UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended June 30, 1998.
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 1-12738
ONSITE ENERGY CORPORATION
(Name of small business issuer in its charter)
Delaware 33-0576371
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
701 Palomar Airport Road, Suite 200
Carlsbad, California 92009
(Address of principal executive offices) (Zip Code)
(760) 931-2400
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Class A Common Stock N/A
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes |_| No |X|
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |_|
State issuer's revenues for its most recent fiscal year..............$12,267,148
State the aggregate market value of the voting and non-voting common equity held
by non affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days........$1,726,887 as of November 2, 1998.
The number of shares of Common Stock outstanding as of November 2, 1998 is
18,457,253.
DOCUMENTS INCORPORATED BY REFERENCE None
<PAGE>2
Item 1. Description of Business
Introduction. Onsite Energy Corporation, a Delaware corporation dba ONSITE SYCOM
Energy Corporation ("the Company"), was formed pursuant to a business
reorganization effective February 15, 1994 (the "Reorganization"), between
Western Energy Management, Inc., a Delaware corporation formed in 1991 ("WEM"),
and Onsite Energy Corporation, a California corporation formed in 1982
("Onsite-Cal"). Under the Reorganization, Onsite-Cal merged with and into the
Company, and a newly-formed subsidiary of the Company merged with and into WEM,
which survived and became a wholly-owned subsidiary of the Company. The Company
accounted for this transaction as a purchase of Onsite-Cal.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995. With the exception of historical facts
stated herein, the matters discussed in this annual report are "forward looking"
statements that involve risks and uncertainties that could cause actual results
to differ materially from projected results. Such "forward looking" statements
include, but are not necessarily limited to, statements regarding anticipated
levels of future revenue and earnings from operations of the Company, projected
costs and expenses related to the Company's energy services agreements, and the
availability of future debt and equity capital on commercially reasonable terms.
Factors that could cause actual results to differ materially include, in
addition to the other factors identified in this report, the cyclical and
volatile price of energy, the inability to continue to contract sufficient
customers to replace contracts as they become completed, unanticipated delays in
the approval of proposed energy efficiency measures by the Company's customers,
delays in the receipt of, or failure to receive necessary governmental or
utility permits or approvals, or the renewals thereof, risks and uncertainties
relating to general economic and political conditions, both domestically and
internationally, changes in the law and regulations governing the Company's
activities as an energy services company and the activities of the nation's
regulators and public utilities seeking energy efficiency as a cost effective
alternative to constructing new power generation facilities, results of project
specific and company working capital and financing efforts and market
conditions, and other risk factors detailed in this annual report. Readers of
this report are cautioned not to put undue reliance on "forward looking"
statements which are, by their nature, uncertain as reliable indicators of
future performance. The Company disclaims any intent or obligation to publicly
update these "forward looking" statements, whether as a result of new
information, future events or otherwise.
Business of Issuer. The Company is an energy services company (an "ESCO") that
assists energy customers in lowering their energy bills by developing,
engineering, installing, owning and operating efficient, environmentally sound
energy efficiency and power supply projects, and advising customers on the
purchasing of energy in deregulating energy markets. The Company offers its
services to industrial, commercial, institutional and residential customers. By
combining development, engineering, analysis, and project and financial
management skills, the Company provides a complete package of services, ranging
from feasibility assessment through construction and operation for projects
incorporating energy efficient lighting, energy management systems, heating,
ventilation and air conditioning ("HVAC") upgrades, cogeneration and other
energy efficiency measures. The Company has been accredited by the National
Association of Energy Service Companies ("NAESCO"). In addition, the Company
offers professional consulting services in the areas of direct access planning,
market assessment, business strategies, public policy analysis, and
environmental impact feasibility studies. It is the Company's mission to save
its customers money and improve the quality of the environment through
independent energy solutions.
Subsidiaries/Partnerships. Substantially all of the Company's revenues are
generated through energy services and consulting services. The Company's
subsidiaries and partnerships are as follows:
<PAGE>3
SYCOM ONSITE Corporation. Effective June 30, 1998, the Company, through
its newly-formed wholly-owned subsidiary SYCOM ONSITE Corporation ("SO
Corporation"), acquired all of the assets and specific liabilities of
privately-held SYCOM Enterprises, L.L.C. ("SYCOM"), an independent ESCO whose
affiliate, SYCOM Corporation, is, like the Company, accredited by NAESCO. SO
Corporation acquired the project assets and specific liabilities of SYCOM in
exchange for 1,750,000 shares of the Company's Class A Common Stock. In
addition, under a Sale and Noncompetition Agreement, SO Corporation acquired the
right to the services and expertise of all of the employees of SYCOM Corporation
and SYCOM Enterprises, L.P. ("SYCOM LP"), in exchange for 157,500 shares of
non-voting, non-dividend Series D Convertible Preferred Stock of the Company
("Series D Stock") that may be converted in the aggregate into 15,750,000 shares
of the Company's Class A Common Stock. The Series D Stock is held in escrow
under an Escrow Agreement, and will be released when the Company's Class A
Common Stock reaches $2.00 per share and annualized after-tax earnings total
$0.15 per share (assuming that the shares of Class A Common Stock into which the
Series D Stock is convertible is outstanding) over four consecutive quarters,
and certain specified debts of SYCOM Corporation and SYCOM LP have been
satisfied. Pursuant to the terms of a Share Repurchase Agreement, the Company
may repurchase the escrowed Series D Stock for $0.001 per share if: (i) the Sale
and Noncompetition Agreement is terminated; and (ii) after June 30, 2000, such
repurchase is justifiable based on the reasonable business judgment of the
Company's Board of Directors considering the following factors: (a) the key
employees of SYCOM Corporation no longer are being retained by SO Corporation;
and (b) there is no reasonably foreseeable likelihood that all of the following
conditions shall be satisfied: specific debts to a third party and the Company
will be satisfied, and both share performance benchmarks described in the Escrow
Agreement will be achieved. These share values and earnings thresholds increase
by 10 percent per year after December 31, 1999. The Company also may repurchase
the escrowed Series D Stock during the 30 day period prior to the scheduled
release date (June 30, 2006) if any one of the specified conditions for release
of the Series D Stock has not been satisfied. At such time as the Series D Stock
is released from the escrow to SYCOM Corporation, up to three additional members
of the Company's Board of Directors may be designated by SYCOM Corporation. Two
members designated by SYCOM have been added to the Company's Board of Directors.
The acquisition added offices in New Jersey and Washington D.C., and added
another office in California, giving the Company national coverage.
Lighting Technology Services, Inc. On June 13, 1998, the Company
completed the acquisition of Lighting Technology Services, Inc. ("LTS"), a Santa
Ana, California based lighting services company. In exchange for all of the
outstanding shares of LTS, the Company initially issued a total of 690,000
shares of the Company's Class A Common Stock plus $500,000 to the former
stockholders of LTS. The former LTS stockholders also may receive a one-time
earn-out payment in 1999, payable in either cash, or, at the Company's option,
Class A Common Stock. The earn-out payment will be based on LTS's actual pre-tax
earnings contribution for a 12 month period ending March 31, 1999. As a
wholly-owned subsidiary of the Company, LTS will continue to pursue independent
lighting services opportunities in commercial, industrial and educational
markets while also providing lighting subcontractor services to the Company and
other ESCOs.
Onsite Business Services, Inc. In October 1997, the Company acquired
Westar Business Services, Inc. ("WBS"), an indirect wholly-owned subsidiary of
Western Resources, Inc. ("Western Resources") (NYSE:WR). As part of the
transaction, WBS was renamed Onsite Business Services, Inc. ("OBS"). The
purchase price was 1,700,000 shares of the Company's Class A Common Stock issued
upon closing to Westar Capital, Inc., a wholly-owned subsidiary of Western
Resources ("Westar Capital"), with an additional 800,000 shares of Class A
Common Stock being released to Westar Capital from an escrow in March 1998 when
certain conditions set forth in the acquisition documents were satisfied. With
its primary office in Topeka, Kansas, OBS provides utility services and
industrial water services primarily in the states of Kansas, Missouri and
Oklahoma.
<PAGE>4
Onsite/Mid-States, Inc. In February 1998, OBS, via its newly-formed
wholly-owned subsidiary Onsite/Mid-States, Inc. ("OMS"), acquired the operating
assets of Mid-States Armature Works, Inc. ("Mid-States Armature"), for $290,000.
Mid-States Armature has been in business for 45 years providing specialized
medium and high voltage electrical fabrication, installation, maintenance and
repair services to municipal utility customers and others primarily in the
states of Kansas, Nebraska, Missouri, Iowa and Oklahoma. OMS is located in
Salina, Kansas.
Onsite Energy de Panama, S.A. On April 8, 1998, the Company formed
Onsite Energy de Panama, S.A. This Panamanian corporation was formed in order to
facilitate the development and implementation of potential projects in Panama
and Latin America.
Western Energy Management, Inc. As discussed above, via the
Reorganization, WEM became the wholly-owned subsidiary of the Company. While WEM
was engaged in the business of providing comprehensive energy management
services designed to reduce the utility costs of its customers, WEM's current
primary function is to monitor its remaining contracts with customers.
Television City Cogen, L.P. Prior to February 1997, the Company owned
the entire general and limited partnership interests in Television City Cogen,
L.P., a California limited partnership ("TCC"). TCC's major asset was a
1415-kilowatt (kW) cogeneration system (the "System") located at CBS Studios,
Television City in Los Angeles, California. The Company completed construction
of the System in 1988, and through TCC was responsible for the ownership,
operation, maintenance, savings verification and billing for the System, which
provides electricity, chilled water and thermal energy for the CBS Studios
complex. CBS receives discounted rates on electric and thermal energy provided
by the System based on the utility electricity natural gas rates over the 20
year term of the Energy Services Agreement between TCC and CBS. For more
information on cogeneration, see Distributed Generation/Combined Heat & Power
below. The Company sold all of its interest in TCC effective February 17, 1997.
Unless the context indicates otherwise, reference to the Company shall include
all its wholly-owned subsidiaries.
Risk Factors. In addition to other information presented in this annual report,
the following risk factors should be considered carefully in evaluating the
Company and its business. This annual report contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in this section and elsewhere in this annual report.
Loss from Operations. The Company has suffered losses from operations
for the past two fiscal years. For the years ended June 30, 1998, and 1997, the
Company had net losses of $2,218,482 and $1,388,598, respectively, and an
accumulated deficit of $19,414,842 as of June 30, 1998. During the year ended
June 30, 1998, the Company took steps to mitigate losses and enhance its future
viability. Management believes that the Company will be able to generate
additional revenues and operating efficiencies through its acquisitions. No
assurance, however, can be given that losses and negative cash flow will not
continue in the future.
Risks Associated with Expansion. As previously discussed, during the
year ended June 30, 1998, the Company made a series of acquisitions of
businesses including SO Corporation, LTS, OBS and OMS. The Company believes that
the acquisitions of these businesses will offer opportunities for long-term
efficiencies and certain economies of scale in operations and expansion of
customers that should positively affect future operating results of the Company.
As a result of these acquisitions, the Company's
<PAGE>5
number of personnel substantially increased, and the Company's primary
operations on the West Coast expanded to the East Coast and Midwest. There are
inherent risks associated with expansion including integrating each business
under one system, difficulties in staffing and managing a national operation,
and developing an infrastructure and philosophy to support a national operation.
The operations of the Company will be more complex than the individual
businesses acquired, and the combination and continued operation of their
business operations will present challenges for management. Accordingly, no
assurances can be given that the process of effecting the business combination
can be effectively managed to realize the operational efficiencies and increased
customer base. No assurances can be given that one or more of such factors will
not have a material adverse effect on the Company's future national operation
and consequently, on the Company's business, financial condition and operating
results.
Control of the Company. The directors, officers and shareholders that
own more than 5 percent of the Company's Class A Common Stock beneficially own
approximately 81.29 percent of the Company in the aggregate. As a result of
their ownership, such shareholders will have substantial control of all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership also may
have the effect of delaying or preventing a change in control of the Company. In
addition, as discussed in Subsidiaries/Partnership above, in connection with the
acquisition of the assets and certain liabilities of SYCOM, the Company issued
157,500 shares of Series D Stock to SYCOM Corporation. The Series D Stock may be
converted into 15,750,000 shares of the Company's Class A Common Stock and
currently is held in escrow. The Series D Stock may be released to SYCOM
Corporation provided that the Company achieves certain net income thresholds and
the Company's Class A Common Stock trades above $2.00. If the Company's net
income and price of its Class A Common Stock meets these thresholds and other
applicable conditions are met, SYCOM Corporation would beneficially own
approximately 46.04 percent of the Company (based upon current ownership).
Dependence on Key and New Customers. For the fiscal years ended June 30,
1998, and 1997, three customers in the aggregate accounted for 31 percent and 32
percent, respectively, of the Company's total revenues. Historically, large
contracts account for a significant portion of the Company's total revenues.
Although the Company usually receives revenues pursuant to long-term energy
services and maintenance agreements after completion of the project, the
majority of the revenues are from projects that are not recurring. Therefore,
the Company is dependent on finding, financing and entering into contracts with
new customers.
Revenues Dependent upon Phased Approvals from Government Agencies and
Customers. Pursuant to its energy efficiency services agreements, gross revenues
for the Company are dependent upon phased approvals by customers of projects and
budgets. In addition, because many of the Company's contracts are with local,
public agencies, the Company's contracts are subject to public hearings and
local government approval. Therefore, even though the Company has entered into
energy efficiency projects that may provide significant revenues to the Company,
the realization of the budgeted revenue is dependent upon the outcome of energy
audits and the approval of each phase of the work to be performed. Further, many
proposed contracts are subject to approval by local government agencies which
may meet only periodically and may delay approval of the construction contracts
due to other agenda items. A significant delay in the realization of revenue
could have a material adverse impact on the business of the Company and its
operating results.
Possible Need for Additional Working Capital and Potential Dilution to
Existing Shareholders. As a result of existing and potential contracts, and
cost-cutting measures, the Company believes that it will be able to generate
future cash flow sufficient to fund future operations. However, in the event it
is unable to generate cash flow from operations or its contracts are delayed,
the Company may need to secure additional financing to further develop and
provide working capital for its business. In addition, the expanding
<PAGE>6
market for energy services may require the need for additional capital to
finance the Company's growth. As discussed in Major Events, Contractors and
Customers below, pursuant to a stock subscription agreement entered into by the
Company, the Company has the right to require Westar Capital to purchase an
additional 200,000 shares of the Company's Series C Convertible Preferred Stock
("Series C Stock") for $1,000,000. Each share of Series C Stock is convertible
into five shares of the Company's Class A Common Stock. Therefore, although the
Company believes that additional financing will be available, if necessary, the
exercise of the right to obtain the financing will have an ownership dilution
effect on the existing shareholders of the Company.
Dependence on Key Personnel. The Company is highly dependent on its
officers and other key personnel. The future success of the business of the
Company will depend upon the ability to attract, retain and motivate key
employees. Specifically, the loss of Richard T. Sperberg, S. Lynn Sutcliffe,
Frank J. Mazanec, Keith G. Davidson, Richard L. Wright, Dominick Aiello, Glenn
O. Steiger or Roger Dower may adversely affect the Company's business.
Limited Market for Class A Common Stock. Although the Company's Class A
Common Stock is quoted on the OTC Bulletin Board, because of the Company's small
capitalization and public float, there is limited liquidity for its Class A
Common Stock. Therefore, shareholders may have a difficult time selling their
Class A Common Stock without adversely affecting the price of such stock.
Penny Stock Regulations. The Securities and Exchange Commission (the "SEC")
has adopted regulations which generally define "penny stock" to be any equity
security that has a market price (as defined) less than $5.00 per share subject
to certain exceptions. The Company's securities may be covered by the penny
stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
accredited investors (generally, institutions with assets in excess of
$5,000,000 or individuals with net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouse). For
transactions covered by this rule, the broker-dealers must make a special
suitability determination for the purchase and receive the purchaser's written
agreement of the transaction prior to the sale. Consequently, the rule may
affect the ability of broker-dealers to sell the Company's securities and also
affect the ability of purchasers to sell their shares in the secondary market.
Competition. The energy efficiency business is highly competitive. As
discussed in Competition below, the Company will compete with other firms,
including utility affiliates, for a limited number of large contracts.
Competitors generally have substantially greater financial resources than the
Company and may expend considerably larger sums than the Company on marketing.
The successful operation of the Company will depend on its ability to meet
future competition.
Governmental Regulation. As discussed in Governmental
Regulations Environmental Laws below, the Company will be subject to rates and
regulations of the Environmental Protection Agency, the Occupational Safety and
Health Administration and other state, county, municipal and federal agencies.
While the business of the Company will not entail any unusual or significant
environmental risks, the projects of the Company may involve "indirect"
environmental risks from its subcontractors handling or removal of hazardous
waste materials as defined under federal and state law. The Company does not
foresee having to incur material capital expenditures to comply with
environmental laws and regulations.
Environmental Risks. As discussed in Governmental
Regulations Environmental Laws below, the energy efficiency projects of the
Company may involve the handling and/or removal of hazardous substances such as
polychlorinated biphenals (PCBs), asbestos or asbestos-containing materials
(ACMs), urea-formaldehyde paneling, fluorescent lamps or HID lamps, and the
emissions from cogeneration. The Company intends to contract, or have their
customers and/or subcontractors contract, with certified hazardous
<PAGE>7
waste removal companies whenever hazardous waste must be handled, stored,
transported or disposed of, and to obtain indemnification from both the customer
and the subcontractors for any liability the Company may incur if there is not
full and strict compliance with all applicable federal, state and local laws and
ordinances, and regulations thereunder, for the protection of health, safety,
welfare and the environment. Because the Company intends to engage a third party
to handle and remove hazardous waste, the Company believes that potential
liability for environmental risks is not material.
No Dividends on Class A Common Stock. It is anticipated that no
dividends will be declared by the Company on its Class A Common Stock in the
near future. Shares of Series C Stock are entitled to an annual dividend at the
rate of 9.75 percent of the "liquidation preference" of $5.00 per share per
annum out of any funds legally available for payment of such dividends. During
the first two years, the dividends on the Series C Stock may be paid through the
issuance of shares of the Company's Series C Stock.
Major Events, Contracts and Customers. In addition to the acquisitions mentioned
above, the following is a list of major events and contracts that occurred in
the fiscal year ended June 30, 1998 and how they are significant to the last two
fiscal years' revenues.
Westar Capital $2,000,000 Private Placement. In October 1997, the
Company completed a private placement of $2,000,000 of its securities to Westar
Capital, a wholly-owned subsidiary of Western Resources. The private placement
consisted of 2,000,000 shares of the Company's Class A Common Stock at $0.50 per
share and 200,000 shares of the Company's Series C Stock at $5.00 per share.
Each share of the Series C Stock is convertible into five shares of the
Company's Class A Common Stock, and earns a dividend of 9.75 percent per annum,
payable quarterly. Dividends are payable in additional shares of Series C Stock
or cash at the option of the Company for two years. Thereafter, dividends are
payable in cash. Westar Capital also has the right to purchase up to 2,000,000
additional shares of the Company's Class A Common Stock at market price, but not
below $1.00 or above $2.00 per share, by the end of calendar 1998. Further, the
Company may require Westar Capital to purchase up to 400,000 shares of Series C
Stock for $2,000,000 before December 31, 1998. Subsequent to its fiscal year
end, on July 14, 1998, the Company exercised its right to require Westar Capital
to purchase 200,000 of these additional shares of Series C Stock for $1,000,000.
Sedro Woolley, Washington. In July and August 1997, the Company entered
into an energy services agreement with the State of Washington, Department of
General Administration, Division of Engineering and Architecture (the "State")
to provide energy efficiency equipment at the State's multi-purpose facility at
Sedro Woolley, Washington. The Company's agreement with the State provided for
gross contract revenue of approximately $500,000 on the first phase of the
project, which was the replacement of two boilers expected to save the State
approximately $166,000 per year in operation and maintenance costs. In addition
to the installation of equipment, the Company provided commissioning and
training services to the facility's staff. The second phase of the project
provided for approximately $800,000 in gross contract revenues for the Company,
and consisted of the high efficiency lighting retrofit of 21 buildings, the
installation of energy efficiency electric motors, HVAC improvements and the
installation of an energy management system. The agreement also calls for the
Company to provide monitoring and verification services for a 10 year period
after the project is complete. The revenues for fiscal year ended 1997 and 1998
were $60,902 and $1,165,000 respectively.
Unified School District No. 500, Wyandotte County, Kansas. In March
1998, the Company entered into an energy services agreement with Unified School
District No. 500 (the "District") in Wyandotte County, Kansas. Total project
construction revenues will be approximately $6,000,000. Construction is expected
to be substantially complete by December 1998. OBS initially developed the
project, which includes the installation of multiple energy efficiency measures,
including lighting retrofits, energy management systems, chiller and furnace
replacements, and variable speed motor controllers. The Company
<PAGE>8
estimates that the project should result in savings to the District of
approximately $7,775,000 in energy and operating costs over the 10 year term of
the agreement. The Company also will provide training, post-installation
measurement and savings verification services, and steam trap maintenance repair
services for the term of the agreement following the completion of construction
of the project. The Company's future revenues associated with these ongoing
services are estimated at approximately $818,000 over the 10 year contract
period. Revenues for fiscal year ended June 30, 1998 were $1,376,000.
Pacific Gas and Electric Company. In December 1995, the Company signed a
demand side management ("DSM") power savings partner agreement (the "PG&E
Agreement") with Pacific Gas and Electric Company ("PG&E") for the development
and implementation of demand side resources for customers in the PG&E service
territory. Under the terms of the PG&E Agreement, the Company will identify,
design, contract for and complete energy efficiency projects that are estimated
to supply energy savings of approximately 30,000,000 kWh per year for up to
seven years. In general, the price paid by PG&E to the Company for savings will
be approximately $0.02 per kWh for energy savings and $20 per kW for demand
savings. Each host customer project is subject to approval by PG&E and the
Company. The PG&E Agreement was approved by the California Public Utilities
Commission effective August 1, 1996. The Company has signed contracts for energy
services with California State University, Fresno ("CSUF"), and a shopping mall
in Northern California, a portion of which projects are eligible for funds under
the PG&E Agreement. No revenues are recorded for this contract, but are
attributed to individual customer projects that benefit from payments pursuant
to the PG&E Agreement.
Southern California Edison Demand Side Management Energy Efficiency
Agreements. In April 1994, the Company executed a DSM contract with Southern
California Edison ("SCE") after being selected as a result of a competitive bid
solicitation (the "Onsite SCE Agreement"). The Onsite SCE Agreement required the
installation of energy efficiency measures to provide consistent, innovative and
verifiable energy savings in selected commercial, industrial and/or
institutional host customer facilities within a specific eligible SCE service
area market region. In July 1995, the Company acquired an additional, similar
DSM contract with SCE via an assignment to the Company by KENETECH Energy
Management, Inc. ("KEM"), of all of KEM's interest in the same (the "KEM SCE
Agreement"). This acquisition augmented the Onsite SCE Agreement. Both the
Onsite SCE Agreement and the KEM SCE Agreement (collectively, the "SCE
Agreements") were approved by the California Public Utilities Commission in
October 1994. The SCE Agreements provided for the implementation of energy
efficiency projects for host customers within SCE's service territory to provide
up to approximately 53 million kWh per year in measured energy savings.
The Company completed several projects in fiscal year 1997 and 1998 under the
SCE Agreements, including projects with Hughes Aircraft Company (El Segundo,
CA); West Covina Unified School District (West Covina, CA); McDonnell Douglas
Corporation (Long Beach, CA); Foothill Presbyterian Hospital (Glendora, CA);
Mobil Oil Corporation (Torrance, CA), Tecstar, Inc. (City of Industry, CA), TRW,
Inc. (Redondo Beach, CA); The Aerospace Corporation (El Segundo, CA); Southern
California Health Care Systems (Pasadena, CA); and Marshall Industries (El
Monte, CA). As a result of the executed contracts, the Company implemented
projects producing approximately 44 million of the 53 million kWh in annual
energy savings available in the SCE Agreements.
No revenues are recorded for the SCE Agreements but rather are attributed to
individual projects that benefited from payments pursuant to the SCE Agreements,
which earned approximately $1,200,000 and $4,000,000 for the fiscal years ended
June 30, 1998, and 1997, respectively.
California State University, Fresno. The Company's first project
implemented under the PG&E Agreement was with CSUF. The Company has completed
both a first phase lighting retrofit of the project for $600,000 and a second
phase lighting retrofit and free cooling implementation for approximately
<PAGE>9
$1,000,000. The benefits to CSUF are anticipated to include over 1,600,000 kWh
per year reduction in energy consumption, as well as fixture upgrades, and
improved lighting and cooling equipment. CSUF should realize approximately
$120,000 per year in energy cost savings and a total of approximately $160,000
in incentive payments from the Company related to the PG&E Agreement.
California State University, Fresno-University Student Union. The
Company entered into an agreement with California State University, Fresno,
Association Incorporated, University Student Union (the "Student Union"), for an
energy efficiency project at the Student Union's facilities on the campus of
CSUF. Under the agreement, the Company upgraded the Student Union's existing
lighting systems and will be replacing the central chiller with a more efficient
model. Both the Student Union building and a satellite building will experience
significant lighting quality improvements and enhanced air conditioning, as well
as reduced energy costs. The approximately $400,000 project was prompted by an
aggressive campus-wide drive by CSUF to reduce energy costs on campus. The
project is expected to benefit from approximately $100,000 in utility incentives
payable over approximately six years under the PG&E Agreement and approximately
three years under the California Public Utilities Commission-approved standard
performance contract program (the "SPC Program"). Annual electricity cost
reduction is estimated to exceed $73,000.
California State Polytechnic University. The Company completed a
lighting retrofit project for seven buildings at the California State
Polytechnic University ("Cal Poly") in Pomona, California. The Company
retrofitted over 4,000 fixtures and replaced many outdated incandescent fixtures
with new high efficiency compact fluorescent fixtures. The project contributed
approximately $250,000 to the Company's revenues. The project is expected to
save in excess of $43,000 in energy costs for Cal Poly each year, as well as
result in up to $48,000 in incentive payments under the SCE Agreements over a
three year period.
Southern California College. In March 1998, the Company signed an energy
efficiency agreement to supply services related to 19 buildings at Southern
California College ("SoCal College") in Costa Mesa, California. The project was
one of the first to be implemented under the SPC Program. The financial
incentives from the SPC Program for this project are estimated to be as much as
$78,000 distributed over a two year period. The multi-measure project
contributed approximately $390,000 to the Company's current fiscal year
revenues, and will include a fee for providing measurement and verification
services for two years. The project consists of retrofitting 3,500 lighting
fixtures and installing 125 occupancy sensors as well as HVAC equipment
modification, the repair and replacement of heat pumps and chilled water piping,
and the installation of an energy management system. The energy efficiency
retrofit is estimated to result in electricity energy savings of up to 800,000
kWh per year for SoCal College.
City of Anthony, Kansas. In March 1998, OBS contracted with the City of
Anthony, Kansas (the "City"), to construct a voltage regulator station and to
upgrade a portion of the City's 4.16kV electric distribution system to 12kV. The
City, which operates its own municipal electric utility system in south central
Kansas, expects to realize increased reliability and improved system efficiency
from this upgrade. Construction is expected to be complete by calendar year-end
1998. Total project revenue to the Company from this project is estimated at
$2,000,000 in fiscal years 1998 and 1999. Revenues for the fiscal year ended
June 30, 1998 were approximately $325,000.
California Energy Commission. The California Energy Commission ("CEC")
selected the Company, through its International Energy Fund, for development
support of four energy efficiency projects in the Republic of Panama via a grant
for $75,000 from the CEC. Additionally, the Company sponsored the First Regional
Symposium for Energy Efficiency and Distributed Generation, which took place in
Panama in May 1997. The Company organized the symposium with separate financial
support of the CEC.
<PAGE>10
USL Parallel Products of California, Inc. In June 1998, the Company
signed an energy efficiency services agreement for an industrial process
improvement at the facilities of USL Parallel Products of California, Inc.
("Parallel Products"), a subsidiary of US Liquids, Inc. (AMEX: USL). The project
will include installation of a variable speed drive on a compressor utilized in
Parallel Products' evaporation process. The energy savings are anticipated to
exceed $75,000 per year, and the economics of the project will benefit from
approximately $145,000 in incentives payable under the SPC Program over
approximately a two year period. The project will contribute approximately
$325,000 in revenues to the Company during the fiscal year 1999.
Santa Ana Unified School District. In May 1998, LTS entered into an
approximately $2,500,000 subcontract with Sempra Energy Solutions to provide
lighting retrofit and FEMA (Federal Emergency Management Agency) lighting and
ceiling upgrades for the Santa Ana Unified School District. LTS's contract
encompasses upgrading over 1,000,000 square feet of ceilings, installing over
2,000 new fixtures, retrofitting nearly 15,000 other fixtures with T8 lamps and
electronic ballasts, and installing 600 occupancy sensors for energy efficiency
in 24 schools. This project is expected to be completed in fiscal year 1999.
R.E. Thomason General Hospital. In 1996, the Company entered into an
agreement with R.E. Thomason General Hospital ("Thomason") for the operation and
maintenance ("O&M") of its central utility plant. The original agreement ran for
a 27 month period, commencing February 1996, with additional extensions at the
option of Thomason. In April 1998, Thomason renewed the O&M agreement for an
additional 12 months. In connection with this O&M agreement, the Company has
staffed the central plant facility with eight full-time positions including a
supervisor, mechanic and plant operators. Revenues for fiscal year ended
June 30, 1998, were approximately $850,000.
General Motors Corporation. In July 1996, the Company entered into an
agreement with General Motors Corporation ("GM") to provide turnkey technical
services for the installation of a strategic energy management system at one of
GM's plants. The Company provided control technology for the North American
Truck Group Assembly Plant located in Wentzville, Missouri. Revenues for fiscal
year ended June 30, 1997, for this project were approximately $520,000.
Additionally, in December 1995, the Company signed an agreement with GM to
provide energy efficiency equipment purchases and services at GM's Linden, New
Jersey Assembly Plant. The Company completed the Linden project by June 30,
1996. The project was sponsored by the Company through the Public Service
Electric and Gas Company ("PSE&G") Standard Offer DSM program and includes a 10
year commitment for the measurement and verification ("M&V") of energy savings.
M&V revenue for this project for fiscal year ended June 30, 1998, was
approximately $90,000.
Consulting. In addition to energy efficiency retrofit projects and
services, the Company also provides professional energy efficiency consulting
services for a variety of clients, including energy customers, utilities,
product suppliers and government. These consulting services include engineering
design, project feasibility and development, direct access planning services,
market assessments, business strategy, public policy analysis and environmental
impact/feasibility studies. The Company currently provides consulting support to
customers, manufacturers, utilities, state and federal governments including,
but not limited to, the Gas Research Institute (Chicago, IL); Solar Turbines
(San Diego, CA); R.E. Thomason General Hospital (El Paso, TX); American Gas
Cooling Center (Arlington, VA); California Energy Commission (Sacramento, CA); a
major amusement theme park; a major multi-branch national financial institution;
and Caterpillar Inc. (Lafayette, IN).
Consulting revenues to the Company were approximately $1,000,000 and $1,400,000
for the fiscal years ended June 30, 1998, and 1997, respectively.
<PAGE>11
Industry of Issuer. Following is a description of the ESCO industry and the
business of the Company.
Energy Efficiency Services Company. Pursuant to an independent
evaluation, the Company has been accredited as an ESCO by NAESCO. NAESCO defines
an ESCO as a full-service, vertically integrated company that provides a
complete range of energy efficiency and power management services to its
customers. In order to qualify as an ESCO, a company must be able to offer a
method of financing projects and guaranteeing savings as services offered to
customers. These elements generally are what differentiate an ESCO from
contractors, equipment suppliers and other providers. The Company provides the
customer with "one-stop shopping" for energy services. Such services include:
o An initial energy audit
o Evaluation of purchase options for electricity and fuel, including tariff
analysis
o Detailed economic and feasibility analysis
o Engineering and construction services
o Management of project implementation
o Verification of savings
o Monitoring of performance and maintenance during the service term
o Guaranteed savings and/or shared savings programs
o Performance contracting with utilities, customers
o Financing including, direct loans and equipment leases (on and off balance
sheet)
o Professional consulting services in the areas of direct access
planning, market assessment, business strategy, public policy
analysis and environmental impact/feasibility studies
Through its systems integration program, the Company provides various services
to the customer that focus on energy savings in residential, commercial,
institutional and industrial facilities. Using multiple, proven energy
efficiency technologies provided by the Company, today's building owners and
operators can receive both cash flow savings and environmental benefits while
optimizing energy efficiency, in most cases without any up front capital
required from the customer. The Company's integrated energy measures work
together to:
Reduce energy consumption
Reduce the price of purchased electricity and fuel
Promote efficient use of energy
Shift loads to periods of lower cost energy
Improve the environment
Increase business profitability
By providing a complete package of services, including financing of projects,
the Company becomes the energy partner with each of its customers.
The Changing Environment for Energy Services. The electric utility
industry currently is going through fundamental changes that largely are a
result of the more competitive environment for electric power generation
developed over the last decade. The restructuring of the electric utility
industry will have significant impacts on the method by which electric power is
delivered to customers in the future, and also will affect the way energy
services are valued and provided. In the restructured electric industry, the
competition of the new marketers in the industry is anticipated to facilitate a
rapid evolution of energy value added services in the new marketplace. New
energy supply marketers will move to diversify their electricity supply services
with other services, which will include energy efficiency services.
<PAGE>12
Deregulation of the electric utility industry is likely to expand the scope of
services offered by ESCOs in the new marketplace. To purchase electric power in
the deregulated market, large consumers will need to collect and analyze their
past, present and future electrical consumption data and profiles in order to
identify their demand, and procure cost-effective and reliable electric power.
The Company currently is performing and marketing these new energy services for
large electricity consumers in preparation for the emerging competitive market.
The Company is actively involved in monitoring the regulatory and legislative
process that will determine the rules for the restructured electricity market,
and firmly believes that the benefits and value of energy efficiency will expand
through the evolution of a more competitive market for electricity.
Performance Contracting. Performance contracting is the term used to
describe the terms and conditions under which an ESCO delivers energy services,
typically under a guarantee of energy savings to the customer. The ESCO's
payment is based upon delivery of actual energy savings to the customer. The
values of these energy savings are used to service the project financing costs
if the project is financed or to provide positive cash flow to the customer. In
short, the performance contracting process requires payment for actual results,
not for projections.
Distributed Generation/Combined Heat & Power. The Company has experience
as a distributed generation and a combined heat and power ("CHP") developer in
systems ranging from 60 kW to 20,000 kW at facilities such as industrial
facilities, hospitals, multi-family housing, nursing homes, recreational
centers, health clubs and hotels. CHP is the sequential production of
electricity and thermal energy utilizing a single fuel source. The by-product
thermal energy from the production of electricity is utilized to provide steam
heating, domestic hot water and/or chilled water (through absorption chilling)
to the host facility. As a result, 60 percent to 90 percent of the input fuel's
energy content can be utilized to produce heat and electricity compared to only
25 percent to 40 percent of the fuel's energy content to make electricity alone
in a utility generating plant. The thermal energy produced by the CHP system is
used by the host facility to reduce fuel consumption that otherwise would be
needed to supply the thermal energy produced by boilers or other fuel burning
equipment. A typical system consists of a reciprocating engine or gas turbine
fueled by natural gas, which drives an electrical generator. A heat recovery
system reclaims the heat produced by the engine generator set, yielding steam or
hot water to be used in the host facility for domestic, process or space
heating/cooling needs. Electrical control relays and switchgear protect the
equipment from overload, ensure proper voltage and frequency, and interconnect
with the local utility's power grid. Since completing its first CHP system in
1984, the Company has been associated with over 35 CHP projects. Electric
industry restructuring in California and throughout the U.S. is creating a
renewed interest in on-site (distributed) generation by customers and utilities.
Furthermore, CHP is getting increased attention by state and federal environment
agencies as a generation source that can provide net quality benefits and help
mitigate global climate change.
Business Approach. As an ESCO, the Company provides its customers with a
comprehensive approach to improve the energy efficiency and/or reduce the cost
of energy for the customers' facilities. The services offered by the Company
include direct access planning, energy audits, bill audits, tariff analyses,
transmission and distribution analyses and upgrades, feasibility analyses,
engineering and construction services, project implementation, verification of
savings, performance monitoring, O&M services, guaranteed savings and shared
savings programs, financing, direct loans and equipment leases. In addition, the
Company offers professional consulting services in the areas of market
assessments, business strategies, public policy analysis (including utility
restructuring) and environmental impact/feasibility studies. The Company is
unique in the ESCO marketplace in that it is able to offer customers a full
range of energy services for both supply side and demand side resource
requirements.
<PAGE>13
The Company's approach to marketing its energy efficiency services is to provide
a comprehensive energy efficiency project with financing alternatives for the
customer. Over the past several years, the Company has been successful in
maximizing the incentives from public utilities in the form of SPC programs or
through utility DSM contracts, whereby the incentive payments are provided based
on actual energy savings, which can offset a substantial portion of the
investment necessary to implement the energy efficiency measures. The incentive
payments historically have been based upon the resource and environmental value
of the energy savings (as compared to the cost of building power plants). This
incentive toward the costs of the project enhances the feasibility of the
individual projects, thereby allowing more and larger projects to qualify for
implementation. Before undertaking a project, the Company's engineers analyze
the customer's energy consumption and propose a comprehensive solution that
maximizes energy savings to the customer through the implementation of the
energy projects. The cost and profit of the retrofit programs implemented by the
Company within the customer's facilities are recouped by the savings in energy
and maintenance costs of the project, with net positive cash flow to the
customer generated throughout the life of the project.
During the last five years, the Company has successfully completed several
utility DSM competitive bidding programs with PacifiCorp (April 1993); Southern
California Edison (May 1994, and July 1995, by acquisition); Puget Sound Power &
Light Company (June 1994); Pacific Gas and Electric Company (August 1996);
Jersey Central Power & Light (1990 and 1993); Public Service Electric and Gas
Company (1990, 1993 and 1996); and Potomac Electric Power Company (1992). The
Company also has been a leading ESCO sponsor for SPC programs in New Jersey and
California.
Changes in the electricity marketplace, customer interest in reducing costs, and
the Company's focus on its core business have led to several new projects and
acquisitions that have more than tripled its size and makes the Company the
largest NAESCO-accredited independent ESCO in the country. In the past, the
Company generally did not supply actual construction labor or materials in the
implementation of projects. Because of recent acquisitions, the Company can
provide some of these services (including high efficiency lighting, lighting
installation and maintenance services) while obtaining more control on overall
cost and level of service. The source of subcontractors varies by project, but
generally the Company selects subcontractors based upon experience, quality of
work, price and other factors, including previous relationship with the
customer. In general, subcontractors are solicited from the customer's local
geographic area. The Company's standard agreements with subcontractors (usually
in the form of an Engineering, Procurement and Construction Agreement) contain
general provisions standard for the construction industry for the installation
of energy efficiency measures.
For many projects, the Company also provides ongoing O&M and M&V services for
the installed systems. The Company offers the benefits of energy efficient
systems through third party ownership or project financing repaid through
savings generated by the project, requiring little or no capital investment by
the energy services customer.
The Company's infrastructure services are designed to approach areas of facility
operations that may not be addressed in traditional energy efficiency projects,
and include electric and natural gas facilities, power quality and water
treatment facilities. From electrical switchgear design to high voltage power
line construction, the Company can provide customized utility services. The
Company can design the project, procure the materials and manage the
installation of equipment. The Company also provides management of its
customers' utility equipment to reduce the chance of failures, minimize duration
of outages and protect assets. The Company's engineers audit electrical service
from local utilities using state-of-the-art technology to isolate, identify and
remedy problems before they cost the customer more money. The Company provides
harmonic investigations and remediation, wiring and grounding studies, and
transients and over-voltage analysis. The Company also meets the process water
needs of its customers through design, construction, operation and even
ownership of high purity water systems. Specializing in reverse
<PAGE>14
osmosis systems, the Company utilizes cost effective membrane technologies to
filter dissolved salts as well as inorganic molecules. The Company will evaluate
water treatment processes best suited for the customers needs, then design and
install a site-specific water treatment system.
A summary of the general process utilized by the Company for implementation of
an energy project includes the following:
Audit/Feasibility Analysis: The Company and a customer enter into a
Letter of Agreement providing for an audit/feasibility analysis at no up-front
cost. The customer only pays if the Company identifies a cost-effective project
that the Customer does not agree to pursue. Upon execution of the Letter of
Agreement by a customer, the Company's technical staff conducts an on-site
analysis in sufficient detail to establish the potential savings, capital cost
estimates and scope of the project. The Company's engineers and technicians
often will monitor energy use with data logger equipment. This data is analyzed
to determine savings opportunities and energy efficiency measures appropriate
for a particular facility. This information also provides empirical data on
which to base the rebate or DSM application that will be made to the utility
company, if applicable. These findings are presented to the customer in the form
of a technical proposal/audit report for the project.
Detailed Engineering: Upon the execution by a customer and the Company
of an Energy Efficiency Services Agreement or similar agreement (an "ESA"),
licensed mechanical and specialty engineers design the installation of each
element of the approved proposal. The process of obtaining required permits from
regulatory agencies also begins at this point.
Financing: Once the ESA has been executed, the Company arranges
financing for the project in cooperation with the customer if the customer does
not desire to finance the project itself. Financing can take many forms, from
energy savings-based agreements to equipment capital and operating leases to
traditional and non-recourse project financed loans. The Company has experience
in arranging such financing for projects based upon anticipated annual savings.
Financing packages are negotiated for the customer in most cases such that the
customer is not required to invest its own funds.
Procurement and Construction: This phase involves equipment purchasing,
subcontractor selection and construction management to final project completion.
Construction management consists of an experienced project execution team under
the overall direction of one of the Company's experienced project managers.
Start Up: This step integrates the initial operation of the project,
including system start-up and programming, commissioning and final acceptance.
O&M Services: This final phase assures a smooth handoff to operating
personnel of the customer, and includes training and documentation. Maintenance
contracts, where the Company supplies maintenance services, are available and
incorporated into many projects. Guarantees of annual and total savings are
coupled with ongoing maintenance of the installed energy efficiency equipment.
M&V Services: The Company provides verification of continuing energy
savings, both initially upon project completion and on an ongoing basis
throughout the term of the ESA. This verification is based upon protocols agreed
upon between the customer, the Company and the utility, if applicable.
Competition. In general, the Company's competitors are other ESCOs, particularly
the other 18 ESCOs accredited by NAESCO, that provide similar comprehensive
services to customers. Some of these competitors are large companies, affiliated
with utilities or equipment manufacturers, with more assets and that have a
larger manpower and resource base than the Company. Utility companies and their
affiliates can
<PAGE>15
function as both competitors and partners for the Company. Many utilities now
are entering the DSM market through wholly-owned subsidiaries of holding
companies in direct competition with ESCOs, including the Company. However, the
Company sometimes teams with utility DSM subsidiaries whereby the utility
subsidiary functions as a source of financing for energy efficiency services
projects developed and implemented by the Company.
An important competitive advantage for any ESCO is its ability to provide
financing and performance guarantees to the customer. This is the area in which
many small, independent ESCOs may be at a disadvantage when compared with the
larger companies and utilities. However, the Company has successfully used
financing sources such as Academic Capital, L.L.C. ("Academic"), Dana Commercial
Credit, Koch Financial ("Koch") and ABN AMRO Chicago Corporation (fka ChiCorp
Financial Services, Inc.) ("ABN"), among others, to provide financing for
qualified energy projects, thus maintaining this important advantage for the
Company. Over the last four years, Academic, ABN and Koch have provided
financing on most of the Company's projects that have been financed. More
recently, though, the Company has obtained financing from other sources and has
identified other potential sources of financing, thereby reducing its overall
dependence on a limited number of sources of project financing. In addition,
many of the Company's customers have the ability to obtain their own financing
or to pay for the cost of the project themselves.
The Company's competitive advantage historically has been its independence from
affiliation with commodity suppliers (utilities) and equipment vendors, and its
ability to offer a broader range of services and equipment than other ESCOs can
offer. In addition, the Company has been in the energy efficiency business for a
longer period of time with a significant number of successful projects, more
than most other ESCO competitors.
Raw Materials. The Company obtains most of its material and equipment from
several suppliers. The items it purchases generally are available "off the
shelf" and from several vendors. Those items that the Company may have custom
built also typically are available from several sources.
Government Regulation/Environmental Laws. The Company is subject to rules and
regulations of the Environmental Protection Agency, the Occupational Safety and
Health Administration and other federal, state, county and municipal agencies.
The Company's business entails "indirect" environmental risks from its
subcontractors' handling and removal of polychlorinated biphenals (PCBs)
ballasts, asbestos or asbestos-containing materials (ACMs), urea-formaldehyde
paneling, fluorescent lamps or HID lamps, and air quality compliance for
emissions from its CHP facilities. The Company contracts with certified
hazardous waste removal companies or require its customers or subcontractors to
contract with certified hazardous waste removal companies. The Company obtains
indemnification from applicable customers and subcontractors as to liability the
Company might incur in connection with hazardous materials or environmental
concerns.
In February 1998, the Company received a notice from the South Coast Air Quality
Management District for alleged reporting violations in calendar year 1996 on
the facility previously owned by TCC. No remedial action is required and the
Company may be subject to certain penalties, but management does not believe
this matter will have a material impact on the Company's operations or
liquidity.
Employees. As of November 2, 1998, the Company employed approximately 160
persons in regular or temporary full-time or part-time positions.
<PAGE>16
Item 2. Description of Property
The Company's corporate headquarters is located in Carlsbad, California. The
property is held on a three year lease expiring in July 31, 2001, and covering
approximately 10,000 square feet. As of August 1, 1998, the Company expanded its
office space by an additional 3000 square feet, which is included under the
current lease. The Company expanded its regional offices to include Kansas City
(Lenexa), Kansas (lease of 1,400 square feet of office space for one year
expiring May 1999), and San Ramon, California (lease of 2,000 square feet of
office space on a three year lease expiring March 2001).
The Company's subsidiaries are located in Somerset, New Jersey (SO Corporation);
Topeka, Kansas (OBS); Salina, Kansas (OMS); and Santa Ana, California (LTS). OBS
leases 2,000 square feet of office space on a one year lease with an option to
renew, expiring November 1998. OMS owns the main building (9,698 square fee)
that includes office space and storage in Salina, Kansas. OMS also owns two
annexes in Salina, Kansas (one consisting of 1,225 square feet and one
consisting of 2,400 square feet). OMS leases a fourth building from former
management on a month by month basis to store testing equipment. This lease will
continue indefinitely. LTS leases approximately 4,200 square feet in Santa Ana,
California. This lease currently is one-year lease and expires July 1999.
Additionally, under an agreement with SYCOM Corporation, the Company is required
to reimburse SYCOM Corporation for the applicable continuing operating expenses
(including rent) for the offices and a small warehouse in Somerset, New Jersey.
No other office or warehouse space is leased or owned by the Company. Management
believes that the current properties, including the additions made in 1998, will
be suitable for the Company's operations.
Item 3. Legal Proceedings
In January 1998, the Oregon Bureau of Labor and Industries (the "BLI") filed a
suit against LTS and two other parties for alleged unpaid wages in the amount of
$509,205 for 32 employees who worked on a lighting retrofit project in the state
of Oregon. A trial date of April 13, 1999, has been set, but the parties are
attempting to obtain the approval of mediation rules in order to mediate this
matter. Management also has had discussions with the BLI to resolve this issue;
however, no agreement has been reached. Management believes, based on current
information, that any settlement would not have a material impact on the
Company.
Additionally, in October 1998, Energy Conservation Consultants, Inc. ("ECCI"), a
Louisiana-based company, filed a suit (United States District County, Eastern
District of Louisiana, Case No. 98-2914) against OBS alleging breach of contract
in connection with one of the Company's projects. The suit seeks reimbursement
for expenses allegedly incurred by ECCI in the preparation of an audit and lost
profits in the aggregate amount of $748,000. Management is attempting to settle
the matter; however, no agreement has been reached. Management believes, based
on current information, that any settlement would not have a material impact on
the Company.
Item 4. Submission of Matters to Vote of Security Holders
No matters have been submitted during the fourth quarter of fiscal year ended
June 30, 1998, to a vote of securities holders.
<PAGE>17
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Since August 2, 1995, the Company's Class A Common Stock has traded on the
National Association of Securities Dealers (NASD) Over-the-Counter (OTC)
Electronic Bulletin Board under the symbol "ONSE." The following table sets
forth the high and low prices per share of the Company's Class A Common Stock
for the prior two fiscal years by quarters.
Quarter Ended High Low
September 30, 1996 $1.625 $1.4375
December 31, 1996 $0.50 $0.50
March 31, 1997 $0.25 $0.25
June 30, 1997 $0.50 $0.25
September 30, 1997 $0.34 $0.18
December 31, 1997 $0.9375 $0.26
March 31, 1998 $0.6875 $0.50
June 30, 1998 $1.4375 $0.5625
The high and low market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
As of November 2, 1998, there were approximately 225 holders of record of the
Common Stock.
The Company has not paid dividends on its Class A Common Stock, nor does the
Company anticipate paying dividends on the Class A Common Stock in the
foreseeable future. The Company has paid dividends on the Series C Stock. The
Series C Stock earns a dividend of 9.75 percent per annum, payable quarterly.
Dividends have been paid in the form of 23,354 shares of Series C Stock.
Dividends are payable in additional shares of Series C Stock or cash at the
option of the Company for two years. Thereafter, dividends are payable in cash.
Item 6. Management's Discussion and Analysis
When used in this discussion and the financial statements that follow, the words
"expect(s)," "feel(s)," "believe(s)," "will," "may," "anticipate(s)" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to republish revised
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. Readers also are
urged to carefully review and consider the various disclosures made by the
Company that attempt to advise interested parties of the factors that affect the
Company's business, including the discussion under Item 1. Description of
Business, Industry of Issuer section in this report, as well as the Company's
periodic reports on Forms 10-KSB, 10-QSB and 8-K filed with the Securities and
Exchange Commission.
<PAGE>18
As discussed in Item 1. Description of Business, the Company acquired OBS, OMS,
LTS and SO Corporation during the fiscal year 1998, and sold TCC during the
fiscal year 1997. To accurately depict the change in operations, liquidity and
capital resources, the Company has given a consolidated comparative and also a
comparative that removes the impact of its subsidiaries.
Results of Operations.
Revenues. Revenues increased in the fiscal year ended June 30, 1998, by
$2,705,773 or 28.30 percent. This increase primarily is due to acquisitions.
After elimination of revenues attributable to newly acquired subsidiaries and
the divestiture of TCC, revenues decreased by $42,066, or 0.47 percent. This
decrease is attributable to a $408,792, or 29.95 percent decrease in consulting
revenues, offset by an increase of $348,242, or 4.53 percent in contract
revenues. Consulting revenues were lower in fiscal year 1998 due in part to the
conversion of one large consulting agreement into a long term construction
contracts. Also, one large design project contributed significant consulting
revenues in fiscal year 1997. Long-term construction contracts were relatively
flat due to one large contract starting in the last half of fiscal year ended
June 30, 1998.
Gross Margin. Gross margin for the fiscal year ended June 30, 1998 was
18.01 percent compared to 30 percent in fiscal year 1997. After elimination of
revenues and cost of sales attributable to newly acquired subsidiaries and the
divestiture of TCC, gross margin was 13.60 percent and 28.51 percent for fiscal
year end 1998 and 1997 respectively. The decrease in gross margin as a
percentage of sales is attributable to lower gross margins on long term
contracts entered into in the fiscal year 1998. The unburdened budgeted gross
margin percentage on long term construction projects was approximately 12.28
percent. Fully burdened gross margin on these contracts was 9.61 percent for
fiscal year 1998. Revenues under these contracts represented 62.37 percent of
total revenues.
Selling, General & Administrative Expenses. Selling, general and
administrative ("SG&A") expenses were $4,418,736 or 36.02 percent of revenues in
fiscal year end June 30, 1998, compared to $3,726,095 or 38.97 percent in fiscal
year 1997. After elimination of revenues and SG&A expenses attributable to newly
acquired subsidiaries and the divestiture of TCC, SG&A as a percentage of
revenues was 39.24 percent and 32.09 percent for fiscal year end 1998 and 1997,
respectively. The percentage of expenses to revenues increased primarily because
of the effect of an increase in overall SG&A related to growth without a
corresponding increase of overall revenues in the fiscal year end June 30, 1998.
Additionally, employee related expenses increased by approximately $400,000.
This staffing increase was made at the Company headquarters location and to
establish an office in Northern California.
Goodwill amortization included in SG&A in the fiscal year ended June 30, 1998
was $280,927 compared to $400,000 in the fiscal year ended June 30, 1997. After
elimination of revenues and SG&A expenses attributable to newly acquired
subsidiaries and the divestiture of TCC, goodwill amortization was $266,667.
Goodwill amortization in fiscal year 1998 arises primarily out of the
acquisition of Onsite-Cal in 1994, which resulted in goodwill of $1,600,000 that
was amortized over a four year period, which ended in February 1998. With the
recent acquisitions made by the Company in the last quarter of fiscal year 1998,
goodwill amortization for fiscal year 1999 is expected to increase.
Loss from Operations. Loss from operations increased in the fiscal year
ended June 30, 1998 by $944,393 or 74.69 percent. After elimination of revenues
attributable to newly acquired subsidiaries and the divestiture of TCC, loss
from operations increased by $1,852,208, or 407.51 percent. This increase is
attributable to an increase in cost of sales of 20.31 percent, which is
reflected in the decrease in gross margin. The additional loss also can be
attributable to the increase of SG&A expenses of 21.72 percent. The majority of
this increase was due to the addition of new development offices and staff to
prepare for
<PAGE>19
expected new business opportunities resulting from acquisitions and deregulated
markets incentives with standard performance contracts.
Other Income/Expense. Other income (expense) decreased by $113,509 or
98.17 percent for the fiscal year ended June 30, 1998. The change was
attributable to a decrease in interest expense of $131,628. After elimination of
revenues attributable to newly acquired subsidiaries and the divestiture of TCC,
other income (expense) decreased by $57,500 or 90.72 percent. The majority of
the change was a decrease in interest expense of $78,248. During the fiscal year
end June 30, 1997, the Company had paid off substantially all of its interest
bearing debt.
Net Loss. Net loss for the year ended June 30, 1998, increased by
$829,884, or 59.76 percent. This resulted in a basic and diluted loss per share
of $0.16, an increase in the loss per share from fiscal year 1997 of $0.03.
After elimination of revenues and cost of sales attributable to newly acquired
subsidiaries and the divestiture of TCC, increase in net loss was 347.39
percent. This increase was attributable to some long-term projects that had a
lower gross margin than expected. The increase in SG&A expenses also effected
the net loss due to the addition of staff and office set up expenses.
Liquidity and Capital Resources. The Company's cash and cash equivalents
increased by $1,566,112 in fiscal year end June 30, 1998, an increase of 297.23
percent. Working capital was a negative $2,693,367 as of June 30, 1998, compared
to a negative $30,333 as of June 30, 1997, an increase in negative working
capital of $2,663,034. The increased deficit in working capital was largely
attributable to the increase in the current portion of notes payable acquired
from acquisitions (such notes are expected to be repaid from project proceeds)
and the billings in excess of costs related to one major project. The shortfall
in working capital is expected to be resolved from positive cash flow from
operations and the availability of up to an additional $1,000,000 of cash from
an existing stock subscription agreement.
Cash flows provided by operating activities for the year ended June 30, 1998
were $814,280, compared to $41,297 for the year ended June 30, 1997. A
substantial portion of the cash, approximately $2,000,000, was provided from
advance billings under one contract in progress at the end of the year. An
increase in accounts payable plus increased volume relating to new contracts
increased the cash flow from operations by $772,983.
Cash flows used by investing activities for the fiscal year ended June 30, 1998,
were $1,330,791 compared to cash flows provided by investing activities of
$535,608 for the fiscal year ended June 30, 1997, an increase of $1,866,399. The
primary reason for the increase in investing activities was the cash used in the
acquisition of four businesses (OMS, OBS, LTS and SO Corporation). Cash flows
from financing activities were $2,082,623 for the fiscal year ended June 30,
1998, compared to a negative $1,026,481 for the same period in fiscal 1997, an
increase of 302.89 percent. The principal reason for the change from
year-to-year was due to the proceeds from the private placement to Westar
Capital.
As shown in the accompanying financial statements, the Company has reported
significant net losses for the years ended June 30, 1998 and 1997, and has an
accumulated deficit of $19,414,842 as of June 30, 1998. During the year ended
June 30, 1998, the Company took steps to mitigate the losses and enhance its
future viability. Management believes that the Company will be able to generate
additional revenues and operating efficiencies through its acquisitions as well
as by other means to achieve profitable operations. In addition, subsequent to
year end, the Company has exercised its right under a stock subscription
agreement to require Westar Capital to purchase an additional 200,000 shares of
Series C Stock for $1,000,000 (see Note 20). The Company may require Westar
Capital to purchase an additional 200,000 shares of Series C Stock for
$1,000,000. Management believes that all of the above actions will allow the
Company to continue as a going concern. Cash requirements for periods beyond the
next 12 months depend on the Company's profitability, its ability to manage
working capital requirements and its rate of growth.
<PAGE>20
Industry. As described in detail in Item 1. Description of Business, the
deregulation of the electric utility industry in California and throughout the
U.S. has created a more competitive environment for electric power generation
and energy services. This has and will continue to provide opportunities for the
Company to expand the scope of services. The Company continues to market new
energy services for larger consumers in preparation for the emerging competitive
marketplace created by deregulation.
Foreign Operations. On April 8, 1998, the Company formed Onsite Energy de
Panama, S.A. This Panamanian corporation was formed in order to facilitate the
acquisition and development of potential projects in Panama and Latin America.
For fiscal year ended June 30, 1998, there was no operating activity.
Tax Legislation New tax legislation is not expected to have a material effect on
liquidity, financial condition and operations of the Company. The deferred tax
asset includes the future benefit of the LTS pre-acquisition deductible
temporary differences and net operating losses of $184,100. The deferred asset
has been fully reserved through the valuation allowance. Any future tax benefit
realized for these items will first reduce any goodwill remaining from this
acquisition and then income tax expense. The deferred tax asset also includes
the future benefit of the tax deduction for the exercise of stock options of
$13,000. The deferred asset is fully reserved through the valuation allowance.
Any future tax benefit realized for this item will be a component of paid in
capital.
At June 30, 1998, the Company has net operating loss carryforwards of
approximately $19,116,000, which expire in the years 2006 through 2017. The
Company has California net operating loss carryforwards at June 30, 1998 of
$5,018,000, which expire in years 1999 through 2003. The benefit of the net
operating losses to offset future taxable income is subject to reduction or
limitation of use as a result of certain consolidated return filing regulations
and additional limitations relating to a 50 percent change in ownership due to
various stock transactions.
Environmental Issues. In February 1998, the Company received a notice from the
South Coast Air Quality Management District for alleged reporting violations in
calendar year 1996 on the facility previously owned by TCC. While no remedial
action is required, the Company may be subject to certain penalties but
management does not believe this matter will have a material impact on the
Company's operations or liquidity.
Year 2000. The Company is developing plans to address issues related to the
impact on its computer systems of the year 2000. The Company believes that
substantially all software applications currently being used for the financial
and operational systems have adequately addressed any year 2000 issues. Most
hardware systems have been assessed and plans are being developed to address
systems modification requirements. The financial impact of making any required
systems changes is not expected to be material to the Company's consolidated
financial position, liquidity or results of operations. Any risks the Company
faces are expected to be external to ongoing operations. The Company has
numerous alternative vendors for critical supplies, materials and components and
thus current vendors and subcontractors who have not adequately prepared for the
year 2000 can be substituted in favor of those that have prepared.
Item 7. Financial Statements.
The Company's consolidated financial statements are attached as pages F-1
through F-27.
<PAGE>21
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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<PAGE>22
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(b) of the Exchange Act.
The following table sets forth the persons currently serving as directors of the
Company, and certain information with respect to those persons.
Director Age Director Since
Charles C. McGettigan 53 1993
Richard T. Sperberg 47 1982(1)
H. Tate Holt 47 1994
Timothy G. Clark 59 1994
Leroy P. Wages 49 1998
William M. Gary III 47 1982 (1)
S. Lynn Sutcliffe 55 1998
Richard L. Wright 55 1998
(1) Includes time of service with Onsite-Cal.
Background of Current Directors.
Charles C. McGettigan. Mr. McGettigan has been a director of the Company since
its inception in 1993, and began serving as the Chairman of the Board in
December 1994. Mr. McGettigan became a director of WEM in May 1992. He was a
founding partner in 1991 and is a general partner of Proactive Investment
Managers, L.P., which is the general partner of Proactive Partners, L.P., a
merchant banking fund. Mr. McGettigan co-founded McGettigan, Wick & Co., Inc.,
an investment banking firm, in 1988. From 1984 to 1988, he was a Principal,
Corporate Finance, of Hambrecht & Quist, Inc. He currently serves on the Boards
of Directors of Cuisine Solutions, Modtech, Inc., PMR Corporation, Sonex
Research, Inc., Tanknology - NDE Environmental Corporation and Wray-Tech
Instruments, Inc. Mr. McGettigan is a graduate of Georgetown University, and
received his Master of Business Administration from The Wharton School of
Business of the University of Pennsylvania.
Richard T. Sperberg. Mr. Sperberg has been a director, and the Chief Executive
Officer, of the Company since its inception in 1993, and currently serves as the
Company's Interim Chief Financial Officer. He served as the President of the
Company until October 1998, has been the Chief Executive Officer of WEM since
January 1993, and began serving as a director of WEM in February 1994. In 1982,
Mr. Sperberg co-founded Onsite-Cal, and served as President, Chief Executive
Officer and a director until February 1994, when Onsite-Cal and WEM reorganized
into the Company. Mr. Sperberg has been involved in project management of
<PAGE>23
energy efficiency, advanced energy technologies, alternative energy and
cogeneration projects for 23 years, with specific management experience with
Onsite-Cal, the Gas Research Institute, and the U.S. Department of Energy. He
holds a Masters of Science in Nuclear Engineering from the University of
California, Los Angeles, and a Bachelor of Science in Nuclear Engineering from
the University of California, Santa Barbara. Mr. Sperberg previously served on
the Boards of Directors of the American Cogeneration Association and the San
Diego Cogeneration Association, and currently serves as the President of NAESCO,
and as a member of its Board of Directors.
H. Tate Holt. Mr. Holt has been a director of the Company since May 1994. Mr.
Holt currently is the President of Holt & Associates, a corporate growth
management consulting firm, and has held that position since July 1990.
Previously, from 1987 to 1990, Mr. Holt was Senior Vice President of Automatic
Data Processing, Inc. ("ADP"), in Santa Clara, California. Mr. Holt has over
twenty (20) years of experience in various senior sales and marketing positions
with Fortune 50 and Inc. 500 companies, including IBM, Triad Systems and ADP. He
has participated in major restructuring and strategic planning in several
divisions of each of these companies. Since 1990, Holt & Associates has assisted
its small and medium-sized clients in developing and achieving aggressive growth
targets. Mr. Holt currently serves on the Board of Directors of DBS Industries,
Inc., and is the author of the book "The Business Doc - Prescriptions for
Growth." Mr. Holt holds an A.B. from Indiana University.
Timothy G. Clark. Mr. Clark began serving as a director of the Company in
October 1994. The former President and Chief Executive Officer of KA Industries,
Inc., a privately-owned corporation that manufactures and sells premium gift
baked goods, Mr. Clark currently serves as a consultant to a variety of clients
through his own firm, T.G. Clark & Associates. From 1991 to 1994, Mr. Clark was
a managing partner at Hankin & Co., a consulting company focusing on business
and financial planning, including turnarounds. Mr. Clark holds an A.B. from the
University of Southern California and a Master of Business Administration from
the Harvard University Graduate School of Business.
Leroy P. Wages. Mr. Wages has more than 20 years experience in the electric
utility industry. He currently is Director of Corporate Strategy for Western
Resources, the parent company of Westar Energy, Inc. ("Westar Energy"), and
Westar Capital. Western Resources is a full service provider of monitored
security, energy and related services, and is headquartered in Topeka, Kansas.
Mr. Wages' utility industry experience includes rate design, internal audit,
customer service and accounting. Mr. Wages also serves as the Chairman of the
Board and President of both Westar Capital and Westar Energy. Mr. Wages holds a
Bachelor of Business Administration in Accounting from Washburn University.
William M. Gary III. Mr. Gary served as the Company's Executive Vice President
and Secretary through December 31, 1997, and has served as a director of the
Company since its inception in 1993. Mr. Gary co-founded Onsite-Cal in 1982, and
served as the Chairman of the Board and the Executive Vice President of
Onsite-Cal until February 1994, when Onsite-Cal and WEM reorganized into the
Company. Mr. Gary has been involved in energy efficiency, alternative energy and
cogeneration projects for 20 years. Prior to co-founding Onsite-Cal, Mr. Gary
was a consultant with Arco Solar and held numerous management positions with San
Diego Gas & Electric in the alternative energy and conservation fields. He
currently serves as a member of the Board of Directors of the San Diego
Cogeneration Association. Mr. Gary holds a Bachelor of Science in Mechanical
Engineering from California Polytechnic University. He is a licensed
professional engineer in California and a Certified Energy Manager.
S. Lynn Sutcliffe. Since 1990, Mr. Sutcliffe has served as the President and
Chief Executive Officer of SYCOM Corporation, which is the general partner of
SYCOM LP. From 1968 through 1977, Mr. Sutcliffe was General Counsel of the U.S.
Senate Commerce Committee, which had jurisdiction over all electric and gas
utility issues. Mr. Sutcliffe left the Commerce Committee to become one of the
founding partners of Van Ness, Feldman, Sutcliffe & Curtis, P.C., a law firm
nationally recognized for its expertise in energy law and
<PAGE>24
policy. Mr. Sutcliffe participated in this law firm until 1990. Mr. Sutcliffe's
expertise includes a wide range of legislative, regulatory, contractual,
financial and developmental issues associated with the energy industry. From
1994 through 1996, Mr. Sutcliffe served as the President of NAESCO, and was a
member of the Energy and Transportation Task Force of the President's Council on
Sustainability in 1996. Mr. Sutcliffe brings to the Company's Board over 23
years of experience in the energy services industry. He holds an A.B. from
Princeton University, and a Juris Doctorate from the University of Washington.
Richard L. Wright. Mr. Wright has been Treasurer of SYCOM Corporation and SYCOM
LP since 1995, during which time he has performed project development and
strategic planning functions at the executive level. Mr. Wright has over 11
years of experience in developing and financing energy related companies and
projects. He has extensive knowledge of the federal and state legislative
processes as well as of the decision-making processes at the county and
municipal level. In 1977, Mr. Wright served on the White House Energy Task Force
and later as the Assistant Secretary at the Department of Energy. Prior to
joining SYCOM, Mr. Wright served as the Chief of Staff of the former Governor of
New Jersey from 1993 through 1994, and as the Associate Treasurer of the State
of New Jersey from 1990 through 1993. Mr. Wright earned a Bachelor of Arts in
Religion from Princeton University, and a Juris Doctorate from the University of
California Boalt Hall School of Law.
[Remainder of page intentionally left blank]
<PAGE>25
Executive Officers. The following table sets forth certain information with
respect to the current executive officers of the Company.
Name Positions with the Age Office Held
Company Since
Charles C. McGettigan Chairman of the Board 53 1994
Richard T. Sperberg Chief Executive Officer 47 1982 (1)
and Interim Chief
Financial Officer
S. Lynn Sutcliffe President 55 1998
Frank J. Mazanec Senior Vice President 50 1992 (1)
Keith G. Davidson Senior Vice President 48 1994
Richard L. Wright Senior Vice President 55 1998
Hector A. Esquer Vice President 40 1991 (1)
J. Derek Shockley Vice President 38 1997
David X. Kolk Vice President 47 1997
Elizabeth T. Lowe Vice President 35 1997
Bruce A. Hedman Vice President 48 1998
Dominick Aiello Vice President 39 1998
Roger Dower Vice President 48 1998
Glenn O. Steiger Vice President 50 1998
Christian J. Bitters Vice President 41 1998
Russell Wm. Royal President/Chief Operating 46 1992 (2)
Officer - LTS
Audrey Nelson Stubenberg Secretary/General Counsel 35 1998
(1) Includes time of service with Onsite-Cal.
(2) Includes time of service with LTS.
Executive officers are elected periodically (but at least annually) by the Board
of Directors and serve at the pleasure of the Board. No family relationship
exists between any of the officers or directors.
<PAGE>26
Background of Executive Officers. For the business backgrounds of Messrs.
McGettigan, Sperberg, Sutcliffe and Wright, see Background of Current Directors
above.
Frank J. Mazanec. Since 1992, Mr. Mazanec has been employed by the Company and
its predecessor, Onsite-Cal. Mr. Mazanec is a licensed professional engineer in
Colorado. Over the past 20 years, he has developed and managed over $100,000,000
in energy generation, waste management and environmental projects. Prior to
joining Onsite-Cal in 1992, Mr. Mazanec served as West Coast Regional Director
for Wheelabrator Technologies, which included responsibility for the Spokane and
Pierce County, Washington and Baltimore, Maryland, Waste-to-Energy facilities.
In 1990, he formed Integrated Waste Management, Inc., through which he served as
a consultant to Onsite-Cal until joining Onsite-Cal in 1992. Mr. Mazanec is
responsible for managing one of the Company's internal business units, and
currently serves as a Senior Vice President of the Company. Mr. Mazanec has a
Bachelor of Science in Civil Engineering from the University of Vermont, a
Bachelor of Science in Economics and Finance from Fairleigh Dickinson
University, and a Master of Business Administration from the University of
Southern California.
Keith G. Davidson. Mr. Davidson has been a Vice President of the Company since
1994, and recently was promoted to Senior Vice President. Mr. Davidson has over
20 years of diversified management experience in energy and environmental
technology, product commercialization and market development. Mr. Davidson is
responsible for one of the Company's internal business units. Prior to joining
the Company in 1994, Mr. Davidson was a Director at the Gas Research Institute
in Chicago, Illinois, where he led the gas industry's collaborative development
programs directed at natural gas growth markets of electric power generation,
cogeneration and natural gas vehicles. Mr. Davidson was past President of the
American Cogeneration Association, and a member of the American Society of
Heating, Refrigerating and Air Conditioning Engineers, and previously served as
the co-Chairman of CADER. He is the recipient of several industry honors,
including the Association of Energy Engineers' Cogeneration Professional of the
Year in 1989, and was inducted into the American Gas Association's Industrial
and Commercial Hall of Flame. Mr. Davidson earned a Bachelor of Science in
Mechanical Engineering from the University of Missouri and a Master of Science
in Mechanical Engineering from Stanford University.
Hector A. Esquer. Mr. Esquer is a professional engineer licensed in the states
of California and New Mexico. Mr. Esquer joined Onsite-Cal in 1986, and as Vice
President is responsible for the overall management of project implementation.
Over the past 10 years, Mr. Esquer has managed the implementation of over
$30,000,000 of energy efficiency projects for the Company. Mr. Esquer previously
was a Project Engineer for San Diego Gas & Electric and Fluor Corporation. He
holds a Bachelor of Science in Electrical Engineering from San Diego State
University and is a Certified Energy Manager.
J. Derek Shockley. Mr. Shockley is responsible for managing OBS and OMS. These
subsidiary companies provide medium and high voltage electrical services, as
well as industrial water treatment services to municipal, industrial, large
commercial and institutional customers. Mr. Shockley has over 13 years of
diversified experience in the energy industry that includes planning, sales,
marketing, and project development work in the areas of demand side management,
electrotechnologies and applied research. He was a member of EPRI's Water &
Wastewater Research Project steering committee, and a past member of the Kansas
Energy & Natural Resources advisory committee. Mr. Shockley is the recipient of
several national awards, including the EEI Common Goals Environmental Award, and
the EPRI Technology Innovators Award. Prior to joining the Company, Mr. Shockley
held a number of positions with Western Resources, including Director of
Business Development, Manager of National and Institutional Accounts, and an
energy use consultant. Mr. Shockley holds a Bachelor of Arts in Business
Administration (with an emphasis on Finance) from Washburn University.
Dr. David X. Kolk. In his capacity as Vice President of the Company, Dr. Kolk
specializes in integrated resource planning (IRP), regulatory affairs, and
transmission planning and economic and financial analysis.
<PAGE>27
He joined the Company in December 1997 after working with Power Resource
Manager, LLC ("PRM"). Prior to joining PRM, Dr. Kolk spent 12 years with the
City of Anaheim, where as the System Planning Manager he was responsible for
preparing, defending before regulatory agencies and implementing the City's
integrated resource plan. He represented the City and other municipal entities
in various forums dealing with transmission deregulation and electric services
industry deregulation. Dr. Kolk also was responsible for overseeing the City's
negotiations with SCE and managing the City's outside attorneys and legal
efforts before the Federal Energy Regulatory Commission. Prior to that, Dr. Kolk
was in charge of the City's energy services group, providing conservation and
demand side management services to commercial and industrial customers and
served on the City's business retention and attraction team. Dr. Kolk was
responsible for planning Anaheim's distribution facilities for several years and
was Project Manager on behalf of 11 municipal entities and the Western Area
transmission facility located near Adelanto, California. Dr. Kolk also serves as
a vice-president of the Riverside County Asset Leasing Corporation, the entity
responsible for overseeing and managing all Riverside County debt. Dr. Kolk has
written extensively on energy policy including two books, one on the natural gas
industry and the other on the structure of the U.S. economy. Dr. Kolk holds a
Bachelor of Science and Ph.D. in Economics from the University of California,
Riverside, and a Master of Science in Economics from the University of
California, San Diego.
Elizabeth T. Lowe. As Vice President, Ms. Lowe heads up the Company's Northern
California office. She is responsible for marketing, operations and regulatory
representation in Northern California. Ms. Lowe also adds to the Company's
consulting capabilities in the areas of natural gas and electricity purchases
and overall customer strategies to reduce energy costs. Ms. Lowe joined the
Company in 1997. Prior to joining the Company, Ms. Lowe served as Vice President
of Western Operations for DukeSolutions, Inc. (formerly Duke/Louis Dreyfus),
heading up the Western region operations for this Duke Energy subsidiary. The
Western region group worked with retail and wholesale customers to develop and
implement overall energy purchasing strategies through negotiations training,
strategic alliances, and engineering and pricing solutions. Prior to joining
DukeSolutions, Ms. Lowe spent 10 years in energy and environmental consulting,
and most recently developed and directed Barakat & Chamberlin's Corporate Energy
Management practice. In this capacity, she assisted large energy consumers in
the development of energy cost reduction strategies through procurement and
management of fuels, tariff and contract negotiations, aggregation strategies
and demand side management planning. Ms. Lowe earned a Master of Environment
Management in Resource Economics and Policy from Duke University's Nicholas
School of Environment and a Bachelor of Arts in Public Policy Studies from Duke
University's School of Policy Studies and Public Affairs. Ms. Lowe is an
associate member of the California Manufacturers Association, the California
League of Food Processors, and President of the Power Association of Northern
California.
Dr. Bruce A. Hedman. Dr. Hedman joined the Company in 1998, as Vice President,
Consulting Services, and together with Mr. Davidson is responsible for the
Company's consulting services business. Dr. Hedman has over 20 years of
experience in energy and environmental technology development, new product
commercialization, and market research and development. Before joining the
Company, Dr. Hedman was Executive Director of the Industrial Center Inc. in
Arlington, Virginia, a natural gas industry technology transfer and market
development organization that supports commercial introduction of new natural
gas technologies in the industrial market. Prior to this, he was Senior Program
Manager at Battelle Pacific Northwest Laboratory's Washington, DC offices,
providing strategic planning and policy analysis support on natural gas issues
and end-use research, development and commercialization. Dr. Hedman started his
career at the Gas Research Institute ("GRI") in Chicago, holding a variety of
research management positions in power generation, alternative fueled vehicles
and industrial end-use. When he left GRI in 1994, Dr. Hedman was Group Manager,
Industrial and Power Generation Products and responsible for the development and
commercialization of new natural gas technologies for these priority markets.
Dr. Hedman has a Bachelor of Science, Master of Science and Ph.D. in Mechanical
Engineering from Drexel University in Philadelphia, Pennsylvania.
<PAGE>28
Dominick Aiello. Mr. Aiello, an employee of SYCOM Corporation, currently serves
as the Company's Vice President, and is directly responsible for overseeing the
Company's Project Development efforts primarily in the Eastern U.S. Mr. Aiello
has more than five years experience in developing energy efficiency projects in
both the public and private sectors. He is responsible for managing a national
sales force of 12 project developers. Mr. Aiello also has been a key contributor
in implementing a sales training curriculum for both the current sales team and
new hires. Prior to joining SYCOM Corporation, Mr. Aiello served as a Sales
Manager for IBM.
Glenn O. Steiger. In his capacity as the Company's Vice President, Governmental
Aggregation Services, Mr. Steiger is responsible for developing and
administering all energy aggregation and related service activities for the
Company's governmental accounts. An employee of SYCOM Corporation, Mr. Steiger
joined SYCOM Corporation and the Company with 28 years of energy experience
including a distinguished 15 year career with GPU Energy, where he served in the
following leadership capacities: Vice President of Corporate Affairs, Director
of Competitive Strategies & Initiatives, Skylands Division Director, Manager of
Cogeneration and Marketing, and Load Management Manager. Mr. Steiger's
accomplishments at GPU include the successful creation of both the Coalition for
Customer Choice and the Coalition for Competitive Issues. In addition, Mr.
Steiger led the campaigns to defeat municipalization efforts in both Aberdeen
and Monroe, New Jersey. In Monroe, he created and negotiated New Jersey's first
successful municipal electric aggregation program. Working with a team of
township officials, residents and the township attorney, Mr. Steiger developed
the conceptual, technical and customer framework necessary to move this cutting
edge competitive initiative to a fully operational customer choice program. He
was also responsible for the negotiation and acquisition of over 1000 MW of
cogeneration related power for GPU and helped to create GPU's first "shared
savings" energy management program. He served on the New Jersey Energy Master
Plan negotiating committee and Governor Whitman's Economic Development Master
Plan Commission. Mr. Steiger also headed the Energy/Utility Division at the MWW
Group where he specialized in providing the energy industry with public
relations, governmental advocacy, marketing communications, and energy
aggregation program development expertise. His energy-related background also
includes leadership roles with Public Service Electric & Gas Company, Sussex
Rural Electric Cooperative and Bailey Controls. Mr. Steiger is a licensed
Professional Engineer with a Bachelor of Science in Civil Engineering and a
Masters in Management of Public and Regulated Enterprises, both from the New
Jersey Institute of Technology. A graduate of Leadership New Jersey and the Duke
University Executive School of Business, he is also a member of the National
Society of Professional Engineers and a Member of the U.S. Chamber of Commerce
and the Edison Electric Institute's Grass Roots Advisory Boards.
Roger Dower. Mr. Dower, the Company's Vice President, manages the Company's
Washington, D.C. business unit, where he oversees the development activity for
trade associations and federal projects as well as regional development. Mr.
Dower, an employee of SYCOM Corporation, also provides legislative and
regulatory support for the Company and the energy service industry's energy and
environmental agenda. Mr. Dower is an expert in energy and environmental
economics, policy, regulation and legislation. Prior to joining SYCOM
Corporation and the Company, Mr. Dower was Director of the Climate, Energy and
Pollution Program at the World Resources Institute from 1990 to 1996. Prior to
that, Mr. Dower was the head of the Energy and Environment Unit at the
Congressional Budget Office from 1985 to 1990. Mr. Dower has also served as a
consultant to the Executive Office of the President of the United States from
1979 to 1980 and was the Research Director and a Board Member of the
Environmental Law Institute from 1976 to 1985. He has authored numerous
publications on carbon dioxide (CO2) policy, renewable energy and tax policy
relative to energy and the environment. With over 18 years of experience in the
energy business, Mr. Dower has an in-depth understanding of energy markets, the
role of energy efficiency and the environmental effects of energy. Mr. Dower
received a Masters of Science and Bachelor of Science in Resource Economics from
the University of Maryland.
<PAGE>29
Christian J. Bitters. Mr. Bitters serves as Vice President of Operations for the
Company. In this capacity, Mr. Bitters oversees the project management and
engineering teams responsible for implementation of all of the Company's
projects primarily in the Eastern U.S., and has over seven years of experience
in managing the implementation of energy efficiency projects in commercial,
industrial, governmental and institutional facilities. Mr. Bitters is
responsible for recruiting and training new team members and developed a
sophisticated Project Management Manual that defines the roles,
responsibilities, methods, procedures and specifications for implementing the
Company's projects. Mr. Bitters' experience includes project management of
commercial office space and recruiting, training and managing project managers
and engineers. Prior to joining SYCOM Corporation, he served as a Senior Project
Manager for OMNI Construction, Inc., in Washington, D.C. for 10 years, where he
managed construction and renovation projects with a total value of $205,000,000.
Mr. Bitters holds a Master of Science and Bachelor of Science in Civil
Engineering from the University of Maryland.
Russell Wm. Royal. Mr. Royal serves as the President and Chief Operating Officer
of LTS, the Southern California lighting contractor acquired by the Company in
June 1998. Mr. Royal has 20 years experience in all phases of building
automation, light retrofit and lighting controls. His specific project
experience includes: numerous high-rise office building retrofit and control
projects through-out California, district-wide multi-facility lighting retrofit
and lighting controls projects for the Santa Ana Unified School District and
several comprehensive campus wide lighting retrofit and lighting controls
projects at several California community colleges and school districts. Mr.
Royal has a Bachelor of Science in Psychology from California State University,
San Bernardino.
Audrey Nelson Stubenberg, Esq. Ms. Nelson Stubenberg has 10 years experience as
a practicing transactional attorney and currently serves as the Company's
Secretary and General Counsel. She joined the Company in 1994. Prior to joining
the Company, Ms. Nelson Stubenberg was an associate with the San Diego law firm
of Procopio, Cory, Hargreaves and Savitch, a business and commercial
transactions firm. A member of the California State Bar and the American Bar
Association, Ms. Nelson Stubenberg earned a Bachelor of Arts from the University
of Redlands and a Juris Doctorate from the University of San Diego School of
Law.
Compliance with Section 16(a) of the Securities Exchange Act of 1934. Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company
directors, executive officers and persons who own more than 10 percent of the
Company's Class A Common Stock to file reports of ownership and changes in
ownership with the SEC. Directors, officers and stockholders of more than 10
percent of the Company's Class A Common Stock are required by the SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on review of the copies of such forms furnished to the Company, or
written representations that such filings were not required, the Company
believes that since July 1, 1997, through the end of its most recent fiscal
year, all Section 16(a) filing requirements applicable to its directors,
officers and stockholders of more than 10 percent of the Company's Class A
Common Stock were complied with except as follows: (i) one report (Form 3)
covering one transaction inadvertently was filed late by Mr. Kolk; (ii) one
report (Form 3) covering one transaction inadvertently was filed late by Ms.
Lowe; (iii) one report (Form 3) covering one transaction inadvertently was filed
late by Mr. Shockley; (iv) one report (Form 3) covering one transaction
inadvertently was filed late by Mr. Royal; (v) one report (Form 4) covering one
transaction inadvertently were filed late by Mr. Holt; and (vi) two reports
(Form 4 and Form 5) covering two transactions inadvertently were filed late by
Mr. Clark. Additionally, the Company has not received copies of a Form 5 from
two former officers of the Company.
<PAGE>30
Item 10. Executive Compensation.
The following table sets forth the aggregate cash compensation paid for the past
three fiscal years by the Company and its predecessors for services of Mr.
Sperberg (President), and the three most highly compensated executive officers
whose compensation exceeds $100,000 per year: Messrs. Gary (former Executive
Vice President and Secretary), Mazanec (Senior Vice President) and Davidson
(Senior Vice President).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
---------------------- ---------
Annual Compensation Awards Payouts
- ----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------
Restricted
Stock Securities All Other
Name and Other Annual Award(s) Underlying LTIP Compensation
Principal Position Fiscal Salary Bonus Compensation ($) Options Payouts ($)
Year ($) ($) ($) (#) ($)
- ----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------
- ----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard T. Sperberg 1998 $149,125(2) $32,500 $17,889 (3) -0- 126,954 (5) -0- $ -0-
CEO and President 1997 $136,000 $ -0- $15,781 (3) -0- 318,616 (6) -0- $ -0-
1996 $130,000 $13,473 $15,953 (3) -0- 375,205 (7) -0- $ -0-
- ----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------
- ----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------
William M. Gary III(1) 1998 $132,660(2) $ -0- $12,371 (3) -0- 25,000 (8) -0- $43,776 (17)
EVP and Secretary 1997 $120,000 $ -0- $ 7,953 (3) -0- -0- (9) -0- $ -0-
1996 $115,000 $ 4,504 $12,945 (3) -0- 30,691 (10) -0- $ -0-
- ----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------
- ----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------
Frank J. Mazanec 1998 $137,154(2) $22,083 $10,923 (3)(4) -0- 75,000 (11) -0- $ -0-
Senior Vice 1997 $127,000 $ -0- $64,471 (3)(4) -0- 272,352 (12) -0- $ -0-
President 1996 $120,000 $ 8,815 $49,663 (3)(4) -0- 72,904 (13) -0- $ -0-
- ----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------
- ----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------
Keith G. Davidson 1998 $121,342(2) $23,333 $ 7,702 (3)(4) -0- 140,000 (14) -0- $ -0-
Senior Vice 1997 $102,000 $ -0- $20,838 (3)(4) -0- 119,118 (15) -0- $ -0-
President 1996 $105,000 $ 1,426 $43,860 (3)(4) -0- 137,597 (16) -0- $ -0-
- ----------------------- ------ ------------ -------- ------------- --------- ------------ --------- ------------
</TABLE>
(1) Mr. Gary served as the Company's Executive Vice President and Secretary
through December 31, 1997. Effective January 1, 1998, Mr. Gary and the
Company executed a Severance Agreement pursuant to which, in exchange
for Mr. Gary's agreement to continue to serve in a limited capacity to
the Company, the Company agreed to pay Mr. Gary his annual salary plus
certain benefits (including health care) through June 30, 1998, unless
Mr. Gary had not secured full-time employment with an employer other
than the Company as of such date, in which case Mr. Gary's employment
with the Company would continue until December 31, 1998, unless Mr. Gary
obtains full-time employment prior to that date. As of November 5, 1998,
Mr. Gary has represented to the Company that he has not obtained
full-time employment.
(2) In fiscal year 1997, certain executive officers agreed to defer certain
portions of their base salary and other compensation from approximately
December 1, 1996 through June 30, 1997. This deferred compensation was
repaid on December 31, 1997, with simple interest at the rate of 15
percent per annum.
<PAGE>31
(3) Includes a company car or car expense allowance and premiums for life
insurance.
(4) Includes commissions paid or advanced in connection with negotiated
customer contracts pursuant to the commission policy of the Company.
(5) Includes a five year option to purchase 126,954 shares of Class A Common
Stock at $0.704 per share granted on April 1, 1998, subject to vesting
as follows: 42,318 shares vest on April 1 in each of fiscal year 1999,
2000 and 2001.
(6) Includes (i) a five year option to purchase 250,000 shares of Class A
Common Stock at $0.3251 per share granted on March 13, 1997, subject to
vesting as follows: 83,334 shares vested on March 13, 1998; and 83,333
shares vest on March 13 in each of fiscal year 1999 and 2000; and (ii) a
five year option to purchase 4,000 shares of Class A Common Stock at
$0.2956 per share, as repriced on March 13, 1997, and a 10 year option
to purchase 64,616 shares of Class A Common Stock at $0.2956 per share,
as repriced on March 13, 1997 (which options are fully vested). Mr.
Sperberg previously reported a five year option to purchase 38,100
shares of Class A Common Stock at $0.2956 per share, as repriced on
March 13, 1997, which options were exercised in January 1998.
(7) Includes (i) a five year option to purchase 150,000 shares of Class A
Common Stock at $0.28 per share, as repriced on August 9, 1995 (which
options are fully vested); and (ii) 10 year options to purchase (a)
52,808 shares of Class A Common Stock at $0.50 per share granted on
November 20, 1995; (b) 107,781 shares of Class A Common Stock at $0.50
per share granted on January 25, 1996; and (c) 64,616 shares of Class A
Common Stock at $0.2956 per share granted on May 22, 1996, and as
repriced on March 13, 1997 (which options are fully vested).
(8) Includes a five year option to purchase 25,000 shares of Class A Common
Stock at $0.5625 per share, issued to Mr. Gary on January 1, 1998, in
accordance with the Company's 1993 Stock Option Plan for his service as
a non-employee director.
(9) Mr. Gary previously reported (i) a five year option to purchase 25,000
shares of Class A Common Stock at $0.3251 per share granted on March 13,
1997, which subsequently were relinquished under the terms of Mr. Gary's
Severance Agreement; and (ii) five year options to purchase 39,200
shares of Class A Common Stock at $0.2956 per share, as repriced on
March 13, 1997, and a 10 year option to purchase 14,670 shares of Class
A Common Stock at $0.2956 per share, as repriced on March 13, 1997,
which options were exercised in December 1997 (500), January 1998
(35,700 and 3,000) and April 1998 (14,670).
(10) Mr. Gary previously reported a five year option to purchase 100,000
shares of Class A Common Stock at $0.28 per share, as repriced on August
9, 1995 (which options were exercised in April 1998), 13,608 shares of
Class A Common Stock at $0.50 per share granted on November 20, 1995,
17,083 shares of Class A Common Stock at $0.50 per share granted on
January 25, 1996, and 14,670 shares of Class A Common Stock at $0.2956
per share granted on May 22, 1996, and as repriced on March 13, 1997
(which options were exercised in April 1998).
(11) Includes a five year option to purchase 75,000 shares of Class A Common
Stock at $0.64 per share granted on April 1, 1998, subject to vesting as
follows: 25,000 shares vest on April 1 in each of fiscal year 1999, 2000
and 2001.
(12) Includes (i) a 10 year option to purchase 250,000 shares of Class A
Common Stock at $0.2956 per share granted on March 13, 1997, subject to
vesting as follows: 83,334 shares vested on March 13, 1998; and 83,333
shares vest on March 13 in each of fiscal year 1999 and 2000; and (ii)
five year options to purchase 4,000 shares of Class A Common Stock at
$0.2956 per share, as repriced on March 13, 1997, and a 10 year option
to purchase 18,352 of Class A Common Stock at $0.2956 per share, as
repriced on March 13, 1997 (which options are fully vested). Mr. Mazanec
previously reported a five year option to purchase 9,300 shares of Class
A Common Stock at $0.2956 per share, as repriced on March 13, 1997,
which options were exercised in December 1997 (500) and January 1998
(8,800).
<PAGE>32
(13) Includes 10 year options to purchase (i) 7,736 shares of Class A Common
Stock at $0.50 per share granted on November 20, 1995; (ii) 46,816
shares of Class A Common Stock at $0.50 per share granted on January 25,
1996; and (iii) 18,352 shares of Class A Common Stock at $0.2956 per
share granted on May 22, 1996, and as repriced on March 13, 1997 (all of
which options are fully vested). Mr. Mazanec previously reported a 10
year option to purchase 70,000 shares of Class A Common Stock at $0.25
per share, as repriced on August 9, 1995, which options were exercised
in June 1998.
(14) Includes 10 year options to purchase (i) 40,000 shares of Class A Common
Stock at $0.53 per share granted on October 27, 1997, subject to vesting
as follows: 13,334 shares vest on October 27, 1998; and 13,333 shares
vest on October 27 in each of fiscal year 1999 and 2000; and (ii)
100,000 shares of Class A Common Stock at $0.64 per share granted on
April 1, 1998, subject to vesting as follows: 33,334 shares vest on
April 1, 1999; and 33,333 shares vest on April 1 in each of fiscal year
2000 and 2001.
(15) Includes 10 year options to purchase (i) 100,000 shares of Class A
Common Stock at $0.2956 per share granted on March 13, 1997, subject to
vesting as follows: 33,334 shares vested on March 13, 1998; and 33,333
shares vest on March 13 in each of fiscal year 1999 and 2000; and (ii)
19,118 shares of Class A Common Stock at $0.2956 per share granted on
May 22, 1996, as repriced on March 13, 1997 (which options are fully
vested).
(16) Includes 10 year options to purchase (i) 70,000 shares of Class A Common
Stock at $0.25 per share, as repriced on August 9, 1995; (ii) 37,072
shares of Class A Common Stock at $0.50 per share granted on November
20, 1995; (iii) 11,407 shares of Class A Common Stock at $0.50 per share
granted on January 25, 1996; and (iv) 19,118 shares of Class A Common
Stock at $0.2956 per share granted on May 22, 1996, as repriced on March
13, 1997 (all of which options are fully vested).
(17) Includes $43,776 paid to Mr. Gary under his Severance Agreement in the
form of a cash-less transaction involving the simultaneous exercise of
certain options.
The following table sets forth options granted by the Company to the individuals
listed in the Summary Compensation Table.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
- ----------------------- ------------- --------------- ------------- ------------- -------------
Number of Percentage of
Securities Total
Underlying Options/SARs Market
Options/SARs Granted to Exercise or Price on
Granted Employees Base Price Date Expiration
Name (#) In Fiscal Year ($/Share) of Grant Date
<S> <C> <C> <C> <C> <C>
Richard T. Sperberg 126,954 12.35 $0.704 $0.64 4/1/03
- ----------------------- ------------- --------------- ------------- ------------- -------------
William M. Gary II 25,000 2.43 $0.5625 $0.5625 1/1/03
- ----------------------- ------------- --------------- ------------- ------------- -------------
Frank J. Mazanec 75,000 7.29 $0.64 $0.64 4/1/08
- ----------------------- ------------- --------------- ------------- ------------- -------------
Keith G. Davidson 100,000 9.72 $0.64 $0.64 4/1/08
40,000 3.89 $0.53 $0.53 10/27/07
- ----------------------- ------------- --------------- ------------- ------------- -------------
</TABLE>
<PAGE>
AGGREGATED OPTION/SARS EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SARS VALUES
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Shares Underlying In-the-Money
Acquired Unexercised Options
On Value Options/SARs at FY at FY End
Exercise Realized End (#) Exercisable/
Name (#) ($) Exercisable/ Unexercisable *
Unexercisable
- ------------------------- ------------- ------------- -------------------- --------------------
- ------------------------- ------------- ------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Richard T. Sperberg 38,100 $11,979 462,539/293,620 $371,493/$199,960
- ------------------------- ------------- ------------- -------------------- --------------------
- ------------------------- ------------- ------------- -------------------- --------------------
William M. Gary III 153,870 $54,027 55,691/-0- $35,751/$-0-
- ------------------------- ------------- ------------- -------------------- --------------------
- ------------------------- ------------- ------------- -------------------- --------------------
Frank J. Mazanec 79,300 $68,926 160,238/241,666 $128,962/$185,483
- ------------------------- ------------- ------------- -------------------- --------------------
- ------------------------- ------------- ------------- -------------------- --------------------
Keith G. Davidson -0- $-0- 170,931/206,666 $142,745/$136,893
- ------------------------- ------------- ------------- -------------------- --------------------
</TABLE>
*Based upon the average price of $1.17 as of June 30, 1998.
Employment Agreements with Executive Officers. In June 1998, the Company
executed an Agreement of Purchase and Sale of Stock (the "Stock Purchase
Agreement") to acquire all of the issued and outstanding stock of LTS. In
connection with the Stock Purchase Agreement, Russell Wm. Royal executed an
Employment Agreement with the Company and LTS (together referred to in the
Employment Agreement as the "Company") pursuant to which the Company secured the
full-time services of Mr. Royal on an exclusive basis (upon the terms and
conditions set forth in the Employment Agreement) until March 31, 2000 (unless
terminated earlier in accordance with the Employment Agreement) at a base salary
of $125,000 per year, subject to increases as determined by the Company's Board
of Directors based upon Mr. Royal's performance, LTS's net income contribution
to the Company's consolidated financial statements and the compensation of the
Company executives. Beginning in January 1999, Mr. Royal is eligible to
participate in the Company's Stock Option Plan, and the Company's bonus pool
(consistent with other the Company executives), all as determined by the
Compensation Committee at its sole discretion. Mr. Royal also receives a monthly
car allowance, and is entitled to participate in employee benefit and fringe
benefits plans that LTS makes available generally to its employees. Furthermore,
in addition to his other compensation under the Employment Agreement, Mr. Royal
is entitled to certain bonus and/or severance payments sufficient to make
certain payments due and owing by Mr. Royal on certain loans from LTS, provided
that the impact of the bonus payments will be considered in connection with the
earn-out provisions under the Stock Purchase Agreement. The Employment Agreement
also provides for a severance payment equal to Mr. Royal's then monthly base
salary multiplied by the number of months remaining under the Employment
Agreement if Mr. Royal is terminated without cause. Additionally, either the
Company or Mr. Royal may terminate the Employment Agreement in the event a
change in control in the Company occurs during the term of the Employment
Agreement. Under the terms of the Employment Agreement, Mr. Royal is prohibited
from engaging in any activity competitive with the Company during the term of
the Employment Agreement.
<PAGE>34
Item 11. Security Ownership of Certain Beneficial Owners and Management..
The following table sets forth certain information about the ownership of the
Company's Class A Common Stock by (i) those persons known by the Company to be
the beneficial owners of more than 5 percent of the total number of outstanding
shares of any class entitled to vote; (ii) each director and highly compensated
officer; and (iii) all directors and officers of the Company as a group. The
table includes Class A Common Stock issuable upon the exercise of Options or
Warrants that are exercisable within 60 days. Except as indicated in the
footnotes to the table, the named persons have sole voting and investment power
with respect to all shares of the Company's Class A Common Stock shown as
beneficially owned by them, subject to community property laws where applicable.
The ownership figures in the table are based on the books and records of the
Company.
Class A Common Stock
----------------------------------
Name and Address Amount of Percent of Class
of Beneficial Owner Ownership
- --------------------------------------------- ---------------- -----------------
Timothy G. Clark 150,000 (1) *
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
Keith G. Davidson 218,295 (2) 1.17
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
William M. Gary III 2,319,478 (3) 12.51
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
Gruber & McBaine Capital Management., LLC 1,182,043 (4) 6.40
50 Osgood Place
San Francisco, CA 94133
Jon D. Gruber 3,286,847 (5) 17.85
50 Osgood Place
San Francisco, CA 94133
H. Tate Holt 322,882 (6) 1.74
240 Wilson Way
Larkspur, CA 94939
<PAGE>35
Lagunitas Partners, L.P. 888,572 (7) 4.81
50 Osgood Place
San Francisco, CA 94133
Thomas Lloyd-Butler 1,190,043 (8) 6.44
50 Osgood Place
San Francisco, CA 94133
Frank J. Mazanec 655,370 (9) 3.52
Mazanec Family Trust
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
J. Patterson McBaine 3,278,247 (10) 17.81
50 Osgood Place
San Francisco, CA 94133
Charles C. McGettigan 2,337,695 (11) 12.26
50 Osgood Place
San Francisco, CA 94133
Proactive Investment Managers, L.P. 1,981,304 (12) 10.95
50 Osgood Place
San Francisco, CA 94133
Proactive Partners, L.P. 1,906,521 (13) 10.56
50 Osgood Place
San Francisco, CA 94133
Richard T. Sperberg 3,097,161 (14) 16.05
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
S. Lynn Sutcliffe 1,750,000 (15) 9.48
27 Worlds Fair Drive, First Floor
Somerset, NJ 08873
<PAGE>36
SYCOM Enterprises, LLC 1,750,000 (16) 9.48
27 Worlds Fair Drive, First Floor
Somerset, NJ 08873
Westar Capital, Inc. 8,616,770 (17) 38.17
818 South Kansas Street
Topeka, KS 66601
Myron A. Wick III 2,141,304 (18) 11.32
50 Osgood Place
San Francisco, CA 94133
All Directors and Officers as a Group 11,864,750 (19) 56.82
(15)
(1) Includes Options to purchase 50,000, 25,000, 25,000, 25,000 and 25,000
shares of Class A Common Stock exercisable until January 25, 2001,
October 3, 2001, April 23, 2002, October 3, 2002, and October 3, 2003
respectively.
(2) In addition to 34,030 shares of Class A Common Stock over which Mr.
Davidson has sole voting and investment power (which number includes
30,600 shares held by Mr. Davidson's minor children), the table reflects
184,265 shares of Class A Common Stock that may be immediately acquired
upon the exercise of Options expiring August 9, 2005 (70,000 shares),
November 20, 2005 (37,072 shares), January 25, 2006 (11,407 shares), May
22, 2006 (19,118 shares), March 13, 2007 (33,334 shares) and October 28,
2007 (13,334). The table does not reflect 66,666 shares of Class A
Common Stock that may be acquired upon the exercise of Options expiring
March 13, 2007, in the event a change in control is deemed to have
occurred. In this event, Mr. Davidson's percent of class ownership would
be 1.52 percent.
(3) Includes 30,619 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Options expiring November 20, 2005 (13,608
shares) and January 25, 2006 (17,083 shares), and 45,858 shares of Class
A Common Stock that may be immediately acquired upon the exercise of
Warrants expiring June 30, 1999.
The table also reflects an aggregate of 1,879,782 shares of Class A
Common Stock (which number includes 142,856 shares held by Mr. Gary's
minor children) that are subject to (i) a Stockholders Agreement among
certain stockholders of the Company, including Mr. Gary, and Westar
Capital (the "Westar Stockholders Agreement"); and (ii) a Voting
Agreement among certain stockholders of the Company, including Mr. Gary,
SYCOM and SYCOM Corporation (the "SYCOM Voting Agreement"). Under
the Westar Stockholders Agreement Westar Capital (i) has the right to
nominate a certain number of directors, and the principal stockholders
of the Company that are a party to the Westar Stockholders Agreement,
including Mr. Gary, have agreed to vote for Westar Capital's nominees;
and (ii) shall vote for the remaining nominees selected by the
Nominating Committee of the Company. The Westar Stockholders Agreement
terminates the earlier of (i) five years after the date of the
Agreement; or (ii) the date upon which the stockholdings of Westar
Capital and its affiliates, counted on an as-converted basis, falls
below 10 percent of the outstanding Common Stock of the Company,
calculated on a fully-diluted basis as specified in the Westar
Stockholders Agreement.
Under the SYCOM Voting Agreement (i) SYCOM and SYCOM Corporation have
<PAGE>37
the right to nominate a certain number of directors, and the principal
stockholders of the Company that are a party to the SYCOM Voting
Agreement, including Mr. Gary, have agreed to vote for such nominees;
(ii) SYCOM and SYCOM Corporation have agreed to vote for the remaining
director nominees selected by the Company; and (iii) all parties to the
SYCOM Voting Agreement, including Mr. Gary, have agreed to vote at the
next annual meeting to authorize the issuance of additional common stock
to permit the conversion of the Series D Convertible Preferred Stock to
Class A Common Stock in accordance with the terms of the Sale and
Noncompetition Agreement among the Company, SYCOM Corporation and
others. The SYCOM Voting Agreement terminates June 30, 2001.
Additionally the table reflects the following securities that all are
subject to an Agreement of Stock Purchase and Sale among Messrs. Gary,
Esquer, Mazanec and Sperberg: 351,892 shares of Class A Common Stock,
and 11,327 shares of Class A Common Stock that may be acquired upon the
exercise of Warrants expiring June 30, 1999. Messrs. Gary, Esquer and
Sperberg have entered into such Agreement whereby they have sold,
subject to payment and vesting schedules, shares of the Onsite-Cal to
Messrs. Esquer and Mazanec. Until a share is paid for all voting and
dispositive rights remain with the seller. Upon vesting and payment,
each such purchaser of the Onsite-Cal shares became entitled to the same
number of the Company's Class A Common Stock received by the sellers,
pursuant to the Reorganization, with respect to the shares sold. The
table reflects all adjustments for shares that have vested and been paid
for in full.
(4) Gruber & McBaine Capital Management, LLC ("Gruber & McBaine"), the
successor-in-interest to Gruber & McBaine Capital Management, Inc., a
California corporation, is an investment advisor and a general partner
of Lagunitas Partners, L.P. Consequently, Gruber & McBaine has or shares
voting or dispositive power over 1,151,573 shares of Class A Common
Stock and 30,470 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Warrants expiring June 30, 1999.
(5) Mr. Gruber is a member of Gruber & McBaine Capital Management, LLC,
which is an investment advisor and a general partner of Lagunitas
Partners, L.P., and is a general partner of Proactive Investment
Managers, L.P., which also is an investment advisor and general partner
of Proactive Partners, L.P., and Fremont Proactive Partners, L.P.
Consequently, in addition to 123,500 shares of Class A Common Stock over
which Mr. Gruber has sole voting and investment power (which number
includes shares held by Mr. Gruber's family members and foundations),
Mr. Gruber also has or shares voting or dispositive power over 2,841,041
shares of Class A Common Stock and 322,306 shares of Class A Common
Stock that may be immediately acquired upon the exercise of Warrants
expiring December 17, 1998, March 1, 1999, June 30, 1999, and September
11, 2002.
(6) Includes 150,000 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Options expiring January 25, 2001 (50,000
shares), May 4, 2001 (25,000 shares), April 23, 2002 (25,000 shares),
May 4, 2002 (25,000 shares) and May 4, 2003 (25,000 shares).
Additionally the table reflects 30,000 shares held by Mr. Holt's
children.
The table also reflects 143,082 shares of Class A Common Stock that are
subject to the SYCOM Voting Agreement among certain stockholders of the
Company, including Mr. Holt as the President of Holt & Associates, SYCOM
and SYCOM Corporation. As previously disclosed, under the SYCOM Voting
Agreement (i) SYCOM and SYCOM Corporation have the right to nominate a
certain number of directors, and the principal stockholders of the
Company that are a party to the SYCOM Voting Agreement, including Mr.
Holt, have agreed to vote for such nominees; (ii) SYCOM and SYCOM
Corporation have agreed to vote for the remaining director nominees
selected by the Company; and (iii) all parties to the SYCOM Voting
Agreement, including Mr. Holt, have agreed to vote at the next annual
meeting to authorize the issuance of additional common stock to permit
the conversion of the Series D Convertible Preferred Stock to Class A
Common Stock in accordance with the terms of the Sale and Noncompetition
Agreement among the Company, SYCOM Corporation and others. The SYCOM
Voting Agreement terminates June 30, 2001.
(7) Includes 30,470 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Warrants expiring June 30, 1999, and over
which Lagunitas Partners, L.P. ("Lagunitas") has sole voting and
investment power. The table also reflects an aggregate of 858,102 shares
of Class A Common Stock that are subject to (i) the Westar Stockholders
Agreement among certain stockholders of the Company, including
Lagunitas, and Westar Capital; and (ii) the SYCOM Voting Agreement among
<PAGE>38
certain stockholders of the Company, including Lagunitas, SYCOM and
SYCOM Corporation. As previously disclosed, under the Westar
Stockholders Agreement Westar Capital (i) has the right to nominate a
certain number of directors, and the principal stockholders of the
Company that are a party to the Westar Stockholders Agreement, including
Lagunitas, have agreed to vote for Westar Capital's nominees; and (ii)
shall vote for the remaining nominees selected by the Nominating
Committee of the Company. The Westar Stockholders Agreement terminates
the earlier of (i) five years after the date of the Agreement; or (ii)
the date upon which the stockholdings of Westar Capital and its
affiliates, counted on an as-converted basis, falls below 10 percent of
the outstanding Common Stock of the Company, calculated on a
fully-diluted basis as specified in the Westar Stockholders Agreement.
As previously disclosed, under the SYCOM Voting Agreement (i) SYCOM and
SYCOM Corporation have the right to nominate a certain number of
directors, and the principal stockholders of the Company that are a
party to the SYCOM Voting Agreement, including Lagunitas, have agreed to
vote for such nominees; (ii) SYCOM and SYCOM Corporation have agreed to
vote for the remaining director nominees selected by the Company; and
(iii) all parties to the SYCOM Voting Agreement, including Lagunitas,
have agreed to vote at the next annual meeting to authorize the issuance
of additional common stock to permit the conversion of the Series D
Convertible Preferred Stock to Class A Common Stock in accordance with
the terms of the Sale and Noncompetition Agreement among the Company,
SYCOM Corporation and others. The SYCOM Voting Agreement terminates June
30, 2001.
(8) Mr. Lloyd-Butler is a member of Gruber & McBaine Capital Management,
LLC, an investment advisor and a general partner of Lagunitas Partners,
L.P. Consequently, in addition to the 8,000 shares of Class A Common
Stock over which he has sole voting and investment power, Mr.
Lloyd-Butler has or shares voting or dispositive power over 1,151,573
shares of Class A Common Stock and 30,470 shares of Class A Common Stock
that may be immediately acquired upon the exercise of Warrants expiring
June 30, 1999.
(9) Includes 160,238 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Options expiring February 15, 1999 (4,000
shares), November 20, 2005 (7,736 shares), January 25, 2006 (46,816
shares), May 22, 2006 (18,352 shares), and March 13, 2007 (83,334
shares), and 2,264 shares of Class A Common Stock that may be
immediately acquired upon the exercise of Warrants expiring June 30,
1999. Additionally, the table reflects 144,850 shares of Class A Common
Stock over which Mr. Mazanec, as a trustee of the Mazanec Family Trust,
has or shares voting or dispositive power. The table does not reflect
166,666 shares of Class A Common Stock that may be acquired upon the
exercise of Options expiring March 13, 2007, in the event a change in
control is deemed to have occurred. In this event, Mr. Mazanec's percent
of class ownership would be 4.37 percent.
The table also reflects the following securities that all are subject to
an Agreement of Stock Purchase and Sale among Messrs. Mazanec, Esquer,
Gary and Sperberg: 336,604 shares of Class A Common Stock, and 11,414
shares of Class A Common Stock that may be immediately acquired upon the
exercise of Warrants expiring June 30, 1999. As previously disclosed,
Messrs. Esquer, Gary and Sperberg have entered into such Agreement
whereby they have sold, subject to payment and vesting schedules, shares
of Onsite-Cal to Messrs. Esquer and Mazanec. Until a share is paid for
all voting and dispositive rights remain with the seller. Upon vesting
and payment, each such purchaser of the Onsite-Cal shares became
entitled to the same number of the Company's Class A Common Stock
received by the sellers, pursuant to the Reorganization, with respect to
the shares sold. The table reflects all adjustments for shares that have
vested and been paid for in full.
(10) Mr. McBaine is a member of Gruber & McBaine Capital Management, LLC,
an investment advisor and a general partner of Lagunitas Partners,
L.P., and is a general partner of Proactive Investment Managers, L.P.,
also an investment advisor and a general partner of Proactive Partners,
L.P., and Fremont Proactive Partners, L.P. Consequently, in addition to
the 114,900 shares of Class A Common Stock over which he has sole voting
and investment power (which number includes shares held by Mr. McBaine's
family members), Mr. McBaine has or shares voting or dispositive power
over 2,841,041 shares of Class A Common Stock and 322,306 shares of
Class A Common Stock that may be immediately acquired upon the exercise
of Warrants expiring December 17, 1998, March 1, 1999, June 30, 1999,
and September 11, 2002.
<PAGE>39
(11) Includes Options to purchase 75,000, 25,000, 25,000, 25,000 and 25,000
shares of Class A Common Stock exercisable until January 25, 2001, July
13, 2001, April 23, 2002, July 13, 2002, and July 13, 2003,
respectively. In addition to 21,391 shares of Class A Common Stock in
which Mr. McGettigan has sole voting and investment power, Mr.
McGettigan is a general partner of Proactive Investment Managers, L.P.,
an investment advisor and a general partner of Proactive Partners, L.P.,
and Fremont Proactive Partners, L.P., and is a general partner of
McGettigan, Wick & Co., Inc., and consequently has or shares voting or
dispositive power over 1,689,468 shares of Class A Common Stock, and
451,836 shares of Class A Common Stock that may be immediately acquired
upon the exercise of Warrants expiring December 17, 1998, March 1, 1999,
June 30, 1999, September 11, 2002, and June 30, 2003.
(12) Proactive Investment Managers, L.P. ("PIM"), is a general partner of
Proactive Partners, L.P., and Fremont Proactive Partners, L.P., and
consequently has or shares voting or dispositive power over 1,689,468
shares of Class A Common Stock and 279,558 shares of Class A Common
Stock that may be immediately acquired upon the exercise of Warrants
expiring December 17, 1998, March 1, 1999, June 30, 1999, and September
11, 2002. The table also reflects 12,278 shares of Class A Common Stock
that may be immediately acquired upon the exercise of Warrants expiring
December 17, 1998, and June 30, 1999, and over which PIM has sole voting
and investment power.
(13) In addition to 36,678 shares of Class A Common Stock over which
Proactive Partners, L.P. ("Proactive") has sole voting and investment
power, the table reflects 276,888 shares of Class A Common Stock that
may be immediately acquired upon the exercise of Warrants expiring
December 17, 1998, March 1, 1999, June 30, 1999, and September 11, 2002.
The table also reflects an aggregate of 1,592,955 shares of Class A
Common Stock that are subject to (i) the Westar Stockholders Agreement
among certain stockholders of the Company, including Proactive, and
Westar Capital; and (ii) the SYCOM Voting Agreement among certain
stockholders of the Company, including Proactive, SYCOM and SYCOM
Corporation . As previously disclosed, under the Westar Stockholders
Agreement Westar Capital (i) has the right to nominate a certain number
of directors, and the principal stockholders of the Company that are a
party to the Westar Stockholders Agreement, including Proactive, have
agreed to vote for Westar Capital's nominees; and (ii) shall vote for
the remaining nominees selected by the Nominating Committee of the
Company. The Westar Stockholders Agreement terminates the earlier of (i)
five years after the date of the Agreement; or (ii) the date upon which
the stockholdings of Westar Capital and its affiliates, counted on an
as-converted basis, falls below 10 percent of the outstanding Common
Stock of the Company, calculated on a fully-diluted basis as specified
in the Westar Stockholders Agreement.
As previously disclosed, under the SYCOM Voting Agreement (i) SYCOM and
SYCOM Corporation have the right to nominate a certain number of
directors, and the principal stockholders of the Company that are a
party to the SYCOM Voting Agreement, including Proactive, have agreed to
vote for such nominees; (ii) SYCOM and SYCOM Corporation have agreed to
vote for the remaining director nominees selected by the Company; and
(iii) all parties to the SYCOM Voting Agreement, including Proactive,
have agreed to vote at the next annual meeting to authorize the issuance
of additional common stock to permit the conversion of the Series D
Convertible Preferred Stock to Class A Common Stock in accordance with
the terms of the Sale and Noncompetition Agreement among the Company,
SYCOM Corporation and others. The SYCOM Voting Agreement terminates June
30, 2001.
(14) Includes 462,539 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Options expiring February 15, 1999 (4,000
shares), August 9, 2005 (150,000 shares), November 20, 2005 (107,781
shares), January 25, 2006 (52,808 shares), May 22, 2006 (64,616 shares),
and March 13, 2002 (83,334 shares), 371,846 shares of Class A Common
Stock that may be immediately acquired upon the exercise of Warrants
expiring June 30, 1999, and September 11, 2002, 90 shares over which Mr.
Sperberg has sole voting and investment power, and 70,454 shares held by
Mr. Sperberg's minor son. The table does not reflect 166,666 shares of
Class A Common Stock that may be acquired upon the exercise of Options
expiring March 13, 2007, in the event a change in control is deemed to
have occurred. In this event, Mr. Sperberg's percent of class ownership
would be 16.76 percent.
<PAGE>40
The table also reflects an aggregate of 1,848,922 shares of Class A
Common Stock that are subject to (i) the Westar Stockholders Agreement
among certain stockholders of the Company, including Mr. Sperberg, and
Westar Capital; and (ii) the SYCOM Voting Agreement among certain
stockholders of the Company, including Mr. Sperberg, and SYCOM and SYCOM
Corporation. As previously disclosed, under the Westar Stockholders
Agreement Westar Capital (i) has the right to nominate a certain number
of directors, and the principal stockholders of the Company that are a
party to the Westar Stockholders Agreement, including Mr. Sperberg, have
agreed to vote for Westar Capital's nominees; and (ii) shall vote for
the remaining nominees selected by the Nominating Committee of the
Company. The Westar Stockholders Agreement terminates the earlier of (i)
five years after the date of the Agreement; or (ii) the date upon which
the stockholdings of Westar Capital and its affiliates, counted on an
as-converted basis, falls below 10 percent of the outstanding Common
Stock of the Company, calculated on a fully-diluted basis as specified
in the Westar Stockholders Agreement.
As previously disclosed, under the SYCOM Voting Agreement (i) SYCOM and
SYCOM Corporation have the right to nominate a certain number of
directors, and the principal stockholders of the Company that are a
party to the SYCOM Voting Agreement, including Mr. Sperberg, have agreed
to vote for such nominees; (ii) SYCOM and SYCOM Corporation have agreed
to vote for the remaining director nominees selected by the Company; and
(iii) all parties to the SYCOM Voting Agreement, including Mr. Sperberg,
have agreed to vote at the next annual meeting to authorize the issuance
of additional common stock to permit the conversion of the Series D
Convertible Preferred Stock to Class A Common Stock in accordance with
the terms of the Sale and Noncompetition Agreement among the Company,
SYCOM Corporation and others. The SYCOM Voting Agreement terminates June
30, 2001.
Additionally the table reflects the following securities that all are
subject to an Agreement of Stock Purchase and Sale among Messrs.
Sperberg, Esquer, Gary and Mazanec: 351,892 shares of Class A Common
Stock, and 11,327 shares of Class A Common Stock that may be acquired
upon the exercise of Warrants expiring June 30, 1999. As previously
disclosed, Messrs. Sperberg, Esquer and Gary have entered into such
Agreement whereby they have sold, subject to payment and vesting
schedules, shares of Onsite-Cal to Messrs. Esquer and Mazanec. Until a
share is paid for all voting and dispositive rights remain with the
seller. Upon vesting and payment, each such purchaser of the Onsite-Cal
shares became entitled to the same number of the Company's Class A
Common Stock received by the sellers, pursuant to the Reorganization,
with respect to the shares sold. The table reflects all adjustments for
shares that have vested and been paid for in full.
(15) Mr. Sutcliffe is the majority shareholder of SSBKK, Inc., the sole
member of SYCOM Enterprises, LLC, and of SYCOM Corporation, and
consequently has or shares voting or dispositive power over 1,750,000
shares of Class A Common Stock issued and outstanding. Additionally, as
the majority shareholder of SYCOM Corporation, Mr. Sutcliffe has or
shares voting or dispositive power of 15,750,000 shares of Class A
Common Stock that are not reflected in the table but may be issued upon
the conversion of 157,500 shares of Series D Stock, which shares
currently are in escrow and may be released in the future upon the
satisfaction of certain conditions.
(16) Represents 1,750,000 shares of Class A Common Stock that are subject to
the SYCOM Voting Agreement among certain stockholders of the Company,
SYCOM and SYCOM Corporation. As previously disclosed, under the SYCOM
Voting Agreement (i) SYCOM and SYCOM Corporation have the right to
nominate a certain number of directors, and the principal stockholders
of the Company that are a party to the SYCOM Voting Agreement have
agreed to vote for such nominees; (ii) SYCOM and SYCOM Corporation have
agreed to vote for the remaining director nominees selected by the
Company; and (iii) all parties to the SYCOM Voting Agreement have agreed
to vote at the next annual meeting to authorize the issuance of
additional common stock to permit the conversion of the Series D
Convertible Preferred Stock to Class A Common Stock in accordance with
the terms of the Sale and Noncompetition Agreement among the Company,
SYCOM Corporation and others. The SYCOM Voting Agreement terminates June
30, 2001.
(17) Includes the following securities that are subject to the Westar
Stockholders Agreement among certain stockholders of the Company and
Westar Capital: 4,500,000 shares of Class A Common Stock, 2,116,770
shares of Class A Common Stock underlying 423,354 shares of Series C
Convertible Preferred Stock, and 2,000,000 shares that could be purchase
<PAGE>41
by Westar Capital under the Stock Subscription Agreement between the
Company and Westar Capital. As previously disclosed, under the Westar
Stockholders Agreement Westar Capital (i) has the right to nominate a
certain number of directors, and the principal stockholders of the
Company that are a party to the Westar Stockholders Agreement have
agreed to vote for Westar Capital's nominees; and (ii) shall vote for
the remaining nominees selected by the Nominating Committee of the
Company. The Westar Stockholders Agreement terminates the earlier of (i)
five years after the date of the Agreement; or (ii) the date upon which
the stockholdings of Westar Capital and its affiliates, counted on an
as-converted basis, falls below 10 percent of the outstanding Common
Stock of the Company, calculated on a fully-diluted basis as specified
in the Westar Stockholders Agreement.
(18) Mr. Wick is a general partner of Proactive Investment Managers, L.P., an
investment advisor and a general partner of Proactive Partners, L.P.,
and Fremont Proactive Partners, L.P., and is a general partner of
McGettigan, Wick & Co., Inc., and consequently has or shares voting or
dispositive power over 1,689,468 shares of Class A Common Stock and
451,836 shares of Class A Common Stock that may be immediately acquired
upon the exercise of Warrants expiring December 17, 1998, March 1, 1999,
June 30, 1999, September 11, 2002, and June 30, 2003.
(19) Includes the aggregate of ownership of Messrs. Clark, Davidson, Gary,
Holt, Mazanec, McGettigan, Sperberg and Sutcliffe as set forth in
footnotes (1), (2), (3), (6), (9), (11), (14) and (15), and an aggregate
of 424,620 shares of Class A Common Stock held by other officers,
196,406 shares of Class A Common Stock that may be acquired within the
next sixty (60) days upon the exercise of options held by other
officers, and 392,843 shares of Class A Common Stock that are subject to
a Stock Purchase Agreement among Messrs. Esquer, Gary, Mazanec and
Sperberg.
* Less than one percent (1%).
Item 12. Certain Relationships and Related Transactions.
Grant of Warrants. In January 1997, the Company executed an energy services
agreement (the "ESA") with a customer to perform an energy analysis and install
energy efficient measures at the customer's facilities. A condition of the ESA
was that the Company procure and maintain a payment and performance bond for 100
percent of the construction cost set forth in the ESA.
In accordance with the terms and conditions of the ESA, the Company procured the
requisite bonds. In order to obtain the bonds, however, the Company was required
to post an irrevocable letter of credit in the amount of $150,000 in favor of
the surety company, and Mr. Sperberg was required to execute personal guarantees
and indemnity agreements. The collateral for the letter of credit consists of a
deposit of funds posted by Proactive Partners, L.P. ("Proactive"), a shareholder
of the Company. Mr. McGettigan, the Chairman of the Board of Directors of the
Company, is a general partner of Proactive, and Mr. Sperberg is the Chief
Executive Officer of the Company.
In exchange, and as consideration, for the agreement by Proactive to post the
necessary collateral for the letter of credit, and by Mr. Sperberg to execute
the necessary guarantees and indemnity agreements, the Company agreed (i) to
indemnify each of Proactive and Mr. Sperberg in the event the Company defaults
under the ESA and/or the bonds, and as a result of such default, the surety
company seeks to draw on the letter of credit and/or enforce the personal
guarantee and indemnity agreement of Mr. Sperberg, which indemnities are to be
secured by the assets of the Company; and (ii) to issue warrants to each of
Proactive and Mr. Sperberg to acquire shares of Class A Common Stock of the
Company. The Company agreed to issue warrants to Proactive representing the
right to acquire 200,000 shares of Class A Common Stock of the Company at the
exercise price of $0.1875 per share, which was the current price of the
Company's Class A Common Stock on the OTC Electronic Bulletin Board at the time
of the meeting of the Board of Directors of the Company held on September 11,
1997, at which meeting this transaction was approved. The number of shares that
are the subject of the Proactive warrants represent 25 percent of the amount of
<PAGE>42
the collateral posted by Proactive. Similarly, the Company agreed to issue
warrants to Mr. Sperberg representing the right to acquire 325,988 shares of the
Company's Class A Common Stock at the exercise price of $0.1875 per share, which
represents 6 percent of the aggregate amount of the bonds.
Guaranty of Performance. In March 1998, the Company entered into an energy
services agreement (the "Agreement") with a customer to install energy efficient
equipment in a large number of the customer's facilities. A condition precedent
to the customer's execution of the Agreement, however, was the customer's
receipt of a guaranty from Westar Capital, guaranteeing the payment obligations
of the Company under the Agreement.
Accordingly, in exchange, and as consideration for, Westar Capital's execution
of the guaranty, the Company (i) agreed, in essence, to indemnify Westar Capital
in the event Westar Capital must perform under its guaranty; (ii) executed a
promissory note to cover any amounts the Company may owe to Westar Capital as a
result of Westar Capital's performance under its guaranty; and (iii) granted
Westar Capital a security interest in the Company's assets to secure its payment
of the note. The security agreement includes certain exceptions in the security
interest granted therein for project financing or working capital financing,
provided the Company's shareholder equity is above a specified amount. No
amounts currently are outstanding under the note. Rita A. Sharpe, a former
director of the Company, is the former President of Westar Capital, a
shareholder of the Company, and Mr. Wages, a director of the Company, is the
Director of Corporate Strategy for Western Resources, the parent company of
Westar Capital, and the Chairman of the Board and President of Westar Capital.
Engagement of Investment Advisor. In connection with the SYCOM transaction, the
Company engaged McGettigan Wick & Co., Inc., an investment banking firm
("McGettigan Wick"), to assist the Company in the structure and negotiation of
the transaction. Under the terms of the engagement, the Company agreed to pay
McGettigan Wick $50,000 one year after the closing of the transaction (which was
June 30, 1998), and issue warrants to McGettigan Wick to acquire 160,000 shares
of the Company's Class A Common Stock at the exercise price of $1.17 per share,
which was the current price of the Company's Class A Common Stock on the OTC
Electronic Bulletin Board on June 30, 1998. Mr. McGettigan is a general partner
of Proactive Investment Managers, L.P. and Proactive Partners, L.P.,
shareholders of the Company, and is the Chairman of the Board of Directors of
the Company.
Westar Transaction. In February 1998, OMS acquired the operating assets of
Mid-States Armature in exchange for $290,000 cash. In connection with this
transaction, the Company executed an agreement with Westar Energy, a sister
corporation of Westar Capital and wholly-owned subsidiary of Western Resources,
pursuant to which Westar Energy agreed to loan to the Company an amount equal to
the amount paid by the Company for the operating assets. In April 1998, this
loan was made by Westar Energy to the Company. The loan must be repaid by the
first anniversary of the closing of the asset acquisition, and bears interest at
the rate of 12 percent per annum. At the option of Westar Energy the loan may be
repaid in cash or shares of Class A Common Stock of the Company calculated at
the average closing price of such stock over a 20 consecutive trading day period
prior to the repayment date (provided, however, that such price shall not be
less than $1.00 per share or greater than $2.00 per share). Ms. Sharpe, a former
director of the Company, is the former President of Westar Energy and Westar
Capital, which is a shareholder of the Company, and Mr. Wages, a director of the
Company, is the Director of Corporate Strategy of Western Resources, the parent
company of Westar Capital and Westar Energy, and the Chairman of the Board and
President of Westar Capital and Westar Energy.
Guaranty of Bonds. In connection with the Company's acquisition of OBS, the
Company entered into a Transition Agreement pursuant to which Westar Energy
agreed, for a period of one year after the closing of the OBS acquisition, to
maintain an indemnity agreement with Westar Capital at a level sufficient to
provide credit support to OBS for bid and performance bonds
<PAGE>43
required to be posted in connection with OBS's business. OBS pays all actual and
out-of-pocket fees and costs associated with these bonds. OBS (individually or
with the Company) currently has bonds in the aggregate amount of approximately
$8,882,760 outstanding on projects that are in various stages of completion and
for which Westar Energy and/or Westar Capital have provided the requisite credit
support. Ms. Sharpe, a former director of the Company, is the former President
of Westar Energy and Westar Capital, which is a shareholder of the Company, and
Mr. Wages, a director of the Company, is the Director of Corporate Strategy of
Western Resources, the parent company of Westar Capital and Westar Energy, and
the Chairman of the Board and President of Westar Capital and Westar Energy.
Outstanding Obligations. Under agreements with Western Resources, OBS maintains
equipment for supplying demineralized water for boiler makeup water that OBS
installed at Western Resources' Lawrence Energy Center and Tecumseh Energy
Center. As of the fiscal year ended June 30, 1998, OBS had outstanding accounts
receivable from Western Resources in the amount of $69,924. Additionally, in
accordance with the terms and conditions of the Transaction Agreement, Western
Resources performs certain subcontracting services for OBS. As of the fiscal
year ended June 30, 1998, OBS had outstanding accounts payable with Western
Resources in the amount of $369,961, and accrued liabilities with Western
Resources in the amount of $254,409. Ms. Sharpe, a former director of the
Company, is the former President of Westar Energy and Westar Capital, which is a
shareholder of the Company, and Mr. Wages, a director of the Company, is the
Director of Corporate Strategy of Western Resources, the parent company of
Westar Capital and Westar Energy, and the Chairman of the Board and President of
Westar Capital and Westar Energy.
PART IV
Item 13. Exhibits and Reports on Form 8-K.
a) Exhibits
2.1 The Amended and Restated Agreement and Plan of Reorganization by
and between Western Energy Management, Inc. and Onsite Energy, as
amended*
3.1 Certificate of Incorporation*
3.2 Form of Bylaws*
10.1 1993 Stock Option Plan*
10.2 Form of Employment Agreement between Onsite Energy Corporation and
Richard T. Sperberg*
10.3 Form of Employment Agreement between Onsite Energy Corporation and
William M. Gary III*
10.4 Form of Employment Agreement between Onsite Energy Corporation and Frank
J. Mazanec*
10.5 Form of Employment Agreement between Onsite Energy Corporation and
Hector A. Esquer*
10.11 Energy Services Agreement (between Western Energy Management, Inc. and
Tustin Unified School District dated October 1992)*
<PAGE>44
10.29 Television City Cogen L.P. Energy Services Agreement (between Onsite
Energy and CBS Operations & Engineering, a division of CBS Inc., dated
5/20/87)*
10.32 A. Extension and Amendment to Agreement for $2,000,000 Note dated
9/27/93 (between Television City Cogen, L.P. and Shawmut Bank N.A.)*
B. Amended and Restated Term Loan for $2,000,000 dated 9/27/93
(between Television City Cogen, L.P. and Shawmut Bank, N.A.)*
10.46 EUA/Onsite, L.P., and Santa Ana Unified School District, as amended*
10.47 EUA/Onsite, L.P., and Chino Unified School District, as amended*
10.48 Energy Services Agreement between Western Energy Management, Inc., and
R. E. Thomason General Hospital*
10.50 Agreement between Onsite Energy and EUA Cogenex Corporation**
10.51 Agreement for the Sale and Purchase of Stock (to acquire Lanikai
Lighting, Inc.)**
10.52 Debt Conversion and Preferred Stock Purchase Agreement**
10.53 Settlement Agreement and Release with George T. McLaughlin, dated July
21, 1995***
10.54 Master Energy Efficiency Services Agreement between Onsite
Energy Corporation and Hercules Incorporated, predecessor-in-interest
to Alliant Techsystems Inc., dated February 8, 1995***
10.55 Master Energy Efficiency Services Agreement between Onsite Energy
Corporation and IHC Hospitals, Inc., dated February 28, 1995***
10.56 Master Energy Efficiency Services Agreement between Onsite Energy
Corporation and First Security Bank of Utah, N.A., dated February 17,
1995***
10.57 Master Energy Efficiency Services Agreement between Onsite Energy
Corporation and Utah National Guard, dated December 30, 1994***
10.58 Master Energy Efficiency Services Agreement between Onsite Energy
Corporation and The Boyer Company, dated August 18, 1995***
10.59 Southern California Edison Company Demand Side Management Bidding Pilot
Industrial & Large Commercial Energy Efficiency Agreement between Onsite
Energy Corporation and Southern California Edison Company, dated May 4,
1994***
10.60 Southern California Edison Company Demand Side Management Bidding Pilot
Industrial & Large Commercial Energy Efficiency Agreement between
KENETECH Energy Management, Inc., and Southern California Edison
Company, dated May 4, 1994, acquired by Onsite Energy Corporation on
June 20, 1995***
10.61 Energy Service Agreement between Onsite Energy Corporation and Ford
Motor Company, dated August 2, 1995***
<PAGE>45
10.62 Standard Energy Savings Agreement between Onsite Energy Corporation
and Public Service Electric and Gas Company, dated July 21, 1995***
10.63 Purchase Order No. B11 PO95 470871, from Ford Motor Company to Onsite
Energy Corporation, dated August 30, 1995
10.64 Conservation Purchase Agreement with Puget Sound Power & Light Company,
dated June 21, 1994***
10.65 Peak Load Reduction Agreement with Nevada Power Company, dated May 31,
1994***
10.66 Agreement to Accept Proceeds from Sale of Stock for Services Rendered,
dated January 30, 1995***
10.67 Purchase Order No. 7-6R0212 to Onsite Energy Corporation from Hughes
Aircraft Company, dated October 20, 1995****
10.68 Purchase Order No. 7-6R0213 to Onsite Energy Corporation from Hughes
Aircraft Company, dated October 20, 1995****
10.69 Engineering, Procurement and Construction Agreement between Onsite
Energy Corporation and Parke Industries, Inc., dated November 21,
1995****
10.70 Engineering, Procurement and Construction Agreement between Onsite
Energy Corporation and General Motors Corporation, Truck & Bus
Division, dated December 20, 1995****
10.71 Master Lease Agreement between Onsite Energy Corporation and General
Motors Corporation, Truck & Bus Division, dated December 20, 1995****
10.72 Master Lease Agreement, Supplemental Terms, between Onsite Energy
Corporation and General Motors Corporation, Truck & Bus Division, dated
December 20, 1995****
10.73 Equipment Schedule No. 1 to Master Lease Agreement, between Onsite
Energy Corporation and General Motors Corporation, Truck & Bus
Division, dated December 20, 1995****
10.74 Financing Agreement, Agreement for Purchase and Sale of Equipment and
Assignment of Rights between Onsite Energy Corporation and ChiCorp
Financial Services, Inc., dated December 1995****
10.76 Engineering, Procurement and Construction Agreement between
Onsite Energy Corporation and Geissenberger Manufacturing Corp. dba
The Robert Group, dated January 11, 1996****
10.77 Master Engineering, Procurement and Construction Agreement between
Onsite Energy Corporation and Ram Air Engineering, dated September 30,
1995****
10.78 Acquisition and Release Agreement for Lanikai Lighting, Inc. among
Joel Hemington, Tom Halvorsen, Onsite Energy Corporation and Lanikai
Lighting, Inc., dated February 20, 1996*****
<PAGE>46
10.79 Contract Change Order No. 1 [Amendment No. 1] to Engineering,
Procurement and Construction Agreement between Onsite Energy
Corporation and General Motors Corporation, Truck & Bus Division, dated
March 1, 1996*****
10.80 Amendment No. 1 dated March 1, 1996, to Equipment Schedule No. 1 to
Master Lease Agreement, between Onsite Energy Corporation and
General Motors Corporation, Truck & Bus Division, dated March 1,
1996*****
10.81 Pacific Gas & Electric Company Demand Side Management Agreement between
Onsite Energy Corporation and Pacific Gas & Electric Company, dated
March 5, 1996*****
10.82 Purchase and Assignment Agreement between Onsite Energy Corporation
and KENETECH Energy Management, Inc., dated March 20, 1996*****
10.83 Operation and Maintenance Agreement between Onsite Energy
Corporation and El Paso County Hospital District dated June 1996
(executed March 1, 1996)*****
10.84 Master Energy Efficiency Services Agreement between Onsite Energy
Corporation and West Covina Unified School District, dated June 3,
1996******
10.85 Financing Agreement, Agreement for Purchase and Sale of Equipment and
Assignment of Rights between Onsite Energy Corporation and ChiCorp
Financial Services, Inc., dated June 3, 1996******
10.86 Master Energy Efficiency Services Agreement between Onsite Energy
Corporation and California State University, Fresno, dated June 28,
1996******
10.87 Energy Services Agreement No. 97-031 A, dated January 27, 1997, between
Onsite Energy Corporation and State of Washington, Department of
General Administration, Energy Conservation Services, Northern State
Multi-Service Center, Sedro Woolley, Washington*******
A. Energy Services Agreement Amendment No. 1 dated July 14, 1997
B. Energy Services Agreement Amendment No. 2 dated August 4, 1997
10.88 Performance Based Energy Savings Agreement dated March 31, 1998, between
Onsite Energy Corporation and Unified School District No. 500, Wyandotte
County, Kansas********
10.89 Engineering, Procurement and Construction Agreement between Onsite
Energy Corporation and Lighting Technology Services, Inc., dated as of
March 31, 1998********
10.90 Engineering, Procurement and Construction Agreement between Onsite
Energy Corporation and The Fagan Company, dated as of March 31,
1998********
10.91 Performance Based Energy Savings Agreement dated March 3, 1998, between
Onsite Business Services, Inc. and the City of Anthony, Kansas
21 Subsidiaries of the Registrant
23.1 Consent of Hein + Associates, LLP
<PAGE>47
* Previously filed as exhibits to Onsite Energy Corporation's
Registration Statement, Form S-4, Registration No. 33-66010, filed
with the Securities and Exchange Commission on December 20, 1993.
** Previously filed as exhibits to Onsite Energy Corporation's Form
10-KSB, as amended and restated on July 19, 1995.
*** Previously filed as exhibits to Onsite Energy Corporation's Form
10-KSB, as filed for the year ended June 30, 1995.
**** Previously filed as exhibits to Onsite Energy Corporation's Form
10-QSB, as filed for the quarter ended December 31, 1995.
***** Previously filed as exhibits to Onsite Energy Corporation's Form
10-QSB, as filed for the quarter ended March 31, 1996.
****** Previously filed as exhibits to Onsite Energy Corporation's Form
10-KSB, as filed for the year ended June 30, 1996.
******* Previously filed as exhibits to Onsite Energy Corporation's Form
10-KSB, as filed for the year ended June 30, 1997.
******** Previously filed as exhibits to Onsite Energy Corporation's Form
10-QSB, as filed for the quarter ended March 31, 1998.
b) Reports on Form 8-K
In the fourth quarter of fiscal year 1998 the Company filed two reports on Form
8-K. One Form 8-K, dated June 12, 1998, and filed on June 24, 1998, reported the
acquisition by the Company of all of the issued and outstanding shares of LTS
under an Agreement of Purchase and Sale of Stock among the Company, LTS, Russell
Wm. Royal and Keith L. Aldrich. Another Form 8-K, dated June 30, 1998, and filed
on July 15, 1998, reported the acquisition by SO Corporation of all the assets
and certain liabilities of, and the execution of a Sale and Noncompetition
Agreement with SYCOM Corporation and other related agreements among the parties.
As of the date of this report, Forms 8-K/A had not been submitted relating to
the acquisitions of LTS and SO Corporation. The Company expects these filings to
occur shortly.
<PAGE>48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Form 10-KSB to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: November 12, 1998 By: RICHARD T. SPERBERG
-------------------------------------
Chief Executive Officer (Principal Executive
Officer), Interim Chief Financial Officer
(Principal Financial and Accounting Officer),
Director
<PAGE>49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Form 10-KSB to be signed on its
behalf by the undersigned, thereunto duly authorized.
ONSITE ENERGY CORPORATION
Date: November 12, 1998 By: CHARLES C. MCGETTIGAN
--------------------------------------------
Charles C. McGettigan
Chairman of the Board and
Outside Director
Date: November 12, 1998 By: RICHARD T. SPERBERG
--------------------------------------------
Richard T. Sperberg
Chief Executive Officer, Interim Chief
Financial Officer and Director
Date: November 12, 1998 By: S. LYNN SUTCLIFFE
--------------------------------------------
S. Lynn Sutcliffe
President and Director
Date: November 12, 1998 By: TIMOTHY G. CLARK
--------------------------------------------
Timothy G. Clark
Outside Director
Date: November 12, 1998 By: H. TATE HOLT
---------------------------------------------
H. Tate Holt
Outside Director
Date: November 12, 1998 By: LEROY P. WAGES
---------------------------------------------
Leroy P. Wages
Outside Director
Date: November 12, 1998 By: WILLIAM M. GARY, III
---------------------------------------------
William M. Gary, III
Former Executive Vice President, Former
Secretary and Director
Date: November 12, 1998 By: RICHARD L. WRIGHT
---------------------------------------------
Richard L. Wright
Senior Vice President and Director
<PAGE>F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report ..............................................F-2
Consolidated Balance Sheet - June 30, 1998.................................F-3
Consolidated Statements of Operations - For the Years ended
June 30, 1998 and 1997..................................................F-4
Consolidated Statement of Stockholders' Equity (Deficit) -
For the Years ended June 30, 1998 and 1997..............................F-5
Consolidated Statements of Cash Flows - For the Years ended
June 30, 1998 and 1997..................................................F-7
Notes to Consolidated Financial Statement..................................F-8
<PAGE>F-2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Onsite Energy Corporation
Carlsbad, California
We have audited the accompanying consolidated balance sheet of Onsite Energy
Corporation and subsidiaries (the "Company") as of June 30, 1998 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years ended June 30, 1998 and 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Onsite Energy
Corporation and subsidiaries at June 30, 1998 and the results of their
operations and their cash flows for the years ended June 30, 1998 and 1997 in
conformity with generally accepted accounting principles.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
September 28, 1998, except for the last paragraph of Note 20 which is as of
October 16, 1998
<PAGE>F-3
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1998
ASSETS
Current Assets:
Cash $ 2,093,006
Cash-restricted 157,836
Accounts receivable, net of allowance for doubtful
accounts of $15,030 3,518,870
Inventory 178,215
Costs and estimated earnings in excess of billings
on uncompleted contracts 944,820
Other assets 611,195
-------------
TOTAL CURRENT ASSETS 7,503,942
Property and equipment, net of accumulated depreciation
and amortization 1,958,178
Excess of purchase price over net assets acquired, net
of amortization of $14,261 3,563,718
Other 116,830
-------------
TOTAL ASSETS $ 13,142,668
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - related parties $ 468,329
Current portion of notes payable 1,846,870
Accounts payable 3,380,271
Billings in excess of costs and estimated earnings on
uncompleted contracts 2,888,659
Accrued expenses and other liabilities 1,613,180
-------------
TOTAL CURRENT LIABILITIES 10,197,309
Long-Term Liabilities:
Accrued future operation and maintenance costs
associated with energy services agreements 465,359
Notes payable, less current portion 3,010
-------------
TOTAL LIABILITIES 10,665,678
-------------
Commitments and contingencies
(Notes 3, 4, 15, 17, 18, 19 and 20) -
Stockholders' Equity:
Preferred Stock, Series C, 842,500 shares
authorized, 208,205 issued and outstanding
(Aggregate $1,041,025 liquidation preference) 208
Preferred Stock, Series D, 157,500 shares authorized,
issued and outstanding and held in escrow (Note 4) -
Common Stock, $.001 par value, 24,000,000 shares authorized:
Class A common stock, 23,999,000 shares
authorized, 18,243,188 issued and outstanding 18,243
Class B common stock, 1,000 shares authorized,
none issued and outstanding -
Additional paid-in capital 23,208,598
Notes receivable - related parties (1,335,217)
Accumulated deficit (19,414,842)
-------------
TOTAL STOCKHOLDERS' EQUITY 2,476,990
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,142,668
=============
The accompanying notes are an integral part of these financial statements
<PAGE>F-4
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------------- -----------------
<S> <C> <C>
Revenues $12,267,148 $ 9,561,375
Cost of sales 10,057,277 6,692,198
----------- -----------
Gross margin 2,209,871 2,869,177
Selling, general, and administrative expenses 3,879,237 3,139,018
Depreciation and amortization 539,499 587,077
Loss on disposition of partnership interests - 425,240
Gain on sale of assets - (17,686)
----------- -----------
Operating loss (2,208,865) (1,264,472)
Other income (expense):
Interest (expense) (27,400) (159,028)
Interest income 25,283 43,402
----------- -----------
Total other income (expense) (2,117) (115,626)
----------- -----------
Loss before provision for income taxes (2,210,982) (1,380,098)
Provision for income taxes 7,500 8,500
----------- -----------
Net loss $(2,218,482) $(1,388,598)
=========== ===========
Net loss allocated to common stockholders $(2,267,629) $(1,388,598)
=========== ===========
Basic and diluted loss per common share $ (0.16) $ (0.13)
========== ==========
Weighted average shares outstanding 13,790,185 10,818,498
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-5
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock PREFERRED STOCK
----------------------- -------------------------------------------------------------------------
Class A Series A Series B Series C
----------------------- ----------------------- ----------------------- -----------------------
SHARES AMOUNT SHARES Amount SHARES Amount SHARES Amount
----------- ----------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance July 1, 1996 6,263,463 $6,263 3,810 $ 4 605,641 $ 605 - $ -
Issued to Onsite 401k plan 48,562 49 - - - - - -
Conversion of accounts
payable to Class A
common stock 62,077 62 - - - - - -
Common shares issued for
Series A and B
preferred dividends 347,048 347 - - - - - -
Conversion of Series A
preferred stock 3,571,494 3,572 (3,810) (4) - - - -
Conversion of Series B
preferred stock 605,641 605 - - (605,641) (605) - -
Exercise of stock option 45,887 46 - - - - - -
Net Loss - - - - - - - -
--------------------------------------------------------------------------------------------------
Balance June 30, 1997 10,944,172 10,944 - - - - - -
Issued to Onsite 401k plan 49,912 50 - - - - - -
Issued pursuant to private
offering, Net of expenses 2,000,000 2,000 - - - - -
Stock issued for acquisitions 4,940,000 4,940 - - - - - -
Exercise of stock options 309,104 309 - - - - - -
Sale of Series C
preferred stock - - - - - - 200,000 200
Series C preferred
stock dividends - - - - - - 8,205 8
Compensation recognized upon
issuance of warrants - - - - - - - -
Notes receivable acquired in
acquisitions - - - - - - - -
Net loss - - - - - - - -
--------------------------------------------------------------------------------------------------
Balance June 30, 1998 18,243,188 $18,243 - $ - - $ - 208,205 $ 208
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>F-6
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended June 30, 1998 and 1997
(CONTINUED)
<TABLE>
<CAPTION>
NOTES
Common ADDITIONAL RECEIVABLE
SHARES PAID-IN RELATED ACCUMULATED
ISSUABLE CAPITAL PARTIES DEFICIT TOTAL
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance July 1, 1996 $ 608,439 $16,336,469 $ - $ (15,758,615) $1,193,165
Issued to Onsite 401k plan - 24,931 - - 24,980
Conversion of accounts
payable to Class A
common stock - 66,973 - - 67,035
Common shares issued for
Series A and B
preferred dividends (608,439) 608,092 - - -
Conversion of Series A
preferred stock - (3,568) - - -
Conversion of Series B
preferred stock - - - - -
Exercise of stock option - 20,064 - - 20,110
Net Loss - - - (1,388,598) (1,388,598)
-------------------------------------------------------------------------------
Balance June 30, 1997 - 17,052,961 - (17,147,213) (83,308)
Issued to Onsite 401k plan - 17,399 - - 17,449
Issued pursuant to private
offering, Net of expenses - 951,542 - - 953,542
Stock issued for acquisitions - 4,031,923 - - 4,036,863
Exercise of stock options - 86,854 - - 87,163
Sale of Series C preferred stock - 999,800 - - 1,000,000
Series C preferred stock dividends - 49,139 - (49,147) -
Compensation recognized upon
issuance of warrants - 18,980 - - 18,980
Notes receivable acquired in
acquisitions - - (1,335,217) - (1,335,217)
Net loss - - - (2,218,482) (2,218,482)
-------------------------------------------------------------------------------
Balance June 30, 1998 $ - $23,208,598 $ (1,335,217) $(19,414,842) $ 2,476,990
===============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>F-7
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For
the Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,218,482) $ (1,388,598)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization of goodwill 280,927 400,000
Amortization of acquired contract costs - 399,032
Additions (reductions) to reserve for future operation
and maintenance costs 43,927 (45,925)
Provision for bad debts 30,192 37,093
Depreciation 258,572 187,077
Compensation recognized upon issuance of stock warrants 18,980 -
Loss on disposition of partnership interests - 425,240
Gain on sale of assets - (17,686)
Change in operating assets and liabilities:
Accounts receivable (781,792) 747,923
(Increase) decrease in costs and estimated earnings
in excess of billings on uncompleted contracts (225,324) 2,051,592
Inventory (5,758) -
Other assets (435,120) 260,322
Cash-restricted 115,331 (50,467)
Accounts payable 1,351,806 (1,464,594)
Increase (decrease) in billings in excess of costs
and estimated earnings on uncompleted contracts 1,739,390 (1,130,080)
Accrued expenses and other liabilities 641,631 (344,632)
Deferred income - (25,000)
------------ ------------
Net cash provided by operating activities 814,280 41,297
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (119,075) (4,473)
Proceeds from sale of assets - 540,081
Loan to Shareholders (7,911) -
Acquisition of businesses, net of cash acquired (1,203,805) -
------------ ------------
Net cash provided by (used in) investing activities (1,330,791) 535,608
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable - related party 290,000 -
Proceeds from issuance of common stock 953,542 -
Proceeds from issuance of preferred stock 1,000,000 -
Proceeds from exercise of stock options 87,163 45,090
Repayment of notes payable - related party (46,804) (1,071,571)
Repayment of long-term debt (201,278) -
------------ ------------
Net cash provided by (used in) in financing activites 2,082,623 (1,026,481)
------------ ------------
Net increase (decrease) in cash 1,566,112 (449,576)
Cash, beginning of year 526,894 976,470
------------ ------------
Cash, end of year $ 2,093,006 $ 526,894
============ ============
Supplemental disclosures of non-cash transactions:
Payment of Series A and B Preferred Stock dividends
with common stock $ - $ 347
============ ============
Payment of Series C Preferred Stock dividends
with Series C Preferred Stock $ 49,147 $ -
============ ============
Payment of accrued liabilities with common stock $ 17,449 $ 67,035
============ ============
Liabilities accrued for acquisition costs $ 285,594 $ -
============ ============
Conversion of preferred stock to common stock $ - $ 4,176
============ ============
Fair market value of assets, less liabilities of
businesses acquired with common stock $ 4,036,863 $ -
============ ============
Supplemental disclosures of cash transactions:
Interest paid $ 33,385 $ 159,028
============ ============
Income taxes paid $ 36,175 $ 41,290
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>F-8
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations:
Onsite Energy Corporation, which does business as ONSITE SYCOM Energy
Corporation ("the Company"), is an energy efficiency services company ("ESCO")
that develops, designs, constructs, owns and operates comprehensive energy
efficiency projects and assists customers in reducing the cost of purchased
electricity and fuel. The Company also offers professional consulting services
in the areas of market assessment, business strategies, public policy analysis,
environmental studies and utility deregulation. It is the Company's mission to
save its customers money and improve the quality of the environment through
independent energy solutions.
The Company was formed pursuant to a reorganization between Western Energy
Management, Inc., a Delaware corporation ("WEM"), and Onsite Energy Corporation,
a California corporation formed in 1982 ("Onsite-Cal"), which was effective
February 15, 1994. Under the reorganization, Onsite-Cal merged with and into the
Company and a newly formed subsidiary of the Company merged with and into WEM,
which survived and became a wholly owned subsidiary of the Company. This
transaction was accounted for as a purchase of Onsite-Cal by the Company.
In October 1997, the Company acquired Westar Business Services, Inc.("WBS"),
which was renamed Onsite Business Services, Inc. ("OBS") (see Note 4). OBS
provides utility services and industrial water services primarily in the states
of Kansas, Missouri and Oklahoma.
In February 1998, OBS acquired the operating assets of Mid-States Armature
Works, Inc. ("Mid-States") through a newly formed subsidiary Onsite/Mid-States,
Inc. ("OMS") (see Note 4). OMS provides specialized medium and high voltage
electrical fabrication, installation, maintenance and repair services to
municipal utility customers and others, primarily in the states of Kansas,
Nebraska, Missouri, Iowa, and Oklahoma.
On April 8, 1998, the Company formed Onsite Energy de Panama, S.A., a Panamanian
corporation to facilitate the acquisition of potential projects in Panama and
Latin America. As of June 30, 1998, there has been no operating activity in this
subsidiary.
In June 1998, the Company acquired Lighting Technology Services, Inc. ("LTS")
(see Note 4). LTS provides energy efficiency projects through retrofits of
lighting and controls either independently or as a subcontractor to the Company
and other energy services companies primarily in Southern California.
On June 30, 1998, the Company acquired the assets and certain liabilities of
SYCOM Enterprises, LLC through a newly-formed subsidiary SYCOM ONSITE
Corporation ("SO Corporation") (see Note 4). SO Corporation is also an ESCO with
customers primarily on the east coast of the United States.
The Company also owned general and limited partnership interests in Television
City Cogen, L.P., a California limited partnership ("TCC"). Effective February
17, 1997, the Company sold its interests in TCC.
<PAGE>F-9
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Unless the context indicates otherwise, reference to the Company shall include
all of its wholly-owned subsidiaries.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all of its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Revenue Recognition
Revenues on development and construction of energy efficiency projects requiring
contract performance prior to commencement of deliveries are recorded using the
percentage of completion method. Under this method, the revenue recognized is
that portion of the total contract price that the cost expended to date bears to
the anticipated final total costs based on current estimates of the costs to
complete the project. When the total estimated costs to complete a project
exceed the total contract amount, thereby indicating a loss, the entire
anticipated loss is recognized currently.
Ongoing revenues on contracts containing guaranteed savings to customers are
generally recognized when the guaranteed savings are achieved. No warranties or
reserves are applicable to these contracts.
Revenues for development, management, marketing and similar services are
recognized as the services are performed.
Operation and Maintenance Agreements
Commencing July 1, 1993, the Company began entering into long term operation and
maintenance agreements with its customers. In instances where estimated costs
exceed estimated revenue, the Company discounts the estimated future deficit
cash flows at an appropriate long-term interest rate and recognizes expense and
a related liability in its financial statements. As of June 30, 1998, the
liability for deferred operations and maintenance costs is $465,359.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with an original
maturity of three months or less to be cash equivalents.
<PAGE>F-10
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Restricted Cash
Restricted cash consists of amounts on deposit with financial institutions for
the purpose of securing performance milestones under several of the Company's
demand side management ("DSM") contracts. Funds become available to the Company
over a period of 24 to 36 months following completion of the last contract
provided certain conditions and milestones are achieved. In the event that
conditions or milestones are not achieved, the Company will be required to
forfeit its right to some or all of the funds on deposit. As of June 30, 1998,
the Company believes that all conditions and milestones will be achieved and
that no funds under these DSM contracts will be subject to forfeiture.
Property and Equipment
Property and equipment are recorded at cost. Replacements and improvements are
capitalized, while repairs and maintenance are charged to expense as incurred.
Depreciation and amortization are provided using the straight-line method over
the assets estimated useful lives ranging from five to thirty one and one-half
years. Leasehold improvements and leased equipment are amortized over the useful
life or term of the respective lease, whichever is less. When an asset is sold
or otherwise disposed of, the cost and accumulated depreciation or amortization
is removed from the accounts and any resulting gain or loss is recognized
currently.
Excess of Purchase Price Over Net Assets Acquired
Excess of purchase price over net assets acquired ("Goodwill") represents the
purchase price in excess of the fair value of the net assets of acquired
businesses and is being amortized using the straight-line method over its
estimated useful life. The carrying value is evaluated at least annually. The
Company considers current facts and circumstances, including expected future
operating income and cash flows to determine whether it is probable that
impairment has occurred.
Income Taxes
The Company accounts for income taxes under the liability method, which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the financial statements or
tax returns. Deferred tax assets and liabilities are determined based on the
difference between financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse.
Earnings Per Common and Common Equivalent Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued a new
statement titled "Earnings per Share" ("FASB128"). The new statement is
effective for both interim and annual periods ending after December 15, 1997.
FASB128 replaces the presentation of primary and fully diluted earnings per
share with the presentation of basic and diluted earnings per share. Basic
earnings per share excludes dilution and is calculated by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Income available to common stockholders is
calculated by subtracting preferred stock dividends from net income. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue
<PAGE>F-11
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. Common
stock equivalents for the years ending June 30, 1998 and 1997 were anti-dilutive
and excluded in the earnings per share computation.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost of assets may
be impaired, an evaluation of recoverability would be performed. If an
evaluation were required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash flow is required.
There were no impairments of long-lived assets for the years ended June 30, 1998
or 1997.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB25") and related interpretations
in accounting for its employee stock options. In accordance with FASB Statement
No. 123 "Accounting for Stock-Based Compensation" ("FASB123"), the Company will
disclose the impact of adopting the fair value accounting of employee stock
options. Transactions in equity instruments with non-employees for goods or
services have been accounted for using the fair value method as prescribed by
FASB123.
Impact of Recently Issued Standards
The FASB has issued Statement of Financial Accounting Standards 130, "Reporting
Comprehensive Income" ("FASB130") and Statement of Financial Accounting
Standards 131 "Disclosures About Segments of an Enterprise and Related
Information" ("FASB131"). FASB130 establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, FASB130 requires that all components of comprehensive income shall
be classified based on their nature and shall be reported in the financial
statements in the period in which they are recognized. A total amount for
comprehensive income shall be displayed in the financial statements where the
components of other comprehensive income are reported. FASB131 supersedes
Statement of Financial Accounting Standards 14 "Financial Reporting for Segments
of a Business Enterprise." FASB131 establishes standards on the way that public
companies report financial information about operating segments in annual
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. FASB131 defines operating segments as components of a company about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance.
<PAGE>F-12
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FASB130 and FASB131 are effective for financial statements for periods beginning
after December 15, 1997 and require comparative information for earlier years to
be restated. Results of operations and financial position will be unaffected by
implementation of these standards.
FASB Statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," ("FASB132") was issued in February 1998. This
statement revises the disclosure requirement for pensions and other
postretirement benefits. This statement is effective for the Company's financial
statements for the year ended June 30, 1999 and the adoption of this standard is
not expected to have a material effect on the Company's financial statements.
FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("FASB133") was issued in June 1998. This statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for the Company's
financial statements for the year ended June 30, 2001 and the adoption of this
standard is not expected to have a material effect on the Company's financial
statements.
Use of Estimates
The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates.
The Company's financial statements are based upon a number of significant
estimates, including the allowance for doubtful accounts, percentage of
completion on long term contracts, the estimated useful lives selected for
property and equipment and intangible assets, realizability of deferred tax
assets, and accrued future operation and maintenance costs associated with
energy services agreements. Due to the uncertainties inherent in the estimation
process, it is at least reasonably possible that these estimates will be further
revised in the near term and such revisions could be material.
Fair Value of Financial Instruments
The estimated fair values for financial instruments under FASB Statement No.
107, "Disclosures about Fair Value of Financial Instruments," are determined at
discrete points in time based on relevant market information. These estimates
involve uncertainties and cannot be determined with precision. The estimated
fair values of the Company's financial instruments, which includes all cash,
accounts receivables, accounts payable, long-term debt and other debt,
approximates the carrying value in the consolidated financial statements at June
30, 1998.
<PAGE>F-13
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Concentrations of Credit Risk
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on or off balance sheet) that arise from
financial instruments exist for groups of customers or groups of counterparties
when they have similar economic characteristics that would cause their ability
to meet contractual obligations to be similarly effected by changes in economic
or other conditions. In accordance with FASB No. 105, "Disclosure of Information
about Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk," the credit risk amounts shown
in Note 18 do not take into account the value of any collateral or security.
3. Basis of Presentation
As shown in the accompanying financial statements, the Company has reported net
losses of $2,218,482 and $1,388,598 for the years ended June 30, 1998 and 1997,
respectively, and has an accumulated deficit of $19,414,842 and a working
capital deficit of $2,693,367 as of June 30, 1998.
During the year ended June 30, 1998, the Company took steps to mitigate the
losses and enhance its future viability. Management believes that the Company
will be able to generate additional revenues and operating efficiencies through
its acquisitions as well as by other means to achieve profitable operations. In
addition, subsequent to year-end, the Company has exercised its right under a
stock subscription agreement to require Westar Capital, Inc., ("Westar Capital")
to purchase an additional 200,000 shares of Series C Convertible Preferred Stock
for $1,000,000 (see Note 20). The Company can require Westar Capital to purchase
an additional 200,000 shares of Series C Convertible Preferred Stock for
$1,000,000. Management believes that these actions will allow the Company to
continue as a going concern.
4. Acquisitions and Dispositions
On October 28, 1997, the Company entered into a Plan and Agreement of
Reorganization with Westar Capital to acquire WBS (now OBS). The Company
acquired all of WBS's issued and outstanding stock in exchange for 1,700,000
shares of the Company's Class A Common Stock. On March 31, 1998, the Company
issued an additional 800,000 shares of Class A Common Stock pursuant to the
agreement. The stock issuances were valued at the average of the bid and ask
stock prices on the date of issuance. The transaction was accounted for as a
purchase. The resulting purchase price including acquisition costs was
$1,498,716 which resulted in no amounts being allocated to excess of purchase
price over assets acquired.
In February 1998, OBS acquired the operating assets of Mid-States for $290,000
through its newly created subsidiary, OMS. The transaction was accounted for as
a purchase.
Effective June 13, 1998, the Company acquired all of the outstanding common
shares of LTS, in exchange for 690,000 shares of the Company's Class A Common
Stock plus $500,000. The stock issuances were valued at the average of the bid
and ask stock prices on the date of issuance. The
<PAGE>F-14
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
former LTS shareholders also may receive a one-time earn-out payment in 1999,
payable in either cash, or, at the Company's option, the Company's Class A
Common Stock. The earn-out payment will be based on LTS' actual pre-tax earnings
contribution for a 12 month period ending March 31, 1999. The transaction was
accounted for as a purchase. The resulting purchase price including acquisition
costs was $995,788 which resulted in $1,445,922 being allocated to excess of
purchase price over net assets acquired.
On June 30, 1998, the Company acquired all the assets and specific liabilities
of SYCOM Enterprises, LLC through a newly-created subsidiary (SO Corporation) in
exchange for 1,750,000 shares of the Company's Class A Common Stock. The stock
issuances were valued at the average of the bid and ask stock prices on the date
of issuance. In addition, under a Sale and Noncompetition Agreement SO
Corporation acquired the right to the services and expertise of all of the
employees of SYCOM Corporation and SYCOM Enterprises, L.P., affiliates of Sycom
Enterprises, LLC. in exchange for the right to receive 157,500 shares of Series
D Convertible Preferred Stock that is convertible into 15,750,000 shares of the
Company's Class A Common Stock. The Series D Stock (including the shares of the
Company's Class A Common Stock into which the Series D Stock is convertible)
will be held in escrow and will be released when: (i) the market value of the
Company's Class A Common Stock reaches $2.00 per share; (ii) annualized
after-tax earnings total $0.15 per share (including the Class A Common Shares
into which the Series D Stock is convertible) over four consecutive quarters;
and (iii) certain debts of SYCOM Corporation and SYCOM Enterprises, L.P.
(including those to the Company and its affiliates) have been satisfied. These
share values and earnings thresholds increase by 10 percent per year after
December 31, 1999. Pursuant to the terms of a Share Repurchase Agreement, the
Company may repurchase the escrowed Series D Stock (including the Company's
Class A Common Stock into which the Series D Stock is convertible) for $0.001
per share if: (i) the Sale and Noncompetition Agreement is terminated; and (ii)
after June 30, 2000, such repurchase is justifiable based on the reasonable
business judgment of the Company's Board of Directors considering the following
factors: (a) the key employees of SYCOM Corporation no longer are being retained
by SO Corporation; and (b) there is no reasonably foreseeable likelihood that
all of the following conditions shall be satisfied: specific debts to a third
party and the Company will be satisfied, and both share performance benchmarks
described in the Escrow Agreement shall be achieved. The Company also may
repurchase the escrowed Series D Stock (and the Company's Class A Common Stock
into which the Series D Stock is convertible) during the 30 day period prior to
the scheduled release date (that is, June 30, 2006) if any one of the specified
conditions for release of the Series D Stock has not been satisfied. Due to the
uncertainty of the ultimate issuance of the preferred shares, no value will be
attributed to such preferred shares until they are released from escrow.
The Company has agreed to make loans to SYCOM Corporation and SYCOM Enterprises,
L.P. from time to time equal to their recurring general and administrative
expenses and debt service to third parties with interest at 9.75% per annum.
(See Note 11). The Company may require immediate repayment of such loans if
certain earnings thresholds are not met. If the Company requires immediate
repayment then certain third party debt owing by SYCOM Corporation and/or SYCOM
Enterprises, L.P. must be repaid by a like amount. The debt repayment to the
Company can be in the form of cash or a reduction in the number of the escrowed
shares of the Series D Stock (or Class A Common Stock into which the Series D
Stock can be converted). The debt repayment to the third party lender can be in
the form of cash or a distribution of the escrowed shares of the Series D Stock
(or Class A Common Stock into which the Series D Stock can be converted). The
Company has also agreed to lend up to $1,000,000 to
<PAGE>F-15
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SYCOM Enterprises, LLC, to allow its shareholders to pay anticipated income
taxes resulting from the sale. Any amounts loaned will accrue interest at 9.75%
per annum and will be secured by the Company's Class A Common Stock issued in
the acquisition at the rate of 1.75 common shares per $1.00 loaned.
The resulting purchase price including acquisition costs was $2,060,439 with
$2,132,056 being allocated to excess of purchase price over net assets acquired.
The following presents pro forma information as if all of the acquisitions
described above occurred on July 1, 1996:
Year Ended
June 30, 1998 June 30, 1997
Revenue $ 38,225,107 $ 49,725,191
============= ==============
Operating Income (Loss) $ (9,416,694) $ 3,632,789
============= ==============
Net Loss $ (11,730,057) $ (69,870)
============= ==============
Basic and Diluted loss per common share $ (0.64) $ **
============= ==============
**per share value less than one cent.
5. Accounts Receivable
Accounts Receivable consisted of the following as of June 30, 1998:
Contract receivables
Completed contracts $ 472,590
Contracts in progress 2,432,781
------------
2,905,371
Trade receivables 628,529
------------
3,533,900
Less: Allowance for doubtful accounts (15,030)
------------
$ 3,518,870
============
<PAGE>F-16
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on contracts as of June 30, 1998, consisted of
the following:
Costs incurred $ 11,796,701
Estimated earnings 2,234,198
-------------
14,030,899
Less: Billings to date (15,974,738)
-------------
$ (1,943,839)
=============
Included in the accompanying Balance Sheet
under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 944,820
Billings in excess of costs and earnings on
uncompleted contracts (2,888,659)
-------------
$ (1,943,839)
=============
7. Property and Equipment
Property and equipment at June 30, 1998, consisted of:
Estimated
Useful Lives
------------
Office furniture $ 474,915 5-7 years
Equipment and Tools 722,639 7-10 years
Vehicles 39,971 5 years
Water Treatment Plants 993,516 Contract life
(50 to 56 months)
Land 44,000 -
Building 80,000 31.5 years
Leasehold improvements 42,135 5-20 years
------------
2,397,176
Less: Accumulated depreciation
and amortization (438,998)
------------
$ 1,958,178
============
Depreciation expense amounted to $258,572 and $187,077 for the years ended June
30, 1998 and 1997, respectively.
<PAGE>F-17
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. Notes Payable
Notes payable at June 30, 1998, consisted of the following:
Note payable to a third party, interest at 12.00%,
with all unpaid interest and principal due July 31, 1998,
unsecured $ 7,532
Notes payable with payments upon completion of certain
milestones with interest at 18.0%, past due, secured
by accounts receivable and other assets 1,132,961
Notes payable with payments upon completion of certain
milestones, interest at 13.5% due July 1998 through
December 1998, secured by accounts receivable and
other assets 669,126
Notes payable with monthly installments of $1,175
including interest at 10.75%, maturing August through
September 1998, collateralized by certain automobiles 8,667
Notes payable, non-interest bearing, due in monthly
installments of $1,000, unsecured 6,777
Note payable, due in monthly installments of $200,
including interest at 10.75%, maturing December 1998,
collateralized by certain computer equipment 1,839
Note payable, due in monthly installments of $1,631,
including interest at 9% maturing September 1999, unsecured 22,978
-----------
Total notes payable 1,849,880
Less: Current portion 1,846,870
-----------
Total Long Term Notes Payable $ 3,010
===========
<PAGE>F-18
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. Notes Payable - related parties
Notes payable - related parties consisted of the following at June 30, 1998:
Note payable to related party, interest at 8.0%,
due on demand $ 178,329
Note payable due to related party, interest at
12.0% per annum, due April 1999 290,000
-----------
$ 468,329
===========
10. Accrued expenses and other liabilities
At June 30, 1998, accrued expenses and other liabilities consisted of the
following:
Payroll and related payroll taxes $ 383,910
Accrued Interest 68,877
Additional consideration related to acquisition 200,000
Accrued job costs 798,476
Other accrued liabilities 161,917
------------
Total $ 1,613,180
============
11. Stockholders' Equity
Stock Subscription Agreement
On October 28, 1997, the Company entered into a Stock Subscription Agreement
(the "Stock Agreement") with Westar Capital. Pursuant to the Stock Agreement,
the Company completed a private placement of 2,000,000 shares of the Company's
Class A Common Stock at $0.50 per share and 200,000 shares of the Company's
newly-created Series C Convertible Preferred Stock at $5.00 per share. Each
share of Series C Convertible Preferred Stock is convertible into five (5)
shares of the Company's Class A Common Stock. Conversion can take place by the
holder at any time. The Company has the right to require conversion if the
average closing price of the Company's Class A Common Stock equals or exceeds
$2.00 per share.
Class A and Class B Common Stock
Holders of Class A Common Stock are entitled to one vote per share for the
election of directors and other corporate matters which shareholders are
entitled or permitted to vote. Holders of Class B Common Stock shall not be
entitled to vote but are entitled to receive dividends ratably with Class A
Common Stock when and as declared by the Board of Directors. As of June 30,
1998, there were no shares of Class B Common Stock issued and outstanding.
<PAGE>F-19
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Warrants
On September 11, 1997, the Company issued warrants to purchase 525,988 shares of
Class A Common Stock at $0.1875 per share, which expire on September 11, 2002,
to an officer and to an entity affiliated with a director as consideration for
posting collateral and guaranteeing performance bonds. The Company recognized
$18,980 in expense related to these warrants.
On June 30, 1998, the Company paid $50,000 and issued warrants to purchase
160,000 shares of Class A Common Stock at $1.125 per share, which expire on June
30, 2003, to entities affiliated with a director as consideration for services
rendered in the acquisition of the assets of SYCOM Enterprises, LLC. The Company
recognized compensation expense in the amount of $92,016 related to these
warrants which has been accounted for as additional purchase price.
As of June 30, 1998, the Company has issued and outstanding a total of 952,833
warrants to purchase shares of its Class A Common Stock. The exercise prices
range from $0.1875 to $4.00 per share with expiration dates ranging from
December 1998 through June 2003.
Preferred Stock
On October 23, 1997, the Company amended its Certificate of Incorporation to
eliminate the Series A and B Convertible Preferred Stock.
Each holder of a share of Series C Convertible Preferred Stock ("Series C") is
entitled to one vote per share for each share of Class A Common Stock that
Series C is convertible into and to an annual dividend at the rate of 9.75% of
the Series C liquidation preference ($5.00 per share) payable quarterly.
Dividends are cumulative. Each share of Series C is convertible at the option of
the holder into five shares of Class A Common Stock. Dividends in the amount of
$49,147 were paid in the form of 8,205 shares of Series C during the year ended
June 30, 1998.
Holders of Series D Convertible Preferred Stock ("Series D") are not entitled to
dividends or to vote. Each share of Series D is convertible, at the option of
the holder, into 100 shares of Class A Common Stock. All shares of Series D are
held in escrow (see Note 4).
Notes Receivable - Related Parties
As of June 30, 1998, Notes Receivable - Related Parties includes receivables
with the previous owners of LTS, who are current employees and directors of LTS,
in the amount of $180,027. Such loans accrue interest at 10% per annum and are
due in March 2003.
Also included are amounts due from affiliates of SYCOM Enterprises, LLC in the
amount of $1,155,190. The loan accrues interest at 9.75% per annum, is due on or
before June 30, 2006 and is collateralized by certain assets of an affiliate of
SYCOM Enterprises, LLC. Additionally see Note 4.
<PAGE>F-20
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. Stock Option Plans:
WEM 1990 Non-Statutory Stock Option Plan (formerly WEM Stock Option Plan)
Effective February 15, 1994, the Company adopted the WEM 1990 Non-Statutory
Stock Option Plan (the "1990 Plan"). The 1990 Plan provides for the granting of
options to directors, officers, employees and consultants to purchase up to
100,000 shares of the Company's Class A Common Stock. The 1990 Plan is
administered by a committee of outside directors appointed by the Board of
Directors.
As of June 30, 1998, the status of the 1990 Plan was as follows:
Outstanding Exercise Price Exercisable
Options Per Share Options
----------- -------------- -----------
July 1, 1996 500 $6.10 500
Options Granted 500 $0.2956 =====
Options Cancelled (500) $6.10
----------
June 30, 1997 500 $0.2956 500
Options Exercised (500) $0.2956 =====
----------
June 30, 1998 0 0
========== ======
WEM 1991 Non-Statutory Stock Option Plan
Effective February 15, 1994, Onsite adopted the WEM 1991 Non-Statutory Stock
Option Plan (the "1991 Plan"). The 1991 Plan provides for the granting of
options to non-employee directors, officers, employees and consultants to
purchase up to 160,000 shares of the Company's Class A Common Stock. The 1991
Plan is administered by a committee of outside directors appointed by the Board
of Directors.
As of June 30, 1998, the status of the 1991 Plan was as follows:
Outstanding Exercise Price Exercisable
Options Per Share Options
----------- -------------- -----------
July 1, 1996 90,000 $5.3125 - $29.70 90,000
Options cancelled (5,000) $29.70 ======
---------
June 30, 1997 and
1998 85,000 $5.3125 85,000
========= ======
Non-Plan Options
During fiscal year 1993, WEM issued stock options that were not part of the 1990
Plan or the 1991 Plan (the "Non-Plan Options"). Effective February 15, 1994, the
Company adopted the Non-Plan Options, and has provided for the granting of
options to various parties to purchase up to 113,000 shares of the Company's
Class A Common Stock.
As of June 30, 1998, the status of the Non-Plan Options was as follows:
<PAGE>F-21
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Outstanding Exercise Price Exercisable
Options Per Share Options
----------- -------------- -----------
July 1, 1996 105,000 $5.3125 - $6.10 105,000
Options Cancelled (1,000) $5.3125 =======
Options Granted 104,000 $0.2956
Options Cancelled (104,000) $5.3125 - $6.10
----------
June 30, 1997 104,000 $0.2956 104,000
Options Exercised (103,100) $0.2956 =======
Options Cancelled (900) $0.2956
---------
June 30, 1998 0 0
========= =======
The Onsite 1993 Stock Option Plan
During fiscal 1994, the Company adopted the Onsite 1993 Stock Option Plan (the
"1993 Plan"). The 1993 Plan, as amended, provides for the granting of options to
directors, officers, employees and consultants to purchase up to 3,300,000
shares of Class A Common Stock and is administered by a committee of outside
directors appointed by the Board of Directors.
As of June 30, 1998, the status of the 1993 Plan was as follows:
Outstanding Exercise Price Exercisable
Options Per Share Options
----------- -------------- -----------
July 1, 1996 1,807,483 $0.25 - $5.625 1,395,901
Options granted 1,508,440 $0.25 - $5.3125 =========
Options cancelled (816,645) $0.25 - $0.50
Options exercised (42,553) $0.25 - $0.50
----------
June 30, 1997 2,456,725 $0.24 - $5.3125 1,729,593
Options granted 880,954 $0.23 - $0.9063 =========
Options exercised (206,004) $0.25 - $0.5000
Options cancelled (133,417) $0.25 - $0.2956
----------
June 30, 1998 2,998,258 $0.23 - $5.3125 1,596,651
========= =========
At June 30, 1998, no additional options were available for granting to purchase
shares of Class A Common Stock.
<PAGE>F-22
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A summary of option transactions under the 1993 Plan during the years ended
June 30, 1998, and 1997, is as follows:
Weighted-Average
Fixed Options Shares Exercise Price
--------------------- -------------------- -----------------------
July 1, 1996 1,807,483 $ 0.7573
Granted 1,508,440 $ 0.2909
Exercised (42,553) $ 0.4628
Cancelled (816,645) $ 0.4764
----------
June 30, 1997 2,456,725 $ 0.5789
Granted 880,954 $ 0.6224
Exercised (206,004) $ 0.2752
Cancelled (133,417) $ 0.2797
---------
June 30, 1998 2,998,258 $ 0.6259
=========
During the year ended June 30, 1997, the Compensation Committee and Board of
Directors approved a repricing for 400,440 options to $0.2956 with original
exercise prices ranging between $1.94 and $6.10. This was accounted for as a
reprice of options to the fair market value on the date of the repricing. The
weighted average contractual life for all options as of June 30, 1998, was
approximately six years, with exercise prices ranging from $0.23 to $5.31.
Proforma Information
As stated in Note 2, the Company has not adopted the fair value accounting
prescribed by FAS 123 for employees. Had compensation cost for stock options
issued to employees been determined based on the fair value at grant date for
awards in 1998 and 1997 consistent with the provisions of FAS 123, the Company's
net loss and net loss per share would have been adjusted to the proforma amounts
indicated below:
Year Ended June 30,
-----------------------------
1998 1997
----------- --------
Net Loss $ (2,480,017) $ (1,471,328)
============= =============
Basic and Diluted Loss
Per Common Share $ (0.18) $ (0.14)
============= =============
<PAGE>F-23
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model using the following weighted-average
assumptions: expected volatility of 116.9%, an expected life of three years for
option shares, no dividends would be declared during the expected term of the
options, and a risk-free interest rate using the monthly US Treasury T-Strip
Rate at the option grant date for fiscal years ended 1998, and 1997,
respectively.
The weighted-average fair value of stock options granted to employees during the
years ended June 30, 1998 and 1997, was $0.36 and $0.19, respectively.
13. Income Taxes
Income tax expense for the years ended June 30, 1998 and 1997 is comprised of
the following:
Year ended June 30, 1998 Current Deferred Total
------------ ---------- ----------
Federal $ - $ - $ -
State 7,500 - 7,500
------------ ---------- ----------
$ 7,500 $ - $ 7,500
============ ========== ==========
Year ended June 30, 1997 Current Deferred Total
------------ ---------- ----------
Federal $ - $ - $ -
State 8,500 - 8,500
------------ ---------- ----------
$ 8,500 $ - $ 8,500
============ ========== ==========
The actual income tax expense differs from the "expected" tax (benefit)
(computed by applying the U.S. Federal corporate income tax rate of 34% for each
period) as follows:
1998 1997
------------ ----------
Amount of expected tax (benefit) $ (751,800) $ (469,200)
Non-deductible expenses 13,900 4,400
State taxes, net 4,900 5,600
Effect of change in state tax rate 27,600 -
Change in valuation allowance for deferred
tax assets 712,900 467,700
----------- -----------
Total $ 7,500 $ 8,500
=========== ===========
<PAGE>F-24
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The components of the net deferred tax asset recognized as of June 30, 1998 and
1997, are as follows:
1998 1997
----------- ---------
Current deferred tax assets (liabilities):
Litigation settlement accrual $ 16,000 $ 6,700
Deferred operation and maintenance
reserve 185,400 169,200
Vacation accrual 44,400 29,100
Deferred compensation - 27,300
Inventory reserve 6,000 -
Book compensation on issuance of
stock options 7,600 -
Allowance for doubtful accounts 6,000 -
Other 600 35,000
----------- ---------
266,000 267,300
Valuation allowance (266,000) (267,300)
----------- ---------
Net current deferred tax asset $ - $ -
=========== =========
1998 1997
------------ ------------
Long-Term deferred tax assets (liabilities):
Net operating loss carryforwards $ 6,943,200 $ 4,504,600
Goodwill due to difference in
amortization 453,300 392,500
Depreciation (137,100) -
Capital loss carryforward - 66,100
Alternative minimum tax credit 11,200 15,200
Other 800 -
------------ ------------
7,271,400 $ 4,978,400
Valuation allowance (7,271,400) (4,978,400)
------------ ------------
Net current deferred tax asset $ - $ -
============ ============
The deferred tax asset includes the future benefit of the LTS pre-acquisition
deductible temporary differences and net operating losses of $184,100. The
deferred asset has been fully reserved through the valuation allowance. Any
future tax benefit realized for these items will first reduce any goodwill
remaining from this acquisition and then reduce income tax expense.
The deferred tax asset also includes the future benefit of the tax deduction for
the exercise of stock options of $13,000. The deferred asset is fully reserved
through the valuation allowance. Any future tax benefit realized for this item
will be a credited to paid in capital.
At June 30, 1998, the Company has net operating loss carryforwards of
approximately $19,116,000, which expire in the years 2006 through 2013. The
Company has California net operating loss carryforwards at June 30, 1998 of
$5,018,000, which expire in years 1999 through 2003.
<PAGE>F-25
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The benefit of the net operating losses to offset future taxable income is
subject to reduction or limitation of use as a result of certain consolidated
return filing regulations and additional limitations relating to a 50% change in
ownership due to various stock transactions.
14. Related Parties
During the fiscal year ended June 30, 1998, the Company paid two directors of
the Company, professional fees for due diligence in the amount of $48,078 and
$6,451, respectively.
As of the fiscal year end June 30, 1998, OBS has outstanding accounts receivable
with Western Resources, Inc. the parent company of a shareholder of the Company,
in the amount of $69,924 in relation to water treatment plants in Lawrence,
Kansas and Tecumseh, Kansas. OBS has recognized $323,454 in revenue related to
these water treatment facilities. OBS also has outstanding accounts payable with
Western Resources in the amount of $369,961. In addition, OBS has accrued
liabilities with Western Resources in the amount of $254,409.
Westar Capital has guaranteed any shortfalls of energy savings on the Company's
contract with a customer. Such guaranty is backed by an insurance police
purchased by the Company for a short fall of energy savings. In addition, Westar
Capital and an affiliate have indemnified a bonding company for bid and
performance bonds obtained by the Company.
Also see Notes 9 and 11.
15. Commitments and Contingencies
Leases
The Company leases its administrative facility under a noncancellable operating
lease expiring in 2001 with a three-year renewal option. As of August 1, 1998,
the Company increased its office space that is included under the current lease.
The Company expanded its regional offices to include Kansas City, Kansas, where
there is a one year lease expiring May 1999, and San Ramon, California, where
office space is rented on a three year lease that expires March 2001. OBS leases
office space that has a one year lease with an option to renew, expiring
November 1998. OMS leases a small building from the former owner on a month by
month basis to store testing equipment. This lease will continue indefinitely.
LTS currently has a one-year lease that expires July 1999.
<PAGE>F-26
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Future minimum lease payments under operating leases is as follows:
Year ending June 30,
1999 $ 448,704
2000 377,399
2001 377,399
2002 1,440
2003 1,440
Thereafter 1,440
------------
Total minimum lease payments $ 1,207,822
============
Total rent expense, including month-to-month equipment rentals, was $201,995 and
$272,641 in 1998, and 1997, respectively.
Employment Agreements
Effective April 1, 1998, the Company entered into employment agreements with the
President and Chief Operating Officer, and with the Vice President and
Responsible Managing Officer of LTS which expire on March 31, 2000. Such
agreements provide for minimum salary levels totaling $235,000 per year
excluding bonuses, as well as severance payments upon termination of employment
without cause.
Ongoing Maintenance for Water Treatment Plants
OBS has two contracts with Western Resources whereby OBS constructed and
maintains equipment for supplying demineralized water for boiler makeup water at
Lawrence Energy Center and Tecumseh Energy Center. Both contracts terminate on
December 31, 2001, unless renewed at the end of the term as agreed upon by both
parties. OBS is responsible for producing the quality of demineralized water as
specified. If damage occurs due to the specified quality of demineralized water
not being produced, OBS is liable for the cost of the repairs to the equipment
limited to a maximum of $300,000 per incident.
Environmental Costs
The Company is subject to federal, state and local environmental laws and
regulations. Environmental expenditures are expensed or capitalized depending on
their future economic benefit. Expenditures that relate to an existing condition
caused by past operations and that has no future economic benefits are expensed.
Liabilities for expenditures of a non-capital nature are recorded when
environmental assessments are probable, and the costs can be reasonably
estimated. In February 1998, the Company received a notice from the South Coast
Air Quality Management District for alleged reporting violations in calendar
year 1996 on the facility previously owned by TCC. No remedial action is
required. The Company may be subject to certain penalties, but management does
not believe this matter will have a material adverse impact on the Company's
financial condition or results of operations. Although the level of future
expenditures for environmental matters cannot be determined
<PAGE>F-27
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
with any degree of certainty, it is management's opinion that such costs when
determined will not have a material adverse effect on the financial position or
results of operations of the Company.
Guaranteed Savings
The Company is contingently liable to its customers pursuant to contractual
terms in the event annual guaranteed savings are not achieved by the customer.
Litigation
In January 1998, the Oregon Bureau of Labor and Industries (the "BLI") filed a
suit against LTS and two other parties for alleged unpaid wages in the amount of
$509,205 for 32 employees who worked on a lighting retrofit project in the state
of Oregon. A trial date of April 13, 1999 has been set, but the parties are
attempting to obtain the approval of mediation rules in order to mediate this
matter. Management also has had discussions with the BLI to resolve this issue;
however, no agreement has been reached. Management believes, based on current
information, that any settlement would not have a material adverse impact on the
Company.
16. Defined Contribution Plan
The Company sponsors a 401(k) defined contribution plan, which covers
substantially all employees. Company contributions are determined annually at
the discretion of management and vest at the rate of 20% per year of employment.
During the years ended June 30, 1998 and 1997, the Company's matching
contribution was $53,480 and $43,088, respectively.
17. Significant Customers
Revenues from the three largest customers accounted for 31% (11%, 10%, 10% each)
of total revenues in fiscal 1998, and revenues from three other customers
accounted for 32% (10%, 9%, 13% each) of total revenues in fiscal 1997.
18. Concentration of Credit Risk
The Company operates in one industry segment, energy services. The Company's
customers generally are located in the United States. Financial instruments that
subject the Company to credit risk consist principally of accounts receivable.
At June 30, 1998, accounts receivable totaled $4,478,720, and the Company has
provided an allowance for doubtful accounts of $15,030.
<PAGE>F-28
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
For the years ended June 30, 1998, and 1997, bad debts totaled $30,192 and
$37,093 respectively. The Company performs periodic credit evaluations on its
customers' financial condition and believes that the allowance for doubtful
accounts is adequate.
At June 30, 1998, the Company maintained cash balances with a commercial bank,
which were approximately $1,552,187 in excess of FDIC insurance limits.
19. Year 2000
The Company is developing plans to address issues related to the impact on its
computer systems of the year 2000. The Company believes that substantially all
software applications currently being used for the financial and operational
systems have adequately addressed any year 2000 issues. Most hardware systems
have been assessed and plans are being developed to address systems modification
requirements. The financial impact of making any required systems changes is not
expected to be material to the Company's consolidated financial position,
liquidity or results of operations. Any risks the Company faces are expected to
be external to ongoing operations. The Company has numerous alternative vendors
for critical supplies, materials and components. Current vendors and
subcontractors who have not adequately prepared for the year 2000 can be
substituted in favor of those that have prepared.
20. Subsequent Events
On July 14, 1998, the Company exercised its right under the Stock Subscription
Agreement to require Westar Capital to purchase an additional 200,000 shares of
Series C Preferred Stock for $1,000,000.
On October 16, 1998, Energy Conservation Consultants, Inc. ("ECCI"), a
Louisiana-based company, filed a suit (United States District County, Eastern
District of Louisiana, Case No. 98-2914) against OBS alleging breach of contract
in connection with one of the Company's projects. The suit seeks reimbursement
for expenses allegedly incurred by ECCI in the preparation of an audit and lost
profits in the aggregate amount of $748,000. Management is attempting to settle
the matter; however, no agreement has been reached. Management believes, based
on current information, that any settlement would not have a material adverse
impact on the Company.
EXHIBIT 10.91
AGREEMENT BETWEEN OWNER AND CONTRACTOR
Project Name: System Voltage Upgrade Project
Downtown Substation, Plant Switchgear
Contract Name: Construction & Distribution System Upgrade
Contract No.: A-2
THIS AGREEMENT is dated as of the 3rd day of March in the year 1998 by and
between the City of Anthony, Kansas (hereinafter called Owner) and Onsite
Business Services (hereinafter called Contractor).
Owner and Contractor, in consideration of the mutual covenants hereinafter set
forth, agree as follows:
ARTICLE 1 - WORK
1.01 Contractor shall complete all Work as specified or indicated in the
Contract Documents. The Work under this Contract is generally described
as follows: material procurement and construction of the 12.47-kV
Downtown regulating substation, including structures, equipment,
foundations, bus, low voltage wiring, grounding, raceway, metering,
miscellaneous materials, and demolition of existing substation. The
installation of a 15-kV class metal-clad switchgear and associated
equipment and materials at the City of Anthony power plant.
1.02 Upgrade of the Electric Distribution System, consisting of work on
energized lines, construction of new lines, removal of existing electric
lines and transformer replacement.
1.03 The Project for which the Work under the Contract Documents may be the
whole or only a part is generally described as follows: Electric System
Voltage Upgrade - 1997.
ARTICLE 2 - ENGINEER
2.01 The Project has been designed by Burns & McDonnell Engineering Co. Inc.,
who is hereinafter called Engineer and who is to act as Owner's
representative, assume all duties and responsibilities, and have the
rights and authority assigned to Engineer in the Contract Documents in
connection with completion of the Work in accordance with the Contract
Documents.
ARTICLE 3 - CONTRACT TIME
3.01 TIME OF THE ESSENCE:
A. All time limits for milestones, if any, Substantial Completion, and
completion and readiness for final payment as stated in the Contract
Documents are of the essence of the Contract.
3.02 DATES FOR SUBSTANTIAL COMPLETION AND FINAL PAYMENT:
A. The Work will be Substantially Completed on or before December 31,
1998, and completed and ready for final payment in accordance with the
GENERAL CONDITIONS on or before January 31, 1999. 1. Areas to be
Substantially Complete prior to date stated above are as follows:
Switchgear Foundation Installation B May 22, 1998
<PAGE>
3. LIQUIDATED DAMAGES:
<PAGE>
A. Owner and Contractor recognize that time is of the essence of this
Agreement and that Owner will suffer financial loss if the Work is not
completed within the time specified above, plus any extensions thereof
allowed in accordance with the GENERAL CONDITIONS. The parties also
recognize the delays, expense, and difficulties involved in proving the
actual loss suffered by Owner if the Work is not Substantially Completed on
time. Accordingly, instead of requiring any such proof, Owner and
Contractor agree that as liquidated damages for delay (but not as a
penalty) Contractor shall pay Owner five hundred dollars ($500.00) for each
day that expires after the time specified above in Paragraph 3.02 for
Substantial Completion until the Work is Substantially Complete. After
Substantial Completion, if Contractor shall neglect, refuse, or fail to
complete the remaining Work within the time specified in Paragraph 3.01 for
completion and readiness for final payment or any proper extension thereof
granted by Owner, Contractor shall pay Owner five hundred dollars ($500.00)
for each day that expires after the time specified for completion and
readiness for final payment.
ARTICLE 4 - CONTRACT PRICE - Not Used
ARTICLE 5 - PAYMENT PROCEDURES
1 SUBMITTAL AND PROCESSING OF PAYMENTS:
A. Contractor shall submit Applications for Payment in accordance with the
GF-NERAL CONDITIONS. Applications for Payment will be processed by
Engineer and Owner shall make payment as provided in the GENERAL
CONDITIONS.
5.02 PROGRESS PAYMENTS, RETAINAGE:
A. Owner shall make progress payments on account of the Contract Price on the
basis of Contractor's Applications for Payment as recommended by Engineer,
on or about the 3rd Monday of each month during construction. All such
payments will be measured by the schedule of values established in the
GENERAL CONDITIONS (and in the case of Unit Price Work based on the number
of units completed) or, in the event there is no schedule of values, as
provided in the General Requirements. 1. Prior to Substantial Completion,
progress payments will be made in an amount equal to the percentage
indicated below, but, in each case, less the aggregate of payments
previously made and less such amounts as Engineer shall determine, or Owner
may withhold, in accordance with the GENERAL CONDITIONS.
a. 90% of Work completed (with the balance being retainage).
b. 90% (with the
balance being retainage) of Equipment and Materials not
incorporated in the Work (but delivered, suitably stored, and accompanied
by documentation satisfactory to Owner as provided in the GENERAL
CONDITIONS).
5.03 FINAL PAYMENT:
A. Upon final completion and acceptance of the Work in accordance with the
GENERAL CONDITIONS, Owner shall pay the remainder of the Contract Price
as recommended by Engineer and as provided in the GENERAL CONDITIONS.
ARTICLE 6 - INTEREST
6.01 All moneys not paid when due hereunder shall bear interest at the rate of
9% per annum in accordance with the GENERAL CONDITIONS.
ARTICLE 7 CONTRACTOR'S REPRESENTATIONS
7.01 In order to induce Owner to enter into this Agreement, Contractor makes
the following representations:
A. Contractor has examined and carefully studied the Contract Documents
(including the Addenda) and other related data identified in the
Bidding Documents.
B. Contractor has visited the Site and become familiar with and is
satisfied as to the general, local, and Site conditions that may affect
cost, progress, performance, and furnishing of the Work.
C. Contractor is familiar with and is satisfied as to all federal, state,
and local Laws and Regulations that may affect cost, progress,
performance, and furnishing of the Work.
<PAGE>
D. Contractor shall carefully study all: (1) reports of explorations and
tests of subsurface conditions at or contiguous to the Site and all
drawings of physical conditions in or relating to existing surface or
subsurface structures at or contiguous to the Site; and (2) reports and
drawings of a Hazardous Envirorunental Condition, if any, at the Site.
Contractor acknowledges that Owner and Engineer do not assume
responsibility for the accuracy or completeness of information and data
shown or indicated in the Contract Documents with respect to
Underground Facilities at or contiguous to the Site.
E. Contractor shall obtain and carefully study (and assumes responsibility
of having done so) all such additional supplementary examinations,
investigations, explorations, tests, studies, and data concerning
conditions (surface, subsurface, and Underground Facilities) at or
contiguous to the Site or otherwise which may affect cost, progress,
performance, and furnishing of the Work or which relate to any aspect
of the means, methods, techniques, sequences, and procedures of
construction to be employed by Contractor and safety precautions and
programs incident thereto.
F. Contractor does not consider that the Owner should furnish any
additional examinations, investigations, explorations, tests, studies,
or data necessary for the performing and furnishing of the Work at the
Contract Price, within the Contract Times, and in accordance with the
other terms and conditions of the Contract Documents.
G. Contractor is aware of the general nature of work to be performed by
Owner and others at the Site that relates to the Work as indicated in
the Contract Documents.
H. Contractor has correlated the information known to Contractor,
information and observations obtained from visits to the Site, reports
and drawings identified in the Contract Documents, and all additional
examinations, investigations, explorations, tests, studies, and data
with the Contract Documents.
I. Contractor has given Engineer written notice of all conflicts, errors,
ambiguities, or discrepancies that Contractor has discovered in the
Contract Documents and the written resolution thereof by Engineer is
acceptable to Contractor.
J. The Contract Documents are generally sufficient to indicate and convey
understanding of all terms and conditions for performance and
furnishing of the Work.
ARTICLE 8 - CONTRACT DOCUMENTS
8.01 CONTENTS:
A. The Contract Documents which comprise the entire Agreement between Owner
and Contractor concerning the Work consist of the following and may only be
amended, modified, or supplemented as provided in the
GENERAL CONDITIONS:
1. This Agreement.
2. Exhibits to this Agreement (enumerated as follows):
a. Notice to Proceed.
b. Contractor's Bid.
C. Documentation submitted by Contractor prior to Notice of Award.
3. Performance, Payment, and other Bonds.
4. General Conditions.
5. Specifications consisting of divisions and sections as listed in
table of contents of Bid Documents.
6. Drawings consisting of a cover sheet and sheets as listed in the
table of contents thereof, with each sheet bearing the following
general title:
City of Anthony, Kansas
7. Addenda numbers 1 to 4, inclusive.
8. The following which may be delivered or issued after the Effective
Date of the Agreement and are not attached hereto: All Written
Amendments and other documents amending, modifying, or supplementing
the Contract Documents pursuant to the GENERAL CONDITIONS.
ARTICLE 9 - MISCELLANEOUS
9.01 TERMS:
A. Terms used in this Agreement which are defined in the GENERAL CONDITIONS
shall have the meanings stated in the GENERAL CONDITIONS.
<PAGE>
2. ASSIGNMENT OF CONTRACT:
A. No assignment by a party hereto of any rights under or interests in the
Contract Documents will be binding on another party hereto without the
written consent of the party sought to be bound; and specifically but
without limitation, moneys that may become due and moneys that are due
may not be assigned without such consent (except to the extent that the
effect of this restriction may be limited by Law), and unless
specifically stated to the contrary in any written consent to an
assignment, no assignment will release or discharge the assignor from
any duty or responsibility under the Contract Documents.
9.03 SUCCESSORS AND ASSIGNS:
A. Owner and Contractor each binds himself, his partners, successors,
assigns, and legal representatives to the other party hereto, its
partners, successors, assigns, and legal representatives in respect to
all covenants, Agreements, and obligations contained in the Contract
Documents.
9.04 SEVERABILITY:
A. Any provision or part of the Contract Documents held to be void or
unenforceable under any Law or Regulation shall be deemed stricken, and
all remaining provisions shall continue to be valid and binding upon
Owner and Contractor, who agree that the Contract Documents shall be
reformed to replace such stricken provision or part thereof with a valid
and enforceable provision that comes as close as possible to expressing
the intention of the stricken provision.
OTHER PROVISIONS: Not Applicable.
IN WITNESS WHEREOF, Owner and Contractor have signed this Agreement in
triplicate. One counterpart each has been delivered to Owner, Contractor, and
Engineer. All portions of the Contract Documents have been signed, initialed, or
identified by Owner and Contractor or identified by Engineer on their behalf.
This Agreement will be effective on March 3, 1998, which is the Effective Date
of the Agreement.
CONTRACTOR: Onsite Business Services, Inc.
By: \s\ Richard T. Sperberg By: \s\ David G. Cherry
Title: President Title: Mayor
(SEAL) (SEAL)
Attest: \s\ Audrey Nelson Stubenberg Attest:\s\ Bob H Newton
Address for giving notices: Address for giving notices:
701 Palomar Airport Road Suite 200
Carlsbad, CA 92009
(License No._____________________
(if required by law)
(If Owner is a public body, attach
evidence Agent for Service of
process of authority to sign and
resolution or other
_______________________________ documents authorizing execution of
Agreement)
(If Contractor is a corporation, attach Approved as to Form:
evidence of authority to sign.)
By: ____________________________________
Attorney for: ________________________
Exhibit 21
Subsidiaries of the Registrant
1. Western Energy Management, Inc., is a Delaware corporation and is a
wholly-owned subsidiary of the Company.
2. Onsite/TCC Corp. ("Onsite/TCC") is a Delaware corporation and was a
wholly-owned subsidiary of the Company until February 1997.
3. Television City Cogen, L.P. ("TCC"), is a California Limited Partnership.
The Company, directly or indirectly through Onsite/TCC, owned all of the
general and limited partnership interests in TCC until February 1997.
4. Onsite Business Services, Inc. ("OBS"), is a Kansas corporation and is a
wholly-owned subsidiary of the Company.
5. Onsite/Mid-States, Inc., is a Kansas corporation and is a wholly-owned
subsidiary of OBS.
6. SYCOM ONSITE Corporation is a Delaware corporation and is a wholly-owned
subsidiary of the Company.
7. Lighting Technology Services, Inc., is a California corporation and is a
wholly-owned subsidiary of the Company.
8. Onsite Energy de Panama, S.A. is a Panamanian corporation and is a
wholly-owned subsidiary of the Company.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(33-79894, 333-25879, 333-47821) on Form S-8 of Onsite Energy Corporation of our
report dated September 28, 1998, except for the last paragraph of Note 20 which
is as of October 16, 1998, relating to the consolidated balance sheet of Onsite
Energy Corporation and subsidiaries as of June 30, 1998, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended June 30, 1998 and 1997, which report appears in the June 30, 1998,
annual report on Form 10-KSB of Onsite Energy Corporation.
/s/ HEIN + ASSOCIATES LLP
Hein + Associates LLP
Certified Public Accountants
Orange, California
November 11, 1998
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