UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-KA
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)
The undersigned Registrant hereby amends the following item of its Current
Report on Form 8-K filed August 7, 2001, and files the further financial
statements, as set forth below.
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
(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
(6) Notes to Condensed Financial Statements
(B) PRO FORMA FINANCIAL INFORMATION
1. Pro Forma Combined Condensed Financial Statements
(1) Unaudited Pro Forma Combined Condensed Balance Sheet at
March 31, 2001, as restated
(2) Unaudited Pro Forma Combined Condensed Statements of
Operations for the Three Months Ended March 31, 2001 and Year
Ended December 31, 2000, as restated
(3) Notes to Unaudited Pro Forma Combined Condensed Financial
Statements, as restated
(C) EXHIBITS
3.02 Certificate of Designations related to the Company's newly
designated, $.01 par value, Series B Convertible Preferred
Stock. *
* Previously filed
** Refiled herewith for reader convenience
(C) EXHIBITS (CONTINUED)
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).
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 14, 2001 /s/ William D. Linehan
---------------------------
William D. Linehan
Treasurer and
Chief Financial Officer
(principal accounting officer
and authorized officer)
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
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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
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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
NINE MONTHS
ENDED INCEPTION TO
MARCH 31, 2001 MARCH 31, 2001
-------------------------------------
Revenues:
Other Revenues 9,000.00 9,000.00
Interest Income 14,576.57 14,669.82
-----------------------------------
Total Revenues 23,576.57 23,669.82
-----------------------------------
Project Costs:
Project Related Legal Costs 10,784.12 10,784.12
Other Project Related Corporate Costs 2,096.64 2,096.64
-----------------------------------
Total Project Costs 12,880.76 12,880.76
-----------------------------------
Gross Profit 10,695.81 10,789.06
-----------------------------------
Operating Expenses:
Salaries and Benefits:
Salaries 462,565.69 683,918.21
Issuance of Common Stock for Services - 104,341.00
Payroll Taxes and Benefits 42,767.85 66,701.00
-----------------------------------
Total Salaries and Benefits 505,333.54 854,960.21
-----------------------------------
Marketing and Sales:
Business Development 32,375.22 57,361.18
Trade Shows 400.00 400.00
-----------------------------------
Total Marketing and Sales 32,775.22 57,761.18
-----------------------------------
General and Administrative:
Legal 35,588.36 78,788.00
Accounting 12,180.75 15,264.75
General Travel and Entertainment 31,353.65 31,353.65
Auto Expenses 9,433.27 16,488.46
Office Rents 36,003.00 56,660.00
Telephone 25,788.34 39,575.43
Office Supplies and Expenses 16,071.08 21,109.27
Couriers and Postage 4,484.15 5,369.57
Dues, Licenses, and Subscriptions 4,599.15 5,014.15
Computer System Expenses 15,599.12 16,748.62
Seminars and Training 772.50 772.50
Bad Debts 39,800.00 66,074.45
Miscellaneous Expense 1,521.18 2,774.86
-----------------------------------
Total General and Administrative 233,194.55 355,993.71
-----------------------------------
Other Expenses:
Corporate Financing Costs 15,157.00 16,933.00
New Technology Licensing Fees 15,000.00 15,000.00
Consulting Fees 120,349.00 147,849.00
Purchased Opportunities - 25,000.00
Directors Fees 11,250.00 12,500.00
Other Expenses 2,089.00 2,640.50
-----------------------------------
Total Other Expenses 163,845.00 219,922.50
-----------------------------------
Total Operating Expenses 935,148.31 1,488,637.60
-----------------------------------
Loss from Operations (924,452.50) (1,477,848.54)
-----------------------------------
Depreciation 5,533.00 5,579.00
-----------------------------------
Loss Before Income Taxes (929,985.50) (1,483,427.54)
-----------------------------------
Income Taxes - -
-----------------------------------
Net Loss (929,985.50) (1,483,427.54)
===================================
MICROGY COGENERATION SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED STATEMENT OF CASH FLOWS
NINE MONTHS
ENDED INCEPTION TO
MARCH 31, 2001 MARCH 31, 2001
---------------------------------------
Operating Activities:
Net Loss $ (929,985.50) $ (1,483,427.54)
Adjustments to Reconcile Net Loss to
Net Cash Used for Operating Activities
Depreciation 5,533.00 5,579.00
Issuance of Common Stock for Services - 104,341.00
Employee Travel Advances (1,324.02) (1,500.00)
Prepaid Expenses (751.00) (4,297.00)
Accounts Payable 81,003.26 151,101.04
Payroll and Taxes Payable 53,470.44 80,381.55
---------------------------------------
Net Cash Used for Operating Activities (792,053.82) (1,147,821.95)
---------------------------------------
Investing Activities:
Purchase of Equipment (39,806.47) (41,267.36)
Investment in Affiliate (83,407.32) (83,407.32)
Investment in Projects (100,693.50) (100,693.50)
---------------------------------------
Net Cash Used for Investing Activities (223,907.29) (225,368.18)
---------------------------------------
Financing Activities:
Issuance of common stock 675,008.04 1,307,104.54
Note Payable - Stockholder 75,000.00 75,000.00
Issuance of Common Stock to affiliate 83,407.32 83,407.32
---------------------------------------
Net Cash Provided by Financing Activities 833,415.36 1,465,511.86
---------------------------------------
Net Change in Cash (182,545.75) 92,321.73
Beginning Cash 274,867.48 -
---------------------------------------
Ending Cash $ 92,321.73 $ 92,321.73
=======================================
MICROGY COGENERATION SYSTEMS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2001
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 March 31, 2001. 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, fixtures, and
computer equipment, 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 accounting principles
generally accepted in the United States 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 the grant.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
(Statement No. 133), which established accounting and reporting standards for
derivative instruments, derivative instruments embedded in other contracts, and
hedging activities. Statement No. 133 requires that entities recognize all
derivative instruments as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The adoption of
Statement No. 133 did not have a material impact on the Company's unaudited
condensed financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued two new
pronouncements: Statement of Financial Accounting Standards No. 141, Business
Combinations (Statement No. 141), and Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (Statement No. 142).
Statement No. 141 is effective as follows: a) use of the pooling-of-interest
method is prohibited for business combinations initiated after June 30, 2001;
and b) the provisions of Statement No. 141 also apply to all business
combinations accounted for by the purchase method that are completed after
June 30, 2001 (that is, the date of the acquisition is July 2001 or later).
There are also transition provisions that apply to business combinations
completed before July 1, 2001, that were accounted for by the purchase method.
The most significant changes made by Statement No. 142 are: a) goodwill and
indefinite-lived intangible assets will be tested for impairment at least
annually; b) goodwill will no longer be amortized to income; and c) the
amortization period of intangible assets with finite lives will no longer be
limited to forty years. Statement No. 142 is effective for fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized in an entity's statement of financial position at that date,
regardless of when those assets were initially recognized. The Company is
currently evaluating the provisions of Statement No. 141 and Statement No. 142
and has not adopted such provisions in its March 31, 2001 unaudited condensed
financial statements.
2. INCOME TAXES
The Company accounts for income taxes in conformity with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (Statement No. 109).
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 for
March 31, 2001 are as follows:
Deferred tax assets:
Net operating loss carryforward $ 563,700
Allowance for uncollectible notes 25,100
---------
Total deferred tax assets 588,800
Valuation allowance (588,800)
---------
Net deferred taxes $ -
=========
At March 31, 2001, the Company had net operating loss carryforwards for income
tax purposes of approximately $1,417,000, which expire through 2020.
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. After expiration of
the lease, the Company continues to lease the office space on a month-to-month
basis.
On December 1, 2000, the Company entered into an operating lease for office
space in Mequon, Wisconsin for a period of one year. The Company was released
from this lease effective August 6, 2001. The Company's Wisconsin office
currently is in Thiensville, Wisconsin and on a month-to-month rental basis.
Rental expense was approximately $36,000 for the nine months ended March 31,
2001.
4. COMMON STOCK ISSUANCES
In July 2000, pursuant to a share exchange agreement, the Company issued 154,458
shares of its common stock and warrants in exchange for 797,299 shares of
preferred stock of a related party. This investment transaction was recorded at
$83,407.
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 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.
Incentive stock options totaling 290,000
shares have been issued to employees under the Plan. There were 4,710,000 shares
of common stock still reserved for issuance under the 2000 Plan as of March 31,
2001.
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 March 31, 2001 there were no preferred shares issued or outstanding.
7. WARRANTS
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. The warrant has been revised to extend
the $0.50 per share exercise price through May 31, 2002 and $1.00 per share
exercise price from June 1, 2002 through September 30, 2002.
8. RELATED PARTY TRANSACTIONS
As disclosed in Note 4, during July 2001, the Company acquired all of the
preferred stock of a related party whose President and Vice President are also
officers and stockholders of the Company.
Advances have also been made to that related party under a promissory note
related to a secured advance line not to exceed $250,000. The Company had
advanced $66,074 as of March 31, 2001. 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.
On March 30, 2001, the Company borrowed $75,000 from a Company officer and
stockholder under a promissory note related to an unsecured advance line not to
exceed $200,000. The note has an interest rate of 8%. The Company had borrowed
$75,000 under this note as of March 31, 2001.
9. INVESTMENT IN PROJECTS
Investment in Projects as of March 31, 2001, consists primarily of the cost of
engineering work related to the Company's future biopower generating projects.
The Company may, if appropriate, recognize the cost of this engineering work in
the future as a portion of its equity
contribution to these projects. The cost of this engineering work totaled
$100,694 as of March 31, 2001.
10. POWER CONTRACTS
On December 18, 2000, the Company, through a wholly-owned LLC entity, entered
into an agreement with a West Coast utility for up to 15 megawatts of green
power at facilities in central California.
11. 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.
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.
12. 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 stand-alone or utility-connected systems.
13. ADEQUACY OF DISCLOSURE
The accompanying unaudited condensed financial statements of the Company have
been prepared by management and may 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. The results of operations for the nine months ended March 31,
2001 are not necessarily indicative of results to be expected for the year
ending June 30, 2001. For further information, refer to the financial
statements and footnotes included in the Company's Audited Financial Statements
for the Period from March 25, 1999 (inception) through June 30, 2000.
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET (AS RESTATED)
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 6,186,827 (C) 6,186,827
OTHER ASSETS 451,328 184,211 635,539
---------------------------------------------------------------------------------------
$ 71,879,774 $ 317,908 $ 6,186,827 - $ 78,384,509
=======================================================================================
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 7,122,399 $ 231,483 400,000 (B) $ 7,753,882
Other current liabilities 2,865,489 75,000 2,940,489
---------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 9,987,888 306,483 - 400,000 10,694,371
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 - 400,000 75,569,156
MINORITY INTEREST 1,405 (E) 1,405
SHAREHOLDERS' (DEFICIT) EQUITY:
Preferred Stock 100 1,528,690 (B) 1,528,790
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) 4,212,942 (B) 4,212,942
Accumulated deficit (2,206,034) (1,483,428) 1,483,428 (E) (2,206,034)
---------------------------------------------------------------------------------------
(2,080,680) 11,425 (11,425) 5,796,847 3,716,167
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) 5,796,847 2,813,948
---------------------------------------------------------------------------------------
$ 71,879,774 $ 317,908 $ (10,020) $ 6,196,847 $ 78,384,509
=======================================================================================
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
Environmental Power Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Statement of Operations (As Restated)
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 2,051 154,671 (C) 243,269
---------------------------------------------------------------------------------------
11,744,538 289,030 154,671 12,188,239
OPERATING INCOME 1,738,353 (289,030) (154,671) 1,294,652
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) (154,671) 1,322,232
MINORITY INTEREST 35,428 (E) 35,428
INCOME TAX EXPENSE (777,000) - 100,812 (D) (676,188)
---------------------------------------------------------------------------------------
NET INCOME $ 987,937 $ (288,034) $ (18,431) $ 681,472
=======================================================================================
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 (AS RESTATED)
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 3,528 618,683 (C) 1,037,441
----------------------------------------------------------------------------
52,725,156 1,055,872 618,683 54,399,711
OPERATING INCOME 1,578,066 (1,055,872) (618,683) (96,489)
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) (618,683) 1,807,097
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) $ (129,951) $ 663,596
============================================================================
EARNINGS PER COMMON SHARE:
Basic $ 0.16 (F) $ 0.04
Diluted $ 0.16 (F) $ 0.03
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (AS
RESTATED)
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 stock, 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 C).
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 for 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
---------- ----------
Fair Market Value of Stock Issued $4,268,157 $1,528,690 $5,796,847
Estimated Direct Acquisition Costs 400,000
----------
Total Purchase Price $6,196,847
==========
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.
Direct acquisition costs were estimated at the time of making this report and
will be revised in future reports when actual cost information is available.
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 tangible 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 $6,196,847
Estimated fair value of the net tangible 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 $6,186,827
==========
The Company reported amortization of goodwill of $618,683 and $154,671 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 attributable to shareholders $681,472 16,928,332 $.04
Effect of dividends to preferred stockholders (1,250)
-------- ---------- ----
Basic EPS - Income attributable to common shareholders 680,222 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 attributable to common shareholders $680,222 18,907,146 $.04
======== ========== ====
YEAR ENDED DECEMBER 31, 2000:
-----------------------------
Income attributable to shareholders $663,596 16,928,332 $.04
Effect of dividends to preferred stockholders (5,000)
-------- ---------- ----
Basic EPS - Income attributable to common shareholders 658,596 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 attributable to common shareholders $658,596 18,907,965 $.03
======== ========== ====
NOTE G - RESTATEMENT
--------------------
The pro forma financial statements have been restated from those previously
filed principally to increase the purchase price of Microgy to include estimated
direct costs of the acquisition. This resulted in an increase to goodwill and an
increase to amortization expense for the three months ended March 31, 2001 and
the year ended December 31, 2001.