UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A-2
(Amendment No. 2 Filed on March 2, 2000)
(MarkOne)
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 ______________
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..............$44,100,561
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.
<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.
<PAGE>3
Subsidiaries/Partnerships. Substantially all of the Company's revenues are
generated through energy services and consulting services. The Company's
subsidiaries are as follows:
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
<PAGE>4
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.
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/Financial Statement Restatement. The Company had
previously been corresponding with the SEC regarding the Company's Form 10-KSB
for the year ended June 30, 1998. In response to information submitted by the
Company, on December 3, 1999, the SEC sent a comment letter directing the
Company to restate its financial statements for each of the last three fiscal
years ended June 30, 1999, 1998, and 1997 as well as for the quarter ended
September 30, 1999. The restatement is the result of a review of the Company's
accounting policies as it related to the timing of the recognition of revenues
and expenses.
<PAGE>5
The SEC took exception to certain applications of accounting principles as
applied by ONSITE SYCOM in the areas of the timing of revenue recognition where
utility incentive payments are a part of ONSITE SYCOM's revenue stream, the
timing of revenue recognition with respect to the sale of future utility revenue
payments and the timing of revenue and expense recognition relative to contracts
containing future commitments of services following the implementation of
certain projects. The Company, along with its independent auditors, believed
that it was adhering to Generally Accepted Accounting Principles ("GAAP") and
had provided the SEC with arguments in support of its position in these areas.
Rather than continue to utilize resources in an appeal to the SEC Chief
Accountant, the Company decided to amend previously filed financial statements
and reports to reflect the SEC's position on the timing of income and expense
recognition in these areas. As a result, ONSITE SYCOM restated its previously
filed financial statements for each of the fiscal years ending June 30, 1997,
1998 and 1999, as well as the first fiscal quarter ended September 30, 1999.
The Company implemented several projects in fiscal 1998 where the price to the
customer was less than the cost to implement the project, creating a loss for
accounting purposes. This "loss" was recovered and profits were achieved through
the Company's retaining a share of utility incentive payments that resulted from
energy savings from the implemented project. In these instances, the Company
estimated its revenue from these utility incentive payments and recognized the
revenue as the project was being implemented using the percentage of completion
methodology. The SEC has required the Company to defer recognition of the
utility incentive payment component of revenue until the point in time that the
utility is billed for the incentive payments. Generally, these billings occur on
a quarterly basis for a three year period.
Further, the Company sold other future utility incentive payment streams to a
third party on a non-recourse basis. At the time of the sale, in fiscal 1997 and
1998, the Company recognized revenue to the extent it received cash. The SEC has
required the Company to record these payments as a financing transaction (debt)
and to recognize revenue related to the utility incentive payments on an as
billed basis, again quarterly over a three year period.
In addition, the Company has a small number of contracts for which it has a
commitment to provide relamping services several years after the initial
implementation of the project. The Company originally recognized all the revenue
and an estimate of the future cost as the project was being implemented. The SEC
has required the Company to defer a portion of the revenue and eliminate the
reserve for future cost until the relampings actually occur.
Lastly, the Company has approximately 15 contracts that call for ongoing
services generally over a ten year period. The Company originally recorded the
estimated future costs associated with these commitments on a net present value
basis. The SEC has required the Company to record these commitments on an
undiscounted basis.
Unaudited filing of Form 10-KSB. The original and first amended filings
of Form 10-KSB for the fiscal year ended June 30, 1999 were audited by the
Company's independent auditors, Hein+Associates. The opinion issued was
qualified subject to the Company's ability to continue as a going concern. As of
the time of filing amendment number 2, the Company's auditors have not reviewed
revisions resulting from the restatements due to non-payment by the Company of
accounting and tax fees, and therefore, the Company's auditor's opinion is not
included with this filing.
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,
<PAGE>6
1999, and 1998, the Company had net losses of $6,466,108 and $2,211,295,
respectively, negative working capital of $7,098,826 and an accumulated deficit
of $27,185,601 as of June 30, 1999. Management believes that the Company will be
able to generate additional revenues and improve 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.
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
<PAGE>7
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.
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
<PAGE>8
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.
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.
Item 6. Management's Discussion and Analysis
When used in this discussion and the financial statements that follow, the words
"expect(s)," "feel(s)," "believe(s)," "will," "may," "anticipate(s)" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Readers are cautioned not to place
<PAGE>9
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 original and first amended filings of Form 10-KSB for the fiscal
year ended June 30, 1999 were audited by the Company's independent auditors,
Hein+Associates. The opinion issued was qualified subject to the Company's
ability to continue as a going concern. As of the time of filing amendment
number 2, our auditors have not reviewed revisions resulting from the
restatements due to non-payment of fees, and therefore their opinion is not
included with this filing.
The SEC took exception to certain applications of accounting principles
as applied by ONSITE SYCOM in the areas of the timing of revenue recognition
where utility incentive payments are a part of ONSITE SYCOM's revenue stream,
the timing of revenue recognition with respect to the sale of future utility
revenue payments and the timing of revenue and expense recognition relative to
contracts containing future commitments of services following the implementation
of certain projects. The Company, along with its independent auditors, believed
that it was adhering to GAAP and had provided the SEC with arguments in support
of its position in these areas. Rather than continue to utilize resources in an
appeal to the SEC Chief Accountant, the Company decided to amend previously
filed financial statements and reports to reflect the SEC's position on the
timing of income and expense recognition in these areas. As a result, ONSITE
SYCOM restated its previously filed financial statements for each of the fiscal
years ending June 30, 1997, 1998 and 1999, as well as the first fiscal quarter
ended September 30, 1999.
The Company implemented several projects in fiscal 1998 where the price
to the customer was less than the cost to implement the project, creating a loss
for accounting purposes. This "loss" was recovered and profits were achieved
through the Company's retaining a share of utility incentive payments that
resulted from energy savings from the implemented project. In these instances,
the Company estimated its revenue from these utility incentive payments and
recognized the revenue as the project was being implemented using the percentage
of completion methodology. The SEC has required the Company to defer recognition
of the utility incentive payment component of revenue until the point in time
that the utility is billed for the incentive payments. Generally, these billings
occur on a quarterly basis for a three year period.
Further, the Company sold other future utility incentive payment streams
to a third party on a non-recourse basis. At the time of the sale, in fiscal
1997 and 1998, the Company recognized revenue to the extent it received cash.
The SEC has required the Company to record these payments as a financing
transaction (debt) and to recognize revenue related to the utility incentive
payments on an as billed basis, again quarterly over a three year period.
In addition, the Company has a small number of contracts for which it
has a commitment to provide relamping services several years after the initial
implementation of the project. The Company originally recognized all the revenue
and an estimate of the future cost as the project was being implemented. The SEC
has required the Company to defer a portion of the revenue and eliminate the
reserve for future cost until the relampings actually occur.
<PAGE>10
Last, the Company has approximately 15 contracts that call for ongoing
services generally over a ten year period. The Company originally recorded the
estimated future costs associated with these commitments on a net present value
basis. The SEC has required the Company to record these commitments on an
undiscounted basis.
The following table shows the originally reported and revised results
for each of the last three fiscal years.
Fiscal year ended June 30,
1997 1998 1999
As Filed $ (1,388,598) $ (2,218,482) $ (6,909,011)
As restated $ (2,240,028) $ 2,211,295 $ (6,466,108)
------------- ------------- -------------
Difference $ (851,430) $ 7,187 $ 442,903
============= ============= =============
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
$44,100,561 or 257.05 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 $3,395,366, or
27.49 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
20.31 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 22.34 percent for the fiscal year 1999 compared
to 19.05 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
<PAGE>11
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,
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 $572,464 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 1999
compared to $266,667 for the fiscal year 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 $4,170,803 or 188.79 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 $208,492, or 9.42 percent.
Other Income/Expense. Other expense increased $82,010 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 $203,163. 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 and financing
attributable to utility incentive payment streams. 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
$4,254,813, or 192.41 percent from the loss for fiscal year 1998. This resulted
in a loss per share of $0.36, 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,
contributed significantly to the increase in the loss per share. After
<PAGE>12
elimination of revenues and expenses attributable to newly acquired
subsidiaries, the decrease in net loss was $208,492, or a decrease of 9.43
percent.
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 $7,098,826as
of June 30, 1999, compared to a negative $3,604,344 as of June 30, 1998, an
increase in negative working capital of $3,494,482. 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 $285,056, compared to $806,491 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 $6,466,108 and $2,211,295, respectively, negative working capital of
$7,098,826 and an accumulated deficit of $27,185,601 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
<PAGE>12
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.
The original and first amended filings of Form 10-KSB for the fiscal
year ended June 30, 1999 were audited by the Company's independent auditors,
Hein+Associates. The opinion issued was qualified subject to the Company's
ability to continue as a going concern. As of the time of filing amendment
number 2, the Company's auditors have not reviewed revisions resulting from the
restatements due to non-payment by the Company of accounting and tax fees, and
therefore, the Company's auditor's opinion is not included with this filing.
Seasonality and Inflation. Management does not believe that the business of the
Company is effected 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
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
<PAGE>14
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.
<PAGE>15
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: March 2, 2000 By: /s/ RICHARD T. SPERBERG
-------------------------------------
Richard T. Sperberg
Chief Executive Officer (Principal Executive
Officer), Director
Date: March 2, 2000 By: /s/ J. BRADFORD HANSON, CPA
-------------------------------------
J. Bradford Hanson, CPA
Chief Financial Officer,
Principal Financial and Accounting Officer
<PAGE>F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report ..................................................*
Consolidated Balance Sheet - June 30, 1999...................................F-3
Consolidated Statements of Operations - For the Years ended
June 30, 1999, 1998 and 1997...............................................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
* The original and first amended filings of Form 10-KSB for the fiscal year
ended June 30, 1999 were audited by the Company's independent auditors,
Hein+Associates. The opinion issued was qualified subject to the Company's
ability to continue as a going concern. As of the time of filing amendment
number 2, the Company's auditors have not reviewed revisions resulting from the
restatements due to non-payment by the Company of accounting and tax fees, and
therefore, the Company's auditor's opinion is not included with this filing.
<PAGE>F-2
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
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 2,900,612
Accounts payable 9,035,325
Billings in excess of costs and estimated earnings on uncompleted contracts 1,445,790
Accrued expenses and other liabilities 1,776,903
Liabilities in excess of assets held for sale 235,861
-----------
TOTAL CURRENT LIABILITIES 15,606,405
Long-Term Liabilities:
Accrued future operation and maintenance costs associated with energy
services agreements 140,288
Notes payable, less current portion 56,866
-----------
TOTAL LIABILITIES 15,803,559
-----------
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 (27,185,601)
-----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (5,675,650)
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $10,127,909
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>F-3
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS For the
Years Ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Revenues $ 43,539,867 $ 11,942,659 $ 8,473,223
Utility Revenue 560,694 408,738 129,323
Cost of sales 35,144,224 9,998,788 6,544,797
------------- ------------- ------------
Gross margin 8,956,337 2,352,609 2,057,749
Selling, general, and administrative expenses 11,193,561 3,879,237 3,121,332
Depreciation and amortization expense 1,074,855 539,499 587,077
Reserve on sale or disposal of subsidiary 1,010,000 - 425,240
Impairment of excess of purchase price
over net assets acquired 1,918,851 - -
------------- ------------- ------------
Operating loss (6,240,930) (2,066,127) (2,075,900)
------------- ------------- ------------
Other income (expense):
Interest expense (366,114) (162,951) (180,911)
Interest income 146,436 25,283 25,283
------------- ------------- ------------
Total other expense (219,678) (137,668) (155,628)
------------- ------------- ------------
Loss before provision for income taxes (6,460,608) (2,203,795) (2,231,528)
Provision for income taxes 5,500 7,500 8,500
------------- ------------- ------------
Net loss ($6,466,108) ($2,211,295) ($2,240,028)
============= ============= ============
Net loss allocated to common shareholders ($6,670,676) ($2,252,942) ($2,240,028)
============= ============= ============
Basic and diluted loss per common share: ($0.36) ($0.16) ($0.21)
============= ============= ============
Weighted average number of shares
used in per common share calculation: 18,469,094 13,790,185 10,818,498
============= ============= ============
</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>
<CAPTION>
Common Stock Preferred Stock
------------------ ------------------------------------------------------------------------
Class A Series C Series D
------------------ --------------- --------------------------------------------------------
Notes Share-
Additional Receivable- holders
Paid-In Share- Accumulated Equity
Shares Amount Shares Amount Shares Amount Capital holders Deficit (Deficit)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances July 1, 1997 10,944,172 $ 10,944 - $ - - $ - $17,052,961 $ - $(18,254,483) $(1,190,578)
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 - - - - - - - - (2,211,295) (2,211,295)
------------------- --------------- -------------- ---------------------------------------------------
Balances June 30, 1998 18,243,188 $ 18,243 208,205 $ 208 - $ - $23,208,598 $(1,335,217) $(20,514,925) $ 1,376,907
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 - - - - - - - - (6,466,108) (6,466,108)
------------------- --------------- -------------- ---------------------------------------------------
Balances June 30, 1999 18,584,853 $ 18,585 649,120 $ 649 - $ - $25,583,816 $(4,093,099) $(27,185,601) $(5,675,650)
================== =============== ============== ===================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>F-5
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the
Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,466,108) $ (2,211,295)
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 88,930 (14,562)
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 79,977 622,889
Deferred income 186,288 62,255
------------ -------------
Net cash provided by (used in) operating activities (285,056) 806,491
------------ -------------
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 aquired - (1,203,805)
------------ -------------
Net cash used in investing activities (2,840,421) (1,330,791)
------------ -------------
Cash flows from financing activities:
Proceeds from notes payable 1,178,108 552,234
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 (1,012,293) (455,723)
------------ -------------
Net cash provided by financing activities 1,932,879 2,090,412
------------ -------------
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 $ 385,937 $ 168,936
============ =============
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 acquired assets were allocated between REEP and ERSI. REEP provides
residential energy services while ERSI is a commercial lighting contractor.
<PAGE>F-8
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Unless the context indicates otherwise, reference to the Company shall
include all of its wholly-owned subsidiaries.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all of its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Revenue Recognition
Revenue Recognition/Financial Statement Restatement. The Company had
previously been corresponding with the SEC regarding the Company's Form
10-KSB for the year ended June 30, 1998. In response to information
submitted by the Company, on December 3, 1999, the SEC sent a comment letter
directing the Company to restate its financial statements for each of the
last three fiscal years ended June 30, 1999, 1998, and 1997 as well as for
the quarter ended September 30, 1999. The restatement is the result of a
routine review of the Company's accounting policies as it related to the
timing of the recognition of revenues and expenses. The financial statements
reflect the changes mandated by the SEC.
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.
Revenues attributable to the Company's share of utility incentive payments
resulting from savings on implemented projects are recognized as billed to
the utility.
In addition to the installation of energy savings measures at a customer
site, the Company is generally engaged to provide 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.
<PAGE>F-9
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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") and measurement and
verification ("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 records as an expense the estimates of future deficit cash flows
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 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
$183,197, of which $42,909 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.
<PAGE>F-10
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 5 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 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.
<PAGE>F-11
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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
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, realizability of shareholder notes receivable and accrued future
<PAGE>F-12
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
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 $6,466,108 and
$2,2111,295, respectively, negative working capital of $7,098,826 and an
accumulated deficit of $27,185,601 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
<PAGE>F-13
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
The Company's ability to continue as a going concern 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 recoverability 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
<PAGE>F-14
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 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
<PAGE>F-15
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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
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:
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)
============= =============
<PAGE>F-16
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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)
=============
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)
=============
<PAGE>F-17
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. Property and Equipment
Property and equipment at June 30, 1999 consisted of:
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
============
Depreciation expense amounted to $572,465 and $258,572 for the years ended
June 30, 1999 and 1998, respectively.
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
Notes payable collateralized by utility incentive payments
with interest at 12.0% 458,023
-----------
Less: current portion 2,900,612
-----------
$ 56,866
===========
<PAGE>F-18
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 48,347
Deferred income 658,988
Accrued operation and maintenance costs associated with
energy services agreements 42,909
Other accrued liabilities 5,452
-----------
$ 1,776,903
===========
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. 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.
<PAGE>F-19
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
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).
<PAGE>F-20
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
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.
<PAGE>F-21
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
As of June 30, 1999, the status of the 1993 Plan was as follows:
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
========= =========
At June 30, 1999, no additional options were available for granting to
purchase shares of Class A Common Stock.
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, 1998 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.
<PAGE>F-22
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
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:
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
========= ==========
<PAGE>F-23
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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
========= ========== =========
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:
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 $ - $ -
============= ============
<PAGE>F-24
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 $ - $ -
============= ============
The deferred tax asset includes the future benefit of the LTS
pre-acquisition deductible temporary differences and net operating losses of
$184,100. The deferred asset has been fully reserved through the valuation
allowance. Any future tax benefit realized for these items will first reduce
any goodwill remaining from this acquisition and then reduce income tax
expense.
The deferred tax asset also includes the future benefit of the tax deduction
for the exercise of stock options of $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).
<PAGE>F-25
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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, CA. 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.
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
<PAGE>F-26
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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
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.
<PAGE>F-27
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 year
1999, and revenues from three other customers accounted for 31 percent (11
percent, 10 percent, and 10 percent each) of total revenues in fiscal year
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.
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
<PAGE>F-28
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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
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
============
<PAGE>F-29
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
21. Restated Financial Statements
The Company was required to restate previously issued financial statements for a
change in the timing of the recording of certain revenue and expense items. The
following table shows each of the quarters revised results for the fiscal
quarters over the last two fiscal years.
Three Month Period Ended
September 30, December 31, March 31
1997 1997 1998
------------ ------------ ------------
Revenues 2,156,683 3,222,456 3,371,530
Utility Revenue 102,185 102,185 102,185
Cost of sales 1,572,172 2,540,449 2,663,083
------------ ------------ ------------
Gross margin 686,696 784,192 810,632
Selling, general, and
administrative expenses 596,047 1,096,902 1,180,828
------------ ------------ ------------
Operating income (loss) 90,649 (312,710) (370,196)
Other income (expense) (38,373) (30,176) (77,899)
------------ ------------ ------------
Income (loss) before provision
for income taxes 52,276 (342,886) (448,095)
Provision for income taxes 6,738 5,499 4,438
------------ ------------ ------------
Net income (loss) $ 45,538 $ (348,385) $ (452,533)
============ ============ ============
Net loss allocated to
common stockholders $ 45,538 $ (348,385) $ (476,908)
============ ============ ============
Basic and diluted loss
per common share $ 0.00 $ (0.03) $ (0.03)
============ ============ ============
Weighted average shares
outstanding 10,944,172 13,519,572 14,714,361
============ ============ ============
<PAGE>F-30
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Three Month Period Ended
September 30, December 31, March 31
1997 1997 1998
------------ ------------ ------------
Revenues $ 9,314,041 $ 9,315,984 $ 12,627,875
Utility Revenue 140,174 140,174 140,174
Cost of sales 7,899,511 7,763,819 9,305,795
------------ ------------ ------------
Gross margin 1,554,704 1,692,339 3,462,254
Selling, general, and
administrative expenses 2,982,080 3,021,839 2,950,054
------------ ------------ ------------
Operating income (loss) (1,427,376) (1,329,500) 512,200
Other income (expense) (72,404) (66,772) (26,687)
------------ ------------ ------------
Income (loss) before provision
for income taxes (1,499,780) (1,396,272) 485,513
Provision for income taxes - - -
------------ ------------ ------------
Net income (loss) $ (1,499,780) $ (1,396,272) $ 485,513
============ ============ ============
Net loss allocated to
common stockholders $ (1,525,355) $ (1,446,640) $ 433,917
============ ============ ============
Basic and diluted loss
per common share $ (0.08) $ (0.08) $ 0.02
============ ============ ============
Weighted average shares
outstanding 18,295,536 18,488,514 18,537,128
============ ============ ============
The following table shows the originally reported and revised results for each
of the last three fiscal years.
<PAGE>31
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Fiscal year ended June 30,
1997 1998 1999
As Filed $ (1,388,598) $ (2,218,482) $ (6,909,011)
As restated $ (2,240,028) $ 2,211,295 $ (6,466,108)
-----------------------------------------------------
Difference $ (851,430) $ 7,187 $ 442,903
=====================================================
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-KSB
FOR THE PERIOD ENDED JUNE 30, 1999, FOR ONSITE ENERGY CORPORATION, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<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> 1,413,918
<DEPRECIATION> 1,258,000
<TOTAL-ASSETS> 10,127,909
<CURRENT-LIABILITIES> 15,563,496
<BONDS> 0
0
649
<COMMON> 18,585
<OTHER-SE> (5,694,884)
<TOTAL-LIABILITY-AND-EQUITY> 10,127,909
<SALES> 44,100,561
<TOTAL-REVENUES> 44,100,561
<CGS> 35,144,224
<TOTAL-COSTS> 15,197,267
<OTHER-EXPENSES> 219,678
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 366,114
<INCOME-PRETAX> (6,460,608)
<INCOME-TAX> 5,500
<INCOME-CONTINUING> (6,466,108)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,466,108)
<EPS-BASIC> (.36)
<EPS-DILUTED> (.36)
</TABLE>
