (574
    )
    
    
    (98
    )Purchase of restricted annuity contract
    
    
    
    
    
    
    (1,978
    )
    
    
    Acquisitions, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (2,345
    )Proceeds from sale of property, plant and equipment
    
    
    6
    
    
    
    7
    
    
    
    17Net cash used in investing activities
    
    
    (19,017
    )
    
    
    (4,692
    )
    
    
    (5,042
    )Cash flows from financing activities:Net proceeds from private placement
    
    
    
    
    
    
    
    
    
    
    26,221Proceeds from sale leaseback financing
    
    
    5,912
    
    
    
    
    
    
    
    Proceeds from term loan
    
    
    2,584
    
    
    
    
    
    
    
    Proceeds from stock warrant and option exercises,
net of shares tendered
    
    
    266
    
    
    
    1,104
    
    
    
    3,066Principal payments on long-term notes payable
    
    
    (2,584
    )
    
    
    
    
    
    
    (3,376
    )Net payments on line of credit
    
    
    
    
    
    
    
    
    
    
    (1,314
    )Payments on preferred stock redemptions
    
    
    
    
    
    
    (220
    )
    
    
    (81
    )Payments on capital lease obligations
    
    
    (2
    )
    
    
    (5
    )
    
    
    (5
    )Net cash provided by financing activities
    
    
    6,176
    
    
    
    879
    
    
    
    24,511NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
    
    
    (4,394
    )
    
    
    12,794
    
    
    
    13,728CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    28,710
    
    
    
    15,916
    
    
    
    2,188CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    24,316
    
    
    $
    28,710
    
    
    $
    15,916
 See accompanying notes to consolidated financial statements.
 F-7




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006  in thousands, except per share data)
 1.
    
    Description of Business, Basis of Presentation, Summary of Significant Accounting Policies
and Recent Accounting PronouncementsDescription of BusinessPowerSecure International, Inc., based in Wake Forest, North Carolina was incorporated on April
5, 1991. We are a leading provider of Energy and Smart Grid Solutions and Energy Services to
utilities, commercial, institutional and industrial customers, and oil and natural gas
producers. We provide our products and services across the strategic business areas of
Interactive Distributed Generation®, Utility Infrastructure, Energy Efficiency, and
Energy Services.Through our PowerSecure, Inc. subsidiary we focus on three of these areas, including
Interactive Distributed Generation®, Utility Infrastructure, and Energy Efficiency. Our core
Interactive Distributed Generation® business involves installing sophisticated electric
generation equipment directly at the location where power is utilized. This equipment
provides a dependable backup power supply during power outages, while at the same time
providing a more efficient and environmentally friendly means of delivering power during high
cost periods of peak power demand. Our intelligent Interactive Distributed Generation®
systems contain our electronic controls technology which enables our systems to be monitored
24x7 by our monitoring center, safeguarding our customers from power outages and their
related costs. Through this monitoring center, we utilize our proprietary smart grid
capabilities to forecast utilities peak demand periods, and electronically deploy our systems
to deliver more efficient and environmentally friendly power during these periods of peak
demand. Our systems also enable utilities to delay new infrastructure investments for
transmitting and distributing power, and minimize energy losses associated with moving
electricity over long distances.Our Utility Infrastructure business, which is an extension of our Interactive Distributed
Generation® business, provides utilities with regulatory consulting and rate design services
and power system engineering and construction services. Our Energy Efficiency business is
focused on providing lighting solutions for commercial, industrial, and institutional
customers, including our state-of-the-art green EfficientLights LED lighting technology for
refrigerated cases in grocery and retail drug stores.Through our Southern Flow and WaterSecure Holdings, Inc. subsidiaries we focus on
business opportunities in the energy services field. Our Energy Services businesses serve the
oil and natural gas industry with natural gas measurement products and services, through
Southern Flow, and water processing services, through WaterSecure.Our Southern Flow subsidiary provides natural gas measurement services to customers
involved in the business of oil and natural gas production, transportation and processing,
with a focus on
the natural gas market. WaterSecure Holdings, Inc. (formerly known as Marcum Gas
 F-8




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##### Table of Contents



Transmission, Inc.), which we also refer to as WaterSecure, owns approximately 40% of the
equity interests in an unconsolidated business, Marcum Midstream 1995-2 Business Trust, which
we refer to as MM 95-2 or as our WaterSecure operations. Our WaterSecure operations
business operates water disposal facilities in northeastern Colorado.
 See Note 15 for more information concerning our reportable segments.In August 2007, we changed our name from Metretek Technologies, Inc. to PowerSecure
International, Inc.Basis of PresentationOrganization The accompanying consolidated financial statements include the accounts of
PowerSecure International, Inc. and its subsidiaries, primarily, PowerSecure, Inc. (our
PowerSecure subsidiary) (and its majority-owned and wholly-owned subsidiaries,
UtilityEngineering, Inc., PowerServices, Inc., EnergyLite, Inc. EfficientLights, LLC and
Reids Trailer, Inc. dba PowerFab), Southern Flow Companies, Inc. (Southern Flow), and
Metretek, Incorporated (Metretek Florida) (and its majority-owned subsidiary, Metretek
Contract Manufacturing Company, Inc. (MCM)), and WaterSecure Holdings, Inc. (WaterSecure)
(and its majority-owned subsidiary, Conquest Acquisition Company LLC (CAC LLC)),
collectively referred to as the Company or we or us or our.The consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America. The consolidated financial
statements presented reflect entries necessary for the fair presentation of the Consolidated
Statements of Operations for the years ended December 31, 2008, 2007 and 2006, Consolidated
Balance Sheets as of December 31, 2008 and 2007 and Consolidated Statements of Cash Flows for
the years ended December 31, 2008, 2007 and 2006. All entries required for the fair
presentation of the financial statements are of a normal recurring nature. Intercompany
transactions and balances are eliminated upon consolidation. We use the equity method to
account for our investment in MM 95-2.Use of Estimates The preparation of our consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America requires that
our management make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates include
percentage-of-completion estimates for revenue and cost of sales recognition, allowance for
doubtful accounts receivable, inventory valuation reserves, and our deferred tax valuation
allowance.Reclassifications In late 2007, our board of directors approved a plan to discontinue
the operations of Metretek Florida and sell all of its assets (see Note 5). The operations of
the discontinued segment have been reclassified to discontinued operations for all periods
presented in the accompanying consolidated statements of operations. In addition, certain 2007
and 2006 amounts have been reclassified to conform to current year presentation. Such
reclassifications had no effect on net income or loss or stockholders equity.Summary of Significant Accounting Policies
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Revenue Recognition For our distributed generation turn-key project-based sales and our
utility infrastructure projects, we recognize revenue and profit as work progresses using the
percentage-of-completion method, which relies on various estimates. We believe the use of the
percentage-of-completion method of accounting for our distributed generation projects is
preferable to the completed contract method because a typical distributed generation
construction project occurs over several accounting periods and the percentage-of-completion
method is a better method to match the revenues and costs to the reporting period in which the
construction services are performed. Nearly all of our distributed generation projects are
fixed-price contracts, with the exception of certain contracts which provide for additional
billings based on wire usage to connect the distributed generation equipment to customer
facilities.In applying the percentage-of-completion method to our distributed generation turn-key
projects, we have identified the key output project phases that are standard components of our
construction projects. We have further identified, based on past experience, an estimate of
the value of each of these output phases based on a combination of costs incurred and the
value added to the overall construction project. While the order of these phases varies
depending on the project, each of these output phases is necessary to complete each project
and each phase is an integral part of the turnkey product solution we deliver to our
customers. We use these output phases and percentages to measure our progress toward
completion of our construction projects. For each reporting period, the status of each
project, by phase, is determined by employees who are managers of or are otherwise directly
involved with the constructions project and is reviewed by our accounting personnel.
Utilizing this information, we recognize project revenues (and associated project costs) and
gross profit based on the percentage associated with output phases that are complete or in
process on each of our projects.In applying the percentage-of-completion method to our utility infrastructure projects, sales
and gross profit are recognized as work is performed based on the relationship between actual
costs incurred and total estimated costs at completion.In all cases where we utilize the percentage-of-completion, revenues and gross profit are
adjusted prospectively for revisions in estimated total contract costs and contract values.
Estimated losses, if any, are recorded when identified. While a project is in process,
amounts billed to customers in excess of revenues recognized to date are classified as current
liabilities. Likewise, amounts recognized as revenue in excess of actual billings to date are
recorded as unbilled accounts receivable. In the event a contract provides for adjustments to
the contract price for actual wire or other raw material usage, we recognize the associated
revenue when the actual costs are incurred and the customer is billed.Because the percentage-of-completion method of accounting relies upon estimates described
above, recognized revenues and profits are subject to revision as a project progresses to
completion. Revisions in profit estimates are charged to income in the period in which the
facts that give rise to the revision become known. In the event we were required to adjust
any particular projects estimated revenues or costs, the effect on the current period
earnings may or may not be insignificant. If, however, conditions arise that requires us to
adjust our estimated revenues or costs for a series of similar construction projects, the
effect on current period earnings would most likely be significant. In addition, certain
contracts provide for cancellation
provisions prior to completion of a project. The cancellation provisions generally provide
for payment of costs incurred, but may result in an adjustment to profit already recognized in
a prior period.
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We recognize equipment and product revenue, in accordance with the SECs Staff Accounting
Bulletin No. 101, when persuasive evidence of a non-cancelable arrangement exists, delivery
has occurred and/or services have been rendered, the price is fixed or determinable, and
collectability is reasonably assured. Equipment and product sales are generally made
directly to end users of the product, who are responsible for payment for the product.Service revenue includes regulatory consulting and rate design services, power system
engineering services, energy conservation services, chart services, field services, laboratory
analysis, data management services, and monitoring and maintenance services. Revenues from
these services are recognized when the service is performed and the customer has accepted the
work.Revenues on our recurring revenue distributed generation projects are recognized over the term
of the contract as we provide utilities and their customers with access to distributed
generation systems for standby power and peak shaving or, in certain cases, when energy
savings are realized by the customer at their site. These contracts can involve multiple
parties, with one party paying us for the value of backup power (usually, but not always, a
commercial, industrial, or institutional customer), and one party paying us for the value of
the electrical capacity provided by the system (usually a utility).Sales of certain goods or services sometimes involve the provision of multiple elements.
Revenues from contracts with multiple element arrangements are recognized as each element is
earned based on the relative fair value of each element and when the delivered elements have
value to customers on a standalone basis. Amounts allocated to each element are based on its
objectively determined fair value, such as the sales price for the product or service when it
is sold separately or competitor prices for similar products or services.Cash and Cash Equivalents Cash and all highly liquid investments with a maturity of three
months or less from 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. Supplemental statement of cash flows information is as follows:
 2008
    
    2007
    
    2006Cash paid during the year for:Interest
    
    $
    171
    
    
    $
    26
    
    
    $
    122Income taxes
    
    
    491
    
    
    
    848
    
    
    
    167Supplemental schedule of non-cash investing
and financing activities:Capital lease obligations incurred for the
purchase of equipment
    
    
    5,912
    
    
    
    8
    
    
    
    13Equipment transferred to inventory
    
    
    288
    
    
    
    
    
    
    
    
 Accounts Receivable Our customers include a wide variety of mid-sized and large businesses,
utilities and institutions. We perform ongoing credit evaluations of our customers financial
condition and generally do not require collateral. We continuously monitor collections and
payments from our customers and regularly adjust credit limits of customers based upon payment
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history and a customers current credit worthiness, as judged by us. We maintain a provision
for estimated credit losses.
 Concentration of Credit Risk We are subject to concentrations of credit risk from our cash
and cash equivalents and accounts receivable. We limit our exposure to credit risk associated
with cash and cash equivalents by placing our cash and cash equivalents with multiple domestic
financial institutions. Nevertheless, our cash in bank deposit accounts at these financial
institutions frequently exceeds federally insured limits. We further limit our exposure to
credit risk associated with these cash accounts by adherence to our investment policy. We
have not experienced any losses in such accounts.From time to time, we have derived a material portion of our revenues from one or more
significant customers. During the year ended December 31, 2008, our largest PowerSecure
subsidiary customer, Publix Super Markets (Publix), constituted $45,211 of project-based
revenues, or 33% of our consolidated revenues. During the year ended December 31, 2007,
Publix constituted $52,132 of project-based revenues, or 47% of our consolidated revenues.
During the year ended December 31, 2006, Publix constituted $61,359 of project-based revenues,
or 53% of our consolidated revenues. The total accounts receivable from Publix at December
31, 2008 and 2007 was $5,404 and $8,146, respectively. No other customer accounted for more
than 10% of our consolidated revenue in 2008, 2007, or 2006.To date, nearly all our revenues have been derived from sales to customers within the United
States.Inventories Inventories are stated at the lower of cost (determined primarily on a
specific-identification basis) or market. Inventories at December 31, 2008 and 2007 are
summarized as follows:
 2008
    
    
    2007Raw materials, equipment and supplies
    
    $
    5,203
    
    
    $
    9,070Work in process
    
    
    12,721
    
    
    
    10,301Finished goods and merchandise
    
    
    1,999
    
    
    
    1,542Valuation reserve
    
    
    (210
    )
    
    
    (128
    )Total
    
    $
    19,713
    
    
    $
    20,785
 Raw materials, equipment and supplies consist primarily of equipment with long lead-times
purchased for anticipated customer orders. Work in progress consists primarily of equipment
and parts allocated to specific distributed generation turn-key projects and utility
infrastructure
projects accounted for on the percentage-of-completion basis. Finished goods and merchandise
consists primarily of equipment and parts stocked for resale to natural gas producers by our
Southern Flow subsidiary.
 Property, Plant and Equipment Property, plant and equipment are stated at cost and are
generally depreciated using the straight-line method over their estimated useful lives, which
depending on asset class ranges from 3 to 30 years. Depreciation expense on property, plant
and equipment was $1,345, $816, and $547 for the years ended December 31, 2008, 2007 and 2006,
respectively. Property, plant and equipment includes items under capital lease with a net book
value of $5,892 and $9 at December 31, 2008 and 2007, respectively.
 
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Investment in Unconsolidated AffiliateThrough WaterSecure, we hold a minority interest in MM
95-2. We currently own 40.45% of MM 95-2. During the years ended December 31, 2008 and 2006,
WaterSecure acquired additional equity interests in MM 95-2 at a purchase price of $710 and
$1,260, respectively. We used cash on hand and a combination of cash on hand and borrowings on
our lines of credit to acquire the additional equity interests in MM 95-2 in 2008 and 2006,
respectively.MM 95-2 owns and operates six water treatment and disposal facilities located at five
facilities in northeastern Colorado. We utilize the equity method to account for our
investment in MM 95-2. The balance of our equity investment MM 95-2 includes $822 and $719 of
unamortized purchase premiums we paid on our acquired interests at December 31, 2008 and 2007,
respectively. The premiums are being amortized over a period of 14 years, which represents the
estimated weighted average useful life of the underlying assets acquired. Amortization expense
on the premiums was $67, $61, and $61 for the years ended December 31, 2008, 2007, and 2006,
respectively.Summarized financial information for MM 95-2 at December 31, 2008 and 2007 and for the three
years ended December 31, 2008 are as follows:
 December 31,2008
    
    
    2007Total current assets
    
    $
    4,645
    
    
    $
    3,137Property, plant and equipment, net
    
    
    8,067
    
    
    
    8,367Total other assets
    
    
    17
    
    
    
    13Total assets
    
    $
    12,729
    
    
    $
    11,517Total current liabilities
    
    $
    1,393
    
    
    $
    1,362Long-term note payable
    
    
    3,550
    
    
    
    2,373Total shareholders equity
    
    
    7,786
    
    
    
    7,782Total liabilities and shareholders equity
    
    $
    12,729
    
    
    $
    11,517
 Year Ended December 31,2008
    
    
    2007
    
    
    2006Total revenues
    
    $
    17,906
    
    
    $
    13,205
    
    
    $
    11,028Total costs and expenses
    
    
    8,652
    
    
    
    5,556
    
    
    
    5,100Net income
    
    $
    9,254
    
    
    $
    7,649
    
    
    $
    5,928
 Goodwill and Other Intangible Assets We account for goodwill and other intangible assets in
accordance with the provisions of FAS No. 141, Business Combinations and FAS No. 142,
Goodwill and Other Intangible Assets. We amortize intangible assets that do not have an
indefinite life over their estimated useful lives and do not amortize goodwill and intangible
assets with indefinite lives. Amortization expense on intangible assets was $619, $623, and
$277 for the years ended December 31, 2008, 2007 and 2006, respectively. We perform annual
reviews (on October 1) of goodwill and intangible assets with indefinite lives for impairment
(or more frequently if impairment indicators arise). Based on the results of our annual
reviews, we have concluded that there has been no impairment of goodwill or intangible assets
during the three years ended December 31, 2008.
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We capitalize software development costs integral to our products once technological
feasibility of the products and software has been determined. Purchased software and software
development costs are amortized over five years, using the straight-line method. Unamortized
software and software development costs at December 31, 2008 and 2007 are $291 and $357,
respectively. Patents and license agreements are amortized using the straight-line method
over the lesser of their estimated economic lives or their legal term of existence, currently
3 to 5 years. Unamortized patent and license costs at December 31, 2008 and 2007 are $306 and
$328, respectively.During 2006, our PowerSecure subsidiary purchased contract and intellectual property rights to
provide services to federal customers of an investor-owned utility. The contract rights are
being amortized over their expected contract terms. The intellectual property rights are
being amortized over ten years, using the straight-line method. Unamortized contract and
intellectual property rights at December 31, 2008 and 2007 are $679 and $976, respectively.Debt Issuance Costs Debt issuance costs are amortized over the term of the corresponding
debt instrument using the straight-line method, which approximates the effective interest
method. Amortization and write-off of debt issuance costs was $103, $18 and $5 for the years
ended December 31, 2008, 2007 and 2006, respectively.Debt issuance costs are included in other current assets and other non-current assets and
consisted of the following as of December 31, 2008 and 2007:
 2008
    
    
    2007Debt issuance costs
    
    $
    121
    
    
    $
    3Addition of debt issuance costs
    
    
    415
    
    
    
    136Write-off of debt issuance costs
    
    
    (43
    )
    
    
    (1
    )Accumulated amortization
    
    
    (60
    )
    
    
    (17
    )Debt issuance costs, net
    
    $
    433
    
    
    $
    121
 Accrued and Other Liabilities Accrued and other liabilities at December 31, 2008 and 2007
are summarized as follows:
 2008
    
    
    2007Accrued project costs
    
    $
    10,086
    
    
    $
    12,980Payroll, employee benefits and related liabilities
    
    
    5,790
    
    
    
    4,521Sales, property and franchise taxes payable
    
    
    566
    
    
    
    1,334Advance billings on projects in progress
    
    
    4,750
    
    
    
    15,358Preferred stock redemption obligation
    
    
    104
    
    
    
    104Deferred revenue
    
    
    527
    
    
    
    276Insurance premiums and reserves
    
    
    149
    
    
    
    29Warranty reserve
    
    
    697
    
    
    
    421Other
    
    
    425
    
    
    
    134Total
    
    $
    23,094
    
    
    $
    35,157
 Warranty Reserve We provide a standard one-year warranty for our distributed generation and
switchgear equipment. In addition, we offer extended warranty terms on our distributed
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generation turn-key and switchgear projects. We reserve for the estimated cost of product
warranties when revenue is recognized, and we evaluate our reserve periodically by comparing
our warranty repair experience by product. The purchase price for extended warranties or
extended warranties included in the contract terms are deferred as a component of our warranty
reserve. The warranty reserve included in Accrued and other liabilities is set forth below.
 Year Ended December 31,2008
    
    
    2007
    
    
    2006Warranty provision at the beginning of the year
    
    $
    421
    
    
    $
    116
    
    
    $
    71Accruals for warranties issued during the year
    
    
    326
    
    
    
    305
    
    
    
    49Warranty settlements during the year
    
    
    (30
    )
    
    
    
    
    
    
    (4
    )Changes in liability for pre-existing warranties during the year
    
    
    (20
    )
    
    
    
    
    
    
    Warranty provision at the end of the year
    
    $
    697
    
    
    $
    421
    
    
    $
    116
 Minority Interest The minority shareholders interest in the equity and losses of
EfficientLights for the year ended December 31, 2008 and 2007 and the minority shareholders
interests in the equity and the income of CAC LLC for the period from January 1, 2006 to March
31, 2006 is included in minority interest in the accompanying consolidated financial
statements. In late 2007, the FASB issued FAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements-
an amendment of ARB No. 51 (FAS 160), which establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary (minority interest) and for the deconsolidation
of a subsidiary. We will be required to adopt the provisions of FAS 160 beginning January 1,
2009. We are currently evaluating the impact that the adoption of FAS 160 will have on our
financial position and results of operations.Share-Based Compensation We account for share-based compensation in accordance with the
provisions of FAS No. 123 (Revised 2004), Share-Based Payment (FAS 123(R)), 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. We
measure the fair value of restricted stock awards based on the number of shares granted and
the quoted price of our common stock on the date of the grant, and we measure the fair value
of stock options using the Black-Scholes valuation model. These fair values are recognized as
compensation expense over the service period, net of estimated forfeitures.Pre-tax share-based compensation expense for our stock options and restricted stock awards
recognized under FAS 123(R) during the years ended December 31, 2008, 2007 and 2006 was
$2,384, $2,092 and $778, respectively, and is included in general and administrative expense
in the accompanying consolidated statements of operations.Research and Developments Costs Research and development costs relating principally to the
design, development or enhancement of products are expensed as incurred.Impairment or Disposal of Long-Lived Assets In accordance with FAS No. 144 Accounting for
the Impairment or Disposal of Long-Lived Assets, we evaluate our long-lived assets whenever
significant events or changes in circumstances occur that indicate that the carrying amount of
an asset may not be recoverable. Recoverability of these assets is determined by comparing
the forecasted undiscounted future net cash flows from the operations to which the assets
relate, based on managements best estimates using appropriate assumptions and
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projections at
the time, to the carrying amount of the assets. If the carrying value is determined not to be
recoverable from future operating cash flows, the asset is deemed impaired and an impairment
loss is recognized equal to the amount by which the carrying amount exceeds the estimated fair
value of the asset.
 Income Taxes On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a
minimum recognition threshold for a tax position taken or expected to be taken in a tax return
that is required to be met before being recognized in the financial statements. FIN 48 also
provides guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition.We account for income taxes in accordance with the provisions of FAS No. 109, Accounting for
Income Taxes (FAS 109). Accordingly, we recognize deferred income tax assets and
liabilities for the estimated future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. We have net operating loss carryforwards available in certain
jurisdictions to reduce future taxable income. Future tax benefits for net operating loss
carryforwards are recognized to the extent that realization of these benefits is considered
more likely than not. To the extent that
available evidence raises doubt about the realization of a deferred income tax asset, a
valuation allowance is established.Accounting Changes and Error Corrections Effective January 1, 2006, we adopted the
provisions of FAS No. 154, Accounting Changes and Error Corrections (FAS 154). FAS 154
changed the requirements for the accounting and reporting of a change in accounting principle,
and applied to all voluntary changes in accounting principle as well as to changes required by
an accounting pronouncement that does not include specific transition provisions. 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.Financial Instruments Effective January 1, 2007, we adopted the provisions of FAS No. 155,
Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133
and 140 (FAS 155). FAS 155 eliminated the exemption from applying FAS 133, Accounting for
Derivative Instruments and Hedging Activities, to interests in securitized financial assets.
The adoption of FAS 155 had no effect on our financial position or results of operations.Recent Accounting PronouncementsFair Value Measurements Effective January 1, 2008, we adopted the provisions of 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. The adoption of FAS 157 had no effect
on our financial position or results of operations.
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In October 2008, the FASB issued Staff Position No. FAS 157-3, Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active (FSP FAS 157-3). FSP FAS
157-3 clarifies the application of SFAS 157 in a market that is not active and illustrates how
an entity would determine fair value of a financial asset when the market for that financial
asset is not active. FSP FAS 157-3 became effective upon issuance. The adoption of FSP FAS
157-3 had no effect on our financial position or results of operations.Financial Assets and Financial Liabilities Effective January 1, 2008, we adopted the
provisions of FAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (FAS 159), which permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently required to be
measured at fair value. The adoption of FAS 159 had no effect on our financial position or
results of operations.Accounting for Business Combinations In late 2007, the FASB issued FAS No. 141(R), Business
Combinations-a replacement of FASB Statement No. 141 (FAS 141(R)), which significantly
changes the principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. FAS 141(R) also provides guidance for
recognizing and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. FAS 141(R) is effective prospectively,
except for certain retrospective adjustments to deferred tax balances, for fiscal years
beginning after December 15, 2008 and will become effective for us on January 1, 2009. To the
extent we engage in any business combinations after January 1, 2009, we expect that the
adoption of FAS 141(R) will have an impact on our future financial position and results of
operations, depending on the assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree.Derivative Instruments and Hedging Activities  In March 2008, the FASB issued FAS No. 161,
Disclosures About Derivative Instruments and Hedging Activities
 an amendment of FASB Statement No. 133 (FAS
161).  FAS 161 amends FAS No. 133 by requiring
expanded disclosures about, but does not change the accounting for, derivative
instruments and hedging activities, including increased qualitative, quantitative, and
credit-risk disclosures.  FAS 161 is effective for years and interim periods beginning after
November 15, 2008 and will become effective for us on January 1, 2009.  We are currently evaluating
the potential impact that the adoption of FAS 161 will have on our financial position and results of operations.Useful Life of Intangible Assets  In April 2008, the FASB issued FASB Staff Position
(FSP) FAS 142-3, Determination of Useful Life of
Intangible Assets (FSP FAS 142-3).
FSP FAS 142-3 amends the factors that should be considered in developing the renewal or
extension assumptions used to determine the useful life of a recognized intangible asset
under FAS 142, Goodwill and Other Intangible Assets.  FSP FAS 142-3 also requires expanded
disclosure related to the determination of intangible asset useful lives.
FSP FAS 142-3 is effective for years beginning after December 15, 2008 and will become effective
for us on January 1, 2009. We are currently evaluating the potential impact the adoption of
FAS FSP 142-3 will have on our financial position and results of operations.Heirarchy of Generally Accepted Accounting Principles  In May 2008,
the FASB issued FAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles (FAS 162).
FAS 162 identifies the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements of nongovernmental entities
that are presented in conformity with generally accepted accounting principles (GAAP) in the
United States (the GAAP hierarchy). While FAS 162 formalizes the sources and hierarchy of GAAP
within the authoritative accounting literature, it does not change the accounting principles
that are already in place.  FAS 162 is effective 60 days following the Security and Exchange
Commissions approval of the Public Company Accounting Oversight Board amendments to Auditing
Standards Section 411.  We do not expect the adoption of FAS 162 to have a material effect on our
financial position or results of operations.Participating Securities  In June 2008, the FASB issued FSP Emerging Issues Task Force
(EITF) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities (FSP 03-6-1).  FSP 03-6-1 clarifies that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and are to be included in the computation of earnings per
share under the two-class method described in SFAS No. 128,
Earnings Per Share. This FSP will be effective for
us on January 1, 2009 and requires all presented prior-period earnings per share data to be adjusted retrospectively.
We do not expect the adoption of FSP 03-6-1 to have a material effect on our financial position or results of operations.Defensive Intangible Assets In November 2008 the FASB ratified EITF Issue No. 08-7,
Accounting for Defensive Intangible Assets, or EITF 08-7. EITF 08-7 applies to defensive
intangible assets, which are acquired intangible assets that the acquirer does not intend to
actively use but intends to hold to prevent its competitors from obtaining access to them. As
these assets are separately identifiable, EITF 08-7 requires an acquiring entity to account for
defensive intangible assets as a separate unit of accounting, which should be amortized to
expense over the period the asset diminished in value. Defensive intangible assets must be
recognized at fair value in accordance with SFAS 141R and SFAS 157. EITF 08-7 is effective for
financial statements issued for fiscal years beginning after December 15, 2008. We do not
expect EITF 08-7 will have an impact on our consolidated financial statements when effective,
but the nature and magnitude of the specific effects will depend upon the nature, terms and
size of any intangible assets purchased after the effective date.
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Transfers of Financial Assets and Interests in Variable Interest Entities In December 2008,
the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises)
about Transfers of Financial Assets and Interests in Variable Interest Entities, (FSP FAS
140-4 and FIN 46(R)-8). This pronouncement amends FASB Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities to require
public entities to provide additional disclosures about the transfers of financial assets. The
pronouncement also amends FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities, to require public enterprises to provide additional disclosures
about their involvement with variable interest entities and qualifying special purpose
entities.FSP FAS 140-4 and FIN 46(R)-8 were effective for us for the year ended December 31,
2008. As we do not have any variable interest entities or special purpose entities, the
adoption of this standard did not have any impact on our financial position, results of
operations or financial statement disclosures.Employers Disclosures about Postretirement Benefit Plan AssetsIn December 2008, the FASB
issued FSP FAS No. 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets
(FSP FAS 132(R)-1), which requires additional disclosures for employers pension and other
postretirement benefit plan assets. As pension and other postretirement benefit plan assets
were not included within the scope of SFAS No. 157, FSP FAS 132(R)-1 requires employers to
disclose information about fair value measurements of plan assets similar to the disclosures
required under SFAS No. 157, the investment policies and strategies for the major categories of
plan assets, and significant concentrations of risk within plan assets. FSP FAS 132(R)-1 will
be effective for us as of December 31, 2009. We do not expect the adoption of this standard
will have any impact on our financial position, results of operations or financial statement
disclosures.Impairment of Purchased Beneficial InterestsIn January 2009, the FASB issued FSP EITF No.
99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 (FSP EITF 99-20-1).
This pronouncement amends EITF 99-20, Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a
Transferor in Securitized Financial Assets, (EITF 99-20), to achieve more consistent
determination of whether an other-than-temporary impairment has occurred. FSP EITF 99-21-1 also
retains and emphasizes the objective of an other than-temporary impairment assessment and the
related disclosure requirements in SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, and other related guidance. FSP EITF 99-20-1 is effective for interim
and annual reporting periods ending after December 15, 2008, and is required to be applied
prospectively. The adoption of FSP EITF 99-20-1 did not have any impact on our financial
position or results of operations.2.
    
    Earnings (Loss) per ShareBasic earnings (loss) per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the period. Diluted earnings (loss) per
share is computed using the weighted average number of common shares outstanding and, when
dilutive, potential common shares from stock options and warrants using the treasury stock
method. Diluted earnings per share excludes the impact of potential common shares related to
stock options and warrants in periods in which we reported a loss from continuing operations
or in which the option or warrant exercise price is greater than the average market price of
our common stock during the period because the effect would be antidilutive. A total of
1,058,000 common shares issuable upon the exercise of in-the-money stock options and warrants
were excluded from the diluted weighted average number of shares outstanding for the year
ended December 31, 2007 because their effect was antidilutive.The following table sets forth the calculation of basic and diluted earnings (loss) per share:
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Year Ended December 31,2008
    
    
    2007
    
    
    2006Income (loss) from continuing operations
    
    $
    10,735
    
    
    $
    (999
    )
    
    $
    11,733Loss from discontinued operations
    
    
    (77
    )
    
    
    (609
    )
    
    
    (28
    )Net income (loss)
    
    $
    10,658
    
    
    $
    (1,608
    )
    
    $
    11,705Basic weighted-average common
shares outstanding in period
    
    
    16,374
    
    
    
    16,045
    
    
    
    15,063Add dilutive effects of stock
options and warrants
    
    
    647
    
    
    
    
    
    
    
    1,414Diluted weighted-average commonshares outstanding in period
    
    
    17,021
    
    
    
    16,045
    
    
    
    16,477Basic earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    0.66
    
    
    $
    (0.06
    )
    
    $
    0.78Loss from discontinued operations
    
    
    (0.00
    )
    
    
    (0.04
    )
    
    
    (0.00
    )Basic earnings (loss) per common share
    
    $
    0.65
    
    
    $
    (0.10
    )
    
    $
    0.78Diluted earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    0.63
    
    
    $
    (0.06
    )
    
    $
    0.71Loss from discontinued operations
    
    
    (0.00
    )
    
    
    (0.04
    )
    
    
    (0.00
    )Diluted earnings (loss) per common share
    
    $
    0.63
    
    
    $
    (0.10
    )
    
    $
    0.71
 3.
    
    Restructuring ChargesThe accompanying consolidated results of operations for the year ended December 31, 2007
include restructuring charges for severance and associated costs related to certain
organizational changes focused on accelerating our growth, and especially the growth of our
PowerSecure subsidiary. These restructuring charges also include costs related to our
decision to relocate our corporate headquarters from Denver, Colorado to our PowerSecure
subsidiarys facilities in Wake Forest, North Carolina. These restructuring charges totaled
$14,139 pre-tax, $8,625 after-tax, and $0.83 per fully diluted share. These pre-tax charges
are reported in the Restructuring charges line in the accompanying consolidated statement of
operations for the year ended
December 31, 2007 and are recorded in the Unallocated Corporate Costs amounts included in
the segment financial information in Note 15.These restructuring charges are the result of certain organizational changes made in April
2007 by our board of directors that were focused on accelerating our growth, and especially
the growth of our PowerSecure subsidiary. In April 2007, W. Phillip Marcum, one of our
founders, resigned as our Chairman of the Board, President and Chief Executive Officer, and
the Board appointed Sidney Hinton, who had previously served as President and Chief Executive
Officer of our PowerSecure subsidiary, to also to serve as our President and Chief Executive
Officer and appointed a non-employee director to serve as our Chairman. Also in April 2007,
A. Bradley Gabbard, also one of our founders, resigned as our Executive Vice President and
Chief Financial Officer, and the Board appointed Gary Zuiderveen, our controller, to also
serve as our Chief Financial Officer until a new Chief Financial Officer was located and
appointed. As a result of these organizational changes, we recorded restructuring charges of
$14,139 in fiscal 2007. These
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charges included severance of $7,661 for our former Chief
Executive Officer, $5,237 for our former Chief Financial Officer, $182 for other individuals,
as well as $1,000 of third-party professional fees and other expenses directly related to
implementing the organizational changes. During the years ended December 31, 2008 and 2007,
we made cash payments in the aggregate amount of $4,026 and $8,410, respectively, for the
liability accrued for these organizational changes. The balance of our payment obligations at
December 31, 2008 relating to these organizational changes, which balance consists entirely of
severance costs to our former Chief Executive Officer and our former Chief Financial Officer,
will be paid in installments of $1,349 in 2009, and $355 in 2010.Also in April 2007, our Board approved a plan to relocate our corporate headquarters from
Denver, Colorado to our facilities in Wake Forest, North Carolina. In connection with the
relocation, we incurred $23 in lease termination costs, all of which were incurred and paid
during the year ended December 31, 2007 and recorded as restructuring charges.4.
    
    Private Placement and Related Transactions2006 Private Placement 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 $28,176 (the 2006 Private Placement). The 2006
Private Placement was made pursuant to a Securities Purchase Agreement, dated as of March 29,
2006. In addition, we entered into a Registration Rights Agreement, dated March 29, 2006, with
the investors, pursuant to which we filed with the Securities and Exchange Commission (the
SEC) a registration statement to register the resale of the shares purchased in the 2006
Private Placement by the investors, that was declared effective by the SEC on May 9, 2006. We
are obligated to use our reasonable best efforts to keep the registration statement
continuously effective until the earliest of five years after its effective date or until all
of the shares covered by the registration statement have been sold or may be sold without the
volume restrictions under Rule 144(k) of the Securities Act of 1933, as amended (the
Securities Act).We received net cash proceeds of approximately $26,221 from the 2006 Private Placement, of
which we used $5,064 for the retirement of long-term debt, and the balance of which we have and
intend to continue to use for capital expenditures, working capital, acquisitions, and other
general corporate purposes. We paid a cash commission in the amount of $1,856 to Roth Capital
Partners, LLC, our placement agent in the 2006 Private Placement. The shares were issued in
the 2006 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.2004 Private Placement and Stock Warrant Exercises In May 2004, we completed a private
placement to institutional and accredited investors of 3,510,548 shares of our common stock
and warrants to purchase 1,053,164 shares of our common stock (the 2004 Private Placement),
raising gross proceeds of $10,883. The warrants issued in the 2004 Private Placement have an
exercise price of $3.41 per share of common stock and expire in May 2009. The warrants were
callable by us commencing one year after issuance, upon satisfaction of certain conditions.On January 19, 2006, we exercised our right to call the 892,518 remaining outstanding warrants
issued in the 2004 Private Placement. As a result of the warrant call, 801,517 warrants were
exercised resulting in $1,775 proceeds to us and the issuance of 705,000 shares of our common
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stock. At December 31, 2008 and 2007, 91,001 warrants remained outstanding due to
restrictions upon exercise applicable at the time we called the warrants to one group of the
warrant holders.5.
    
    Discontinued OperationsIn December 2007, our board of directors approved a plan to sell substantially all of the
assets of Metretek Florida, which operated our automated data collection and telemetry
segment. The board of directors adopted this plan in conjunction with its review of our
strategic alternatives for our non-core businesses. On March 14, 2008, Metretek Florida
entered into an Asset Purchase Agreement with Mercury Instruments LLC (Mercury). Under the
purchase agreement, Metretek Florida sold substantially all of its assets and business to
Mercury for a total purchase price of $2,250. The sale was completed March 31, 2008. On
April 1, 2008, we received proceeds from the sale in the amount of $1,800, and the remaining
proceeds from the sale in the amount of $450 were deposited by the seller into an escrow
account, the balance of which is included in other receivables in the accompanying
consolidated balance sheet at December 31, 2008.Metretek Florida retained its cash, accounts receivables, accounts payable in excess of $183
and certain other liabilities, other than those liabilities expressly assumed by Mercury in
the purchase agreement. Mercury assumed most of the customer orders of Metretek Florida and
its facilities lease. The purchase agreement contains customary representations, warranties
and indemnification obligations by Metretek Florida and Mercury to each other, and includes a
one year escrow of $450 of the purchase price to support the indemnity obligations of Metretek
Florida.As a result of the sale, we recorded an after-tax estimated loss on disposal of our
discontinued operations of $1,120 during the fourth quarter of fiscal 2007. Upon closing of
the sale, we recorded an additional loss on disposition in the amount of $42 to reflect
changes in assets and liabilities sold from December 31, 2007 to the date of closing. This
non-cash charge represents our current estimate of the actual losses incurred. Additional
losses may be recorded to the extent indemnity obligations are incurred, or warranty and other
obligations exceed amounts we have currently reserved.The accompanying consolidated financial statements have been reclassified for all periods
presented to reflect the operations of Metretek Florida as discontinued operations. We ceased
recording depreciation upon classification of the assets as discontinued operations in January
2008. Depreciation and amortization expense of Metretek Florida during the years ended
December 31, 2007 and 2006 was $44 and $107, respectively. Results of discontinued operations
for the years ended December 31 were as follows:
 2008
    
    
    2007
    
    
    2006Total revenues
    
    $
    1,285
    
    
    $
    5,240
    
    
    $
    3,663Operating expenses
    
    
    1,321
    
    
    
    4,599
    
    
    
    3,691Income (loss) from operations
    
    
    (36
    )
    
    
    641
    
    
    
    (28
    )Income tax benefit
    
    
    1
    
    
    
    11
    
    
    
    Estimated loss on disposal
    
    
    (42
    )
    
    
    (1,261
    )
    
    
    Loss from discontinued operations
    
    $
    (77
    )
    
    $
    (609
    )
    
    $
    (28
    )
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The loss on disposal for the year ended December 31, 2007 includes $140 of charges related to
the ultimate disposal of the remaining net assets of MCM, a wholly-owned subsidiary of
Metretek Florida. Our board of directors had approved to a plan to sell the assets and
business of MCM in 2004.The following assets and liabilities were segregated and classified as held for sale, in the
accompanying consolidated balance sheet at December 31, 2008 and 2007:
 2008
    
    
    2007Inventories
    
    $
    
    
    
    $
    1,189Prepaid expenses and other current assets
    
    
    
    
    
    
    195Property, plant and equipment, less
accumulated depreciation
    
    
    
    
    
    
    163Goodwill
    
    
    
    
    
    
    771Intangible assets, less accumulated amortization
    
    
    
    
    
    
    48Other assets
    
    
    
    
    
    
    34Assets of discontinued operations held for sale
    
    $
    
    
    
    $
    2,400Current liabilites
    
    
    53
    
    
    
    754Other
    
    
    
    
    
    
    Liabilities of discontinued operations held for sale
    
    $
    53
    
    
    $
    754
 Net cash flows of our discontinued operations from the categories of investing and financing
activities were not significant for 2008, 2007 and 2006.6.
    
    Series B Preferred StockIn February 2000, we completed a $14,000 private placement consisting of 1,400,000 shares of
common stock, 7,000 shares of Series B convertible preferred stock and warrants to purchase
700,000 shares of our common stock. All unconverted Series B preferred stock was subject to
mandatory redemption on December 9, 2004. The warrants issued in the private placement
expired unexercised on December 9, 2004.During the year ended December 31, 2006, we retired shares of Series B preferred stock at a
total redemption value of $81. During the year ended
December 31, 2007, we retired additional shares of Series B preferred
stock at a total redemption value of $220. There were no shares
of Series B preferred stock presented for redemption during the year ended December 31, 2008.
At December 31, 2008, our redemption obligation on the remaining 71 shares of Series B
preferred stock is $104. We expect to retire the remaining shares of Series B preferred stock
during 2009 as the holders of the remaining preferred shares present such shares to us for
redemption. The balance of the redemption obligation is included in accrued and other
liabilities in the accompanying consolidated balance sheets.7.
    
    Acquisitions and Minority InterestsPowerSecure Subsidiary Acquisitions During the third quarter of 2007, our PowerSecure
subsidiary formed EfficientLights, LLC. EfficientLights designs and manufactures lighting
solutions that substantially reduce the energy consumed in lighting refrigerated cases in
grocery and retail drug stores. EfficientLights purchased certain energy conservation assets
and
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operations from Advanced Specialty Products, Inc. (ASP) and its founder in exchange for
cash, assumption of certain liabilities, and a 33.33% ownership interest in EfficientLights.
The assets acquired included the assets and technology associated with its primary product, an
LED lighting solution for freezer cases in retail chains that consumes approximately one-third
the energy of a comparable fluorescent unit. As a result of the acquisition, our PowerSecure
subsidiary owns 66.67% of the ownership interest in EfficientLights and the principal of ASP,
who is now the President of EfficientLights, owns the remaining 33.33% minority ownership
interest. In connection with the acquisition of the assets and business, our PowerSecure
subsidiary acquired an option to purchase the remaining one-third ownership interest of
EfficientLights in exchange for 1,000,000 shares of our common stock. The acquisition was
accounted for as a purchase, and the operating results of EfficientLights have been included in
the consolidated statement of operations from the date of acquisition. The minority
shareholders interest in accumulated losses of EfficientLights exceeded his basis in
EfficientLights at December 31, 2007. Accordingly, we discontinued recording additional
minority interest losses in EfficientLights effective January 1, 2008.The purchase price of the EfficientLights acquisition was allocated as follows:
 Cash
    
    $
    60Equipment
    
    
    89Intangible rights
    
    
    11Accounts payable
    
    
    (70
    )Minority interest
    
    
    (30
    )Net assets acquired
    
    $
    60
 Pro forma results of operations for the years ended December 31, 2007 and 2006 have not been
included herein as the effects of the acquisition were not material to our results of
operations.During the third quarter of 2006, our PowerSecure subsidiary 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. In
addition, our PowerSecure subsidiary acquired expertise in equipment design concepts, budgeting
procedures, pricing strategies and other intellectual property in the federal market. The
purchase price for the intellectual property and contract rights was $1,500, which was
allocated to intellectual property and to the individual contract rights acquired and is being
amortized over the respective expected asset lives.During the fourth quarter of 2006, our PowerSecure subsidiary purchased the substantially all
of the assets and certain of the liabilities of PowerFab, a North Carolina company engaged in
the business of building trailers for transportation of goods and equipment, as part of our
mobile distributed generation equipment business strategy and to gain capabilities in the area
of metal fabrication. The assets acquired included cash, accounts receivable, inventory,
contract rights, furniture and fixtures, equipment, land and building, and certain intangible
assets including patent rights and trademarks. The liabilities assumed were limited to
obligations incurred under contracts acquired. The purchase price was $810 and was paid at
closing. The acquisition was accounted for as a purchase with the operating results of
PowerFab included in the consolidated statement of operations from the date of acquisition.
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The purchase price of the two fiscal 2006 PowerSecure subsidiary acquisitions, including direct
costs incurred in the amount of $44, was allocated as follows:
 Cash
    
    $
    9Accounts receivable
    
    
    43Inventory
    
    
    42Equipment
    
    
    122Land and building
    
    
    375Intangible rights
    
    
    1,545Goodwill
    
    
    306Accounts payable
    
    
    (88
    )Net assets acquired
    
    $
    2,354
 Pro forma results of operations for the year ended December 31, 2006 have not been included
herein as the effects of the acquisitions were not material to our results of operations.CAC LLC Minority Interest We previously owned a 73.75% interest in CAC LLC through our
subsidiary, WaterSecure. CAC LLC was formed in January 2004 to acquire additional interests in
our unconsolidated affiliate, MM 95-2. Effective April 1, 2006, the assets (consisting
principally of the investment in MM 95-2) and liabilities of CAC LLC (consisting principally of
a long-term note payable) were distributed to its shareholders (including WaterSecure), the
separate operating activities of CAC LLC ceased, and the minority shareholders interest in the
equity of CAC LLC was eliminated. The minority shareholders interest in the income of CAC LLC
for the period from January 1, 2006 to March 31, 2006 was $72, and is included in minority
interest in the accompanying consolidated financial statements.8.
    
    Deferred Compensation PlanIn his employment agreement (see Note 11), Sidney Hinton, our President and Chief Executive
Officer, has a deferred compensation arrangement that provides for payments by us to him, upon
retirement, monthly amounts ranging from $15 per month, if he commences receiving payments at
age 53, to $20 per month, if he commences receiving payments at age 58, which payments continue
for life. The deferred compensation payments under the plan vest on the earlier of August 15,
2012 or upon a change in control. We funded our obligation under the deferred compensation
plan in 2007 through the purchase of a fixed deferred annuity contract in the amount of $1,978
through John Hancock Annuities. The deferred annuity contract provides for a guaranteed
minimum interest rate on the annuity sufficient to meet our obligations under the deferred
compensation plan. If the deferred compensation fails to vest, then the annuity reverts to us.
We are subject to income tax on the earnings of the annuity. The fair value of the annuity,
including interest thereon, at December 31, 2008 and 2007 is $2,133 and $2,001, respectively,
and is included in the accompanying consolidated balance sheet under other assets. We are
accruing our obligation under the deferred compensation agreement over a period of eight years.
The liability for the deferred compensation obligation at December 31, 2008 and 2007 is $388
and $55, respectively, and is included in the accompanying consolidated balance sheet under
deferred compensation obligation. The accompanying consolidated statements of operations
includes
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general and administrative expense in the amount of $329 and $55 for the years ended
December 31, 2008 and 2007, respectively, associated with the deferred compensation plan.9.
    
    DebtLine of Credit In August 2007, we entered into a revolving credit agreement with Citibank,
N.A., as the administrative agent, providing for a three-year $25,000 senior, first-priority
secured revolving and term credit facility. The revolving credit facility refinanced and
expanded our prior credit facility with First National Bank of Colorado. The agreement was
guaranteed by our active subsidiaries and secured by all of our assets and the assets of our
subsidiaries.In January 2008, we entered into a $2,584 term credit agreement with Citibank, for the purpose
of financing a portion of the purchase price of our Wake Forest, North Carolina principal
executive offices and the offices of our PowerSecure subsidiary. This term credit facility
contained virtually the same terms, and was secured by the same collateral, including security
interest and guarantees, as our revolving credit facility, but did not reduce our available
borrowings under the revolving credit facility.In January 2008, we entered into a first amendment to the revolving credit agreement with
Citibank, modifying the credit agreement to incorporate and facilitate the term credit
agreement and to amend certain technical provisions of the credit agreement.In May 2008, we entered into a second amendment to the revolving credit agreement and first
amendment to term credit agreement with Citibank, modifying the credit agreement and term
credit agreement to eliminate the restrictive covenants on annual capital expenditures.In November 2008, we entered into a third amendment to the revolving credit agreement with
Citibank, and expanded the lenders to include SunTrust bank and BB&T. The amendment expanded
the amount of the credit facility to $50,000 and modified certain terms and conditions of the
revolving credit agreement, including extending the maturity date to November 2011, increasing
the interest rate, adding a feature to enable balances used to finance recurring revenue
projects to continue to be financed after November 2011 under an extended term facility that
matures in November 2013, certain affirmative, negative and financial covenants, the use of
proceeds and other terms of the credit agreement. The credit facility, as amended, is a
$50,000 senior, first-priority secured revolving credit facility that is guaranteed by all of
our active subsidiaries and secured by all of our assets and the assets of our active
subsidiaries.We may, from time to time, request an increase in the aggregate revolving commitment amount by
up to $15,000 without the prior consent of the lenders provided that each lender has the
unilateral right to determine whether it agrees to increase its revolving commitment and that
no lender is required to increase its individual pro rata commitment amount without such
lenders consent.Pursuant to the third amendment, the credit facility, as a revolving credit facility, matures
and terminates on November 13, 2011. However, we have the option prior to that maturity date
to convert a portion of outstanding principal balance, in an amount not to exceed the present
value of estimated annual contract revenues receivable under the initial term of contracts for
recurring revenue projects executed after December 31, 2007, into a non-revolving term loan
for a two year
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period expiring November 12, 2013, making quarterly payments based upon a four
year fully amortized basis.We intend to use the proceeds available under the credit facility to finance our PowerSecure
subsidiarys recurring revenue projects as well as to finance capital expenditures, working
capital, acquisitions, and general corporate purposes. Our outstanding borrowings under the
credit facility at any time, the proceeds of which were used for working capital purposes and
not in connection with recurring revenue projects, cannot exceed $15,000.As amended, outstanding balances under the credit facility bear interest, at our discretion,
at either the London Interbank Offered Rate for the corresponding deposits of U. S. Dollars
plus an applicable margin, which is on a sliding scale ranging from 175 basis points to 300
basis points based upon the our leverage ratio, or at Citibanks alternate base rate plus an
applicable margin, on a sliding scale ranging from 0 basis points to 125 basis points based
upon our leverage ratio. Our leverage ratio is the ratio of our funded indebtedness as of a
given date to our consolidated EBITDA as defined in the credit agreement for the four
consecutive quarters ending on such date. Citibanks alternate base rate is equal to the
higher of the Federal Funds Rate as published by the Federal Reserve of New York plus 0.50%,
and Citibanks prime commercial lending rate.The credit facility is not subject to any borrowing base computations or limitations, but does
contain certain financial covenants. Our maximum leverage ratio cannot exceed 3.25. Our
minimum fixed charge coverage ratio must be in excess of 1.50, where the fixed charge coverage
ratio is defined as the ratio of the aggregate of our trailing 12 month consolidated EBITDA
plus our lease or rent expense minus our taxes based on income and payable in cash, divided by
the sum of our consolidated interest charges plus our lease or rent expenses plus our
scheduled principal payments and dividends, computed over the previous period. Also, our
minimum asset coverage must be in excess of 1.25, where our asset coverage is defined as the
summation of 80% of the book value of accounts receivable plus 60% of the book value of
inventory plus 50% of the book value of net fixed assets, divided by total funded debt
outstanding. In addition, we are required to maintain a minimum consolidated tangible net
worth, computed on a quarterly basis, equal to approximately $42.8 million, plus 50% of our
net income each year ending after December 31, 2007, with no reduction for any net loss in any
year, plus 100% of any equity we raise through the sale of equity interests, less the amount
of any non-cash charges or losses. Finally, our debt to worth ratio, which is the ratio of our
total consolidated indebtedness to our consolidated tangible net worth, cannot exceed 1.5 to
1.0 at the end of any quarter. At December 31, 2008, we were in compliance with these
financial covenants.Under the amended credit facility, our cumulative capital expenditures beginning in 2008
cannot exceed the sum of $5,000 plus $1,250 per quarter, on a cumulative basis, plus an
allowance for our PowerSecure subsidiary recurring revenue projects generated after December
31, 2007. The amendment to the credit facility did not significantly modify the other
representations and warranties and affirmative and negative covenants under the credit
agreement, including restrictions with respect to liens, indebtedness, loans and investments,
material changes in our business, asset sales or leases or transfers of assets, restricted
payments such as distributions and dividends, mergers or consolidations and transactions with
affiliates.Upon the sale of any of our assets or the assets of our subsidiaries other than in the
ordinary course of business or the public or private sale of any of our equity or debt or the
equity or debt of our subsidiaries other than equity issuances where the aggregate net equity
proceeds do not
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exceed $10,000, we are required to use the net proceeds thereof to repay any
indebtedness then outstanding under the credit facility, except for certain reinvestment
provisions.Our obligations under the credit facility are secured by guarantees and security agreements by
each of our active subsidiaries, including but not limited to our PowerSecure subsidiary,
Southern Flow and WaterSecure. The guarantees guaranty all of our obligations under the
credit facility, and the security agreements grant to the lenders a first priority security
interest in virtually all of the assets of each of the parties to the credit agreement.The credit agreement also 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.In connection with the third amendment to the credit facility described above, we used
approximately $2,500 of cash on hand to repay the outstanding balance of, and to terminate,
the term credit agreement, dated as of January 17, 2008, between us and Citibank.At December 31, 2008, there were no balances outstanding under the credit facility and we had
$50,000 available to borrow, however, the availability of this capital under our credit
facility includes restrictions on the use of proceeds, and is dependent upon our ability to
satisfy certain financial and operating covenants, as described above.Equipment Line On July 22, 2008, Caterpillar Financial Services Corporation (Caterpillar)
renewed a line of credit to finance the purchase, from time to time, of Caterpillar generators
to be used in our PowerSecure subsidiarys projects, primarily those projects sold under the
recurring revenue model, pursuant to a letter by Caterpillar containing the terms of this
credit line. The line of credit was increased from its previous $7,500 level to $10,000.
Under this line of credit, our PowerSecure subsidiary 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. The line of credit expires on September 30, 2009
(subject to renewal, if requested by our PowerSecure subsidiary and accepted by Caterpillar in
its sole discretion), or at an earlier date upon notice given by Caterpillar in its sole
discretion. The letter setting forth the terms of the line of credit confirms the intent of
Caterpillar to finance equipment purchases by our PowerSecure subsidiary, but is not an
unconditional binding commitment to provide such financing. The line of credit contains
various customary provisions and is contingent upon the continued credit-worthiness of our
PowerSecure subsidiary in the sole discretion of Caterpillar. This line of credit from
Caterpillar is a permitted indebtedness under our credit facility
with Citibank. As of December 31, 2008,
there were no balances borrowed or outstanding under the equipment line of credit with
Caterpillar.10.
    
    Capital Lease ObligationsIn December 2008, we entered into a sale and leaseback transaction with SunTrust Equipment
Finance and Leasing, an affiliate of SunTrust bank, resulting in the sale of distributed
generation equipment placed in service at customer locations and a lease of the equipment from
SunTrust. We received $5,912 from the sale of the equipment which we will repay under the
terms of the lease with monthly payments of $85 of principal and interest over a period of 84
months. At the expiration of the term of the lease, we have the option to purchase the
equipment for $1, assuming
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no default under the lease by us has occurred and is then
continuing. The lease is guaranteed by us under an equipment lease guaranty. The lease and
the lease guaranty constitute permitted indebtedness under our current credit agreement, under
which an affiliate of the lessor is one of the lenders.We intend to use the proceeds of the lease financing to finance our PowerSecure subsidiarys
recurring revenue projects as well as to finance capital expenditures and working capital. We
account for the lease financing as a capital lease in our consolidated financial statements in
accordance with generally accepted accounting principles.The lease provides our PowerSecure subsidiary with limited rights, subject to the lessors
approval which will not be unreasonably withheld, to relocate and substitute equipment during
its term. The lease contains customary representations and warranties, covenants relating to
the use and maintenance of the equipment, indemnification, events of default, including
payment defaults, breach of representations and warranties, covenant defaults, cross-defaults,
certain
bankruptcy or insolvency events, customary for leases of this nature. The lease also grants
to the lessor certain remedies upon a default, including the right to cancel the lease, to
accelerate all rent payments for the remainder of the term of the lease, to recover liquidated
damages, or to repossess and re-lease, sell or otherwise dispose of the equipment.Under the lease guaranty, we have unconditionally guaranteed the obligations of our
PowerSecure subsidiary under the lease for the benefit of the lessor.Capital lease obligations at December 31, 2008 consist of the equipment described above as
well as a $5 equipment lease at Southern Flow payable in monthly installments, including
interest, at 6.85%. The scheduled annual payments on our capital lease obligations are as
follows:
 ScheduledYear Ending December 31:
    
    Payments2009
    
    $
    1,0172010
    
    
    1,0172011
    
    
    1,0172012
    
    
    1,0162013 and beyond
    
    
    3,047Total minimum lease payments
    
    
    7,114Less: Interest included in the lease payments
    
    
    1,197Present value of minimum lease payments
    
    $
    5,917
 11.
    
    Commitments and Contingencies and Income from Litigation SettlementsIncome from Litigation Settlements In January 2001, a class action was filed in the District
Court for the City and County of Denver, Colorado against us and certain affiliates and parties
unrelated to us. 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 WaterSecure was the managing trustee. A settlement to fully resolve all claims by the
class against us and our affiliates was submitted and granted final approval by the district
court on June 11, 2004. We recorded the loss that occurred as a result of the class action and
settlement in the
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fourth quarter of 2002. All of our obligations under the settlement were
extinguished during the second quarter of 2006.After the settlement with the class was approved, we vigorously pursued 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.We agreed to settlements with four of the Other Parties during the fourth quarter of 2006 and
with the remaining Other Parties in 2007. As a result of the settlements with the Other
Parties, we recorded income during the years ended December 31, 2007 and 2006 in the amounts of
$385 and $343, respectively. These amounts are included in interest and other income in our
consolidated statements of operations. All of the Other Party Claims have been settled and no
additional amounts are payable to us at December 31, 2008.Other Matters From time to time, we hire employees that are subject to restrictive
covenants, such as non-competition agreements with their former employers. We comply, and
require our employees to comply, with the terms of all known restrictive covenants. However,
we have in the past and may in the future receive claims and demands by some former employers
alleging actual or potential violations of these restrictive covenants. While we do not
believe any pending claims have merit, we cannot provide any assurance of the outcome of these
claims.From time to time, in the ordinary course of business we encounter performance issues with key
component parts we utilize in our distributed generation systems, switchgear systems, utility
infrastructure products, and lighting products, such as engines, generators, breakers, fuel
systems, LED and other lighting technologies, and other complex electrical components. While
we strive to utilize high quality component parts from reputable suppliers, and to back-up
their quality and performance with manufacturers warranties, even the best parts and
components have performance issues from time to time, and these performance issues create
significant financial and operating risks to our business, operations and financial results.
These risks include the expense, time, focus and resources involved in repairing, replacing or
modifying distributed generation systems, switchgear systems and lighting systems for component
part malfunctions, whether or not covered under manufacturers warranties and the burden and
costs we would incur due to manufacturers disputing or failing to timely and fully honor their
warranty obligations for quality and performance issues. These risks also include the
potential material and adverse effects on our business, operations, reputation and financial
results, including reduced revenues, additional expenses and capital cost, and asset
write-offs, due to the cancellation or deferral of projects by our customers, or claims made by
our customers for damages, as a result of performance issues.Although we believe our suppliers warranties generally cover these performance issues, from
time to time we face disputes with our suppliers with respect to those performance issues and
their warranty obligations, or the performance issues are not covered by manufacturers
warranties, and our customers may claim to incur damages as a result of those performance
issues. In those cases, we vigorously defend our position and rights, including our warranty
rights, and we take all commercially practical actions to ensure our customers are fully
satisfied with the quality of our products and services and do not incur any damages. As of
the date of this report, we have identified performance issues with approximately $5-10 million
of manufacturers component
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parts installed in distributed generation systems deployed at
customers sites, and additional performance issues could arise from time to time in the
future. We are working collaboratively with the manufacturers to resolve these issues.
However, in the event the manufacturers solutions do not fully satisfy the required
performance standards, we could incur additional costs to replace, rebuild, or repair these
systems, as well as incur adverse material future financial consequences related to the
cancellation of customer contracts, including reduced revenues, additional expenses and capital
cost, and asset write-offs. In certain instances, these performance issues could also result
in customers claims for damages. We currently expect the manufacturers to rectify these
performance issues to meet our customers required performance standards with minimal
additional cost to us, however, we cannot provide any assurance that an acceptable solution
will be achieved in each case, or if a solution is
achieved the timing or costs to us associated with such solutions. Additionally, the outcome
of any warranty claims is inherently difficult to predict due to the uncertainty of technical
solutions, cost, customer requirements, and the uncertainty inherent in litigation and disputes
generally, and thus there is no assurance we will not be adversely affected by these, or other
performance issues with key parts and components. In addition, the mere existence of
performance issues, even if finally resolved with our suppliers, can have an adverse effect on
our reputation for quality, which could adversely affect our business. Accordingly, potential
negative financial impacts from these items cannot be estimated at this time.From time to time, we are involved in other disputes and legal actions arising in the ordinary
course of business. We intend to vigorously defend all claims against us. Although the
ultimate outcome of these 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.Operating Leases We lease business facilities, equipment and vehicles under operating lease
agreements which specify minimum rentals. Substantially all leases have renewal provisions.
Rental expense for the years ended December 31, 2008, 2007 and 2006 totaled $3,038, $2,455 and
$1,721, respectively. Future minimum rental payments under noncancelable operating leases
having an initial or remaining term of more than one year are as follows:
 ScheduledYear Ending December 31:
    
    Payments2009
    
    $
    9882010
    
    
    7552011
    
    
    5262012
    
    
    4562013 and thereafter
    
    
    630Total minimum rental payments
    
    $
    3,355
 Employee Benefit Plan We have a defined contribution savings and investment plan (the 401(k) Plan) under Section 401(k) of the Internal Revenue Code.
All employees age 18 or older are eligible to participate in the 401(k) Plan. The 401(k) Plan provides for discretionary contributions by employees of up to 80% of their eligible compensation.
In 2008, 2007, and 2006, we made discretionary matching contributions of 50% of participant contributions, subject
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to a maximum of 6% of each participants eligible compensation. Our 401(k) Plan expense for
the years ended December 31, 2008, 2007 and 2006 was $454, $354 and $296, respectively.Employment Agreements On August 15, 2007, we entered into an Employment and Non-Competition
Agreement (the Hinton Employment Agreement) with Sidney Hinton, our President and Chief
Executive Officer. The key terms of the Hinton Employment Agreement include a five year term,
with automatic one-year renewals, an increase in base salary, annual bonuses equal to 7% of
our PowerSecure subsidiarys cash flow from operations, a grant of 600,000 restricted shares
of our common stock (see Note 14), a $5,000 life insurance policy, a disability insurance
policy and an annuity upon his retirement (see Note 8). The Hinton Employment Agreement also
provides for severance benefits equal to as much as three times the sum of his most recent
base salary plus his average bonuses for the two years before and for the year of the date of
termination, depending upon the circumstances of his termination.On December 10, 2007, we entered into an Employment and Non-Competition Agreement (the Hutter
Employment Agreement) with Christopher Hutter, our Vice President and Chief Financial
Officer. The key terms of the Hutter Employment Agreement include a five year term, with
automatic one-year renewals, annual bonuses up to 35% of his base salary, and a grant of
25,000 restricted shares of our common stock (see Note 14). The Hutter Employment Agreement
also provides for severance benefits equal to as much as two times the sum of his most recent
base salary plus his average bonuses for the two years before and for the year of the date of
termination, depending upon the circumstances of his termination.The Hinton and Hutter Employment Agreements were amended on December 31, 2008 to comply with
the provisions of Section 409A of the internal Revenue Code, relating to deferred
compensation, but the substantive provisions of these employment agreements were not
materially changed.We also have employment agreements with certain other executive officers and with other key
employees which provide for base salary, restricted stock grants, incentive compensation,
change-in-control provisions, non-competition provisions, severance arrangements, and other
normal employment terms and conditions.
 12.
    
    Income TaxesWe account for income taxes in accordance with FAS 109 and FIN 48. Under the provisions of
FAS 109, a deferred tax liability or asset (net of a valuation allowance) is provided in our
financial statements by applying the provisions of applicable laws to measure the deferred tax
consequences of temporary differences that will result in net taxable or deductible amounts in
future years as a result of events recognized in the financial statements in the current or
preceding years.Income tax benefit (provision) included in the accompanying consolidated statements of
operations represents changes in our net deferred tax assets, federal alternative minimum tax
and state income taxes in various state jurisdictions in which we have taxable activities.
The following table summarizes our income tax benefit (provision) for the years ended December
31:
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2008
    
    
    2007
    
    
    2006Current:Federal
    
    $
    (192
    )
    
    $
    (60
    )
    
    $
    (141
    )State
    
    
    (1,021
    )
    
    
    (113
    )
    
    
    (556
    )Total current
    
    
    (1,213
    )
    
    
    (173
    )
    
    
    (697
    )Deferred:Federal
    
    
    340
    
    
    
    1,865
    
    
    
    State
    
    
    50
    
    
    
    142
    
    
    
    232Total deferred
    
    
    390
    
    
    
    2,007
    
    
    
    232Total benefit (provision)
    
    $
    (823
    )
    
    $
    1,834
    
    
    $
    (465
    )
 Total income tax expense from continuing operations differs from the amount computed by
applying the statutory federal income tax rate to income (loss) from continuing operations
before income tax expense. Following is a table reconciling such differences for the years
ended December 31:
 2008
    
    2007
    
    2006Federal taxes at statutory rate
    
    
    34.00
    %
    
    
    34.00
    %
    
    
    34.00
    %State taxes, net of federal benefit
    
    
    7.61
    %
    
    
    -5.24
    %
    
    
    6.16
    %Permanent items
    
    
    1.62
    %
    
    
    -10.68
    %
    
    
    1.81
    %Alternative minimum tax
    
    
    1.67
    %
    
    
    -2.13
    %
    
    
    1.16
    %Tax benefit for NOL, net of valuation allowance
    
    
    -39.17
    %
    
    
    33.51
    %
    
    
    -39.31
    %True ups and other adjustments
    
    
    1.41
    %
    
    
    15.25
    %
    
    
    0.00
    %Effective income tax rate for continuing
operations
    
    
    7.14
    %
    
    
    64.71
    %
    
    
    3.82
    %
 The components of our federal and state deferred tax assets and liabilities at December 31,
2008 and 2007 are shown below:
 2008
    
    
    2007Deferred tax assets:Net operating loss carryforwards
    
    $
    7,447
    
    
    $
    11,081Tax credit carryforwards
    
    
    392
    
    
    
    201Allowance for bad debts
    
    
    107
    
    
    
    102Restructuring charges
    
    
    2,051
    
    
    
    2,235Equity compensation
    
    
    948
    
    
    
    624Other
    
    
    517
    
    
    
    393Gross deferred tax assets
    
    
    11,462
    
    
    
    14,636Deferred tax liabilities:Differences between book and tax basis of property and
equipment and intangible assets
    
    
    3,375
    
    
    
    2,798Investment in MM 1995-2
    
    
    113
    
    
    
    Other
    
    
    249
    
    
    
    Gross deferred tax liabilities
    
    
    3,737
    
    
    
    2,798Net deferred tax asset
    
    
    7,725
    
    
    
    11,838Valuation allowance and other
    
    
    (4,806
    )
    
    
    (9,309
    )Deferred tax assets, net
    
    $
    2,919
    
    
    $
    2,529
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We believe that based on all available evidence, including our history of generating taxable
income in the years ended December 31, 2008, 2007 and 2006, along with the anticipated
generation of taxable income in 2009 and beyond, it is more likely than not that some portion
of the net deferred tax assets that existed at December 31, 2008 and 2007 will be realized and
therefore $4,503 of the valuation allowance was released during the year ended December 31,
2008 and $973 of the valuation allowance was released during the year ended December 31, 2007.
The deferred tax asset for net operating loss carryforwards at December 31, 2008 and 2007 does
not include $121 and $1,021, respectively, that relates to the tax effect of stock options for
which the benefit will not be recognized in stockholders equity until the period that the
amounts decrease taxes payable. The related $356 and $2,617 tax deduction at December 31, 2008
and 2007 are included in the unused net operating loss below.At December 31, 2008, we had unused federal net operating losses to carry forward against
future years taxable income of $30,376 and various state carryforwards that expire in
various amounts from 2009 to 2026. At December 31, 2008, we also had unused federal
alternative minimum tax credits that carryforward indefinitely.We or our subsidiaries file income tax returns in the U.S. federal jurisdiction and in various
state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and
local income tax examinations by tax authorities for years prior to 2005. We adopted the
provisions of FIN 48 effective January 1, 2007. As a result of the implementation of FIN 48,
we recognized a liability of $348 for unrecognized tax benefits, including interest and
penalties of $107, which was accounted for as an increase to the January 1, 2007 balance of
accumulated deficit.The following is a reconciliation of the beginning and ending amount of unrecognized tax
benefits:
 Unrecognized Tax BenefitCorporateExpense
    
    
    InventoryAllocation
    
    
    Capitalization
    
    
    TotalJanuary 1, 2007 adoption of
FIN 48
    
    $
    316
    
    
    $
    32
    
    
    $
    348Current year increase
(decrease) as a result of
tax positions taken
during the year
    
    
    479
    
    
    
    (6
    )
    
    
    473Reductions as a result of a
lapse of
the applicable statute of
limitations
    
    
    (37
    )
    
    
    (26
    )
    
    
    (63
    )Balance at December 31, 2007
    
    
    758
    
    
    
    
    
    
    
    758Current year increase
(decrease) as a result of
tax positions taken
during the year
    
    
    195
    
    
    
    
    
    
    
    195Reductions as a result of a
lapse of
the applicable statute of
limitations
    
    
    (84
    )
    
    
    
    
    
    
    (84
    )Balance at December 31, 2008
    
    $
    869
    
    
    $
    
    
    
    $
    869
 We believe nearly all of our unrecognized tax benefits would, if recognized, affect our
effective tax rate.We recognize interest and penalties related to our tax contingencies as income tax expense.
The total amount of interest and penalties recognized in the accompanying consolidated
statement of
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13.
    
    Capital StockStockholder Rights Plan On December 12, 1991, our board of directors adopted a Stockholder
Rights Plan, which was amended and restated on October 25, 2001 in order to extend, renew and
modify its terms (as amended and restated, the Rights Plan), to protect stockholder
interests against takeover strategies that may not provide maximum shareholder value.
Pursuant to the Rights Plan, a dividend of one preferred stock purchase right (Right) was
issued with respect to each share of our common stock outstanding on December 9, 1991, and
attaches to each share of common stock we issued thereafter. No separate certificates
representing the Rights have been issued. Each Right entitles the holder to purchase one
one-hundredth of a share of our Series C. Preferred Stock at an exercise price of $15.00 per
share under certain circumstances. This portion of a preferred share provides the holder with
approximately the same dividend, voting and liquidation rights as one share of common stock.
If any person or group (referred to as an Acquiring Person) becomes the beneficial owner of,
or announces a tender offer that would result in the Acquiring Person becoming the beneficial
owner of, 15% or more of our common stock (subject to certain exceptions), then each Right,
other than Rights held by the Acquiring Person which become void, will become exercisable for
our common stock, or of the Acquiring Person in the case where the Acquiring Person acquires
us, having a then current market value of twice the exercise price of the Right. At the
option of the board of directors, the Rights may be redeemed for
$0.01 per Right or exchanged for shares of our common stock at the exchange rate of one share
per Right, in each case subject to adjustment. Until a Right is exercised, the holder thereof,
as such, has no rights as a stockholder. The Rights will expire on November 30, 2011, unless
such date is extended prior thereto by the board of directors.
 14.
    
    Share-Based CompensationWe account for share-based compensation related to stock options and restricted stock awards
in accordance with the provisions of FAS 123(R), which requires the measurement and
recognition of compensation expense for all share-based awards made to employees and directors
based on estimated fair values.Stock Plans We have granted stock options and restricted stock awards to employees,
directors, advisors and consultants under various stock plans. We currently maintain two
stock plans.Under our 1998 Stock Incentive Plan, as amended (the 1998 Stock Plan), we granted incentive
stock options, non-qualified stock options, stock appreciation rights, restricted stock,
performance awards and other stock-based awards to our officers, directors, employees,
consultants and advisors for shares of our common stock. Stock options granted under the 1998
Stock Plan contained exercise prices not less than the fair market value of our common stock
on the date of grant, and had a term of 10 years from the date of grant. Nonqualified stock
option grants to our directors under the 1998 Stock Plan generally vested over periods up to
two years. Qualified
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In March 2008, our board of directors adopted the PowerSecure International, Inc. 2008 Stock
Incentive Plan (the 2008 Stock Plan), which was approved by our stockholders at the Annual
Meeting of Stockholders held on June 9, 2008. The 2008 Stock Plan authorizes our board of
directors to grant incentive stock options, non-qualified stock options, stock appreciation
rights, restricted stock, performance awards and other stock-based awards to our officers,
directors, employees, consultants and advisors for up to an aggregate of 600,000 shares of our
common stock. Stock options granted under the 2008 Stock Plan must contain exercise prices
not less than the fair market value of our common stock on the date of grant, and must contain
a term not in excess of 10 years from the date of grant. The 2008 Stock Plan replaced our
1998 Stock Plan.Stock Options Net income (loss) for the years ended December 31, 2008, 2007 and 2006
includes $656, $972 and $712, respectively, of pre-tax compensation costs related to
outstanding stock options. The after-tax compensation cost of outstanding stock options for
the years ended December 31, 2008 and 2007 was $400 and $593, respectively. There were no net
income tax benefits related to our stock-based compensation arrangements during the year ended
December 31, 2006 because a valuation allowance was provided for nearly all of our net deferred
tax assets. All of the stock option compensation expense is included in general and
administrative expenses in the accompanying consolidated statements of operations.During the year ended December 31, 2006, we issued 140,000 nonqualified stock options to new
employees outside of our existing stock option plans pursuant to an exception provided by the
American Stock Exchange on which our common stock was listed at the time those stock options
were granted.A summary of option activity for the year ended December 31, 2008 is as follows:
 WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2007
    
    
    1,728
    
    
    $
    5.34Granted-Directors
    
    
    
    
    
    
    Granted-Employees
    
    
    232
    
    
    
    4.31Exercised
    
    
    (169
    )
    
    
    2.68Canceled
    
    
    
    
    
    
    Forfeited
    
    
    (83
    )
    
    
    10.85Balance, December 31, 2008
    
    
    1,708
    
    
    $
    5.21
    
    
    
    5.71
    
    
    $
    (1.92
    )Exercisable, December 31, 2008
    
    
    1,306
    
    
    $
    4.49
    
    
    
    4.80
    
    
    $
    (1.20
    )
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WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2006
    
    
    2,085
    
    
    $
    4.61Granted-Directors
    
    
    38
    
    
    
    12.73Granted-Employees
    
    
    30
    
    
    
    12.67Exercised
    
    
    (411
    )
    
    
    2.68Canceled
    
    
    
    
    
    
    Forfeited
    
    
    (14
    )
    
    
    10.28Balance, December 31, 2007
    
    
    1,728
    
    
    $
    5.34
    
    
    
    5.96
    
    
    $
    8.22Exercisable, December 31, 2007
    
    
    1,358
    
    
    $
    3.89
    
    
    
    5.37
    
    
    $
    9.69
  WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2005
    
    
    2,289
    
    
    $
    2.98Granted-Directors
    
    
    23
    
    
    
    14.78Granted-Employees
    
    
    306
    
    
    
    12.64Exercised
    
    
    (514
    )
    
    
    2.51Canceled
    
    
    
    
    
    
    Forfeited
    
    
    (19
    )
    
    
    6.49Balance, December 31, 2006
    
    
    2,085
    
    
    $
    4.61
    
    
    
    6.55
    
    
    $
    7.71Exercisable, December 31, 2006
    
    
    1,546
    
    
    $
    3.07
    
    
    
    5.78
    
    
    $
    9.25
 There were no options granted to our directors during the year ended December 31, 2008. The
weighted average grant date fair value of the options granted to our directors during the
years ended December 31, 2007 and 2006 was $8.29 and $11.22, respectively. The weighted
average grant date fair value of the options granted to employees during the years ended
December 31, 2008, 2007 and 2006 was $2.55, $8.25 and $8.48, respectively. The fair value was
measured using the Black-Scholes valuation model with the following assumptions for the years
ended December 31:
 2008
    
    2007
    
    2006Expected stock price volatilility
    
    
    65.0
    %
    
    
    75.7
    %
    
    
    88.0
    %Risk Free interest rate
    
    
    1.84
    %
    
    
    5.07
    %
    
    
    4.72
    %Annual dividends
    
    $
    
    
    
    $
    
    
    
    $
    Expected life  employees
    
    5 years
    
    5 years
    
    4.3 yearsExpected life  directors
    
    na
    
    5 years
    
    6 years
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##### Table of Contents



The fair value of the stock option grants are amortized over their respective service periods
using the straight-line method and assuming a forfeiture rate of 5%.At December 31, 2008 and 2007, there was $1,453 and $1,979, respectively, of total
unrecognized compensation costs related to stock options. These costs at December 31, 2008
are expected to be recognized over a weighted average period of 1.55 years.The total intrinsic value of stock options exercised during the years ended December 31, 2008,
2007 and 2006 was $1,023, $4,532 and $5,736, respectively. Cash received from stock option
exercises for the years ended December 31, 2008, 2007 and 2006 was $501, $1,052 and $1,291,
respectively. The tax benefit realized on the 2008, 2007 and 2006 stock option exercises was
$263, $52 and $331, respectively. The total grant date fair value of stock options vested
during the years ended December 31, 2008, 2007 and 2006 was $820, $971 and $667, respectively.Restricted Stock Awards Net income (loss) for the years ended December 31, 2008, 2007 and
2006 includes $1,728, $1,120 and $66, respectively, of pre-tax compensation costs related to
outstanding restricted stock awards granted to directors, certain officers and our employees.
All of the restricted stock award compensation expense during the years ended December 31,
2008, 2007 and 2006 is included in general and administrative expenses in the accompanying
consolidated statements of operations.A total of 61,759 and 645,000 restricted shares were granted under our stock plans during the
years ended December 31, 2008 and 2007, respectively. There were no restricted stock awards
issued during the year ended December 31, 2006. A summary of unvested restricted stock award
activity for the three years ended December 31, 2008 is as follows:
 F-37




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##### Table of Contents



WeightedUnvested
    
    
    AverageRestricted
    
    
    Grant DateShares
    
    
    Fair ValueBalance, January 1, 2006
    
    
    30
    
    
    $
    2.20Granted-Directors
    
    
    
    
    
    
    Granted-Officers
    
    
    
    
    
    
    Granted-Employees
    
    
    
    
    
    
    Vested
    
    
    (30
    )
    
    
    2.20Forfeited
    
    
    
    
    
    
    Balance, December 31, 2006
    
    
    
    
    
    $
    Granted-Directors
    
    
    
    
    
    
    Granted-Officers
    
    
    645
    
    
    
    12.49Granted-Employees
    
    
    
    
    
    
    Vested
    
    
    (4
    )
    
    
    14.50Forfeited
    
    
    
    
    
    
    Balance, December 31, 2007
    
    
    641
    
    
    $
    12.48Granted-Directors
    
    
    34
    
    
    
    6.98Granted-Officers
    
    
    
    
    
    
    Granted-Employees
    
    
    28
    
    
    
    7.45Vested
    
    
    (75
    )
    
    
    11.62Forfeited
    
    
    
    
    
    
    Balance, December 31, 2008
    
    
    628
    
    
    $
    12.06
 Restricted shares are subject to forfeiture and cannot be sold or otherwise transferred until
they vest. If the holder of the restricted shares leaves us before the restricted shares
vest, other than due to termination by us without cause, then any unvested restricted shares
will be forfeited and returned to us. The restricted shares granted to directors vest in
equal amounts over a period of one or three years, depending on the nature of the grant. The
restricted shares granted to employees other than officers vest in equal annual amounts over
five years. The unvested restricted shares previously granted to officers are scheduled to
vest as follows:
 
    
    A total of 300,000 restricted shares will cliff vest in their entirety on August
15, 2012, provided the officer remains employed with us through that date.
    
    A total of 22,500 restricted shares will cliff vest in their entirety on
December 10, 2012, provided the officers remain employed with us through that date.
    
    The remaining 258,000 restricted shares vest in four equal annual installments,
commencing when our annual report on Form 10-K for the year ended December 31, 2008
is filed, but only upon the achievement of performance targets each year relating to
our net income for fiscal years 2008 through 2012.
    
    All restricted and unvested shares will automatically vest upon a change in
control.
 The fair value of the cliff vesting restricted shares is being amortized on a straight-line
basis over the vesting period. The fair value of the performance vesting shares is expensed
as the
 F-38




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##### Table of Contents



achievement of the performance criteria becomes probable and the related service period
conditions are met. At December 31, 2008, the balance of unrecognized compensation cost
related to unvested restricted shares was $5,653, which, assuming all future performance
criteria will be met, we expect will be recognized over a weighted average period of
approximately 4 years.
 15.
    
    Segment and Related InformationOur operating segments represent components of our business for which discrete financial
information is available and is reviewed regularly by the chief operating decision-maker, or
decision-making group, to evaluate performance and make operating decisions. We conduct our
operations through two operating segments: Energy and Smart Grid Solutions, and Energy
Services. Our reportable segments are strategic business units that offer different products
and services and serve different customer bases. They are managed separately because each
business requires different technology and marketing strategies. Previously, we were also
engaged in a third business segment, Automated Energy Data Collection and Telemetry conducted
through our Metretek Florida subsidiary. That segment of our business has been discontinued
and the results of its operations are excluded from our segment information below.Energy and Smart Grid Solutions Through our PowerSecure subsidiary we serve utilities and
commercial, institutional, and industrial customers in the areas of Interactive Distributed
Generation ®, Utility Infrastructure and Energy Efficiency. Each of these PowerSecure
subsidiary business units operates in a distinct market with distinct technical disciplines,
but shares a common customer base with our PowerSecure subsidiary products and services and
which we intend to grow through shared resources and customer leads. Accordingly, these units
are included within our Energy and Smart Grid Solutions segment results; andEnergy Services Through our Southern Flow and WaterSecure subsidiaries we serve customers
in the oil and natural gas production business with our measurement services and products, and
water disposal services. Southern Flows services include on-site field services, chart
processing and analysis, laboratory analysis, and data management and reporting. These
services are provided principally to customers involved in natural gas production, gathering,
transportation and processing. WaterSecure, through its equity investment MM-95-2, provides
water disposal for oil and natural gas producers.The accounting policies of the reportable segments are the same as those described in Note 1
of the Notes to Consolidated Financial Statements. We evaluate the performance of our
operating segments based on Income (loss) before income taxes. Intersegment sales are not
significant. During the year ended December 31, 2008, we changed the composition of our
reportable segments to include the management fees and equity income of our WaterSecure
operations within our Energy Services segment. Previously, our WaterSecure operations were
not included in our segment activity. The segment activity for the years ended December 31,
2007 and 2006 have been reclassified to conform to current year presentation.Summarized financial information concerning our reportable segments is shown in the following
table. Unallocated corporate cost amounts include corporate overhead and related items
including restructuring charges, other income and assets of discontinued operations which, for
purposes of evaluating the operations of our segments, are not allocated to our segment
activities. Total asset amounts exclude intercompany receivable balances eliminated in
consolidation.
 F-39




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##### Table of Contents



Year Ended December 31, 2008Energy and
    
    
    
    
    
    
    UnallocatedSmart Grid
    
    
    Energy
    
    
    CorporateSolutions
    
    
    Services
    
    
    Costs
    
    
    TotalRevenues
    
    $
    115,993
    
    
    $
    19,447
    
    
    $
    
    
    
    $
    135,440Cost of sales
    
    
    77,550
    
    
    
    14,181
    
    
    
    
    
    
    
    91,731Gross profit
    
    
    38,443
    
    
    
    5,266
    
    
    
    
    
    
    
    43,709Operating expenses:General and administrative
    
    
    21,995
    
    
    
    1,900
    
    
    
    5,008
    
    
    
    28,903Selling, marketing and service
    
    
    5,325
    
    
    
    23
    
    
    
    
    
    
    
    5,348Depreciation and amortization
    
    
    1,774
    
    
    
    251
    
    
    
    6
    
    
    
    2,031Reasearch and development
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    118Total operating expenses
    
    
    29,212
    
    
    
    2,174
    
    
    
    5,014
    
    
    
    36,400Operating income (loss)
    
    
    9,231
    
    
    
    3,092
    
    
    
    (5,014
    )
    
    
    7,309Other income and (expenses)Management fees
    
    
    
    
    
    
    556
    
    
    
    
    
    
    
    556Equity income
    
    
    
    
    
    
    3,490
    
    
    
    
    
    
    
    3,490Interest and other income
    
    
    82
    
    
    
    26
    
    
    
    382
    
    
    
    490Interest and finance charges
    
    
    (140
    )
    
    
    
    
    
    
    (147
    )
    
    
    (287
    )Income (loss) before
income taxes
    
    $
    9,173
    
    
    $
    7,164
    
    
    $
    (4,779
    )
    
    $
    11,558Total capital expenditures
    
    $
    17,897
    
    
    $
    1,126
    
    
    $
    
    
    
    $
    19,023Total investment in
unconsolidated affiliate
    
    $
    
    
    
    $
    4,106
    
    
    $
    
    
    
    $
    4,106Total assets
    
    $
    79,485
    
    
    $
    16,731
    
    
    $
    14,295
    
    
    $
    110,511
 Year Ended December 31, 2007Energy and
    
    
    
    
    
    
    UnallocatedSmart Grid
    
    
    Energy
    
    
    CorporateSolutions
    
    
    Services
    
    
    Costs
    
    
    TotalRevenues
    
    $
    94,923
    
    
    $
    16,189
    
    
    $
    
    
    
    $
    111,112Cost of sales
    
    
    65,015
    
    
    
    11,790
    
    
    
    
    
    
    
    76,805Gross profit
    
    
    29,908
    
    
    
    4,399
    
    
    
    
    
    
    
    34,307Operating expenses:General and administrative
    
    
    16,747
    
    
    
    1,581
    
    
    
    4,161
    
    
    
    22,489Selling, marketing and service
    
    
    3,538
    
    
    
    37
    
    
    
    
    
    
    
    3,575Depreciation and amortization
    
    
    1,285
    
    
    
    205
    
    
    
    10
    
    
    
    1,500Reasearch and development
    
    
    148
    
    
    
    
    
    
    
    
    
    
    
    148Restructuring charges
    
    
    
    
    
    
    
    
    
    
    14,139
    
    
    
    14,139Total operating expenses
    
    
    21,718
    
    
    
    1,823
    
    
    
    18,310
    
    
    
    41,851Operating income (loss)
    
    
    8,190
    
    
    
    2,576
    
    
    
    (18,310
    )
    
    
    (7,544
    )Other income and (expenses)Management fees
    
    
    
    
    
    
    423
    
    
    
    
    
    
    
    423Equity income
    
    
    
    
    
    
    2,774
    
    
    
    
    
    
    
    2,774Interest and other income
    
    
    335
    
    
    
    409
    
    
    
    827
    
    
    
    1,571Interest and finance charges
    
    
    (7
    )
    
    
    (7
    )
    
    
    (43
    )
    
    
    (57
    )Income (loss) before
income taxes
    
    $
    8,518
    
    
    $
    6,175
    
    
    $
    (17,526
    )
    
    $
    (2,833
    )Total capital expenditures
    
    $
    2,338
    
    
    $
    383
    
    
    $
    
    
    
    $
    2,721Total investment in
unconsolidated affiliate
    
    $
    
    
    
    $
    3,652
    
    
    $
    
    
    
    $
    3,652Total assets
    
    $
    71,010
    
    
    $
    16,900
    
    
    $
    25,113
    
    
    $
    113,023
 F-40




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##### Table of Contents



Year Ended December 31, 2006Energy and
    
    
    
    
    
    
    UnallocatedSmart Grid
    
    
    Energy
    
    
    CorporateSolutions
    
    
    Services
    
    
    Costs
    
    
    TotalRevenues
    
    $
    99,542
    
    
    $
    16,160
    
    
    $
    
    
    
    $
    115,702Cost of sales
    
    
    72,318
    
    
    
    11,786
    
    
    
    
    
    
    
    84,104Gross profit
    
    
    27,224
    
    
    
    4,374
    
    
    
    
    
    
    
    31,598Operating expenses:General and administrative
    
    
    13,163
    
    
    
    1,624
    
    
    
    4,224
    
    
    
    19,011Selling, marketing and service
    
    
    2,848
    
    
    
    12
    
    
    
    
    
    
    
    2,860Depreciation and amortization
    
    
    689
    
    
    
    182
    
    
    
    14
    
    
    
    885Reasearch and development
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    73Total operating expenses
    
    
    16,773
    
    
    
    1,818
    
    
    
    4,238
    
    
    
    22,829Operating income (loss)
    
    
    10,451
    
    
    
    2,556
    
    
    
    (4,238
    )
    
    
    8,769Other income and (expenses)Management fees
    
    
    
    
    
    
    365
    
    
    
    
    
    
    
    365Equity income
    
    
    
    
    
    
    2,221
    
    
    
    
    
    
    
    2,221Interest and other income
    
    
    97
    
    
    
    (49
    )
    
    
    939
    
    
    
    987Interest and finance charges
    
    
    (63
    )
    
    
    (23
    )
    
    
    (58
    )
    
    
    (144
    )Income (loss) before
income taxes
    
    $
    10,485
    
    
    $
    5,070
    
    
    $
    (3,357
    )
    
    $
    12,198Total capital expenditures
    
    $
    1,214
    
    
    $
    1,396
    
    
    $
    104
    
    
    $
    2,714Total investment in
unconsolidated affiliate
    
    $
    
    
    
    $
    3,514
    
    
    $
    
    
    
    $
    3,514
  2008
    
    
    2007
    
    
    2006United States
    
    $
    135,431
    
    
    $
    111,102
    
    
    $
    115,684Canada
    
    
    9
    
    
    
    11
    
    
    
    19Total
    
    $
    135,440
    
    
    $
    111,113
    
    
    $
    115,703
 16.
    
    Unaudited Quarterly Consolidated Financial DataThe following table illustrates selected unaudited consolidated quarterly statement of
operations data for the years ended December 31, 2008 and 2007. In our opinion, this unaudited
information has been prepared on substantially the same basis as the consolidated financial
statements appearing elsewhere in this Annual Report on Form 10-K and includes all adjustments
(consisting of normal recurring adjustments) necessary to present fairly the unaudited
consolidated quarterly data. The unaudited consolidated quarterly data should be read together
with the audited consolidated financial statements and notes thereto appearing elsewhere in
this Annual Report on Form 10-K. The results for any quarter are not necessarily indicative of
results for any future period.
 F-41




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##### Table of Contents



Quarter in 2008First
    
    
    Second
    
    
    Third
    
    
    FourthTotal revenues
    
    $
    33,575
    
    
    $
    41,952
    
    
    $
    33,557
    
    
    $
    26,356Operating income (loss)
    
    
    976
    
    
    
    3,786
    
    
    
    1,973
    
    
    
    574Other income, net
    
    
    325
    
    
    
    230
    
    
    
    171
    
    
    
    33Equity income
    
    
    964
    
    
    
    1,227
    
    
    
    839
    
    
    
    460Income taxes
    
    
    (311
    )
    
    
    (303
    )
    
    
    (70
    )
    
    
    (139
    )Income (loss) from continuing operations
    
    
    1,954
    
    
    
    4,940
    
    
    
    2,913
    
    
    
    928Income (loss) from discontinued operations
    
    
    (77
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    1,877
    
    
    $
    4,940
    
    
    $
    2,913
    
    
    $
    928Basic earnings per common share:Income from continuing operations
    
    $
    0.12
    
    
    $
    0.30
    
    
    $
    0.18
    
    
    $
    0.06Income (loss) from discontinued
operations
    
    
    (0.01
    )
    
    
    
    
    
    
    
    
    
    
    Basic earnings per common share
    
    $
    0.11
    
    
    $
    0.30
    
    
    $
    0.18
    
    
    $
    0.06Diluted earnings per common share:Income (loss) from continuing
operations
    
    $
    0.11
    
    
    $
    0.29
    
    
    $
    0.17
    
    
    $
    0.06Income (loss) from discontinued
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted earnings per common share
    
    $
    0.11
    
    
    $
    0.29
    
    
    $
    0.17
    
    
    $
    0.06
 Quarter in 2007First
    
    
    Second
    
    
    Third
    
    
    FourthTotal revenues
    
    $
    25,416
    
    
    $
    22,591
    
    
    $
    26,230
    
    
    $
    36,876Operating income (loss)
    
    
    958
    
    
    
    (14,584
    )
    
    
    1,508
    
    
    
    4,574Other income, net
    
    
    598
    
    
    
    220
    
    
    
    250
    
    
    
    453Income from litigation settlements
    
    
    278
    
    
    
    
    
    
    
    107
    
    
    
    Equity income
    
    
    648
    
    
    
    673
    
    
    
    656
    
    
    
    796Minority interest
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    24Income taxes
    
    
    (306
    )
    
    
    (170
    )
    
    
    (162
    )
    
    
    2,472Income (loss) from continuing operations
    
    
    2,176
    
    
    
    (13,861
    )
    
    
    2,365
    
    
    
    8,319Income (loss) from discontinued operations
    
    
    57
    
    
    
    6
    
    
    
    290
    
    
    
    (961
    )Net income (loss)
    
    $
    2,233
    
    
    $
    (13,855
    )
    
    $
    2,655
    
    
    $
    7,358Basic earnings per common share:Income from continuing operations
    
    $
    0.14
    
    
    $
    (0.87
    )
    
    $
    0.15
    
    
    $
    0.51Income (loss) from discontinued
operations
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    (0.06
    )Basic earnings per common share
    
    $
    0.14
    
    
    $
    (0.87
    )
    
    $
    0.16
    
    
    $
    0.45Diluted earnings per common share:Income (loss) from continuing
operations
    
    $
    0.13
    
    
    $
    (0.87
    )
    
    $
    0.14
    
    
    $
    0.48Income (loss) from discontinued
operations
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    (0.05
    )Diluted earnings per common share
    
    $
    0.13
    
    
    $
    (0.87
    )
    
    $
    0.15
    
    
    $
    0.43
  F-42




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##### Table of Contents



SCHEDULE II
 POWERSECURE INTERNATIONAL, INC.
 VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2008, 2007 and 2006
(In thousands)
 Additions:Balance at
    
    Charged to
    
    
    
    
    
    Balance atBeginning
    
    Operating
    
    Deductions:
    
    End ofDescription
    
    of Period
    
    Expenses
    
    Write-offs
    
    PeriodAllowance for doubtful accounts:Year ended December 31, 2008
    
    $
    262
    
    
    $
    216
    
    
    $
    (202
    ) (1)
    
    $
    276Year ended December 31, 2007
    
    
    225
    
    
    
    43
    
    
    
    (6
    ) (1)
    
    
    262Year ended December 31, 2006
    
    
    95
    
    
    
    146
    
    
    
    (16
    ) (1)
    
    
    225Inventory reserve:Year ended December 31, 2008
    
    $
    128
    
    
    $
    122
    
    
    $
    (39
    )(2)
    
    $
    211Year ended December 31, 2007
    
    
    202
    
    
    
    67
    
    
    
    (141
    )(2)
    
    
    128Year ended December 31, 2006
    
    
    166
    
    
    
    55
    
    
    
    (19
    )(2)
    
    
    202
 
 (1)
    
    Represents amounts written off as uncollectible, less recoveries.(2)
    
    Represents amounts written off against reserve, less recoveries.




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##### Table of Contents



MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
 TABLE OF CONTENTS
 PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    G - 2CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2007
    
    
    G - 3CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED
DECEMBER 31, 2008, 2007 AND 2006
    
    
    G - 4CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
    
    
    G - 5CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2008, 2007 AND 2006
    
    
    G - 6NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    G - 7
 G-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     HEIN & ASSOCIATES LLP
 
 G-2




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##### Table of Contents



MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
 2008
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    3,229,909
    
    
    $
    1,394,927Trade receivables (net of allowance for doubtful accounts of
$9,454 and $9,454, respectively)
    
    
    1,392,947
    
    
    
    1,716,141Prepaid expenses
    
    
    22,000
    
    
    
    25,667Total current assets
    
    
    4,644,856
    
    
    
    3,136,735PROPERTY, PLANT AND EQUIPMENT, AT COST:Wells and storage tanks
    
    
    8,218,524
    
    
    
    7,696,701Equipment
    
    
    4,184,738
    
    
    
    3,919,425Land and improvements
    
    
    2,005,330
    
    
    
    2,005,330Total
    
    
    14,408,592
    
    
    
    13,621,456Less accumulated depletion and depreciation
    
    
    6,340,984
    
    
    
    5,254,711Property, plant and equipment, net
    
    
    8,067,608
    
    
    
    8,366,745OTHER ASSETS:Deferred loan charges (net of accumulated amortization
of $878 and $2,485, respectively)
    
    
    9,662
    
    
    
    4,970Intangible assets (net of accumulated amortization
of $12,834 and $11,501, respectively)
    
    
    7,166
    
    
    
    8,499Total other assets
    
    
    16,828
    
    
    
    13,469TOTAL
    
    $
    12,729,292
    
    
    $
    11,516,949LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Note payable (Note 3)
    
    $
    749,396
    
    
    $
    549,796Accounts payable
    
    
    292,112
    
    
    
    478,522Administration fee
    
    
    14,125
    
    
    
    14,125Management fee
    
    
    157,087
    
    
    
    184,798Operator fee
    
    
    40,538
    
    
    
    34,620Accrued and other liabilities
    
    
    139,429
    
    
    
    100,621Total current liabilities
    
    
    1,392,687
    
    
    
    1,362,482LONG-TERM NOTE PAYABLE (Note 3)
    
    
    3,550,604
    
    
    
    2,372,807COMMITMENTS AND CONTINGENCIES (Note 4)SHAREHOLDERS EQUITY
    
    
    7,786,001
    
    
    
    7,781,660TOTAL
    
    $
    12,729,292
    
    
    $
    11,516,949
 See notes to consolidated financial statements.
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MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
 2008
    
    
    2007
    
    
    2006REVENUE:Disposal fees and mineral product sales
    
    $
    17,874,921
    
    
    $
    13,135,040
    
    
    $
    10,945,690Interest and other
    
    
    31,023
    
    
    
    70,787
    
    
    
    82,081Total revenue
    
    
    17,905,944
    
    
    
    13,205,827
    
    
    
    11,027,771COSTS AND EXPENSES:Cost of operations
    
    
    5,983,306
    
    
    
    3,454,204
    
    
    
    3,279,631Depreciation and amortization
    
    
    1,087,606
    
    
    
    761,793
    
    
    
    687,128General and administrative costs
    
    
    275,511
    
    
    
    390,280
    
    
    
    330,408Administration fee
    
    
    56,500
    
    
    
    56,500
    
    
    
    56,500Management fee
    
    
    893,746
    
    
    
    656,752
    
    
    
    547,285Operator fee
    
    
    162,150
    
    
    
    132,102
    
    
    
    127,332Interest and finance charges
    
    
    192,784
    
    
    
    104,738
    
    
    
    71,321Total costs and expenses
    
    
    8,651,603
    
    
    
    5,556,369
    
    
    
    5,099,605NET INCOME
    
    $
    9,254,341
    
    
    $
    7,649,458
    
    
    $
    5,928,166
 See notes to consolidated financial statements.
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MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
 ShareholdersEquityBALANCE, JANUARY 1, 2006
    
    $
    6,304,036Cash distributions paid
    
    
    (5,000,000
    )Net income
    
    
    5,928,166BALANCE, DECEMBER 31, 2006
    
    
    7,232,202Cash distributions paid
    
    
    (7,100,000
    )Net income
    
    
    7,649,458BALANCE, DECEMBER 31, 2007
    
    
    7,781,660Cash distributions paid
    
    
    (9,250,000
    )Net income
    
    
    9,254,341BALANCE, DECEMBER 31, 2008
    
    $
    7,786,001
 See notes to consolidated financial statements.
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MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
 2008
    
    
    2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    9,254,341
    
    
    $
    7,649,458
    
    
    $
    5,928,166Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,087,606
    
    
    
    761,793
    
    
    
    687,128Changes in other assets and liabilities:Trade receivables, net
    
    
    323,194
    
    
    
    (506,523
    )
    
    
    229,564Accounts payable
    
    
    (186,410
    )
    
    
    232,810
    
    
    
    (285,001
    )Administration fee
    
    
    
    
    
    
    
    
    
    
    9,417Management fee
    
    
    (27,711
    )
    
    
    52,437
    
    
    
    77,381Operator fee
    
    
    5,918
    
    
    
    2,787
    
    
    
    23,305Accrued expenses
    
    
    38,808
    
    
    
    14,926
    
    
    
    73,580Prepaid expenses and other
    
    
    (1,025
    )
    
    
    (4,970
    )
    
    
    (21,404
    )Net cash provided by operating activities
    
    
    10,494,721
    
    
    
    8,202,718
    
    
    
    6,722,136CASH FLOWS FROM INVESTING ACTIVITIES:Well development and enhancement
    
    
    (224,205
    )
    
    
    (3,028,648
    )
    
    
    (175,804
    )Other capital expenditures
    
    
    (562,931
    )
    
    
    (269,838
    )
    
    
    (158,619
    )Net cash used in investing activities
    
    
    (787,136
    )
    
    
    (3,298,486
    )
    
    
    (334,423
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from note payable
    
    
    4,300,000
    
    
    
    3,100,000
    
    
    
    Payments on note payable
    
    
    (2,922,603
    )
    
    
    (1,090,195
    )
    
    
    (540,863
    )Distributions to preferred shareholders
    
    
    (9,250,000
    )
    
    
    (7,100,000
    )
    
    
    (5,000,000
    )Net cash used in financing activities
    
    
    (7,872,603
    )
    
    
    (5,090,195
    )
    
    
    (5,540,863
    )NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
    
    
    1,834,982
    
    
    
    (185,963
    )
    
    
    846,850CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
    
    
    1,394,927
    
    
    
    1,580,890
    
    
    
    734,040CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    3,229,909
    
    
    $
    1,394,927
    
    
    $
    1,580,890
 See notes to consolidated financial statements.
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MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
 1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESOrganization The accompanying consolidated financial statements includes the accounts of
Marcum Midstream 1995-2 Business Trust and its wholly-owned subsidiary, Marcum Midstream 1995-2
EC Holding, LLC (MM95-2 EC Holding), collectively referred to as the Trust. The Trust
commenced operations on February 8, 1996. The Trust owns and operates six injection wells at
five oil field production water disposal facilities located in northeastern Colorado. MM95-2
EC Holding was formed by the Trust in July 2002 for the purpose of acquiring additional
operating assets.WaterSecure Holdings, Inc. (WaterSecure), a wholly-owned subsidiary of PowerSecure
International, Inc., is the managing trustee of the Trust, and Conquest Oil Company
(Conquest) operates the Trust assets under an operating agreement with the Trust.
Collectively, WaterSecure and Conquest, along with their affiliates, owned 178.2, or 78.8%, of
the 226 outstanding shares of the Trust at December 31, 2007. In July 2008, WaterSecure and
Conquest purchased additional shares of the Trust, thereby increasing their collective
ownership (along with their affiliates) to 197.1 shares, or 87.2%, of
the 226 outstanding shares of the Trust.Principles of Consolidation The consolidated financial statements include the accounts of
the Trust and its subsidiary. All intercompany accounts and transactions have been eliminated
in consolidation.Revenue Recognition Revenues from disposal fees are recognized upon delivery and acceptance
of water to be disposed. Revenues from mineral product sales are recognized upon delivery to
the customer. Revenue amounts shown in the accompanying consolidated statements of income are
net of severance and conservation taxes and certain royalty interests.Statements of Cash Flows The Trust considers all highly liquid investments with an original
maturity of three months or less at time of purchase to be cash equivalents. The Trust
maintains its cash in bank deposit accounts which, at times, may exceed federally insured
limits. The Trust has not experienced any losses in such accounts. The Trust does not believe
it is exposed to any significant credit risk on cash and cash equivalents. Supplemental
statement of cash flows information is as follows:
 2008
    
    2007
    
    2006Cash paid for interest
    
    $
    186,936
    
    
    $
    102,253
    
    
    $
    67,058
 Statements of Shareholders EquityThere are 226 shares of the Trust authorized and outstanding.
There are no other authorized forms of ownership interest of the Trust.Receivables and Credit Policies Trade receivables consist of uncollateralized customer
obligations due under normal trade terms requiring payment within 30 days of the invoice date.
The Trust reviews trade receivables periodically and reduces the carrying amount by a valuation
allowance that reflects managements best estimate of the amount that may not be collectible.
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Property, Plant and Equipment Property, plant and equipment is stated at cost. The majority
of the Trust operating assets are depreciated based upon a units-of-production method while
equipment and land improvements are depreciated on the straight-line basis over estimated
useful lives ranging from 5 to 15 years. Management has evaluated future asset retirement
obligations and has concluded that estimated asset retirement obligations of the Trust are not
material.Other Intangibles Other intangible assets are being amortized on the straight-line basis
over 15 years.Income Taxes For federal and state income tax purposes, the Trust is treated as a
partnership and is not subject to federal or state income taxes. Accordingly, no provision for
federal income taxes is included in the financial statements of the Trust and the tax effects
of its activities accrue to the shareholders. The Trusts tax returns, the qualification of
the Trust as a partnership for federal income tax purposes, and the amount of taxable income or
loss are subject to examination by federal and state taxing authorities. If such examinations
result in changes to the Trusts taxable income, the tax liability of the shareholders could
change accordingly.Use of Estimates The preparation of the Trusts financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in these financial statements
and accompanying notes. Actual results could differ from those estimates.Major Customers Three customers have historically generated the majority of the Trusts
disposal fee revenues. In addition, revenues from mineral product sales are currently
generated from purchases by one customer, however management believes other customers would
purchase such products at substantially the same volumes and at prevailing market prices in the
event the current customer discontinued purchasing from the Trust.2.
    
    WELL DEVELOPMENT COSTSIn the fourth quarter of 2006, the Trust acquired additional land for expansion of its
operating activities. During 2007, the Trust developed a sixth well on the land. The new well
was placed into service in December 2007. Total cost of the development (including land) was
$3,042,000, and assets were allocated as follows:
 Well and storage tanks
    
    $
    1,486,000Equipment
    
    
    1,037,000Land and improvements
    
    
    519,000Total
    
    $
    3,042,000
 The well development was financed principally through a term loan with Bank of Choice, as
described further in Note 3.
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3.
    
    NOTE PAYABLEIn August 2005, the Trust entered into an amendment of its 2002 term loan agreement (2002
Loan) with Wells Fargo Bank West to borrow an additional $1,005,000; to extend the term of the
Loan Agreement to August 22, 2008; and to reduce the scheduled principal and interest payments
on the note to $50,660 per month. Proceeds from the additional borrowings under the 2002 Loan
were used by the Trust in 2006 to develop backup capacity through the development of a fifth
well and enhance operations at two of its existing sites.Interest accrued on the outstanding balance of the 2002 Loan at a fixed annual rate of 5.55%
per year. The 2002 Loan contained various financial and other affirmative and negative
covenants and was collateralized by a first priority interest in virtually all of the assets
acquired by the Trust. Fees incurred in connection with obtaining the original 2002 Loan and
the subsequent amendment thereof, in the amount of $25,702, were deferred and amortized over
the term of the original 2002 Loan.During 2007, in order to finance the development of the Trusts sixth operating well and to
refinance the then outstanding principal balance on the 2002 Loan, the Trust entered into a
Term Loan Agreement (the 2007 Loan) with Bank of Choice in the aggregate principal amount of
$3,100,000, which was evidenced by a note payable to the lender (the 2007 Note). Of the
total proceeds from the 2007 Loan, $537,000 was used to refinance the 2002 Loan and the balance
was used to fund the well development costs described in Note 2.Interest accrued on the unpaid balance of the 2007 Note at a fixed annual rate of 7.2% per year
and required monthly principal and interest payments to the lender in the amount of $61,837
through the maturity date of August 28, 2012. The 2007 Note was collateralized by a first
priority interest in the assets of the sixth well. Fees incurred in connection with the 2007
Loan in the amount of $7,455 were deferred and amortized over the first year of the loan.In December 2008, in order to finance the development of a seventh operating well and to
refinance the remaining principal and extend the maturity date on the 2007 Loan, the Trust
entered into a new Term Loan Agreement (the 2008 Loan) with Bank of Choice in the aggregate
principal amount of $4,300,000, which was evidenced by a promissory note payable to the order
of the lender (the 2008 Note). Of the total proceeds of the 2008 Loan, $2,429,000 was used
to refinance the 2007 Loan and up to $1,800,000 is expected to be used to finance the
development of a seventh operating well in 2009.Interest accrues on the unpaid balance of the 2008 Note at a fixed annual rate of 6.59% and the
2008 Loan calls for monthly principal and interest payments to the lender in the amount of
$84,502 through the maturity date of December 9, 2013. The 2008 Note is collateralized by a
first priority interest in all assets of the Trust including accounts receivable, inventory and
equipment and the assets of the seventh well. Fees incurred in connection with the 2008 Loan
in the amount of $10,540 were deferred and are being amortized over the first year of the loan.
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At December 31, 2008, scheduled principal payments on the 2008 Note payable over the remaining
term of the 2008 Note are as follows:
 Years Ended
    
    PrincipalDecember 31,
    
    Payments2009
    
    $
    749,3962010
    
    
    801,0292011
    
    
    856,2202012
    
    
    915,2132013
    
    
    978,142$
    4,300,000
 4.
    
    COMMITMENTS AND CONTINGENCIESIn December 2002, after the Trust completed an acquisition of certain operating assets
including real property, the Trust discovered certain contamination of the soils under the
site. Shortly thereafter, the Trust filed a complaint against the seller in Colorado State
District Court, for enforcement of seller indemnifications in the asset purchase agreement. The
Trust engaged an environmental engineering firm to evaluate the extent of the contamination,
and that firm concluded that approximately 1% of the property area had been contaminated. The
environmental firm developed, and, with its assistance, the Trust commenced an active
remediation plan that the firm advised should bring the assets back into compliance with
applicable environmental requirements. The remediation plan consists of a soil vapor
extraction system which is in place and continues to operate. Based upon the most recent
ground water sampling results, adverse impacts to groundwater continue to decrease. If future
sampling results continue to indicate favorable improvements, the soil vapor extraction system
may be shut down in 2009. Even if the soil vapor extraction system is shut down, ground water
sampling will likely be required through at least 2010.In early 2005, the Trust began a planned upgrade to various components of another of its
operating facilities. As the improvement project began, Trust management found that soils under
the facility were contaminated. The environmental firm used in the above remediation was
engaged to direct the Trust on the appropriate course to return the soils to a level in
compliance within regulatory limits. The environmental firm initially recommended, and the
regulatory authorities did not indicate otherwise, that no active remediation process was
likely necessary due to the small levels of contamination, the limited area impacted, and the
cost to implement a remediation process. Further, the environmental firm indicated that
naturally occurring processes would likely eliminate the contamination over time, although
those processes may occur over a period of several years. Upon further review of the site data
and economic feasibility in 2008, the environmental firm has proposed, and the Trust expects to
implement, an active form of remediation in 2009. The proposed remedial method will consist of
a soil vapor extraction and air sparge system, similar in nature to the system successfully
implemented above, but with the added component of air sparging. It is currently estimated
that the system will be installed in 2009 and operate for two years, followed by one year of
quarterly groundwater monitoring. Although no assurance can be given, Trust management
believes the contamination will be successfully abated using the active remediation plan
described above, with no material adverse effects to the financial position or results of
operations of the Trust.
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The Trust is subject to regulations and reporting requirements covering water quality, land
use, the storage of oil and water, and the disposal of water. Compliance is continually
assessed by Trust management. Regulations, interpretations and enforcement policies can
change, which may adversely impact the Trusts operations in the future. Additionally, from
time to time, in the normal course of operations, oil or water spills or releases into the
environment may occur. The Trust must pay all or a portion of the cost to remediate sites
where such environmental contamination has occurred as a result of activities of the Trust. To
date, the Trust is not aware of any such environmental contamination caused by the activities
of the Trust that would have material adverse effects to the financial position or results of
operations of the Trust. However, the nature of environmental contamination matters is
inherently uncertain, and Trust management cannot provide any guarantee or assurance that all
environmental contamination has been identified, or that the current or future remediation
efforts will be successful. Additional contamination, either currently undetected or
undetectable or arising in the future, could later be discovered.In January 2008, two of the Trusts facilities suffered explosions and fire damage in separate
incidents. One of the facilities suffered significant damage and was temporarily shut down for
approximately two weeks. The other facility suffered minimal damage, but was also limited in
its operating activities for a short period. One employee of the Trust and two agents of a
trucking company bringing water to the former facility were injured in the most serious fire
but have fully recovered.During 2008, both of the damaged facilities returned to fully operational status. As a result
of these incidents, the Trust completed a series of changes recommended by safety experts to
minimize the risk of future explosions or fires. During the year ended December 31, 2008, the
Trust incurred $152,000 of uninsured fire expense, incurred $388,000 of safety improvement
expense, and has incurred other operational expenses directly related to the fires. However,
due to the nature of the Trusts activities, the risk of future fires or explosions cannot be
fully eliminated. Damages resulting from future fires or explosions may result in injury or
loss of human life, extensive loss of or damage to equipment and assets of the Trust and could
result in temporary or permanent shut down of one or more of the Trusts facilities.5.
    
    TRUST GENERAL AND ADMINISTRATIVE COSTSPursuant to the Second Amended and Restated Declaration of Trust (the Restated Declaration),
the Trust incurred $192,000, $282,000 and $248,000 of Active Trustee and Trust Officer
consulting and retainer fees and compensation paid to WaterSecure, Conquest and their
affiliates during the years ended December 31, 2008, 2007 and 2006, respectively.6.
    
    CASH DISTRIBUTIONS AND PROFIT ALLOCATIONSCash distributions and profit and loss allocations are determined by terms set forth in the
Restated Declaration. Generally, the Trust distributes all cash provided by operating
activities less amounts paid for acquisitions and capital expenditures, and debt service
requirements. All profits and cash distributions are allocated to shareholders in amounts
equal to their percentage ownership of the shares of the Trust.
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##### Table of Contents



7.
    
    OTHER RELATED PARTY TRANSACTIONSPursuant to the Restated Declaration, WaterSecure, as managing trustee, is entitled to
compensation for services rendered to the Trust. The compensation includes an annual Trust
administration fee equal to 1% of the total initial capital subscriptions of the shareholders
and an annual Trust management fee of 5% of Trust revenues, paid quarterly in arrears. The
Trust management fee is reduced to 4% for any quarter that Trust revenues during the prior four
consecutive calendar quarters do not exceed $3 million. Conquest, as operator, has been
reimbursed for direct operating expenses incurred during the years ended December 31, 2008,
2007 and 2006 in the amount of $1,823,000, $1,211,000 and $977,000, respectively, which costs
are included in cost of operations in the accompanying statements of income, and is paid an
annual operator fee (currently $150,000 ($25,000 per injection well), adjusted upward or
downward annually based on changes in the consumer price index). Accounts payable at December
31, 2008 and 2007 includes a liability in the amount of $4,000 and $52,000, respectively,
payable to Conquest for unreimbursed direct operating expenses.In December 1999, Conquest and WaterSecure agreed to share equally all future fees received
from the Trust. These fees include the administration fee, management fee, and operator fee.In September 2003, the Trust entered into a License Agreement (the License Agreement) with an
entity wholly owned by the principals of Conquest, the Operator. The License Agreement runs
month-to-month and provides the Trust with an alternative facility, owned by the Conquest
principals, to dispose of water for certain customers of the Trust. The Trust is obligated to
pay a monthly fee to the Conquest principals of $5,000 for rights under the License Agreement.
The Trust earns revenues from disposal fees for water disposed at that facility for the Trusts
customers. During the years ended December 31, 2008 and 2006, the Trust paid a net $25,000 and
$14,000, respectively; and during the year ended December 31, 2007, the Trust earned a net
$17,000 under the License Agreement, which is included in interest and other revenues in the
Trusts consolidated statements of income.
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##### Table of Contents



SIGNATURES
  POWERSECURE INTERNATIONAL, INC.By:
    /s/ SIDNEY HINTONSidney HintonPresident and Chief Executive
OfficerDate: March 12, 2009 POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ SIDNEY HINTON

Sidney Hinton
    
    President, Chief Executive Officer and
Director
(Principal Executive Officer)
    
    March 12, 2009/s/ CHRISTOPHER T. HUTTER

Christopher T. Hutter
    
    Vice President, Chief Financial Officer, Treasurer
and Assistant Secretary
(Principal Financial Officer)
    
    March 12, 2009/s/ GARY J. ZUIDERVEEN

Gary J. Zuiderveen
    
    Vice President of Financial Reporting, Controller,
Principal Accounting Officer,
Assistant Treasurer and Secretary
(Principal Accounting Officer)
    
    March 12, 2009/s/ ANTHONY D. PELL

Anthony D. Pell
    
    Director
    
    March 12, 2009/s/ KEVIN P. COLLINS

Kevin P. Collins
    
    Director
    
    March 12, 2009/s/ JOHN A. (ANDY) MILLER

John A. (Andy) Miller
    
    Director
    
    March 12, 2009/s/ THOMAS J. MADDEN III

Thomas J. Madden III
    
    Director
    
    March 12, 2009
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POWERSECURE INTERNATIONAL, INC.
Form 10-K
For the Year Ended December 31, 2008
 
 EXHIBIT INDEX
 Number
    
    Description(3.1)
    
    Second Restated Certificate of Incorporation of Registrant.
(Incorporated by reference to Exhibit 4.1 to Registrants Registration
Statement on Form S-3, Registration No. 333-96369.)(3.2)
    
    Certificate of Ownership and Merger, as filed with the
Secretary of State of the State of Delaware on August 22, 2007, merging
PowerSecure International, Inc. into Registrant and amending Registrants
Second Amended and Restated Certificate of Incorporation to change the
Registrants name to PowerSecure International, Inc. (Incorporated by reference
to Exhibit 3.1 to Registrants Current Report on Form 8-K filed on August 22,
2007.)(3.3)
    
    Amended and Restated By-Laws of Registrant. (Incorporated by
reference to Exhibit 3.2 to Registrants Current Report on Form 8-K filed on
August 22, 2007.)(4.1)
    
    Specimen Common Stock Certificate. (Incorporated by reference
to Exhibit 4.1 to Registrants Registration Statement on Form S-18,
Registration No. 33-44558.)(4.2)
    
    Amended and Restated Rights Agreement, dated as of November
30, 2001, between Registrant and Computershare Investor Services, LLC.
(Incorporated by reference to Exhibit 4.1 to Registrants Registration
Statement on Form 8-A/A, Amendment No. 5, filed November 30, 2001.)(4.3)
    
    Amendment No. 1, dated as of April 22, 2004, to Amended and
Restated Rights Agreement between Registrant and ComputerShare Investor
Services, LLC. (Incorporated by reference to Exhibit 10.6 to Registrants
Current Report on Form 8-K filed May 6, 2004).(4.4)
    
    Amendment No. 2, dated as of March 29, 2006, to Amended and
Restated Rights Agreement between Registrant and ComputerShare Investor
Services, LLC. (Incorporated by reference to Exhibit 10.3 to Registrants
Current Report on Form 8-K filed March 30, 2006).(4.5)
    
    Form of Registration Rights Agreement, dated as of March 29,
2006, by and among Registrant and the investors named therein. (Incorporated by
reference to Exhibit 10.5 to Registrants Current Report on Form 8-K filed
March 30, 2006).(10.1)
    
    Separation Agreement, dated as of April 16, 2007, between Registrant and W.
Phillip Marcum (Incorporated by reference to Exhibit 10.1 to Registrants
Current Report on Form 8-K, filed April 20, 2007)*(10.2)
    
    Separation Agreement, dated as of April 16, 2007, between Registrant and A.
Bradley Gabbard. (Incorporated by reference to Exhibit 10.2 to Registrants
Current Report on Form 8-K, filed April 20, 2007)*(10.3)
    
    Registrants 1998 Stock Incentive Plan, amended and restated as of June 12,
2006. (Incorporated by reference to Exhibit 4.3 to Registrants Registration
Statement on Form S-8, Registration No. 333-134938.)*(10.4)
    
    Form of Incentive Stock Option Agreement under the Registrants 1998 Stock
Incentive Plan, as amended. (Incorporated by reference to Exhibit 10.1 to
Registrants Current Report on Form 8-K, filed August 25, 2004)*
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##### Table of Contents



Number
    
    Description(10.5)
    
    Form of Non-Qualified Stock Option Agreement under the Registrants 1998
Stock Incentive Plan, as amended. (Incorporated by reference to Exhibit 10.2
to Registrants Current Report on Form 8-K, filed August 25, 2004)*(10.6)
    
    Form of Restricted Stock Agreement under the Registrants 1998 Stock
Incentive Plan, as amended. (Incorporated by reference to Exhibit 10.3 to
Registrants Current Report on Form 8-K, filed August 25, 2004)*(10.7)
    
    Registrants 2008 Stock Incentive Plan. (Incorporated by reference to Exhibit
10.1 to Registrants Registration Statement on Form S-8, Registration No.
333-151540.)(10.8)
    
    Form of Restricted Stock Agreement under the Registrants 2008 Stock
Incentive Plan. (Incorporated by reference to Exhibit 10.2 to Registrants
Current Report on Form 8-K filed June 13, 2008.)(10.9)
    
    Form of Incentive Stock Option Agreement for Employees under the PowerSecure
International, Inc. 2008 Stock Incentive Plan. (Incorporated by reference to
Exhibit 10.3 to Registrants Current Report on Form 8-K filed June 13, 2008.)(10.10)
    
    Form of Non-Qualified Stock Option Agreement under the Registrants 2008
Stock Incentive Plan. (Incorporated by reference to Exhibit 10.4 to
Registrants Current Report on Form 8-K filed June 13, 2008.)(10.11)
    
    Form of Indemnification Agreement between Registrant and certain of its
directors. (Incorporated by reference to Exhibit 10.21 to Registrants Annual
Report on Form 10-KSB for the year ended December 31, 1999.)(10.12)
    
    Prototype  Basic Plan Document for the Metretek  Southern Flow Savings and
Investment Plan. (Incorporated by reference to Exhibit 4.7 to Registrants
Registration Statement on Form S-8, Registration No. 333-42698.)*(10.13)
    
    Adoption Agreement for the Metretek  Southern Flow Savings and Investment
Plan. (Incorporated by reference to Exhibit 4.8 to Registrants Registration
Statement on Form S-8, Registration No. 333-42698.)*(10.14)
    
    Employment and Non-Competition Agreement, dated as of August 15, 2007,
between Registrant and Sidney Hinton. (Incorporated by reference to Exhibit
10.1 to Registrants Current Report on Form 8-K filed August 15, 2007)*(10.15)
    
    First Amended and Restated Employment and Non-Competition Agreement, dated
as of December 31, 2008, by and between PowerSecure International, Inc. and
Sidney Hinton. (Incorporated by reference to Exhibit 10.1 to Registrants
Current Report on Form 8-K filed January 7, 2009)*(10.16)
    
    Restricted Stock Agreement, dated as of August 15, 2007, by and between
Registrant and Sidney Hinton. (Incorporated by reference to Exhibit 10.2 to
Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2007)*(10.17)
    
    Amendment No. 1 to Restricted Stock Agreement, dated as of December 31,
2007,
by and between Registrant and Sidney Hinton. (Incorporated by reference to
Exhibit 10.1 to Registrants Current Report on Form 8-K filed January 7,
2008)*(10.18)
    
    Employment and Non-Competition Agreement, dated as of December 10, 2007, by
and between Registrant and Christopher T. Hutter. (Incorporated by reference
to Exhibit 10.1 to Registrants Current Report on Form 8-K filed December 12,
2007)*(10.19)
    
    First Amended and Restated Employment and Non-Competition Agreement, dated
as of December 31, 2008, by and between PowerSecure International, Inc. and
Christopher T. Hutter. (Incorporated by reference to Exhibit 10.2 to
Registrants Current Report on Form 8-K filed January 7, 2009)*
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##### Table of Contents



Number
    
    Description(10.20)
    
    Restricted Stock Agreement, dated as of December 10, 2007, by and between
Registrant and Christopher T. Hutter. (Incorporated by reference to Exhibit
10.2 to Registrants Current Report on Form 8-K filed December 12, 2007)*(10.21)
    
    Employment and Non-Competition Agreement, dated as of by and between
Registrant and Gary J. Zuiderveen. (Incorporated by reference to Exhibit 10.6
to Registrants Current Report on Form 8-K, filed April 20, 2007)*(10.22)
    
    Amendment No. 1, dated December 10, 2007, to Employment and Non-Competition
Agreement by and between Registrant and Gary J. Zuiderveen. (Incorporated by
reference to Exhibit 10.3 to Registrants Current Report on Form 8-K filed
December 12, 2007)*(10.23)
    
    First Amended and Restated Employment and Non-Competition Agreement, dated
as of December 31, 2008, by and between PowerSecure International, Inc. and
Gary J. Zuiderveen. (Incorporated by reference to Exhibit 10.3 to Registrants
Current Report on Form 8-K filed January 7, 2009)*(10.24)
    
    Restricted Stock Agreement, dated as of December 10, 2007, to Employment and
Non-Competition Agreement by and between Registrant and Gary J. Zuiderveen.
(Incorporated by reference to Exhibit 10.4 to Registrants Current Report on
Form 8-K filed December 12, 2007)*(10.25)
    
    Amended and Restated Employment Agreement, dated as of April 16, 2007,
between Southern Flow Companies, Inc. and John Bernard. (Incorporated by
reference to Exhibit 10.7 to Registrants Current Report on Form 8-K filed
April 20, 2007)*(10.26)
    
    Second Amended and Restated Employment and Non-Competition Agreement, dated
as of December 31, 2008, by and between Southern Flow Companies, Inc. and John
D. Bernard. (Incorporated by reference to Exhibit 10.4 to Registrants Current
Report on Form 8-K filed January 7, 2009)*(10.27)
    
    Termination Agreement and Release, dated as of May 21, 2007, between
Registrant and Daniel J. Packard. (Incorporated by reference to Exhibit 10.1
to Registrants Current Report on Form 8-K filed May 25, 2007)*(10.28)
    
    Summary Sheet of Compensation of Non-Employee Directors. (Filed herewith.)*(10.29)
    
    Credit Agreement, dated as of August 23, 2007, among Registrant, the
financial institutions from time to time parties thereto as lenders, and
Citibank, N.A., as administrative agent. (Incorporated by reference to Exhibit
10.1 to Registrants Current Report on Form 8-K filed August 24, 2007.)(10.30)
    
    First Amendment to Credit Agreement, dated as of January 17, 2008, among
Registrant, the financial institutions from time to time parties thereto as
lenders, and Citibank, N.A., as administrative agent. (Incorporated by
reference to Exhibit 10.6 to Registrants Current Report on Form 8-K filed
January 23, 2008.)(10.31)
    
    Second Amendment to Credit Agreement, dated as of May 5, 2008, among
Registrant, the financial institutions from time to time parties thereto as
lenders, and Citibank, N.A., as administrative agent. (Incorporated by
reference to Exhibit 10.8 to Registrants Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2008.)(10.32)
    
    Third Amendment to Credit Agreement, dated as of November 13, 2008, among
PowerSecure International, Inc., as borrower, Citibank, N.A., as administrative
agent and lender, and SunTrust Bank and Branch Banking and Trust Company, as
lenders. (Incorporated by reference to Exhibit 10.2 to Registrants Current
Report on Form 8-K filed August 24, 2007.)**
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##### Table of Contents



Number
    
    Description(10.33)
    
    Form of Security Agreement, dated as of August 23, 2007, by each of
Registrant and its active subsidiaries in favor of Citibank, N.A., as
administrative agent, as secured party. (Incorporated by reference to Exhibit
10.2 to Registrants Current Report on Form 8-K filed August 24, 2007.)(10.34)
    
    Form of First Amendment to Security Agreement, dated as of January 17, 2008,
by each of Registrant and its active subsidiaries in favor of Citibank, N.A.,
as administrative agent, as secured party. (Incorporated by reference to
Exhibit 10.4 to Registrants Current Report on Form 8-K filed January 23,
2008.)(10.35)
    
    Form of Guaranty, dated as of August 23, 2007, by each active subsidiary of
Registrant in favor of Citibank, N.A., as administrative agent. (Incorporated
by reference to Exhibit 10.3 to Registrants Current Report on Form 8-K filed
August 24, 2007.)(10.36)
    
    Term Credit Agreement, dated as of January 17, 2008, among Registrant, the
financial institutions from time to time parties thereto as lenders, and
Citibank, N.A., as administrative agent. (Incorporated by reference to Exhibit
10.2 to Registrants Current Report on Form 8-K filed January 23, 2008.)(10.37)
    
    First Amendment to Term Credit Agreement, dated as of May 5, 2008, among
Registrant, the financial institutions from time to time parties thereto as
lenders, and Citibank, N.A., as administrative agent. (Incorporated by
reference to Exhibit 10.9 to Registrants Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2008.)(10.38)
    
    Form of First Amendment to Security Agreement, dated as of January 17, 2008,
by each of Registrant and its active subsidiaries in favor of Citibank, N.A.,
as administrative agent, as secured party. (Incorporated by reference to
Exhibit 10.4 to Registrants Current Report on Form 8-K filed January 23,
2008.)(10.39)
    
    Guaranty, dated as of January 17, 2008, by the active subsidiaries of
Registrant in favor of Citibank, N.A., as administrative agent. (Incorporated
by reference to Exhibit 10.5 to Registrants Current Report on Form 8-K filed
January 23, 2008.)(10.40)
    
    Form of Equipment Lease Agreement, dated as of December 22, 2008, between
SunTrust Equipment Finance & Leasing Corp., as lessor, and PowerSecure, Inc.,
as lessee. (Incorporated by reference to Exhibit 10.1 to Registrants Current
Report on Form 8-K filed December 30, 2008.)(10.41)
    
    Form of Equipment Lease Guaranty, dated as of December 22, 2008, by
Registrant in favor of SunTrust Equipment Finance & Leasing Corp. (Incorporated
by reference to Exhibit 10.2 to Registrants Current Report on Form 8-K filed
December 30, 2008.)(10.42)
    
    PowerSecure, Inc. Key Employee Long-Term Retention Plan. (Incorporated by
reference to Exhibit 10.2 to Registrants Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2006.)*(10.43)
    
    Real Estate Purchase Agreement, dated as of January 16, 2008, between
PowerSecure, Inc. and H & C Holdings, LLC. (Incorporated by reference to
Exhibit 10.1 to Registrants Current Report on Form 8-K filed January 23,
2008.)(10.44)
    
    Asset Purchase Agreement, dated as of March 14, 2008, between Registrant,
Metretek, Incorporated and Mercury Instruments LLC. (Incorporated by reference
to Exhibit 10.38 to Registrants Annual Report on Form 10-K for the year ended
December 31, 2007.)
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##### Table of Contents



Number
    
    Description(14.1)
    
    Registrants Code of Ethics for Principal Executive Officer and Senior
Financial Officers. (Incorporated by reference to Exhibit 14.1 to Registrants
Annual Report on Form 10-K for the year ended December 31, 2003.)(14.2)
    
    Registrants Code of Business Conduct and Ethics. (Incorporated by reference
to Exhibit 14.2 to Registrants Annual Report on Form 10-K for the year ended
December 31, 2003.)(21.1)
    
    List of Subsidiaries of Registrant (Filed herewith.)(23.1)
    
    Consent of Hein & Associates LLP, Independent Registered Public Accounting
Firm (Filed herewith.)(31.1)
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)(31.2)
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)(32.1)
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
and Rule 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Filed herewith.)(32.2)
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
and Rule 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Filed herewith.)
 
 *
    
    Indicates management contract or compensation plan or arrangement.**
    
    Portions of this exhibit have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities
Exchange Act of 1934, as amended. X-5