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, 1999.
|_| 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)
(Issuer's telephone number) (760) 931-2400
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 |X| No |_|
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............$43,557,902
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......$1,117,682 as of September 27, 1999.
The number of shares of Common Stock outstanding as of September 27, 1999 is
18,641,302.
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated by Reference 10-K Part and Item Where Incorporated
- ---------------------------------- -----------------------------------------
Definitive Proxy Statement for Part III: Items 9, 10, 11 and 12
Annual Meeting of Stockholders of
the Registrant to be held
December 1, 1999
<PAGE>2
PART I
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.
Business of Issuer. The Company is an energy services company ("ESCO") that
assists energy customers in lowering their energy costs 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. In addition, the Company offers bill auditing,
tariff analysis, transmission and distribution analysis and upgrade and
aggregation services. The Company also provides professional consulting services
in the areas of direct access planning, market assessment, business strategies,
public policy analysis, and environmental impact feasibility studies. The
Company has been accredited by the National Association of Energy Service
Companies ("NAESCO"). It is the Company's mission to save its customers money
and improve the quality of the environment through independent energy solutions.
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 with 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.
Subsidiaries/Partnerships. Substantially all of the Company's revenues are
generated through energy services and consulting services. The Company's
subsidiaries 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, LLC"), 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,
LLC 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 (including the shares of Class A Common Stock into which the
Series D Stock is convertible are outstanding) over four consecutive quarters,
and certain specified debts of SYCOM Corporation and SYCOM LP 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 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. 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, LLC 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 Costa
Mesa, 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 and paid $500,000 to the former
stockholders of LTS. As a wholly-owned subsidiary of the Company, LTS continues
to pursue independent lighting services opportunities in commercial, industrial
and educational markets while also providing lighting subcontractor services to
the Company and other ESCOs. Subsequent to its fiscal year end, the Company made
a decision to explore the sale or disposition of its lighting subsidiaries.
Onsite Energy 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. Subsequently, Onsite
Business Services, Inc. changed its name to Onsite Energy Services, Inc.
("OES"). The purchase price was 1,700,000 shares of the Company's Class A Common
Stock issued upon closing to Westar Capital, Inc. ("Westar Capital"), a
wholly-owned subsidiary of Western Resources, 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, OES 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, OES, 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.
REEP Onsite, Inc. and ERSI Onsite, Inc. Effective April 1, 1999,
the Company formed REEP Onsite, Inc. ("REEP"), and ERSI Onsite, Inc. ("ERSI"),
for the purpose of acquiring substantially all of the assets of REEP, Inc. in
exchange for assumption of specific liabilities. REEP provides residential
energy services while ERSI is a commercial lighting contractor. REEP, Inc. is an
affiliate of SYCOM Corporation and has been in business for 16 years. Subsequent
to its fiscal year end, the Company made a decision to explore the sale or
disposition of its lighting subsidiaries.
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. The Company was formed via a merger in
February 1994, in which Western Energy Management, Inc. ("WEM") became a
wholly-owned subsidiary. WEM was engaged in the business of providing
comprehensive energy management services designed to reduce the utility costs of
its customers. Its current sole function is to monitor its remaining commitments
under contracts with customers that were entered into prior to February 1994.
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.
Revenue Recognition. The Company has previously been corresponding with
the SEC regarding its Form 10-KSB for the year ended June 30, 1998. In response
to information submitted by the Company, on October 13, 1999, the SEC sent a
comment letter questioning the appropriateness of certain aspects of the
Company's revenue recognition accounting policies. The Company believes that its
revenue recognition accounting policies are appropriate and intends to respond
to and continue to work with the SEC to resolve the comments. However, no
assurance can be given that the SEC will not require adjustments to be made to
the Company's previously issued financial statements and financial statements
contained in this annual report.
Loss from Operations, Possible Need for Additional Working Capital and
Potential Dilution to Existing Shareholders. The Company has suffered losses
from operations for the past two fiscal years. For the years ended June 30,
1999, and 1998, the Company had net losses of $6,909,011 and $2,218,482,
respectively, negative working capital of $6,357,699 and an accumulated deficit
of $26,528,421 as of June 30, 1999. 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. During
the year ended June 30, 1999, the Company took steps to mitigate the losses and
enhance its future viability. In addition, during the fiscal year end 1999, the
Company exercised its right under a stock subscription agreement to require
Westar Capital to purchase an additional 400,000 shares of Series C Convertible
Preferred Stock for $2,000,000. Subsequent to its most recent fiscal year end,
the Company also privately placed shares of newly created Series E Convertible
Preferred Stock ("Series E Stock") to existing shareholders for $1,000,000.
Concurrent with this private placement, members of senior management of the
Company have agreed to receive shares of the Company's Class A Common Stock in
lieu of a portion of their salary in an effort to reduce cash outflows related
to compensation. Subsequent to June 30, 1999, a decision was made to explore the
sale or disposition of the Company's lighting subsidiaries, which could provide
<PAGE>5
capital, reduce operating losses and will allow management to better focus on
its core ESCO business activities. In addition, the Company is exploring
strategic relationships with companies that could involve an investment in the
Company. The Company may also raise cash through the sale of long term future
revenue streams that it currently owns or has rights to. The Company is also
examining ways to further reduce overhead including, but not limited to, the
possibility of targeted staff reductions. Further, the Company, through the
acquisition of other energy service companies, expects to continue to gain
economies of scale through the use of a consolidated management team and the
synergies of marketing efforts of the different entities. Management believes
that all of the above actions will allow the Company to continue as a going
concern. Future cash requirements depend on the Company's profitability, its
ability to manage working capital requirements and its rate of growth.
Additional financing through the sale of securities may have an ownership
dilution effect on existing shareholders.
Risks Associated with Expansion. As previously discussed, during the
years ended June 30, 1998 and 1999, the Company made a series of acquisitions of
businesses including SO Corporation, LTS, OES, OMS, REEP and ERSI. 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 help future operating results of the Company.
As a result of these acquisitions, the Company's 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 78.2 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 section above, in connection
with the acquisition of the assets and certain liabilities of SYCOM, LLC the
Company issued 157,500 shares of Series D Stock to SYCOM Corporation. Under
certain conditions, 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 48.42 percent of the Company
(based upon current ownership).
Dependence on Limited Key and New Customers. For the fiscal years ended
June 30, 1999, and 1998, three customers in the aggregate accounted for
approximately 34 percent and 31 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.
<PAGE>6
Revenues Dependent upon Phased Approvals from Government Agencies and
Customers. Pursuant to its energy efficiency services agreements, a material
portion of the 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 Company's 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 that 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, its cash flow and its operating results.
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 and S. Lynn Sutcliffe,
among others may materially 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 Over-the-Counter (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 that 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 to the Company 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.
<PAGE>7
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 (PCB), asbestos or asbestos-containing materials
(ACMs), urea-formaldehyde paneling, fluorescent lamps or HID lamps, and the
emissions from on-site generation projects. The Company intends to contract, or
have their customers and/or subcontractors contract, with certified hazardous
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.
Ongoing Maintenance for Water Treatment Plants. OES has two contracts
with Western Resources whereby OES 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. OES 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, OES is liable for the cost of the repairs to the equipment limited to
a maximum of $300,000 per incident. There have been no damage occurrences since
the inception of both contracts. The occurrence of an incident, or multiple
incidents, although considered remote, could have a material adverse impact on
the financial condition and the results of operations of the Company. The loss
of either of the two contracts would not have a material adverse effect on the
financial condition or the results of operations of the Company.
No Dividends on Class A Common Stock. It is anticipated that no cash
dividends will be declared by the Company on its Class A Common Stock in the
near future. Shares of Series C Preferred 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, 1999, and how they are significant to the last
two fiscal years' revenues.
Westar Capital Additional $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 Preferred 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 Preferred Stock or cash at the option of the Company for two years.
Thereafter, dividends are payable in cash. In addition, the Company exercised
its rights under the agreement to require Westar Capital to purchase an
additional 400,000 shares of Series C Stock for $2,000,000. As of June 30, 1999,
Westar Capital owns 4,500,000 shares of Class A Common Stock and 649,120 shares
of Series C Convertible Preferred Stock.
<PAGE>8
$1,000,000 Private Placement. Subsequent to its fiscal year end, in
August 1999, the Company completed a private placement with its Chairman of the
Board and other related investors. Terms of the placement include the issuance
of 50,000 shares of Series E Stock convertible into 5,000,000 shares of Class A
Common Stock, warrants to purchase 1,250,000 shares Class A Common Stock at $.50
per share and warrants to purchase 1,250,000 shares of Class A Common Stock at
$.75 per share. The Series E Stock is immediately convertible to common stock at
a rate which was below market on the date of issuance, resulting in a beneficial
conversion element of approximately $763,000 which will be recorded as a
preferred stock dividend in the first fiscal quarter ended September 30, 1999. A
portion of the securities was sold to a director. The intrinsic value of the
convertible preferred shares issued to the director was $47,000 on the date of
issuance and will result in a charge against earnings in the first fiscal
quarter ended September 30, 1999.
Atlantic County. In November 1998, the Company was awarded a contract
with Atlantic County, New Jersey. The project involves the installation of
energy efficient lighting, HVAC improvements, installation of control systems
and elevator motor improvements. Annual energy cost savings of approximately
$836,000 is projected to pay for the total project cost of approximately $7
million over a ten year period.
Revenues to the Company were approximately $6.9 million for the fiscal
year ended June 30, 1999. There were no revenues to the Company in the fiscal
year ended June 30, 1998.
Jersey Gardens Mall, Elizabeth, New Jersey. In November, 1998, the
Company entered into a $3.8 million contract (reduced to $3.3 million with
change orders) with an affiliate of Glimcher Development Corporation to build
and operate an electrical distribution system for the Jersey Gardens Mall in
Elizabeth, New Jersey. The Company is constructing a distribution and electric
supply system that will provide energy to light, heat and air condition the
Jersey Gardens Mall's more than 1,600,000 square feet of planned space.
Construction of both the Mall and the distribution system are underway and are
scheduled to be completed by calendar year end 1999. The Company also will
arrange purchases of electricity for the Mall under New Jersey's new
deregulation law.
Revenues to the Company were approximately $3.3 million for the fiscal
year ended June 30, 1999. There were no revenues to the Company in the fiscal
year ended June 30, 1998.
Arden Realty, Incorporated. In March 1999, LTS and the Company executed
two contracts with Arden Realty Inc. ("Arden"), the first of which is to
administer and obtain incentives for 31 properties under the Standard
Performance Contract ("SPC") program, which provides payments authorized by the
California Public Utilities Commission for energy efficiency projects. Through
this contract, LTS and the Company will receive approximately $250,000, paid
over a two-year period. Under the second Arden contract, LTS will procure
equipment and install lighting retrofits, occupancy sensors and new exit signs
at 11 properties. Total revenue to LTS, including utility incentive payments,
from this contract is approximately $1.5 million. These retrofits are
anticipated to be complete by the end of calendar year 1999.
Revenues to the Company were $1.2 million for the fiscal year ended
June 30, 1999. There were no revenues in the fiscal year ended June 30, 1998.
Middletown Board of Education. The Company has signed contracts for the
third, fourth and fifth phases under a master energy services agreement with the
Middletown Board of Education ("MBOE") in Middletown, New Jersey, with total
additional project costs of approximately $13 million. The Company's overall
contracts now total approximately $22.8 million (of which the Company will
recognize approximately $6.2 million in revenue and the MBOE will contract
<PAGE>9
directly with other subcontractors for the remainder in costs) in project costs
and is expected to save MBOE approximately $9 million in energy costs over 10
years and will receive substantial benefits from incentives paid from the local
utility. The project enables the MBOE to make significant energy-related capital
improvements to its facilities and to fund these improvements mostly through
energy cost savings and incentives provided by the local host utility. The
Company is accomplishing the overall project at MBOE through the installation of
geothermal heat pumps and the retrofit of facility lighting. The implementation
of the project is expected to be completed over a period of approximately two
years.
Revenues to the Company were approximately $500,000 in the fiscal year
ended June 30, 1999. There were no revenues attributable to the Company for this
project in the fiscal year ended June 30, 1998.
National Railroad Passenger Corporation ("Amtrak"). The Company has
implemented a project for Amtrak to reduce energy losses from the existing steam
distribution system and to generate process and heat energy with more
cost-efficient equipment. The existing steam distribution system was replaced
with oil-fired and electric boilers at the points of use. For heating purposes,
oil fired boilers and electric resistance heat will serve each building's needs.
This project is expected to generate $1.2 million in revenues for the Company.
Revenues to the Company were approximately $300,000 in the fiscal year
ended June 30, 1999. There were no revenues attributable to this project in the
fiscal year ended June 30, 1998.
Newark Public Schools. In December 1998, the Company entered into an
agreement to perform work on state-operated facilities in the City of Newark,
New Jersey to total $7.6 million in revenues for the Company. This project
requires the Company, as a subcontractor to John Controls, Inc., to procure and
install certain lighting equipment that is designed to improve the efficiency
with which the Newark Schools use various forms of energy (electricity and gas)
and to reduce expenditures for that energy. The Company also arranged for, and
sponsored participation of the facilities in the Standard Offer Program offered
by Public Service Electric and Gas Company ("PSE&G"), through which PSE&G
purchases energy savings generated by the project.
Revenues to the Company were approximately $3.9 million for the fiscal
year ended June 30, 1999. There were no revenues to the Company in the fiscal
year ended June 30, 1998.
Board of Education of the Hudson County Schools of Technology. In April
1999, the Company entered into an energy services agreement with the Hudson
County Schools of Technology Board of Education (the "Hudson BOE"). Under this
agreement, the Company is responsible for the design, procurement and
installation of all equipment and the execution of an energy services agreement
with PSE&G in order for Hudson BOE to benefit from payments under the PSE&G
Standard Offer Program for energy saved by the project equipment. The Company
will also install certain measurement and verification equipment in order to
monitor the energy saved. The total revenues generated from this project total
$1.9 million.
Revenues to the Company were approximately $1.4 million for the fiscal
year ended June 30, 1999. There were no revenues to the Company in the fiscal
year ended June 30, 1998.
Passaic Valley Sewerage Commission, Newark, New Jersey. In December
1996, the Company entered into a master energy efficiency agreement with Passaic
Valley Sewerage Commission (the "Commission"). The second amendment to the
agreement involves a fee to the Company of approximately $1.3 million for the
interface between the Commission and the host utility. This interface involves
<PAGE>10
the application for utility incentive payments as well as the development and
installation of a measurement and savings verification plan and the related
equipment on a project that involves installation of equipment that improves the
process of producing sludge. The implementation of this project is expected to
take approximately two years. Utility incentive payments, all of which are paid
to the Commission, are expected to be approximately $19 million over 10 years.
Revenues to the Company were $900,000 in the fiscal year ended June 30,
1999. There were no revenues to the Company related to this project in fiscal
1998.
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 was
substantially completed by the fiscal year end 1999. OES 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 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, 1999 and 1998 were $4.6
million and $1.4 million, respectively.
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"), a shopping mall in
Northern California, and a central California newspaper 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.
Revenues from customers under this arrangement were $760,000 and
$1.2 million for the fiscal years ended June 30, 1999 and 1998, respectively.
Southern California Edison Demand Side Management Energy Efficiency
Agreements. In April 1994, the Company executed a DSM contract with Southern
California Edison Company ("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 KEMs interest in the same
<PAGE>11
(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 SCEs 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 Raytheon Corporation (fka
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 $1.4 million and $1.2 million for the
fiscal years ended June 30, 1999, and 1998, respectively.
City of Anthony, Kansas. In March 1998, OES 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
1999. Total revenue to the Company from this project is estimated at $2.0
million.
Revenues for the fiscal year ended June 30, 1999, and June 30, 1998,
were approximately $1.5 million and $300,000, respectively.
California Energy Commission. The California Energy Commission ("CEC")
selected the Company, through its International Energy Fund, for development
support of seven energy efficiency projects in the Republic of Panama via a
grant for $325,000 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.
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
encompassed 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 was completed in fiscal year 1999.
Revenues to the Company were approximately $2.4 million in the fiscal
year ended June 30, 1999. There were no revenues associated with this project in
the fiscal year ended June 30, 1998.
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
<PAGE>12
a 27 month period, commencing February 1996, with additional extensions at the
option of Thomason. In April 1999, 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, 1999 were approximately
$850,000.
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); Industrial
Center, Inc. (Arlington, VA); California Energy Commission (Sacramento, CA); a
major amusement theme park; a major multi-branch national financial institution;
Caterpillar Inc. (Lafayette, IN); Deere Power Systems Group (Waterloo, IA);
Lockheed Martin (Oak Ridge, TN); the American Gas Association (Washington, DC);
the Interstate Natural Gas Association of America (Washington, DC); the Electric
Power Research Institute (Palo Alto, CA) and the U.S. Department of Energy
(Washington, D.C.).
Consulting revenues to the Company were approximately $1.5 million
and $1 million for the fiscal years ended June 30, 1999, and 1998, respectively.
Other Services. As a result of deregulation in the State of New
Jersey, the Company now markets services for the efficient and economical
purchase of energy, primarily through aggregation. In addition to the Jersey
Garden Mall project discussed above, the Company has entered into the following
relationships:
Sussex County, New Jersey. In June 1999, the Company entered into a
contract with the Sussex County Board of Chosen Freeholders to aggregate energy
and provide energy services for the County and five other government entities.
Sussex County is the first county in the state of New Jersey to formally
announce aggregation plans. The Company will aggregate 50 buildings; Sussex
County College, Sussex County Municipal Utilities Authority and the
municipalities of Sparta, Hardyston, Franklin and Vernon, which represent annual
electric bills of more than $1 million.
Middlesex County, New Jersey. Middlesex County Improvement Authority
has retained the Company to aggregate electric energy for all participating
county and municipal facilities. Middlesex County is the second such county in
the state of New Jersey to formally announce aggregation plans. Sussex County
was the first county to announce its association with the Company for
aggregation. This project will help position the Middlesex County to maximize
cost savings associated with the initiation of energy deregulation. By pooling
together energy needs, Middlesex County will benefit from a reduction in
electric rates.
No revenues were recognized by the Company for either fiscal year ended
June 30, 1999 or 1998.
Industry of Issuer. Following is a description of the ESCO industry and the
business of the Company.
Traditional ESCOs. Energy service companies (ESCOs) have traditionally
provided energy efficiency and related services to customers. These ESCOs have
provided services through performance contracting that usually involved a
guarantee of savings and financing of the energy efficiency measures installed
<PAGE>13
that was paid for out of savings. 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 accredited 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 traditional ESCO services to
many of its customers. The services are described in greater detail below.
Comprehensive Energy Services. The Company provides the customer
with comprehensive 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)
A more detailed discussion of these services follows.
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 incentive 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.
<PAGE>14
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.
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.
Providing Utility Incentives for Customers. In some utility markets
that have not yet deregulated and in some markets that have deregulated,
utilities are providing performance incentives for customers that save energy.
In some cases these incentives are available only through ESCOs; in other cases
either the ESCO or a customer may obtain the incentives.
Over the past several years, the Company has been successful in
maximizing the incentives for its projects. These incentives may be delivered
through Standard Performance Contract programs or through utility DSM contracts,
whereby the incentive payments are provided based on actual energy savings
achieved from the implemented project. These incentives 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 incremental cost
of building new power plants due to increased consumption). 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 efficiency projects. The costs and margin 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, generally with net
positive cash flow to the customer generated throughout the life of the project.
During the last six years, the Company has successfully completed
several utility DSM competitive bidding programs with PacifiCorp (April 1993);
Southern California Edison Company (May 1994, and July 1995, by acquisition);
Puget Sound Power & Light Company (June 1994); Pacific Gas and Electric Company
("PG&E") (August 1996); Jersey Central Power & Light (by SYCOM LP in 1990 and
1993); Public Service Electric and Gas Company (by SYCOM LP in 1990, 1993 and
1996); and Potomac Electric Power Company (by SYCOM LP in 1992). The Company
also has been a leading ESCO sponsor for Standard
<PAGE>15
Performance Contracting programs in New Jersey and California.
National Accreditation. As previously discussed, the Company has
been accredited NAESCO which has been supported by the U.S. Department of
Transportation. Only 21 ESCOs in the country have obtained such accreditation.
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 competitive marketplace.
New energy supply marketers are moving to diversify their electricity supply
services with other services, which will include energy efficiency services.
Deregulation of the electric utility industry is expanding the scope of
services offered by ESCOs in the competitive 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
competitive market.
The Company has expanded its services and organized them to serve the
deregulating marketplace. In addition to the traditional ESCO services, the
Company is providing the following services directly to end-use customers or
through utility and new energy service companies that are concentrating on
marketing the energy commodity and using the Company as an alliance partner to
provide the other value-added services:
Services to Prepare Customers for Deregulation
(a) Bill Auditing, tariff analyses, and distribution upgrade
The Company audits bills, develops load profiles useful for its energy
buying group efforts, and analyzes and optimizes tariffs for customers. Bill
auditing has become even more important as the number of pricing points for
customers increase and as unbundled bills are late in arriving and have charges
from several sources. Tariff analysis can also be important in the transition.
Customers may be on incorrect tariffs or may not have taken advantage of special
riders or negotiated tariffs that utilities are offering in an attempt to retain
customers, especially during the early years of deregulation. The Company also
looks for opportunities to upgrade customers to higher, less expensive levels of
transmission and distribution service. This is becoming more important as
utilities expand their investment (and, therefore, increase the costs) in the
continuing regulated sector of transmission and distribution.
b) Energy efficiency and load management
Energy efficiency is still a cornerstone of the service offering by the
Company in a deregulating world. Decreasing the use of energy while still
performing the same amount of services is often the most cost-effective strategy
for the end-user. In a deregulating world, load management takes on more
importance because peak-pricing may be much more expensive than it once was in a
bundled, regulated rate environment. The ability to move a customer's energy use
from on-peak to off-peak times becomes more cost-effective in deregulating
<PAGE>16
markets where more of the energy bill is subject to market forces and
time-of-use pricing.
c) On-site and Distributed Generation/Combined Heat & Power
The Company has experience as a distributed generation and a combined
heat and power ("CHP") developer and implementer for 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. Development activities may be related to on-site generation where the
electricity generation is only used on-site and not transmitted to the grid or
it can be locally distributed to the grid. In either case, it may combine
generation of electricity with heat recovery -CHP. 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 or independent 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 generally 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 switch gear 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, New Jersey and Illinois as well as other parts of 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
environmental agencies as a generation source that can provide net environmental
quality benefits to help mitigate global climate change.
d) Energy system outsourcing
The Company can take over the entire operation and maintenance
responsibility of the heating, cooling and lighting systems in a customer's
facility and provide the customer an agreed upon long-term, fixed price contract
to provide the customer the heat, cooling and electricty it needs. This approach
is referred to as "energy system outsourcing" and offers substantial advantages
to those customers who want to be relieved of the costs associated with
operating and maintaining their energy systems.
e) Commodity purchasing, aggregation, buying groups
The Company advises its customers on energy purchasing choices
(electricity, natural gas and other fuels) and assists them in exercising their
choices by preparing individual requests for proposals or creating energy buying
groups. Buying groups are created for customers with multiple facilities, trade
association members, and municipal and county governments. For example, the
Company represents four national trade associations in providing energy services
for their members, including forming buying groups in states that are
deregulating. It also represents regional trade associations. Finally, as
previously discussed in Other Services, the Company has been selected by two
counties in New Jersey to aggregate all of their purchases of energy.
<PAGE>17
f) Energy Consulting
The Company offers consulting services for customers, suppliers, and
other stakeholders on regulatory policies, market developments and new power
technology applications. The Company has contracts with energy industry trade
associations, state and federal governments, manufacturers, and end-users of
energy.
Non-exclusive Alliances with energy commodity ESCOs. The deregulating
energy world consists of many new entrants that call themselves ESCOs but are
not nationally accredited by NAESCO. Some of these entities hold themselves out
to provide all services to the customer under the auspices of "total energy
solution". Others have tried the "total energy solution" approach and abandoned
it, or they have concluded they do not have the experience to succeed in the
retail market beyond the sale of the commodity. In order to compete with those
offering, but not necessarily delivering total energy solutions, these
commodity-focused ESCOs are allying themselves with those who do have
traditional ESCO experience and ESCO experience in deregulating markets beyond
the commodity sale. The Company has allied with several of these ESCOs on a
regional basis or on specific national account competitions.
Acquisition of Service Companies Previously Subcontracted. 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
measurement and verification ("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 some of its customers through design, construction, operation and even
ownership of high purity water systems. Specializing in reverse osmosis systems,
the Company utilizes cost effective membrane technologies to filter dissolved
salts as well as inorganic molecules. The Company evaluates water treatment
processes best suited for the customers' needs, then design and install a
site-specific water treatment system.
<PAGE>18
Markets Served and Results of Service. The Company provides various
customer services that focus on saving energy dollars in residential,
commercial, institutional and industrial facilities. Using multiple, proven
energy technologies prescribed by the Company, today's building owners and
operators can receive both cash flow savings and environmental benefits while
optimizing energy efficiency, load management or alternative generation, 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 providing or
arranging financing of projects, the Company becomes the energy partner with
each of its customers.
Competition to the Company. In general, the Company's competitors are
other ESCOs, particularly the other 20 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 a larger manpower and resource base than the Company. Utility
companies and their affiliates can function as both competitors and partners for
the Company as discussed in Non-exclusive Alliances. Many utilities now are
entering the energy efficiency services market through wholly-owned subsidiaries
of holding companies in direct competition with ESCOs, including the Company.
However, the Company sometimes teams with utility service 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 significantly greater
number of successful projects, than most other ESCO competitors.
In summary, there are several factors that distinguish the Company from
most other ESCOs. These include:
<PAGE>19
o Independence: The Company is not affiliated with any provider of energy or
with any equipment manufacturer. It makes unbiased choices with regard to
sources of energy commodity or a specific piece of equipment (e.g. a
control system) sold by an affiliate. The Company promote one energy
specific technology (e.g. an electric technology) when another technology
(e.g., a gas technology) could better serve the customer.
o Projects Experience: Since 1982 the Company and its acquired affiliates
have provided energy efficiency and related services in over 750 facilities
and has saved customers well over $150 million. These services have been
performed in all types of facilities, including industrial complexes, large
and small commercial buildings, schools, government buildings, waste water
treatment plants, hospitals and homes.
o Personnel: The Company has an experienced staff of energy service
professionals whose senior managers are recognized leaders in the energy
services industry. The CEO of the Company is the current President of
NAESCO and the President was a previous NAESCO President.
o Access to Financing: As discussed above in Competition, the Company has
utilized a number of different financing entities and alternatives to
provide financing alternatives to its customers.
o Emission Reduction Credits: The Company is the only ESCO that has
successfully created emission reduction credits from energy efficiency that
have been used by customers to meet pollution reduction obligations .
o Open Book Pricing: The Company also provides many of its customers with the
option of open book pricing and set forth the various cost components of a
project.
o Accreditation: As discussed in National Accreditation above, the Company is
accredited NAESCO, making it the largest independent accredited energy
services company in the United States. It is also on the U.S. Department
of Defense and Department of Energy approved lists of energy services
companies.
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. Some government laws and
regulations promote the Company's business. For example, in New Jersey, the new
deregulation law provides economic incentives for on-site generation by allowing
on-site generation on contiguous properties, by exempting the generation from
being considered a public utility, and by not imposing stranded costs and
societal benefit charges on on-site generation (at least until revenue erosion
reaches 7.5 percent of the 1999 base). Similar incentives exist for on-site
generation in Illinois. The U.S. Environmental Administration has endorsed
energy efficiency as a pollution control strategy and promoted energy efficiency
that is measured and monitored in the manner which the Company measures and
monitors by making the pollution avoidance eligible for emission reduction
credits and allowances. Some states such as New Jersey have passed similar
regulations.
However, some government laws and regulations impose requirements upon
the Company. The Company is subject to rules and regulations of the
Environmental Protection Agency, the Occupational Safety and Health
<PAGE>20
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. The Company may also be subject to certain lighting level requirements
in certain public facilities when it undertakes lighting retrofits. It has
substantial experience in meeting such standards at both the Federal and State
level.
Employees. As of September 27, 1999, the Company employed approximately 150
persons, either directly or through contract with SYCOM Corporation, in regular
or temporary full-time or part-time positions.
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 13,000 square feet. The Company also leases on
a month by month basis a 250 square foot storage facility. The Company has a
regional office in 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 (OES); Salina, Kansas (OMS); and Costa Mesa,
California (LTS). OES leases 2,000 square feet of office space on a one year
lease with an option to renew, expiring November 1999. OMS owns the main
building (9,698 square feet) 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 leased a fourth
building from former management on a month by month basis to store testing
equipment. This lease was terminated in July 1999. LTS leases approximately
5,476 square feet in Costa Mesa, California. This lease is a three-year lease
with an option to renew, expiring August, 2002. 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 and Washington, D.C.
No other office or warehouse space is leased or owned by the Company.
Management believes that the current properties will be suitable for the
Company's operations.
Item 3. Legal Proceedings
In October 1998, Energy Conservation Consultants, Inc. ("ECCI"), a
Louisiana-based company, filed a suit (United States District Court, Eastern
District of Louisiana, Case No. 98-2914) against OES 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. Discovery is ongoing and management is continuing its attempts to
settle the matter, including through mediation; however, no agreement has been
reached. A continuance has been granted and trial now is set for February 2000.
Additionally, in June 1999, a former officer of the Company (July
1998 through October 1998) filed a suit (Superior Court of the State of
California, County of San Diego, North County Branch, Case No. N081711) alleging
fraud, negligence and wrongful discharge in connection with his
<PAGE>21
employment termination in October 1998. The action seeks compensatory damages
and punitive damages in excess of $25,000. The parties have agreed to mediation
in an effort to settle this matter; however, no settlement agreement has been
reached.
Item 4. Submission of Matters to Vote of Security Holders
No matters have been submitted during the fiscal year ended June 30,
1999, to a vote of securities holders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Since August 2, 1995, the Company's Class A Common Stock has been
quoted on the 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, 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
September 30, 1998 $1.2500 $0.7812
December 31, 1998 $0.7810 $0.4687
March 31, 1999 $0.9062 $0.5000
June 30, 1999 $0.6250 $0.3125
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 September 27, 1999, there were approximately 228 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 cash dividends on the Class A Common Stock in
the foreseeable future. The Company has paid stock 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 40,915 and 8,205 shares of
Series C Stock in the years ended June 30, 1999 and 1998, respectively.
Dividends are payable in additional shares of Series C Stock or cash at the
option of the Company through November 1999. 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)"
<PAGE>22
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, as well as the Company's periodic reports on Forms 10-KSB, 10-QSB and
8-K filed with the SEC.
The Company has previously been corresponding with the SEC regarding its
Form 10- KSB for the year ended June 30, 1998. In response to information
submitted by the Company, on October 13, 1999, the SEC sent a comment letter
questioning the appropriateness of certain aspects of the Company's revenue
recognition accounting policies. The Company believes that its revenue
recognition accounting policies are appropriate and intends to respond to and
continue to work with the SEC to resolve the comments. However, no assurance can
be given that the SEC will not require adjustments to be made to the Company's
previously issued financial statements and financial statements contained in
this annual report.
As discussed in Item 1. Description of Business, the Company acquired
OES, OMS, LTS and SO Corporation during the fiscal year 1998, and REEP and ERSI
during the fiscal year 1999. 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 newly acquired
subsidiaries.
Results of Operations.
Revenues. Revenues increased in the fiscal year ended June 30, 1999, by
$31,290,754 or 255.08 percent. This increase is primarily attributable to the
activity from newly acquired subsidiaries. After elimination of revenues
attributable to newly acquired subsidiaries and prorated revenues from
subsidiaries acquired mid-fiscal year 1998, revenues increased by $2,852,707, or
23.25 percent from fiscal year ended June 30, 1998 to June 30, 1999. The
increase in revenues occurred as a result of the completion of projects in
process as of the beginning of the fiscal year as well as the start of several
new long term construction projects in the fiscal year ended June 30, 1999.
Consulting revenues increased by 57.50 percent due to consulting services
provided to three major customers.
Gross Margin. Gross margin for the fiscal year ended June 30, 1999 was
19.38 percent of revenues compared to 18.01 percent in fiscal year 1998. After
elimination of revenues and cost of sales attributable to newly acquired
subsidiaries, gross margin was 19.72 percent for the fiscal year 1999 compared
to 18.01 percent in fiscal year 1998. The Company typically engages in several
different types of business with substantially different margin results. The
project types are as follows: general construction projects that produce a
typical margin in the 10 to 35 percent range; fee based projects, where the
major construction subcontractors are hired by the customer and, as such, the
costs and related revenues do not flow through the Company and the margin can
range from 30 to 80 percent; consulting contracts where the typical margins are
50 to 70 percent; and lighting projects, through LTS, REEP and ERSI, where the
margins typically are lower, usually in the range of 10 to 25 percent. As a
result of the mix in margins, the gross margin for any given period can
fluctuate significantly and is not necessarily indicative of a trend.
Selling, General & Administrative Expenses. Selling, general and
administrative ("SG&A") expenses were $11,193,561 or 25.70 percent of revenues
in the fiscal year ended June 30, 1999, compared to $3,879,237 or 31.62 percent
of revenues in fiscal year 1998. After elimination of revenues and SG&A expenses
attributable to newly acquired subsidiaries, SG&A as a percentage of revenues
was 28.93 percent for fiscal year end 1999 compared to 31.62 percent for the
fiscal year 1998. The decrease was primarily due to the 23.25 percent increase
in revenue without corresponding increases to SG&A. Without SG&A from newly
acquired subsidiaries, SG&A increased by 12.75 percent from fiscal year 1998 to
fiscal year 1999. However, there were several significant changes from 1998 to
1999. Bad debt expense increased by $93,000, or 310 percent from fiscal year
1998 to 1999. The closing of two regional offices decreased facilities expenses
by $237,000, or 67.47 percent in fiscal year 1999 compared to fiscal year 1998
<PAGE>23
and one time professional service and office set up charges that were incurred
in fiscal year end 1998 were not repeated, which caused other office expenses to
decrease by 55.67 percent.
Depreciation expense was $572,465 as of June 30, 1999 compared to
$258,572 as of June 30, 1998. The increase of 121.39 percent was attributable to
the activity related to the newly acquired subsidiaries.
Goodwill (excess purchase price over net assets acquired) amortization
included in SG&A in the fiscal year ended June 30, 1999 was $502,390 compared to
$280,927 in the fiscal year ended June 30, 1998, an increase of 78.83 percent.
Goodwill amortization for fiscal year 1999 has increased as a result of the
acquisitions made by the Company in the last quarter of fiscal year 1998 and
April 1999. After elimination of goodwill amortization attributable to newly
acquired subsidiaries, there was no goodwill amortization for fiscal year end
1999 compared to $266,667 for the fiscal year end 1998. 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.
Loss from Operations. Loss from operations increased in the fiscal year
ended June 30, 1999 by $4,548,795 or 205.93 percent. This increase was mainly
attributable to the loss recognized related to the decision to sell or
dispose of the Company's lighting subsidiaries and the write off of excess
purchase price over net assets acquired for SO Corporation. As a result of the
operating losses of SO Corporation, management determined that the carrying
value of excess of purchase price over net assets acquired had been impaired as
of June 30, 1999. The effect of this determination was to charge against
operating earnings (additional loss) of $1,918,851, the unamortized balance as
of June 30, 1999. After elimination of revenues and expenses attributable to
newly acquired subsidiaries, loss from operations decreased by $614,961, or
27.84 percent.
Other Income/Expense. Other expense increased $143,734 for the fiscal
year ended June 30, 1999. The change was attributable to an increase in interest
income of $121,153 offset by an increase of interest expense of $264,887. The
interest income arises from notes receivable from newly acquired subsidiaries.
The interest expense is related to notes payable on certain long term
construction projects added with the acquisition of SO Corporation. After
elimination of activity attributable to newly acquired subsidiaries, other
income was $163,672 for fiscal year ended June 30, 1999, compared to other
expense of $2,117 for the same period in 1998. The change was due to an increase
of interest income of $168,453 with little change in interest expense.
Net Loss. Net loss for the year ended June 30, 1999 increased by
$4,690,529, or 211.43 percent from the loss for fiscal year 1998. This resulted
in a loss per share of $0.39, compared to the loss per share for fiscal year
1998 of $0.16. The increase in preferred stock dividends of $155,421,
accompanied with the reserve taken related to the decision to sell or dispose of
the lighting subsidiaries and the write-off of goodwill for SO Corporation,
caused the increase in the loss per share. After elimination of revenues and
expenses attributable to newly acquired subsidiaries, the increase in net loss
was $227,195, or 10.24 percent. This increase was attributable to the $1,010,000
reserve recognized related to the decision to sell or dispose of the lighting
subsidiaries.
Liquidity and Capital Resources.
The Company's cash decreased by $1,192,598 in fiscal year end June 30,
1999, a decrease of 56.98 percent. Working capital was a negative $6,357,699 as
<PAGE>24
of June 30, 1999, compared to a negative $2,693,367 as of June 30, 1998, an
increase in negative working capital of $3,664,332. The increased deficit in
working capital was largely attributable to the increase in the current portion
of notes payable acquired from acquisitions and an increase in accounts payable
of approximately $6.8 million, offset by an increase in accounts receivable of
approximately $3.7 million.
Cash flows used in operating activities for the year ended June 30,
1999 were $771,923, compared to $814,280 provided by operating activities for
the year ended June 30, 1998. Increases in receivables and decreases in billings
in excess of costs and estimated earnings on uncompleted contracts increased the
cash used in operations. This increase was partially offset by the increase in
accounts payable.
Cash flows used in investing activities for the fiscal year ended June
30, 1999, were $2,840,421 compared to $1,330,791 for the fiscal year ended June
30, 1998, an increase of $1,509,630. This increase was primarily due to the
increase in loans to shareholders acquired with the new subsidiaries. Cash flows
provided by financing activities were $2,419,746 for the fiscal year ended June
30, 1999, compared to $2,082,623 for the same period in fiscal 1998, an increase
of 16.19 percent. The principal reason for the change from year-to-year was due
to the proceeds in July 1998 and February 1999 from the additional private
placement of securities to Westar Capital.
The Company has suffered losses from operations for the past two fiscal
years. For the years ended June 30, 1999, and 1998, the Company had net losses
of $6,909,011 and $2,218,482, respectively, negative working capital of
$6,357,699 and an accumulated deficit of $26,528,421 as of June 30, 1999.
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. During the year ended June 30, 1999, the
Company took steps to mitigate the losses and enhance its future viability. In
addition, during the fiscal year end 1999, the Company exercised its right under
a stock subscription agreement to require Westar Capital to purchase an
additional 400,000 shares of Series C Convertible Preferred Stock for
$2,000,000. Subsequent to its most recent fiscal year end, the Company also
privately placed shares of newly created Series E Convertible Preferred Stock
("Series E Stock") to existing shareholders for $1,000,000. Concurrent with this
private placement, members of senior management of the Company have agreed to
receive shares of the Company's Class A Common Stock in lieu of a portion of
their salary in an effort to reduce cash outflows related to compensation.
Subsequent to June 30, 1999, a decision was made to explore the sale or
disposition of the Company's lighting subsidiaries, which could provide capital,
reduce operating losses and will allow management to better focus on its core
ESCO business activities. In addition, the Company is exploring strategic
relationships with companies that could involve an investment in the Company.
The Company may also raise cash through the sale of long term future revenue
streams that it currently owns or has rights to. The Company is also examining
ways to further reduce overhead including, but not limited to, the possibility
of targeted staff reductions. Further, the Company, through the acquisition of
other energy service companies, expects to continue to gain economies of scale
through the use of a consolidated management team and the synergies of marketing
efforts of the different entities. Management believes that all of the above
actions will allow the Company to continue as a going concern. Future cash
requirements depend on the Company's profitability, its ability to manage
working capital requirements and its rate of growth. Additional financing
through the sale of securities may have an ownership dilution effect on existing
shareholders.
Seasonality and Inflation. The Company's business is not significantly affected
by seasonality or inflation.
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
<PAGE>25
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.
There was no operating activity through the fiscal year ended June 30, 1999.
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 a valuation allowance. Any future tax benefit
realized for these items will first reduce any goodwill remaining from this
acquisition and then income tax expense.
At June 30, 1999, the Company has net operating loss carryforwards of
approximately $22,686,000, which expire in the years 2006 through 2019. The
Company has California net operating loss carryforwards at June 30, 1999 of
$1,722,000, which expire in years 2000 through 2004. 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.
Year 2000. The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's or its suppliers' and customers' computer programs that have date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failures or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. The Company believes that substantially all software applications
currently being used for the financial and operational systems have adequately
addressed any year 2000 issues. All hardware systems have been assessed and
plans have been developed to address systems modification requirements. The
costs incurred to date related to its Year 2000 activities have not been
material to the Company, and based upon current estimates, the Company does not
believe that the total cost of its Year 2000 readiness programs will have a
material adverse impact on the Company's results of operations or financial
position. 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.
Item 7. Financial Statements.
The Company's consolidated financial statements are attached as pages
F-1 through F-28.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
[Remainder of page intentionally left blank]
<PAGE>26
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: October 8, 1999 By: /s/ RICHARD T. SPERBERG
------------------------------------
Richard T. Sperberg
Chief Executive Officer (Principal
Executive Officer), Director
Date: October 8, 1999 By: /s/ J. BRADFORD HANSON, CPA
------------------------------------
J. Bradford Hanson, CPA
Chief Financial Officer, Principal
Financial and Accounting Officer
<PAGE>27
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: October 8, 1999 By: /s/ CHARLES C. MCGETTIGAN
-----------------------------------
Charles C. McGettigan
Chairman of the Board and
Outside Director
Date: October 8, 1999 By: /s/ RICHARD T. SPERBERG
-----------------------------------
Richard T. Sperberg
Chief Executive Officer
and Director
Date: October 8, 1999 By: /s/ S. LYNN SUTCLIFFE
-----------------------------------
S. Lynn Sutcliffe
President and Director
Date: October 8, 1999 By: /s/ RICHARD L. WRIGHT
-----------------------------------
Richard L. Wright
Senior Vice President and Director
Date: October 8, 1999 By: /s/ TIMOTHY G. CLARK
-----------------------------------
Timothy G. Clark
Outside Director
Date: October 8, 1999 By: /s/ H. TATE HOLT
-----------------------------------
H. Tate Holt
Outside Director
<PAGE>F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report ....................................................................F-2
Consolidated Balance Sheet - June 30, 1999.......................................................F-3
Consolidated Statements of Operations - For the Years ended
June 30, 1999 and 1998......................................................................F-4
Consolidated Statement of Shareholders' Equity (Deficit) - For the Years ended
June 30, 1999 and 1998......................................................................F-5
Consolidated Statements of Cash Flows - For the Years ended
June 30, 1999 and 1998......................................................................F-6
Notes to Consolidated Financial Statements.......................................................F-7
</TABLE>
<PAGE>F-2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
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, 1999 and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the years ended June 30, 1999 and 1998. 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 audits 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, 1999 and the results of their
operations and their cash flows for the years ended June 30, 1999 and 1998 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has a working capital deficit of $6,357,699, and an accumulated
deficit of $26,528,421. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with regard
to these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of reported asset amounts or the amounts and classification of
liabilities that might result from the outcome of this uncertainty.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
September 3, 1999
<PAGE>F-3
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1999
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash $ 900,408
Accounts receivable, net of allowance for doubtful accounts of $35,000 6,071,729
Inventory 185,562
Capitalized project costs 147,022
Costs and estimated earnings in excess of billings on uncompleted contracts 1,109,315
Other current assets 50,634
-----------------
TOTAL CURRENT ASSETS 8,464,670
Cash-restricted 147,838
Property and equipment, net of accumulated depreciation and amortization of $1,258,000 1,413,918
Other assets 101,483
-----------------
TOTAL ASSETS $ 10,127,909
=================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable - related party $ 211,914
Notes payable 2,499,455
Accounts payable 9,035,325
Billings in excess of costs and estimated earnings on uncompleted contracts 1,445,790
Accrued expenses and other liabilities 1,394,024
Liabilities in excess of assets held for sale 235,861
------------------
TOTAL CURRENT LIABILITIES 14,822,369
Long-Term Liabilities:
Accrued future operation and maintenance costs associated with energy services
agreements 324,010
-------------------
TOTAL LIABILITIES 15,146,379
-------------------
Commitments and contingencies (Notes 2, 3, 4, 8, 11, 12, 14, 15, 20)
Shareholders' Equity (Deficit):
Preferred Stock, Series C, 842,500 shares authorized, 649,120 issued and
outstanding (Aggregate $3,245,600 liquidation preference) 649
Preferred Stock, Series D, 157,500 shares authorized, issued and outstanding and held
in escrow -
Common Stock, $.001 par value, 24,000,000 shares authorized:
Class A common stock, 23,999,000 shares authorized, 18,584,853 issued and
outstanding 18,585
Class B common stock, 1,000 shares authorized, none issued and outstanding -
Additional paid-in capital 25,583,816
Notes receivable - shareholders (4,093,099)
Accumulated deficit (26,528,421)
------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (5,018,470)
------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 10,127,909
==================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>F-4
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 1999 and 1998
<TABLE>
<S> <C> <C>
1999 1998
----------------- -------------------
Revenues $ 43,557,902 $ 12,267,148
Cost of sales 35,118,295 10,057,277
----------------- -------------------
Gross margin 8,439,607 2,209,871
Selling, general, and administrative expenses 11,193,561 3,879,237
Depreciation and amortization expense 1,074,855 539,499
Reserve on sale or disposal of subsidiary 1,010,000 -
Impairment of excess of purchase price
over net assets acquired 1,918,851 -
----------------- -------------------
Operating loss (6,757,660) (2,208,865)
----------------- -------------------
Other income (expense):
Interest expense (292,287) (27,400)
Interest income 146,436 25,283
----------------- -------------------
Total other expense (145,851) (2,117)
----------------- -------------------
Loss before provision for income taxes (6,903,511) (2,210,982)
Provision for income taxes 5,500 7,500
----------------- -------------------
Net loss $ (6,909,011) $ (2,218,482)
================= ===================
Net loss allocated to common shareholders $ (7,113,579) $ (2,267,629)
================= ===================
Basic and diluted loss per common share: $ (0.39) $ (0.16)
================= ===================
Weighted average number of shares
used in per common share calculation: 13,790,185
18,469,094
================= ===================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-5
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended June 30, 1999 and 1998
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock Preferred Stock
------------------------------------ --------------------------------------------------------------
Class A Series C Series D
------------------------------------ -------------------------------- -----------------------------
Total
Additional Notes Accum- Shareholders
Paid-In Receivable- ulated Equity
Shares Amount Shares Amount Shares Amount Capital Shareholders Deficit (Deficit)
-------- -------- -------- ------ ------ ------ ----------- -------------- ------------ ------------
Balances July 1, 1997 10,944,172 $ 10,944 - $ - - $ - $17,052,961 $ - $(17,147,213) $ (83,308)
Issued to Onsite 401k Plan 49,912 50 - - - - 17,399 - - 17,449
Issued pursuant to private
offering net of expenses 2,000,000 2,000 - - - - 951,542 - - 953,542
Stock issued for acquisitions 4,940,000 4,940 - - - - 4,031,923 - - 4,036,863
Exercise of stock options 309,104 309 - - - - 86,854 - - 87,163
Sale of Series C preferred
stock - - 200,000 200 - - 999,800 - - 1,000,000
Series C preferred stock
dividend - - 8,205 8 - - 49,139 - (49,147) -
Compensation recognized upon
issuance of warrants - - - - - - 18,980 - - 18,980
Notes receivable from
shareholders acquired in
acquisitions - - - - - - - (1,335,217) - (1,335,217)
Net Loss - - - - - - - - (2,218,482) (2,218,482)
------------ --------- ------- ---- ---- ----- ----------- ----------- ------------ ------------
Balances June 30, 1998 $ 18,243,188 18,243 208,205 $208 - $ - $23,208,598 $(1,335,217) $(19,414,842) $2,476,990
Exercise of stock options 75,334 75 - - - - 23,404 - - 23,479
Issued to Onsite 401k Plan 266,331 267 - - - - 147,687 - - 147,954
Series C preferred stock
dividend - - 40,915 41 - - 204,527 - (204,568) -
Sale of Series C preferred
stock - - 400,000 400 - - 1,999,600 - - 2,000,000
Notes receivable from
shareholders acquired in
acquisitions - - - - - - - (2,757,882) - (2,757,882)
Net Loss - - - - - - - - (6,909,011) (6,909,011)
----------- -------- -------- ---- ---- ----- ----------- ----------- ------------ ------------
Balances June 30, 1999 18,584,853 $18,585 649,120 $649 - $ - $25,583,816 $(4,093,099) $(26,528,421) $(5,018,470)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-6
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1999 and 1998
<TABLE>
<S> <C> <C>
1999 1998
--------------------- ---------------------
Cash flows from operating activities:
Net loss $ (6,909,011) $ (2,218,482)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization of excess purchase price over net assets
acquired 502,390 280,927
Adjustment resulting from impairment in estimated carrying
value of excess purchase price over net assets acquired 1,918,851
Amortization of acquired contract costs 50,196
-
Estimated loss on disposal of subsidiary 1,010,000
-
Accrued future operation and maintenance costs (39,174) 43,927
Provision for bad debts 35,000 30,192
Depreciation 572,465 258,572
Compensation recognized upon issuance of stock warrants - 18,980
Accounts receivable (3,780,739) (781,792)
Increase in costs and estimated earnings
in excess of billings on uncompleted contracts (252,419) (225,324)
Inventory (7,347) (5,758)
Other assets 44,100 (435,120)
Cash-restricted 9,998 115,331
Accounts payable 6,847,535 1,351,806
Increase (decrease) in billings in excess of costs
and estimated earnings on uncompleted contracts (1,124,173) 1,739,390
Accrued expenses and other liabilities 164,117 641,631
Deferred income 186,288 -
--------------------- ---------------------
Net cash provided by (used in) operating activities (771,923) 814,280
-------------------- ---------------------
Cash flows from investing activities:
Purchases of property and equipment (82,539) (119,075)
Loan to shareholders (2,757,882) (7,911)
Acquisition of businesses, net of cash acquired - (1,203,805)
--------------------- ---------------------
Net cash used in investing activities (2,840,421) (1,330,791)
--------------------- ---------------------
Cash flows from financing activities:
Proceeds from notes payable 1,178,108 290,000
Proceeds from issuance of common stock - 953,542
Proceeds from issuance of preferred stock 2,000,000 1,000,000
Proceeds from exercise of stock options 23,479 87,163
Repayment of notes payable - related party (256,415) (46,804)
Repayment of notes payable (525,426) (201,278)
--------------------- ---------------------
Net cash provided by financing activities 2,419,746 2,082,623
--------------------- ---------------------
Net increase (decrease) in cash (1,192,598) 1,566,112
Cash, beginning of year 2,093,006 526,894
--------------------- ---------------------
Cash, end of year $ 900,408 $ 2,093,006
===================== =====================
Supplemental disclosures of non-cash transactions:
Payment of Series C Preferred Stock dividends
with Series C Preferred stock $ 204,568 $ 49,147
===================== =====================
Payment of accrued liabilities with common stock $ 147,954 $ 17,449
===================== ====================
Liabilities accrued for acquisition costs $ - $ 285,594
===================== ===================
Fair market value of assets, less liabilities of
businesses acquired with common stock $ - $ 4,036,863
===================== =====================
Supplemental disclosures of cash transactions:
Interest paid $ 312,110 $ 33,385
===================== =====================
Income taxes paid $ 5,500 $ 36,175
===================== =====================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-7
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 and on-site generation projects and assists
customers in reducing the cost of purchased electricity and fuel. The
Company also offers bill auditing, tariff analysis, transmission and
distribution analysis and upgrade and aggregation services. In addition,
the Company 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, a
California corporation, which was effective February 15, 1994.
In October 1997, the Company acquired Westar Business Services, Inc.
("WBS"), which was renamed OBS and subsequently changed its name to Onsite
Energy Services, Inc. ("OES") (see Note 4). OES provides utility services
and industrial water services primarily in the states of Kansas, Missouri
and Oklahoma.
In February 1998, OES acquired the operating assets of Mid-States Armature
Works, Inc. ("Mid-States Armature") 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, 1999, 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 ESCOs 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.
Effective April 1, 1999, the Company formed REEP Onsite, Inc. ("REEP") and
ERSI Onsite, Inc. ("ERSI") for the purpose of acquiring substantially
all of the assets of REEP, Inc. for assumption of certain liabilities
(see Note 4). The aquired assets were allocated between REEP and ERSI. REEP
provides residential energy services while ERSI is a commercial lighting
contractor.
Unless the context indicates otherwise, reference to the Company shall
include all of its wholly-owned subsidiaries.
<PAGE>F-8
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 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. The implementation
period for a typical project is approximately three to six months. The
implementation period for larger projects (those in excess of $2,000,000)
can range from six to twenty four months.
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.
In addition to the installation of energy savings measures at a customer
site, the Company is generally engaged to provide measurement and
verification ("M&V") services of actual savings as compared to expected, or
estimated savings identified in the engineering, or pre-implementation
stages of the contract. This service is typically performed for the purpose
of billing the local host utility for incentive payments due to either the
customer and/or the Company based upon achieved savings. The Company
generally performs M&V as a separate service to the construction contract
for which it is compensated as services are rendered. Revenue related to
the M&V services are recognized as the services are performed. Revenue
arising from the Company's share of utility incentive payments is
recognized in the period that actual savings are achieved.
Revenues for consulting, development, management, marketing and other
similar services are recognized as the services are performed.
Operation and Maintenance Agreements
Commencing July 1, 1993, the Company, on a limited basis, began entering
into long term operation and maintenance ("O&M") M&V agreements with some of its
customers. These agreements, where they exist, are components of the
construction contracts that provide for ongoing service on the installed energy
efficiency projects. These agreements are entered into as a condition of the
implementation contract and are not a primary service of the Company and are
accounted for as a component cost on the installed energy efficiency project. In
the 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 during the construction period. In instances where revenues
associated with the operation and maintenance exceed estimated costs, the
revenues are recognized as services are
<PAGE>F-9
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
performed. Estimated costs associated with these revenues are accrued at
the time the revenues are recognized. As of June 30, 1999, the total
liability for deferred operations and maintenance costs is $426,185, of
which $102,175 is expected to be incurred in the next fiscal year.
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. As of
June 30, 1999 and 1998, there were no cash equivalents outstanding.
Restricted Cash
Restricted cash consists of amounts on deposit with financial institutions
for the purpose of securing performance milestones under one of the
Company's demand side management ("DSM") contracts and for project
implementation commitments. Under the DSM deposit, funds become available
to the Company over a period of 12 to 36 months following completion of the
last contract provided certain conditions and milestones are achieved
(December 1999). In the event that conditions or milestones are not
achieved, the Company may be required to forfeit its right to some or all
of the funds on deposit. As of June 30, 1999, the Company has $43,000
reserved for funds that have a low probability of return. Of the remaining
balance of $147,838, the Company believes that all conditions and
milestones will be achieved and that no additional funds under these
projects will be subject to forfeiture.
Inventory
Inventory consists of materials for use in installation and maintenance of
energy efficiency projects and are stated at the lower of cost, determined
by the first-in, first-out method, or market.
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 31.5 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
<PAGE>F-10
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
expected future operating income and cash flows to determine whether it is
probable that impairment has occurred. As a result of the operating losses
of SO Corporation, management determined that the carrying value of excess
of purchase price over net assets acquired had been impaired as of June 30,
1999. The effect of this determination was a charge against earnings
(additional loss) of $1,918,851, the unamortized balance as of June 30,
1999.
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
basis 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
Basic earnings per share excludes dilution and is calculated by dividing
income (loss) available to common shareholders by the weighted-average
number of common shares outstanding for the period. Loss applicable to
common shareholders was calculated by adding $204,568 and $49,147 of
preferred stock dividends to net loss for the years ended June 30, 1999 and
1998, respectively. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue 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.
Options, warrants and preferred stock convertible to an aggregate of
23,692,958 and 20,827,116 for the years ending June 30, 1999 and 1998,
respectively were excluded in the earnings per share computation because
their effect was anti-dilutive.
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.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations
in accounting for its employee stock options. In accordance with FASB
Statement No. 123 "Accounting for Stock-Based Compensation" ("FASB 123"),
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
<PAGE>F-11
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
value method as prescribed by FASB 123.
Impact of Recently Issued Standards
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. This statement was amended by FASB No. 137,
issued in June 1999, such that it is effective for the Company's financial
statements for the year ended June 30, 2002. The adoption of this standard
is not expected to have a material effect on the Company's financial
statements.
FASB Statement No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise" was issued in 1998. FASB Statement No.
135, "Rescission of FASB Statement No. 75 and Technical Corrections"
and FASB Statement No. 136, "Transfers of Assets to a Not-for-Profit
Organization or Charitable Trust That Raises or Holds Contributions
for Others" were issued in 1999. These pronouncements are not
expected to impact the Company regarding future financial statement
disclosures, results of operations or financial position.
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 fair value of cash is its demand value which is equal to its
carrying value. The fair value of notes payable are based upon borrowing
rates that are available to the Company for loans with similar terms,
collateral and maturity. As of June 30, 1999, the estimated fair values of
notes payable approximate their carrying values.
<PAGE>F-12
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.
Reclassification
Certain reclassifications have been made to the consolidated financial
statements for the year ended June 30, 1998 to conform with the current
year presentation.
3. Basis of Presentation
As shown in the accompanying financial statements, the Company has suffered
losses from operations for the past two fiscal years. For the years ended
June 30, 1999, and 1998, the Company had net losses of $6,909,011 and
$2,218,482, respectively, negative working capital of $6,357,699 and an
accumulated deficit of $26,528,421 as of June 30, 1999. 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. During the year ended June 30, 1999, the Company
took steps to mitigate the losses and enhance its future viability. In
addition, during the fiscal year end 1999, the Company exercised its right
under a stock subscription agreement to require Westar Capital to purchase
an additional 400,000 shares of Series C Convertible Preferred Stock for
$2,000,000. Subsequent to its most recent fiscal year end, the Company also
privately placed shares of newly created Series E Convertible Preferred
Stock ("Series E Stock") to existing shareholders for $1,000,000.
Concurrent with this private placement, members of senior management of the
Company have agreed to receive shares of the Company's Class A Common Stock
in lieu of a portion of their salary in an effort to reduce cash outflows
related to compensation. Subsequent to June 30, 1999, a decision was made
to explore the sale or disposition of the Company's lighting subsidiaries,
which could provide capital, reduce operating losses and will allow
management to better focus on its core ESCO business activities. In
addition, the Company is exploring strategic relationships with companies
that could involve an investment in the Company. The Company may also raise
cash through the sale of long term future revenue streams that it currently
owns or has rights to. The Company is also examining ways to further reduce
overhead including, but not limited to, the possibility of targeted staff
reductions. Further, the Company, through the acquisition of other energy
service companies, expects to continue to gain economies of scale through
the use of a consolidated management team and the synergies of marketing
efforts of the different entities. Management believes that all of the
above actions will allow the Company to continue as a going concern. Future
cash requirements depend on the Company's profitability, its ability to
manage working capital requirements and its rate of growth. Additional
financing through the sale of securities may have an ownership dilution
effect on existing shareholders.
<PAGE>F-13
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company's ability to continue as a going conern is dependent on its
ability to obtain necessary working capital and ultimately achieve
profitable operations, none of which can be assured. The accompanying
consolidated financial statements do not include any adjustments relating
to the recoerability and classification of recorded asset amounts or the
amount and classification of liabilities or any other adjustment that might
be necessary should the Company be unable to continue as a going concern.
4. Acquisitions
On October 28, 1997, the Company entered into a Plan and Agreement of
Reorganization with Westar Capital to acquire Westar Capital's wholly-owned
subsidiary WBS (now OES). 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. This stock issuance was valued at the average of the closing
bid and ask prices for three days before and after the acquisition was
agreed to by the Company and Westar Capital. On March 31, 1998, the Company
released an additional 800,000 shares of Class A Common Stock from an
escrow established pursuant to the Plan and Agreement. The subsequent stock
issuance was valued at the average of the bid and ask stock prices on the
date of issuance. The transaction was accounted for as a purchase and
accordingly the inclusion of the operations of OES in the consolidated
operations commenced on the acquisition date. 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, OES acquired the operating assets of Mid-States Armature
for $290,000 through its newly created subsidiary, OMS. The transaction was
accounted for as a purchase and accordingly, the inclusion of the
operations of OMS in the consolidated operations commenced on the
acquisition date.
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. This stock issuance was valued at the average
of the closing bid and ask prices for three days before and after the
acquisition was agreed to by the Company and LTS. The transaction was
accounted for as a purchase and accordingly, the inclusion of the
operations of LTS in the consolidated operations commenced on the
acquisition date. 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. The excess of purchase price over
net assets acquired was being amortized over a period of 60 months
beginning July 1998. Subsequent to its fiscal year end, the Company made
a decision to explore the sale or disposition of its lighting
subsidiaries. A reserve for the sale or disposition of the lighting
subsidiaries was recorded at June 30, 1999 in the amount of
$1,010,000.
On June 30, 1998, the Company acquired all the assets and specific
liabilities of SYCOM Enterprises, LLC ("SYCOM, LLC") through a
newly-created subsidiary (SO Corporation) in exchange for 1,750,000 shares
of the Company's Class A Common Stock. This stock issuance was valued at
the average of the closing bid and ask prices for three days before and
after the acquisition was agreed to by the Company and SYCOM, LLC. 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, LLC, in
exchange for the right to receive 157,500 shares of Series D Convertible
Preferred Stock ("Series D 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 if and
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
<PAGE>F-14
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 general and
administrative expenses and debt service to third parties with interest at
9.75 percent 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).
In addition, the Company agreed to pay $50,000 and issued warrants to
purchase 160,000 shares of Class A Common Stock which are currently
exercisable at $0.4185 per share, through June 30, 2003, to entities
affiliated with a director of the Company as consideration for services
rendered in connection with the acquisition. The Company recognized $92,016
related to these warrants which was accounted for as additional purchase
price. The transaction was accounted for as a purchase and accordingly, the
inclusion of the operations of SO Corporation in the consolidated
operations commenced on the acquisition date. The resulting purchase price
including acquisition costs was $2,060,439 with $2,132,056 being allocated
<PAGE>F-15
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
to excess of purchase price over net assets acquired. As a result of the
operating losses of SO Corporation, a further evaluation of the carrying
value of excess purchase price over net assets acquired as of June 30, 1999
resulted in the write-off of $1,918,851 through a charge to earnings.
Effective April 1, 1999, the Company, through two newly formed
entities, REEP Onsite, Inc. and ERSI Onsite, Inc., acquired
substantially all of the assets of REEP, Inc. for assumption of
certain liabilities.
The following presents pro forma information as if the April 1, 1999
acquisitions described immediately above occurred on July 1, 1997:
<TABLE>
<S> <C> <C>
Year Ended Year Ended
June 30, 1999 June 30, 1998
------------- -------------
Revenue $ 45,391,000 $ 41,212,000
================= ================
Operating Income (Loss) $ (6,942,000) $ (10,310,000)
================= ==================
Net Loss $ (7,205,000) $ (12,751,000)
================= ==================
Basic and Diluted loss per common share $ (0.39) $ (0.79)
================= =================
</TABLE>
5. Accounts Receivable
Accounts Receivable consisted of the following as of June 30, 1999:
Contracts Receivable:
Completed Contracts $ 705,561
Contracts in Progress 4,077,057
Trade receivables 1,324,111
Less: Allowance for doubtful accounts (35,000)
-------------
Total $ 6,071,729
============
6. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on contracts as of June 30, 1999, consisted of
the following:
Costs incurred $ 28,496,874
Estimated earnings 7,477,447
-------------
35,974,321
Less: Billings to date (36,310,796)
------------
$ (336,475)
=============
<PAGE>F-16
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Included in the accompanying Balance Sheet
under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 1,109,315
Billings in excess of costs and earnings on
uncompleted contracts (1,445,790)
--------------
$ (336,475)
==============
Property and Equipment
Property and equipment at June 30, 1999 consisted of:
<TABLE>
<S> <C> <C>
Estimated Useful Lives
---------------------------
Office furniture and equipment $ 1,287,071 5-7 years
Land 44,000 -
Building 80,000 31.5 years
Water treatment plants 993,517 Contract life (50 to 56
months)
Equipment and tools 201,832 7-10 years
Vehicles 23,674 5 years
Leasehold improvements 41,824 5-20 years
------------------------
$ 2,671,918
Less: Accumulated Depreciation (1,258,000)
------------------------
$ 1,413,918
========================
</TABLE>
Depreciation expense amounted to $572,465 and $258,572 for the years ended June
30, 1999 and 1998, respectively.
<PAGE>F-17
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<S> <C>
8. Notes Payable
Notes payable at June 30, 1999, consisted of the following:
Note payable with payments due upon completion of certain contractual
milestones with interest at 18.0%, past due, collateralized
by accounts receivable and other assets $ 69,049
Notes payable with payments due upon completion of certain
contractual milestones with interest at 12.5% to 18%, collateralized
by accounts receivable and other assets 2,430,406
----------------
$ 2,499,455
================
9. Note Payable - related party
Note payable - related party at June 30, 1999 consisted of the following:
Note payable due on demand to related party, interest at
12.0% per annum 211,914
----------------
$ 211,914
=================
10. Accrued expenses and other liabilities
At June 30, 1999, accrued expenses and other liabilities consisted of the
following:
Payroll and related payroll taxes $ 266,798
Accrued job costs 305,912
Accrued utility commitments 448,497
Accrued interest 49,054
Deferred income 216,136
Accrued operation and maintenance costs associated with energy
services agreements 102,175
Other accrued liabilities 5,452
---------------
$ 1394,024
===============
</TABLE>
11. Shareholders' 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.
<PAGE>F-18
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
On July 14, 1998 and February 12, 1999, the Company exercised its right
under the Stock Subscription Agreement to require Westar Capital to
purchase an additional 400,000 shares of Series C Convertible Preferred
Stock for $2 million.
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,
1999, there were no shares of Class B Common Stock issued and outstanding.
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 agreed to pay $50,000 and issued warrants to
purchase 160,000 shares of Class A Common Stock which are exercisable at
$0.4185 per share, through June 30, 2003, to entities affiliated with a
director as consideration for services rendered in the acquisition of the
assets of SYCOM, LLC. The Company recognized $92,016 related to these
warrants which was accounted for as additional purchase price of SO
Corporation.
As of June 30, 1999, the Company has issued and outstanding a total of
685,998 warrants to purchase shares of its Class A Common Stock. The
exercise prices range from $0.1875 to $0.4185 per share with expiration
dates ranging from September 2002 through June 2004.
<PAGE>F-19
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 percent 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 $204,568 and $49,147 were paid in the
form of 40,915 and 8,205 shares, respectively, of Series C during the years
ended June 30, 1999 and 1998, respectively.
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 - Shareholders
As of June 30, 1999, Notes Receivable - Shareholders - includes receivables
with the previous owners of LTS, who are current employees and directors of
LTS, in the amount of $305,626. Such loans accrue interest at 10 percent
per annum and are due in March 2003.
Also included are amounts due from affiliates of SYCOM, LLC in the amount
of $3,787,473. Some of the amounts accrue interest at 9.75 percent per
annum, are due on or before June 30, 2006 and are collateralized by certain
assets of an affiliate of SYCOM, LLC. (Additionally, see Note 4.)
12. Stock Option Plans:
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 maximum term for grants under the 1991 Plan is 10 years
with a maximum vesting period of three years. The 1991 Plan is administered
by a committee of outside directors appointed by the Board of Directors.
There was no option activity under the 1991 plan for the years ended June
30, 1999 or 1998. As of June 30, 1999, all 85,000 options outstanding under
the plan were exercisable at $5.3125 through January 15, 2003.
<PAGE>F-20
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Onsite 1993 Stock Option Plan
During fiscal year 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.
The maximum term for grants under the 1993 Plan is 10 years with a maximum
vesting period of three years for options granted prior to June 10, 1998.
Any grants subsequent to June 10, 1998 have a maximum vesting period of
four years.
As of June 30, 1999, the status of the 1993 Plan was as follows:
<TABLE>
<S> <C> <C> <C>
Outstanding Exercise Price Exercisable
Options Per Share Options
--------------------------------------------------------------------
July 1, 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
===================== ====================
Options granted 394,000 $0.36 - $1.2180
Options exercised (75,334) $0.25 - $0.5000
Options cancelled (326,691) $0.25 - $1.1250
---------------------
June 30, 1999 2,990,233 $0.23 - $5.3125 1,588,626
===================== ====================
</TABLE>
At June 30, 1999, no additional options were available for granting to purchase
shares of Class A Common Stock.
<PAGE>F-21
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, 1999, and 1998, is as follows:
Weighted-Average
Fixed Options Shares Exercise Price
----------------------- --------------------- ----------------------
July 1, 1997 2,456,725 $ 0.5789
==============
Granted 880,954 $ 0.6224
Exercised (206,004) $ 0.2752
Cancelled (133,417) $ 0.2797
--------------
June 30, 199 2,998,258 $ 0.6259
==============
Granted 394,000 $ 0.5364
Exercised (75,334) $ 0.3302
Cancelled (326,691) $ 0.5289
-------------
June 30, 1999 2,990,233 $ 0.6326
=============
The weighted average contractual life for all options as of June 30, 1999,
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 FASB 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 1999 and 1998 consistent with the provisions of
FASB 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,
1999 1998
------------------ -----------------
Net Loss $ (7,524,941) $ (2,480,017)
================== =================
Basic and Diluted Loss
Per Common Share $ (0.41) $ (0.18)
================== ================
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted-average
assumptions: expected volatility of 117.83 percent, 116.8 percent for
grants during the year ended June 30, 1998, 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 U.S.
Treasury T-Strip Rate at the option grant date for fiscal years ended 1999,
and 1998, respectively.
The weighted-average fair value of stock options granted to employees
during the years ended June 30, 1999 and 1998, was $0.38 and $0.36,
respectively.
<PAGE>F-22
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SYCOM Non Plan Options
During fiscal year 1999, the Company issued stock options that were not
part of the 1993 Plan (the "Non-Plan Options"). The maximum term for
Non-Plan Option grants is five years with a maximum vesting period of four
years.
As of June 30, 1999, the status of the Non-Plan Options was as follows:
<TABLE>
<S> <C> <C> <C>
Outstanding Exercise Price Exercisable
Options Per Share Options
--------------------- -------------------- -----------------
June 30, 1998 - -
===================== ===============
Options granted 899,126 $0.3850 - $0.8125 765,126
Options exercised - -
Options cancelled (11,000) $0.4185 - $0.8125 -
---------------------
June 30, 1999 888,126 $0.3850 - $0.5465 765,126
===================== ===============
13. Income Taxes
Income tax expense for the years ended June 30, 1999 and 1998, is comprised
of the following:
Year ended June 30, 1999 Current Deferred Total
----------------- --------------------- --------------------
Federal $ - $ - $ -
State 5,500 - 5,500
----------------- --------------------- --------------------
$ 5,500 $ - $ 5,500
================= ===================== ====================
Year ended June 30, 1998 Current Deferred Total
----------------- --------------------- --------------------
Federal $ - $ - $ -
State 7,500 - 7,500
----------------- --------------------- --------------------
$ 7,500 $ - $ 7,500
================= ===================== ====================
</TABLE>
<PAGE>F-23
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The actual income tax expense differs from the "expected" tax (benefit)
(computed by applying the U.S. Federal corporate income tax rate of 34
percent for each period) as follows:
<TABLE>
<S> <C> <C>
1999 1998
------------------- -------------------
Amount of expected tax (benefit) $ (2,347,100) $ (751,800)
Non-deductible expenses 450,000 13,900
State taxes, net 3,600 4,900
Effect of change in state tax rate - 27,600
Change in valuation allowance for deferred
tax assets 1,899,000 712,900
=================== ===================
Total $ 5,500 $ 7,500
=================== ===================
The components of the net deferred tax asset recognized as of June 30, 1999
and 1998, are as follows:
1999 1998
------------------- -------------------
Current deferred tax assets (liabilities):
Litigation settlement accrual $ 6,800 $ 16,000
Deferred operation and maintenance
reserve 169,800 185,400
Vacation accrual 70,100 44,400
Inventory reserve 26,200 6,000
Book compensation on issuance of
stock options - 7,600
Allowance for doubtful accounts 14,400 6,000
Other 800 600
------------------- -------------------
288,100 266,000
Valuation allowance (288,100) (266,000)
------------------- -------------------
Net current deferred tax asset $ - $ -
=================== ===================
1999 1998
------------------- -------------------
Long-Term deferred tax assets (liabilities):
Net operating loss carryforwards $ 7,865,500 $6,943,200
Goodwill due to difference in
amortization 1,202,100 453,300
Depreciation 700 (137,100)
Alternative minimum tax credit 11,200 11,200
Other 900 800
------------------- -------------------
9,080,400 7,271,400
Valuation allowance (9,080,400) (7,271,400)
=================== ===================
Net current deferred tax asset $ - $ -
=================== ===================
</TABLE>
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.
<PAGE>F-24
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The deferred tax asset also includes the future benefit of the tax
deduction for the exercise of stock options of $33,000. 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, 1999, the Company has net operating loss carryforwards of
approximately $22,686,000, which expire in the years 2006 through 2019. The
Company has California net operating loss carryforwards at June 30, 1999 of
$1,722,000, which expire in years 2000 through 2004.
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.
14. Related Parties
During the fiscal year ended June 30, 1999, the Company paid one director
of the Company professional fees in the amount of $14,535.
As of June 30, 1999, OES has outstanding accounts receivable with Western
Resources, Inc., the parent company of a shareholder of the Company, in the
amount of $47,415 in relation to water treatment plants in Lawrence, Kansas
and Tecumseh, Kansas. OES has recognized $471,336 in revenue related to
these water treatment facilities.
Westar Capital has guaranteed any shortfalls of energy savings on the
Company's contract with one 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 San Ramon, California, where office space is rented on a three year
lease that expires March 2001. The Company also leases on a month by month
basis a 250 square foot storage facility in Carlsbad, California. OES
leases office space that has a one year lease with an option to renew,
expiring November 1999. OMS leased a small building from the former owner
on a month-by-month basis to store testing equipment. This lease
terminated in July 1999. LTS currently has a three-year lease that
expires August 2002.
<PAGE>F-25
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Future minimum lease payments under operating leases (including equipment)
is as follows:
Year ending June 30,
2000 454,000
2001 436,000
2002 70,000
2003 21,000
2004 9,000
--------------------
Total minimum lease payments $ 990,000
====================
Total rent expense, including month-to-month equipment rentals, was
$467,000 and $202,000 in 1999, and 1998, 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. (See also Note 20).
Ongoing Maintenance for Water Treatment Plants
OES has two contracts with Western Resources whereby OES 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. OES 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, OES is liable for the
cost of the repairs to the equipment limited to a maximum of $300,000 per
incident. There have been no damage occurrences since the inception of both
contracts and management believes any future loss to be remote.
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.
Guaranteed Savings
The Company is contingently liable to some of its customers pursuant to
contractual terms in the event annual guaranteed savings are not achieved
by the customer. These guarantees are derived from conservative engineering
estimates and generally are guaranteed at a level of less than 100 percent
of the total estimated savings. As of June 30, 1999, projects with
associated savings guarantees had an aggregate annual savings of
approximately $5.4 million of which the Company has guaranteed an aggregate
of approximately $4.2 million annually. To date, the Company has not
<PAGE>F-26
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
incurred any losses associated with these guarantees and any risk of future
losses attributable to these guarantees is considered by management to be
remote.
Litigation
In October 1998, Energy Conservation Consultants, Inc. ("ECCI"), a
Louisiana-based company, filed a suit (United States District Court,
Eastern District of Louisiana, Case No. 98-2914) against OES 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. Discovery is ongoing and
management is continuing its attempts to settle the matter, including
through mediation; however, no agreement has been reached. A continuance
has been granted and trial now is set for February 2000.
Additionally, in June 1999, a former officer of the Company (July 1998
through October 1998) filed a suit (Superior Court of the State of
California, County of San Diego, North County Branch, Case No. N081711)
alleging fraud, negligence and wrongful discharge in connection with his
employment termination in October 1998. The action seeks compensatory
damages and punitive damages in excess of $25,000. The parties have agreed
to mediation in an effort to settle this matter; however, no settlement
agreement has been reached.
16. Defined Contribution Plan
The Company sponsors a 401(k) defined contribution plan, which covers
substantially all employees. Company matching contributions are determined
annually at the discretion of management and vest at the rate of 20 percent
per year of employment. For the current year, the company match was 75
percent of the employee contribution up to 6 percent of their annual
salary. During the years ended June 30, 1999 and 1998, the Company's
matching contribution expense was $83,046 and $53,480, respectively. The
Company match was in the form of Class A Common Stock issued to the plan's
fiduciary. Shares issued in matching were 266,331 and 49,912 for the fiscal
years 1999 and 1998, respectively.
17. Significant Customers
Revenues from the three largest customers accounted for 34 percent
(16 percent, 11 percent and 9 percent each) of total revenues in fiscal
1999, and revenues from three other customers accounted for 31 percent (11
percent, 10 percent, 10 percent each) of total revenues in fiscal 1998.
18. Concentration of Credit Risk
The Company operates in one industry segment, energy consulting 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, 1999, accounts receivable totaled $6,071,729, and the Company
has provided an allowance for doubtful accounts of $35,000.
<PAGE>F-27
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
For the years ended June 30, 1999, and 1998, bad debts totaled $123,000 and
$30,000 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, 1999, the Company maintained cash balances with a commercial
bank, which were approximately $387,000 in excess of FDIC insurance limits.
19. Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's or its suppliers' and customers' computer programs that have date
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations including, among other things, a
temporary inability to process transactions, send invoices, or engage in
similar normal business activities. The Company believes that substantially
all software applications currently being used for the financial and
operational systems have adequately addressed any year 2000 issues. All
hardware systems have been assessed and plans have been developed to
address systems modification requirements. The costs incurred to date
related to its Year 2000 activities have not been material to the Company,
and based upon current estimates, the Company does not believe that the
total cost of its Year 2000 readiness programs will have a material adverse
impact on the Company's results of operations or financial position. 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
Private Placement of Securities
In August 1999, the Company completed a private placement of equity
securities with its Chairman of the Board and other related investors.
Terms of the placement include the issuance of 50,000 shares of Series E
Convertible Preferred Stock that is convertible into 5,000,000 shares of
Class A Common Stock, warrants to purchase 1,250,000 shares of Class A
Common Stock at $.50 per share and warrants to purchase 1,250,000 shares of
Class A Common Stock at $.75 per share. The preferred shares are
convertible at a rate which is below market on the date of issuance,
resulting in a beneficial conversion element. The shares are immediately
convertible and the beneficial conversion element of approximately $763,000
will be recorded as a preferred stock dividend in the first quarter ending
September 30, 1999. A portion of the securities was sold to a director. The
intrinsic value of preferred shares sold to the director was $47,000, and
will result in a charge against earnings in the first quarter ending
September 30,1999.
Sale or Disposal of Subsidiaries
On September 28, 1999, the Company decided to explore the sale or
disposition of its interests in the lighting contracting subsidiaries,
namely, LTS, REEP and ERSI. As a result of this decision, the Company
<PAGE>F-28
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
recorded a reserve on the disposition of the combined entities of
$1,010,000 at June 30, 1999. Further, the assets and liabilities of these
entities have been reclassified to the category liabilities in excess of
assets held for sale.
The amounts included in the financial statements as of June 30, 1999
consisted of the following:
ASSETS:
Accounts receivable $ 1,192,880
Cost and estimated earnings in excess of billings
on uncompleted contracts 87,924
Property and equipment, net 54,335
Other assets 467,066
------------------
Total assets 1,802,205
------------------
LIABILITIES:
Accounts payable $ 1,192,481
Billings in excess of costs and estimated
earnings on uncompleted contracts 318,696
Accrued expenses and other liabilities 526,889
------------------
Total liabilities 2,038,066
------------------
Liabilities in excess of assets held for sale $ 235,861
==================
Total revenues generated by these subsidiaries were $7,704,000 and $233,000
for the years ended June 30, 1999 and 1998, respectively. Income (loss)
before taxes for these subsidiaries was ($1,392,000) and $19,000 for the
years ended June 30, 1999 and 1998, respectively.
Exhibit 21
Subsidiaries of the Registrant
1. Western Energy Management, Inc., ("WEM") is a Delaware corporation and
is a wholly-owned subsidiary of the Company.
2. Onsite Energy Services, Inc. ("OES"), is a Kansas corporation and is a
wholly-owned subsidiary of the Company.
3. Onsite/Mid-States, Inc. ("OMS"), is a Kansas corporation and is a
wholly-owned subsidiary of OES.
4. SYCOM ONSITE Corporation ("SO Corporation"), is a Delaware corporation and
is a wholly-owned subsidiary of the Company.
5. Lighting Technology Services, Inc.("LTS"), is a California corporation and
is a wholly-owned subsidiary of the Company.
6. Onsite Energy de Panama, S.A. is a Panamanian corporation and is a
wholly-owned subsidiary of the Company.
7. REEP Onsite, Inc. ("REEP") is a Delaware corporation and is a wholly-owned
subsidiary of the Company.
8. ERSI Onsite, Inc. ("ERSI") is a Delaware corporation and is a wholly-owned
subsidiary of the Company.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 900,408
<SECURITIES> 0
<RECEIVABLES> 6,071,729
<ALLOWANCES> 35,000
<INVENTORY> 185,562
<CURRENT-ASSETS> 8,464,670
<PP&E> 2,671,918
<DEPRECIATION> 1,258,000
<TOTAL-ASSETS> 10,127,909
<CURRENT-LIABILITIES> 14,822,369
<BONDS> 2,711,369
0
649
<COMMON> 18,585
<OTHER-SE> 21,490,717
<TOTAL-LIABILITY-AND-EQUITY> 10,127,909
<SALES> 43,557,902
<TOTAL-REVENUES> 43,557,902
<CGS> 35,118,295
<TOTAL-COSTS> 35,118,295
<OTHER-EXPENSES> 15,197,267
<LOSS-PROVISION> 35,000
<INTEREST-EXPENSE> 292,287
<INCOME-PRETAX> 6,903,511
<INCOME-TAX> 5,500
<INCOME-CONTINUING> 6,909,011
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,909,011
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.39
</TABLE>
