<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/x/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-2791
ELECTRIC CITY CORP.
(Exact name of small business issuer as specified in its charter)
DELAWARE 36-4197337
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1280 Landmeier Road, Elk Grove Village, Illinois 60007-2410
(Address of principal executive offices)
(847) 437-1666
(Issuer's telephone number)
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: Yes /X/ No / /
28,276,679 shares of the registrant's common stock, $.0001 par value per share,
were outstanding as of July 31, 2000.
Transitional Small Business Disclosure Format: Yes / / No /X/
<PAGE>
ELECTRIC CITY CORP.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Part I Financial Information
ITEM 1. Financial Statements:
Balance Sheets
June 30, 2000 and December 31, 1999....................................... 4
Statement of Operations
Three Months Ended June 30, 2000 and 1999................................. 6
Statement of Operations
Six Months Ended June 30, 2000 and 1999................................... 7
Statement of Stockholders' Equity (Deficit)
Six Months Ended June 30, 2000............................................ 8
Statement of Cash Flows
Six Months Ended June 30, 2000 and 1999................................... 9
Notes to Condensed Consolidated Financial Statements...................... 10
ITEM 2. Management Discussion and Analysis of
Financial Condition or Plan of Operations................................. 16
Part II. Other Information:
ITEM 1. Litigation................................................................ 20
ITEM 2. Changes in Securities..................................................... 20
ITEM 6. Exhibits and Reports on Form 8-K.......................................... 21
Signatures................................................................ 22
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
3
<PAGE>
ELECTRIC CITY CORP.
BALANCE SHEET
================================================================================
<TABLE>
<CAPTION>
JUNE 30,
2000 DECEMBER 31,
(UNAUDITED) 1999 (1)
------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 1,277,844 $ 6,166,197
Accounts receivable, net 1,449,324 1,324,901
Inventories 1,939,533 1,115,817
Other, including $35,000 note receivable from
employees as of June 30, 2000 83,582 600,000
------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,750,283 9,206,915
Property and Equipment 1,744,447 1,568,509
Less accumulated depreciation (194,535) (112,042)
------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 1,549,912 1,456,467
Costs in Excess of Assets Acquired,
net of amortization of $364,305 and $196,164 at
June 30, 2000 and December 31, 1999, respectively 2,998,510 3,166,651
------------------------------------------------------------------------------------------------
$ 9,298,705 $ 13,830,033
================================================================================================
</TABLE>
4
<PAGE>
ELECTRIC CITY CORP.
BALANCE SHEET
================================================================================
<TABLE>
<CAPTION>
JUNE 30,
2000 DECEMBER 31,
(UNAUDITED) 1999 (1)
------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 494,822 $ 1,820,380
Accounts payable 582,599 820,762
Accrued expenses 590,476 417,265
Due to distributors 1,180,244 0
Amounts refundable from private placement 0 110,000
Deferred revenue 170,000 175,000
------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,018,142 3,343,407
LONG-TERM DEFERRED REVENUE 404,167 429,167
LONG-TERM DEBT 1,232,016 777,022
------------------------------------------------------------------------------------------------
COMMON STOCK SUBJECT TO RESCISSION 9,194,882 9,149,982
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value, 30,000,000
shares authorized, 26,095,500 issued as of
June 30, 2000 and 26,091,500 shares issued
and outstanding as of December 31, 1999. 2,609 2,609
Additional paid-in capital 8,917,795 8,682,873
Accumulated deficit (13,462,405) (8,555,027)
------------------------------------------------------------------------------------------------
(4,542,001) 130,455
Less treasury stock, at cost, 1,000 and 0 shares (8,500) 0
------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (4,550,501) 130,455
------------------------------------------------------------------------------------------------
$ 9,298,705 $ 13,830,033
================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
(1) Derived from audited December 31, 1999 10-K
5
<PAGE>
ELECTRIC CITY CORP.
STATEMENT OF OPERATIONS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE $ 1,152,427 $ 759,313
----------------------------------------------------------------------------------------------------
EXPENSES
Cost of sales 1,024,327 696,904
Selling, general and administrative 1,945,710 1,127,160
Repurchase of distributor territories & legal settlement 1,680,394 0
----------------------------------------------------------------------------------------------------
Total expenses 4,650,431 1,824,064
OPERATING LOSS (3,498,004) (1,064,751)
----------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 33,960 5,690
Interest expense (39,718) (39,067)
----------------------------------------------------------------------------------------------------
Total other income (expense) (5,758) (33,377)
----------------------------------------------------------------------------------------------------
NET LOSS $ (3,503,762) $ (1,098,128)
----------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET LOSS PER COMMON SHARE (0.12) (0.04)
----------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
used in computation of basic and diluted net loss per share 28,272,799 24,706,536
====================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
ELECTRIC CITY CORP.
STATEMENT OF OPERATIONS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE $ 2,151,530 $ 853,875
--------------------------------------------------------------------------------------------------
EXPENSES
Cost of sales 1,931,355 735,116
Selling, general and administrative 3,568,614 3,978,987
Repurchase of distributor territories & legal settlement 1,680,394 0
--------------------------------------------------------------------------------------------------
Total expenses 7,180,363 4,714,103
OPERATING LOSS (5,028,833) (3,860,228)
--------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 217,729 7,598
Interest expense (96,274) (65,713)
--------------------------------------------------------------------------------------------------
Total other income (expense) 121,455 (58,115)
--------------------------------------------------------------------------------------------------
NET LOSS $(4,907,378) $(3,918,343)
--------------------------------------------------------------------------------------------------
(0.17) (0.17)
BASIC AND DILUTED NET LOSS PER COMMON SHARE
--------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
used in computation of basic and diluted net loss per share 28,264,378 23,730,601
==================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
ELECTRIC CITY CORP.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumluated Treasury Shareholders'
Shares Stock Capital Deficit Stock Equity (Deficit)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999 26,091,500 $ 2,609 $ 8,682,873 $ (8,555,027) $ -- $ 130,455
Issuance of shares in exchange for
services received 4,000 -- 35,372 -- -- 35,372
Treasury Stock (1,000) -- -- -- (8,500) (8,500)
Options issued as part of
repurchase of distributor territories -- -- 199,550 -- -- 199,550
Net loss for the six months
ended June 30, 2000 -- -- -- (4,907,378) -- (4,907,378)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2000 26,094,500 $ 2,609 $ 8,917,795 $ (13,462,405) $ (8,500) (4,550,501)
===================================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
ELECTRIC CITY CORP.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 2000 1999
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (4,907,378) $ (3,918,343)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 250,634 66,327
Issuance of shares in exchange for services rendered 0 2,979,611
Repurchase of distributor territories 1,354,794 0
Settlement of lawsuit 325,600 0
Changes in assets and liabilities,
Accounts receivable (124,423) (667,409)
Inventories (823,716) 316,654
Other current assets (83,582) 3,271
Accounts payable (238,163) 179,846
Accrued expenses (117,017) 44,611
Deferred revenue (5,000) 125,000
------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,368,250) (870,433)
------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Repayment of stockholder loan 600,000 0
Purchase of property and equipment (175,938) (26,969)
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 424,062 (26,969)
------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Payment of amounts due sellers (856,524) 0
Payment on long-term debt (14,040) (9,756)
Proceeds from private placement - net 44,900 0
Proceeds from stock issuance - net 0 891,978
Amounts refundable from private placement (110,000) 0
Proceeds from loan from stockholders 0 200,000
Purchase of Treasury Stock (8,500) 0
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (944,164) 1,082,222
------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (4,888,353) 184,820
------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, at beginning of period 6,166,197 93,799
Cash and Cash Equivalents, at end of period $ 1,277,844 $ 278,619
==============================================================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid during the periods for interest $ 136,594 $ 39,061
Accrual satisfied through issuance of stock 35,372 0
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
ELECTRIC CITY CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. BASIS OF PRESENTATION The financial information included herein is
unaudited; however, such information
reflects all adjustments (consisting solely
of normal recurring adjustments), which, in
the opinion of management, are necessary for
a fair statement of results for the interim
periods.
The results of operations for the
three-month and six-month periods ended June
30, 2000 are not necessarily indicative of
the results to be expected for the full
year.
For further information, refer to the
audited financial statements and the related
footnotes included in the Electric City
Corp. Annual Report on Form 10-KSB/A for the
year ended December 31, 1999.
2. ACQUISITION OF MARINO Effective May 24, 1999, the Company acquired
ELECTRIC ASSETS certain assets of Marino Electric, Inc. from
Joseph Marino, a related party, for
$1,792,000 in cash and 1,600,000 shares
($2,096,000) of the Company's common stock.
As Mr. Marino 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
is being amortized on a straight-line basis
over 10 years. Under the terms of the
purchase agreement, the Company was
obligated to pay the cash portion of the
purchase price upon the closing of a private
placement of the Company's common stock,
which was commenced in July 1999. In May
2000, Mr. Marino waived this requirement and
instead has received a payment of $800,000
and a subordinated secured term note for the
principal amount of $972,000, which bears
interest at 10% per annum payable over 24
months, requiring monthly principal and
interest payments of $44,928.
3. STOCK SPLIT The Company effected a two-for-one stock
split effective July 30, 1999. The stock
split has been retroactively reflected in
the financial statements as of and for the
three months and six months ended June 30,
1999.
10
<PAGE>
4. NET LOSS PER SHARE The Company computes net loss per share
under Statement of Financial Accounting
Standards No. 128 "Earnings Per Share." The
statement requires presentation of two
amounts, basic and diluted net loss per
common share. Basic net loss per common
share is computed by dividing net loss
available to common stockholders by the
number of weighed average common shares
outstanding. Included in the computation of
weighted average common shares outstanding
for the three months and six months ended
June 30, 2000 are 2,181,179 shares of common
stock subject to possible rescission.
Dilutive net loss per share would include
all common stock equivalents. The Company
has not included the outstanding options or
warrants as common stock equivalents in the
computation of diluted net loss per share
for three months and six months ended June
30, 2000 and 1999 because the effect would
be antidilutive.
5. INVENTORIES Inventories consisted of the following:
<TABLE>
<CAPTION>
June 30,
2000
December 31,
1999
<S> <C>
Raw Materials
$1,053,878
$742,501
Work in process
365,432
331,053
Finished goods
520,223
42,263
$1,939,533
$1,115,817
</TABLE>
6. COMMON STOCK SUBJECT TO In January 2000, the Company completed a
POSSIBLE RESCISSION private placement of 2,181,179 shares of its
common stock in an offering made pursuant to
11
<PAGE>
Regulation D and Rule 506 of the Securities
Act of 1933, as amended (the "506
Offering"). The proceeds of this offering
were used to purchase inventory, to repay
indebtedness to the principal stockholders
and for general working capital purposes. As
a result of the Company's statements made in
certain press releases issued during the 506
Offering, it is possible, but not altogether
certain, that such statements might 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, certain investors
may have rescission rights as to the shares
purchased. Such investors may have the right
under Federal securities laws to rescind
these purchases of common stock for a period
of one year from the date of purchase of the
common stock. A rescission right could
entitle the holders of the shares to receive
a return of the consideration paid ($4.50
per share), together with interest from the
date of purchase. Based upon the close
business relationship some investors have
with the Company and its management and
relationships that others have with
management of the Company, the Company does
not believe that investors owning a material
amount of securities purchased in the 506
Offering would demand rescission and any
such rescission would not have a material
effect on the Company's financial position.
As the possibility of rescission does exist,
the shares subject to rescission have been
reported as mezzanine equity in the
Company's financial statements.
7. SWITCHBOARD APPARATUS, On March 23, 2000, the Company signed a
INC. non-binding letter of intent to purchase all
the shares of Switchboard Apparatus, Inc., a
manufacturer of electrical switchgear. The
acquisition is contingent on satisfactory
completion of due diligence, execution of a
purchase agreement and satisfaction of
customary closing conditions. The majority
of the consideration to the selling
shareholders will be in the form of Electric
City common stock. The Company anticipates
that the acquisition will close in August
2000. This acquisition will be accounted for
using the purchase method of accounting.
8. GREAT LAKES CONTROLLED On April 5, 2000, the Company signed a
ENERGY CORPORATION non-binding letter of intent to purchase all
the shares of Great Lakes Controlled Energy
Corporation, an independent systems
integrator and facility retrofit specialist.
The acquisition is contingent on
satisfactory completion of due diligence,
execution of a purchase agreement and
satisfaction of customary closing
conditions. The majority of the
consideration to the selling
12
<PAGE>
shareholders will be in the form of Electric
City common stock. The Company anticipates
that the acquisition will close in September
2000. This acquisition will be accounted for
using the purchase method of accounting.
13
<PAGE>
9. LITIGATION a) John Prinz, a former consultant to the
Company filed suit in the Circuit Court
of Cook County, Illinois against the
Company alleging breach of a consulting
agreement that was entered into between
the parties on April 6, 1999. Pursuant
to that agreement, which terminated by
its own terms on October 6, 1999, the
consultant was to perform a variety of
services, including (1) assisting the
Company in obtaining working capital,
(2) facilitating the purchase of
another company, and (3) facilitating
the process of listing the Company as a
NASDAQ small-cap company. On June 30,
2000, the Company, in exchange for Mr.
Prinz dropping his suit, agreed to pay
Mr. Prinz (a) 60,000 shares of the
Company's common stock valued at
$223,800 based on the then current
price of the stock on the OTC, (b)
options to purchase during a four year
period 40,000 shares of the Company's
common stock at an exercise price equal
to the lower of: (i) $7.00 per share;
or (ii) the price per share of the sale
by the Company of its common stock
within 180 days of the signing of the
agreement (these options have been
valued at $86,800 using a modified
Black-Sholes option pricing model), and
(c) $15,000 in cash to be paid upon the
earlier of 180 days or the closing of
an equity funding in excess of $1
million. The Company recorded a total
one-time charge of $325,600 during the
second quarter of 2000 in recognition
of this settlement agreement. This
amount is included in accrued expenses
at June 30, 2000.
b) As the result of certain distributors
failing to meet sales quotas and
minimum purchase requirements under
their distribution agreements, the
Company entered into discussions
regarding the possible termination or
restructuring of those agreements.
Three distributors, representing eleven
states did not agree with the proposed
restructuring of the agreements and
threatened legal action. The three
distributors stated that they were
prepared to assert claims of securities
fraud and RICO claims, breach of
contract, breach of the covenant of
good faith and fair dealing, common law
fraud and tortious interference.
Management denied all of the claims
made by the distributors, but after a
series of negotiations in an attempt to
avoid the time and cost of a lawsuit,
the Company agreed to repurchase the
territories held by the distributors
for an amount equal to the amount
invested by the distributors in
developing the territories. The Company
repurchased the sales territories for
(a) $1,280,244 in cash, the majority to
be paid upon the closing of an equity
funding, and (b) options to purchase
65,000 shares of the Company's common
stock
14
<PAGE>
at a price of $7.00 per share over a
ten year period. These options have
been valued at $199,550 using a
modified Black-Sholes option pricing
model. A portion of the cash payment
represents a refund of a $125,000 cash
security deposit paid by the
distributors to the Company. The
Company recorded a $1,354,794 one-time
charge during the second quarter of
2000 in recognition of the repurchase
agreement. The territories repurchased
are Arizona, Colorado, Florida,
Georgia, Michigan, Nebraska, North
Carolina, Ohio, South Carolina and
Virginia.
15
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION OR PLAN OF OPERATION
You should read the following discussion regarding the Company along with the
Company's financial statement and related notes included in this quarterly
report. This quarterly report, including the following discussion, contains
forward-looking statements that are subject to risks, uncertainties and
assumptions. The Company's actual results, performance and achievements in 2000
and beyond may differ materially from those expressed in, or implied by these
forward-looking statements. See Cautionary Note Regarding Forward-Looking
Statements.
Results of Operations.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999.
The Company's total revenue for the three-month period ended June 30, 2000 was
$1,152,427 as compared to $759,313 for the three-month period ended June 30,
1999. During the second quarter of 2000, EnergySaver sales totaled $475,875,
while revenue generated from the sale of switchgear, distribution panels and
miscellaneous electrical components totaled $676,552. This compares with
EnergySaver sales of $351,800 and switchgear and distribution panel sales of
$407,513 during the second quarter of 1999. The Company acquired substantially
all of the assets of Marino Electric, a manufacturer of electrical switchgear
and distribution panels, on May 24, 1999. As a result the quarter ended June 30,
1999 only includes six weeks of revenues for sales of such products.
Cost of sales for the three-month period ended June 30, 2000 totaled $1,024,327
as compared to $696,904 for the three-month period ended June 30, 1999. The
increase in the cost of sales was primarily due to the increase in sales
activity resulting from the acquisition of Marino Electric in May 1999 and
increased sales of EnergySaver units. The gross margin earned during the second
quarter of 2000 was approximately 11.1%, an increase from the 8.2% earned in the
second quarter of 1999. The improvement in the gross margin was largely due to
improved utilization of manufacturing capacity and increased sales of the
EnergySaver.
Selling, general and administrative expense ("SG&A") for the three-month period
ended June 30, 2000 was $1,945,710 as compared to $1,127,160 for the three-month
period ended June 30, 1999. Charges for outside services, including charges for
legal, accounting, engineering, and public relation services totaled $389,217
for the second quarter of 2000 versus $699,031 for the second quarter of 1999.
Salaries and related expenses increased from $148,857 in second quarter of 1999
to $756,245 in the second quarter of 2000. The increase in salaries and related
expense is due to the Company's decision to hire a new team of senior managers
in January of 2000 and its addition of sales and marketing personnel for the
EnergySaver. Other SG&A expenses have increased as a result of the increase in
headcount and the decision to expand the marketing of the EnergySaver to markets
outside of the Chicago area, which has resulted in $285,928 of travel related
expense incurred during the second quarter of 2000.
The quarter ended June 30, 2000 included charges related to the repurchase of
eleven distribution territories from three distributors and the settlement of a
suit brought by a former consultant. The Company repurchased the eleven sales
territories, including the exclusive rights to sell the EnergySaver in Ohio,
Michigan, Northern California, Florida, Georgia, North Carolina, South Carolina,
Virginia, Arizona, Colorado and Nebraska, for $1,280,244 (which includes the
return of a $125,000 cash security deposit paid by the distributors to the
Company) plus options to purchase 65,000 shares at $7.00 per share. The options
were valued at $199,550 using a modified Black-Sholes option pricing model. The
payment of the majority of the cash portion of the repurchase price was deferred
until the earlier of 180 days or the Company closes an equity funding in excess
of $1,000,000. During the quarter the Company also settled the suit brought by
John Prinz, a former consultant, for $15,000 in cash, 60,000 shares of
16
<PAGE>
Electric City common stock and options to purchase 40,000 shares at an exercise
price equal to the lower of: (i) $7.00 per share; or (ii) the price per share of
the sale by the Company of its common stock within 180 days of the signing of
the Agreement. These options have been valued at $86,800 using a modified
Black-Scholes option pricing model. The total one time charge recognized as a
result of this settlement was $325,600.
Other non-operating expense for the three-month period ending June 30, 2000
totaled $5,758 as compared to $33,377 for the three-month period ended June 30,
1999. The Company earned interest income of $33,960 during the second quarter of
2000 versus $5,690 earned in the second quarter of 1999. The increase in
interest income was the result of higher average cash balances during 2000.
Total interest expense for the quarter ending June 30, 2000 was $39,718 versus
$39,067 in the year earlier period. The majority of the interest expense in the
second quarter of 2000 was related to the Marino seller's note and the mortgage
on the Company facility in Elk Grove Village Illinois while the majority of the
interest expense in the second quarter of 1999 was related to the mortgage on
the Company facility.
The Company has not recorded any provision for future tax refunds as the
realization of the benefit cannot be assured at this time. The Company's net
operating loss carry forward, which can be used to reduce future taxable income,
as of the end of June 2000 approximated $10 million.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999.
Revenue for the six-month period ended June 30, 2000 totaled $2,151,530 versus
$853,875 for the same period ended June 30, 1999. The increase in revenue is due
to increased sales of EnergySavers and the fact that the 1999 period only
included six weeks of sales from the electrical switchboard and distribution
panel business that was acquired from Marino Electric on May 24, 1999. The
EnergySaver generated total sales of $737,623 during the first six months of
2000 as compared to $445,800 in the same period during 1999.
Cost of sales for the six-month period ended June 30, 2000 was $1,931,355 versus
$735,166 for the period ended June 30 1999. The increase in the cost of sales is
related to the increase in overall sales during the period. The gross margin on
sales for the first half of 2000 was 10.2% versus 13.9% for the first half of
1999. Margins were slightly stronger in the first half of 1999, despite lower
utilization of the Company's manufacturing capacity, due mainly to the fact that
sales of the EnergySaver represented a larger portion of the total sales for the
period.
Selling, general & administrative expenses were $3,568,614 for the six-months
ended June 30, 2000 versus $3,978,987 for the same period in 1999. Charges for
outside services, including charges for legal, accounting, engineering, and
public relation services totaled $852,403 for the first half of 2000, versus
$3,352,317 for the first six months of 1999. Salaries and related expenses
increased from $256,187 in the first half of 1999 to $1,626,395 in the first
half of 2000. Average headcount has increased significantly as a result of the
Company's decision to hire a new team of senior managers and to greatly expand
the sales and marketing staff for the EnergySaver. Also, prior to acquiring
Marino Electric on May 24, 1999, the Company had very few administrative
employees. Other SG&A expenses have increased as a result of the increase in
headcount and the decision to expand the marketing of the EnergySaver to markets
outside of the Chicago area which has resulted in $435,662 of travel related
expense incurred during the first half of 2000.
The first six months of 2000 included charges related to the repurchase of
eleven distribution territories from three distributors and the settlement of a
suit brought by a former consultant. The Company repurchased the eleven sales
territories, including the exclusive rights to sell the EnergySaver in Ohio,
Michigan, Northern California, Florida, Georgia, North Carolina, South Carolina,
Virginia, Arizona, Colorado and Nebraska, for $1,280,244 (which includes the
return of a $125,000 cash security deposit
17
<PAGE>
paid by the distributors to the Company) plus options to purchase 65,000 shares
at $7.00 each. For accounting purposes, the options were valued at $199,550
using a modified Black-Sholes option pricing model. The payment of the majority
of the cash portion of the repurchase price has been deferred until the Company
completes an equity funding. During the first half of 2000 the Company also
settled the suit brought by John Prinz, a former consultant, for $15,000 in
cash, 60,000 shares of Electric City common stock and options to purchase 40,000
shares at $7.00 per share. The total charge recognized as a result of this
settlement was $325,600.
For the first six months of 2000 the Company recorded non-operating income of
$121,455 versus non-operating expense of $58,115 for the first six months of
1999. The Company recorded $217,729 in interest income during the first half of
2000, $120,000 of which was associated with a $600,000 loan to a stockholder
which was repaid in full during March 2000. The balance of the interest income
was earned on excess cash balances during the six-month period. The interest
income was partially offset by interest expense of $96,274, the majority of
which was related to the amounts due to the sellers of Marino Electric and the
mortgage on the Company's facility in Elk Grove Village, Illinois. Other
non-operating expense for the first half of 1999 consisted primarily of mortgage
interest and interest on notes to shareholders, which was partially offset by
$7,598 in interest income earned on excess cash balances.
Liquidity and Capital Resources
As of June 30, 2000, the Company had cash and cash equivalents of $1,277,844,
versus cash and cash equivalents of $6,166,1097 on December 31, 1999. The
Company's debt obligations as of June 30, 2000 consisted of a mortgage of
$767,985 on its facility in Elk Grove Village Illinois, vehicle loans totaling
$23,409, and a note due the seller of Marino Electric for $935,476. The
Company's principal cash requirements are for operating expenses, including
employee costs, the costs related to research and development, advertising
costs, the cost of outside services including those providing accounting, legal,
engineering and consulting services, and the funding of inventory and accounts
receivable, and capital expenditures. The Company has financed its operations
since inception primarily through the private placement of common stock and
loans from stockholders.
Net cash declined $4,888,353 during the first half of 2000 versus increasing
$184,820 during the same period in 1999. Operating activities consumed
$4,368,250 and $870,433 during the first six months of 2000 and 1999
respectively. The net loss reported in 2000 included non-cash charges totaling
$1,680,394 related to the repurchase of eleven distributor territories and the
settlement of a lawsuit. The net loss reported in 1999 included $2,979,611 of
non-cash charges associated with services provided in exchange for stock.
Depreciation and amortization for the first six months of 2000 was $250,634
versus $66,327 for the same period in 1999. The 1999 period only included one
month of depreciation and amortization related to the Marino Electric purchase
versus six months included in 2000. Working capital increased $1,291,901 during
the first six months of 2000 versus declining $1,973 for the same period in
1999. The increase in working capital during 2000 was largely the result of an
$823,716 increase in inventory and a $238,163 reduction in accounts payable. The
increase in inventory was primarily due to the production of EnergySavers in
anticipation of future orders. The Company intends to work down this inventory
of finished goods over the coming months. The decline in accounts payable is the
result of the Company's decision to cut back on inventory purchases to work down
the inventory of finished goods.
Investing activities produced $424,062 during the six-month period ending June
30, 2000, versus consuming $26,969 during the six-month period ending June 30,
1999. The first half of 2000 benefited from a $600,000 repayment of a loan to a
stockholder, which was partially offset by purchases of property and equipment
totaling $175,938. Cash used in investing activities during the first half of
1999 was related to the purchase property and equipment for use at the Company's
Elk Grove Village headquarters.
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Financing activities consumed $944,164 during the six-month period ending June
30, 2000, versus generating $1,082,222 during the six-months ending June 30,
1999. During the first half of 2000, the Company paid $856,524 of the amount
owed to the sellers of Marino Electric, and paid $14,005 to reduce the balances
on the mortgage and auto loans. During the same period in 1999, it reduced the
principal balances on the mortgage by $9,756, but received $891,978 from the
sale of stock and $200,000 through a loan from a stockholder.
During June 2000, the Company secured a $2 million working capital loan from
LaSalle Bank N.A. The loan is a revolving loan with an initial term of one year
and bears interest at a rate equal to the prime rate or LIBOR plus 2.75%.
Availability under the line is tied to and secured by inventory and receivable
balances. As of June 30 there was no outstanding balance on the loan.
The continued development, manufacturing and expansion of sales of the Company's
products, including the EnergySaver, will require the continued commitment of
significant funds. The actual timing and amount of the Company's future funding
requirements will depend on many factors, including the amount and timing of
future revenues, the level and amount of product marketing and sales efforts,
the magnitude of research and development, the ability of the Company to improve
margins and the cost of additional manufacturing equipment. Management believes
that the current cash balances along with an increased working capital line
should provide sufficient liquidity until internally generated cash reaches a
level sufficient to fund ongoing operations.
In order to provide sufficient capital for future growth through acquisitions
and expansion of sales and marketing efforts, the Company is actively seeking
addition equity funding at this time. If the Company receives additional funds
through the issuance of equity securities, the Company's existing stockholders
may experience dilution and the new equity securities may have rights,
preferences, or privileges senior to those of the Company's common stock, but
standard for equity of the kind anticipated.
Cautionary Note Regarding Forward-Looking Statements
This discussion includes forward-looking statements that reflect Electric City's
current expectations about its future results, performance, prospects and
opportunities. Electric City has tried to identify these forward-looking
statements by using words such as "may," "will," "expects," "anticipates,"
"believes," "intends," "estimates" or similar expressions. These forward-looking
statements are based on information currently available to Electric City and are
subject to a number of risks, uncertainties and other factors that could cause
Electric City's actual results, performance, prospects or opportunities in the
remainder of 2000 and beyond to differ materially from those expressed in, or
implied by, these forward-looking statements. These risks, uncertainties and
other factors include, without limitation, the Company's growth expectations,
the Company's discussions regarding future sales, acquisitions and new product
development, the need for additional financing, the limited trading market for
the Company's securities, the possible volatility of the Company's stock price,
the concentration of ownership, and the potential fluctuation in operating
results. For further information about these and other risks, uncertainties and
factors, please review the disclosures included under the caption "Risk Factors"
in Electric City's private placement memorandum dated as of July 30, 1999 with
the Securities and Exchange Commission. Except as required by the federal
securities laws, Electric City undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events, changed circumstances or any other reason after the date of this
document.
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ELECTRIC CITY CORP.
PART II. OTHER INFORMATION
ITEM 1. Litigation
John Prinz, a former consultant to the Company filed suit in
the Circuit Court of Cook County, Illinois against the Company
alleging breach of a consulting agreement that was entered
into between the parties on April 6, 1999. Pursuant to that
agreement, which terminated by its own terms on October 6,
1999, the consultant was to perform a variety of services,
including (1) assisting the Company in obtaining working
capital, (2) facilitating the purchase of another company, and
(3) facilitating the process of listing the Company as a
NASDAQ small-cap company. The Company on June 30, 2000, in
exchange for dropping his suit, agreed to pay Mr. Prinz (a)
60,000 shares of the Company's common stock, (b) options to
purchase during a four year period 40,000 shares of the
Company's common stock at an exercise price equal to the lower
of: (i) $7.00 per share; or (ii) the price per share of the
sale by the Company of its common stock within 180 days of the
signing of the agreement, and (c) $15,000 in cash to be paid
upon the earlier of 180 days or the closing of an equity
funding in excess of $1 million. The Company recorded a total
charge of $325,600 during the second quarter of 2000 in
recognition of this settlement agreement.
As the result of certain distributors failing to meet sales
quotas and minimum purchase requirements under their
distribution agreements, the Company entered into discussions
regarding the possible termination or restructuring of those
agreements. Three distributors, representing eleven states did
not agree with the proposed restructuring of the agreements
and threatened legal action. The three distributors stated
that they were prepared to assert claims of securities fraud
and RICO claims, breach of contract, breach of the covenant of
good faith and fair dealing, common law fraud and tortious
interference. Management denied all of the claims made by the
distributors. After a series of meetings the Company agreed to
repurchase the territories held by the distributors for an
amount equal to the amount invested by the distributors in
developing the territories. The Company agreed to repurchase
the sales territories for (a) $1,280,244 in cash, to be paid
upon the closing of an equity funding, and (b) 65,000 options
to purchase shares of the Company's common stock at a price of
$7.00 per share. Included in the cash payment is a refund of a
$125,000 cash security deposit paid by the distributors to
Electric City. The Company recorded a $1,354,794 charge during
the second quarter of 2000 in recognition of the repurchase
agreement. The territories repurchased are Arizona, Colorado,
Florida, Georgia, Michigan, Nebraska, North Carolina, Ohio,
South Carolina and Virginia.
Item 2. Changes In Securities
During March of 2000, the Company issued an aggregate 8,611
shares of common stock to an individual investor and a
retirement fund that had purchased shares at $4.50 per share
as part of the private placement of its common stock in an
offering made pursuant to Regulation D and Rule 506 of the
Securities Act of 1933, as amended. Payment for the shares was
received in early 1999. Each of the purchasers represented
that they were financially sophisticated and aware of the
Company's business and financial condition. Each purchaser
also represented that they acquired the shares for investment
for their own account and not with a view for distribution.
All certificates representing the shares contain restrictive
legends regarding their transfer.
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ITEM 6. Exhibits And Reports On Form 8-K.
(a) Exhibits
10.1 Loan agreement dated June 28, 2000 between LaSalle
Bank National Association and Electric City Corp.
10.2 Revolving credit note dated June 28, 2000 issued by
Electric City Corp. to LaSalle Bank National
Association
10.3 Security agreement dated June 28, 2000 made between
Electric City Corp. and LaSalle Bank National
Association
10.4 Equipment term note issued by Electric City Corp. to
LaSalle Bank National Association
10.5 Subordinated Secured Term Note between Joseph Marino
and Electric City Corp., dated May 30, 2000
10.6 General Security Agreement between Electric City
Corp. and Joseph Marino, dated May 30, 2000.
27 Financial data schedule.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
second quarter of 2000.
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SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELECTRIC CITY CORP.:
Dated: August 11, 2000 By: /s/ John Mitola
----------------------------------------
John Mitola
Chief Executive Officer (principal
executive officer)
Dated: August 11, 2000 By: /s/ Brian Kawamura
----------------------------------------
Brian Kawamura
President and Chief Operating Officer
Dated: August 11, 2000 By: /s/ Jeffrey Mistarz
----------------------------------------
Jeffrey Mistarz
Chief Financial Officer (principal
financial and accounting officer)
22
