<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-2791
ELECTRIC CITY CORP.
(Exact name of small business issuer as specified in its charter)
DELAWARE 36-4197337
-------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1280 Landmeier Road, Elk Grove Village, Illinois 60007-2410
(Address of principal executive offices)
(847) 437-1666
(Issuer's telephone number)
------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days:
Yes No X
------- ------
28,954,755 shares of the registrant's common stock, $.0001 par value per share,
were outstanding as of October 31, 2000.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
1
<PAGE>
ELECTRIC CITY CORP.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
Page
Number
------
Part I Financial Information
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 2000 (unaudited) and December 31, 1999....... 4
Condensed Consolidated Statement of Operations
Three Months Ended September 30, 2000 and 1999 (unaudited).. 6
Condensed Consolidated Statement of Operations
Nine Months Ended September 30, 2000 and 1999 (unaudited)... 7
Condensed Consolidated Statement of Stockholders' Equity
(Deficit) Nine Months Ended September 30, 2000 (unaudited).. 8
Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2000 and 1999 (unaudited)... 9
Notes to Condensed Consolidated Financial Statements........ 10
ITEM 2. Management's Discussion and Analysis of
Financial Condition or Plan of Operations.................. 15
Part II. Other Information:
ITEM 2. Changes in Securities...................................... 21
ITEM 5. Other Information.......................................... 22
ITEM 6. Exhibits and Reports on Form 8-K........................... 22
Signatures................................................. 23
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
3
<PAGE>
ELECTRIC CITY CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
===============================================================================
SEPTEMBER 30,
2000 DECEMBER 31,
(UNAUDITED) 1999 (1)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 272,674 $ 6,166,197
Accounts receivable, net 2,285,092 1,324,901
Inventories 2,452,999 1,115,817
Note receivable from shareholder 0 600,000
Other, including $41,000 note receivable from
employees as of September 30, 2000 243,005 0
------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 5,253,770 9,206,915
Property and equipment 2,259,186 1,568,509
Less accumulated depreciation (247,918) (112,042)
------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 2,011,268 1,456,467
Costs in excess of assets acquired,
net of amortization of $463,632 and $196,164 at
September 30, 2000 and December 31, 1999, respectively 4,730,121 3,166,651
Other 2,838 0
------------------------------------------------------------------------------------------------------
$ 11,997,997 $13,830,033
======================================================================================================
</TABLE>
4
<PAGE>
ELECTRIC CITY CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
================================================================================
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 DECEMBER 31,
(UNAUDITED) 1999 (1)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit and current portion of long-term debt $ 1,169,705 $ 1,820,380
Accounts payable 1,805,342 820,762
Accrued expenses 522,506 417,265
Notes payable, including $1,216,007 due to distributors
as of September 30, 2000 1,416,007 0
Amounts refundable from private placement 0 110,000
Deferred revenue 50,000 175,000
---------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,963,559 3,343,407
LONG-TERM DEFERRED REVENUE 391,667 429,167
LONG-TERM DEBT, LESS CURRENT PORTION 1,506,583 777,022
---------------------------------------------------------------------------------------------------------------------------
COMMON STOCK SUBJECT TO RESCISSION 1,520,000 9,149,982
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 5,000,000 authorized - -
Common stock, $.0001 par value, 30,000,000 shares authorized,
28,954,755 issued as of September 30, 2000 and 26,091,500
shares issued and outstanding as of December 31, 1999. 2,856 2,609
Additional paid-in capital 18,991,961 8,682,873
Accumulated deficit (15,370,128) (8,555,027)
---------------------------------------------------------------------------------------------------------------------------
3,624,689 130,455
Less treasury stock, at cost, 1,000 and 0 shares as of
September 30, 2000 and December 31, 1999, respectively (8,500) 0
---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,616,189 130,455
---------------------------------------------------------------------------------------------------------------------------
$ 11,997,997 $ 13,830,033
===========================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
(1) Derived from audited financial statements in the Company's annual report on
Form 10-KSB for the eight month transition period from May 1, 1999 through
December 31, 1999.
5
<PAGE>
ELECTRIC CITY CORP.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE $ 1,661,545 $ 867,109
---------------------------------------------------------------------------------------------------------------------------
EXPENSES
Cost of sales 1,443,627 861,483
Selling, general and administrative 2,041,303 1,557,460
---------------------------------------------------------------------------------------------------------------------------
Total expenses 3,484,930 2,418,944
OPERATING LOSS (1,823,385) (1,551,835)
---------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE
Interest income 8,946 35,447
Interest expense (93,284) (77,476)
---------------------------------------------------------------------------------------------------------------------------
Total other expense (84,338) (42,029)
---------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (1,907,723) $(1,593,864)
---------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET LOSS PER COMMON SHARE (0.07) (0.06)
---------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
used in computation of basic and diluted net loss per share 28,529,481 26,239,959
===========================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
ELECTRIC CITY CORP.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30 2000 1999
--------------------------------------------------------------------------------------------------------
REVENUE $ 3,813,074 $ 1,720,983
--------------------------------------------------------------------------------------------------------
EXPENSES
Cost of sales 3,374,982 1,525,288
Selling, general and administrative 5,609,916 5,044,219
Repurchase of distributor territories & legal settlement 1,680,394 0
--------------------------------------------------------------------------------------------------------
Total expenses 10,665,292 6,569,507
OPERATING LOSS (6,852,218) (4,848,523)
--------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 226,675 43,045
Interest expense (189,558) (143,189)
--------------------------------------------------------------------------------------------------------
Total other income (expense) 37,117 (100,144)
--------------------------------------------------------------------------------------------------------
NET LOSS $ (6,815,101) $ (4,948,667)
--------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET LOSS PER COMMON SHARE (0.24) (0.20)
--------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
used in computation of basic and diluted net loss per share 28,354,221 24,576,245
========================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
ELECTRIC CITY CORP.
STATEMENT OF CONDENSED CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumluated Treasury Stockholders'
Shares Stock Capital Deficit Stock Equity (Deficit)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999 26,091,500 $ 2,609 $ 8,682,873 $ (8,555,027) $ - $ 130,455
Release of shares subject to
rescission 1,790,624 179 7,674,704 - - 7,674,883
Shares issued for acquisition of
Switchboard Apparatus, Inc. 551,226 55 1,941,695 - - 1,941,750
Issuance of shares in exchange for
services received 70,850 7 246,845 - - 246,852
Options issued in exchange for
services received - - 22,500 - - 22,500
Repurchase of shares (1,000) - - - (8,500) (8,500)
Options issued as part of
repurchase of distributor territories - - 199,550 - - 199,550
Shares issued as part of
legal settlement 60,000 6 223,794 - - 223,800
Net loss for the nine months
ended September 30, 2000 - - - - (6,815,101) (6,815,101)
------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000 28,563,200 $ 2,856 $18,991,961 $(15,370,128) $ (8,500) 3,616,189
==============================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS.
8
<PAGE>
ELECTRIC CITY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
==============================================================================
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30 2000 1999
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Loss $(6,815,101) $(4,948,667)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 403,391 179,400
Issuance of shares in exchange for services rendered 115,232 2,979,611
Repurchase of distributor territories 1,354,794 0
Accrued interest on Distributor Note 35,763 0
Settlement of lawsuit 325,600 0
Changes in assets and liabilities, excluding
business acquisition
Accounts receivable (317,653) (900,736)
Inventories (755,325) 187,686
Other current assets (121,878) 3,271
Accounts payable 526,220 388,700
Accrued expenses (176,435) 112,583
Deferred revenue (137,500) 616,667
------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (5,562,893) (1,381,484)
------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Cash obtained in acquisition 67,585 0
Repayment of stockholder loan 600,000 0
Purchase of property and equipment (181,772) (94,764)
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 485,812 (94,764)
------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Payment of amounts due sellers (968,360) 0
Borrowings on line of credit 250,000 0
Payment on (proceeds from) long-term debt (24,482) 473,661
Proceeds from private placement - net 44,900 7,467,932
Proceeds from stock issuance - net 0 891,978
Amounts refundable from private placement (110,000) 0
Proceeds from loan from stockholders 0 (97,000)
Purchase of Treasury Stock (8,500) 0
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (816,442) 8,736,571
------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (5,893,523) 7,260,323
------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, at beginning of period 6,166,197 93,799
Cash and Cash Equivalents, at end of period $ 272,674 $ 7,354,122
==============================================================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid during the periods for interest $ 178,648 $ 48,442
Accrual satisfied through issuance of stock 35,372 0
Supplemental Schedule of Noncash Financing Activities
In August 2000 the Company acquired the stock of Switchboard
Apparatus, Inc., for 551,226 shares valued at $1,941,740
The related assets and liabilities acquired were as follows:
Cash $ 67,585 --
Accounts receivable 642,538 --
Inventory 581,857 --
Property and equipment 508,905 --
Other Assets 5,264 --
Goodwill 1,830,939
------------------------------------------------------------------------------------------------------------------------------
Assets acquired 3,637,087
Accounts payable assumed (458,360) --
Other liabilities assumed (1,236,977) --
Stock issued (1,941,750) --
------------------------------------------------------------------------------------------------------------------------------
$ -
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
9
<PAGE>
ELECTRIC CITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
1. BASIS OF PRESENTATION The financial information included herein is
unaudited; however, such information
reflects all adjustments (consisting
solely of normal recurring adjustments),
which, in the opinion of management, are
necessary for a fair statement of results
for the interim periods.
The results of operations for the
three-month and nine-month periods ended
September 30, 2000 are not necessarily
indicative of the results to be expected
for the full year.
For further information, refer to the
audited financial statements and the
related footnotes included in the
Electric City Corp. Annual Report on Form
10-KSB, as amended, for the eight-month
transition period ended December 31, 1999.
2. ACQUISITION OF MARINO Effective May 24, 1999, the Company acquired
ELECTRIC ASSETS certain assets of Marino Electric, Inc.
from Joseph Marino, a related party, for
$1,792,000 in cash and 1,600,000 shares
($2,096,000) of the Company's common
stock. As Mr. Marino owned less than 50%
of the common stock of the Company, the
transaction was accounted for by the
purchase method of accounting. The
purchase price of $3,888,000 exceeded the
fair value of the assets acquired by
approximately $3,363,000, which is being
amortized on a straight-line basis over
10 years. Under the terms of the purchase
agreement, the Company was obligated to
pay the cash portion of the purchase
price upon the closing of a private
placement of the Company's common stock,
which was commenced in July 1999. In May
2000, Mr. Marino waived this requirement
and instead received a payment of
$800,000 and a subordinated secured term
note for the principal amount of
$972,000, which bears interest at 10% per
annum payable over 24 months, requiring
monthly principal and interest payments
of $44,928. As of September 30, 2000, the
principal owed and outstanding on this
note was $823,640.
3. ACQUISITION OF Effective August 31, 2000, the Company
SWITCHBOARD APPARATUS, acquired all of the issued and outstanding
INC. shares of capital stock of Switchboard
Apparatus, Inc. ("Switchboard") a
manufacturer of electrical switchgear and
distribution panels, from Switchboard's
shareholders for 551,226 shares of the
Company's common stock valued at
$1,941,750, based on quoted market
prices, plus the assumption of
Switchboard's liabilities, including
$350,000 of payments owed to the selling
shareholders of Switchboard and $827,556
of bank debt. The purchase price was
arrived at through arms' length
negotiations between Electric City and
the Sellers. Switchboard is currently
being operated as a wholly owned </TABLE>
10
<PAGE>
ELECTRIC CITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
subsidiary of the Company.
The purchase price paid plus the
liabilities assumed exceeded the value of
the assets acquired by $1,830,939, which
is being amortized on a straight-line
basis over ten years. The acquisition has
been recorded using the purchase method
of accounting, and, therefore, one
month's results of operations of
Switchboard are included in the Company's
results for the period ended September
30, 2000. The Company will file the
required audited financial statements of
Switchboard Apparatus as soon as possible
as an amendment to its current report on
Form 8-K dated August 31, 2000.
The following unaudited pro forma data
summarizes the Company's results of
operations for the periods indicated as
if the Switchboard acquisition had been
completed as of the beginning of the
periods presented. The pro forma data
give effect to actual operating results
prior to the acquisition, adjusted to
include the pro forma effect of interest
expense, amortization of intangibles and
income taxes. The pro forma information
does not necessarily reflect the actual
results that would have occurred during
the periods presented nor is it
necessarily indicative of future results
of operations of the combined companies.
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
(UNAUDITED) (UNAUDITED)
---------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 7,788,178 $ 4,329,873
Net loss (6,968,242) (4,954,283)
Basic and diluted net loss per common share (0.24) (0.20)
<CAPTION>
<S> <C> <C>
4. STOCK SPLIT The Company effected a two-for-one stock
split effective July 30, 1999. The stock
split has been retroactively reflected in
the financial statements as of and for
the three months and nine months ended
September 30, 1999.
5. NET LOSS PER SHARE The Company computes net loss per share
under Statement of Financial Accounting
Standards No. 128 "Earnings Per Share."
The statement requires presentation of
two amounts, basic and diluted net loss
per common share. Basic net loss per
common share is computed by dividing net
loss available to common stockholders by
the number of weighed average common
shares outstanding. Included in the
</TABLE>
11
<PAGE>
ELECTRIC CITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<S> <C> <C>
computation of weighted average common
shares outstanding for the three months
and nine months ended September 30, 2000
are shares of common stock subject to
possible rescission. Base net loss per
share would include all common stock
outstanding. The Company has not included
the outstanding options or warrants as
common stock equivalents in the
computation of diluted net loss per share
for three months and nine months ended
September 30, 2000 and 1999 because the
effect would be antidilutive.
6. INVENTORIES Inventories consisted of the following:
<CAPTION>
September 30, December 31,
2000 1999
=================================================================================
<S> <C> <C>
Raw Materials $1,629,297 $742,501
Work in process 19,591 331,053
Finished goods 804,111 42,263
---------------------------------------------------------------------------------
$2,452,999 $1,115,817
=================================================================================
<CAPTION>
<S> <C> <C>
7. COMMON STOCK SUBJECT In January 2000, the Company completed a
TO POSSIBLE private placement of 2,181,179 shares of its
RESCISSION common stock in an offering made
the Securities Act of 1933, as amended
(the "506 Offering"). The proceeds of
this offering were used to pursuant to
Regulation D and Rule 506 of purchase
inventory, to repay indebtedness to the
principal stockholders and for general
working capital purposes. As a result of
the Company's statements made in certain
press releases issued during the 506
Offering, it is possible, but not
altogether certain, that such statements
might have been considered general
solicitation, which is not permitted in a
nonpublic offering under Rule 506 and,
therefore, a violation of the
registration provisions of Section 5 of
the Securities Act of 1933, as amended.
As a result, the Company might have been
in violation of Section 5 of the
Securities Act of 1933, as amended, and
consequently, certain investors may have
rescission rights as to the shares
purchased. If it is determined that the
Company violated the rules regarding
general solicitation such investors would
have the right under Federal securities
laws to rescind these purchases of common
stock for a period of one year from the
date of the violation.
Over a year has passed since the
Company's issuance of the press release
described above, and of the total number
of shares possibly subject to rescission,
1,790,624 had been held for at least one
year as of September 30, 2000. The
Company has reclassified the amount
associated with these shares on September
30, 2000 from common stock subject to
rescission to common stock and additional
paid in
</TABLE>
12
<PAGE>
ELECTRIC CITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<S> <C> <C>
capital.
Because the possibility of rescission
still may exist with respect to 390,555
shares, such shares are still reported as
mezzanine equity on the Company's
condensed consolidated balance sheet.
8. GREAT LAKES CONTROLLED On April 5, 2000, the Company signed a
ENERGY CORPORATION non-binding letter of intent to
purchase all the shares of Great Lakes
Controlled Energy Corporation, an
independent systems integrator and
facility retrofit specialist. The
acquisition is contingent on satisfactory
completion of due diligence, execution of
a purchase agreement and satisfaction of
customary closing conditions. The
majority of the consideration to the
selling shareholders will be in the form
of Electric City common stock. The
Company and Great Lakes are still
negotiating the purchase price based on
findings during financial due
diligence and the Company is working to
close the acquisition before the end of
2000. This acquisition will be accounted
for using the purchase method of
accounting.
9. LITIGATION a) John Prinz, a former consultant to the
Company filed suit in the Circuit Court
of Cook County, Illinois against the
Company alleging breach of a consulting
agreement that was entered into between
the parties on April 6, 1999. Pursuant to
that agreement, which terminated by its
own terms on October 6, 1999, the
consultant was to perform a variety of
services, including (1) assisting the
Company in obtaining working capital, (2)
facilitating the purchase of another
company, and (3) facilitating the process
of listing the Company as a NASDAQ
small-cap company. On June 30, 2000, the
Company, in exchange for Mr. Prinz
dropping his suit, agreed to pay Mr.
Prinz (a) 60,000 shares of the Company's
common stock valued at $223,800 based on
the then current price of the stock on
the OTC, (b) options to purchase during a
four year period 40,000 shares of the
Company's common stock at an exercise
price equal to the lower of: (i) $7.00
per share; or (ii) the price per share of
the sale by the Company of its common
stock within 180 days of the signing of
the agreement (these options have been
valued at $86,800 using a modified
Black-Sholes option pricing model), and
(c) $15,000 in cash to be paid upon the
earlier of 180 days or the closing of an
equity funding in excess of $1 million.
The Company recorded a total one-time
charge of $325,600 during the second
quarter of 2000 in recognition of this
settlement agreement, of which $101,800
is included in accrued expenses at
September 30, 2000.
b) As the result of certain distributors
</TABLE>
13
<PAGE>
Electric City Corp.
Notes to Consolidated Financial Statements
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
failing to meet sales quotas and minimum
purchase requirements under their
distribution agreements, the Company
entered into discussions regarding the
possible termination or restructuring of
those agreements. Three distributors,
representing eleven states did not agree
with the proposed restructuring of the
agreements and threatened legal action.
The three distributors stated that they
were prepared to assert claims of
securities fraud and RICO claims, breach
of contract, breach of the covenant of
good faith and fair dealing, common law
fraud and tortuous interference.
Management denied all of the claims made
by the distributors, but after a series
of negotiations in an attempt to avoid
the time and cost of a lawsuit, the
Company agreed to repurchase the
territories held by the distributors for
an amount equal to the amount invested by
the distributors in developing the
territories. The Company repurchased the
sales territories for (a) $1,280,244 in
cash, the majority to be paid upon the
closing of an equity funding, and (b)
options to purchase 65,000 shares of the
Company's common stock at a price of
$7.00 per share over a ten year period.
These options have been valued at
$199,550 using a modified Black-Sholes
option pricing model. A portion of the
cash payment represents a refund of a
$125,000 cash security deposit paid by
the distributors to the Company. The
Company recorded a $1,354,794 one-time
charge during the second quarter of 2000
in recognition of the repurchase
agreement. The territories repurchased
are Arizona, Colorado, Florida, Georgia,
Michigan, Nebraska, North Carolina, Ohio,
South Carolina and Virginia.
</TABLE>
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION OR PLAN OF OPERATIONS
You should read the following discussion regarding the Company along with the
Company's financial statement and related notes included in this quarterly
report. This quarterly report, including the following discussion, contains
forward-looking statements that are subject to risks, uncertainties and
assumptions. The Company's actual results, performance and achievements in 2000
and beyond may differ materially from those expressed in, or implied by these
forward-looking statements. See Cautionary Note Regarding Forward-Looking
Statements.
On August 31, 2000, the Company acquired all of the stock of Switchboard
Apparatus, Inc. ("Switchboard"), a manufacturer of electrical switchgear and
distribution panels located in Broadview, Illinois. As a result, Switchboard
became, and is currently operated as a wholly owned subsidiary of the Company.
The acquisition was recorded using the purchase method of accounting, thus only
one month's results of operations of Switchboard Apparatus are included in
Electric City's results for the period ended September 30, 2000. The Company
expects revenue generated from the sale of switchgear, distribution panels and
miscellaneous electrical components, cost of sales and selling, general and
administrative expense to continue to increase during the remainder of 2000 due
to the acquisition of Switchboard and the inclusion of a full quarter of the
acquired company's results.
Results of Operations.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1999.
The Company's total revenue for the three-month period ended September 30,
2000 was $1,661,545 as compared to $867,109 for the three-month period ended
September 30, 1999. During the third quarter of 2000, EnergySaver sales
totaled $435,911, while revenue generated from the sale of switchgear,
distribution panels and miscellaneous electrical components totaled
$1,225,634, which included one month's sales of Switchboard. This compares
with EnergySaver sales of $209,500 and switchgear and distribution panel
sales of $657,609 during the third quarter of 1999.
Cost of sales for the three-month period ended September 30, 2000 totaled
$1,443,627 as compared to $861,483 for the three-month period ended September
30, 1999. The increase in the cost of sales was primarily due to the increase in
sales as a result of the acquisition of Switchboard and increased sales of
EnergySaver units and switchgear and distribution panels during the quarter. The
gross margin earned during the third quarter of 2000 was approximately 13.1%, an
increase from the 0.7% earned in the third quarter of 1999. The improvement in
the gross margin was largely due to improved utilization of manufacturing
capacity and increased sales of the EnergySaver.
Selling, general and administrative expense ("SG&A") for the three-month
period ended September 30, 2000 was $2,041,303 as compared to $1,557,460 for
the three-month period ended September 30, 1999. Charges for outside
services, including charges for legal, accounting, engineering, and public
relation services totaled $486,289 for the third quarter of 2000 versus
$444,264 for the third quarter of 1999. Salaries and related expenses
increased from $361,127 in the third quarter of 1999 to $961,165 in the third
quarter of 2000. The increase in salaries and related expense is primarily
due to (1) the new employees resulting from the Company's acquisition of
Switchboard, (2) the Company's hiring a new team of senior managers in
January 2000 and (3) the Company's expansion of its sales and marketing staff
to support the EnergySaver. Other SG&A expenses have increased as a result
the acquisition of Switchboard, the increase in headcount and the decision to
expand the marketing of the EnergySaver to markets outside of the Chicago
area, which has resulted in $152,475 of travel related expense incurred
during the third quarter of 2000 versus $61,455 during the third quarter of
1999. Depreciation and amortization expense
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included in SG&A increased from $31,950 in the third quarter of 1999 to $125,510
in the third quarter of 2000 primarily due to amortization of goodwill related
to the Company's acquisitions.
Other expense for the three-month period ending September 30, 2000 totaled
$84,338 as compared to $42,029 for the three-month period ended September 30,
1999. The Company earned interest income of $8,946 during the third quarter
of 2000 versus $35,447 earned in the third quarter of 1999. The decrease in
interest income was the result of lower average cash balances during the
third quarter of 2000. Total interest expense for the quarter ending
September 30, 2000 was $93,284 versus $77,476 in the year earlier period. The
majority of the interest expense in the third quarter of 2000 was related to
the note payable to distributors for the amount owed on the repurchase of
certain state distributorships, the Marino seller's note and the mortgage on
the Company facility in Elk Grove Village Illinois, while the majority of the
interest expense in the third quarter of 1999 was related to the Marino's
sellers note and the mortgage on the Company facility.
The Company has not recorded any provision for future tax refunds as the
realization of the benefit cannot be assured at this time. The Company's net
operating loss carry forward, which can be used to reduce future taxable income,
as of the end of September 2000 approximated $15 million.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1999.
Revenue for the nine-month period ended September 30, 2000 totaled $3,813,074
versus $1,720,983 for the same period ended September 30, 1999. The increase in
revenue is due to the acquisition of Switchboard in August 2000 and increased
sales of EnergySavers. Also the nine-month period ended September 30, 1999 only
included four months of sales from the electrical switchgear and distribution
panel business that was acquired from Marino Electric on May 24, 1999. The
EnergySaver generated total sales of $1,173,534 during the first nine months of
2000 as compared to $655,300 in the same period during 1999, while sales of
switchgear and distribution panels generated revenue of $1,065,683 and
$2,639,540 during the nine month period ended September 30,1999 and September
30, 2000, respectively.
Cost of sales for the nine-month period ended September 30, 2000 was $3,374,982
versus $1,525,288 for the period ended September 30, 1999. The increase in the
cost of sales is related to the increase in overall sales during the period. The
gross margin on sales for the first three quarters of 2000 was unchanged from
the 11.4% realized during the same period in 1999.
SG&A expenses were $5,609,916 for the nine-months ended September 30, 2000
versus $5,044,219 for the same period in 1999. Charges for outside services,
including charges for legal, accounting, engineering, and public relation
services totaled $1,338,692 for the first nine months of 2000, versus $3,796,581
for the first nine months of 1999. Salaries and related expenses increased from
$617,314 in the first three quarters of 1999 to $2,486,145 in the first three
quarters of 2000. Average headcount has increased significantly primarily due to
(1) the Company's hiring a new team of senior managers in January 2000, (2) the
Company's expansion of its sales and marketing staff to support the EnergySaver
and (3) the new employees resulting from the Company's acquisition of
Switchboard Apparatus. Also, prior to acquiring Marino Electric on May 24, 1999,
the Company had very few administrative employees. Other SG&A expenses have
increased as a result of the acquisition of Switchboard Apparatus and the
increase in headcount and the decision to expand the marketing of the
EnergySaver to markets outside of the Chicago area which has resulted in
$588,137 of travel related expense incurred during the first nine months of
2000. Depreciation and amortization expense included in SG&A for the nine-month
period increased from $104,232 in 1999 to $340,751 due primarily to the
amortization of the goodwill generated from the Company's acquisitions.
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The first nine months of 2000 included a charge related to the repurchase of
eleven distribution territories from three distributors and the settlement of a
suit brought by a former consultant. The Company repurchased the eleven sales
territories, including the exclusive rights to sell the EnergySaver in Ohio,
Michigan, Northern California, Florida, Georgia, North Carolina, South Carolina,
Virginia, Arizona, Colorado and Nebraska, for $1,280,244 (which includes the
return of a $125,000 cash security deposit paid by the distributors to the
Company) plus options to purchase 65,000 shares at $7.00 each. For accounting
purposes, the options were valued at $199,550 using a modified Black-Sholes
option pricing model. The payment of the majority of the cash portion of the
repurchase price has been deferred until the Company completes an equity
funding. During the first nine months of 2000 the Company also settled the suit
brought by John Prinz, a former consultant, for $15,000 in cash, 60,000 shares
of Electric City common stock and options to purchase 40,000 shares at $7.00 per
share. The total charge recognized as a result of this settlement was $325,600.
For the first nine months of 2000 the Company recorded non-operating income of
$37,117 versus non-operating expense of $100,144 during the same period in 1999.
The Company recorded $226,675 in interest income during the first nine months of
2000, $120,000 of which was associated with a $600,000 loan to a stockholder,
which was repaid in full during March 2000. The balance of the interest income
was earned on excess cash balances during the nine-month period. The interest
income was partially offset by interest expense of $189,558, the majority of
which was related to the amounts due to the sellers of Marino Electric, the
mortgage on the Company's facility in Elk Grove Village, Illinois, and a note
payable to distributors for the amount owed on the repurchase of certain state
distributorships. Other non-operating expense for the first nine months of 1999
consisted primarily of mortgage interest and interest on notes to shareholders,
which was partially offset by $43,045 in interest income earned on excess cash
balances.
Liquidity and Capital Resources
As of September 30, 2000, the Company had cash and cash equivalents of $272,674,
versus cash and cash equivalents of $6,166,197 on December 31, 1999. The
Company's debt obligations as of September 30, 2000 consisted of $602,200 owed
on two revolving lines of credit, a mortgage of $763,517 on its facility in Elk
Grove Village Illinois, an equipment loan of $464,661, vehicle loans totaling
$20,829, and a note due the seller of Marino Electric for $823,640. The
Company's principal cash requirements are for operating expenses, including
employee costs, the costs related to research and development, advertising
costs, the cost of outside services including those providing accounting, legal,
engineering and consulting services, and the funding of inventory and accounts
receivable, and capital expenditures. The Company has financed its operations
since inception primarily through the private placement of common stock,
preferred stock and loans from stockholders.
Net cash declined $5,893,523 during the first nine months of 2000 versus
increasing $7,260,323 during the same period in 1999. Operating activities
consumed $5,562,893 and $1,381,484 during the first nine months of 2000 and
1999, respectively. The net loss reported during the nine months ended
September 30, 2000 included non-cash charges of $1,680,394 related to the
repurchase of eleven distributor territories and the settlement of a lawsuit,
$233,980 of stock issued by the Company in exchange for services rendered and
$35,763 of interest that was accrued but not paid on a note payable to
distributors. The net loss reported during the nine months ended September
30, 1999 included $2,979,611 of non-cash charges associated with stock issued
by the Company in exchange for services rendered. Depreciation and goodwill
amortization for the first nine months of 2000 was $403,391 versus $179,400
for the same period in 1999. The 1999 period only included four months of
depreciation and amortization related to the Marino Electric purchase versus
nine months included in 2000. The 2000 period also included one month of
goodwill amortization related to the Switchboard acquisition. Working capital
increased $1,101,319 during the first nine months of 2000 versus declining
$408,172 for the same period in 1999. The increase in working capital during
the first nine months of 2000, excluding changes
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resulting from the acquisition of Switchboard, was largely the result of a
$755,325 increase in inventory and a $317,653 increase in accounts receivable.
The increase in inventory was primarily due to the production of EnergySavers in
anticipation of future orders. The Company has begun to work down this inventory
of finished goods and expects to continue to reduce its inventory over the
coming months. The increase in accounts receivable is primarily the result of
increased sales. Working capital during the first nine months of 1999 benefited
from the receipt of $616,667 in deposits from state distributors that was
recorded as deferred revenue.
Investing activities produced $485,813 during the nine-month period ending
September 30, 2000, versus consuming $94,764 during the nine-month period ending
September 30, 1999. The first nine months of 2000 benefited from a $600,000
repayment of a loan to a stockholder and $67,585 acquired in the Switchboard
acquisition, which was partially offset by purchases of property and equipment
totaling $181,772. Cash used in investing activities during the first nine
months of 1999 was related to the purchase of property and equipment for use at
the Company's Elk Grove Village headquarters.
Financing activities consumed $816,442 during the nine-month period ending
September 30, 2000, versus generating $8,736,571 during the nine-months ending
September 30, 1999. During the first nine months of 2000, the Company paid
$968,360 of the amount owed to the sellers of Marino Electric, refunded $110,000
to two investors in the Company's private placement of common stock that was
completed in January 2000, and paid $24,482 to reduce the balances on its
mortgage, equipment loan and auto loans. These uses of funds were partially
offset by $44,900 in proceeds received from the private placement and $250,000
borrowed under the Company's line of credit with LaSalle Bank N.A. During the
same period in 1999, the Company reduced the principal balances on the mortgage
by $12,712, but received $891,978 from the sale of stock, $7,467,932 from the
sale of stock as part of the private placement which commenced in July 1999,
$203,000 from loans from stockholders and $455,220 from its line of credit with
LaSalle Bank N.A.
During June 2000, the Company secured a $2 million working capital loan from
LaSalle Bank N.A. The loan is a revolving loan with an initial term of one year
and bears interest at a rate equal to the prime rate or LIBOR plus 2.75%.
Availability under the line is tied to and secured by inventory and receivable
balances. As of September 30, 2000, there was $250,000 outstanding on the loan.
As part of the acquisition of Switchboard Apparatus, the Company assumed a
revolving line of credit and an equipment loan from Oxford Bank & Trust. The
revolving credit line bears interest at the rate of 3% over the bank's base rate
and provides for maximum borrowings of $400,000. Availability under the line is
tied to inventory and receivable balances. As of September 30, 2000, there was
$352,200 outstanding on the line of credit. The equipment loan had an original
principal balance of $521,500, a fixed interest rate of 8.4% and matures on
September 3, 2004. As of September 30, 2000, the outstanding principal balance
on the equipment loan was $464,461. Switchboard has pledged all of its assets as
security for these loans.
In October 2000, the Company received net proceeds of $2,000,000 from the sale
of 2,000 shares of its series B convertible preferred stock to the Augustine
Fund LP at a price of $1,000 per share and the issuance of warrants to purchase
200,000 shares of common stock at an exercise price of $4.425 per share, subject
to certain adjustments. The preferred stock carries a dividend rate of 8% per
annum, payable quarterly in cash or common stock, at the Company's option. The
preferred stock is convertible at any time into shares of the Company's common
stock at a conversion price equal to the lower of $4.06 per share or 75% of the
average of the five lowest closing bid prices of the Company's stock during a 30
day period prior to conversion. The Company may redeem the preferred shares at
any time prior to conversion at a redemption price of $1,250 per share, and the
shares automatically convert into common stock three years after issuance if not
previously converted or redeemed. In addition, the Augustine Fund entered into a
trading agreement, which is described more fully below in section 2. The Company
elected to issue this preferred stock prior to a larger institutional funding
plan it is currently pursuing.
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The continued development, manufacturing and expansion of sales of the Company's
products, including the EnergySaver, the Global Commander and TP3, will require
the continued commitment of significant funds. The actual timing and amount of
the Company's future funding requirements will depend on many factors, including
the amount and timing of future revenues, the level and amount of product
marketing and sales efforts, the magnitude of research and development, the
ability of the Company to improve margins and the cost of additional
manufacturing equipment. For example, in order to provide sufficient capital for
future growth through acquisitions and expansion of sales and marketing efforts,
the Company is actively seeking additional equity funding at this time. In
particular the Company is seeking additional capital to fund:
- general operating expenses until its sales increase to a point at
which they can support the Company's operations;
- research and development of new products, including modifications to
the EnergySaver product to improve the Company's ability to target
specific applications and a new line of EnergySaver reliability
switchgear targeted at the telecommunications and internet industries;
- capital expenditures necessary to expand the Company's manufacturing
capacity, both for the production of EnergySavers and switchgear;
- acquisitions of companies with complementary products to the
Company's; and
- the repayment of the note due distributors.
If the Company receives additional funds through the issuance of equity
securities, the Company's existing stockholders will likely experience dilution
of their present equity ownership position and voting rights, depending on the
number of shares issued and the terms and conditions of the issuance, and the
new equity securities will likely have rights, preferences, or privileges senior
to those of the Company's common stock.
In the event that the Company is not successful in raising additional equity,
management believes that the combination of the cash raised in the recent sale
of preferred stock (as described above) and the Company's working capital line
will allow it to continue to operate, but the Company would have to scale back
its growth plans and delay planned expenditures on research and development and
capital expenditures.
Cautionary Note Regarding Forward-Looking Statements
This discussion includes forward-looking statements that reflect Electric
City's current expectations about its future results, performance, prospects
and opportunities. Electric City has tried to identify these forward-looking
statements by using words such as "may," "will," "expects," "anticipates,"
"believes," "intends," "estimates" or similar expressions. These
forward-looking statements are based on information currently available to
Electric City and are subject to a number of risks, uncertainties and other
factors that could cause Electric City's actual results, performance,
prospects or opportunities in the remainder of 2000 and beyond to differ
materially from those expressed in, or implied by, these forward-looking
statements. These risks, uncertainties and other factors include, without
limitation, the Company's limited operating history, the Company's history of
operating losses, consumers' acceptance, the Company's use or licensed
technologies, risk of increased competition, the Company's ability to
successfully integrate acquired businesses products and technologies, the
Company's ability to manage its growth, the Company's commercial scale
development of products and technologies to satisfy consumers demands and
requirements, the need for additional financing and the terms and conditions
of any financing that is consummated, the limited trading market for the
Company's securities, the possible volatility of the Company's stock price,
the concentration of ownership, and the potential fluctuation in the
Company's operating results. For further information about these and other
risks, uncertainties and factors, please review the disclosures included
under the caption "Risk Factors" in Electric City's filings
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with the Securities and Exchange Commission. Except as required by the federal
securities laws, Electric City undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events, changed circumstances or any other reason after the date of this
document.
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PART II. OTHER INFORMATION
ITEM 2. Changes In Securities
On August 31, 2000, pursuant to an Agreement and Plan of Merger by and
among Electric City Corp. and Electric City Acquisition Corporation, a
wholly-owned subsidiary of Electric City on the one hand, and
Switchboard Apparatus, Inc. and Dale Hoppensteadt, George Miller and
Helmut Hoppe (collectively, the "Sellers"), on the other hand,
Electric City purchased from the Sellers all of the issued and
outstanding shares of capital stock of Switchboard Apparatus. In
connection with the acquisition, Switchboard Apparatus was merged
with, and into, the Merger Subsidiary, with Merger Subsidiary
continuing as the surviving corporation under the name Switchboard
Apparatus, Inc. The aggregate purchase price of $1,941,750 was paid to
the Sellers in the form of 551,226 shares of Electric City common
stock. Fifteen percent (15%) of the shares issued are being held in
escrow to indemnify Electric City against certain damages that may
arise in connection with the acquisition. Electric City has agreed to
register the shares of its common stock issued to the Sellers under
the Securities Act of 1933, as amended.
During August 2000, the Company issued 60,000 shares of its common
stock to John Prinz as part of a settlement agreement with Mr. Prinz.
During August 2000, the Company issued 58,600 shares of its common
stock to thestockpage.com, a Canadian firm hired to provide investor
relations services to the Company. Of the total shares issued to
thestockpage.com, 40,000 are to be returned to the Company if prior to
December 1, 2000 the Company registers the common stock underlying
certain warrants which were issued to thestockpage.com in 1999 for
services rendered. The remaining 18,600 shares are for services to be
provided by thestockpage.com through January 2001.
On July 24, 2000, the Company issued to a consultant a warrant to
purchase 50,000 shares of the Company's common stock for services
rendered. In connection therewith, the Company recorded expenses of
$22,500. The exercise price was not lower than the closing bid price
on the grant date. The warrant is exercisable at $5.50 per share
anytime prior to the later of December 24, 2000 or 14 days following
the date of registration of the Company's first SEC registration
statement for its common stock following the effective date of the
warrant.
The Company also issued during the third quarter of 2000, a total of
7,000 shares of its common stock valued at $25,250 to two consultants
for services rendered to the Company.
No underwriters were involved in any of the transactions described
above. All of the securities issued in the foregoing transactions were
issued by the Company in reliance upon the exemption from registration
available under Section 4(2) of the Securities Act in that the
transactions involved the issuance and sale of the Company's
securities to financially sophisticated individuals or entities that
were aware of the Company's securities and business and financial
condition, and took the securities for investment purposes and
understood the ramifications of the actions. Certain of the purchasers
also represented that they were acquiring such securities for
investment for their own account
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and not for distribution. All certificates representing the stock
issued have a legend imprinted on them stating that the shares have
not been registered under the Securities Act and cannot be transferred
until properly registered under the Securities Act or an exemption
applies.
ITEM 5. Other Information
The Augustine Fund, L.P., Victor Conant, Nikolas Konstant, Joseph
Marino, Kevin McEneely and Michael Stelter (collectively, the "Selling
Stockholders") have each entered into trading agreements with the
Company which are effective for a term of three years beginning on
October 17, 2000. The trading agreements restrict each Selling
Stockholder's transfer of the Company's common stock as follows:
- sales in any one trading day by such Selling Shareholder
shall not exceed the greater of 10,000 shares or 10% of the
average trading volume of the Company's stock during the 10
prior trading days;
- public trades in an opening transaction, during the last
half hour of any trading day and at any time outside of
regular trading hours shall be prohibited by such Selling
Shareholder; and
- up to four times within any 12-month period, the Company may
prohibit any Selling Stockholder from trading the common
stock for an entire trading day.
The Company has agreed to give each Selling Stockholder a right of
first refusal to sell their common stock to any third party that
contacts the Company with a desire to purchase 100,000 or more shares
of the Company's common stock. This right shall be allocated equally
among each of the Selling Stockholders who elect to participate in the
sale. However, this right of first refusal shall not preclude the
Company's ability to raise additional capital should such need arise.
ITEM 6. Exhibits And Reports On Form 8-K.
(a) Exhibits
2 The Agreement and Plan of Merger dated as of
August 31, 2000, by and among Electric City Corp.
and Electric City Acquisition Corporation, on the
one hand, and Switchboard Apparatus, Inc., Dale
Hoppensteadt, George Miller and Helmut Hoppe, on
the other hand (incorporated by reference to
Exhibit 2 to the current report on Form 8-K dated
August 31, 2000 filed with the SEC).
4 Indemnification and Stockholder Agreement, dated
as of August 31, 2000, by and among Electric City
Corp. and Dale Hoppensteadt, George Miller and
Helmut Hoppe (incorporated by reference to Exhibit
4 to the current report on Form 8-K dated August
31, 2000 filed with the SEC).
27 Financial data schedule.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated August
31, 2000, reporting the acquisition of Switchboard
Apparatus, Inc under Items 2 and 7.
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SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELECTRIC CITY CORP.:
Dated: November 14, 2000 By: /s/ John Mitola
------------------------------------
John Mitola
Chief Executive Officer (principal
executive officer)
Dated: November 14, 2000 By: /s/ Brian Kawamura
------------------------------------
Brian Kawamura
President and Chief Operating Officer
Dated: November 14, 2000 By: /s/ Jeffrey Mistarz
------------------------------------
Jeffrey Mistarz
Chief Financial Officer (principal
financial and accounting officer)
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