UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Date of Report (Date of earliest event reported): July 23, 2001
-------------
Environmental Power Corporation
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-15472 04-2782065
-------- ------------ ----------
(State of other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
500 Market Street, Suite 1-E, Portsmouth, New Hampshire 03801
(Address of principal executive offices)
(603) 431-1780
(Registrant's telephone number, including area code)
Item 2. Acquisition or Disposition of Assets
On July 23, 2001 (the "Closing Date"), the Company acquired approximately 87.7%
of the outstanding common stock of Microgy Cogeneration Systems Inc. ("Microgy")
in exchange for securities of the Company pursuant to a Share Exchange Agreement
(the "Exchange Agreement") dated as of June 20, 2001 among the Company, Microgy
and the Principal Microgy Shareholders, as defined therein.
Microgy is a development stage company which intends to develop, finance, own
and operate project facilities which utilize environmentally friendly
technologies that focus primarily on production of energy from animal and
organic wastes (bio-energy), creation of fuels from renewable bio sources
(bio-fuels) and the creation of cogeneration projects (alternative energy) which
have potential distributed power applications. Microgy intends to develop and
license from others proprietary technologies that focus on renewable, clean,
cost effective energy and fuels. The basic business trends which Microgy
believes supports its plans include:
. worldwide deregulation and restructuring of the electric utility
industry;
. trends favoring distributed generation;
. environmental regulations which aim at reducing pollution; and
. structural changes occurring in the basic fossil fuels industries.
To accomplish its objectives, Microgy has begun to license technologies,
contract for sites to host its project facilities, enter into power purchase
agreements to sell energy as a source of revenue, and explore areas of mutual
interest with others to seek to create projects with sustainable long-term
revenue streams.
Microgy, a Colorado corporation, has principal executive offices located at 1767
A Denver West Boulevard, Suite 15, Golden, Colorado 80401. The telephone number
for Microgy's principal executive offices is (303) 384-9402.
The Company issued an aggregate of 5,521,549 shares of the Company's common
stock, $.01 par value ("Common Stock") and 197,760.7 shares of the Company's
newly designated Series B Convertible Preferred Stock, $.01 par value (the "EPC
Preferred Stock"), to the Principal Microgy Shareholders in exchange for
15,919,147 shares of Microgy common stock. Each share of Preferred Stock, which
votes with the Common Stock on an as converted basis, will automatically be
converted into ten shares of Common Stock upon an increase in the authorized
common stock to an amount sufficient to allow conversion of the Preferred Stock.
The exchange ratio (the "Exchange Ratio") used was 0.3468495 shares of Common
Stock and 0.0124228 shares of Preferred Stock for each share of Microgy common
stock. The Exchange Ratio was determined by negotiations among the Company,
Microgy and the primary Principal Microgy Shareholders. The Exchange Ratio is
based on all of the fully diluted equity of Microgy being exchanged for 45% of
the fully diluted equity of the Company, assuming exercise or conversion
of all derivative securities. Pursuant to Section 2.4 of the Agreement, the
Exchange Ratio may be increased to reflect certain issuances of equity by the
Company to generate funds to be available for financing Microgy. However,
holders of approximately 94% of the Microgy common stock exchanged have agreed
to waive their right to adjustments in the Exchange Ratio. The Principal Microgy
Shareholders included two Microgy shareholders who executed Joinder Agreements,
becoming parties to the Exchange Agreement. At the closing, one of the Principal
Microgy Shareholders exchanged a warrant to purchase 800,000 shares of Microgy
common stock for a warrant to purchase securities of the Company based on the
Exchange Ratio.
Under the Exchange Agreement, the Company agreed to offer (the "Subsequent
Offer") the remaining shareholders of Microgy (who own an aggregate of 2,230,126
shares of Microgy Common, warrants to purchase 885,000 shares of Microgy common
stock and options to purchase 290,000 shares of Microgy common stock) to
exchange for EPC securities based on the Exchange Ratio.
The Agreement provides that, within 30 days of the Closing Date, the Board of
Directors of the Company will be enlarged from five to eight members and the
three resulting vacancies will be filled by designees of the Principal Microgy
Shareholders (including replacements or substitutes similarly designated, the
"Microgy Designees").
In connection with the Exchange Agreement, the Company, the Principal Microgy
Shareholders, Joseph E. Cresci and Donald A. Livingston entered into a
Stockholders' Agreement as of the Closing Date (the "Stockholders' Agreement").
Messrs. Cresci and Livingston (the "Majority Stockholders") are Directors,
officers and principal stockholders of the Company. The Stockholders Agreement
provides among other things, that:
. The Company will arrange for a meeting of stockholders to present a
proposal to increase the authorized Common Stock from 20 million
shares to a greater number at least sufficient to permit the
conversion of the Preferred Stock into Common Stock and the parties
will vote the shares they own or control in favor thereof;
. The parties will take all lawful action, including voting the shares
they own or control, to cause the proportion of Microgy Designees to
the existing five Directors, (including any replacement or substitute
designated by the Majority Stockholders, the "Incumbent Directors")
and for the election of the Microgy Designees and the Incumbent
Directors;
. Each Party who is a director of the Company, in such capacity (subject
to his fiduciary duties to the Company), unless agreed by a majority
of the then Incumbent Directors, will retain Messrs. Cresci and
Livingston as Chairman and Chief Executive Officer and President,
respectively, and not take any action to alter the respective powers
and functions of such offices;
. Each Principal Microgy Shareholder agreed that, unless such Principal
Microgy Shareholder has been specifically invited in writing by a
majority of the then Incumbent Directors (or in the case of (a)(i)
below, has obtained the consent of a
majority of the then Incumbent Directors), such Principal Microgy
Shareholder will not in any manner, directly or indirectly, (a) effect
or seek, offer or propose (whether publicly or otherwise) to effect,
or cause or participate in or in any way assist any other person to
effect or seek, offer or propose (whether publicly or otherwise) to
effect or participate in, (i) in the case of George A. Kast and
Benjamin Brant, any acquisition of any securities (or beneficial
ownership thereof) or assets of the Company, or any of its
subsidiaries, except as contemplated in the Exchange Agreement; (ii)
any tender or exchange offer or merger or other business combination
involving the Company or any of its subsidiaries, (iii) any
recapitalization, restructuring, liquidation, dissolution or other
extraordinary transaction with respect to the Company or any of its
subsidiaries or (iv) any "solicitation" of "proxies" (as such terms
are used in the proxy rules of the Securities and Exchange Commission)
or consents to vote any voting securities of the Company, except as
contemplated in the Stockholders' Agreement, (b) form, join or in any
way participate in a "group" (as defined under the Securities Exchange
Act of 1934, as amended), with respect to the securities of the
Company, except as contemplated in the Stockholders' Agreement, (c)
otherwise act, alone or in concert with others, to seek to control or
influence the management, Board or policies of the Company, (other
than acting as a shareholder or director in the ordinary course), (d)
take any action which might force the Company to make a public
announcement regarding any of the types of matters set forth in (a)
above, (e) advise, assist or encourage any other persons in connection
with the foregoing, or (f) enter into any discussions or arrangements
with any third party with respect to any of the foregoing.
. The Stockholders' Agreement terminates on June 30, 2003.
The Company also entered into a Registration Rights Agreement as of the Closing
Date (the "Registration Rights Agreement") with the Principal Microgy
Shareholders, the Majority Stockholders and those Microgy security holders who
exchange Microgy securities in the Subsequent Offer and execute counterpart
signature pages thereto (collectively, the "Holders"). Pursuant to the
Registration Rights Agreement, the Company agreed to file, by November 30, 2001,
a Registration Statement on behalf of the Holders allowing holders to resell
Common Stock and granted the Holders piggyback registration rights.
The Exchange Agreement and related documents, which are filed as exhibits to
this Report, qualify the description of the transaction set forth above and
contain additional information regarding the terms of the transaction.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements for Microgy
A. Audited Financial Statements
(1) Report of Independent Auditors
(2) Balance Sheet as of June 30, 2000
(3) Statements of Operations for the Year Ended June 30, 2000 and for
the Period from March 25, 1999 (inception) through June 30, 2000
(4) Statements of Changes in Stockholders' for the Period from March
25, 1999 (inception) through June 30, 2000
(5) Statements of Cash Flows for the Year Ended June 30, 2000 and for
the Period from March 25, 1999 (inception) through June 30, 2000
(6) Notes to the Financial Statements
B. Unaudited Interim Financial Statements
(1) Balance Sheet as of March 31, 2001
(2) Statement of Operations for the Nine Months Ended March 31, 2001
(3) Statement of Operations for the Period from March 25, 1999
(inception) through March 31, 2001 (to be filed as an amendment
to this Report within 60 days after the filing hereof)
(4) Statement of Cash Flows for the Nine Months Ended March 31, 2001
(5) Statement of Cash Flows for the Period from March 25, 1999
(inception) through March 31, 2001 (to be filed as an amendment
to this Report within 60 days after the filing hereof)
(6) Notes to Condensed Financial Statements (to be filed as an
amendment to this Report within 60 days after the filing hereof)
(b) Pro Forma Financial Information
1. Pro Forma Combined Condensed Financial Statements
(1) Unaudited Pro Forma Combined Condensed Balance Sheet at March 31,
2001
(2) Unaudited Pro Forma Combined Condensed Statements of Operations
for the Three Months Ended March 31, 2001 and Year Ended December
31, 2000
(3) Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
(c) Exhibits
3.02 Certificate of Designations related to the Company's newly
designated, $.01 par value, Series B Convertible Preferred Stock.
10.03 Share Exchange Agreement dated June 20, 2001 among the Company,
Microgy and the Principal Microgy Shareholders (incorporated by
reference to Exhibit 2 to Amendment No. 7 to Schedule 13D filed
---------
by Joseph E. Cresci on August 2, 2001 (the "13D")).
10.04 Stockholders' Agreement dated July 23, 2001 among the Company,
the Principal Microgy Shareholders, Joseph E. Cresci and Donald
A. Livingston (incorporated by reference to Exhibit 4 to the 13D)
---------
10.05 Registration Rights Agreement dated July 23, 2001 among the
Company, the Principal Microgy Shareholders, Joseph E. Cresci,
Donald A. Livingston and future exchanging Microgy security
holders who become a party thereto (incorporated by reference to
Exhibit 5 to the 13D).
10.06 Form of Joinder Agreement (incorporated by reference to Exhibit 6
---------
to the 13D).
(c) Exhibits (continued)
10.07 Form of Waiver Agreement dated July 23, 2001 executed by certain
Microgy Shareholders (incorporated by reference to Exhibit 3 to
--------
the 13D).
10.08 Warrant Agreement dated July 23, 2001 between the Company and
Daniel J. Eastman. (incorporated by reference to Exhibit 6 to the
---------
Schedule 13D filed by Daniel J. Eastman on August 2, 2001).
Cautionary Statement
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements. Certain statements contained in
this report, such as statements concerning Microgy's intentions to develop,
finance, own and operate project facilities, Microgy's intentions to develop and
license from others proprietary technologies, anticipated business trends,
changes to EPC's authorized capital, changes to EPC's Board of Directors, EPC's
acquisition of the remaining Microgy securities, future registrations of EPC's
securities and other statements contained herein regarding matters that are not
historical facts, are forward looking statements as such term is defined in the
Act. Because such statements involve risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, uncertainties involving development stage
companies, financing requirements and uncertainties, difficulties involved in
executing on a business plan, technological uncertainties, risks relating to
managing and integrating acquired businesses, volatile and unpredictable
developments (including plant outages and repair requirements), the difficulty
of estimating construction, development, repair and maintenance costs and
timeframes, the uncertainties involved in estimating insurance and implied
warranty recoveries, if any, the inability to predict the course or outcome of
any negotiations with parties involved with EPC's or Microgy's projects,
uncertainties relating to general economic and industry conditions, the amount
and rate of growth in expenses, uncertainties relating to government and
regulatory policies, the legal environment, intellectual property issues, the
competitive environment in which EPC and Microgy operate and other factors,
including those described in the Company's filings with the Securities and
Exchange Commission, including the section "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Certain Factors That May
Impact Future Results" of EPC's Quarterly Report on Form 10-Q for the period
ended March 31, 2001. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. EPC undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENVIRONMENTAL POWER CORPORATION
August 7, 2001 /s/ William D. Linehan
-----------------------------------------------
William D. Linehan
Treasurer and
Chief Financial Officer
(principal accounting officer
and authorized officer)
MICRO GYCOGENERATION SYSTEMS, INC.
(A development stage company)
FINANCIAL STATEMENTS
For the period from March 25, 1999 (inception)
through June 30, 2000
MICROGY COGENERATION SYSTEMS, INC.
(A development stage company)
FINANCIAL STATEMENTS
For the period from March 25, 1999 (inception) through June 30, 2000
Contents
Report of Independent Auditors ......................................... 1
Audited Financial Statements
Balance Sheet .......................................................... 2
Statement of Operations ................................................ 3
Statement of Changes in Stockholders' Equity ........................... 4
Statement of Cash Flows ................................................ 5
Notes to the Financial Statements ...................................... 6
Report of Independent Auditors
Board of Directors
Microgy Cogeneration Systems, Inc.
We have audited the accompanying balance sheet of Microgy Cogeneration Systems,
Inc. (a development stage company) as of June 30, 2000, and the related
statement of operations, changes in stockholders' equity, and cash flows for the
year ended June 30, 2000 and the period from March 25, 1999 (inception) through
June 30, 2000. 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 auditing standards generally accepted
in the United States. 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 Microgy Cogeneration Systems,
Inc. at June 30, 2000, and the results of its operations and its cash flows for
the year ended June 30, 2000 and the period from March 25, 1999 (inception)
through June 30, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
October 6, 2000
1
MICROGY COGENERATION SYSTEMS, INC.
(A development stage company)
BALANCE SHEET
June 30, 2000
Assets
Current assets:
Cash and cash equivalents $ 274,866
Common stock subscriptions receivable 675,008
Prepaid expenses and other current assets 3,722
---------------
Total current assets 953,596
Property and equipment 1,461
Accumulated depreciation (46)
---------------
Net property and equipment 1,415
---------------
Total assets $ 955,011
===============
Liabilities
Current liabilities:
Accounts payable $ 70,098
Accrued liabilities 26,911
---------------
Total current liabilities 97,009
Stockholders' equity:
Common stock ($.001 par value; 75,000,000 shares
authorized; 17,994,815 issued and outstanding) 17,995
Preferred stock ($.001 par value; 25,000,000 shares
authorized; none issued and outstanding) --
Additional paid-in capital 1,393,451
Deficit accumulated during the development stage (553,444)
---------------
Total stockholders' equity 858,002
---------------
Total liabilities and stockholders' equity $ 955,011
===============
See accompanying notes.
2
MICROGY COGENERATION SYSTEMS, INC.
(A development stage company)
STATEMENT OF OPERATIONS
Inception
Year Ended through
June 30, June 30,
2000 2000
------------------------------
Revenues
Interest income $ 93 $ 93
------------------------------
93 93
Expenses
Salaries and benefits 245,286 245,286
Issuance of common stock for services 104,341 104,341
Marketing and sales 25,025 25,025
General and administrative 121,161 124,011
Other operating expenses 51,328 54,828
Depreciation expense 46 46
------------------------------
(547,187) (553,537)
------------------------------
Loss before income taxes (547,094) (553,444)
Income taxes -- --
------------------------------
Net loss $ (547,094) $ (553,444)
==============================
See accompanying notes.
3
MICROGY COGENERATION SYSTEMS, INC.
(A development stage company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the period from March 25, 1999 (inception) through June 30, 2000
Common Stock Additional Total
----------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
-----------------------------------------------------------------------------
Balance at March 25, 1999 -- $ -- $ -- $ -- $ --
Issuance of stock for cash--initial stockholders 8,112,500 8,113 -- -- 8,113
-----------------------------------------------------------------------------
Net loss -- -- -- (6,350) (6,350)
-----------------------------------------------------------------------------
Balance at June 30, 1999 8,112,500 8,113 -- (6,350) 1,763
Issuance of stock for cash to a director 5,937,500 5,937 244,063 -- 250,000
Issuance of stock to management for cash
($1,954) and services ($104,341) 1,954,000 1,954 104,341 -- 106,295
Issuance of stock for cash in private placement,
net of $28,000 expenses 1,990,815 1,991 1,045,047 -- 1,047,038
Net loss -- -- -- (547,094) (547,094)
-----------------------------------------------------------------------------
Balance at June 30, 2000 17,994,815 $17,995 $1,393,451 $(553,444) $ 858,002
=============================================================================
See accompanying notes.
4
MICROGY COGENERATION SYSTEMS, INC.
(A development stage company)
STATEMENT OF CASH FLOWS
Year Ended Inception to
June 30, June 30,
2000 2000
---------------------------------
Cash flows from operating activities
Net loss $ (547,094) $ (553,444)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 46 46
Issuance of common stock for services 104,341 104,341
Increase in prepaid expenses and other current assets (3,722) (3,722)
Increase in accounts payable 63,748 70,098
Increase in accrued liabilities 26,911 26,911
---------------------------------
Net cash used in operating activities (355,770) (355,770)
Cash flows from investing activities
Purchase of property and equipment (1,461) (1,461)
---------------------------------
Net cash used in investing activities (1,461) (1,461)
Cash flows from financing activities
Proceeds from sale of common stock 632,097 632,097
---------------------------------
Net cash provided by financing activities 632,097 632,097
Net change in cash 274,866 274,866
---------------------------------
Cash, beginning of period -- --
---------------------------------
Cash, end of period $ 274,866 $ 274,866
=================================
See accompanying notes.
5
MICROGY COGENERATION SYSTEMS, INC.
(A development stage company)
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2000
1. Summary of Significant Accounting Policies
Organization and Development Stage Activity
Microgy Cogeneration Systems, Inc. (the "Company") was incorporated in Colorado
on March 25, 1999, and is in a development stage as of June 30, 2000. The
Company is an alternative energy company developing renewable energy projects
worldwide through proprietary technologies and systems. The initial projects are
biopower facilities that process agricultural and organic wastes into renewable
energy and fuels through Company systems using proprietary technologies.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand at the balance sheet date.
Property and Equipment
Property and equipment, consisting primarily of furniture and fixtures, is
stated at cost. Depreciation is computed over the estimated useful lives of the
assets, which range from 5 to 7 years.
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 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.
Stock-Based Compensation
Pursuant to the provisions of Statement of Financial Accounting Standards No.
123, Accounting and Disclosure of Stock-Based Compensation (Statement No. 123),
the Company accounts for its stock compensation arrangements under Accounting
Principles Board No. 25, Accounting for Stock Issued to Employees (APB No. 25),
and related pronouncements. Under the provisions of APB No. 25, no compensation
expense is recognized when stock options are granted with exercise prices equal
to or greater than market value on the date of grant.
6
MICROGY COGENERATION SYSTEMS, INC.
(A development stage company)
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. Summary of Significant Accounting Policies (continued)
Common Stock Subscriptions Receivable
Common stock subscriptions receivable represent amounts due from stockholders of
the Company's common stock at the balance sheet date. All amounts were received
by the Company during July 2000.
2. Income Taxes
The Company accounts for income taxes in conformity with Statement No. 109,
Accounting for Income Taxes. Under the provisions of Statement No. 109, a
deferred tax liability or asset (net of a valuation allowance) is provided in
the financial statements by applying the provisions of applicable tax laws to
measure the deferred tax consequences of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. These temporary differences will
result in net taxable or deductible amounts in future years as a result of
events recognized in the financial statements in the current or preceding years.
The Tax Reform Act of 1986 contains provisions that limit the utilization of net
operating loss and tax credit carryforwards if there has been a "change in
ownership" as described in Section 382 of the Internal Revenue Code. Such a
change of ownership may limit the Company's utilization of its net operating
loss and tax credit carryforwards, and could be triggered by an initial public
offering or by subsequent sales of securities by the Company or its
stockholders.
Significant components of the Company's deferred tax liabilities and assets are
as follows:
June 30,
2000
--------------
Deferred tax assets:
Net operating loss carryforward $ 200,613
Allowance for uncollectible notes 9,987
--------------
Total deferred tax assets 210,600
Valuation allowance (210,600)
--------------
Net deferred taxes $ --
==============
7
MICROGY COGENERATION SYSTEMS, INC.
(A development stage company)
NOTES TO THE FINANCIAL STATEMENTS (continued)
2. Income Taxes (continued)
At June 30, 2000, the Company had net operating loss carryforwards for income
tax purposes of approximately $527,000, which expire through 2019.
3. Leases
Commencing on April 1, 2000, the Company entered into an operating lease for
office space in Golden, Colorado for a period of one year. Additionally, the
Company entered into an operating lease for office space in Mequon, Wisconsin
for a period of one year commencing on April 15, 2000.
Future minimum rental commitments under operating leases as of June 30, 2000,
all due during fiscal year 2001, were $33,000.
Rental expense was approximately $21,000 for the year ended June 30, 2000.
4. Common Stock Issuances
During March and June 1999, 8,112,500 shares of common stock were issued to
management and founders of the Company for an aggregate of $8,113 or $0.001 per
share.
In August 1999, the Company sold 5,937,500 shares for an aggregate of $250,000
or $0.042 per share.
During January and April of 2000, 1,500,000 shares and 454,000 shares,
respectively, were issued to members of management for an aggregate of $1,500
and $454, respectively. In connection with both issuances, the Company recorded
expense in relation to services of $104,341.
During June 2000, the Company completed a private placement and raised a total
of $1,047,038 on the issuance of 1,990,815 shares at a price of $0.54 per share,
net of issuance costs of $28,000.
5. Stock Options
In June 2000, the Company's Board of Directors and stockholders approved the
2000 Stock Option Plan (the 2000 Plan) pursuant to which a total of 5,000,000
shares of common stock have been reserved for issuance to eligible employees,
consultants and
8
MICROGY COGENERATION SYSTEMS, INC.
(A development stage company)
NOTES TO THE FINANCIAL STATEMENTS (continued)
5. Stock Options (continued)
directors of the Company. Awards under the 2000 Plan may consist of incentive
stock options, which qualify under Section 422 of the Internal Revenue Code, or
nonqualified stock options, which do not qualify under that provision. The 2000
Plan provides for an exercise period of up to six years with the price being
equal to the fair market value at the time the option is granted. The 2000 Plan
is administered by the Board of Directors, which has the authority to select the
individuals to whom awards will be granted and to determine whether and to what
extent stock options are to be granted, the numbers of shares of common stock to
be covered by each award, the vesting schedule of stock options, and all other
terms and conditions of each award. There were 5,000,000 shares of common stock
reserved for issuance under the 2000 Plan as of June 30, 2000. No stock options
were issued as of June 30, 2000.
6. Preferred Stock
The Company is authorized to issue up to 25,000,000 shares of nonvoting
preferred stock, $0.001 par value, with the shares to be issued in series by the
Board of Directors. The shares of preferred stock may be issued in one or more
series with such designations, rights, preferences and limitations as the
Company's Board of Directors may determine without approval of its stockholders.
As of June 30, 2000 there were no preferred stock shares issued or outstanding.
7. Warrants and Rights
In May 1999, the Company issued 885,000 warrants to stockholders of the Company.
The shareholder warrants expire in May 2002. Each warrant is exercisable for one
share of common stock at a price of $1.00 per share. The Company has the ability
to call the warrants at a price of $1.20 per common share or greater.
In December 1999, an employee was issued a warrant to purchase 800,000 shares of
common stock at an exercise price of $0.50 per share through March 2001 and
$1.00 per share through September 2002.
A major midwestern utility company, or its designee, has the right to purchase
5% of the outstanding common stock of the Company for $3,250,000 at the time the
right is exercised. This right expires on the earlier of May 4, 2001 or 30 days
prior to a public offering by the Company.
9
MICROGY COGENERATION SYSTEMS, INC.
(A development stage company)
NOTES TO THE FINANCIAL STATEMENTS (continued)
8. Related Party Transactions
Rent and telephone expenses in the amount of $9,250 were paid to a related party
having the same President and Vice President as the Company who are also
stockholders of both entities. Business opportunities relating to anaerobic
digestion, microturbines, and heating and cooling technology were purchased for
$25,000 in September 1999 from the same related party and expensed at that time.
Advances were also made to that related party under a promissory note related to
a secured advance line not to exceed $250,000. The Company had advanced $26,274
as of June 30, 2000. As of October 6, 2000 there were approximately $112,000 in
outstanding advances secured by the related party's assets. Due to the
uncertainty of collection, this amount has been reserved in full. In addition,
no interest income related to the note receivable has been recognized by the
Company.
9. Power Contracts
On May 4, 2000, the Company entered into an agreement with a major midwestern
utility company whereby the utility would buy all of the Base Power generated at
a Company facility in excess of the Company's needs at the facility. At the same
time, the Company entered into a supplemental Green Power purchase agreement
with the same utility in which the utility will pay a specified premium for all
of the renewable green energy produced at the Company's facility. The term of
both agreements is ten years.
Contracts are under negotiation with the same utility for nine or more
additional facilities. Each project represents approximately one megawatt of
power, for a total of ten or more megawatts of Green Power.
Each of the ten projects is anticipated to have a long-term lease agreement with
a host farm, typically for ten years or longer.
On July 23, 2000, the Company entered into a letter of intent with a west coast
utility for up to 15 megawatts of Green Power at facilities in southern
California.
10. European Technology Provider
On May 12, 2000, the Company entered into a revised licensing agreement with a
European technology provider whereby the Company is granted a perpetual and
exclusive license for use of certain proprietary technology in its cogeneration
facilities. This agreement superseded an initial license agreement executed in
November 1999.
10
MICROGY COGENERATION SYSTEMS, INC.
(A development stage company)
NOTES TO THE FINANCIAL STATEMENTS (continued)
10. European Technology Provider (continued)
The European technology provider will own a 5% minority equity stake in any
legal entity that owns any project developed by the Company using the European
technology provider's enhanced anaerobic digester technology wherein the Company
retains an equity position.
The agreement specifies a fixed payment amount per project to the European
technology provider for engineering work and construction drawings. The
agreement also specifies that a licensing fee as well as a monthly consulting
fee will be paid to the European technology provider.
11. Colorado Technology Provider
On September 17, 1999, the Company entered into an agreement with a Colorado
technology provider whereby the Company is granted an exclusive and perpetual
worldwide license for use of the Colorado technology provider's proprietary
microturbine in the Company's biogas or cogeneration projects. The agreement
also gives the Company the right to manufacture the microturbine.
The Company also has a nonexclusive and perpetual worldwide license for the
manufacture and use of the proprietary microturbine in a stand-alone or
utility-connected system.
11
Microgy Cogeneration Systems, Inc.
(A development stage company)
Unaudited Balance Sheet
As of March 31, 2001
ASSETS
Current Assets:
Cash and Cash Equivalents 92,321.73
Due from Affiliate 66,074.45
Allowance for Doubtful Collections (66,074.45)
Employee Travel Advances 1,500.00
Prepaid Expenses 4,187.00
-----------------------
Total Current Assets 98,008.73
-----------------------
Property and Equipment:
Total Property and Equipment 41,267.36
Accumulated Depreciation (5,579.00)
-----------------------
Net Property and Equipment 35,688.36
-----------------------
Other Assets:
Refundable Deposits 110.00
Investment in Preferred Stock 83,407.32
Investment in Microgy Projects 100,693.50
-----------------------
Total Other Assets 184,210.82
-----------------------
Total Assets 317,907.91
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable 151,101.04
Notes Payable - Shareholder 75,000.00
Payroll Due to Employees 80,381.55
-----------------------
Total Current Liabilities 306,482.59
-----------------------
Stockholders' Equity:
Common Stock 18,149.28
Additional Paid-in Capital 1,476,703.58
Accumulated Deficit (1,483,427.54)
-----------------------
Total Stockholders' Equity 11,425.32
-----------------------
Total Liabilities & Stockholders' Equity 317,907.91
=======================
Microgy Cogeneration Systems, Inc.
(A development stage company)
Unaudited Statement of Operations
For the Nine Months Ended March 31, 2001
Revenues:
Other Revenues 9,000.00
Interest Income 14,576.57
---------------------
Total Revenues 23,576.57
---------------------
Project Costs:
Project Related Legal Costs 10,784.12
Other Project Related Corporate Costs 2,096.64
---------------------
Total Project Costs 12,880.76
---------------------
Gross Profit 10,695.81
---------------------
Operating Expenses:
Salaries and Benefits:
Salaries 462,565.69
Payroll Taxes and Benefits 42,767.85
---------------------
Total Salaries and Benefits 505,333.54
---------------------
Marketing and Sales:
Business Development 32,375.22
Trade Shows 400.00
---------------------
Total Marketing and Sales 32,775.22
---------------------
General and Administrative:
Legal 35,588.36
Accounting 12,180.75
General Travel and Entertainment 31,353.65
Auto Expenses 9,433.27
Office Rents 36,003.00
Telephone 25,788.34
Office Supplies and Expenses 16,071.08
Couriers and Postage 4,484.15
Dues, Licenses, and Subscriptions 4,599.15
Computer System Expenses 15,599.12
Seminars and Training 772.50
Bad Debts 39,800.00
Miscellaneous Expense 1,521.18
---------------------
Total General and Administrative 233,194.55
---------------------
Other Expenses:
Corporate Financing Costs 15,157.00
New Technology Licensing Fees 15,000.00
Consulting Fees 120,349.00
Directors Fees 11,250.00
Other Expenses 2,089.00
---------------------
Total Other Expenses 163,845.00
---------------------
Total Operating Expenses 935,148.31
---------------------
Income (Loss) from Operations (924,452.50)
---------------------
Depreciation 5,533.00
---------------------
Income (Loss) Before Income Taxes (929,985.50)
---------------------
Income Taxes 0.00
---------------------
Net Income (Loss) (929,985.50)
=====================
Microgy Cogeneration Systems, Inc.
(A development stage company)
Unaudited Statement of Cash Flows
For the Nine Months Ended March 31, 2001
Operating Activities:
Net Income (Loss) $ (929,985.50)
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities
Depreciation 5,533.00
Employee Travel Advances (1,324.02)
Prepaid Expenses (751.00)
Accounts Payable 81,003.26
Payroll and Taxes Payable 53,470.44
-------------------
Net Cash Provided by (Used for) Operating Activities (792,053.82)
-------------------
Investing Activities:
Purchase of Equipment (39,806.47)
Investment in Affiliate (83,407.32)
Investment in Projects (100,693.50)
-------------------
Net Cash Provided by (Used for) Investing Activities (223,907.29)
-------------------
Financing Activities:
Stock Subscriptions Receivable 675,008.04
Note Payable - Stockholder 75,000.00
Issuance of Common Stock 83,407.32
-------------------
Net Cash Provided by (Used for) Financing Activities 833,415.36
-------------------
Net Change in Cash (182,545.75)
Beginning Cash 274,867.48
-------------------
Ending Cash $ 92,321.73
===================
Environmental Power Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Balance Sheet
As of March 31, 2001
EPC Microgy Pro Forma Pro Forma Combined
(prior filing) (standalone) Adjustments Note Adjustments Note Total
-----------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,427 $ 92,322 $ 103,749
Restricted cash 798,979 798,979
Receivable from utility 7,694,577 7,694,577
Other current assets 1,355,034 5,687 1,360,721
-----------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 9,860,017 98,009 - - 9,958,026
PROPERTY, PLANT AND EQUIPMENT, NET 517,629 35,688 553,317
DEFERRED INCOME TAX ASSET 724,193 724,193
LEASE RIGHTS, NET 2,273,256 2,273,256
ACCRUED POWER GENERATION REVENUES 58,053,351 58,053,351
GOODWILL 5,785,756 (C) 5,785,756
OTHER ASSETS 451,328 184,211 635,539
-----------------------------------------------------------------------------------------
$ 71,879,774 $ 317,908 $ 5,785,756 - $ 77,983,438
=========================================================================================
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 7,122,399 $ 231,483 $ 7,353,882
Other current liabilities 2,865,489 75,000 2,940,489
-----------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 9,987,888 306,483 - - 10,294,371
DEFERRED GAIN, NET 4,703,262 4,703,262
SECURED PROMISSORY NOTES PAYABLE
AND OTHER BORROWINGS 2,118,172 2,118,172
ACCRUED LEASE EXPENSES 58,053,351 58,053,351
-----------------------------------------------------------------------------------------
TOTAL LIABILITIES 74,862,673 306,483 - - 75,169,156
MINORITY INTEREST 1,405 (E) 1,405
SHAREHOLDERS' (DEFICIT) EQUITY:
Preferred Stock 100 1,528,408 (B) 1,528,508
Common Stock 125,254 18,149 (18,149) (E) 55,215 (B) 180,469
Additional Paid-in Capital 1,476,704 (1,476,704) (E) 4,212,153 (B) 4,212,153
Accumulated deficit (2,206,034) (1,483,428) 1,483,428 (E) (2,206,034)
-----------------------------------------------------------------------------------------
(2,080,680) 11,425 (11,425) 5,795,776 3,715,096
Treasury stock (456,271) (456,271)
Notes receivable from officers and board
members (445,948) (445,948)
-----------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' (DEFICIT) EQUITY (2,982,899) 11,425 (11,425) 5,795,776 2,812,877
-----------------------------------------------------------------------------------------
$ 71,879,774 $ 317,908 $ (10,020) $ 5,795,776 $ 77,983,438
=========================================================================================
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
Environmental Power Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Statement of Operations
Three Months Ended March 31, 2001
EPC Microgy Pro Forma Combined
(prior filing) (standalone) Adjustments Note Total
-----------------------------------------------------------------------------------------
POWER GENERATION REVENUES $ 13,482,891 - $ 13,482,891
COSTS AND EXPENSES:
Operating expenses 4,957,240 4,957,240
Lease expenses 6,015,022 6,015,022
General and administrative expenses 685,729 286,979 972,708
Depreciation and amortization 86,547 2,051 144,644 (C) 233,242
-----------------------------------------------------------------------------------------
11,744,538 289,030 144,644 12,178,212
OPERATING INCOME 1,738,353 (289,030) (144,644) 1,304,679
OTHER INCOME (EXPENSE):
Interest income 18,784 996 19,780
Interest expense (69,303) (69,303)
Amortization of deferred gain 77,103 77,103
-----------------------------------------------------------------------------------------
26,584 996 - 27,580
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 1,764,937 (288,034) (144,644) 1,332,259
MINORITY INTEREST 35,428 (E) 35,428
INCOME TAX EXPENSE (777,000) - 100,812 (D) (676,188)
-----------------------------------------------------------------------------------------
NET INCOME $ 987,937 $ (288,034) $ (8,404) $ 691,499
=========================================================================================
EARNINGS PER COMMON SHARE:
Basic $ 0.09 (F) $ 0.04
Diluted $ 0.09 (F) $ 0.04
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
Environmental Power Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Statement of Operations
Year Ended December 31, 2000
EPC Microgy Pro Forma Combined
(prior filing) (standalone) Adjustments Note Total
----------------------------------------------------------------------------
POWER GENERATION REVENUES $ 54,303,222 - $ 54,303,222
COSTS AND EXPENSES:
Operating expenses 22,291,069 22,291,069
Lease expenses 26,415,897 26,415,897
General and administrative expenses 3,602,960 1,052,344 4,655,304
Depreciation and amortization 415,230 3,528 578,576 (C) 997,334
----------------------------------------------------------------------------
52,725,156 1,055,872 578,576 54,359,604
OPERATING INCOME 1,578,066 (1,055,872) (578,576) (56,382)
OTHER INCOME (EXPENSE):
Interest income 736,867 13,611 750,478
Interest expense (320,641) (320,641)
Amortization of deferred gain 308,411 308,411
Sale of NOx emission credits 1,156,338 1,156,338
Other income - 9,000 9,000
----------------------------------------------------------------------------
1,880,975 22,611 - 1,903,586
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 3,459,041 (1,033,261) (578,576) 1,847,204
MINORITY INTEREST 127,091 (E) 127,091
INCOME TAX EXPENSE (1,632,233) - 361,641 (D) (1,270,592)
----------------------------------------------------------------------------
NET INCOME $ 1,826,808 $(1,033,261) $ (89,844) $ 703,703
============================================================================
EARNINGS PER COMMON SHARE:
Basic $ 0.16 (F) $ 0.04
Diluted $ 0.16 (F) $ 0.04
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
NOTE A -- BASIS OF PRESENTATION
-------------------------------
On July 23, 2001, Environmental Power Corporation (individually "EPC" or
consolidated "the Company") acquired approximately 87.7% of the outstanding
common stock of Microgy Cogeneration Systems Inc. ("Microgy") in exchange for
securities of the Company pursuant to a Share Exchange Agreement (the "Exchange
Agreement") dated as of June 20, 2001 among the Company, Microgy and the
Principal Microgy Shareholders, as defined therein. Under the terms of the
Exchange Agreement, the Company issued an aggregate of 5,521,549 shares of the
Company's common stock, $.01 par value ("Common Stock") and 197,760.7 shares of
the Company's newly designated Series B Convertible Preferred Stock, $.01 par
value (the "Preferred Stock"), to the Principal Microgy Shareholders in exchange
for 15,919,147 shares of Microgy common stock. Each share of Preferred Stock,
which votes with the Common Stock on an as converted basis, will automatically
be converted into ten shares of Common Stock upon an increase in the authorized
common stock to an amount sufficient to allow conversion of the Preferred Stock.
The exchange ratio ("Exchange Ratio") used was 0.3468495 shares of Common Stock
and 0.0124228 shares of Preferred Stock for each share of Microgy common stock.
Under the terms of the Exchange Agreement, the Company agreed to offer the
remaining shareholders of Microgy (who own an aggregate of 2,230,126 shares of
Microgy Common, warrants to purchase 885,000 shares of Microgy common stock and
options to purchase 290,000 shares of Microgy common stock) an opportunity to
exchange their Microgy securities for EPC securities based on the Exchange
Ratio. On July 23, 2001, one of the Principal Microgy Shareholders also
exchanged a warrant to purchase 800,000 shares of Microgy common stock for a
warrant to purchase securities of the Company based on the Exchange Ratio. The
exercise price for the warrant to purchase securities of the Company exceeded
the estimated market value of the Company's common stock on the date of the
exchange.
Solely for purposes of this presentation, these unaudited combined condensed
financial statements have been prepared as if Microgy were combined with EPC and
its other subsidiaries into one reporting entity. The purchase price paid by EPC
for Microgy's net assets has been pushed down to the subsidiary. The portion of
the purchase price not allocated to assets or liabilities has been recorded as
goodwill (See Note B).
The accompanying unaudited pro forma combined condensed financial statements of
the Company have been prepared in accordance with the instructions to Form 10-Q
and Regulation S-X and do not include all of the information and footnotes
required by generally accepted accounting principles for annual financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. For further information, refer to the consolidated financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2000.
NOTE B - PURCHASE PRICE
-----------------------
For purposes of the unaudited pro forma combined condensed financial statements,
the purchase price of approximately 87.7% of the outstanding common stock of
Microgy was calculated as follows:
Total
Common Preferred Purchase Price
------ --------- --------------
EPC shares issued as consideration 5,521,549 197,760.7
Market price per share $0.773 $7.73
---------- -----------
Total Consideration Paid $4,267,368 $1,528,408 $5,795,776
========== ========== ==========
Market prices per share were based on the average closing market price of EPC's
common stock from June 18, 2001 through June 27, 2001. Each preferred share is
convertible to ten common shares and votes with common shares on an as converted
basis. Therefore, the market price for each preferred share was estimated to be
ten times the market price for each common share.
NOTE C -- GOODWILL
------------------
For purposes of the unaudited pro forma combined condensed financial statements,
the Company has allocated 100% of the purchase price which was not allocable to
net assets to goodwill. Goodwill, which is being amortized on a straight-line
basis over ten years, was determined as follows:
Total Purchase Price of the 87.7% interest in Microgy $5,795,776
Estimated fair value of the net assets acquired:
87.7% of the historical book value of Microgy
as of March 31, 2001 (10,020)
-------------
Estimated Goodwill as of March 31, 2001 $5,785,756
=============
The Company reported amortization of goodwill of $578,576 and $144,644 in its
unaudited pro forma combined condensed statements of operations for the year
ended December 31, 2000 and the three months ended March 31, 2001, respectively.
The Company is still in the process of evaluating its acquired intellectual
property for the purpose of separately identifying, valuing and providing
meaningful disclosures of each identifiable intangible asset. After such
evaluation, the Company will provide further information about its intangible
assets.
NOTE D - INCOME TAXES
---------------------
Microgy is a development stage company which currently does not report income
taxes on a standalone basis. For purposes of the unaudited pro forma combined
condensed financial statements, the Company has reported an income tax benefit
representing 35% of Microgy's loss before income taxes. This amount represents
the Company's estimated savings of Federal and certain state income taxes from
including Microgy's operations in a combined tax return.
NOTE E - MINORITY INTEREST
--------------------------
The Company has a 12.3% minority interest of Microgy shareholders who were not a
party to the Exchange Agreement. For purposes of the unaudited pro forma
combined condensed financial statements, the Company has made the following pro
forma adjustments:
. The Company eliminated 100% of the Microgy equity and reported 12.3% of
such equity as a minority interest on its Pro Forma Combined Condensed
Balance Sheet as of March 31, 2001.
. The Company reported 12.3% of Microgy's loss before income taxes as a
minority interest under the caption other income in its Pro Forma Combined
Condensed Statements of Operations for the three months ended March 31,
2001 and the year ended December 31, 2000.
NOTE F -- EARNINGS PER COMMON SHARE
-----------------------------------
The Company computes its earnings per common share using the treasury stock
method in accordance with SFAS No. 128, "Earnings per Share". The Company
computes basic earnings per share by dividing net income for the period by the
weighted average number of shares of common stock outstanding during the period.
For purposes of calculating diluted earnings per share, the Company assumes the
conversion of its Series B Convertible Preferred Stock and considers its shares
issuable in connection with stock options to be dilutive common stock
equivalents when the exercise price is less than the average market price of the
Company's common stock for the period. The Company excludes antidilutive common
stock equivalents from the calculation of diluted earnings per share. The
following table outlines the calculation of basic earnings per share and diluted
earnings per share for the three months ended March 31, 2001 and year ended
December 31, 2000.
NOTE F -- EARNINGS PER COMMON SHARE (CONTINUED)
-----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amounts
---------------- ------------------ -------------
Three Months Ended March 31, 2001:
Income available to shareholders $ 691,499 16,928,332 $ .04
Effect of dividends to preferred stockholders (1,250)
---------------- ------------------ -------------
Basic EPS - income available to common shareholders 690,249 16,928,332 .04
Effect of dilutive securities:
Assumed conversion of Series B Preferred Stock 1,977,607
Assumed exercise of dilutive stock options 1,207
---------------- ------------------ -------------
Diluted EPS - income available to common shareholders $ 690,249 18,907,146 $ .04
================ ================== =============
Year Ended December 31, 2000:
Income available to shareholders $ 703,703 16,928,332 $ .04
Effect of dividends to preferred stockholders (5,000)
---------------- ------------------ -------------
Basic EPS - income available to common shareholders 698,703 16,928,332 .04
Effect of dilutive securities:
Assumed conversion of Series B Preferred Stock 1,977,607
Assumed exercise of dilutive stock options 2,026
---------------- ------------------ -------------
Diluted EPS - income available to common shareholders $ 698,703 18,907,965 $ .04
================ ================== =============