ELECTRIC CITY CORP.
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(Exact name of registrant as specified in its charter)
Delaware 36-4197337
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1280 Landmeier Road, Elk Grove Village, Illinois 60007
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (847) 437-1666
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None
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Securities to be registered under Section 12(g) of the Act:
Common Stock, $.0001 par value
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(Title of class)
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PART I
Items 1. Description of Business.
Electric City History and Recent Developments
Electric City Corp. is a company that was formed to acquire and
commercialize a proprietary device and proprietary software package that reduces
the amount of electricity required to power various lighting facilities in
commercial buildings, factories, and office structures, as well as street and
parking lot lighting. All share amounts presented herein reflect the 2 for 1
share stock split on all outstanding shares of common stock effective July 30,
1999.
Electric City plans to manufacture and sell its EnergySaver State of
the Art Lighting Control Technology (hereinafter referred to as the
"EnergySaver"), an energy management and savings system which utilizes the
technology, in the U.S. under an exclusive license agreement. Electric City's
activities to date have included raising capital, developing prototypes and
installing test systems at test sites in the U.S. and the limited sale of
systems.
On May 24, 1999, Electric City entered into an agreement to purchase
most of the assets, including inventory, of Marino Electric, Inc which agreement
the parties have treated as closed as of May 24, 1999, subject to the payment of
the balance of the purchase price. Marino Electric was a local designer and
manufacturer of custom electrical switchgear and distribution panels owned by
Joseph C. Marino, a director and principal shareholder of Electric City. The
purchase price of $3,880,000 consists of the issuance of 1,600,000 shares of
Electric City common stock and $1,792,000 in cash to be paid from the proceeds
of Electric City's current private placement described below. Electric City
plans to increase overall revenues by marketing and distributing Marino Electric
products in tandem with the EnergySaver.
Pursuant to the License Agreement dated January 1, 1998 between Giorgio
Reverberi, the owner of the Italian patent on a proprietary device and
proprietary software package underlying the EnergySaver, and Joseph C. Marino, a
director and principal shareholder of Electric City (who sublicensed the rights
to Electric City for use in the U.S.), Electric City must pay Reverberi a
royalty of $300 for each product unit made by or for Electric City and sold by
Electric City.
Electric City was initially formed as a Delaware limited liability
company (Electric City, L.L.C.) on December 5, 1997 to acquire the
above-referenced license and commercialize the application of a patented device
that reduces the amount of electricity required to power various lighting
facilities in commercial buildings, factories, office structures and street and
parking lot lighting.
On February 4, 1998, an Operating Agreement was entered into between
Electric City, L.L.C.'s two members each owning 50%, Joseph C. Marino, who on
May 2, 1998, assigned his interest to Pino, L.L.C. ("Pino"), which is controlled
by Mr. Marino and NCVC L.L.C., which is controlled by Victor Conant, Kevin
McEneely, and Nikolas Konstant through dy/dx Consulting, LLC, a Delaware limited
liability company. On June 5, 1998, Electric City, L.L.C. merged with and into
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Electric City Corp. and Joseph C. Marino sublicensed his rights under the
Reverberi license agreement Electric City for use in the U.S.
In June 1998, Electric City issued 1,200,272 shares of its common stock
with a fair market value of $1,200,272 representing approximately six (6%)
percent of Electric City's issued and outstanding common stock, to the
approximately 330 shareholders of Pice Products Corporation, an inactive
unaffiliated company with minimal assets, pursuant to merger agreement under
which Pice was merged with and into Electric City. The number of shares issued
to Pice was determined and negotiated with the principals of Pice by the
Company's Board of Directors as a whole and was concluded by the Board to be an
"arm's length transaction" in that none of the Board of Directors was in any way
affiliated with, or related to the principals of Pice. The purpose of the merger
was to substantially increase the number of shareholders of Electric City to
facilitate the establishment of a public trading market for Electric City common
stock. Trading in Electric City common stock commenced on August 14, 1998
through the OTC Bulletin Board under the trading symbol "ECCC".
For a chart representing the "affiliated and Nonaffiliated Stock
Ownership, please see Page 17.
During July 1998, Electric City acquired its present corporate
headquarters, manufacturing and warehouse located at 1280 Landmeier Road, Elk
Grove Village, Illinois for the purchase price of $1,140,000 (of which $800,000
was borrowed by way of a mortgage) and $340,000 was paid by the issuance of
340,000 shares of its common stock. The mortgage debt bears interest at the rate
of 8.25% per annum and is payable in monthly installments of principal and
interest of $6,876 until August 2003, with a final balloon payment of $710,000
due in August 2003.
On May 24, 1999, Electric City entered into an asset purchase agreement
with Marino Electric, Inc. a corporation wholly owned by Joseph Marino, a
director and principal shareholder of Electric City. The Board as a whole
believes the terms of the transaction are as favorable to the Company as if
negotiated with an unaffiliated third party. The agreement provides for the
acquisition by Electric City of certain of the assets of Marino Electric,
including work in progress, inventory, equipment and all goodwill trade names
and trademarks, excluding the accounts receivable, cash, and a recreational
vehicle, free and clear of any claims, liens or encumbrances in exchange for
$1,792,000 in cash and 1,600,000 shares of Electric City common stock (at an
assigned value of $1.31 per share determined by the price of the stock at the
time of the initial negotiation of the transaction in January, 1999) for a total
purchase price of $3,880,000. No liabilities of Marino Electric, Inc. were
assumed. Since that date, Electric City has delivered, as partial payment of the
purchase price, 1,600,000 shares of its restricted common stock, however, the
cash portion of the purchase price is to be paid at the closing of the minimum
of Electric City's current private placement described herein. Electric City
received an appraisal of a controlling interest in Marino Electric's common
stock conducted by The Griffing Group, Inc., a party not affiliated with the
transaction. This appraisal valued the Marino Electric business as a going
concern at approximately $3.2 million. However, the final purchase price
includes adjustments to the appraisal amount to reflect the synergistic value of
Marino Electric to Electric City and the expected strategic benefits to be
derived from the combination over and above Marino Electric's stand-alone value.
The parties are presently treating the transaction as having been closed
effective May 24, 1999, subject to the payment of the balance of the purchase
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price, and therefore, Electric City has accrued a current liability on its books
for $1,792,000, which is accruing interest at the rate of 9% per annum and will
be paid on or before April 30, 2000. Mr. Marino has agreed to allow the Company
retain and utilize the funds until the referenced date. The $1,792,000 will be
paid from the proceeds of the current 506 private placement which has raised
funds well in excess of the amounts due under the agreement . The agreement also
provides cross-indemnification against losses suffered as a result of breaches
of the representations and warranties of the parties contained in the agreement.
Through June 30, 1999, Electric City had sold approximately 50
EnergySaver systems to commercial clients within the United States. These sales
resulted in gross revenues of approximately $300,000. In addition, demonstration
EnergySaver units have been installed for test periods in some City of Chicago
buildings, including at O'Hare International Airport and several public
libraries. During the fiscal year 1998/1999 the EnergySaver accounted for 100%
of the Company's sales. In the first fiscal quarter of 1999, the amount was
19.5%.
Please see Recent Sales, page 28 for a discussion of arrangements with
John Prinz & Associates, T. J. Riley and Associates, Giorgio Reverberi, Giuseppe
Tagliati and Richard Levy. These arrangements were entered into by the Company
for various consulting services and the individuals have been compensated by the
issuance of the Company's common stock.
Electric City's activities to date have included raising capital,
establishing a sales distribution network, selling the EnergySaver product and
preparing to assemble the EnergySaver product at Electric City's principal
facilities located at 1280 Landmeier Road, Elk Grove Village, Illinois.
Business of Marino Electric
Marino Electric is a local designer and manufacturer of custom
electrical switching gear and distribution panels which serve to distribute
electricity from a building's principal power source to the various electric
switches within a building. Marino Electric's products can be found in many
buildings in the Chicago area.
Marino Electric's principal customers are electrical contractors for
commercial building projects. Most Marino Electric contracts involve the custom
manufacturing of electrical switching gear and distribution panels for such
projects. In addition, Marino Electric fabricates cases (electrical boxes) and
assembles circuit breakers, bus bars and switches. Marino Electric's principal
parts suppliers are Siemens and Cutler Hammer.
Since Electric City's EnergySaver is attached to a building's electric
distribution panel, Electric City plans to increase overall revenues for the
combined entity by marketing and distributing Marino Electric products in tandem
with the EnergySaver, which can be incorporated directly into the distribution
panel for new construction projects. The acquisition is also expected to
generally result in national exposure for Marino Electric's business.
Product - The EnergySaver
The EnergySaver is a computer controlled voltage regulation system that
consists of control panels containing electrical parts in a free standing
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enclosure which is connected between the power line and the building's
electrical lighting circuits. Regardless of the efficiency of the current
lighting system, the type of lamp/ballast used, whether for indoor or outdoor
lighting applications, the EnergySaver is programmable to provide the amount of
power that each lighting situation needs to function. The fluctuations (power
spikes, drops and surges) inherent in any power supply are eliminated, resulting
in a reduction of heat generated within a lighting system, which in turn
enhances lamp/ballast life. The EnergySaver regulates the power, while reducing
volts, amps and kilowatts. The EnergySaver has an on-board computer with
intelligent software that provides constant control and self-diagnosis and that
can be easily accessed directly or remotely via modem or two-way radio. The
user, or customer, can control, through the software, the amount of savings
desired, from 0% to 50%. Electric City manufactures EnergySavers of varying
sizes and capacities to address differing lighting situations. The EnergySaver
is Year 2000 compliant with a life expectancy of ten years.
The Company believes the benefits derived from the EnergySaver are
substantial. These benefits include reducing the amount of energy required to
power lighting systems by up to 50%, while significantly increasing the
operating life of lighting bulbs and ballasts, which supplies power to bulbs
within the fixture. The EnergySaver interfaces with new and or existing lighting
panels, ballasts, and lamps without modifications. The EnergySaver provides
output voltage stability, eliminating spikes and surges while providing
protection from lightening strikes, electrical shocks and power interruptions.
The EnergySaver also reduces the heat generated by the lighting system through
its operation of that system with less electricity used.
Planned future enhancements to the EnergySaver include size reduction
for smaller buildings under 5,000 square feet (e.g., single family homes) and
continual product re-design to improve efficiency and manufacturability.
The European counterpart to the EnergySaver which uses the same
proprietary licensed technology has approximately 5,000 European installations
currently in use. This product has been sold in Europe for over 15 years where
it has principally been used by governmental agencies for outdoor street
lighting.
The Market Opportunity
The deregulation of the electric industry represents a unique
opportunity for Electric City and the EnergySaver. According to Forbes
Magazine's May 19, 1997 issue in an article entitled "Power Players", the
electric power industry is $215 billion in the U.S. alone. According to the
"Comprehensive Electricity Competition Plan" of the DOE, retail choice is
required to be implemented by January 1, 2003, thus, the industry is in the
process of a rapid deregulation. Companies, governments and individuals will
soon be able to buy power from any supplier. New power generation and
transmission companies will emerge. The DOE Plan also states that: "The
introduction of competition itself should provide important public benefits, as
sellers will have a strong incentive to add value and differentiate their
products in ways that will provide such benefits...companies will provide
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bundled packages of electricity and efficiency services." Thus, large power
suppliers like Enron, Duke Energy and Unicom), are actively seeking power saving
technologies that will give them a competitive advantage in securing customers.
According to "Demand Side Management in A Community Electricity Franchise:
Testimony of Cape and Islands Self-Reliance before the Massachusetts Department
of Public Utilities on the Economic Feasibility of Energy Efficiency Investment
(July, 1996), "Who will still have the incentive to implement DSM programs in a
deregulated market place? The answer is simple, the people who pay for the
electricity. Demand side management ("DSM") tools are tools that reduce the
amount of electricity used by the customer themselves. Therefore, Electric City
has the enhanced opportunity to sell the EnergySaver to end users of the
electricity and to market the EnergySaver to utilities who need to bundle the
product with their services because of deregulation.
Deregulation may or may not be accompanied by a reduction in market
prices, according to Mr. Dan Berman, Chairman of the Coalition For Local Power.
In an article entitled "Covering the `Stranded Costs," Nation's Business'
September, 1997 issue" stated: "If stranded costs are built into post-regulation
customer bills - as is expected to occur in some states considering or phasing
in deregulation including California - the full benefits of competition will
have to wait until these costs are paid."
Stranded costs are costs incurred by utilities in the building of power
plants and in the building of distribution infrastructure for power delivery to
customers. These costs have historically been incorporated into the energy
charges to customers. Stranded Costs Recovery has been the bottom line for
electric utilities since the beginning of the restructuring debate and many
state regulators have already conceded utility demands that the American public
pay for all their uncompetitive power plants and infrastructure. Prior to
deregulation, the utility that incurred the costs were the same utilities that
sold power to the customers in a captive market. With deregulation the utility
that incurs the costs may or may not be the utility that sells the power.
Stranded cost recovery refers to the incorporation of the costs incurred into
the power costs given to the customers. 1q
Furthermore, according to Mr. Berman, in Davis, California, "Under
utility `restructuring,'...vendors will be clamoring for your electricity
dollar, with no regard for system reliability." Thus, the EnergySaver will be
able to be utilized in these situations to continue reducing the cost of
lighting in a deregulated market and in enhancing system reliability with the
voltage regulation features.
In the event that prices are reduced, increased environmental
sensitivity due to the issue of climate change may result in consumer desire to
lower energy use even in the presence of these falling energy costs, encouraging
the use of the EnergySaver. Coop America, an environmental consumer group,
reported that "Green" purchases have become more popular and stated that not
only is the earth's temperature rising, but that it may be rising at increasing
rates. As it becomes widely recognized that the climate change is worsening,
there may be increased efforts on the part of governments, industry and
individuals worldwide to decrease greenhouse gas emissions that will have a
positive effect on the energy conservation industry. So, if prices do decline,
customers will have an environmental incentive to purchase the EnergySaver.
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As a result of increased environmental sensitivity, Congress passed the
Energy Policy Act of 1992 which requires all states to adopt the American
Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE
Standard 90.1-1989), or better for their state energy codes. ASHRAE 90.1-1989
sets prescriptive unit lighting power allowances (ULPA) of 0.4 watts per square
foot for warehouses 250,000 square feet and over and 3.30 watts per square foot
for retail facilities less than 2,000 square feet. The EnergySaver will help
companies that are not in compliance achieve compliance by reducing energy
consumption to acceptable levels.
The target market for Electric City's EnergySaver is any freestanding
building, commercial or industrial, over 5,000 square feet and any large-scale
outdoor lighting system (e.g. street and parking lot lighting) located in the
U.S. According to the Commercial Buildings Energy Consumption and Expenditures
1995, the most recent U.S. Department of Energy, Energy Information
Administration survey of energy use in commercial buildings with more than 1000
square feet, in 1995 there were 4.6 (+/-0.4) million commercial buildings in the
U.S., and these buildings comprised approximately 58.8 billion square feet,
(+/-3.9) of total floor space.
Sales and Distribution
Electric City is in the process of contracting with established
(typically distribute electrical products)regional distributors ("Regional
Distributors") to carry and market the EnergySaver. Regional Distributors sign
multiyear agreements for product distribution. Regional Distributors secure
dealers to assist in their marketing and sales efforts. Both Regional
Distributors and other dealers make their profit via product markup.
Electric City works with its Regional Distributors in 19 states and is
currently negotiating contracts in New York City and Southern California.
Electric City, by the end of 1999 established 21 exclusive distribution
agreements covering most of the U.S. The distribution agreements are standard 10
year agreements with varying terms of territory, quotas, and payment terms based
on the market covered within the agreement. The agreements have first year
guaranteed sales in the amount of amounts to $11,805,000. The guaranteed sales
are secured by irrevocable letters of credit issued to Electric City Corp.
Electric City has the authority to draw upon letter of credit in the event that
the distributor does not purchase the minimum number of units in the first year
of the distribution agreements. Years two through ten have sales quotas that
increase throughout the term which are not guaranteed sales but obligations that
the distributor must meet to keep its exclusive territory provided for in the
distributor agreement. The Company's profits are expected to steadily increase
at significant rate. The profit margin of the EnergySaver has an estimated
30-45% profit margin. The estimate of the profit margin is based on the current
manufacturing costs of $5,175.00 to $5,775.00 and a final sales price of
$7,500.00 per unit. Year two sales quotas are $41,812,500 and increase annually
to $147,045,000 in the tenth year of the distributor agreement. The sales quotas
are based upon annual increases in sales of approximately 20% per year. Product
years 1-5 have a cumulative sales volume of $268,837,500.00. After the first
year, nonperformance results in the loss of the said territory to Electric City.
Nonperformance relates in each instance to quota achievement and payment within
the said payment terms of the agreement(generally 30-60 days with select areas
requiring a 10% deposit upon order placement). Agreements are renewable after
the 10-year period at the discretion of Electric City. Agreements terminate at
the sole discretion of Electric City if any term is not met. Exclusive
distributors operate exclusively in their named territory meaning they establish
dealerships within that market and manage the sales, installation, product
maintenance, and sales support within the market. Upon selling outside the said
exclusive market, the exclusive distributor operates as a dealer in the markets
of another exclusive distributor, meaning they manage end user sales only. The
Company, in a series of press releases has announced
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the signing of the distributor agreements. In press releases dated March 26,
1999 announcing the Texas, Virginia, Tennessee, Missouri and Kentucky
Distributor Agreements, the April 8, 1999 announcing Wisconsin Distributor
Agreement, and the April 13, 1999 announcing Colorado and Nebraska Distributor
Agreements, the Company inadvertently announced that the agreements had
guaranteed sales beyond the first year of the agreement. In fact, these
agreements do not have guaranteed sales after the first year of the agreement.
Thereafter, all press releases correctly reflected that the distributor
agreements only have guaranteed sales for the first year of the agreement.
In addition, Electric City distributors plan to distribute the
EnergySaver in tandem with the electric distribution panels manufactured by
Marino Electric.
Electric City plans to establish a direct sales force to target large
national or multinational companies. These sales people will focus their efforts
on the energy engineering staffs of these companies, which can analyze and
recommend the purchase of a device such as the EnergySaver for their multiple
sites.
Marketing
Electric City has retained Burson-Marsteller, a high end, full service
public relations firm to assist in the marketing efforts for the EnergySaver.
They have developed a media campaign to introduce the Company to Chicago media,
including print and television outlets. The retainer was for a period of six (6)
months, commencing in March of 1999. The Company has not renewed the agreement.
Licenses and Trademarks
Pursuant to the License Agreement dated January 1, 1998, between
Giorgio Reverberi, the owner of the foreign patent for the technology underlying
the EnergySaver, and Joseph C. Marino, Chairman and CEO of Electric City, Mr.
Marino has an exclusive license to manufacture, have made, import, use and sell
in North America, including the United States, Canada and Mexico; Central and
South Americas and the Caribbean, excluding Cuba, Argentina, Chile, Paraguay and
Uruguay any product or method covered by one or more claims of the Reverberi's
patents. Mr. Marino is to pay Reverberi a royalty of $300 for each product unit
made or sold. The term of the Reverberi License Agreement is until December 31,
2007, which is renewable until December 31, 2017, unless written termination is
provided by either party of the License Agreement no less than 90 days prior to
the renewal date. The Reverberi License Agreement may be terminated by either
party upon breach which remains uncured after sixty (60) days notice and only by
Mr. Marino upon sixty (60) days notice without cause. The Reverberi License
Agreement is transferable by Mr. Marino so long as he retains an interest in the
transferee.
Mr. Marino has sublicensed to Electric City for no fee, the rights to
the United States territory under the Reverberi license agreement. Though
receiving no fee for the sublicense, the sublicense was partial consideration
for Mr. Marino's interest in Electric City, L.L.C. The terms of the Sublicense
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Agreement dated June 5, 1999, mirror the Reverberi License, except for the
territory, which under the Sublicense, is limited to the United States and the
renewal provisions. The Sublicense is renewable upon the same terms as the
Reverberi License Agreement, except that the Sublicense can only be renewed if
the Reverberi License Agreement has not been terminated. Mr. Marino retains all
other rights under the Reverberi License Agreement.
In April 1999 Electric City filed applications with the U.S. Patent and
Trademark Office to federally register its marks "EnergySaver State of the Art
Lighting Control Technology" "EnergyMiser" and its corporate name. As of the
date of this registration statement, the U.S. Patent and Trademark Office had
not determined whether the marks and name could be federally registered and the
Company cannot guarantee that registration certificates will be issued. Electric
City currently relies solely on common law trademark protection. Under common
law, Electric City generally has priority over subsequent users of confusingly
similar marks in the same geographical areas, but does not have priority over a
prior user of a similar mark. If prior use is established, Electric City may not
be able to use its mark in the geographical area of the prior use. While
Electric City's marks are important to Electric City, unavailability of its
marks in any particular geographical area may not necessarily have a material
adverse effect on Electric City. However, such unavailability may preclude
utilization of competitive advantages that come with nationwide or regional
marketing and advertising.
Patents
Electric City's business, apart from that of Marino Electric, is
substantially dependent on the licensed proprietary electric load reduction
technology underlying the EnergySaver. This technology has been patented by
Giorgio Reverberi under Italian law but not in the U.S. a U.S. patent
application was filed by Mr. Reverberi in November 1997 and is has been granted.
The grant of the patent indicates that the EnergySaver does not infringe on
other patents or intellectual property rights. In light of technological
advances that may be made in products of this type, Electric City regards the
value of the protection provided by the patent to be of uncertain duration.
Electric City has made improvements to the EnergySaver since the patent filing.
A new software program was developed, bringing the EnergySaver to Y2k
compliance. The patent for the newly developed software is scheduled to be filed
within 90-120 days.
In addition, Electric City is continually striving to make synergistic
enhancements to the EnergySaver technology. Electric City intends to seek patent
protection for such technological enhancements to the extent that they are
separately patentable. However, the proprietary information may become known to
competitors or others may independently develop substantially equivalent or
better products that do not infringe on Electric City's property information
rights.
Competition
Although Electric City is not aware of any direct competitors currently
offering products comparable to the EnergySaver, competitors are expected to
develop or license their own technologies and to begin to offer products that
will compete with EnergySaver. Many of these competitors will have greater
financial, technical, marketing, customer service and other resources available
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than Electric City. Electric City anticipates that the principal competitive
factors in this emerging industry will be affordable and flexible technology.
Electric City intends to aggressively market its products and quickly achieve a
significant market share which will help it withstand the entry of future
competitors. (See "Marketing.") However, there can be no assurance that Electric
City will succeed in this endeavor or will be able to achieve and maintain
profitability in the highly-competitive environment for energy management
products and services which is likely to develop.
Marino Electric competes primarily with national suppliers of
electrical switchboards such as Siemens and Cutler Hammer, and several local
electrical manufacturers in Illinois. Competition in Marino Electric's industry
revolves primarily around the price of the product and the time it takes to
complete the project. Marino Electric believes that it can generally complete
custom projects more quickly than the other national competitors. National
competitors are structured on an assembly line basis because they primarily
handle standard, non-custom work assignments; the benefit of a custom job shop
environment like Marino Electric is the ability to handle custom assignments in
a more timely manner because each assignment is handled individually and
assembly lines are not utilized.
The Company believes that there is currently not a product on the
market that posses the features and benefits of the EnergySaver; however, there
are products in the market that the Company considers indirect competition to
the EnergySaver. Most products that compete in the same market as the
EnergySaver can be categorized into two categories: those that reduce the power
to the lighting system to a fixed amount of power and those that pulsate the
power to the lighting system, according to the National Lighting Product
Information Program's Specifier Report in Volume 6, Number 2 of the September,
1998 issue. Both types reduce energy costs for lighting. The former allows the
customer to reduce the amount of power given to the lighting system with a fixed
amount of savings. For example, if the customer wanted 3% savings the technology
would be set to reduce the amount of power by 3% at the product's manufacturer.
The level of savings would not be changeable by the customer. The EnergySaver
electronically and automatically changes the savings amounts depending on the
changing customer needs and market prices. The latter category of indirect
competitors pulsate the power to the lighting systems to achieve savings.
According to the same Specifier Report referenced above, these power pulsators,
that in effect supply full power to the lighting systems and then turn the power
off so quickly that the lights remain on, "can reduce power quality as well as
lamp and ballast performance," whereas the EnergySaver enhances lamp/ballast
life. Finally, the Company believes that the EnergySaver rises above this
indirect competition because of the software that accompanies the product which
allows the customer to monitor, operate, and manipulate the EnergySaver from a
remote location. In conclusion, the Company believes that the EnergySaver posses
features and benefits beyond its indirect competitors.
Furthermore, in the face of potentially falling energy prices, the
EnergySaver will remain an attractive product because of the "soft savings" it
provides. Because of the reduced amperage and voltage the powers lighting
systems with, heat generation within the lighting system is reduced, extending
lamp/ballast life. According to the National Lighting Product Information
Program's Specifier Report in Volume 6, Number 2 of the September, 1998 issue
stated referring to technologies such as the EnergySaver which "reduce active
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power" it stated "they should also reduce ballast operating temperatures and
therefore have the potential to extend ballast life." Heat reduction in the
lighting system will also impact air conditioning costs by lessening the
counterproductive heat generation of the overhead lighting. The EnergySaver
regulates the voltage from the power supply to the lighting system, protecting
the lamps/ballast from damaging power surges and spikes. By enhancing
lamp/ballast life, the EnergySaver reduces maintenance costs for its customers.
These "soft savings" are present whether energy costs rise or fall, creating
value for the EnergySaver in either scenario.
In Europe, Electronica Reverberi has two different types of products as
their competition. Both categories of products have very short shelf lives, are
heavy, and noisy in their operation. Constant maintenance and attention is
required by these products because they have many mechanical parts and are often
accompanied by mechanical complications.
Manufacturing
The Reverberi license agreement provides that the licensee may
manufacture its own EnergySaver units. Electric City has begun manufacturing the
units at its principal facility in Elk Grove Village, Illinois, with most of the
component parts supplied by multiple U.S. manufacturers. Electric City continues
to engage in contracting with suppliers to arrange additional reliable sources
of supply of parts. However, at the present time Electric City is entirely
reliant on Electronica Reverberi S.A., which is controlled by Mr. Reverberi, to
supply the computer processor component of the EnergySaver. There is no written
supply agreement with Electronica Reverberi S.A. and purchases are made on an as
needed basis. Electric City Corp. generally paid all invoices within 30 days.
There is no written, verbal, nor implied commitment to continue to purchase the
processor from Reverberi. According to the agreement between Mr. Marino and
Reverberi, all parts can be made in the US. Amounts paid under this agreement
since its inception are $ 724,355.59. The inability of the Company to obtain
components parts from Reverberi at this time would have a material adverse
effect upon the Company, its revenue and its profitability. The Company has
designed and is developing a new software system that is anticipated to be
manufactured locally to overcome this risk. Although Electric City is currently
in discussion with a North American source of supply for the computer processor
component, the Company cannot guarantee that such efforts will be successful.
Due to the capabilities and expertise of the personnel obtained from
Marino Electric, Electric City plans eventually to enter into arrangements
whereby mass production of the EnergySaver would be performed by contract
manufacturers and Electric City's facility in Chicago would be used primarily
for custom orders and technological improvements to the EnergySaver.
Company Financing
For information concerning Company financing, see Item 2. Plan of
Operation.
Research and Development
The Company, through the day to day use of EnergySaver and its
components, and their use at various testing sites around the country develops
modifications and improvements to the product. Total research and development
costs charged to operations were $1,923,000.
11
<PAGE>
Compliance with Environmental Laws
Neither the Company's production nor sales of its products in any way
generate activities or materials that that would require compliance with
federal, state or local environmental laws. The cost of such compliance is
minimal.
Employees
As of June 30, 1999 Electric City had 37 employees, including 17 former
employees of Marino Electric. 35 of these employees are employed full-time.
Electrical manufacturing employees from Marino Electric are covered by a
collective bargaining agreement with the International Brotherhood of Electrical
Workers, affiliated with the A.F.of L.-C.I.O. which expires on December 31,
2000. Electric City considers its relations with its employees to be
satisfactory.
Item 2. Plan of Operation
Electric City is a company that was formed to acquire and commercialize
a proprietary device and proprietary software package that reduces the amount of
electricity required to power various lighting facilities. Electric City's
activities, to date, have included raising capital, developing prototypes,
installing test systems at test sites in the U.S. and the limited sale of its
EnergySaver system.
On May 24, 1999, Electric City entered into an agreement to purchase
most of the assets of Marino Electric, which is a designer and manufacturer of
custom electrical switchgear and panels.
From December 5, 1997 through April 30, 1999, Electric City has
borrowed a total of $1 million from related parties to fund its initial
operating expenses. As of July 30, 1999, $500,000 of this amount has been
converted into 500,000 shares of common stock and $200,000 remains outstanding
and payable on demand. In addition, a total of $98,968 in operating expenses has
been paid on behalf of Electric City by principal shareholders. (See "Certain
Relationships and Related Transactions.") This amount has been treated as
additional paid in capital in the Electric City financial statements as of April
30, 1999.
In addition, Electric City has raised a total of $1,365,179 in cash and
received services with a recorded value of $2,715,899 through private placements
of its common stock. Further, Electric City has purchased land and a building
for its principal offices with a recorded value of $1,140,000 through the
issuance of $800,000 in debt and the issuance of common stock. The mortgage debt
bears interest at 8.25% and is payable in monthly principal and interest
installments of $6,876 until August 2003, with a final balloon payment of
$710,000 due in August 2003.
12
<PAGE>
From May 1, 1998 through April 30, 1999, Electric City has used cash of
$1,724,048 in operating activities, primarily attributable to selling, general
and administrative expenses, and used cash of $945,320 in investing activities
to purchase property and equipment.
The agreement for the purchase of Marino Electric assets provided for
the issuance of 1,600,000 shares of common stock and the payment of $1,792,000
in cash. The tangible assets acquired consist primarily of equipment and
inventory.
In addition to the cash needed to complete the purchase of Marino
Electric assets and implement the planned expansion of Marino Electric from a
local to a national company, Electric City currently estimates that additional
cash may be needed for possible niche acquisitions within the next 12 months of
companies which supply components for the EnergySaver or sell products which are
complementary to the marketing and distribution of the EnergySaver. Electric
City also expects to hire key management personnel such as a chief financial
officer and a chief operating officer within the next twelve months. Only a very
small portion of the cash requirements for these items is expected to be
satisfied through operating revenues. However, the funds raised by the 506
Offering will be sufficient to meet these cash requirements, subject to the
possibility of a rescission of the 506 Offering, as discussed below.
The Company borrowed $250,000 from each of the 2 principal stockholders
of the Company, Pino (an entity in which Joseph Marino holds a 70% membership
interest and Michael Stelter holds a 10% membership interest) and NCVC (an
entity with which Kevin P. McEneely and Victor L. Conant, directors of Electric
City, and Nikolas Konstant, are affiliated and who may be deemed beneficial
owners of the Electric City common stock held by NCVC L.L.C hold the membership
interests) for working capital needs. The borrowings are payable on demand and
bear interest at 9% per annum. The loans are unsecured and contain no covenants.
At July 31, 1999, $200,000 of the original $500,000 remains outstanding. The
remaining balance was paid by the company on October 31, 1999, as follows:
$100,000 principal and $2,125 interest to Pino and $100,000 principal and $2,125
interest to NCVC.
The Company purchased a building for $800,000 cash which was satisfied
with a first mortgage and 340,000 shares of the Company's common stock valued at
$1 per share. The Company has outstanding an 8.25%, $800,000 mortgage note
payable to a bank. The note requires monthly payments of principal and interest
of $6,876 through July 2003. A final payment of approximately $710,000 is due in
August 2003. The mortgage is collateralized by the Company's building and land.
The balance outstanding at July 31, 1999 was approximately $784,000.
As was required under the original Operating Agreement, NCVC, a
stockholder agreed to loan amounts to the Company up to $500,000. The Company
borrowed a total of $254,000 in February, March and April of 1998. The Company
borrowed a total $246,000 from NCVC in May and June of 1998 to bring the
aggregate borrowed to $500,000. The borrowings are payable on demand and bear
interest at 9% per annum. The loans are unsecured and contain no covenants. The
$500,000 was converted into 500,000 shares of stock, in June of 1998.
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<PAGE>
In June 1998, the Company issued 940,000 shares of common stock in a
Regulation D 504 offering. The shares were priced at $1 per share. As a result
of the offering the Company raised $440,000 of cash less offering costs of
$13,023. The remaining 500,000 shares issued in the offering were as a result of
the conversion of the $500,000 loan from a stockholder. The loan was converted
into shares at the $1 per share value. In addition, the Company sold 911,978
shares of common stock for a total of $938,202 in cash in February and March
1999 (See "Recent Sales of Unregistered Securities").
In April 1999, Electric City issued an aggregate of 796,000 shares of
common stock for services rendered to the Company which the Company valued at $
2,232,789. TJ Riley and Associates (Tom Riley) received 246,000 shares for
marketing consulting services to develop sales contacts pursuant to an agreement
dated September 1, 1998, a copy of which is attached to the filing. The
agreement terminated on its own accord on August 31, 1999 and had no renewal
provisions. Giorgio Reverberi received 200,000 shares for research and
development of the EnergySaver rendered on behalf of the Company in Italy,
pursuant to an oral agreement as of January 1, 1999 for a term of four months
with no renewal rights. Giuseppe Tagliati received 100,000 shares for services
rendered in research and development of the EnergySaver in the United States,
pursuant to an oral agreement as of January 1, 1999 for a four month term with
no renewal rights. Richard Levy received 250,000 shares in exchange for
marketing consulting services rendered, pursuant to an oral agreement as of
January 7, 1999 for a four month term with no renewal rights (See "Recent Sales
of Unregistered Securities").
To satisfy its cash requirements, in July 1999 Electric City obtained a
one-year line of credit for $500,000 from LaSalle Bank N.A. Amounts drawn on
this line of credit bear interest at the prime rate plus 1% and are
collateralized by substantially all of the assets of Electric City. Electric
City has borrowed approximately $200,000 against this line of credit. The line
of credit was retired before the end of October, 1999. In addition, Electric
City recently concluded a private placement of up to 2,200,000 shares of its
common stock in an offering made pursuant to Regulation D and Rule 506
thereunder (the "506 Offering") A total of $ 9,057,380.50 has been raised, with
2,149,401 shares issued. The net proceeds of this offering are to be used for
the purchase of the assets of Marino Electric, to purchase inventory, to repay
indebtedness to principal shareholders 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 be considered general solicitation, which is not permitted in a
non public 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 may be in violation of Section 5 of the Securities Act
of 1933, as amended, and, consequently, all of the investors may have rescission
rights as to the shares acquired. Such investors may have the right to rescind
these purchases of common stock for a period of one year from the date of the
purchase of the common stock. In the event that all of the investors opted to
rescind their investment, the Company would be obligated to return the entire
$9,057,380.50, plus statutory interest in an amount dependent upon the state in
which the investors were residents (which normally range from 6% to 9%), which
would have a material adverse effect on the Company's financial position.
Management does not expect the outcome of the possible recissions to have a
material adverse effect on the Company's financial position, based upon the
close business relationship some investors have with the Company and its
management and the relationships that others have with management of the
14
<PAGE>
Company. The Company is not able to determine whether any such investors would
prevail on their claims. See also Part II, Item 4, paragraph (12).
Although Electric City cannot determine at this time how much cash will
be raised in the next 12 months from financing activities the completion of the
acquisition of Marino Electric's assets is the only material financial
commitment for the next 12 months. The proceeds from the 506 Offering will meet
its cash requirements for operations for the next 12 months without additional
financing, subject to the possibility of a rescission of the 506 Offering as
discussed above. Thereafter, Electric City anticipates additional private
placements or public offerings of debt or equity securities for the purpose of
expanding its business and meeting the demands of its growth.
Year 2000 Readiness Disclosure
Computer programs or other embedded technology that have been written
using two digits (rather than four) to define the applicable year and that have
time-sensitive logic may recognize a date using "00" as the Year 1900 rather
than the Year 2000, which could result in widespread miscalculations or system
failures. Both information technology systems and non-information technology
systems using embedded technology may be affected by the Year 2000. Electric
City's EnergySaver is Year 2000 compliant, according to the certificate received
by the software manufacturer, and Electric City believes that its other
equipment, meaning the electric distribution product acquired in the acquisition
of Marino Electric, will not be affected by the Year 2000 because of its
mechanical driven operation as opposed to software driven operation. No specific
indemnities have been provided by the manufacturer other than the manufacturer's
certification of compliance. The EnergySaver has not been tested by an
independent third party but, internal tests run by qualified employees have
determined that it is Y2K compliant. While the Company believes that the
EnergySaver will not be subject to Y2K problems, in the event of such a problem,
there are manual adjustments that can be made to the EnergySaver, that would
allow it to operate in the absence of the software program. The risks associated
with a Y2K malfunction are therefore, minimal. As a result, the Company believes
that the need does not presently exist for a more comprehensive contingency
plan. Electric City, in its day to day operations, does not utilize any
proprietary computer software, but uses a commercially available accounting
software program licensed from Intuit. Electric City has been advised that the
software it uses is Year 2000 compliant.
Electric City has completed its assessment of Year 2000 issues, in
particular the process of verification of whether the critical technology
systems of distributors, vendors, suppliers and significant customers with which
Electric City has material relationships are Year 2000 compliant. ECCC has
approximately fifteen (15) regularly utilized vendors; however only six (6)
provide components that would require difficulty purchasing similar products
elsewhere. One hundred (100%) percent of the vendors have been contacted as to
their Y2K compliance status and all have responded with written verification
that they are Y2K compliant. Under a worst-case scenario, if Electric City and
such third parties are unable to address potential Year 2000 problems in a
timely manner, it could result in material financial risk to Electric City,
including distributor, supplier and customer delays resulting in delay of
revenue and substantial unanticipated costs. Therefore, Electric City plans to
devote all resources necessary to resolve anticipated Year 2000 problems which
it can control in a timely manner, beginning with the ordering of a material
15
<PAGE>
supply sufficient enough to allow for continued manufacturing during potential
Year 2000 issue rectification. Electric City does not expect that costs of
remediating Year 2000 problems will be material. Electric City does not
currently have a Year 2000 contingency plan and it is not anticipated that a
contingency plan will be developed beyond ordering additional materials prior to
the year end. The risks associated with not having a contingency plan are
essentially "time risks" related to vendors being unable to supply materials in
a timely fashion and distributors being unable to complete sales in a timely
fashion. Since the Company is acquiring additional supplies in an amount it
determines will be sufficient for a shipping delay due to a Y2K problem it is
felt that that risk is minimal. The Company has not verified and does not
anticipate verification that its distributors and/or significant customers are
Year 2000 compliant. Since the company will be able to complete sales on behalf
of Y2K disabled distributors, the risk is also considered minimal. As a result,
the Company believes that the need does not presently exist for a more
comprehensive contingency plan. Electric City is currently not able to determine
whether the Year 2000 will have a material effect on Electric City's financial
condition, results of operations or cash flows.
Item 3. Description of Property.
Electric City's principal executive offices, as well as manufacturing
and warehouse space are contained in a single story building of approximately
16,000 square feet located at 1280 Landmeier Road, Elk Grove Village, IL 60007.
Electric City purchased this property in July 1998 in exchange for $800,000 in
the form of a first mortgage and the issuance of 340,000 shares of Electric City
common stock. The property remains encumbered by first mortgage indebtedness in
the amount of $786,887.17 at June 30, 1999. The location is approximately 60%
manufacturing and 40% office.
Electric City's management believes this facility is satisfactory for
all of its needs for the foreseeable future and that the property is adequately
covered by insurance.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The table below sets forth the beneficial ownership as of July 30, 1999
of shares of Electric City's outstanding common stock, $0.0001 par value per
share, (i) by all persons known to Electric City to be the beneficial owner of
more than 5% of the common stock and (ii) by each member of Electric City's
board of directors, Electric City's Named Executive Officer (as defined in Item
6 below) and by all Directors and the Named Executive Officer as a group.
As of July 30, 1999, there were 26,240,250 shares of common stock
issued and outstanding. On July 8, 1999, the Electric City board of directors
declared a 2 shares-for-1 share stock split of all of the issued and outstanding
shares of common stock as of July 29, 1999.
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership % of Class*
- ------------------- -------------------- -----------
Pino, LLC (1) 11,075,002 42.2%
1280 Landmeier Road
Elk Grove, IL 60006
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<PAGE>
NCVC L.L.C. (2) 9,124,998 34.8%
7300 N. Lehigh
Niles, IL 60714
Joseph C. Marino 11,433,135 (3) 43.6%
1280 Landmeier Road
Elk Grove, IL 60006
Michael S. Stelter 155,000 (4) 0.6%
1280 Landmeier Road
Elk Grove, IL 60006
Kevin P. McEneely 9,124,998 (5)(6) 34.8%
7300 N. Lehigh
Niles, IL 60714
Victor L. Conant 9,124,998 (5)(7) 34.8%
7300 N. Lehigh
Niles, IL 60714
Nikolas Konstant 9,124,998 (5) 34.8%
7300 N. Lehigh
Niles, IL 60714
All Directors and Named Executive
Officer as a group (4 persons) 20,723,133 79.0%
* Rule 13d-3(d)(1)(i) under the Securities Exchange Act of 1934, regarding the
determination of beneficial owners of securities, includes as beneficial owners
of securities, among others, any person who directly or indirectly, through any
contract, arrangement, understanding, relationship or otherwise has or shares
voting power and/or investment power with respect to such securities; and, any
person who has the right to acquire beneficial ownership of such security within
sixty days through a means, including, but not limited to, the exercise of any
option, warrant, right or conversion of a security. Any securities not
outstanding that are subject to such options, warrants, rights or conversion
privileges shall be deemed to be outstanding for the purpose of computing the
percentage of outstanding securities of the class owned by such person, but
shall not be deemed to be outstanding for the purpose of computing the
percentage of the class by any other person.
(1) Pino, LLC is an entity in which Joseph Marino holds a 70% membership
interest and Michael Stelter holds a 10% membership interest.
(2) NCVC L.L.C. is an entity with which Kevin P. McEneely and Victor L.
Conant, directors of Electric City, and Nikolas Konstant, are
affiliated and who may be deemed beneficial owners of the Electric City
common stock held by NCVC L.L.C.
17
<PAGE>
(3) Consists of all 11,075,002 shares held of record by Pino, LLC, 328,133
shares held directly by Mr. Marino and 40,000 shares held by Mr.
Marino's son.
(4) Consists of 155,000 shares held of record by Mr. Stelter. Since Mr.
Stelter owns only a 10% membership interest in Pino, LLC and thus is
not able to control Pino, no shares held of record by Pino have been
attributed to Mr. Stelter. All shares held of record by Pino have been
attributed to Mr. Marino, who holds a controlling 70% membership
interest in Pino.
(5) Consists of 9,124,998 shares held of record by NCVC L.L.C. which is
controlled by Messrs. Conant, McEneely and Konstant. Such shares are
deemed to be beneficially owned by each of these individuals.
(6) Mr. McEneely disclaims beneficial ownership of an aggregate of 448,846
shares held by Patrick McEneely and Ryan McEneely, his adult children.
(7) Mr. Conant disclaims beneficial ownership of an aggregate of 470,748
shares held in trust for Carson Conant and Chappell Conant, his adult
children.
As of July 30, 1999, Pino, LLC and NCVC L.L.C. each held options to
acquire 2,000,000 shares of Electric City common stock at an exercise price of
$1.10 per share. These options become exercisable on January 2, 2000 and expire
in June 2008. Effective January 4, 1999, Electric City granted to Joseph Marino
an option to acquire up to 900,000 shares at an exercise price of $1.75 per
share. This option becomes exercisable in pro rata installments at the end of
each of the first four years after the date of grant and expires in December 31,
2008.
In January 1999, high level executive employees of the Company were
granted unqualified options to purchase 304,000 shares of common stock at an
exercise price ranging from $1.75 to $3.50. Options totaling 150,000 shares
vested upon the signing of the option agreements and 154,000 will vest in fiscal
2000. In addition, as of July 30, 1999 there is an outstanding warrant,
currently exercisable, to purchase 200,000 shares of Electric City common stock
at an exercise price of $2.00 per share. Further, in April 1999 Electric City
entered into a contract with John Prinz & Associates LLC whereby Electric City
may issue up to 340,000 shares of common stock to Prinz upon the completion of
services for Electric City. Through July 30, 1999, 80,000 shares had been issued
to Prinz See "Recent Sales of Unregistered Securities."
The following chart represents the relationship between affiliated and
nonaffiliated stock ownership:
ELECTRIC CITY CORP. STOCK OWNERSHIP
20,723,133 5,517,117
---------- ---------
Affiliate Non-affiliate
18
<PAGE>
Item 5. Directors, Executive Officers, Promoters and Control Persons.
The directors and executive officers of Electric City are as follows:
Name Age Positions Held With Company
---- --- ---------------------------
Joseph C. Marino 44 Chief Executive Officer and Chairman of the
Board of Directors and a Director
Kevin P. McEneely 51 Senior Executive Vice President,
Chief Operating Officer,
Secretary and a Director
Michael S. Stelter 42 Vice President of Sales and a Director
Victor L. Conant 52 Director
James Stumpe 41 Director
All directors of Electric City are elected annually unless no annual
shareholders' meeting is held, in which event the Directors serve until their
successors have been elected and qualified. The Bylaws of the Company provides
for five (5) directors of the Company. There is no limit on the number of
one-year terms which a Director may serve. Officers of Electric City serve at
the discretion of the Board of Directors. The following chart represents the
corporate structure of the Company:
Shareholders
Elect
|
Directors
Elect
|
Officers:
CEO/President
|
-------------------------------------------------------
Senior Executive Vice President Vice President of Sales
Chief Operating Officer
There are no family relationships among directors or executive officers
of Electric City.
Additional information concerning each director and executive officer
of Electric City follows:
19
<PAGE>
Joseph C. Marino is a co-founder of Electric City and has served as
Chief Executive Officer of Electric City since its organization as a limited
liability company in December 1997 and as Chairman of the Board of Directors of
Electric City since its incorporation in June 1998. Mr. Marino also serves as
President of Marino Electric, a position he has held since his founding of
Marino Electric in 1986. Marino Electric is an electrical manufacturing company
which is wholly owned by Mr. Marino.
Kevin P. McEneely is a co-founder of Electric City and has served as
Senior Executive Vice President and Chief Operating Officer of Electric City
since its organization in December 1997, and as a director of Electric City
since its incorporation in June 1998. Mr. McEneely is also an Executive Vice
President of Nightingale-Conant Corporation, a position which he has held since
1985. Nightingale-Conant Corporation is a publisher and marketer of audio and
video self-improvement materials.
Michael S. Stelter is a co-founder of Electric City and has served as
Vice President of Sales since its organization in December 1997 and as a
director of Electric City since its incorporation in June 1998. Mr. Stelter also
serves as Vice President of Marino Electric, a position which he has held since
1987.
Victor L. Conant is a co-founder of Electric City and has served as a
director of Electric City since its incorporation in June 1998. Mr. Conant is
also President and Chief Executive Officer of Nightingale-Conant Corporation, a
position which he has held since 1986.
James Stumpe is an member of Electric City of Illinois, LLC, a
distributor of the Company. Mr. Stumpe is also the owner of RCI since 1997,
another distributor of the Company. He has been a part owner Diamac Electric, an
electrical contracting firm, since 1989. He has a degree from DeVry Institute,
an engineering school and is a member of the Local 134, Electrical Union. Mr.
Stumpe became a Director of the Company on October 12, 1999 and currently owns
76,000 shares of the Company's common stock.
Promoter and Control Person
Nikolas Konstant is a co-founder of Electric City. Mr. Konstant is also
the Managing Member of DYDX LLC, (since August 1997) a private investment
company. DYDX is a special limited partner of the Catterton Simon LLP, a venture
capital fund ("CSP III").
Item 6. Executive Compensation.
Summary Compensation Table
The following table summarizes the total compensation awarded or paid
by Electric City to Electric City's Chief Executive Officer for the fiscal year
ended April 30, 1999, Electric City's first completed fiscal year. No other
executive officer of Electric City had a total annual salary and bonus in excess
of $100,000 for fiscal 1999. Accordingly, Electric City's Chief Executive
Officer is the only Named Executive Officer of Electric City under SEC rules.
20
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
- --------------------------------------------------------------------- ---------------------------------------------------------
Awards Payouts
------ -------
Name and Principal Fiscal Restricted
Salary ($) Bonus ($) Other Annual Stock LTIP All Other
Position Year ---------- --------- Compensation ($) Award(s) ($) Options (#) Payouts ($) Compensation($)
-------- ---- --------------- ------------ ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph C. Marino, 1999 $60,000(1) $0 $0 $0 2,700,000(2) $0 $0
Chief Executive
Officer
</TABLE>
(1) In connection with Electric City's initial formation as a limited
liability company, Mr. Marino agreed to an initial salary of $60,000
per year until Electric City obtained sales levels in excess of
$1,000,000, at which time his annual salary was to be increased to
$150,000. Effective January 1, 1999, Electric City and Mr. Marino
entered into a 3-year employment agreement which provides for an annual
salary of $225,000.
(2) Effective July 31, 1998, Electric City granted to Pino, LLC a 10-year
option to acquire up to 2,000,000 shares of common stock at an exercise
price of $1.10 per share. This option becomes exercisable on January 2,
2000. In that Mr. Marino owns a 70% membership interest in Pino, LLC,
only 70% of those shares are reflected . Effective January 4, 1999,
Electric City granted to Joseph Marino an option to acquire up to
900,000 shares at an exercise price of $1.75 per share. This option
becomes exercisable in pro rata installments at the end of each of the
first four years after the date of grant and expires in December, 2008.
Compensation of Other Executive Officers and Directors
There are no standard or other compensation arrangements for directors
of Electric City for their services as such, including service on committees or
special assignments, except for the standard reimbursement of expenses for
attendance at board of directors meetings.
Option Exercises and Values
Option/SAR Grants in Last Fiscal Year
-------------------------------------
(Individual Grants)
<TABLE>
<CAPTION>
Percent of total
Number of Securities options/SARS granted
Underlying Options/SARS to employees in Exercise or base
Name granted (#) fiscal year price ($/Sh) Expiration Date
---- ----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Joseph C. Marino 1,400,000 35% (1) $1.10/Sh 06/25/2008
Joseph C. Marino 900,000 18% (2) $1.75/Sh 12/31/2008
21
<PAGE>
<FN>
(1) Mr. Marino owns a 70% membership interest in Pino, LLC, to which an
option to acquire up to 2,000,000 shares of common stock was issued in
1998. Michael Stelter owns a 10% membership interest in Pino, LLC.
(2) Effective January 4, 1999, Electric City granted to Joseph C. Marino an
option to acquire up to 900,000 shares at an exercise price of $1.75
per share. This option becomes exercisable in prorata installments at
the end of each of the first four years after the date of grant and
expires in December, 2008.
</FN>
</TABLE>
Aggregate Option/SAR Exercise in Last Fiscal Year
And FY-End Option/SAR Values
<TABLE>
<CAPTION>
Value of unexercised
Shares Number of unexercised in-the-money options/SARS at
acquired on options/SARS at FY-end(#) FY-end ($)
Name exercise (#) Value realized ($) exercisable/unexercisable exercisable/unexercisable
---------- ------------ ------------------ ------------------------- -------------------------
<S> <C> <C> <C>
Joseph C. Marino - - 0/1,400,000 0/$ 2,660,000 (1)
Joseph C. Marino - - 0/900,000 0/$ 1,125,000 (2)
<FN>
(1) Based on the difference between the $1.10 per share exercise price and the
closing bid quotation for Electric City common stock on the OTC Bulletin
Board for April 30, 1999 of $3.00 per share (post split).
(2) Based on the difference between the $1.75 per share exercise price and the
closing bid quotation for Electric City common stock on the OTC Bulletin
Board for April 30, 1999 of $3.00 per share (post split).
</FN>
</TABLE>
Long-Term Incentive Plans
The Company has no long-term incentive plans.
Employment Contracts
Effective January 1, 1999, Electric City and Mr. Marino entered into a
4-year employment agreement as President and Chief Executive Officer which
provides for an annual salary of $225,000. As a part of his compensation, Mr.
Marino is allowed the use of a new automobile, provided insurance and is
reimbursed for cellular telephone usage. The Employment Agreement also granted
Mr. Marino options to purchase the common stock of the Company as described
above. Upon the sale of more than forty (40%) of the net assets of the Company
to a person or entity not affiliated with the Company, all of the options
immediately vest and are exercisable by Mr. Marino. The agreement is terminable
for cause by a vote of 3/4 of the Board of Directors of the company, in which
vote Mr. Marino, as a director, would not vote nor be counted as a Director for
22
<PAGE>
purposes of determining the 3/4 vote. Mr. Marino is subject to confidentiality
restrictions and an agreement not to compete with the Company for two (2) years
after his separation from the Company.
Item 7. Certain Relationships and Related Transactions.
On February 4, 1998, in connection with the organization of Electric
City, Joseph C. Marino and NCVC, L.L.C. entered into an operating agreement,
which was amended on May 26, 1998, which commenced the operation of Electric
City as a limited liability company. Under the operating agreement, NCVC agreed
to loan Electric City $500,000 to meet operating cash needs of Electric City and
to secure a letter of credit with a financial institution for $500,000 to secure
the payment obligation to Reverberi. In exchange Joseph C. Marino sublicensed
his rights under the Reverberi license agreement to Electric City. No value was
accorded for the sublicense or the securing of the letter of credit. Of the
total of $500,000 transferred to Electric City, $374,000 was transferred through
May 31, 1998, with the remaining $126,000 loaned to Electric City in July 1998.
The NCVC loans, which represented convertible debt, bore no interest, and were
paid off by the issuance of 500,000 shares of Electric City common stock, at a
price equal to the fair market value at the time of the conversion, which was
upon completion of the private placement in June 1998. After the completion of
the private placement, the letter of credit was unnecessary and was retired.
Upon completion of this transaction, each of Mr. Marino and NCVC had a further
obligation to loan Electric City up to $250,000 on an as-needed basis, bearing
interest at 9% per annum and payable on demand. As of April 30, 1999,
outstanding debt under this arrangement totaled $500,000. As of July 30, 1999,
outstanding debt under this arrangement totaled $200,000. These loans bear
interest of 9% and are payable on demand. Accrued interest on this debt was
approximately $16,000 at July 30, 1999. The Company's Board approved the terms
of each of these transaction and believes the terms each of these transactions
are as favorable to the Company as if negotiated with an unaffiliated third
party. The possibility of conflicts of interest was counterbalanced by the fact
that these transactions were negotiated between equal, sole shareholders of the
Company and each party was at risk and would benefit equally.
During the period from December 5, 1997 (date of inception) through
April 30, 1999, Electric City paid approximately $165,000 to Marino Electric for
goods purchased and services rendered which included components and cabinets for
EnergySaver units and the installations of EnergySaver units. Marino Electric is
wholly owned by Mr. Marino. Further, since January 1, 1999 Electric City has
allowed Marino Electric to use portions of Electric City's building without
charge. The Company's Board negotiated and approved the terms of this
transaction and believes the terms of this transaction are as favorable to the
Company as if negotiated with an unaffiliated third party and allowed the
company to control the manufacture of these items. The possibility of a conflict
of interest was counter balanced by the fact that members of the Board not
affiliated with Marino Electric also approved the transaction. The votes of
Board members that were not affiliated with Marino Electric were necessary to
approve the supply agreement and were voted in favor of the transaction.
Effective May 24, 1999, Electric City entered into an agreement to
acquire most of the assets of Marino Electric for a purchase price of $3,880,000
consisting of $1,792,000 in cash and 1,600,000 shares of Electric City common
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stock. The Company's Board negotiated and approved the terms of each of these
transaction and believes the terms each of these transactions are as favorable
to the Company as if negotiated with an unaffiliated third party. Although the
Board approved the transactions by a Unanimous Consent, the possibility of a
conflict of interest was counter balanced by the fact that members of the Board
not affiliated with Marino Electric also approved the transaction.
Mr. Marino owns the rights under the Reverberi license agreement to
sell EnergySaver in Canada, Mexico, and portions of South America.
Item 8. Description of Securities.
Electric City Corp. is authorized under its certificate of
incorporation to issue 30,000,000 shares of $.0001 par value common stock and
5,000,000 shares of preferred stock, par value $.01 per share. All of the common
shares are entitled to one vote on any matter brought before the shareholders
including the election of directors. The preferred stock may be issued in series
and the board of directors is specifically vested with the authority to
establish and designate series of preferred and fix rights, preferences,
privileges and restrictions of any series of the preferred stock, including
without limitation, those relating to any dividend rights and terms, conversion
rights, voting rights, redemption rights, liquidation preferences and sinking
fund terms. There are no provisions in the Company's certificate of
incorporation that would delay, defer or prevent a change in control.
Electric City common stock has been subject to the "penny stock" rules
under the Securities Exchange Act of 1934, which cover any equity security that
has a market price less than $5.00 per share, subject to certain exceptions
under ss.ss. 15(g). In that the stock has been trading for in excess of $5.00
per share, the stock is currently not subject to the "penny stock' rules. Any
broker engaging in a transaction in a penny stock is required to provide any
customer with a risk disclosure document, disclosure of market quotations, if
any, disclosure of the compensation of the broker-dealer and its salesperson in
the transaction, and monthly account statements showing the market values of
penny stocks held in the customer's accounts. Further the broker-dealer must
determine the suitability of the customer for an investment in "penny stocks" by
obtaining customer information concerning the person's "financial situation,
investment experience, and investment objectives. The broker-dealer must then
"reasonably determine" based on the information furnished and any other
information known to the broker-dealer that transactions in penny stocks are
suitable for the person and that the person (or his independent adviser in such
transactions) has sufficient knowledge and experience in financial matters that
the person reasonably may be expected to be capable of evaluating the risks of
transactions in penny stocks. The bid and offer quotation and compensation
information must be provided prior to effecting the transaction and must be
contained on the customer's confirmation. Certain brokers are less willing to
engage in transactions involving penny stocks as a result of the additional
disclosure requirements described above. If the per share market price of
Electric City common stock falls below $5.00, the penny stock rules may make it
more difficult for holders of Electric City common stock to dispose of their
shares.
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PART II
Item 1. Market for Common Equity and Related Stockholder Matters.
Market Information
Electric City common stock has been quoted on the OTC Bulletin Board
under the symbol "ECCC" since August 14, 1998. The following table sets forth
the range of high and low closing per share bid quotations for Electric City
common stock for each fiscal quarter since August 14, 1998. Such prices are
reported by the OTC Bulletin Board inter-dealer quotation system and reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. These amounts are from trading days prior to the
2 for 1 share stock split of all outstanding shares of common stock effective
July 30, 1999.
Fiscal Quarter High Low
-------------- ---- ---
Fiscal Year 1999
Quarter Ended 10/31/98(1) $3.438 $.875
Quarter Ended 1/31/99 $2.938 $1.125
Quarter Ended 4/30/99 $3.905 $1.625
Fiscal Year 2000 $14.84 $2.25
Quarter Ended 7/31/99
(1) Since August 14, 1998.
The closing quotation for Electric City common stock on the OTC
Bulletin Board on July 30, 1999 was $8.56 per share. Electric City intends to
apply for the listing of its common stock on the Nasdaq SmallCap Market when as
it meets the requirements for such listing. However, Electric City cannot
provide assurance that its application will be approved. The requirements that
Electric City must meet include the registration of its common stock with the
SEC under the Securities Exchange Act of 1934, a per share market price of
$4.00, $4,000,000 in net tangible assets, 3 registered and active market makers
and 300 round lot (100 shares or more) shareholders.
Electric City has never paid a cash dividend with respect to its common
stock and does not anticipate paying cash dividends on its common stock in the
foreseeable future.
As of June 30, 1999 there were approximately 450 holders of record of
Electric City common stock not including those shares beneficially held in
brokerage accounts.
Item 2. Legal Proceedings.
Neither Electric City nor any of its properties are the subject of any
pending legal proceeding, nor is Electric City aware of any contemplated legal
proceeding involving Electric City or its property.
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Item 3. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Item 4. Recent Sales of Unregistered Securities.
Since its inception on December 5, 1997, Electric City has sold
securities in the transactions described below without registering the
securities under the Securities Act of 1933. Except as otherwise indicated, no
underwriter or sales or placement agent was involved in the transactions.
(1) In February 1998, initial membership interests in Electric City
L.L.C. were issued solely to Joseph Marino and NCVC L.L.C. in exchange for the
sublicense of Mr. Marino's rights under his license agreement with Giorgio
Reverberi to the technology underlying the EnergySaver, an agreement by NCVC
L.L.C. to make capital contributions of up to $500,000 and to cause the issuance
of a $500,000 irrevocable standby letter of credit in favor of Mr. Reverberi.
Such limited liability company membership interests were issued in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as such transaction did not involve any public offering. All persons
receiving the shares represented that they were acquiring the shares for
investment and not with a view to distribution. All persons had access to full
information about the Company and representations of the Company provided all
information requested by investors or their representatives. Mr. Marino
subsequently transferred his membership interests to Pino, LLC.
(2) In June, 1998 the Electric City LLC interests were converted into
an aggregate of 20,000,000 shares of common stock of Electric City Corp. in
connection with the merger of Electric City L.L.C. into Electric City Corp. Such
shares were issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as such transaction did not involve
any public offering. At such time Electric City LLC had only 2 members. All
persons receiving the shares represented that they were acquiring the shares for
investment and not with a view to distribution. All persons had access to full
information about the Company and representations of the Company provided all
information requested by investors or their representatives.
(3) In June 1998, Electric City issued an aggregate of 1,200,272 shares
of common stock valued at $$1,200,272 to the approximately 330 shareholders of
Pice Products Corporation, an inactive company with minimal assets, pursuant to
a merger agreement under which Pice Products was merged with and into Electric
City. Such shares were issued in reliance upon the exemption from registration
provided by Section 4(2) as such transaction did not involve any public
offering. All persons receiving the shares represented that they were acquiring
the shares for investment and not with a view to distribution. All persons had
access to full information about the Company and representations of the Company
provided all information requested by investors or their representatives.
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(4) In June 1998, Electric City concluded a private placement under
which it issued an aggregate of 940,000 shares of common stock to 47 persons in
exchange for an aggregate of $440,000 in cash and the conversion of Electric
City's indebtedness to NCVC L.L.C. in the amount of $500,000. Such shares were
issued in reliance upon the exemption from registration provided by Rule 504 of
Regulation D promulgated under the Securities Act of 1933, which limits the
aggregate offering price to not to exceed $1,000,000. All persons receiving the
shares represented that they were acquiring the shares for investment and not
with a view to distribution. All persons had access to full information about
the Company and representations of the Company provided all information
requested by investors or their representatives.
(5) In July 1998, Electric City granted to Pino, LLC and NCVC L.L.C.
10-year options (a total of two (2) persons) to acquire up to an aggregate of
4,000,000 shares of common stock at an exercise price of $1.10 per share. These
options become exercisable on January 2, 2000. The options were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as such transaction did not involve any public offering.
All persons receiving the shares represented that they were acquiring the shares
for investment and not with a view to distribution. All persons had access to
full information about the Company and representations of the Company provided
all information requested by investors or their representatives.
(6) In September 1998, Electric City issued an aggregate of 340,000
shares of common stock to Giovanni and Maria Gullo, Anthony and Rebecca
Petropoulos, and James and Rosanne Spanola (a total of six (6) persons)pursuant
to a Real Estate Sales Contract dated July 3, 1998, under which Electric City
acquired real estate for its new headquarters. The total purchase price for the
property was $1,140,000 of which $800,000 was paid through issuing a mortgage
with a bank at the closing and the balance of $340,000 was paid pursuant to the
issuance of 340,000 shares of common stock. Such shares were issued in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as such transaction did not involve any public offering. All
persons receiving the shares represented that they were acquiring the shares for
investment and not with a view to distribution. All persons had access to full
information about the Company and representations of the Company provided all
information requested by investors or their representatives.
(7) On January 18, 1999, Electric City entered into a six-month
consulting agreement with 1252996 Ontario Limited (d/b/a The Stockpage) under
which Electric City issued in April 1999 an aggregate of 200,000 shares of
common stock and warrants to purchase 200,000 shares of common stock at an
exercise price of $2.00 per share, in exchange for investor relations services
through the Internet which presence was achieved via "Rolling Capital." The
Company valued these services at $512,000, comprised of $418,000 for the stock
and $94,000 for the warrant. The amount attributed to the warrant took into
consideration the possibility of fluctuations in the per share trading price of
the common stock pending exercise. The per share price used to value the shares
was a five day average of the closing price of the Company's common stock on the
OTC Bulletin Board prior to January 18, 1999. Only one (1) entity received this
warrant. The agreement has expired and will not be renewed. Under the agreement,
Electric City is to commence registration of the 200,000 shares of issued common
stock within six months from the date of the agreement, if it is legally able to
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do so. Electric City has not commenced such registration and there is no penalty
for such failure, since it is legally unable to do so. The shares of common
stock and the warrants were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as such
transaction did not involve any public offering. All persons receiving the
shares represented that they were acquiring the shares for investment and not
with a view to distribution. All persons had access to full information about
the Company and representations of the Company provided all information
requested by investors or their representatives.
(8) In February and March 1999, Electric City issued 911,978 shares of
common stock to a small group of approximately 30 individuals closely related
to, or affiliates with long standing personal and/or business relationships with
the Company in exchange for $938,202. Each individual represented to Company, in
writing, that they were "accredited investors" as defined in Regulation D of the
Securities Act of 1933. Such shares were issued in reliance upon the exemption
from registration provided by Rule 506 of Regulation D of the Securities Act of
1933 which limits the aggregate number of non-accredited investors to 35.
Neither the Company nor any person acting on its behalf used any form of general
solicitation or general advertising to offer or sell these securities. All
persons receiving the shares represented that they were acquiring the shares for
investment and not with a view to distribution. All persons had access to full
information about the Company and representations of the Company provided all
information requested by investors or their representatives. The Company did not
timely file a Form D with the Commission in connection with the offering.
However, the Company believes that this is an incidental deviation from the
terms, conditions and requirements of Regulation D not directly intended to
protect particular individuals or entities.
(9) In April 1999, Electric City issued an aggregate of 796,000 shares
of common stock for services rendered to the Company which the Company valued at
$ 2,232,789. TJ Riley and Associates (Tom Riley) received 246,000 shares for
marketing consulting services pursuant to an agreement. Giorgio Reverberi
received 200,000 shares for research and development services. Giuseppe Tagliati
received 100,000 shares for services rendered in research and development . The
Stockpage (see 7 above) received 200,000 shares for investor relations services
pursuant to its January 18, 1999 agreement with the Company. Richard Levy
received 250,000 shares in exchange for marketing consulting services rendered,
pursuant to an oral agreement as of January 7, 1999. A total of four ( 4)
entities were issued shares in this offering; the shares issued to the StockPage
are not included in the paragraph (9) as such shares were issued pursuant to the
January 18, 1999 agreement with the Company. The per share price used to value
the shares was a five day average of the closing price of the Company's common
stock on the OTC Bulletin Board prior to April 20, 1999. Such shares were issued
in reliance upon the exception from registration provided by Rule 4(2) of the
Securities Act of 1933, as such transaction did not involve any public offering.
All persons receiving the shares represented that they were acquiring the shares
for investment and not with a view to distribution. All persons had access to
full information about the Company and representations of the Company provided
all information requested by investors or their representatives.
(10) The Company entered into a Consulting Agreement with John Prinz &
Associates dated April 16, 1999 for Prinz to act as a consultant and promoter on
behalf of the Company. The term of the agreement was for six (6) months and has
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expired. Prinz was to have received shares of stock for services provided to the
Company as follows: 50,000 shares for the introduction to a market maker with
whom the Company would work; 30,000 shares for the development of an acceptable
financial plan; a ten percent (10%) fee for each equity transaction consummated
by the Company initiated by Prinz; a three percent (3%)fee and 10,000 shares for
each debt transaction consummated by the Company initiated by Prinz; 15,000
shares for facilitating the Company's transition to a NASDAQ small cap company;
and ten percent (10%) fee and 20,000 shares to facilitate funding of the
purchase of Marino Electric.
The agreement also provides that all shares of Electric City common
stock issued under the agreement will have piggyback registration rights with
respect to any registration statement filed by Electric City with the SEC.
In May, 1999, Electric City issued 80,000 shares of common stock to
Prinz under this agreement for an introduction to a market maker and the
preparation of a financial plan for the Company. The Company valued the services
to be provided under this agreement at $ 212,496. The per share price used to
value the shares was a five day average of the closing price of the Company's
common stock on the OTC Bulletin Board prior to April 18, 1999. Only one (1)
person received shares in this offering. The shares of Electric City common
stock issued under the agreement were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as such
transaction did not involve any public offering. Prinz Capital is required to
perform additional services to receive the additional shares, which may not be
required by the Company. All persons receiving the shares represented that they
were acquiring the shares for investment and not with a view to distribution.
All persons had access to full information about the Company and representations
of the Company provided all information requested by investors or their
representatives.
(11) In May 1999, Electric City issued 1,600,000 shares of common stock
to Joseph Marino in connection with the acquisition of the assets of Marino
Electric for the purchase price of $3,880,000 consisting of $1,792,000 in cash
and 1,600,000 shares of the Electric City common stock. Only one (1) person
received shares in this offering. Such shares were issued in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as such transaction did not involve any public offering. All persons
receiving the shares represented that they were acquiring the shares for
investment and not with a view to distribution. All persons had access to full
information about the Company and representations of the Company provided all
information requested by investors or their representatives.
(12) The Company conducted in July-December, 1999 an offering to sell
2.2 million shares of its common stock on a best efforts basis pursuant to a
confidential private placement memorandum. Such shares were issued in reliance
upon the exemption from registration provided by Rule 506 of Regulation D of the
Securities Act of 1933 which limits the aggregate number of non-accredited
investors to 35. Investors solicited were individuals who in one way or another
are related to the Company or persons associated with the Company and not from
the general public. The Company raised $9,057,380.50 and sold 2,149,401 shares
to 83 individuals or entities, of whom 65 are accredited and 28 are
non-accredited investors. The Company prepared and used an Offering Memorandum
29
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with this offering. All persons receiving the shares represented that they were
acquiring the shares for investment and not with a view to distribution. All
persons had access to full information about the Company and representations of
the Company provided all information requested by investors or their
representatives. Neither the Company nor any person acting on its behalf used
any form of general solicitation or general advertising to offer or sell these
securities. However, as a result of the Company's statements made in certain
press releases issued during this offering, it is possible, but not altogether
certain, that such statements might be considered general solicitation and
result in a violation of the registration provisions of Section 5 of the
Securities Act of 1933, as amended. The Company's financial statements contain a
Commitments and Contingencies note concerning the potential liability of the
Company in connection with this offering.
The facts relied upon to make the exemption from registration provided
by Section 4(2) of the Securities Act of 1933 (the "Act") available for the sale
of securities discussed in paragraphs 1, 2, 3, 5, 6, 7, 9, 10 and 11 were the
limited number of purchasers, the sophistication or accreditation of the
purchasers, their access to material information, the information furnished to
them by Electric City, the absence of any general solicitation or advertising,
and restrictions on transfer of the securities issued to them as indicated by a
legend on the certificates representing such securities.
Item 5. Indemnification of Directors and Officers.
Electric City's certificate of incorporation and bylaws provide that
Electric City may indemnify officers and directors of Electric City or as
permitted by Delaware law. Electric City has not as of the date of this
registration statement purchased directors and officers liability insurance,
however it may do so in the future.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Disclosure Regarding Forward-Looking Statements
This Registration Statement includes certain statements that may be
deemed to be "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
safe harbors under the Privates Securities Litigation Reform Act will not be
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applicable until such time as the Company becomes subject to the periodic
reporting requirements under the Exchange Act. Since the Company was not a
reporting company at the time this registration statement was filed, the safe
harbors under the Privates Securities Litigation Reform Act are inapplicable to
the statements made in this registration statement. All statements, other than
statements of historical facts, included in this Registration Statement that
address activities, events or developments that Electric City Corp. (the
"Company" or "Electric City") expects, believes or anticipates will or may occur
in the future, future capital costs, the size of various markets, market share,
repayment of debt, business strategies, expansion and growth of the Company's
operations, Year 2000 issues and other such matters are forward-looking
statements. These statements are based on assumptions and analyses made by the
Company in light of its experience and its perception of historical trends,
current conditions, expected future developments and other factors it believes
are appropriate in the circumstances. Such statements are subject to a number of
assumptions, risks and uncertainties, general economic and business conditions,
the business opportunities (or lack thereof) that may be presented to and
pursued by the Company, changes in laws or regulations and other factors, many
of which are beyond the control of the Company. You are cautioned that any such
statements are not guarantees of future performance and that actual results or
developments may differ materially from those projected in the forward-looking
statements.
PART F/S
Financial Statements and Exhibits
Index to Financial Statements
Electric City Corp.
-------------------
F-1 Report of Independent Certified Public Accountants
F-2 - F-3 Balance Sheet as of April 30, 1999
F-4 Statement of Operations for the year ended April 30,
1999
F-5 Statement of Stockholders' Equity for the year ended
April 30, 1999
F-6 - F-7 Statement of Cash Flows for the year ended April 30,
1999
F-8 - F21 Notes to Financial Statements
F-22 - F23 Balance Sheets as of July 31, 1999 and 1998
(Unaudited)
F-24 Statement of Operations for the three months ended
July 31, 1999 and 1998 (Unaudited)
F-25 Statement of Stockholders' Equity for the three
months ended July 31, 1999 (Unaudited)
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F-26 - F-27 Statement of Cash Flows for the three months ended
July 31, 1999 and 1998 (Unaudited)
F-28 - F-29 Notes to Financial Statements
Marino Electric Inc.
F-30 Report of Independent Certified Public Accountants
F-30 - F-32 Balance Sheet as of December 31, 1998 and as of
April 30, 1999 (Unaudited)
F-33 Statement of Income and Retained Earnings for the
year ended December 31, 1998 and December 31, 1997
(Unaudited) and the four months ended April 30, 1998
and 1999 (Unaudited)
F-34 Statement of Cash Flows for the year ended December
31, 1998 and December 31, 1997 (Unaudited) and the
four months ended April 30, 1998 and 1999
(Unaudited)
F-35 - F-38 Notes to Financial Statements
Pro Forma Financial Statements
F-39 Pro Forma Financial Statements
F-40 Unaudited Pro Forma Statement of Operations for the
year ended April 30, 1999
F-41 Unaudited Pro Forma Statement of Operations for the
three months ended July 31, 1999
F-42-F43 Notes to Unaudited Pro Forma Financial Statement
PART III
Exhibit
Number
2.1 Agreement and Plan of Merger dated June 5, 1998 between the Company and
Pice Products Corporation (Previously filed)
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3.1 Certificate of Incorporation (Previously filed)
3.2 Bylaws (Previously filed)
10.1 Sales, Distribution and Patent License Agreement dated January 1, 1998
between Giorgio Reverberi and Joseph C. Marino (Previously filed)
10.2 Sublicense Agreement dated June 24, 1998 between the Company and Joseph
C. Marino (Previously filed)
10.3 Employment Agreement dated as of January 1, 1999 between the Company
and Joseph C. Marino (Previously filed)
10.4 Real Estate Sales Contract dated July 3, 1998 between the Company and
the Giovanni Gullo and Mario Gullo Family Limited Partnership
(Previously filed)
10.5 Asset Purchase Agreement dated May 24, 1999 between the Company and
Marino Electric, Inc. (Previously filed)
10.6 Distribution Agreement dated September 7, 1999 between the Company and
Electric City of Illinois LLC (Previously filed)
10.7 Consulting Agreement dated April 16, 1999 between the Company and John
Prinz & Associates (Previously filed)
10.8 Consulting Agreement dated January 18, 1999 between the Company and
1252996 Ontario Limited (d/b/a The Stockpage) (Previously filed)
10.9 Warrant to Purchase Common Stock dated January 15, 1999 from the
Company to 1252996 Ontario Limited d/b/a The Stockpage (Previously
filed)
10.10 Professional Services Agreement dated September 1, 1998 between the
Company and TJ Riley and Associates (Previously filed)
27.1 Financial Data Schedule as of July 31, 1999 and 4/30/99 (Previously
filed)
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, this _____ day of January 2000.
ELECTRIC CITY CORP.
By:_________________________
Joseph C. Marino
Chief Executive Officer
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TABLE OF CONTENTS
PART I.......................................................................2
Items 1. Description of Business..........................................2
Electric City History and Recent Developments.............................2
Business of Marino Electric...............................................4
Product -The EnergySaver..................................................4
The Market Opportunity....................................................5
Sales and Distribution....................................................7
Marketing.................................................................8
Licenses and Trademarks...................................................8
Patents...................................................................9
Competition...............................................................9
Manufacturing............................................................11
Company Financing........................................................11
Research and Development.................................................11
Compliance with Environmental Laws.......................................12
Employees................................................................12
Item 2. Plan of Operation..................................................12
Year 2000 Readiness Disclosure...........................................15
Item 3. Description of Property............................................16
Item 4. Security Ownership of Certain Beneficial Owners and Management......16
Item 5. Directors, Executive Officers, Promoters and Control Persons.......19
Promoter and Control Person..............................................20
Item 6. Executive Compensation..............................................20
Summary Compensation Table...............................................20
Compensation of Other Executive Officers and Directors...................21
Option Exercises and Values..............................................21
Long-Term Incentive Plans................................................22
Employment Contracts.....................................................22
Item 7. Certain Relationships and Related Transactions......................23
Item 8. Description of Securities..........................................24
PART II.....................................................................25
Item 1. Market for Common Equity and Related Stockholder Matters........25
Market Information..............................................25
Item 2. Legal Proceedings...............................................25
Item 3. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................26
Item 4. Recent Sales of Unregistered Securities.........................26
Item 5. Indemnification of Directors and Officers.......................30
Disclosure Regarding Forward-Looking Statements.............................30
PART F/S....................................................................31
PART III....................................................................32
SIGNATURES..................................................................33
34
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Financial Statements and Exhibits
Index to Financial Statements
Electric City Corp.
- -------------------
F-1 Report of Independent Certified Public Accountants
F-2 - F-3 Balance Sheet as of April 30, 1999
F-4 Statement of Operations for the year ended April 30,
1999
F-5 Statement of Stockholders' Equity for the year ended
April 30, 1999
F-6 - F-7 Statement of Cash Flows for the year ended April 30,
1999
F-8 - F21 Notes to Financial Statements
F-22 - F23 Balance Sheets as of July 31, 1999 and 1998
(Unaudited)
F-24 Statement of Operations for the three months ended
July 31, 1999 and 1998 (Unaudited)
F-25 Statement of Stockholders' Equity the three months
ended July 31, 1999 (Unaudited)
F-26 - F-27 Statement of Cash Flows for the three months ended
July 31, 1999 and 1998 (Unaudited)
F-28 - F-29 Notes to Financial Statements
Marino Electric Inc.
- --------------------
F-30 Report of Independent Certified Public Accountants
F-31 - F-32 Balance Sheet as of December 31, 1998 and as of
April 30, 1999 (Unaudited)
F-33 Statement of Income and Retained Earnings for the
year ended December 31, 1998 and December 31, 1997
(Unaudited) and the four months ended April 30, 1998
and 1999 (Unaudited)
Page i
<PAGE>
F-34 Statement of Cash Flows for the year ended December
31, 1998 and December 31, 1997 (Unaudited) and the
four months ended April 30, 1998 and 1999
(Unaudited)
F-35 - F-38 Notes to Financial Statements
Pro Forma Financial Statements
- ------------------------------
F-39 Pro Forma Financial Statements
F-40 Unaudited Pro Forma Statement of Operations for the
year ended April 30, 1999
F-41 Unaudited Pro Forma Statement of Operations for the
three months ended July 31, 1999
F-42 - F-43 Notes to Unaudited Pro Forma Statements of
Operations
Page ii
<PAGE>
Report of Independent Certified Public Accountants
Electric City Corp.
(A Development Stage Company)
We have audited the accompanying balance sheet of Electric City Corp. (a
development stage company) as of April 30, 1999 and the related statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Electric City Corp. (a
development stage company) at April 30, 1999, and the results of its operations
and cash flows for the year then ended, in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Chicago, Illinois
June 16, 1999, except for Note 17
which is as of December 2, 1999
F-1
<PAGE>
Electric City Corp.
(A Development Stage Company)
Balance Sheet
April 30, 1999
- -------------------------------------------------------------------------------
Assets
Current Assets
Cash and equivalents $ 484,162
Accounts receivable 118,272
Inventories (Note 3) 459,882
Prepaid expenses (Note 11(d)) 213,332
- -------------------------------------------------------------------------------
Total Current Assets 1,275,648
- -------------------------------------------------------------------------------
Net Property and Equipment (Notes 4, 8 and 11(e)) 1,254,967
- -------------------------------------------------------------------------------
$ 2,530,615
===============================================================================
See accompanying notes to financial statements.
F-2
<PAGE>
Electric City Corp.
(A Development Stage Company)
Balance Sheet
April 30, 1999
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable to stockholders (Note 5) $ 500,000
Current portion of long-term debt (Note 8) 18,112
Accounts payable 184,160
Accrued expenses (Note 7) 98,172
- -------------------------------------------------------------------------------
Total Current Liabilities 800,444
- -------------------------------------------------------------------------------
Long-Term Debt, less current portion (Note 8) 770,239
- -------------------------------------------------------------------------------
Commitments (Note 10)
Stockholders' Equity (Notes 6, 11 and 13)
Preferred stock, $.01 par value;
5,000,000 shares authorized -
Common stock, $.0001 par value;
30,000,000 shares authorized,
24,388,250 issued
and outstanding 2,438
Additional paid-in capital 6,097,518
Deficit accumulated during the development stage (5,140,024)
- -------------------------------------------------------------------------------
Total Stockholders' Equity 959,932
- -------------------------------------------------------------------------------
$ 2,530,615
===============================================================================
See accompanying notes to financial statements.
F-3
<PAGE>
Electric City Corp.
(A Development Stage Company)
Statement of Operations
Year ended April 30, 1999
- ------------------------------------------------------------------------------
Revenue $ 208,473
- ------------------------------------------------------------------------------
Expenses
Cost of sales 135,000
Selling, general and administrative 4,033,559
- ------------------------------------------------------------------------------
Total 4,168,559
- ------------------------------------------------------------------------------
Operating Loss (3,960,086)
- ------------------------------------------------------------------------------
Other Income (Expense)
Acquisition expense (Note 11) (1,200,272)
Interest income 9,054
Interest expense (59,613)
- ------------------------------------------------------------------------------
Total other expense (1,250,831)
- ------------------------------------------------------------------------------
Net Loss $ (5,210,917)
==============================================================================
Basic and Diluted Loss Per Common Share $ (0.23)
==============================================================================
Weighted Average Common Shares Outstanding 22,357,874
==============================================================================
See accompanying notes to financial statements.
F-4
<PAGE>
Electric City Corp.
(A Development Stage Company)
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Year ended April 30, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Deficit Total
Accumulated Members'
Additional During the Deficit and
Member Common Paid-in Development Stockholders'
Shares Capital Stock Capital Stage Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 1, 1998 - $ 18,679 $ - $ - $ (49,469) $ (30,790)
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for merger into Company 20,000,000 (18,679) 2,000 16,679 - -
Acquisition of Pice Products Corporation (Note 11) 1,200,272 - 120 1,200,152 - 1,200,272
Conversion of convertible debt (Note 11) 500,000 - 50 499,950 - 500,000
Issuance of shares for cash
(net of offering costs of $13,023) (Note 11) 1,351,978 - 136 1,365,043 - 1,365,179
Issuance of shares for purchase
of land and building (Note 11) 340,000 - 34 339,966 - 340,000
Issuance of shares and warrants in
exchange for services received
(Note 11) 996,000 - 98 2,715,801 - 2,715,899
Net loss for the year ended April 30, 1999 - - - - (5,210,917) (5,210,917)
Net loss of LLC prior to becoming a corporation - - - (120,362) 120,362 -
Expenses paid on behalf of the Company - - - 80,289 - 80,289
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, April 30, 1999 24,388,250 $ - $ 2,438 $ 6,097,518 $ (5,140,024) $ 959,932
====================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Electric City Corp.
(A Development Stage Company)
Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended April 30, 1999
- --------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
<S> <C>
Net loss $ (5,210,917)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 30,353
Issuance of shares and warrants in exchange for services rendered 3,702,839
Expenses paid on behalf of company 80,289
Changes in assets and liabilities
Accounts receivable (118,272)
Inventories (269,001)
Accounts payable 184,160
Accrued liabilities 98,698
- --------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,501,851)
- --------------------------------------------------------------------------------------------------------
Cash Flows Used in Investing Activities
Purchase of property and equipment (941,432)
- --------------------------------------------------------------------------------------------------------
Cash Flows Provided by Financing Activities
Proceeds from long-term debt 800,000
Payments on long-term debt (11,649)
Proceeds from stock issuance 1,365,179
Proceeds from loan from stockholders 746,000
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,899,530
- --------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 456,247
Cash and Cash Equivalents, at beginning of year 27,915
- --------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, at end of year $ 484,162
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
Electric City Corp.
(A Development Stage Company)
Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended April 30, 1999
- ---------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
<S> <C>
Stock issued in exchange for conversion of loan from stockholders $ 500,000
Stock issued as partial payment for land and building 340,000
Stock and warrants issued in exchange for services received 2,715,899
Cash paid for interest 44,000
</TABLE>
F-7
<PAGE>
Electric City Corp.
(A Development Stage Company)
Notes to Financial Statements
1. Organization and Electric City (the "Company") was formed as a
Nature of Business limited liability company (Electric City,
L.L.C.) on December 5, 1997 to acquire and
commercialize application of a patented
technology that reduces the amount of
electricity required to power various
lighting facilities such as commercial
buildings, factories and residential
structures. On February 4, 1998, an Operating
Agreement ("Operating Agreement") was entered
into between Electric City, L.L.C.'s two
members, Joseph C. Marino, who subsequently
assigned his interest to Pino, L.L.C.
("Pino") and NCVC, L.L.C. ("NCVC"), pursuant
to which Electric City, L.L.C. was to
actively market this technology in the United
States. Prior to May 1, 1998, the LLC had
nominal operations, resulting in a loss of
approximately $50,000. The Operating
Agreement was subsequently amended on May 26,
1998. On June 5, 1998, Electric City, L.L.C.
merged with Electric City Corp., a Delaware
corporation. As a result, Electric City Corp.
will distribute, manufacture and sell an
energy management saving system in the
United States under an exclusive license
agreement (Note 8).
The Company's activities to date have
included raising capital, developing
prototypes, installing test systems at test
sites in the United States and the limited
sales of systems. Upon consummation of the
acquisition of certain assets of Marino
Electric, Inc., the Company will no longer be
a development stage company.
2. Summary of Significant
Accounting Policies
Cash and Cash The Company considers highly liquid
Equivalents investments with a maturity of three months
or less when purchased to be cash
equivalents.
Inventories Inventories are stated at the lower of FIFO
cost or market.
F-8
<PAGE>
Electric City Corp.
(A Development Stage Company)
Notes to Financial Statements
Property and Equipment Property and equipment are stated at cost.
For financial reporting purposes depreciation
is computed over the estimated useful lives
of the assets by the straight-line method
over the following lives.
Building 39 years
Computer equipment 3 years
Furniture 5 years
Shop equipment 7 years
Revenue Recognition Revenue from sales of energy systems is
recognized upon shipment.
Research and Development Research and development costs are charged to
Costs operations when incurred and are included in
selling, general and administrative expenses.
Total research and development costs charged
to operations were $1,923,000.
Marketing and Promotional Marketing and promotional costs incurred by
Costs the Company are expensed as incurred.
Organizational Costs The Company incurred organizational costs
upon incorporation of both Electric City,
L.L.C. and Electric City Corp. These costs
consisted of legal and filing costs for the
entities and were expensed as incurred, in
accordance with (AICPA) Statement of Position
98-5, "Reporting on the Costs of Start-Up
Activities."
Income Taxes Income taxes are accounted for under the
asset and liability method. Deferred income
taxes are recognized for the tax consequences
in future years of differences between the
tax basis of assets and liabilities and their
financial reporting amounts at each year end
based on enacted tax laws and statutory tax
rates applicable to the periods in which the
differences are expected to affect taxable
earnings. Valuation allowances are
established when necessary to reduce deferred
tax assets to the amount more likely than not
to be realized.
Use of Estimates The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities
and disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the reporting
period. Actual results could differ from
those estimates.
F-9
<PAGE>
Net Loss Per Share The Company computes loss per share under
Statement of Financial Accounting Standard
No. 128 "Earnings Per Share". The statement
requires presentation of two amounts, basic
and diluted loss per share. Basic loss per
share is computed by dividing loss available
to common stockholders by the weighted
average common shares outstanding. Dilutive
earnings per share would include all common
stock equivalents. The Company has not
included the outstanding options or warrants
as common stock equivalents because the
effect would be antidilutive.
The members' capital was converted into
20,000,000 shares of common stock at the
merger date. The shares have been treated as
if they have been outstanding since inception
for purposes of computing net loss per share.
Recent Accounting In April 1998, the Accounting Standards
Pronouncements Executive Committee issued Statement of
Position ("SOP") 98-5 "Reporting on the Costs
of Start-up Activities." The SOP requires
that all costs of start-up activities should
be expensed as incurred. The SOP is effective
for years beginning after December 15, 1998.
The Company early adopted this SOP.
In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and
Hedging Activities." This standard
establishes accounting and reporting
standards for derivative instruments and for
hedging contracts. This standard is effective
for all fiscal quarters of all fiscal years
beginning after June 15, 2000. When the
Company adopts this statement, it is not
expected to have a material impact on the
Company's financial statements or their
presentation.
Stock Split Subsequent to year end, the Company effected
a 2-for-1 stock split. All shares and per
share amounts have been adjusted to reflect
the split.
F-10
<PAGE>
3. Inventories Inventories consist of the following:
April 30, 1999
---------------------------------------------
Raw materials $ 117,850
Work in process 75,978
Finished goods 266,054
---------------------------------------------
$ 459,882
=============================================
4. Property and Equipment Property and equipment at April 30, 1999 are
summarized as follows:
---------------------------------------------
Land $ 205,000
Building 935,000
Furniture 54,588
Computer equipment 21,608
Autos 69,124
---------------------------------------------
1,285,320
Less accumulated depreciation 30,353
---------------------------------------------
$ 1,254,967
=============================================
F-11
<PAGE>
Electric City Corp.
(A Development Stage Company)
Notes to Financial Statements
5. Operating Agreement On February 4, 1998, Joseph C. Marino
("Controlling Member") and NCVC ("Other
Member") entered into an Operating Agreement
subsequently amended on May 26, 1998,
commencing operations of the development
stage company (Electric City, L.L.C.). Under
the terms and subject to the conditions set
forth in the Operating Agreement, the Other
Member agreed to loan the Company $500,000 to
meet operating cash needs of the Company and
to secure a letter of credit with a financial
institution for $500,000. The Controlling
Member, in exchange, assigned its rights
under a Sales, Distribution and Patent
License Agreement ("License Agreement") (Note
8) to the Company. No value was assigned for
the assignment of the License Agreement or
the securing of the letter of credit. The
letter of credit was retired by the Other
Member's payment of $250,000 to the
Controlling Member, who will obtain and
surrender the letter of credit to the Other
Member and the financial institution. Upon
completion of this transaction, each member
had a further obligation to loan the Company
up to $250,000 each on an as-needed basis. As
of April 30, 1999, loans under this
arrangement totaled $500,000. These loans
bear interest at 9% and are payable on
demand. Accrued interest on this debt is
approximately $16,000 at April 30, 1999.
Additionally, pursuant to the Operating
Agreement, the Other Member was obligated to
bring the Company to the status of a publicly
traded company on the Over-The-Counter
Bulletin Board ("OTC").
The Operating Agreement also requires the
Other Member to indemnify the Controlling
Member in every manner necessary as it
relates to the public registration.
6. Merger Agreement On June 5, 1998, upon the merger of Electric
City, L.L.C. into Electric City Corp., the
Controlling Member and Other Member became
the controlling stockholder and significant
minority stockholder, respectively, and their
respective obligations under the Operating
Agreement transferred and continue to be
obligations.
F-12
<PAGE>
Electric City Corp.
(A Development Stage Company)
Notes to Financial Statements
7. Accrued Expenses Accrued expenses consist of the following:
---------------------------------------------
Compensation $ 7,042
Interest 15,914
Real estate taxes 11,950
Professional fees 47,730
Other 15,536
---------------------------------------------
$ 98,172
=============================================
8. Long-Term Debt Long-term debt consists of the following
at April 30, 1999.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Mortgage note to CIB Bank, 8.25%, payable in monthly
Principal and interest installments of $6,876 until
August 2003. A final payment of $710,000 is due in
<S> <C> <C>
August 2003. Collateralized by the building and land. $ 788,351
Less current portion 18,112
--------------------------------------------------------------------------------
$ 770,239
===============================================================================
</TABLE>
The aggregate amounts of long-term debt
maturing in each of the next five years are
as follows:
---------------------------------------------
2000 $ 18,112
2001 19,664
2002 21,350
2003 23,178
2004 706,047
---------------------------------------------
$ 788,351
=============================================
F-13
<PAGE>
Electric City Corp.
(A Development Stage Company)
Notes to Financial Statements
9. Income Taxes The composition of income tax expense
(benefit) is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Current
<S> <C>
Federal $ (1,284,000)
State (226,000)
Adjustment to valuation allowance 1,510,000
-----------------------------------------------------------------------
Total income tax expense (benefit) $ -
=======================================================================
</TABLE>
Deferred income taxes consist of the
following:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
<S> <C>
Total deferred tax assets, relating principally
to net operating loss carryforwards $ 1,510,000
Deferred tax liabilities -
-----------------------------------------------------------------------
1,510,000
Less valuation allowance (1,510,000)
------------------------------------------------------------------------
Total net deferred tax asset $ -
=======================================================================
</TABLE>
The Company has recorded a valuation
allowance equaling the deferred tax asset due
to the uncertainty of its realization in the
future. At April 30, 1999, the Company has a
U.S. federal net operating loss carryforward
available to offset future taxable income of
approximately $3,860,000 which expires in
fiscal 2019.
F-14
<PAGE>
Electric City Corp.
(A Development Stage Company)
Notes to Financial Statements
The reconciliation of income tax expense
(benefit) to the amount computed by applying
the federal statutory rate is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
<S> <C>
Income tax (benefit) at federal statutory rate $ (1,364,000)
State taxes (193,000)
Tax benefit of loss prior to conversion from L.L.C. to
"C" corporation 47,000
Increase in valuation allowance 1,510,000
--------------------------------------------------------------------------------
Income tax expense (benefit) $ -
================================================================================
</TABLE>
10. License and Pursuant to the License Agreement dated
Employment January 1, 1998 between Giorgio Reverberi
Agreements ("Reverberi"), the owner of the patent, and
Joseph Marino, Chairman and CEO of Electric
City L.L.C. (who assigned the rights to
Company), the Company agrees to pay Reverberi
a royalty of $300 for each product unit made
by or for the Company and sold by the
Company. The term of the License Agreement is
until December 31, 2007, with automatic
renewal available until December 31, 2017,
unless written termination is provided by
either party of the License Agreement no less
than 90 days prior to the automatic renewal
date. The Company has accrued $7,800 at April
30, 1999.
In January 1999, the Company entered into an
employment agreement with its Chairman and
CEO for a period of four years. The agreement
requires an annual salary of $225,000
beginning in June 1999.
F-15
<PAGE>
Electric City Corp.
(A Development Stage Company)
Notes to Financial Statements
11. Equity Transaction
a) On June 5, 1998, the Company acquired
Pice Products Corporation ("Pice"), a
nonoperating company. In this
transaction, 1,200,272 common shares of
the Company were issued to the Pice
stockholders in return for all of the
outstanding shares of Pice. The Company
acquired no identifiable assets or
liabilities. The purpose of this merger
was to enable the Company to obtain
stockholders. The shares were valued at
$1 per share based on estimated fair
value. As the Company acquired no
assets, the Company incurred a charge
for $1,200,272.
b) As part of the original Operating
Agreement (Note 4), the Other Member
agreed to loan amounts to the Company up
to $500,000 to meet cash needs prior to
the private placement offering in June
1998. These loans did not bear interest.
In June 1998, based on the estimated
fair market value price of $1 per share,
the outstanding balance of $500,000 was
converted into 500,000 shares of the
Company's common stock.
c) On June 11, 1998, the Company issued
940,000 shares of common stock in
connection with a private offering in
accordance with Regulation D, Section
504 of the Securities Exchange
Commission's 1933 Act (500,000 upon
conversion of loans described above). As
a result of this offering, the Company
generated $440,000 of cash less offering
costs of $13,023 through the sale of
440,000 shares of common stock at the
estimated fair market value price of $1
per share.
In addition, the Company sold 911,978
shares of common stock for a total of
$938,202 in February and March 1999.
These shares were sold at approximately
$1 per share. During this time period,
the fair market value of the stock
(current trading price on the "OTC")
ranged from $2.57 per share to $3.19 per
share.
d) In August 1998, the Company purchased a
building for $800,000 cash which was
satisfied by a first mortgage and
340,000 shares of the Company's common
stock, valued at $1 per share based on
the estimated fair market value of the
common stock.
F-16
<PAGE>
Electric City Corp.
(A Development Stage Company)
Notes to Financial Statements
e) In April 1999, the Company issued
996,000 shares and 200,000 warrants of
common stock in exchange for consulting
services rendered. As the fair market
value of these services was not readily
determinable, these services were valued
based on the fair market value for the
stock issued (current price of the
common stock on the "OTC") which ranged
from $2.09 to $2.81 Approximately
$2,503,000 has been charged to
operations. $213,332 has been classified
as a prepaid expense as this amount
represents payment for services to be
provided in the future.
f) At April 30, 1999, the Company had
outstanding warrants to purchase 200,000
shares of the Company's common stock at
an exercise price of $2 per share. These
warrants expire in February 2002.
12. Stock Options The Company's Chairman and CEO was granted
options as part of an employment agreement to
acquire 900,000 shares of common stock at
$1.75 each. These options vest ratably over
the four-year term of the employment
agreements and expire in December 2008.
In June 1998, both NCVC and Pino were granted
options to purchase 2,000,000 shares of
common stock each at an exercise price of
$1.10 per share. These options will vest in
January 2000 if the Company's closing stock
price exceeds $5 per share on any 20
consecutive trading days. Subsequent to year
end, the Company's closing stock price
exceeded $5 per share for 20 consecutive
trading days. These options expire in June
2008.
In January 1999, certain employees were
granted options to purchase 304,000 shares of
common stock at an exercise price ranging
from $1.75 to $3.50. 150,000 options vested
upon the signing of the agreements and
154,000 will vest in fiscal 2000. These
options expire in periods from December 2008
through March 2009.
F-17
<PAGE>
Electric City Corp.
(A Development Stage Company)
Notes to Financial Statements
The following table summarizes the options
granted, exercised and outstanding under the
plans:
<TABLE>
<CAPTION>
Exercise Weighted
Price Per Average
Shares Share Exercise Price
--------------------------------------------------------------------------------------
Outstanding at May 1, 1998
<S> <C> <C> <C> <C>
Granted 5,204,000 $1.10 - $3.50 $1.25
Exercised - - -
--------------------------------------------------------------------------------------
Outstanding at April 30, 1999 5,204,000 $1.10 - $3.50 $1.25
======================================================================================
Options exercisable at
April 30, 1999 150,000 $1.75 $1.75
======================================================================================
</TABLE>
The Company applies APB No. 25, "Accounting
for Stock Issued to Employees" and related
interpretations in accounting for options.
Under APB Opinion 25, because the exercise
price of the options equals the market price
of the underlying stock on the measurement
date, no compensation expense is recognized.
F-18
<PAGE>
Electric City Corp.
(A Development Stage Company)
Notes to Financial Statements
The weighted-average, grant-date fair value
of stock options granted to employees during
the year, and the weighted-average
significant assumptions used to determine
those fair values, using a modified
Black-Sholes option pricing model, and the
proforma effect on earnings of the fair value
accounting for stock options under Statement
of Financial Accounting Standards No. 123 are
as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
<S> <C>
Weighted average fair value per options granted $.64
Significant assumptions (weighted average)
Risk-free interest rate at grant date 5.21%
Expected stock price volatility 55%
Expected dividend payout -
Expected option life (years) 4.10
Net loss
As reported (5,211,000)
Proforma (8,351,000)
Net loss per share
As reported (.23)
Proforma (.37)
</TABLE>
The following table summarizes information
about stock options outstanding at April 30,
1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ --------------------------
Number Weighted
Outstanding Average Weighted Number Weighted
at Remaining Average Exercisable Average
Exercise April 30, Contractual Exercise at April Exercise
Price 1999 Life Price 30, 1999 Price
-------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C>
$1.10 4,000,000 9.16 years 1.10 - N/A
$1.75 1,200,000 9.75 years 1.75 150,000 1.75
$3.50 4,000 9.92 years 3.50 - N/A
------------------------------------------------------ --------------------------
5,204,000 9.30 years 1.25 150,000 1.75
====================================================== ==========================
</TABLE>
F-19
<PAGE>
Electric City Corp.
(A Development Stage Company)
Notes to Financial Statements
13. Related Parties During the year ended April 30, 1999, the
Company paid approximately $165,000 to Marino
Electric, Inc. for goods purchased and
services rendered. Marino Electric, Inc. is
owned by an officer and stockholder of the
Company.
14. Financial Instruments The carrying amounts reported in the balance
sheet for cash, accounts receivable, accounts
payable and accrued expenses approximates
fair value because of the short-term nature
of these amounts. The Company's long-term
debt approximates fair value based on
instruments with similar terms.
15. Commitments In April 1999, the Company entered into a
consulting agreement beginning in May for an
initial six-month period. Under the
agreement, the Company is to receive
financial and promotional consulting
services. The agreement provides for payment
of specified shares of the Company's common
stock if the Company agrees to work with the
market maker introduced to them and
additional shares upon the completion of
certain other services.
The above shares, as well as other shares to
be paid for service, will be valued at the
fair market value of the stock at the date of
issuance.
16. Subsequent Event a) In January 1999, the Company agreed,
(Unaudited) subject to an appraisal to acquire
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. The change of control took place
May 24, 1999. As Mr. Marino owns less
than 50% of the common stock of the
Company, the transaction will be
accounted for by purchase accounting.
The purchase price of $3,888,000
exceeded the fair value of the assets
acquired by approximately $3,363,000,
which will be amortized on a
straight-line basis over 10 years.
F-20
<PAGE>
Electric City Corp.
(A Development Stage Company)
Notes to Financial Statements
The summarized unaudited proforma results of
operations set forth for the year ended April
30, 1999 assume the acquisition occurred as
of he beginning of the year.
(Unaudited)
---------------------------------------------
Net sales $ 3,179,000
Net loss (5,401,000)
---------------------------------------------
Proforma net loss per share $ (0.23)
=============================================
17. Common Stock In October 1999, the Company completed a
Subject to Recission private placement of up to 2,200,000 shares
of its common stock in an offering made
pursuant to Regulation D and Rule 506 (the
"506 Offering"). The proceeds of this
offering are to be used for payment of the
cash portion of the Marino Electric
acquisition, inventory, repay indebtedness to
the principal stockholders and for general
working capital purposes. As a result of
Company's statements made in certain press
releases issued during the 506 offering, it
is possible, but not altogether certain, that
such statements might be 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
may be in violation of Section 5 of the
Securities Act of 1933, as amended and
consequently, all of the investors may have
recission rights as to the shares purchased.
Such investors may have the right to rescind
these purchases of common stock for a period
of one year from the date of the purchase of
the common stock. In the event that all of
the investors opted to rescind their
investment, the Company would be obliged to
return the entire $9,057,308, plus statutory
interest in an amount dependent upon the
state in which the investors were residents
(which normally range from 6% to 9%), which
would have a material adverse effect on the
Company's finanicial position.
Management does not expect the outcome of the
possible rescission to have a material
adverse effect on the Company's finanicial
position, based upon the close business
relationship some investors have with the
Company and its management and the
relationship that others have with management
of the Company. The Company is not able to
determine whether any such investors would
prevail on their claims.
F-21
<PAGE>
Electric City Corp.
Balance Sheets
<TABLE>
<CAPTION>
July 31, 1999 1998
- -------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Assets
Current Assets
<S> <C> <C>
Cash and equivalents $ 3,805,428 $ 515,572
Accounts receivable, net of allowance
for doubtful accounts of $10,000 598,598 -
Inventories 703,363 215,502
- -------------------------------------------------------------------------------------------
Total Current Assets 5,107,389 731,074
- -------------------------------------------------------------------------------------------
Property and Equipment 1,460,902 2,904
Less accumulated depreciation (44,838) (128)
- -------------------------------------------------------------------------------------------
Net Property and Equipment 1,416,064 2,776
- -------------------------------------------------------------------------------------------
Cost in Excess of Assets Acquired,
net of amortization of $63,053 3,299,762 -
- -------------------------------------------------------------------------------------------
$ 9,823,215 $ 733,850
===========================================================================================
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
Electric City Corp.
Balance Sheets
<TABLE>
<CAPTION>
July 31, 1999 1998
- -----------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Liabilities and Equity
Current Liabilities
<S> <C> <C>
Due to seller $ 1,792,000 $ -
Line of credit and current maturities
of long-term debt 218,488 -
Notes payable to stockholders 200,000 -
Accounts payable 549,180 9,329
Accrued expenses 121,110 -
Deferred revenue 625,000 -
- -----------------------------------------------------------------------------------------------
Total Current Liabilities 3,505,778 9,329
- -----------------------------------------------------------------------------------------------
Long-Term Debt 765,647 -
- -----------------------------------------------------------------------------------------------
Common Stock Subject to Recission 3,258,675 -
- -----------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $.0001 par value,
30,000,000 shares authorized,
26,090,250 and 22,140,272 issued
and outstanding as of
July 31, 1999 and 1998 2,608 2,214
Additional paid-in capital 8,443,774 2,096,681
Retained deficit (6,153,267) (1,374,374)
- -----------------------------------------------------------------------------------------------
Total Stockholders' Equity 2,293,115 724,521
- -----------------------------------------------------------------------------------------------
$ 9,823,215 $ 733,850
===============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
Electric City Corp.
Statements of Operations
<TABLE>
<CAPTION>
Three months ended
July 31,
---------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue $ 833,523 $ -
- ---------------------------------------------------------------------------------------------------
Expenses
Cost of sales 668,861 -
Selling, general and administrative 1,063,691 247,716
- ---------------------------------------------------------------------------------------------------
Total expenses 1,732,552 247,716
- ---------------------------------------------------------------------------------------------------
Operating Loss (899,029) (247,716)
Other (Expense) Income
Acquisition expense - (1,200,272)
Amortization of cost in excess (63,053) -
Interest income 8,155 2,721
Interest expense (59,316) -
- ---------------------------------------------------------------------------------------------------
Total other (expense) income (114,214) (1,197,551)
- ---------------------------------------------------------------------------------------------------
Net Loss $ (1,013,243) $ (1,445,267)
===================================================================================================
Basic and Diluted Loss Per Common Share $ (0.04) $ (0.07)
===================================================================================================
Weighted Average Shares Outstanding 25,480,598 21,435,272
===================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
Electric City Corp.
Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Stockholders'
Shares Stock Capital Deficit Equity
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, April 30, 1999 24,388,250 $ 2,438 $ 6,098,518 $ (5,140,024) $ 959,932
Issuance of shares in exchange for
services received 102,000 10 250,416 - 250,426
Acquisition of assets of Marino
Electric, Inc. 1,600,000 160 2,095,840 - 2,096,000
Net loss for the quarter ended
July 31, 1999 - - - (1,013,243) (1,013,243)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 1999 26,090,250 $ 2,608 $ 8,443,774 $ (6,153,267) $ 2,293,115
============================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
Electric City Corp.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ended
July 31,
---------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Cash Flows From Operating Activities
<S> <C> <C>
Net loss $ (1,013,243) $ (1,445,267)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Depreciation and amortization 86,701 128
Purchased margin 50,000 -
Issuance of shares and warrants in exchange for services
rendered 463,758 1,200,272
Expenses paid on behalf of company - 74,839
Changes in assets and liabilities, net of acquisition
Decrease in accounts receivable (480,326) -
Increase (decrease) in inventories 48,519 (24,621)
Increase in accounts payable 365,020 9,329
Increase in accrued expenses 22,938 -
Increase in deferred revenue 625,000 -
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 168,367 (185,320)
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows Used in Investing Activities
Purchase of property and equipment (1,560) -
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows Provided by Financing Activities
Borrowings on line of credit 200,000 -
Payments on long-term debt (4,216) -
Proceeds from stock issuance 3,258,675 426,977
Proceeds from loan from stockholders - 246,000
Payments on loan from stockholders (300,000) -
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,154,459 672,977
- -----------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 3,321,266 487,657
Cash and Cash Equivalents, at beginning of period 484,162 27,915
- -----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, at end of period $ 3,805,428 $ 515,572
=======================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
Electric City Corp.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ended
July 31,
---------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Supplemental Cash Flow Disclosure
In May 1999, the Company purchased certain
assets of Marino Electric through the
issuance of 1,600,000 shares of common stock
($2,096,000) and an amount due to the seller
of $1,792,000. The purchase price exceeded
the fair value of the assets acquired by
$3,362,815. This amount has been accounted
for as goodwill and will be amortized over 10
years. The following is the fair value of the
assets acquired.
<S> <C>
Inventory $ 342,000
Fixed assets 183,185
- -----------------------------------------------------------------------------
$ 525,185
=============================================================================
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
Electric City Corp.
Notes to Financial Statements
(The information as of July 31, 1998 and 1998 and for the three months
ended July 31, 1998 and 1999 is unaudited)
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
periods ended July 1998 and 1999 are not
necessarily indicative of the results to be
expected for the full year.
2. Line-of-Credit In July 1999, the Company entered into a
Agreement $500,000 line-of-credit agreement with
LaSalle Bank N.A. This line of credit bears
interest at prime (8% at July 31, 1999) plus
one percent and expires on July 12, 2000. At
July 31, 1999, $200,000 was outstanding under
this line-of-credit agreement.
3. Private Placement In July 1999, the Company issued a private
placement offering under Regulation D of the
Securities Act of 1993. The offering was for
a minimum of 660,000 shares and a maximum of
2,200,000 shares at $4.50 per share. As of
July 31, 1999, the Company had subscriptions
for 724,150 shares with total cash proceeds
of 3,258,675 (See Note 7).
4. Acquisition of Marino In January 1999, the Company agreed, subject
Electric Assets to an appraisal, to acquire certain assets of
Marino Electric, Inc. from Joseph Marino, a
related party, for $1,792,000 in cash and
800,000 shares ($2,096,000) of the Company's
common stock. The closing took place
effective May 24, 1999. As Mr. Marino owns
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 will be
amortized on a straight-line basis over 10
years. The results of operations of Marino
Electric from the date of the acquisition are
reflected in the statement of operations for
the three months ended July 31, 1999. Upon
consummation of the acquisition, the Company
is no longer considered a development stage
company.
F-28
<PAGE>
5. 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 ended July 31, 1999 and 1998,
respectively.
6. Net Loss Per Share The Company computes loss per share under
Statement of Financial Accounting Standards
No. 128 "Earnings Per Share". The statement
requires presentation of two amounts, basic
and diluted loss per share. Basic loss per
share is computed by dividing loss available
to common stockholders by the weighed average
common shares outstanding. Dilutive earnings
per share would include all common stock
equivalents. The Company has not included the
outstanding options or warrants as common
stock equivalents because the effect would be
antidilutive.
7. Common Stock In October 1999, the Company completed a
Subject to Recission private placement of up to 2,200,000 shares
of its common stock in an offering made
pursuant to Regulation D and Rule 506 (the
"506 Offering"). The proceeds of this
offering are to be used for payment of the
cash portion of the Marino Electric
acquisition, inventory, repay indebtedness to
the principal stockholders and for general
working capital purposes. As a result of
Company's statements made in certain press
releases issued during the 506 offering, it
is possible, but not altogether certain, that
such statements might be 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
may be in violation of Section 5 of the
Securities Act of 1933, as amended and
consequently, all of the investors may have
recession rights as to the shares purchased.
Such investors may have the right to rescind
these purchases of common stock for a period
of one year from the date of purchase of the
common stock. In the event that all of the
investors opted to rescind their investment,
the Company would be obliged to return the
entire $9,057,308, plus statutory interest in
an amount dependent upon the state in which
the investors were residents (which normally
range from 6% to 9%), which would have a
material adverse effect on the Company's
finanicial position. Management does not
expect the outcome of the possible rescission
to have a material adverse effect on the
Company's finanicial position, based upon the
close business relationship some investors
have with the Company and its management and
the relationship that others have with
management of the Company. The Company is not
able to determine whether any such investors
would prevail on their claims.
As the possibility of recission does exist,
the shares subject to recission have been
reported as mezzanine equity in the Company's
financial statements.
F-29
<PAGE>
Report of Certified Public Accountants
Marino Electric, Inc.
We have audited the accompanying balance sheet of Marino Electric, Inc. as of
December 31, 1998 and the related statements of operations and retained earnings
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Marino Electric, Inc. at
December 31, 1998, and the results of its operations and cash flows for the year
then ended, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Chicago, Illinois
August 30, 1999
F-30
<PAGE>
Marino Electric, Inc.
Balance Sheet
December 31, April 30,
1998 1999
- --------------------------------------------------------------------------------
(Unaudited)
Assets
Current Assets
Cash and cash equivalents $ 246,359 $ 444,198
Accounts receivable (net of
allowance for doubtful
accounts of $182,000) (Note 6) 556,251 559,808
Inventories 227,580 291,130
- --------------------------------------------------------------------------------
Total Current Assets 1,030,190 1,295,136
- --------------------------------------------------------------------------------
Property and Equipment
Shop equipment 160,942 160,942
Transportation and other equipment 154,987 156,517
- --------------------------------------------------------------------------------
315,929 317,459
Accumulated depreciation (71,985) (85,599)
- --------------------------------------------------------------------------------
Net Property and Equipment 243,944 231,860
- --------------------------------------------------------------------------------
$ 1,274,134 $ 1,526,996
================================================================================
See accompanying notes to financial statements.
F-31
<PAGE>
Marino Electric, Inc.
Balance Sheet
December 31, April 30,
1998 1999
- --------------------------------------------------------------------------------
(Unaudited)
Liabilities and Stockholder's Equity
Current Liabilities
Loan payable to stockholder (Note 3) $ 228,114 $ 228,114
Bank note payable (Note 4) 39,893 34,170
Accounts payable 51,113 139,883
Accrued expenses 178,132 281,688
Deferred tax liability (Note 5) 194,500 149,500
- --------------------------------------------------------------------------------
Total Current Liabilities 691,752 833,355
- --------------------------------------------------------------------------------
Commitments
Stockholder's Equity
Common stock, $1.00 par value;
10,000 shares authorized, 1,000
issued and outstanding 1,000 1,000
Additional paid-in capital 89,975 94,535
Retained earnings 491,407 598,106
- --------------------------------------------------------------------------------
Total Stockholder's Equity 582,382 693,641
- --------------------------------------------------------------------------------
$ 1,274,134 $ 1,526,996
================================================================================
See accompanying notes to financial statements.
F-32
<PAGE>
Marino Electric, Inc.
Statement of Operations and Retained Earnings
<TABLE>
<CAPTION>
Four months ended
- ------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
----------------------------------------- April 30, April 30,
1998 1997 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue (Note 6) $ 3,017,087 $ 3,066,577 $ 823,796 $ 705,391
- ------------------------------------------------------------------------------------------------------------------------------
Expenses
Cost of sales 1,689,905 1,438,981 366,549 540,961
Selling, general and administrative 1,234,826 876,585 289,195 322,267
- ------------------------------------------------------------------------------------------------------------------------------
Total 2,924,731 2,315,566 655,744 863,228
- ------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 92,356 751,011 168,052 (157,837)
- ------------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 11,539 1,432 1,569 2,926
Interest expense (35,336) (18,095) (7,922) (14,672)
- ------------------------------------------------------------------------------------------------------------------------------
Total other expense (23,797) (16,663) (6,353) (11,746)
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) 68,559 734,348 161,699 (169,583)
Taxes (Benefit) on Income (Note 5) 22,000 289,500 55,000 (46,850)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) 46,559 444,848 106,699 (122,733)
Retained Earnings, at beginning of
period 444,848 - 491,407 444,848
- ------------------------------------------------------------------------------------------------------------------------------
Retained Earnings, at end of period $ 491,407 $ 444,848 $ 598,106 $ 322,115
==============================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
Marino Electric, Inc.
Statement of Cash Flows
<TABLE>
<CAPTION>
Four months ended
- ------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, April 30, April 30,
1998 1997 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
Cash Flows From Operating Activities
<S> <C> <C> <C> <C>
Net income (loss) $ 46,559 $ 444,848 $ 106,699 $ (122,733)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities
Depreciation 40,841 31,144 13,614 10,380
Interest imputation 18,625 9,850 4,560 6,560
Increase (decrease) in deferred tax
liability (95,000) 289,500 (45,000) (48,850)
Change in allowance for doubtful
Accounts 154,000 28,000 - -
Changes in assets and liabilities
Accounts receivable 73,902 (812,153) (3,557) 163,742
Inventories (147,580) (80,000) (63,550) -
Accounts payable (66,096) 117,209 88,770 12,486
Accrued liabilities 144,785 32,213 103,556 12,383
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 170,036 60,611 205,092 33,968
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows Used in Investing Activities
Purchase of property and equipment (48,487) (204,942) (1,530) -
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows Used in Financing Activities
Borrowings (repayments) of bank debt (22,653) 62,546 (5,723) (4,000)
Borrowings (repayments) on stockholder loan (100,000) 328,114 - -
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (122,653) 390,690 (5,723) (4,000)
- ------------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash
Equivalents (1,104) 246,359 197,839 29,968
Cash and Cash Equivalents, at beginning of
Period 247,463 - 246,359 247,463
- ------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, at end of period $ 246,359 $ 246,359 $ 444,198 $ 277,431
===============================================================================================================================
Supplemental Disclosure of Cash Flow Information
Stock issued in exchange for fixed assets $ - $ 62,500 $ - $ -
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
Marino Electric, Inc.
Notes to Financial Statements (Information as of April 30, 1999 and
for the year ended December 31, 1997 and four months ended April 30,
1999 and 1998 is unaudited)
1. Nature of Business Marino Electric, Inc. ("Marino") is a
designer and manufacturer of custom
electrical switching gear and distribution
panels which serve to distribute electricity
from a building's principal power source to
the various electric switches within a
building. Marino's principal customers are
located in the metropolitan Chicagoland area.
2. Summary of Significant
Accounting Policies
Cash and Cash The Company considers highly liquid
Equivalents investments with a maturity of three months
or less when purchased to be cash
equivalents.
Inventories Inventories, principally raw material
components, are stated at the lower of
average cost or market.
Property and Property and equipment are stated at cost.
Equipment For financial reporting purposes,
depreciation is computed over the estimated
useful lives of the assets by the
straight-line method over the following
lives:
Shop equipment 10 years
Transportation equipment 5 years
Other 10 years
Revenue Recognition Revenue is recognized from sales when a
product is shipped if the Company has no
further obligation. On contracts where the
Company is required to perform installation
services, revenue is recognized when the
services have been provided.
Income Taxes The Company follows the asset and liability
method which requires the recognition of
deferred tax assets and liabilities for the
expected future tax consequences of temporary
differences between the tax basis and
financial reporting basis of assets and
liabilities.
F-35
<PAGE>
Marino Electric, Inc.
Notes to Financial Statements (Information as of April 30, 1999 and
for the year ended December 31, 1997 and four months ended April 30,
1999 and 1998 is unaudited)
Concentration of Financial instruments that potentially
Credit Risk subject the Company to significant
concentration of credit risk consist
principally of cash instruments and accounts
receivable. The Company maintains cash and
cash equivalents with various financial
institutions. The Company provides credit in
the normal course of business. The Company
performs ongoing credit evaluations of its
customers and maintains allowances for
potential credit losses.
Use of Estimates The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities
and disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the reporting
period. Actual results could differ from
those estimates.
Interim Financial The financial information as of April 30,
Statements 1999 and with respect to the four months
ended April 30, 1999 and 1998 is unaudited.
In the opinion of management, the financial
statements contain all adjustments consisting
of normal recurring accruals necessary for
the fair presentation of the results for such
periods. The information is not necessarily
indicative of the results of operations to be
expected for the fiscal year end.
3. Loans Payable to The balance represents amounts due the sole
Stockholder stockholder of the Company. The amounts are
noninterest bearing and payable on demand.
The Company has reflected interest expense
and a corresponding credit to additional
paid-in capital in accordance with SAB Topic
1:B in the amounts of $18,625, $9,850, $4,560
and $6,560 for the years ended December 31,
1999 and 1998 and the four months ended April
30, 1999 and 1998, respectively.
4. Bank Note Payable The Company has an equipment loan, payable in
monthly installments of $3,028 including
interest through August 1999, with a balloon
payment of approximately $20,000 in September
1999. Interest is computed at the Bank's
prime rate plus 1% (8.75% at December 31,
1998).
F-36
<PAGE>
Marino Electric, Inc.
Notes to Financial Statements (Information as of April 30, 1999 and
for the year ended December 31, 1997 and four months ended April 30,
1999 and 1998 is unaudited)
5. Income Taxes Income taxes (benefit) in the statement of
income are comprised of the following:
<TABLE>
<CAPTION>
Four months ended
----------------------------------------------------------------------------------------
Year ended December 31,
---------------------------------- April 30, April 30,
1998 1997 1999 1998
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 117,000 $ - $ 100,000 $ 2,000
Deferred (95,000) 289,500 (45,000) (48,850)
----------------------------------------------------------------------------------------
Total taxes (benefit)
on income $ 22,000 $ 289,500 $ 55,000 $ (46,850)
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
The deferred tax liability recorded on the
balance sheet is comprised of the following:
December 31, April 30,
1998 1999
---------------------------------------------------------------------------------
Differences in cash/accrual
<S> <C> <C>
method of accounting $ 194,500 $ 149,500
---------------------------------------------------------------------------------
Total $ 194,500 $ 149,500
=================================================================================
</TABLE>
6. Significant Customer One customer accounted for 11% and 12% of
sales in the years ended December 31, 1998
and 1997, respectively. No customer accounted
for more than 10% of sales in the four months
ended April 30, 1999 or 1998. Receivables
from this customer represented 19.0% of total
receivables at December 31, 1998.
7. Related Party During the year ended December 31, 1998, the
Transactions Company sold approximately $219,500 of goods
sold to Electric City Corp. The sole
stockholder of the Company is a significant
stockholder of Electric City Corp.
F-37
<PAGE>
Marino Electric, Inc.
Notes to Financial Statements (Information as of April 30, 1999 and
for the year ended December 31, 1997 and four months ended April 30,
1999 and 1998 is unaudited)
8. Sale of Assets In January 1999, the Company agreed, subject
to an appraisal, to sell certain assets to
Electric City Corp., a related entity, for
$1,792,000 in cash and 1,600,000 shares of
stock. The closing took place effective May
24, 1999.
F-38
<PAGE>
Electric City Corp.
Proforma Financial Statements
The following unaudited proforma statements of operations for the year ended
April 30, 1999 and three months ended July 31, 1999 of Electric City Corp. (the
"Company") gives effect to the acquisition of certain assets of Marino Electric,
Inc. which was made as of May 24, 1999. The assets acquired were the
inventories, all shop equipment and transportation equipment, exclusive of a
recreational vehicle with a net book value of $53,000 at April 30, 1999. Cash
and cash equivalents and accounts receivable were not acquired. The fair value
of the shop and transportation equipment approximated net book value. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, the results of operations of the acquired assets will be included
in Electric City Corp.'s results only from the acquisition date. The unaudited
proforma statements of operations have been prepared as if the acquisition
occurred on May 1, 1998 and are based on historical financial statements of
Electric City Corp. and Marino Electric, Inc. from May 1, 1998 through April 30,
1999 and May 1, 1999 through July 31, 1999. The unaudited proforma balance sheet
has not been provided as the acquisition is reflected in the Company's July 31,
1999 balance sheet.
The purchase method of accounting has been used in preparation of the unaudited
proforma financial statements. Under this method of accounting, the aggregate
purchase price is allocated to assets acquired based on their estimated fair
values. For purposes of the unaudited proforma financial statements, the
purchase price has been allocated based primarily on the information furnished
by management. The final allocation of the purchase price of the assets acquired
will be determined in a reasonable time after consummation of the transaction
and will be based on a complete evaluation of the assets acquired. Accordingly,
the information presented herein may differ from the final purchase price
allocation; however, such allocation is not expected to differ materially from
the preliminary amounts.
In the opinion of the Company's management, all adjustments have been made that
are necessary to present fairly the proforma data.
The unaudited proforma financial statements should be read in conjunction with
the respective financial statements and related notes included elsewhere in this
registration statement. The unaudited pro forma financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the results of operations or financial position that would have been achieved
had the transaction reflected therein been consummated as of the date indicated,
or of the results of operations or financial position for any future periods or
dates.
F-39
<PAGE>
Electric City Corp.
Unaudited Proforma Statement of Operations
Year Ended April 30, 1999
<TABLE>
<CAPTION>
Company
Historical Proforma
April 30, Marino Increase
1999 Electric, Inc. (Decrease) Proforma
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 208,473 $ 3,135,492 $ (165,000)(1) $ 3,178,965
- -------------------------------------------------------------------------------------------------------------------------
Expenses
Cost of selling 135,000 1,515,493 (73,000)(1) 1,577,493
Selling, general and
administrative 4,033,559 1,201,754 - 5,235,313
Acquisition expense 1,200,272 - - 1,200,272
Amortization of cost in excess - - 336,300 (1) 336,300
Interest expense, net 50,559 18,404 161,300 (1) 230,263
- -------------------------------------------------------------------------------------------------------------------------
Total expenses 5,419,390 2,735,651 424,600 8,579,641
Taxes on income - 123,850 (123,850)(1) -
- -------------------------------------------------------------------------------------------------------------------------
Net (Loss) Income $ (5,210,917) $ 275,991 $ (465,750) $ (5,400,676)
=========================================================================================================================
Weighted Average Common
Shares Outstanding 22,357,874 - 1,600,000 (1) 23,957,874
=========================================================================================================================
Basic and Diluted Loss Per
Common Share Outstanding $ (0.23) - - $ (0.23)
=========================================================================================================================
</TABLE>
See accompanying note to unaudited proforma financial statements.
F-40
<PAGE>
Electric City Corp.
Unaudited Proforma Statement of Operations
Three Months Ended July 31, 1999
<TABLE>
<CAPTION>
Company
Historical Proforma
July 31, Marino Increase
1999 Electric, Inc. (Decrease) Proforma
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 833,523 $ 142,476 $ - $ 975,999
- -------------------------------------------------------------------------------------------------------------------------
Expenses
Cost of selling 668,861 75,659 - 744,520
Selling, general and
administrative 1,063,691 50,360 - 1,114,051
Amortization of cost in excess 63,053 - 21,018 (2) 84,071
Interest expense, net 51,161 - 10,300 (2) 61,461
- -------------------------------------------------------------------------------------------------------------------------
Total expenses 1,846,766 126,019 31,318 2,004,103
Taxes on income - 5,000 (5,000)(2) -
- -------------------------------------------------------------------------------------------------------------------------
Net (Loss) Income $ (1,013,243) $ 11,457 $ (26,318) $ (1,028,104)
=========================================================================================================================
Weighted Average Common
Shares Outstanding 25,480,598 - 400,000 (2) 25,880,598
=========================================================================================================================
Basic and Diluted Loss Per
Common Share Outstanding $ (0.04) - - $ (0.04)
=========================================================================================================================
</TABLE>
F-41
<PAGE>
Electric City Corp.
Notes to Unaudited Proforma Statement of Operations
Year Ended April 30, 1999 and Three Months Ended July 31, 1999
Note 1
Effective May 24, 1999, the Company acquired the inventories, all shop equipment
and transportation equipment exclusive of a recreational vehicle with a net book
value of $53,000 at April 30, 1999 of Marino Electric, Inc. ("Marino"). The
Company did not acquire the cash and cash equivalents or accounts receivable of
Marino, nor did the Company assume any liabilities of Marino. Marino's principal
business is the design and manufacture of custom electric switching gear and
distribution panels which serve to distribute electricity from a building's
principal power source to various switches within the building. Marino's
customers are primarily located in the metropolitan Chicagoland area. The
acquisition was consummated for $1,792,000 in cash and 1,600,000 shares of
Electric City Corp.'s common stock with a fair value of $2,096,000.
The transaction was recorded under the purchase method of accounting. The total
cost of the acquisition was approximately $3,888,000, which exceeded the fair
value of the assets acquired by approximately $3,363,000. The fair value of the
inventories, shop equipment and transportation equipment approximated book
value. Cost in excess will be amortized over a 10-year period.
Proforma adjustments related to the acquisition included the following:
o Elimination of $165,000 of sales from Marino to Electric City Corp.
o Amortization of the cost in excess of fair value of net assets acquired of
$336,300 based on a life of 10 years.
o Elimination of tax expense on Marino due to the overall net loss on a
proforma basis.
o The cash portion ($1,792,000) of the purchase price has been reflected as
due to seller at May 1, 1998, and an interest charge of $161,300 has been
made against proforma net loss.
F-42
<PAGE>
Electric City Corp.
Notes to Unaudited Proforma Statement of Operations
Year Ended April 30, 1999 and Three Months Ended July 31, 1999
Note 2
Proforma adjustments related to the acquisition for the three months ended July
31, 1999 included the following:
o Amortization of the cost in excess of fair value of net assets acquired for
the entire three-month period.
o Elimination of tax expense on Marino due to the overall net loss on a
proforma basis.
o Additional interest to reflect the cash portion ($1,792,000) as outstanding
for the entire three-month period.
o Reflect the shares issued (1,600,000) as outstanding for the entire
three-month period.
F-43
