UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A-3
(Amendment No. 3 Filed on June , 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 ________________ to_________________
Commission file number 1-12738
ONSITE ENERGY CORPORATION
(Name of small business issuer in its charter)
Delaware 33-0576371
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
701 Palomar Airport Road, Suite 200
Carlsbad, California 92009
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (760) 931-2400
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Class A Common Stock N/A
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
|X| No |_|
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |_|
State issuer's revenues for its most recent fiscal year..............$44,101,409
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.
Since the close of the transaction in June 1998, Onsite has experienced
significant losses and as a result has been unable to provide sufficient loans
to SYCOM Corporation to enable SYCOM Corporation and its affiliate, SYCOM LP, to
make the requisite payments on a previous loan from Public Service Conservation
Resources Corporation ("PSCRC") to SYCOM LP. PSCRC has given a notice to SYCOM
Corporation and SYCOM LP alleging a default by SYCOM LP under its agreements
with PSCRC. On June 1, 2000, the Company announced that it had given notice to
Sycom Corportion of the termination of the Sale and Noncompetetion Agreement
between the Company and Sycom Corporation, and will return to doing business as
Onsite Energy Corporation. The Company's notice to SYCOM Corporation of the
termination of the Sale and Noncompetition Agreement, given in accordance with
the Company's rights under that Agreement, is a result of the PSCRC default
notice and the Company's continuing losses. The Company, however, will retain
the project assets purchased from SYCOM LLC in June 1998 as well as projects
developed since. In connection with the termination, S. Lynn Sutcliffe resigned
as the President of Onsite. See also Notes to Consolidated Financial Statements,
Note 20 - Subsequent events.
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
<PAGE>4
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 sold
95 percent of its interest in LTS to a previous shareholder of LTS. Operations
of LTS were not material to the consolidated financial statements.
Onsite Energy Services, Inc. In October 1997, the Company acquired Westar
Business Services, Inc. ("WBS"), an indirect wholly-owned subsidiary of Western
Resources, Inc. ("Western Resources") (NYSE:WR). As part of the transaction, WBS
was renamed Onsite Business Services, Inc. Subsequently, Onsite Business
Services, Inc. changed its name to Onsite Energy Services, Inc. ("OES"). The
purchase price was 1,700,000 shares of the Company's Class A Common Stock issued
upon closing to Westar Capital, Inc. ("Westar Capital"), a wholly-owned
subsidiary of Western Resources, with an additional 800,000 shares of Class A
Common Stock being released to Westar Capital from an escrow in March 1998 when
certain conditions set forth in the acquisition documents were satisfied. With
its primary office in Topeka, Kansas, OES provides utility services and
industrial water services primarily in the states of Kansas, Missouri and
Oklahoma. Subsequent to its fiscal year end, OES has become exclusively engaged
in industrial water services.
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. Subsequent to its fiscal year end, the Company sold all of the
assets of OMS to a company owned by two former employees of OES. Operations of
OMS were not material to the consolidated financial statements.
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 shut down the operations
of REEP and to explore the sale or disposition of ERSI. As part of the
separation from the Sycom entities, the Company anticipates disposing of ERSI.
Operations of REEP and ERSI were not material to the consolidated financial
statements.
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.
<PAGE>5
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.
The SEC took exception to certain applications of accounting principles as
applied by the Company in the areas of the timing of revenue recognition where
utility incentive payments are a part of the Company'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. As a result, the Company restated its previously filed
financial statements for each of the fiscal years ending June 30, 1997, 1998 and
1999, as well as the first (a second amendment) and second fiscal quarters ended
September 30, 1999 and December 31, 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 and other ongoing 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.
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 three fiscal years. For the years ended June 30,
1999, 1998 and 1997, the Company had net losses of $6,477,458, $2,098,906, and
$2,398,202, respectively, and had negative working capital of $6,511,390 and an
<PAGE>6
accumulated deficit of $27,467,050 as of June 30, 1999. Management believes that
the Company will be able to generate additional revenues and improve operating
efficiencies through the sale or disposition of its previous 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 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. 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
believed that the acquisitions of these businesses would 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. Subsequent to its fiscal year end,
the Company has changed its direction through divesting itself of OMS and LTS,
discontinuing the operation of REEP and, effective June 30, 2000, will terminate
its working agreement with SYCOM Corporation. As a result of all of the above
actions, the Company will focus on its core activity, ESCO activities in the
Western and Mid-West regions as well as international opportunities.
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.
<PAGE>7
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, or Frank J. Mazanec
among others may materially adversely affect the Company's business.
Limited Market for Class A Common Stock. Although the Company's Class A
Common Stock is quoted on the Over-the-Counter (OTC) Bulletin Board, because of
the Company's small capitalization and public float, there is limited liquidity
for its Class A Common Stock. Therefore, shareholders may have a difficult time
selling their Class A Common Stock without adversely affecting the price of such
stock.
Penny Stock Regulations. The Securities and Exchange Commission (the
"SEC") has adopted regulations that generally define "penny stock" to be any
equity security that has a market price (as defined) less than $5.00 per share
subject to certain exceptions. The Company's securities may be covered by the
penny stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
accredited investors (generally, institutions with assets in excess of
$5,000,000 or individuals with net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouse). For
transactions covered by this rule, the broker-dealers must make a special
suitability determination for the purchase and receive the purchaser's written
agreement of the transaction prior to the sale. Consequently, the rule may
affect the ability of broker-dealers to sell the Company's securities and also
affect the ability of purchasers to sell their shares in the secondary market.
Competition. The energy efficiency business is highly competitive. As
discussed in Competition to the Company below, the Company will compete with
other firms, including utility affiliates, for a limited number of large
contracts. Competitors generally have substantially greater financial resources
than the Company and may expend considerably larger sums than the Company on
marketing. The successful operation of the Company will depend on its ability to
meet future competition.
<PAGE>8
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.
No Dividends on Class A Common Stock. It is anticipated that no cash
dividends will be declared by the Company on its Class A Common Stock in the
near future. Shares of Series C Preferred Stock are entitled to an annual
dividend at the rate of 9.75 percent of the "liquidation preference" of $5.00
per share per annum out of any funds legally available for payment of such
dividends. During the first two years, the dividends on the Series C Stock may
be paid through the issuance of shares of the Company's Series C Stock.
<PAGE>9
Major Events, Contracts and Customers. In addition to the acquisitions
mentioned above, the following is a list of major events and contracts that
occurred in the fiscal year ended June 30, 1999, and how they are significant to
the last two fiscal years' revenues.
Westar Capital Additional $2,000,000 Private Placement. In October 1997,
the Company completed a private placement of $2,000,000 of its securities to
Westar Capital, a wholly-owned subsidiary of Western Resources. The private
placement consisted of 2,000,000 shares of the Company's Class A Common Stock at
$0.50 per share and 200,000 shares of the Company's Series C Preferred Stock at
$5.00 per share. Each share of the Series C Stock is convertible into five
shares of the Company's Class A Common Stock, and earns a dividend of 9.75
percent per annum, payable quarterly. Dividends are payable in additional shares
of Series C Preferred Stock or cash at the option of the Company for two years.
Thereafter, dividends are payable in cash. In addition, the Company exercised
its rights under the agreement to require Westar Capital to purchase an
additional 400,000 shares of Series C Stock for $2,000,000. As of June 30, 1999,
Westar Capital owns 4,500,000 shares of Class A Common Stock and 649,120 shares
of Series C Convertible Preferred Stock.
$1,000,000 Private Placement. Subsequent to its fiscal year end, in
August 1999, the Company completed a private placement with its Chairman of the
Board and other related investors. Terms of the placement include the issuance
of 50,000 shares of Series E Stock convertible into 5,000,000 shares of Class A
Common Stock, warrants to purchase 1,250,000 shares Class A Common Stock at $.50
per share and warrants to purchase 1,250,000 shares of Class A Common Stock at
$.75 per share. The Series E Stock is immediately convertible to common stock at
a rate which was below market on the date of issuance, resulting in a beneficial
conversion element of approximately $763,000 which will be recorded as a
preferred stock dividend in the first fiscal quarter ended September 30, 1999. A
portion of the securities was sold to a director. The intrinsic value of the
convertible preferred shares issued to the director was $47,000 on the date of
issuance and will result in a charge against earnings in the first fiscal
quarter ended September 30, 1999.
Atlantic County. In November 1998, the Company was awarded a contract
with Atlantic County, New Jersey. The project involves the installation of
energy efficient lighting, HVAC improvements, installation of control systems
and elevator motor improvements. Annual energy cost savings of approximately
$836,000 is projected to pay for the total project cost of approximately $7
million over a ten year period.
Revenues to the Company were approximately $6.9 million for the fiscal
year ended June 30, 1999. There were no revenues to the Company in the fiscal
year ended June 30, 1998.
Jersey Gardens Mall, Elizabeth, New Jersey. In November, 1998, the
Company entered into a $3.8 million contract (reduced to $3.3 million with
change orders) with an affiliate of Glimcher Development Corporation to build
and operate an electrical distribution system for the Jersey Gardens Mall in
Elizabeth, New Jersey. The Company is constructing a distribution and electric
supply system that will provide energy to light, heat and air condition the
Jersey Gardens Mall's more than 1,600,000 square feet of planned space.
Construction of both the Mall and the distribution system are underway and are
scheduled to be completed by calendar year end 1999. The Company also will
arrange purchases of electricity for the Mall under New Jersey's new
deregulation law.
<PAGE>10
Revenues to the Company were approximately $3.3 million for the fiscal
year ended June 30, 1999. There were no revenues to the Company in the fiscal
year ended June 30, 1998.
Arden Realty, Incorporated. In March 1999, LTS and the Company executed
two contracts with Arden Realty Inc. ("Arden"), the first of which is to
administer and obtain incentives for 31 properties under the Standard
Performance Contract ("SPC") program, which provides payments authorized by the
California Public Utilities Commission for energy efficiency projects. Through
this contract, LTS and the Company will receive approximately $250,000, paid
over a two-year period. Under the second Arden contract, LTS will procure
equipment and install lighting retrofits, occupancy sensors and new exit signs
at 11 properties. Total revenue to LTS, including utility incentive payments,
from this contract is approximately $1.5 million. These retrofits are
anticipated to be complete by the end of calendar year 1999.
Revenues to the Company were $1.2 million for the fiscal year ended June
30, 1999. There were no revenues in the fiscal year ended June 30, 1998.
Middletown Board of Education. The Company has signed contracts for the
third, fourth and fifth phases under a master energy services agreement with the
Middletown Board of Education ("MBOE") in Middletown, New Jersey, with total
additional project costs of approximately $13 million. The Company's overall
contracts now total approximately $22.8 million (of which the Company will
recognize approximately $6.2 million in revenue and the MBOE will contract
directly with other subcontractors for the remainder in costs) in project costs
and is expected to save MBOE approximately $9 million in energy costs over 10
years and will receive substantial benefits from incentives paid from the local
utility. The project enables the MBOE to make significant energy-related capital
improvements to its facilities and to fund these improvements mostly through
energy cost savings and incentives provided by the local host utility. The
Company is accomplishing the overall project at MBOE through the installation of
geothermal heat pumps and the retrofit of facility lighting. The implementation
of the project is expected to be completed over a period of approximately two
years.
Revenues to the Company were approximately $500,000 in the fiscal year
ended June 30, 1999. There were no revenues attributable to the Company for this
project in the fiscal year ended June 30, 1998.
National Railroad Passenger Corporation ("Amtrak"). The Company has
implemented a project for Amtrak to reduce energy losses from the existing steam
distribution system and to generate process and heat energy with more
cost-efficient equipment. The existing steam distribution system was replaced
with oil-fired and electric boilers at the points of use. For heating purposes,
oil fired boilers and electric resistance heat will serve each building's needs.
This project is expected to generate $1.2 million in revenues for the Company.
Revenues to the Company were approximately $300,000 in the fiscal year
ended June 30, 1999. There were no revenues attributable to this project in the
fiscal year ended June 30, 1998.
Newark Public Schools. In December 1998, the Company entered into an
agreement to perform work on state-operated facilities in the City of Newark,
New Jersey to total $7.6 million in revenues for the Company. This project
requires the Company, as a subcontractor to John Controls, Inc., to procure and
install certain lighting equipment that is designed to improve the efficiency
with which the Newark Schools use various forms of energy (electricity and gas)
and to reduce expenditures for that energy. The Company also arranged for, and
sponsored participation of the facilities in the Standard Offer Program offered
<PAGE>11
by Public Service Electric and Gas Company ("PSE&G"), through which PSE&G
purchases energy savings generated by the project.
Revenues to the Company were approximately $3.9 million for the fiscal
year ended June 30, 1999. There were no revenues to the Company in the fiscal
year ended June 30, 1998.
Board of Education of the Hudson County Schools of Technology. In April
1999, the Company entered into an energy services agreement with the Hudson
County Schools of Technology Board of Education (the "Hudson BOE"). Under this
agreement, the Company is responsible for the design, procurement and
installation of all equipment and the execution of an energy services agreement
with PSE&G in order for Hudson BOE to benefit from payments under the PSE&G
Standard Offer Program for energy saved by the project equipment. The Company
will also install certain measurement and verification equipment in order to
monitor the energy saved. The total revenues generated from this project total
$1.9 million.
Revenues to the Company were approximately $1.4 million for the fiscal
year ended June 30, 1999. There were no revenues to the Company in the fiscal
year ended June 30, 1998.
Passaic Valley Sewerage Commission, Newark, New Jersey. In December
1996, the Company entered into a master energy efficiency agreement with Passaic
Valley Sewerage Commission (the "Commission"). The second amendment to the
agreement involves a fee to the Company of approximately $1.3 million for the
interface between the Commission and the host utility. This interface involves
the application for utility incentive payments as well as the development and
installation of a measurement and savings verification plan and the related
equipment on a project that involves installation of equipment that improves the
process of producing sludge. The implementation of this project is expected to
take approximately two years. Utility incentive payments, all of which are paid
to the Commission, are expected to be approximately $19 million over 10 years.
Revenues to the Company were $900,000 in the fiscal year ended June 30,
1999. There were no revenues to the Company related to this project in fiscal
1998.
Unified School District No. 500, Wyandotte County, Kansas. In March
1998, the Company entered into an energy services agreement with Unified School
District No. 500 (the "District") in Wyandotte County, Kansas. Total project
construction revenues will be approximately $6,000,000. Construction was
substantially completed by the fiscal year end 1999. OES initially developed the
project, which includes the installation of multiple energy efficiency measures,
including lighting retrofits, energy management systems, chiller and furnace
replacements, and variable speed motor controllers. The Company estimates that
the project should result in savings to the District of approximately $7,775,000
in energy and operating costs over the 10 year term of the agreement. The
Company also will provide training, post-installation measurement and savings
verification services, and steam trap maintenance repair services for the term
of the agreement following the completion of construction of the project. The
Company's future revenues associated with these ongoing services are estimated
at approximately $818,000 over the 10 year contract period.
Revenues for fiscal year ended June 30, 1999 and 1998 were $4.6 million
and $1.4 million, respectively.
<PAGE>12
Pacific Gas and Electric Company. In December 1995, the Company signed a
demand side management ("DSM") power savings partner agreement (the "PG&E
Agreement") with Pacific Gas and Electric Company ("PG&E") for the development
and implementation of demand side resources for customers in the PG&E service
territory. Under the terms of the PG&E Agreement, the Company will identify,
design, contract for and complete energy efficiency projects that are estimated
to supply energy savings of approximately 30,000,000 kWh per year for up to
seven years. In general, the price paid by PG&E to the Company for savings will
be approximately $0.02 per kWh for energy savings and $20 per kW for demand
savings. Each host customer project is subject to approval by PG&E and the
Company. The PG&E Agreement was approved by the California Public Utilities
Commission effective August 1, 1996. The Company has signed contracts for energy
services with California State University, Fresno ("CSUF"), a shopping mall in
Northern California, and a central California newspaper a portion of which
projects are eligible for funds under the PG&E Agreement. No revenues are
recorded for this contract, but are attributed to individual customer projects
that benefit from payments pursuant to the PG&E Agreement.
Revenues from customers under this arrangement were $760,000 and
$1.2 million for the fiscal years ended June 30, 1999 and 1998, respectively.
Southern California Edison Demand Side Management Energy Efficiency
Agreements. In April 1994, the Company executed a DSM contract with Southern
California Edison Company ("SCE") after being selected as a result of a
competitive bid solicitation (the "Onsite SCE Agreement"). The Onsite SCE
Agreement required the installation of energy efficiency measures to provide
consistent, innovative and verifiable energy savings in selected commercial,
industrial and/or institutional host customer facilities within a specific
eligible SCE service area market region. In July 1995, the Company acquired an
additional, similar DSM contract with SCE via an assignment to the Company by
KENETECH Energy Management, Inc. ("KEM"), of all of KEMs interest in the same
(the "KEM SCE Agreement"). This acquisition augmented the Onsite SCE Agreement.
Both the Onsite SCE Agreement and the KEM SCE Agreement (collectively, the "SCE
Agreements") were approved by the California Public Utilities Commission in
October 1994. The SCE Agreements provided for the implementation of energy
efficiency projects for host customers within SCEs service territory to provide
up to approximately 53 million kWh per year in measured energy savings.
The Company completed several projects in fiscal year 1997 and 1998
under the SCE Agreements, including projects with Raytheon Corporation (fka
Hughes Aircraft Company) (El Segundo, CA); West Covina Unified School District
(West Covina, CA); McDonnell Douglas Corporation (Long Beach, CA); Foothill
Presbyterian Hospital (Glendora, CA); Mobil Oil Corporation (Torrance, CA),
Tecstar, Inc. (City of Industry, CA), TRW, Inc. (Redondo Beach, CA); The
Aerospace Corporation (El Segundo, CA); Southern California Health Care Systems
(Pasadena, CA); and Marshall Industries (El Monte, CA). As a result of the
executed contracts, the Company implemented projects producing approximately 44
million of the 53 million kWh in annual energy savings available in the SCE
Agreements.
No revenues are recorded for the SCE Agreements but rather are
attributed to individual projects that benefited from payments pursuant to the
SCE Agreements, which earned approximately $1.4 million and $1.2 million for the
fiscal years ended June 30, 1999, and 1998, respectively.
City of Anthony, Kansas. In March 1998, OES contracted with the City of
Anthony, Kansas (the "City"), to construct a voltage regulator station and to
upgrade a portion of the City's 4.16kV electric distribution system to 12kV. The
City, which operates its own municipal electric utility system in south central
<PAGE>13
Kansas, expects to realize increased reliability and improved system efficiency
from this upgrade. Construction is expected to be complete by calendar year-end
1999. Total revenue to the Company from this project is estimated at $2.0
million.
Revenues for the fiscal year ended June 30, 1999, and June 30, 1998,
were approximately $1.5 million and $300,000, respectively.
California Energy Commission. The California Energy Commission ("CEC")
selected the Company, through its International Energy Fund, for development
support of seven energy efficiency projects in the Republic of Panama via a
grant for $325,000 from the CEC. Additionally, the Company sponsored the First
Regional Symposium for Energy Efficiency and Distributed Generation, which took
place in Panama in May 1997. The Company organized the symposium with separate
financial support of the CEC.
Santa Ana Unified School District. In May 1998, LTS entered into an
approximately $2,500,000 subcontract with Sempra Energy Solutions to provide
lighting retrofit and FEMA (Federal Emergency Management Agency) lighting and
ceiling upgrades for the Santa Ana Unified School District. LTS's contract
encompassed upgrading over 1,000,000 square feet of ceilings, installing over
2,000 new fixtures, retrofitting nearly 15,000 other fixtures with T8 lamps and
electronic ballasts, and installing 600 occupancy sensors for energy efficiency
in 24 schools. This project was completed in fiscal year 1999.
Revenues to the Company were approximately $2.4 million in the fiscal
year ended June 30, 1999. There were no revenues associated with this project in
the fiscal year ended June 30, 1998.
R.E. Thomason General Hospital. In 1996, the Company entered into an
agreement with R.E. Thomason General Hospital ("Thomason") for the operation and
maintenance ("O&M") of its central utility plant. The original agreement ran for
a 27 month period, commencing February 1996, with additional extensions at the
option of Thomason. In April 1999, Thomason renewed the O&M agreement for an
additional 12 months. In connection with this O&M agreement, the Company has
staffed the central plant facility with eight full-time positions including a
supervisor, mechanic and plant operators.
Revenues for fiscal year ended June 30, 1999 were approximately
$850,000.
Consulting. In addition to energy efficiency retrofit projects and
services, the Company also provides professional energy efficiency consulting
services for a variety of clients, including energy customers, utilities,
product suppliers and government. These consulting services include engineering
design, project feasibility and development, direct access planning services,
market assessments, business strategy, public policy analysis and environmental
impact/feasibility studies. The Company currently provides consulting support to
customers, manufacturers, utilities, state and federal governments including,
but not limited to, the Gas Research Institute (Chicago, IL); Solar Turbines
(San Diego, CA); R.E. Thomason General Hospital (El Paso, TX); Industrial
Center, Inc. (Arlington, VA); California Energy Commission (Sacramento, CA); a
major amusement theme park; a major multi-branch national financial institution;
Caterpillar Inc. (Lafayette, IN); Deere Power Systems Group (Waterloo, IA);
Lockheed Martin (Oak Ridge, TN); the American Gas Association (Washington, DC);
the Interstate Natural Gas Association of America (Washington, DC); the Electric
Power Research Institute (Palo Alto, CA) and the U.S.
Department of Energy (Washington, D.C.).
<PAGE>14
Consulting revenues to the Company were approximately $1.5 million and
$1 million for the fiscal years ended June 30, 1999, and 1998, respectively.
Other Services. As a result of deregulation in the State of New Jersey,
the Company now markets services for the efficient and economical purchase of
energy, primarily through aggregation. In addition to the Jersey Garden Mall
project discussed above, the Company has entered into the following
relationships:
Sussex County, New Jersey. In June 1999, the Company entered into a
contract with the Sussex County Board of Chosen Freeholders to aggregate energy
and provide energy services for the County and five other government entities.
Sussex County is the first county in the state of New Jersey to formally
announce aggregation plans. The Company will aggregate 50 buildings; Sussex
County College, Sussex County Municipal Utilities Authority and the
municipalities of Sparta, Hardyston, Franklin and Vernon, which represent annual
electric bills of more than $1 million.
Middlesex County, New Jersey. Middlesex County Improvement Authority has
retained the Company to aggregate electric energy for all participating county
and municipal facilities. Middlesex County is the second such county in the
state of New Jersey to formally announce aggregation plans. Sussex County was
the first county to announce its association with the Company for aggregation.
This project will help position the Middlesex County to maximize cost savings
associated with the initiation of energy deregulation. By pooling together
energy needs, Middlesex County will benefit from a reduction in electric rates.
No revenues were recognized by the Company for either fiscal year
ended June 30, 1999 or 1998.
Industry of Issuer. Following is a description of the ESCO industry and the
business of the Company.
Traditional ESCOs. Energy service companies (ESCOs) have traditionally
provided energy efficiency and related services to customers. These ESCOs have
provided services through performance contracting that usually involved a
guarantee of savings and financing of the energy efficiency measures installed
that was paid for out of savings. NAESCO defines an ESCO as a full-service,
vertically integrated company that provides a complete range of energy
efficiency and power management services to its customers. In order to qualify
as an accredited ESCO, a company must be able to offer a method of financing
projects and guaranteeing savings as services offered to customers. These
elements generally are what differentiate an ESCO from contractors, equipment
suppliers and other providers. The Company provides traditional ESCO services to
many of its customers. The services are described in greater detail below.
Comprehensive Energy Services. The Company provides the customer with
comprehensive energy services. Such services include:
o An initial energy audit
o Evaluation of purchase options for electricity and fuel, including tariff
analysis
o Detailed economic and feasibility analysis
o Engineering and construction services
o Management of project implementation
o Verification of savings
o Monitoring of performance and maintenance during the service term
o Guaranteed savings and/or shared savings programs
<PAGE>15
o Performance contracting with utilities, customers
o Financing, including direct loans and equipment leases (on and off balance
sheet)
A more detailed discussion of these services follows.
Audit/Feasibility Analysis: The Company and a customer enter into a
Letter of Agreement providing for an audit/feasibility analysis at no up-front
cost. The customer only pays if the Company identifies a cost-effective project
that the Customer does not agree to pursue. Upon execution of the Letter of
Agreement by a customer, the Company's technical staff conducts an on-site
analysis in sufficient detail to establish the potential savings, capital cost
estimates and scope of the project. The Company's engineers and technicians
often will monitor energy use with data logger equipment. This data is analyzed
to determine savings opportunities and energy efficiency measures appropriate
for a particular facility. This information also provides empirical data on
which to base the incentive application that will be made to the utility
company, if applicable. These findings are presented to the customer in the form
of a technical proposal/audit report for the project.
Detailed Engineering: Upon the execution by a customer and the Company
of an Energy Efficiency Services Agreement or similar agreement (an "ESA"),
licensed mechanical and specialty engineers design the installation of each
element of the approved proposal. The process of obtaining required permits from
regulatory agencies also begins at this point.
Financing: Once the ESA has been executed, the Company arranges
financing for the project in cooperation with the customer if the customer does
not desire to finance the project itself. Financing can take many forms, from
energy savings-based agreements to equipment capital and operating leases to
traditional and non-recourse project financed loans. The Company has experience
in arranging such financing for projects based upon anticipated annual savings.
Financing packages are negotiated for the customer in most cases such that the
customer is not required to invest its own funds.
Procurement and Construction: This phase involves equipment purchasing,
subcontractor selection and construction management to final project completion.
Construction management consists of an experienced project execution team under
the overall direction of one of the Company's experienced project managers.
Start Up: This step integrates the initial operation of the project,
including system start-up and programming, commissioning and final acceptance.
O&M Services: This final phase assures a smooth handoff to operating
personnel of the customer, and includes training and documentation. Maintenance
contracts, where the Company supplies maintenance services, are available and
incorporated into many projects. Guarantees of annual and total savings are
coupled with ongoing maintenance of the installed energy efficiency equipment.
M&V Services: The Company provides verification of continuing energy
savings, both initially upon project completion and on an ongoing basis
throughout the term of the ESA. This verification is based upon protocols agreed
upon between the customer, the Company and the utility, if applicable.
Performance Contracting. Performance contracting is the term used to
describe the terms and conditions under which an ESCO delivers energy services,
typically under a guarantee of energy savings to the customer. The ESCOs payment
is based upon delivery of actual energy savings to the customer. The values of
<PAGE>16
these energy savings are used to service the project financing costs if the
project is financed or to provide positive cash flow to the customer. In short,
the performance contracting process requires payment for actual results, not for
projections.
Providing Utility Incentives for Customers. In some utility markets that
have not yet deregulated and in some markets that have deregulated, utilities
are providing performance incentives for customers that save energy. In some
cases these incentives are available only through ESCOs; in other cases either
the ESCO or a customer may obtain the incentives.
Over the past several years, the Company has been successful in
maximizing the incentives for its projects. These incentives may be delivered
through Standard Performance Contract programs or through utility DSM contracts,
whereby the incentive payments are provided based on actual energy savings
achieved from the implemented project. These incentives can offset a substantial
portion of the investment necessary to implement the energy efficiency measures.
The incentive payments historically have been based upon the resource and
environmental value of the energy savings (as compared to the incremental cost
of building new power plants due to increased consumption). This incentive
toward the costs of the project enhances the feasibility of the individual
projects, thereby allowing more and larger projects to qualify for
implementation. Before undertaking a project, the Company's engineers analyze
the customer's energy consumption and propose a comprehensive solution that
maximizes energy savings to the customer through the implementation of the
energy efficiency projects. The costs and margin of the retrofit programs
implemented by the Company within the customer's facilities are recouped by the
savings in energy and maintenance costs of the project, generally with net
positive cash flow to the customer generated throughout the life of the project.
During the last six years, the Company has successfully completed
several utility DSM competitive bidding programs with PacifiCorp (April 1993);
Southern California Edison Company (May 1994, and July 1995, by acquisition);
Puget Sound Power & Light Company (June 1994); Pacific Gas and Electric Company
("PG&E") (August 1996); Jersey Central Power & Light (by SYCOM LP in 1990 and
1993); Public Service Electric and Gas Company (by SYCOM LP in 1990, 1993 and
1996); and Potomac Electric Power Company (by SYCOM LP in 1992). The Company
also has been a leading ESCO sponsor for Standard Performance Contracting
programs in New Jersey and California.
National Accreditation. As previously discussed, the Company has been
accredited by NAESCO which has been supported by the U.S. Department of
Transportation. Only 21 ESCOs in the country have obtained such accreditation.
The Changing Environment for Energy Services. The electric utility
industry currently is going through fundamental changes that largely are a
result of the more competitive environment for electric power generation
developed over the last decade. The restructuring of the electric utility
industry will have significant impacts on the method by which electric power is
delivered to customers in the future, and also will affect the way energy
services are valued and provided. In the restructured electric industry, the
competition of the new marketers in the industry is anticipated to facilitate a
rapid evolution of energy value added services in the competitive marketplace.
New energy supply marketers are moving to diversify their electricity supply
services with other services, which will include energy efficiency services.
Deregulation of the electric utility industry is expanding the scope of
services offered by ESCOs in the competitive marketplace. To purchase electric
power in the deregulated market, large consumers will need to collect and
<PAGE>17
analyze their past, present and future electrical consumption data and profiles
in order to identify their demand, and procure cost-effective and reliable
electric power. The Company currently is performing and marketing these new
energy services for large electricity consumers in preparation for the
competitive market.
The Company has expanded its services and organized them to serve the
deregulating marketplace. In addition to the traditional ESCO services, the
Company is providing the following services directly to end-use customers or
through utility and new energy service companies that are concentrating on
marketing the energy commodity and using the Company as an alliance partner to
provide the other value-added services:
Services to Prepare Customers for Deregulation
Bill Auditing, Tariff Analyses, and Distribution Upgrade: The Company
audits bills, develops load profiles useful for its energy buying group efforts,
and analyzes and optimizes tariffs for customers. Bill auditing has become even
more important as the number of pricing points for customers increase and as
unbundled bills are late in arriving and have charges from several sources.
Tariff analysis can also be important in the transition. Customers may be on
incorrect tariffs or may not have taken advantage of special riders or
negotiated tariffs that utilities are offering in an attempt to retain
customers, especially during the early years of deregulation. The Company also
looks for opportunities to upgrade customers to higher, less expensive levels of
transmission and distribution service. This is becoming more important as
utilities expand their investment (and, therefore, increase the costs) in the
continuing regulated sector of transmission and distribution.
Energy Efficiency and Load Management: Energy efficiency is still a
cornerstone of the service offering by the Company in a deregulating world.
Decreasing the use of energy while still performing the same amount of services
is often the most cost-effective strategy for the end-user. In a deregulating
world, load management takes on more importance because peak-pricing may be much
more expensive than it once was in a bundled, regulated rate environment. The
ability to move a customer's energy use from on-peak to off-peak times becomes
more cost-effective in deregulating markets where more of the energy bill is
subject to market forces and time-of-use pricing.
On-site and Distributed Generation/Combined Heat & Power: The Company
has experience as a distributed generation and a combined heat and power ("CHP")
developer and implementer for systems ranging from 60 kW to 20,000 kW at
facilities such as industrial facilities, hospitals, multi-family housing,
nursing homes, recreational centers, health clubs and hotels. Development
activities may be related to on-site generation where the electricity generation
is only used on-site and not transmitted to the grid or it can be locally
distributed to the grid. In either case, it may combine generation of
electricity with heat recovery -CHP. CHP is the sequential production of
electricity and thermal energy utilizing a single fuel source. The by-product
thermal energy from the production of electricity is utilized to provide steam
heating, domestic hot water and/or chilled water (through absorption chilling)
to the host facility. As a result, 60 percent to 90 percent of the input fuel's
energy content can be utilized to produce heat and electricity compared to only
25 percent to 40 percent of the fuel's energy content to make electricity alone
in a utility or independent generating plant. The thermal energy produced by the
CHP system is used by the host facility to reduce fuel consumption that
otherwise would be needed to supply the thermal energy produced by boilers or
other fuel burning equipment. A typical system consists of a reciprocating
engine or gas turbine generally fueled by natural gas, which drives an
electrical generator. A heat recovery system reclaims the heat produced by the
engine generator set, yielding steam or hot water to be used in the host
<PAGE>18
facility for domestic, process or space heating/cooling needs. Electrical
control relays and switch gear protect the equipment from overload, ensure
proper voltage and frequency, and interconnect with the local utility's power
grid. Since completing its first CHP system in 1984, the Company has been
associated with over 35 CHP projects. Electric industry restructuring in
California, New Jersey and Illinois as well as other parts of the U.S. is
creating a renewed interest in on-site (distributed) generation by customers and
utilities. Furthermore, CHP is getting increased attention by state and federal
environmental agencies as a generation source that can provide net environmental
quality benefits to help mitigate global climate change.
Energy System Outsourcing: The Company can take over the entire
operation and maintenance responsibility of the heating, cooling and lighting
systems in a customer's facility and provide the customer an agreed upon
long-term, fixed price contract to provide the customer the heat, cooling and
electricity it needs. This approach is referred to as "energy system
outsourcing" and offers substantial advantages to those customers who want to be
relieved of the costs associated with operating and maintaining their energy
systems.
Commodity Purchasing, Aggregation, Buying Groups: The Company advises
its customers on energy purchasing choices (electricity, natural gas and other
fuels) and assists them in exercising their choices by preparing individual
requests for proposals or creating energy buying groups. Buying groups are
created for customers with multiple facilities, trade association members, and
municipal and county governments. For example, the Company represents four
national trade associations in providing energy services for their members,
including forming buying groups in states that are deregulating. It also
represents regional trade associations. Finally, as previously discussed in
Other Services, the Company has been selected by two counties in New Jersey to
aggregate all of their purchases of energy.
Energy Consulting: The Company offers consulting services for customers,
suppliers, and other stakeholders on regulatory policies, market developments
and new power technology applications. The Company has contracts with energy
industry trade associations, state and federal governments, manufacturers, and
end-users of energy.
Non-exclusive Alliances with energy commodity ESCOs. The deregulating
energy world consists of many new entrants that call themselves ESCOs but are
not nationally accredited by NAESCO. Some of these entities hold themselves out
to provide all services to the customer under the auspices of "total energy
solution". Others have tried the "total energy solution" approach and abandoned
it, or they have concluded they do not have the experience to succeed in the
retail market beyond the sale of the commodity. In order to compete with those
offering, but not necessarily delivering total energy solutions, these
commodity-focused ESCOs are allying themselves with those who do have
traditional ESCO experience and ESCO experience in deregulating markets beyond
the commodity sale. The Company has allied with several of these ESCOs on a
regional basis or on specific national account competitions.
Acquisition of Service Companies Previously Subcontracted. Changes in
the electricity marketplace, customer interest in reducing costs, and the
Company's focus on its core business have led to several new projects and
acquisitions that have more than tripled its size and makes the Company the
largest NAESCO-accredited independent ESCO in the country. In the past, the
Company generally did not supply actual construction labor or materials in the
implementation of projects. Because of recent acquisitions, the Company can
provide some of these services (including high efficiency lighting, lighting
installation and maintenance services) while obtaining more control on overall
cost and level of service. The source of subcontractors varies by project, but
generally the Company selects subcontractors based upon experience, quality of
work, price and other factors, including previous relationship with the
<PAGE>19
customer. In general, subcontractors are solicited from the customer's local
geographic area. The Company's standard agreements with subcontractors (usually
in the form of an Engineering, Procurement and Construction Agreement) contain
general provisions standard for the construction industry for the installation
of energy efficiency measures.
For many projects, the Company also provides ongoing O&M and measurement
and verification ("M&V") services for the installed systems. The Company offers
the benefits of energy efficient systems through third party ownership or
project financing repaid through savings generated by the project, requiring
little or no capital investment by the energy services customer.
The Company's infrastructure services are designed to approach areas of
facility operations that may not be addressed in traditional energy efficiency
projects, and include electric and natural gas facilities, power quality and
water treatment facilities. From electrical switchgear design to high voltage
power line construction, the Company can provide customized utility services.
The Company can design the project, procure the materials and manage the
installation of equipment. The Company also provides management of its
customers' utility equipment to reduce the chance of failures, minimize duration
of outages and protect assets. The Company's engineers audit electrical service
from local utilities using state-of-the-art technology to isolate, identify and
remedy problems before they cost the customer more money. The Company provides
harmonic investigations and remediation, wiring and grounding studies, and
transients and over-voltage analysis. The Company also meets the process water
needs of some of its customers through design, construction, operation and even
ownership of high purity water systems. Specializing in reverse osmosis systems,
the Company utilizes cost effective membrane technologies to filter dissolved
salts as well as inorganic molecules. The Company evaluates water treatment
processes best suited for the customers' needs, then design and install a
site-specific water treatment system.
Markets Served and Results of Service. The Company provides various
customer services that focus on saving energy dollars in residential,
commercial, institutional and industrial facilities. Using multiple, proven
energy technologies prescribed by the Company, today's building owners and
operators can receive both cash flow savings and environmental benefits while
optimizing energy efficiency, load management or alternative generation, in most
cases without any up front capital required from the customer. The Company's
integrated energy measures work together to:
Reduce energy consumption
Reduce the price of purchased electricity and fuel Promote
efficient use of energy Shift loads to periods of lower cost
energy Improve the environment Increase business profitability
By providing a complete package of services, including providing or
arranging financing of projects, the Company becomes the energy partner with
each of its customers.
Competition to the Company. In general, the Company's competitors are
other ESCOs, particularly the other 20 ESCOs accredited by NAESCO, that provide
similar comprehensive services to customers. Some of these competitors are large
companies, affiliated with utilities or equipment manufacturers, with more
assets and a larger manpower and resource base than the Company. Utility
companies and their affiliates can function as both competitors and partners for
the Company as discussed in Non-exclusive Alliances. Many utilities now are
entering the energy efficiency services market through wholly-owned subsidiaries
<PAGE>20
of holding companies in direct competition with ESCOs, including the Company.
However, the Company sometimes teams with utility service subsidiaries whereby
the utility subsidiary functions as a source of financing for energy efficiency
services projects developed and implemented by the Company.
An important competitive advantage for any ESCO is its ability to provide
financing and performance guarantees to the customer. This is the area in which
many small, independent ESCOs may be at a disadvantage when compared with the
larger companies and utilities. However, the Company has successfully used
financing sources such as Academic Capital, L.L.C. ("Academic"), Dana Commercial
Credit, Koch Financial ("Koch") and ABN AMRO Chicago Corporation (fka ChiCorp
Financial Services, Inc.) ("ABN"), among others, to provide financing for
qualified energy projects, thus maintaining this important advantage for the
Company. Over the last four years, Academic, ABN and Koch have provided
financing on most of the Company's projects that have been financed. More
recently, though, the Company has obtained financing from other sources and has
identified other potential sources of financing, thereby reducing its overall
dependence on a limited number of sources of project financing. In addition,
many of the Company's customers have the ability to obtain their own financing
or to pay for the cost of the project themselves.
The Company's competitive advantage historically has been its independence
from affiliation with commodity suppliers (utilities) and equipment vendors, and
its ability to offer a broader range of services and equipment than other ESCOs
can offer. In addition, the Company has been in the energy efficiency business
for a longer period of time with a significantly greater number of successful
projects, than most other ESCO competitors.
In summary, there are several factors that distinguish the Company from
most other ESCOs. These include:
Independence: The Company is not affiliated with any provider of energy or
with any equipment manufacturer. It makes unbiased choices with regard to
sources of energy commodity or a specific piece of equipment (e.g. a control
system) sold by an affiliate. The Company promote one energy specific technology
(e.g. an electric technology) when another technology (e.g., a gas technology)
could better serve the customer.
Projects Experience: Since 1982 the Company and its acquired affiliates
have provided energy efficiency and related services in over 750 facilities and
has saved customers well over $150 million. These services have been performed
in all types of facilities, including industrial complexes, large and small
commercial buildings, schools, government buildings, waste water treatment
plants, hospitals and homes.
Personnel: The Company has an experienced staff of energy service
professionals whose senior managers are recognized leaders in the energy
services industry. The CEO of the Company is the current President of NAESCO and
the President was a previous NAESCO President.
Access to Financing: As discussed above in Competition, the Company has
utilized a number of different financing entities and alternatives to provide
financing alternatives to its customers.
Emission Reduction Credits: The Company is the only ESCO that has
successfully created emission reduction credits from energy efficiency that have
been used by customers to meet pollution reduction obligations.
<PAGE>21
Open Book Pricing: The Company also provides many of its customers with the
option of open book pricing and set forth the various cost components of a
project.
Accreditation: As discussed in National Accreditation above, the Company is
accredited by NAESCO, making it the largest independent accredited energy
services company in the United States. It is also on the U.S. Department of
Defense and Department of Energy approved lists of energy services companies.
Raw Materials. The Company obtains most of its material and equipment from
several suppliers. The items it purchases generally are available "off the
shelf" and from several vendors. Those items that the Company may have custom
built also typically are available from several sources.
Government Regulation/Environmental Laws. Some government laws and
regulations promote the Company's business. For example, in New Jersey, the new
deregulation law provides economic incentives for on-site generation by allowing
on-site generation on contiguous properties, by exempting the generation from
being considered a public utility, and by not imposing stranded costs and
societal benefit charges on on-site generation (at least until revenue erosion
reaches 7.5 percent of the 1999 base). Similar incentives exist for on-site
generation in Illinois. The U.S. Environmental Administration has endorsed
energy efficiency as a pollution control strategy and promoted energy efficiency
that is measured and monitored in the manner which the Company measures and
monitors by making the pollution avoidance eligible for emission reduction
credits and allowances. Some states such as New Jersey have passed similar
regulations.
However, some government laws and regulations impose requirements upon
the Company. The Company is subject to rules and regulations of the
Environmental Protection Agency, the Occupational Safety and Health
Administration and other federal, state, county and municipal agencies. The
Company's business entails "indirect" environmental risks from its
subcontractors' handling and removal of polychlorinated biphenals (PCBs)
ballasts, asbestos or asbestos-containing materials (ACMs), urea-formaldehyde
paneling, fluorescent lamps or HID lamps, and air quality compliance for
emissions from its CHP facilities. The Company contracts with certified
hazardous waste removal companies or require its customers or subcontractors to
contract with certified hazardous waste removal companies. The Company obtains
indemnification from applicable customers and subcontractors as to liability the
Company might incur in connection with hazardous materials or environmental
concerns. The Company may also be subject to certain lighting level requirements
in certain public facilities when it undertakes lighting retrofits. It has
substantial experience in meeting such standards at both the Federal and State
level.
Employees. As of September 27, 1999, the Company employed approximately 150
persons, either directly or through contract with SYCOM Corporation, in regular
or temporary full-time or part-time positions.
Item 2. Description of Property
The Company's corporate headquarters is located in Carlsbad, California.
The property is held on a three year lease expiring in July 31, 2001, and
covering approximately 13,000 square feet. The Company also leases a 250 square
foot storage facility on a month by month basis that covers 250 square feet. The
Company has a regional office in San Ramon, California (lease of 2,000 square
feet of office space on a three year lease expiring March 2001).
<PAGE>22
The Company's subsidiaries are located in Somerset, New Jersey (SO
Corporation); Topeka, Kansas (OES); Salina, Kansas (OMS); and Costa Mesa,
California (LTS). OES leases 2,000 square feet of office space on a one year
lease with an option to renew, expiring November 1999. OMS owns the main
building (9,698 square feet) that includes office space and storage in Salina,
Kansas. OMS also owns two annexes in Salina, Kansas (one consisting of 1,225
square feet and one consisting of 2,400 square feet). OMS leased a fourth
building from former management on a month by month basis to store testing
equipment. This lease was terminated in July 1999. LTS leases approximately
5,476 square feet in Costa Mesa, California. This lease is a three-year lease
with an option to renew, expiring August, 2002. Additionally, under an agreement
with SYCOM Corporation, the Company is required to reimburse SYCOM Corporation
for the applicable continuing operating expenses (including rent) for the
offices and a small warehouse in Somerset, New Jersey and Washington, D.C.
No other office or warehouse space is leased or owned by the Company.
Management believes that the current properties will be suitable for the
Company's operations.
Item 3. Legal Proceedings
In October 1998, Energy Conservation Consultants, Inc. ("ECCI"), a
Louisiana-based company, filed a suit (United States District Court, Eastern
District of Louisiana, Case No. 98-2914) against OES alleging breach of contract
in connection with one of the Company's projects. The suit seeks reimbursement
for expenses allegedly incurred by ECCI in the preparation of an audit and lost
profits. Discovery is ongoing and management is continuing its attempts to
settle the matter, including through mediation; however, no agreement has been
reached. A continuance has been granted and trial now is set for February 2000.
Additionally, in June 1999, a former officer of the Company (July 1998
through October 1998) filed a suit (Superior Court of the State of California,
County of San Diego, North County Branch, Case No. N081711) alleging fraud,
negligence and wrongful discharge in connection with his employment termination
in October 1998. The action seeks compensatory damages and punitive damages in
excess of $25,000. The parties have agreed to mediation in an effort to settle
this matter; however, no settlement agreement has been reached.
Item 4. Submission of Matters to Vote of Security Holders
No matters have been submitted during the fiscal year ended June 30,
1999, to a vote of securities holders.
<PAGE>23
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Since August 2, 1995, the Company's Class A Common Stock has been quoted
on the Over-the-Counter (OTC) Electronic Bulletin Board under the symbol "ONSE."
The following table sets forth the high and low prices per share of the
Company's Class A Common Stock for the prior two fiscal years by quarters.
Quarter Ended High Low
------------- ---- ---
September 30, 1997 $0.34 $0.18
December 31, 1997 $0.9375 $0.26
March 31, 1998 $0.6875 $0.50
June 30, 1998 $1.4375 $0.5625
September 30, 1998 $1.2500 $0.7812
December 31, 1998 $0.7810 $0.4687
March 31, 1999 $0.9062 $0.5000
June 30, 1999 $0.6250 $0.3125
The high and low market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions.
As of September 27, 1999, there were approximately 228 holders of record
of the Common Stock.
The Company has not paid dividends on its Class A Common Stock, nor does
the Company anticipate paying cash dividends on the Class A Common Stock in the
foreseeable future. The Company has paid stock dividends on the Series C Stock.
The Series C Stock earns a dividend of 9.75 percent per annum, payable
quarterly. Dividends have been paid in the form of 40,915 and 8,205 shares of
Series C Stock in the years ended June 30, 1999 and 1998, respectively.
Dividends are payable in additional shares of Series C Stock or cash at the
option of the Company through November 1999. Thereafter, dividends are payable
in cash.
Item 6. Management's Discussion and Analysis
When used in this discussion and the financial statements that follow,
the words "expect(s)," "feel(s)," "believe(s)," "will," "may," "anticipate(s)"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to republish
revised forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events. Readers also
are urged to carefully review and consider the various disclosures made by the
Company that attempt to advise interested parties of the factors that affect the
Company's business, including the discussion under Item 1. Description of
Business, as well as the Company's periodic reports on Forms 10-KSB, 10-QSB and
8-K filed with the SEC.
<PAGE>24
The original, first and third amended filings of Form 10-KSB for the
fiscal year ended June 30, 1999 were audited by the Company's independent
auditors, Hein+Associates, LLP. The opinion issued was qualified subject to the
Company's ability to continue as a going concern.
The SEC took exception to certain applications of accounting principles
as applied by the Company in the areas of the timing of revenue recognition
where utility incentive payments are a part of the Company'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. As a result, the Company restated its previously filed
financial statements for each of the fiscal years ending June 30, 1997, 1998 and
1999, as well as the first (a second amendment) and second fiscal quarters ended
September 30, 1999 and December 31, 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 and other ongoing 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.
The following table shows the originally reported and revised results
for each of the last three fiscal years.
<PAGE>25
Fiscal year ended June 30,
1999 1998 1997
------------ ------------ ------------
Net loss, as filed $ (6,909,011) $ (2,218,482) $ (1,388,598)
Net loss, as restated $ (6,477,458) $ (2,098,806) $ (2,398,202)
------------ ------------ ------------
Difference $ 431,553 $ 119,676 $ (1,009,604)
============ ============ ============
On a per share basis was as follows:
Fiscal year ended June 30,
1999 1998 1997
------------ ------------ ------------
Loss per share, as filed $ (0.39) $ (0.16) $ (0.13)
Loss per share, as restated $ (0.36) $ (0.16) $ (0.22)
------------ ------------ ------------
Difference $ 0.03 $ - $ (0.09)
============ ============ ============
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.
Fiscal year ended June 30, 1999 compared to June 30, 1998
Revenues. Revenues increased in the fiscal year ended June 30, 1999, by
$31,655,773 or 254.35 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 $3,217,726, or
25.85 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
20.28 percent of revenues compared to 19.54 percent in fiscal year 1998. After
elimination of revenues and cost of sales attributable to newly acquired
subsidiaries, gross margin was 22.26 percent for the fiscal year 1999 compared
<PAGE>26
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 25.38 percent of revenues
in the fiscal year ended June 30, 1999, compared to $3,879,237 or 31.17 percent
of revenues in fiscal year 1998. After elimination of revenues and SG&A expenses
attributable to newly acquired subsidiaries, SG&A as a percentage of revenues
was 28.20 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 end
1999 compared to $266,667 for the fiscal year end 1998. Goodwill amortization in
fiscal year 1998 arises primarily out of the acquisition of Onsite-Cal in 1994,
which resulted in goodwill of $1,600,000 that was amortized over a four year
period, which ended in February 1998.
Loss from Operations. Loss from operations increased in the fiscal year
ended June 30, 1999 by $4,256,903 or 214.30 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 $113,649 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 $234,802. The
interest income arises from notes receivable from newly acquired subsidiaries.
<PAGE>27
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 $90,892 for fiscal
year ended June 30, 1999, compared to other expense of $104,983 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
$4,378,552, or 208.61 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
elimination of revenues and expenses attributable to newly acquired
subsidiaries, the decrease in net loss was $67,275, or a decrease of 3.11
percent.
Fiscal year end June 30, 1998 compared to June 30, 1997
Revenues Revenues increased in the fiscal year ended June 30, 1998, by
$3,807,912 or 44.1 percent. After elimination of revenues attributable to newly
acquired subsidiaries and the divestiture of TCC, revenues increased by
$889,718, or 10.30 percent. This increase is attributable to a increase in
utility revenue of $300,000 as well as an increase in contract revenues of
approximately $1.0 million offset by a decline in consulting revenues of
approximately $400,000. Consulting revenues were generally lower in fiscal year
1998 due to the conversion of consulting agreements into long term construction
contracts.
Gross Margin Gross margin for the fiscal year ended June 30, 1998 is
19.54% compared to 21.99 percent in fiscal year 1997. The decrease in gross
margin as a percentage of sales is attributable to lower budgeted gross margins
in long term contracts entered into in the fiscal year 1998.
Selling, General and Administrative Expenses Selling, general and
administrative ("SG&A") expenses were $4,418,736 or 35.50 percent of revenues in
the fiscal year end June 30, 1998 compared to $4,133,649, or 47.86 percent in
fiscal year 1997. The percentage of expenses to revenues decreased primarily due
to an increase in revenues as well as a $425,240 loss on the sale of a
subsidiary in 1997.
Goodwill amortization included in SG&A in the fiscal year ended June 30,
1998 was $266,667 compared to $400,000 in the fiscal year ended June 30, 1997.
Goodwill amortization arises primarily out of the acquisition of Onsite-Cal,
which resulted in goodwill of $1,600,000 that was amortized over a four-year
period. The remainder of goodwill was amortized in the fiscal year 1998.
Other Income/(Expense). Other income (expense) was a net expense of
$104,982 in the fiscal year ended June 30, 1998, compared to $155,628 in net
expense in the fiscal year ended June 30, 1997, a decrease of $50,646 primarily
due to a $68,765 decrease in interest expense offset in part by a decrease in
interest income of $18,119.
Net Loss. Net loss for the year ended June 30, 1998 was $2,098.906, or
$.16 loss per share, compared to a net loss of $2,398,202, or $.21 loss per
share, a decrease in loss per share of $299,296, or 12.48%
<PAGE>28
Liquidity and Capital Resources.
The Company's cash decreased by $1,192,598 in fiscal year end June 30,
1999, a decrease of 56.98 percent. Working capital was a negative $6,511,390 as
of June 30, 1999, compared to a negative $3,260,514 as of June 30, 1998, an
increase in negative working capital of $3,250,876. 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 $5.7 million, offset by an increase in accounts receivable of
approximately $2.6 million.
Cash flows used in operating activities for the year ended June 30, 1999
were $488,544, compared to $1,027,832 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 several
fiscal years. For the years ended June 30, 1999, 1998 and 1997, the Company had
net losses of $6,477,458 and $2,098,906 and $2,398,202, respectively, and had
negative working capital of $6,511,390 and an accumulated deficit of $27,467,050
as of June 30, 1999. Management believes that the Company will be able to
generate additional revenues and operating efficiencies through its acquisitions
as well as by other means to achieve profitable operations. During the year
ended June 30, 1999, the Company took steps to mitigate the losses and enhance
its future viability. In addition, during the fiscal year end 1999, the Company
exercised its right under a stock subscription agreement to require Westar
Capital to purchase an additional 400,000 shares of Series C Convertible
Preferred Stock for $2,000,000. Subsequent to its most recent fiscal year end,
the Company also privately placed shares of newly created Series E Convertible
Preferred Stock ("Series E Stock") to existing shareholders for $1,000,000.
Concurrent with this private placement, members of senior management of the
Company have agreed to receive shares of the Company's Class A Common Stock in
lieu of a portion of their salary in an effort to reduce cash outflows related
to compensation. Subsequent to June 30, 1999, a decision was made to explore the
sale or disposition of the Company's lighting subsidiaries, which could provide
capital, reduce operating losses and will allow management to better focus on
its core ESCO business activities. In addition, the Company is exploring
strategic relationships with companies that could involve an investment in the
Company. The Company may also raise cash through the sale of long term future
revenue streams that it currently owns or has rights to. The Company is also
examining ways to further reduce overhead including, but not limited to, the
possibility of targeted staff reductions. Further, the Company, through the
acquisition of other energy service companies, expects to continue to gain
economies of scale through the use of a consolidated management team and the
synergies of marketing efforts of the different entities. Management believes
that all of the above actions will allow the Company to continue as a going
concern. Future cash requirements depend on the Company's profitability, its
ability to manage working capital requirements and its rate of growth.
Additional financing through the sale of securities may have an ownership
dilution effect on existing shareholders.
<PAGE>29
The original, first and third amended filings of Form 10-KSB for the
fiscal year ended June 30, 1999 were audited by the Company's independent
auditors, Hein+Associates LLP. 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 did not review revisions resulting
from the restatements due to non-payment by the Company of accounting and tax
fees.
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
position. Any risks the Company faces are expected to be external to ongoing
operations. The Company has numerous alternative vendors for critical supplies,
<PAGE>30
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-30.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
[Remainder of page intentionally left blank]
<PAGE>31
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
The following table sets forth the persons currently serving as
directors of the Company, and certain information with respect to those persons.
Director Age Director Since
-------- --- --------------
Charles C. McGettigan 54 1993
H. Tate Holt 47 1994
Timothy G. Clark 60 1994
Richard T. Sperberg 48 1982 (1)
S. Lynn Sutcliffe 56 1998
Richard L. Wright 56 1998
(1) Includes time of service with Onsite Energy, a California corporation and a
predecessor of the Company ("Onsite-Cal").
Background of Current Directors.
Charles C. McGettigan. Mr. McGettigan has been a director of the Company since
its inception in 1993, and began serving as the Chairman of the Board in
December 1994. In May 1992, Mr. McGettigan became a director of Western Energy
Management, Inc. ("WEM"), which currently is a wholly-owned subsidiary of the
Company as a result of the reorganization of Onsite-Cal and WEM into Onsite
Energy Corporation. He was a founding partner in 1991 and is a general partner
of Proactive Investment Managers, L.P., which is the general partner of
Proactive Partners, L.P., a merchant banking fund. Mr. McGettigan co-founded
McGettigan, Wick & Co., Inc., an investment banking firm, in 1988. From 1984 to
1988, he was a Principal, Corporate Finance, of Hambrecht & Quist, Inc. He
currently serves on the Boards of Directors of Modtech, Inc., PMR Corporation,
Sonex Research, Inc., Tanknology - NDE Corporation and Wray-Tech Instruments,
Inc. Mr. McGettigan is a graduate of Georgetown University, and received his
Master of Business Administration from The Wharton School of Business of the
University of Pennsylvania.
H. Tate Holt. Mr. Holt has been a director of the Company since May 1994. Mr.
Holt currently is the President and Chief Executive Officer of Newstar Ltd.
("Newstar"), a technology firm. Prior to joining Newstar, Mr. Holt served as the
President of Holt & Associates, a corporate growth management consulting firm,
and held that position from July 1990 through August 1999. Previously, from 1987
to 1990, Mr. Holt was Senior Vice President of Automatic Data Processing, Inc.
("ADP"), in Santa Clara, California. Mr. Holt has over twenty (20) years of
experience in various senior sales and marketing positions with Fortune 50 and
Inc. 500 companies, including IBM, Triad Systems and ADP. He has participated in
major restructuring and strategic planning in several divisions of each of these
companies. Additionally, in his position with Holt & Associates, Mr. Holt
assisted small and medium-sized clients in developing and achieving aggressive
<PAGE>32
growth targets. Mr. Holt currently serves on the Boards of Directors of DBS
Industries, Inc., and AremisSoft Corporation. He is the author of the book "The
Business Doc - Prescriptions for Growth." Mr. Holt holds an A.B. from Indiana
University.
Timothy G. Clark. Mr. Clark began serving as a director of the Company in
October 1994. The former President and Chief Executive Officer of KA Industries,
Inc., a privately-owned corporation that manufactures and sells premium gift
baked goods, Mr. Clark currently serves as a consultant to a variety of clients
through his own firm, T.G. Clark & Associates. From 1991 to 1994, Mr. Clark was
a managing partner at Hankin & Co., a consulting company focusing on business
and financial planning, including turnarounds. Mr. Clark holds an A.B. from the
University of Southern California and a Master of Business Administration from
the Harvard University Graduate School of Business.
Richard T. Sperberg. Mr. Sperberg has been a director and the Chief Executive
Officer of the Company since its inception, served as the Company's President
through October 1998, when Mr. Sutcliffe was elected President, and served as
the Company's Chief Financial Officer from May 1997 through July 1998. He has
been the Chief Executive Officer of WEM since January 1993, and began serving as
a director of WEM in February 1994. In 1982, Mr. Sperberg co-founded Onsite-Cal,
and served as President, Chief Executive Officer and a director until February
1994, when Onsite-Cal and WEM reorganized into Onsite Energy Corporation. Mr.
Sperberg has been involved in project management of energy efficiency, advanced
energy technologies, alternative energy and cogeneration projects for over 23
years, with specific management experience with Onsite-Cal, the Gas Research
Institute ("GRI"), and the U.S. Department of Energy. He holds a Masters of
Science in Nuclear Engineering from the University of California, Los Angeles,
and a Bachelor of Science in Nuclear Engineering from the University of
California, Santa Barbara. Mr. Sperberg previously served on the Boards of
Directors of the American Cogeneration Association and the San Diego
Cogeneration Association, and currently serves as the President of the National
Association of Energy Service Companies (NAESCO), and as a member of its Board
of Directors.
S. Lynn Sutcliffe. In addition to serving as a director since 1998, Mr.
Sutcliffe currently serves as the President of the Company. Since 1990, Mr.
Sutcliffe also has served as the President and Chief Executive Officer of SYCOM
Corporation, which is the general partner of SYCOM LP. From 1968 through 1977,
Mr. Sutcliffe was General Counsel of the U.S. Senate Commerce Committee, which
had jurisdiction over all electric and gas utility issues. Mr. Sutcliffe left
the Commerce Committee to become one of the founding partners of Van Ness,
Feldman, Sutcliffe & Curtis, P.C., a law firm nationally recognized for its
expertise in energy law and policy. Mr. Sutcliffe participated in this law firm
until 1990. Mr. Sutcliffe's expertise includes a wide range of legislative,
regulatory, contractual, financial and developmental issues associated with the
energy industry. From 1994 through 1996, Mr. Sutcliffe served as the President
of the National Association of Energy Services Companies (NAESCO), and was a
member of the Energy and Transportation Task Force of the President's Council on
Sustainability in 1996. He currently serves as the Vice-Chairman of the
Distributed Power Coalition of America (DPCA). Mr. Sutcliffe brings to the
Company's Board over 24 years of experience in the energy services industry. He
holds an A.B. from Princeton University, and a Juris Doctorate from the
University of Washington.
Richard L. Wright. Mr. Wright has served as a director of the Company since
1998, and served as the Treasurer of SYCOM Corporation and SYCOM LP from 1995
through June 1999, during which time he performed project development and
strategic planning functions at the executive level. Mr. Wright has over 11
years of experience in developing and financing energy related companies and
projects. He has extensive knowledge of the federal and state legislative
processes as well as of the decision-making processes at the county and
municipal level. In 1977, Mr. Wright served on the White House Energy Task Force
and later as the Assistant Secretary at the Department of Energy. Prior to
joining the SYCOM entities, Mr. Wright served as the Chief of Staff of the
former Governor of New Jersey from 1993 through 1994, and as the Associate
Treasurer of the State of New Jersey from 1990 through 1993. Mr. Wright earned a
<PAGE>33
Bachelor of Arts in Religion from Princeton University, and a Juris Doctorate
from the University of California Boalt Hall School of Law.
Executive Officers. The following table sets forth certain information with
respect to the current executive officers of the Company.
Name Positions with the Company Age Office Held Since
---- -------------------------- --- -----------------
Charles C. McGettigan Chairman of the Board 54 1994
Richard T. Sperberg Chief Executive Officer 48 1982 (1)
S. Lynn Sutcliffe President 56 1998
J. Bradford Hanson Chief Financial Officer 44 1995 (2)
Frank J. Mazanec Senior Vice President 51 1992 (1)
Keith G. Davidson Senior Vice President 48 1994
Hector A. Esquer Vice President 41 1991 (1)
J. Derek Shockley Vice President 39 1997
Elizabeth T. Lowe Vice President 36 1997
Bruce A. Hedman Vice President 48 1998
Dominick J. Aiello Vice President 40 1998
Roger Dower Vice President 49 1998
Christian J. Bitters Vice President 42 1998
Russell Wm. Royal President/Chief Operating 47 1992 (4)
Officer - Lighting
Technology Services, Inc.(3)
Audrey Nelson Stubenberg Secretary/General Counsel 36 1998
(1) Includes time of service with Onsite-Cal.
(2) Mr. Hanson served as Chief Financial Officer of the Company from August
1995 through May 1997, rejoining the Company in October 1998.
(3) Lighting Technology Services, Inc. ("LTS"), is a wholly-owned subsidiary of
the Company. As previously disclosed, the Company is exploring the sale or
disposition of LTS.
(4) Includes time of service with LTS.
<PAGE>34
Executive officers are elected periodically (usually annually) by the
Board of Directors and serve at the pleasure of the Board. No family
relationship exists between any of the officers or directors.
Background of Executive Officers. For the business backgrounds of Messrs.
McGettigan, Sperberg and Sutcliffe, see Background of Current Directors above.
J. Bradford Hanson. Mr. Hanson has over 15 years of financial accounting,
administration and shareholder relations experience in the energy efficiency
services, financial, manufacturing, software development and retail market
sectors. Mr. Hanson, who has served as the Company's Chief Financial Officer
since October 1998, also served as the Company's Chief Financial Officer from
August 1995 through May 1997. From May 1997 through October 1998, Mr. Hanson
worked for Sports Group International, Inc., and as an independent financial and
accounting consultant. From 1991 through mid-1995, Mr. Hanson worked as an
independent financial and accounting consultant for small businesses. Prior to
1991, he held various Chief Financial Officer, Controller and Senior Auditing
positions with companies such as DAROX Company, BSD Bancorp, Inc., International
Totalizator Systems, Inc., and KPMG Peat Marwick. Mr. Hanson earned a Bachelor
of Science from San Diego State University and is a Certified Public Accountant.
Frank J. Mazanec. Since 1992, Mr. Mazanec has been employed by the Company and
its predecessor, Onsite-Cal. Mr. Mazanec is a licensed professional engineer in
Colorado, and currently serves as Senior Vice President of Onsite. Over the past
20 years, he has developed and managed over $100,000,000 in energy generation,
waste management and environmental projects. Prior to joining Onsite-Cal in
1992, Mr. Mazanec served as West Coast Regional Director for Wheelabrator
Technologies, which included responsibility for the Spokane and Pierce County,
Washington and Baltimore, Maryland, Waste-to-Energy facilities. In 1990, he
formed Integrated Waste Management, Inc., through which he served as a
consultant to Onsite-Cal until joining Onsite-Cal in 1992. Mr. Mazanec is
responsible for managing one of the Company's internal business units. Mr.
Mazanec has a Bachelor of Science in Civil Engineering from the University of
Vermont, a Bachelor of Science in Economics and Finance from Fairleigh Dickinson
University, and a Master of Business Administration from the University of
Southern California.
Keith G. Davidson. Mr. Davidson has been a Vice President of the Company since
1994, and currently serves as Senior Vice President. Mr. Davidson has over 20
years of diversified management experience in energy and environmental
technology, product commercialization and market development. Mr. Davidson is
responsible for one of the Company's internal business units. Prior to joining
the Company in 1994, Mr. Davidson was a Director at GRI (the Gas Research
Institute) in Chicago, Illinois, where he led the gas industry's collaborative
development programs directed at natural gas growth markets of electric power
generation, cogeneration and natural gas vehicles. Mr. Davidson was past
President of the American Cogeneration Association, and a member of the American
Society of Heating, Refrigerating and Air Conditioning Engineers, and previously
served as the co-Chairman of CADER. He is the recipient of several industry
honors, including the Association of Energy Engineers' Cogeneration Professional
of the Year and the American Gas Association's Industrial and Commercial Hall of
Flame. Mr. Davidson earned a Bachelor of Science in Mechanical Engineering from
the University of Missouri and a Master of Science in Mechanical Engineering
from Stanford University.
Hector A. Esquer. Mr. Esquer is a professional engineer licensed in the states
of California and Kansas. Mr. Esquer joined Onsite-Cal in 1986, and as Vice
President is responsible for the overall management of project implementation
for the Company's West Coast operations. Over the past 12 years, Mr. Esquer has
managed the implementation of over $30,000,000 of energy efficiency projects for
the Company. Mr. Esquer previously was a Project Engineer for San Diego Gas &
Electric Company and Fluor Corporation. He holds a Bachelor of Science in
Electrical Engineering from San Diego State University and is a Certified Energy
Manager.
<PAGE>35
J. Derek Shockley. Mr. Shockley is responsible for managing OES and OMS, direct
and indirect wholly-owned subsidiaries of the Company. These subsidiary
companies provide medium and high voltage electrical services, as well as
industrial water treatment services to municipal, industrial, large commercial
and institutional customers. Mr. Shockley has over 13 years of diversified
experience in the energy industry that includes planning, sales, marketing, and
project development work in the areas of demand side management,
electrotechnologies and applied research. He was a member of the Water &
Wastewater Research Project steering committee for the Electric Power Research
Institute ("EPRI") in Palo Alto, California, and a past member of the Kansas
Energy & Natural Resources advisory committee. Mr. Shockley is the recipient of
several national awards, including the EEI Common Goals Environmental Award, and
the EPRI Technology Innovators Award. Prior to joining the Company, Mr. Shockley
held a number of positions with Western Resources, including Director of
Business Development, Manager of National and Institutional Accounts, and an
energy use consultant. Mr. Shockley holds a Bachelor of Arts in Business
Administration (with an emphasis on Finance) from Washburn University,
Elizabeth T. Lowe. As Vice President, Ms. Lowe heads up the Company's Northern
California office. She is responsible for marketing, operations and regulatory
representation in Northern California. Ms. Lowe also adds to the Company's
consulting capabilities in the areas of natural gas and electricity purchases
and overall customer strategies to reduce energy costs. Ms. Lowe joined the
Company in 1997. Prior to joining the Company, Ms. Lowe served as Vice President
of Western Operations for DukeSolutions, Inc. (formerly Duke/Louis Dreyfus),
heading up the Western region operations for this Duke Energy subsidiary. The
Western region group worked with retail and wholesale customers to develop and
implement overall energy purchasing strategies through negotiations training,
strategic alliances, and engineering and pricing solutions. Prior to joining
DukeSolutions, Ms. Lowe spent 10 years in energy and environmental consulting,
and most recently developed and directed Barakat & Chamberlin's Corporate Energy
Management practice. In this capacity, she assisted large energy consumers in
the development of energy cost reduction strategies through procurement and
management of fuels, tariff and contract negotiations, aggregation strategies
and demand-side management planning. Ms. Lowe earned a Master of Environment
Management in Resource Economics and Policy from Duke University's Nicholas
School of Environment and a Bachelor of Arts in Public Policy Studies from Duke
University's School of Policy Studies and Public Affairs. Ms. Lowe is an
associate member of the California Manufacturers Association and the California
League of Food Processors, and is the President of the Power Association of
Northern California.
Dr. Bruce A. Hedman. Dr. Hedman joined the Company in 1998, as Vice President,
Consulting Services, and together with Mr. Davidson is responsible for the
Company's consulting services business. Dr. Hedman has over 20 years of
experience in energy and environmental technology development, new product
commercialization, and market research and development. Before joining the
Company, Dr. Hedman was Executive Director of the Industrial Center Inc. in
Arlington, Virginia, a natural gas industry technology transfer and market
development organization that supports commercial introduction of new natural
gas technologies in the industrial market. Prior to this, he was Senior Program
Manager at Battelle Pacific Northwest Laboratory's Washington, D.C. offices,
providing strategic planning and policy analysis support on natural gas issues
and end-use research, development and commercialization. Dr. Hedman started his
career at GRI in Chicago, holding a variety of research management positions in
power generation, alternative fueled vehicles and industrial end-use. When he
left GRI in 1994, Dr. Hedman was Group Manager, Industrial and Power Generation
Products and responsible for the development and commercialization of new
natural gas technologies for these priority markets. Dr. Hedman has a Bachelor
of Science, Master of Science and Ph.D. in Mechanical Engineering from Drexel
University in Philadelphia, Pennsylvania.
Dominick J. Aiello. Mr. Aiello, an employee of SYCOM Corporation, currently
serves as the Company's Vice President, and is directly responsible for
overseeing the Company's Project Development efforts primarily in the Eastern
U.S. Mr. Aiello has more than seven years experience in developing energy
<PAGE>36
efficiency projects in both the public and private sectors. He is responsible
for managing a national sales force of eight project developers. Mr. Aiello also
has been a key contributor in implementing a sales training curriculum for both
the current sales team and new hires. Prior to joining SYCOM Corporation, Mr.
Aiello served as a Sales Manager for IBM.
Roger Dower. Mr. Dower, the Company's Vice President, manages the Company's
Washington, D.C. business unit, where he oversees the development activity for
trade associations and federal projects as well as regional development. Mr.
Dower, an employee of SYCOM Corporation, also provides legislative and
regulatory support for the Company and the energy service industry's energy and
environmental agenda. Mr. Dower is an expert in energy and environmental
economics, policy, regulation and legislation. Prior to joining SYCOM
Corporation and the Company, Mr. Dower was Director of the Climate, Energy and
Pollution Program at the World Resources Institute from 1990 to 1996. Prior to
that, Mr. Dower was the head of the Energy and Environment Unit at the
Congressional Budget Office from 1985 to 1990. Mr. Dower has also served as a
consultant to the Executive Office of the President of the United States from
1979 to 1980 and was the Research Director and a Board Member of the
Environmental Law Institute from 1976 to 1985. With over 18 years of experience
in the energy business, Mr. Dower has an in-depth understanding of energy
markets, the role of energy efficiency and the environmental effects of energy.
Mr. Dower received a Masters of Science and Bachelor of Science in Resource
Economics from the University of Maryland.
Christian J. Bitters. Mr. Bitters serves as Vice President of Operations for the
Company. In this capacity, Mr. Bitters, an employee of SYCOM Corporation,
oversees the project management and engineering teams responsible for
implementation of all of the Company's projects primarily in the Eastern U.S.,
and has over eight years of experience in managing the implementation of energy
efficiency projects in commercial, industrial, governmental and institutional
facilities. Mr. Bitters is responsible for recruiting and training new team
members and developed a sophisticated Project Management Manual that defines the
roles, responsibilities, methods, procedures and specifications for implementing
the Company's projects. Mr. Bitters' experience includes project management of
commercial office space and recruiting, training and managing project managers
and engineers. Prior to joining SYCOM Corporation, he served as a Senior Project
Manager for OMNI Construction, Inc., in Washington, D.C. for 10 years, where he
managed construction and renovation projects with a total value of $205,000,000.
Mr. Bitters holds a Master of Science and Bachelor of Science in Civil
Engineering from the University of Maryland.
Russell Wm. Royal. Mr. Royal serves as the President and Chief Operating Officer
of LTS, a Southern California lighting contractor acquired by the Company in
June 1998. Mr. Royal has 20 years experience in all phases of building
automation, lighting retrofit and lighting controls. His specific project
experience includes numerous high-rise office building retrofit and control
projects through-out California, district-wide multi-facility lighting retrofit
and lighting controls projects for the Santa Ana Unified School District and
several comprehensive campus wide lighting retrofit and lighting controls
projects at several California community colleges and school districts. Mr.
Royal has a Bachelor of Science in Psychology from California State University,
San Bernardino.
Audrey Nelson Stubenberg, Esq. Ms. Nelson Stubenberg has over 10 years
experience as a practicing transactional attorney and currently serves as the
Company's Secretary and General Counsel. She joined the Company in 1994. Prior
to joining the Company, Ms. Nelson Stubenberg was an associate with the San
Diego law firm of Procopio, Cory, Hargreaves and Savitch, a business and
commercial transactions firm. A member of the California State Bar and the
American Bar Association, Ms. Nelson Stubenberg earned a Bachelor of Arts from
the University of Redlands and a Juris Doctorate from the University of San
Diego School of Law.
<PAGE>37
Compliance with Section 16(a) of the Securities Exchange Act of 1934. Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company
directors, executive officers and persons who own more than 10 percent of the
Company's Class A Common Stock to file reports of ownership and changes in
ownership with the SEC. Directors, officers and stockholders of more than 10
percent of the Company's Class A Common Stock are required by the SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on review of the copies of such forms furnished to the
Company, or written representations that such filings were not required, the
Company believes that since July 1, 1998, through the end of the 1999 fiscal
year, all Section 16(a) filing requirements applicable to its directors,
officers and stockholders of more than 10 percent of the Company's Class A
Common Stock were complied with except as follows: (i) one report (Form 3)
covering one transaction inadvertently was filed late by Mr. Aiello; (ii) one
report (Form 3) covering one transaction inadvertently was filed late by Mr.
Dower; (iii) one report (Form 3) covering one transaction inadvertently was
filed late by Mr. Bitters; (iv) two reports (Form 4 and Form 5) covering two
transactions inadvertently were filed late by Mr. McGettigan; (v) one report
(Form 4) covering one transaction inadvertently was filed late by Mr. Esquer;
and (vi) one report (Form 5) covering one transaction inadvertently was filed
late by Mr. Mazanec. Additionally, the Company has not received copies of a Form
5 from two (2) former officers of the Company.
Item 10. Executive Compensation.
The following table sets forth the aggregate cash compensation paid for the
past three fiscal years by the Company and its predecessors for services of Mr.
Sperberg (Chief Executive Officer), and the four most highly compensated
executive officers whose compensation exceeds $100,000 per year: Messrs.
Sutcliffe (President), Mazanec (Senior Vice President), Davidson (Senior Vice
President) and Aiello (Vice President).
[Remainder of page intentionally left blank]
<PAGE>38
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
--------------------------------------------------------------------------------------------------------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Fiscal Salary Bonus Compensation Award(s) Options Payouts Compensation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
--------------------- ------ ------------ ---------- ------------- ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard T. Sperberg 1999 $175,000 $ -0- $12,372 (4) -0- -0- -0- $ -0-
CEO 1998 $149,125 (2) $32,500 $17,889 (4) -0- 126,954 (7) -0- $ -0-
1997 $136,000 $ -0- $15,781 (4) -0- 314,616 (8) -0- $ -0-
S. Lynn Sutcliffe(1) 1999 $278,486 $ -0- $ 6,600 (4) -0- -0- -0- $ -0-
President
Frank J. Mazanec 1999 $140,000 $40,000 $ 8,909 (4) -0- -0- -0- $ -0-
Senior Vice 1998 $137,154 (2) $22,083 $10,923 (4)(5) -0- 75,000 (9) -0- $ -0-
President 1997 $127,000 $ -0- $64,471 (4)(5) -0- 268,352 (10) -0- $ -0-
Keith G. Davidson 1999 $140,000 $40,000 $ 8,385 (4) -0- -0- -0- $ -0-
Senior Vice 1998 $121,342 (2) $23,333 $ 7,702 (4)(5) -0- 140,000 (11) -0- $ -0-
President 1997 $102,000 $ -0- $20,838 (4)(5) -0- 119,118 (12) -0- $ -0-
Dominick J. Aiello(1) 1999 $120,000 $36,000 (3) $65,741 (4)(6) -0- 164,281 (13) -0- $ -0-
Vice President
</TABLE>
(1) Messrs. Sutcliffe and Aiello are executive officers of the Company but
employees of SYCOM Corporation. In connection with the acquisition of
the assets of SYCOM, LLC, and as an integral part of the transactions
contemplated by the underlying asset purchase and sale agreement,
pursuant to a Sale and Noncompetition Agreement the Company acquired the
right to the services and expertise of all of the employees of SYCOM
Corporation, including Messrs. Sutcliffe and Aiello. In accordance with
the terms and conditions of the Sale and Noncompetition Agreement, the
Company reimburses SYCOM Corporation for the costs of the SYCOM
Corporation employees at their current salary and fringe benefit levels
(including reasonable general and administrative costs). Because Messrs.
Sutcliffe and Aiello became officers of the Company in fiscal year 1999,
information for Messrs. Sutcliffe and Aiello is being reported for
fiscal year 1999 only.
(2) In fiscal year 1997, certain executive officers agreed to defer certain
portions of their base salary and other compensation from approximately
December 1, 1996 through June 30, 1997. This deferred compensation was
repaid on December 31, 1997, with simple interest at the rate of 15
percent per annum.
(3) Mr. Aiello was entitled to a management bonus of $72,000, and he agreed
to accept payment of one-half of this bonus, plus certain commissions as
disclosed in footnote (6) below, in the form of a five year option to
purchase 164,281 shares of the Company's Class A Common Stock at $0.4185
per share, which options are fully vested.
(4) Includes a company car or car expense allowance and premiums for life
insurance.
(5) Includes commissions paid or advanced in connection with negotiated
customer contracts pursuant to the commission policy of the Company.
(6) Pursuant to the commission policy of SYCOM Corporation, Mr. Aiello was
entitled to certain commissions payable in cash, and he agreed to accept
payment of one-half of these commissions, plus certain bonuses as
disclosed in footnote (3) above, in the form of a five year option to
purchase 164,281 shares of the Company's Class A Common Stock at $0.4185
per share, which options are fully vested.
(7) Includes a five year option to purchase 126,954 shares of Class A Common
Stock at $0.704 per share granted on April 1, 1998, subject to vesting
as follows: 42,318 shares vested on April 1, 1999, and 42,318 shares
will vest on April 1 in each of fiscal year 2000 and 2001.
(8) Includes (i) a five year option to purchase 250,000 shares of Class A
Common Stock at $0.3251 per share granted on March 13, 1997, subject to
vesting as follows: 83,334 shares vested on each of March 13, 1998, and
March 13, 1999; and 83,333 shares vest on March 13, 2000; and (ii) a 10
year option to purchase 64,616 shares of Class A Common Stock at $0.2956
per share, as repriced on March 13, 1997 (which options are fully
vested). Mr. Sperberg previously reported five year options to purchase
(i) 38,100 shares of Class A Common Stock at $0.2956 per share, as
repriced on March 13, 1997, which options were exercised in January
1998; and (ii) 4,000 shares of Class A Common Stock at $0.2956 per
share, as repriced on March 13, 1997, which options were exercised in
February 1999.
(9) Includes a five year option to purchase 75,000 shares of Class A Common
Stock at $0.64 per share granted on April 1, 1998, subject to vesting as
follows: 25,000 shares vested on April 1, 1999; and 25,000 shares vest
on April 1 in each of fiscal year 2000 and 2001.
(10) Includes (i) a 10 year option to purchase 250,000 shares of Class A
Common Stock at $0.2956 per share granted on March 13, 1997, subject to
vesting as follows: 83,334 shares vested on each of March 13, 1998 and
1999; and 83,333 shares vest on March 13, 2000; and (ii) a 10 year
option to purchase 18,352 of Class A Common Stock at $0.2956 per share,
as repriced on March 13, 1997 (which options are fully vested). Mr.
Mazanec previously reported five year options to purchase (i) 9,300
shares of Class A Common Stock at $0.2956 per share, as repriced on
March 13, 1997, which options were exercised in December 1997 (500) and
January 1998 (8,800); and (ii) 4,000 shares of Class A Common Stock at
$0.2956 per share, as repriced on March 13, 1997, which options were
exercised in February 1999.
(11) Includes 10 year options to purchase (i) 40,000 shares of Class A Common
Stock at $0.53 per share granted on October 27, 1997, subject to vesting
as follows: 13,334 shares vested on each of October 27, 1998 and 1999;
and 13,333 shares vest on October 27, 2000; and (ii) 100,000 shares of
Class A Common Stock at $0.64 per share granted on April 1, 1998,
subject to vesting as follows: 33,334 shares vested on April 1, 1999;
and 33,333 shares vest on April 1 in each of fiscal year 2000 and 2001.
(12) Includes 10 year options to purchase (i) 100,000 shares of Class A
Common Stock at $0.2956 per share granted on March 13, 1997, subject to
vesting as follows: 33,334 shares vested on each of March 13, 1998 and
1999; and 33,333 shares vest on March 13, 2000; and (ii) 19,118 shares
of Class A Common Stock at $0.2956 per share granted on May 22, 1996, as
repriced on March 13, 1997 (which options are fully vested).
(13) As disclosed in footnotes (3) and (6) above, includes a five year option
to purchase 164,281 shares of Class A Common Stock at $0.4185 per share
granted on May 26, 1999, which options are fully vested.
<PAGE>40
The following table sets forth options granted by the Company to the individuals
listed in the Summary Compensation Table.
Option/SAR Grants in Last Fiscal Year
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Number of Percentage of
Securities Total
Underlying Options/SARs Market
Options/SARs Granted to Exercise or Price on
Granted Employees Base Price Date of Expiration
Name (#) In Fiscal Year ($/Share) Grant Date
---- ------------ -------------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
Richard T. Sperberg -0- N/A N/A N/A N/A
S. Lynn Sutcliffe -0- N/A N/A N/A N/A
Frank J. Mazanec -0- N/A N/A N/A N/A
Keith G. Davidson -0- N/A N/A N/A N/A
Dominick J. Aiello 164,281 12.7 (1) $0.4185 $0.4185 5/26/04
</TABLE>
(1) Mr. Aiello's options are non-plan options, and were not granted under
the Company's 1993 Stock Option Plan. This percentage is calculated
based upon the total number of options granted to employees of both the
Company under the 1993 Stock Option Plan and SYCOM Corporation as
non-plan options.
[Remainder of page intentionally left blank]
<PAGE>41
Aggregated Option/SARs Exercises in Last Fiscal Year and
FISCAL YEAR-END OPTION/SARS VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Options/SARs at FY Options
On Value End (#) at FY End
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable *
---- -------- -------- ------------------ --------------
<S> <C> <C> <C> <C>
Richard T. Sperberg 4,000 $1,568 584,190/167,969 $16,242/$1,650
S. Lynn Sutcliffe -0- $ -0- -0-/ -0- $ -0-/$ -0-
Frank J. Mazanec 4,000 $2,193 264,571/133,333 $9,140/$4,117
Keith G. Davidson -0- $ -0- 250,932/126,665 $10,888/$1,647
Dominick J. Aiello -0- $ -0- 164,281/ -0- $ -0-/$ -0-
</TABLE>
*Based upon the average price of $0.345 as of June 30, 1999.
Directors' Compensation. Prior to June 1, 1998, directors who are not employees
of the Company were not compensated, other than the grant of stock options, for
their service on the Board of Directors. Beginning June 1, however, non-employee
directors are paid a fixed fee for personal attendance at a Board meeting
($1,000 per meeting), or for attendance at a meeting via telephone ($750).
Additionally, non-employee directors' out-of-pocket expenditures currently are
reimbursed. Non-employee directors also receive periodic grants of stock options
issued under the Company's 1993 Stock Option Plan. Each non-employee director
automatically is granted an option to purchase 25,000 shares of Class A Common
Stock on the date he or she becomes a director of the Company, and on each
anniversary date thereafter. The exercise price is the fair market value of the
Company's Class A Common Stock on the date of becoming a director and on the
anniversary date, as appropriate. Each option when granted is immediately
exercisable and has a five year term. Directors who also are officers of the
Company do not receive additional compensation for serving as directors.
Employment Agreements with Executive Officers. In June 1998, when the Company
acquired LTS, Mr. Royal executed an Employment Agreement with the Company and
LTS (together referred to in the Employment Agreement as the "Company") pursuant
to which the Company secured the services of Mr. Royal on an exclusive basis
(upon the terms and conditions set forth in the Employment Agreement) until
March 31, 2000 (unless terminated earlier in accordance with the Employment
Agreement) at a base salary of $125,000 per year, subject to increases as
determined by the Company's Board of Directors based upon a number of factors.
Mr. Royal also receives a monthly car allowance, and is entitled to participate
in employee benefit and fringe benefits plans that LTS makes available generally
<PAGE>42
to its employees. Mr. Royal also is entitled to certain bonus and/or severance
payments. Under the terms of the Employment Agreement, Mr. Royal is prohibited
from engaging in any activity competitive with the Company during the term of
the Employment Agreement. As previously disclosed, the Company is exploring the
sale or disposition of LTS.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information about the ownership
of the Company's Class A Common Stock as of October 26, 1999, by (i) those
persons known by the Company to be the beneficial owners of more than 5 percent
of the total number of outstanding shares of any class entitled to vote; (ii)
each director and highly compensated officer; and (iii) all directors and
officers of the Company as a group. The table includes Class A Common Stock
issuable upon the exercise of Options or Warrants that are exercisable within 60
days. Except as indicated in the footnotes to the table, the named persons have
sole voting and investment power with respect to all shares of the Company Class
A Common Stock shown as beneficially owned by them, subject to community
property laws where applicable. The ownership figures in the table are based on
the books and records of the Company.
Class A Common Stock
----------------------------------
Name and Address Amount of
of Beneficial Owner Ownership Percent of Class
------------------- --------- ----------------
Dominick J. Aiello 164,281 (1) *
27 Worlds Fair Drive, First Floor
Somerset, NJ 08873
Timothy G. Clark 175,000 (2) *
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
Keith G. Davidson 298,295 (3) 1.58
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
William M. Gary III 1,837,947 (4) 9.85
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
Gruber & McBaine Capital Management., LLC 4,502,073 (5) 20.45
50 Osgood Place
San Francisco, CA 94133
<PAGE>43
Jon D. Gruber 9,675,041 (6) 38.13
50 Osgood Place
San Francisco, CA 94133
H. Tate Holt 348,082 (7) 1.85
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
Lagunitas Partners, L.P. 4,233,102 (8) 19.28
50 Osgood Place
San Francisco, CA 94133
Thomas Lloyd-Butler 4,510,073 (9) 20.05
50 Osgood Place
San Francisco, CA 94133
Frank J. Mazanec 728,709 (10) 3.85
Mazanec Family Trust
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
J. Patterson McBaine 9,668,441 (11) 38.10
50 Osgood Place
San Francisco, CA 94133
Charles C. McGettigan 5,554,468 (12) 24.97
50 Osgood Place
San Francisco, CA 94133
Proactive Investment Managers, L.P. 5,049,468 (13) 22.95
50 Osgood Place
San Francisco, CA 94133
Proactive Partners, L.P. 4,909,633 (14) 22.40
50 Osgood Place
San Francisco, CA 94133
Richard T. Sperberg 3,115,082 (15) 15.93
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
<PAGE>44
S. Lynn Sutcliffe 1,750,000 (16) 9.39
27 Worlds Fair Drive, First Floor
Somerset, NJ 08873
SYCOM Enterprises, LLC 1,750,000 (17) 9.39
27 Worlds Fair Drive, First Floor
Somerset, NJ 08873
Westar Capital, Inc. 7,745,600 (18) 35.39
818 South Kansas Street
Topeka, KS 66601
Myron A. Wick III 5,049,468 (19) 22.95
50 Osgood Place
San Francisco, CA 94133
All Directors and Officers as a Group (17) 13,098,266 (20) 52.54
(1) Includes Options to purchase 164,281 shares of Class A Common Stock
exercisable until May 26, 2004. Additionally, in August 1999 in
connection with the private placement of shares of Series E Convertible
Preferred Stock to certain existing shareholders of the Company, certain
executive officers of the Company, including Mr. Aiello, entered into
Salary Reduction Agreements pursuant to which they agreed to reductions
in salary and/or commissions owed (for a six month period from August
1999 through January 2000) in exchange for shares of Class A Common
Stock and certain Warrants. Under the terms of the Salary Reduction
Agreements, the shares of Class A Common Stock and Warrants are subject
to forfeiture in the event the officer voluntarily terminates his or her
employment during the six-month reduction period. In the event of
involuntary termination by the Company, however, the officer is entitled
to a prorata portion of such stock and Warrants (as earned through the
date of termination). Thus the table does not reflect all or any prorata
portion of 50,000 shares of Class A Common Stock and 25,000 shares of
Class A Common Stock underlying Warrants expiring August 13, 2009, that
Mr. Aiello will be entitled to (immediately or upon the exercise of the
Warrants) under the terms of his Salary Reduction Agreement.
Each of the Salary Reduction Agreements entered into by certain
executive officers of the Company, as described above, hereinafter in
these footnotes shall be referred to as the "Salary Reduction
Agreement."
(2) Includes Options to purchase 50,000, 25,000, 25,000, 25,000, 25,000 and
25,000 shares of Class A Common Stock exercisable until January 25,
2001, October 3, 2001, April 23, 2002, October 3, 2002, October 3, 2003,
and October 3, 2004, respectively.
(3) In addition to 34,030 shares of Class A Common Stock over which Mr.
Davidson has sole voting and investment power (which number includes
30,600 shares held by Mr. Davidson's minor children), the table reflects
264,265 shares of Class A Common Stock that may be immediately acquired
upon the exercise of Options expiring August 9, 2005 (70,000 shares),
November 20, 2005 (37,072 shares), January 25, 2006 (11,407 shares), May
22, 2006 (19,118 shares), March 13, 2007 (66,667 shares), October 28,
2007 (26,667) and April 1, 2008 (33,334). The table does not reflect
33,333 shares of Class A Common Stock that may be acquired upon the
exercise of Options expiring March 13, 2007, in the event a change in
<PAGE>45
control is deemed to have occurred. In this event, Mr. Davidson's
percent of class ownership would be 1.75 percent.
Additionally, as previously disclosed, in August 1999 certain executive
officers of the Company, including Mr. Davidson, entered into a Salary
Reduction Agreement. Thus the table does not reflect all or any prorata
portion of 90,000 shares of Class A Common Stock and 50,000 shares of
Class A Common Stock underlying Warrants expiring August 13, 2009, that
Mr. Davidson will be entitled to (immediately or upon the exercise of
the Warrants) under the terms of his Salary Reduction Agreement.
(4) The table reflects an aggregate of 1,545,926 shares of Class A Common
Stock (which number includes 130,000 shares held by Mr. Gary's minor
children and family members) (i) of which 1,159,016 shares are subject
to a Stockholders Agreement among certain stockholders of the Company,
including Mr. Gary, and Westar Capital (the "Stockholders Agreement");
and (ii) all of which shares are subject to a Voting Agreement among
certain stockholders of the Company, including Mr. Gary, SYCOM, LLC and
SYCOM Corporation (the "Voting Agreement"). Under the Stockholders
Agreement, Westar Capital (i) has the right to nominate a certain number
of directors, and the principal stockholders of the Company that are a
party to the Stockholders Agreement, including Mr. Gary, have agreed to
vote for Westar Capital's nominees; and (ii) shall vote for the
remaining nominees selected by the Nominating Committee of the Company.
The Stockholders Agreement terminates the earlier of (i) five years
after the date of the Agreement; or (ii) the date upon which the
stockholdings of Westar Capital and its affiliates, counted on an
as-converted basis, falls below 10 percent of the outstanding Common
Stock of the Company, calculated on a fully-diluted basis as specified
in the Stockholders Agreement.
Under the Voting Agreement (i) SYCOM, LLC and SYCOM Corporation have the
right to nominate a certain number of directors, and the principal
stockholders of the Company that are a party to the Voting Agreement,
including Mr. Gary, have agreed to vote for such nominees; (ii) SYCOM,
LLC and SYCOM Corporation have agreed to vote for the remaining director
nominees selected by the Company; and (iii) all parties to the Voting
Agreement, including Mr. Gary, have agreed to vote at the next annual
meeting to authorize the issuance of additional common stock to permit
the conversion of the Series D Convertible Preferred Stock to Class A
Common Stock in accordance with the terms of the Sale and Noncompetition
Agreement among the Company, SYCOM Corporation and others. The Voting
Agreement terminates June 30, 2001.
Additionally the table reflects 292,021 shares of Class A Common Stock
that are subject to an Agreement of Stock Purchase and Sale among
Messrs. Gary, Esquer, Mazanec and Sperberg. Messrs. Gary, Esquer and
Sperberg have entered into such Agreement whereby they have sold,
subject to payment and vesting schedules, shares of Onsite-Cal to
Messrs. Esquer and Mazanec. Until a share is paid for all voting and
dispositive rights remain with the seller. Upon vesting and payment,
each such purchaser of the Onsite-Cal shares became entitled to the same
number of the Company Class A Common Stock received by the sellers,
pursuant to the Reorganization, with respect to the shares sold. The
table reflects all adjustments for shares that have vested and been paid
for in full.
(5) Gruber & McBaine Capital Management, LLC ("Gruber & McBaine"), the
successor-in-interest to Gruber & McBaine Capital Management, Inc., a
California corporation, is an investment advisor and a general partner
of Lagunitas Partners, L.P. Consequently, Gruber & McBaine has or shares
voting or dispositive power over 3,377,073 shares of Class A Common
Stock (which number includes 2,250,000 shares of Class A Common Stock
underlying 22,500 shares of Series E Convertible Preferred Stock) and
1,125,000 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Warrants expiring August 2, 2009. See also
footnote (8).
(6) Mr. Gruber is a member of Gruber & McBaine Capital Management, LLC,
which is an investment advisor and a general partner of Lagunitas
Partners, L.P., and is a general partner of Proactive Investment
Managers, L.P., which also is an investment advisor and general partner
of Proactive Partners, L.P., and Fremont Proactive Partners, L.P.
Consequently, in addition to 123,500 shares of Class A Common Stock over
which Mr. Gruber has sole voting and investment power (which number
<PAGE>46
includes shares held by Mr. Gruber's family members and foundations),
Mr. Gruber also has or shares voting or dispositive power over 7,066,541
shares of Class A Common Stock (which number includes 4,250,000 shares
of Class A Common Stock underlying 42,500 shares of Series E Convertible
Preferred Stock) and 2,485,000 shares of Class A Common Stock that may
be immediately acquired upon the exercise of Warrants expiring September
11, 2002, June 30, 2003, and August 2, 2009. See also footnotes (8) and
(14).
(7) Includes 175,000 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Options expiring January 25, 2001 (50,000
shares), May 4, 2001 (25,000 shares), April 23, 2002 (25,000 shares),
May 4, 2002 (25,000 shares), May 4, 2003 (25,000 shares), and May 4,
2004 (25,000). Additionally the table reflects 30,000 shares held by Mr.
Holt's children. The table also reflects 143,082 shares of Class A
Common Stock that are subject to the Voting Agreement among certain
stockholders of the Company, including Mr. Holt as the President of Holt
& Associates, SYCOM, LLC and SYCOM Corporation.
(8) Includes 2,250,000 shares of Class A Common Stock underlying 22,500
shares of Series E Convertible Preferred Stock and 1,125,000 shares of
Class A Common Stock that may be immediately acquired upon the exercise
of Warrants expiring August 2, 2009, and over which Lagunitas Partners,
L.P. ("Lagunitas") has sole voting and investment power. The table also
reflects an aggregate of 858,102 shares of Class A Common Stock (i) of
which 550,982 shares are subject to the Stockholders Agreement among
certain stockholders of the Company, including Lagunitas, and Westar
Capital; and (ii) all of which shares are subject to the Voting
Agreement among certain stockholders of the Company, including
Lagunitas, SYCOM, LLC and SYCOM Corporation.
(9) Mr. Lloyd-Butler is a member of Gruber & McBaine Capital Management,
LLC, an investment advisor and a general partner of Lagunitas Partners,
L.P. Consequently, in addition to the 8,000 shares of Class A Common
Stock over which he has sole voting and investment power, Mr.
Lloyd-Butler has or shares voting or dispositive power over 3,377,073
shares of Class A Common Stock (which number includes 2,250,000 shares
of Class A Common Stock underlying 22,500 shares of Series E Convertible
Preferred Stock) and 1,125,000 shares of Class A Common Stock that may
be immediately acquired upon the exercise of Warrants expiring August 2,
2009. See also footnote (8).
(10) Includes 264,571 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Options expiring November 20, 2005 (7,736
shares), January 25, 2006 (46,816 shares), May 22, 2006 (18,352 shares),
March 13, 2007 (166,667 shares), and April 1, 2008 (25,000).
Additionally, the table reflects 187,757 shares of Class A Common Stock
over which Mr. Mazanec, as a trustee of the Mazanec Family Trust, has or
shares voting or dispositive power. The table does not reflect 83,333
shares of Class A Common Stock that may be acquired upon the exercise of
Options expiring March 13, 2007, in the event a change in control is
deemed to have occurred. In this event, Mr. Mazanec's percent of class
ownership would be 4.28 percent
The table also reflects 276,381 shares of Class A Common Stock that are
subject to an Agreement of Stock Purchase and Sale among Messrs.
Mazanec, Esquer, Gary and Sperberg. As previously disclosed, Messrs.
Esquer, Gary and Sperberg have entered into such Agreement whereby they
have sold, subject to payment and vesting schedules, shares of
Onsite-Cal to Messrs. Esquer and Mazanec. Until a share is paid for all
voting and dispositive rights remain with the seller. Upon vesting and
payment, each such purchaser of the Onsite-Cal shares became entitled to
the same number of the Company Class A Common Stock received by the
sellers, pursuant to the Reorganization, with respect to the shares
sold. The table reflects all adjustments for shares that have vested and
been paid for in full.
Additionally, as previously disclosed, in August 1999 certain executive
officers of the Company, including Mr. Mazanec, entered into a Salary
Reduction Agreement. Thus the table does not reflect all or any prorata
portion of 90,000 shares of Class A Common Stock and 50,000 shares of
Class A Common Stock underlying Warrants expiring August 13, 2009, that
Mr. Mazanec will be entitled to (immediately or upon the exercise of the
Warrants) under the terms of his Salary Reduction Agreement.
(11) Mr. McBaine is a member of Gruber & McBaine Capital Management, LLC, an
investment advisor and a general partner of Lagunitas Partners, L.P.,
and is a general partner of Proactive Investment Managers, L.P., also an
investment advisor and a general partner of Proactive Partners, L.P.,
and Fremont Proactive Partners, L.P. Consequently, in addition to the
116,900 shares of Class A Common Stock over which he has sole voting and
<PAGE>47
investment power (which number includes shares held by Mr. McBaine's
family members), Mr. McBaine has or shares voting or dispositive power
over 7,066,541 shares of Class A Common Stock (which number includes
4,250,000 shares of Class A Common Stock underlying 42,500 shares of
Series E Convertible Preferred Stock) and 2,485,000 shares of Class A
Common Stock that may be immediately acquired upon the exercise of
Warrants expiring September 11, 2002, June 30, 2003, and August 2, 2009.
See also footnotes (8) and (14).
(12) Includes Options to purchase 75,000, 25,000, 25,000, 25,000, 25,000 and
25,000 shares of Class A Common Stock exercisable until January 25,
2001, July 13, 2001, April 23, 2002, July 13, 2002, July 13, 2003, and
July 13, 2004, respectively. In addition to 305,000 shares of Class A
Common Stock in which Mr. McGettigan has sole voting and investment
power (which number includes 250,000 shares of Class A Common Stock
underlying 2,500 shares of Series E Convertible Preferred Stock), Mr.
McGettigan is a general partner of Proactive Investment Managers, L.P.,
an investment advisor and a general partner of Proactive Partners, L.P.,
and Fremont Proactive Partners, L.P., and is a general partner of
McGettigan, Wick & Co., Inc., and consequently has or shares voting or
dispositive power over 3,689,468 shares of Class A Common Stock (which
number includes 2,250,000 shares of Class A Common Stock underlying
22,500 shares of Series E Convertible Preferred Stock), and 1,360,000
shares of Class A Common Stock that may be immediately acquired upon the
exercise of Warrants expiring September 11, 2002, June 30, 2003, and
August 2, 2009. See also footnote (14).
(13) Proactive Investment Managers, L.P. ("PIM"), is a general partner of
Proactive Partners, L.P., and Fremont Proactive Partners, L.P., and
consequently has or shares voting or dispositive power over 3,689,468
shares of Class A Common Stock (which number includes 2,250,000 shares
of Class A Common Stock underlying 22,500 shares of Series E Convertible
Preferred Stock) and 1,280,000 shares of Class A Common Stock that may
be immediately acquired upon the exercise of Warrants expiring September
11, 2002, June 30, 2003, and August 2, 2009. The table also reflects
80,000 shares of Class A Common Stock that may be immediately acquired
upon the exercise of Warrants expiring June 30, 2003, and over which PIM
has sole voting and investment power. See also footnote (14).
(14) In addition to 2,036,678 shares of Class A Common Stock over which
Proactive Partners, L.P. ("Proactive") has sole voting and investment
power (which number includes 2,000,000 shares of Class A Common Stock
underlying 20,000 shares of Series E Convertible Preferred Stock), the
table reflects 1,280,000 shares of Class A Common Stock that may be
immediately acquired upon the exercise of Warrants expiring September
11, 2002, June 30, 2003, and August 2, 2009. The table also reflects an
aggregate of 1,592,955 shares of Class A Common Stock (i) of which
1,073,905 shares are subject to the Stockholders Agreement among certain
stockholders of the Company, including Proactive, and Westar Capital;
and (ii) all of which shares are subject to the Voting Agreement among
certain stockholders of the Company, including Proactive, SYCOM, LLC and
SYCOM Corporation
(15) Includes 584,190 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Options expiring August 9, 2005 (150,000
shares), November 20, 2005 (107,781 shares), January 25, 2006 (52,808
shares), May 22, 2006 (64,616 shares), March 13, 2002 (166,667 shares),
and April 1, 2003 (42,318), 325,988 shares of Class A Common Stock that
may be immediately acquired upon the exercise of Warrants expiring
September 11, 2002, and 4,090 shares over which Mr. Sperberg has sole
voting and investment power. The table does not reflect 83,333 shares of
Class A Common Stock that may be acquired upon the exercise of Options
expiring March 13, 2002, in the event a change in control is deemed to
have occurred. In this event, Mr. Sperberg's percent of class ownership
would be 15.93 percent.
The table also reflects an aggregate of 1,848,922 shares of Class A
Common Stock (including 70,545 shares held by Mr. Sperberg's minor son),
(i) of which 1,216,097 shares are subject to the Stockholders Agreement
among certain stockholders of the Company, including Mr. Sperberg, and
Westar Capital; and (ii) all of which shares are subject to the Voting
Agreement among certain stockholders of the Company, including Mr.
Sperberg, and SYCOM LLC and SYCOM Corporation.
Additionally the table reflects 351,892 shares of Class A Common Stock
that are subject to an Agreement of Stock Purchase and Sale among
Messrs. Sperberg, Esquer, Gary and Mazanec. As previously disclosed,
<PAGE>48
Messrs. Sperberg, Esquer and Gary have entered into such Agreement
whereby they have sold, subject to payment and vesting schedules, shares
of Onsite-Cal to Messrs. Esquer and Mazanec. Until a share is paid for
all voting and dispositive rights remain with the seller. Upon vesting
and payment, each such purchaser of the Onsite-Cal shares became
entitled to the same number of the Company Class A Common Stock received
by the sellers, pursuant to the Reorganization, with respect to the
shares sold. The table reflects all adjustments for shares that have
vested and been paid for in full.
Finally, as previously disclosed, in August 1999 certain executive
officers of the Company, including Mr. Sperberg, entered into a Salary
Reduction Agreement. Thus the table does not reflect all or any prorata
portion of 87,500 shares of Class A Common Stock and 43,750 shares of
Class A Common Stock underlying Warrants expiring August 13, 2009, that
Mr. Sperberg will be entitled to (immediately or upon the exercise of
the Warrants) under the terms of his Salary Reduction Agreement.
(16) Mr. Sutcliffe is the majority shareholder of SSBKK, Inc., the sole
member of SYCOM, LLC, and of SYCOM Corporation, and consequently has or
shares voting or dispositive power over 1,750,000 shares of Class A
Common Stock. Additionally, as previously disclosed, in August 1999
certain executive officers of the Company, including Mr. Sutcliffe,
entered into a Salary Reduction Agreement. Thus the table does not
reflect all or any prorata portion of 139,000 shares of Class A Common
Stock and 69,500 shares of Class A Common Stock underlying Warrants
expiring August 13, 2009, that Mr. Sutcliffe will be entitled to
(immediately or upon the exercise of the Warrants) under the terms of
his Salary Reduction Agreement. The table also does not reflect 157,500
shares of Series D Convertible Preferred Stock (or the 15,750,000 shares
of Class A Common Stock underlying the same) issued to SYCOM Corporation
that currently is being held in escrow under an Escrow Agreement because
such shares are non-voting and the conditions precedent to the release
of such shares will not be satisfied within the next 60 days. See also
footnote (17).
(17) Represents 1,750,000 shares of Class A Common Stock that are subject to
the Voting Agreement among certain stockholders of the Company, SYCOM,
LLC and SYCOM Corporation.
(18) Includes the following securities that are subject to the Stockholders
Agreement among certain stockholders of the Company and Westar Capital:
4,500,000 shares of Class A Common Stock, and 3,245,600 shares of Class
A Common Stock underlying 649,120 shares of Series C Convertible
Preferred Stock.
(19) Mr. Wick is a general partner of Proactive Investment Managers, L.P.,
an investment advisor and a general partner of Proactive Partners, L.P.,
and Fremont Proactive Partners, L.P., and is a general partner of
McGettigan, Wick & Co., Inc., and consequently has or shares voting
or dispositive power over 3,689,468 shares of Class A Common Stock and
1,360,000 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Warrants expiring September 11, 2002,
June 30, 2003, and August 2, 2009. See also footnote (14).
(20) Includes the aggregate of ownership of Messrs. Aiello, Clark, Davidson,
Holt, Mazanec, McGettigan, Sperberg and Sutcliffe as set forth in
footnotes (1), (2), (3), (7), (10), (12), (15) and (16), and an
aggregate of 417,720 shares of Class A Common Stock held by other
officers and directors, 524,149 shares of Class A Common Stock that may
be acquired within the next sixty (60) days upon the exercise of options
held by other officers (but not including any shares of Class A Common
Stock and/or shares of Class A Common Stock underlying Warrants expiring
August 13, 2009, that such officers will be entitled to (immediately or
upon the exercise of the Warrants) under the terms of their respective
Salary Reduction Agreements), and 374,372 shares of Class A Common Stock
that are subject to a Stock Purchase Agreement among Hector A. Esquer,
and Messrs. Gary, Mazanec and Sperberg. For purposes of calculating this
footnote, the number of shares attributable to Mr. Sperberg does not
include 351,892 shares that are subject to the above Stock Purchase
Agreement because these shares are counted as owned by Messrs. Mazanec
and Esquer.
* Less than one percent (1%).
<PAGE>49
Item 12. Certain Relationships and Related Transactions.
Guaranty of Bonds. In connection with the Company's acquisition of OBS, the
Company entered into a Transition Agreement pursuant to which Westar Energy,
Inc. ("Westar Energy"), a sister corporation to Westar Capital, a shareholder of
the Company, agreed, for a period of one year after the closing of the OBS
acquisition (November 1997), to maintain an indemnity agreement with Westar
Capital at a level sufficient to provide credit support to OBS for bid and
performance bonds required to be posted in connection with OBS's business. OBS
pays all actual and out-of-pocket fees and costs associated with these bonds.
OBS (individually or with the Company) currently has three bonds outstanding on
projects that are in the final stages of completion and for which Westar Energy
and/or Westar Capital have provided the requisite credit support. Westar Capital
is a 5 percent or more shareholder of the Company.
Westar Transaction. As previously disclosed, in February 1998, OMS acquired the
operating assets of Mid-States Armature in exchange for $290,000. In connection
with this transaction, the Company executed an agreement with Westar Energy
pursuant to which Westar Energy agreed to loan to the Company an amount equal to
the amount paid by the Company for the operating assets. In April 1998, this
loan was made by Westar Energy to the Company, and was to be repaid by the first
anniversary of the closing of the asset acquisition. Pursuant to a February 1999
settlement agreement entered into by the Company, Westar Capital, Westar Energy
and Western Resources in connection with litigation among the parties, Westar
Energy, Westar Capital and Western Resources agreed to apply certain payments
due from Western Resources to OES under existing water treatment plant contracts
to repayment of the subject loan in the event the same was not repaid as above.
Westar Capital is a 5 percent or more shareholder of the Company.
Guaranty of Performance. In March 1998, the Company entered into an energy
services agreement with a customer to install energy efficient equipment in a
large number of the customer's facilities. A condition precedent to the
customer's execution of its agreement, however, was the customer's receipt of a
guaranty from Westar Capital, guaranteeing the payment obligations of the
Company under the customer agreement. Accordingly, in exchange, and as
consideration for, Westar Capital's execution of the guaranty, the Company
agreed, in essence, to indemnify Westar Capital in the event Westar Capital must
perform under its guaranty, executed a promissory note to cover any amounts the
Company may owe to Westar Capital as a result of Westar Capital's performance
under its guaranty, and granted Westar Capital a security interest in the
Company's assets to secure its payment of the note. The security agreement
includes certain exceptions in the security interest granted therein. No amounts
currently are outstanding under the note. Westar Capital is a 5 percent or more
shareholder of the Company.
Engagement of Investment Advisor. In connection with acquisition of the assets
of SYCOM, LLC, the Company engaged McGettigan Wick & Co., Inc., an investment
banking firm ("McGettigan Wick"), to assist the Company in the structure and
negotiation of the transaction. Under the terms of the engagement, the Company
agreed to pay McGettigan Wick $50,000 one year after the closing the transaction
(which was June 30, 1998), and issue warrants to McGettigan Wick (which warrants
immediately were transferred by McGettigan Wick to its affiliates, Proactive and
Proactive Investment Managers, L.P. ("PIM")) to acquire 160,000 shares of Class
A Common Stock of the Company at the exercise price of $1.17 per share, which
was the current price of the Company's Class A Common Stock on the OTC
Electronic Bulletin Board on June 30, 1998. These warrants subsequently were
repriced on May 26, 1999, to $0.4185 per share, which was the current price of
the Company's Class A Common Stock on May 26, 1999. Mr. McGettigan is a general
partner of Proactive and PIM, 5 percent or more shareholders of the Company, and
is the Chairman of the Board of Directors of the Company.
Outstanding Obligations. Under agreements with Western Resources, OES maintains
equipment for supplying demineralized water for boiler makeup water that OES
installed at Western Resources' Lawrence Energy Center and Tecumseh Energy
Center. As of the fiscal year ended June 30, 1999, OBS had outstanding accounts
<PAGE>50
receivable from Western Resources in the amount of $47,415. As previously
disclosed, Westar Capital is a 5 percent or more shareholder of the Company.
August 1999 Private Placement. In August 1999, the Company completed a private
placement of shares of Series E Convertible Preferred Stock and the issuance of
warrants to purchase shares of the Company Class A Common Stock with Mr.
McGettigan, the Chairman of the Board, and other related investors, including
Proactive and Lagunitas Partners, L.P., current shareholders of the Company.
Terms of the placement include the issuance of 50,000 shares of Series E
Convertible Preferred Stock (which is convertible initially into 5,000,000
shares of Class A Common Stock) in exchange for $1,000,000, warrants to purchase
1,250,000 shares of the Company Class A Common Stock at $0.50 per share, and
warrants to purchase 1,250,000 shares of the Company Class A Common Stock at
$0.75 per share. As stated above, Mr. McGettigan is a general partner of
Proactive, a 5 percent or more shareholder of the Company, and is the Chairman
of the Board of Directors of the Company.
Item 13. Exhibits and Reports on Form 8-K
No Form 8-Ks were filed during the last quarter of fiscal year ended June 30,
1999.
[Remainder of page intentionally left blank]
<PAGE>51
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: June 23, 2000 By: /s/ Richard T. Sperberg
-------------------------------------
RICHARD T. SPERBERG
Chief Executive Officer
Date: June 23, 2000 By: /s/ J. Bradford Hanson, CPA
------------------------------
J. BRADFORD HANSON
Chief Financial Officer
<PAGE>52
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: June 23, 2000 By: /s/ Richard T. Sperberg
-------------------------------------
Richard T. Sperberg
Chief Executive Officer (Principal Executive
Officer), Director
Date: June 23, 2000 By: /s/ J. Bradford Hanson, CPA
------------------------------
J. Bradford Hanson, CPA
Chief Financial Officer,
Principal Financial and Accounting Officer
<PAGE>53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Form 10-KSB to be signed on its
behalf by the undersigned, thereunto duly authorized.
ONSITE ENERGY CORPORATION
Date: June 23, 2000 By: /s/ Charles C. McGettigan
--------------------------------------------
Charles C. McGettigan
Chairman of the Board and
Outside Director
Date: June 23, 2000 By: /s/ Richard T. Sperberg
--------------------------------------------
Richard T. Sperberg
Chief Executive Officer
and Director
Date: June 23, 2000 By: /s/ S. Lynn Sutcliffe
--------------------------------------------
S. Lynn Sutcliffe
Director
Date: June 23, 2000 By: /s/ Richard L. Wright
--------------------------------------------
Richard L. Wright
Senior Vice President and Director
Date: June 23, 2000 By: /s/ H. Tate Holt
--------------------------------------------
H. Tate Holt
Outside Director
<PAGE>F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report ................................................F-2
Consolidated Balance Sheets - June 30, 1999 and 1998.........................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, 1998 and 1997........................................F-5
Consolidated Statements of Cash Flows - For the Years ended
June 30, 1999, 1998 and 1997..............................................F-7
Notes to Consolidated Financial Statements...................................F-8
<PAGE>F-2
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Onsite Energy Corporation
Carlsbad, California
We have audited the accompanying consolidated balance sheets of Onsite Energy
Corporation and subsidiaries (the "Company") as of June 30, 1999 and 1998, and
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the years in the three year period ended
June 30, 1999. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Onsite
Energy Corporation and subsidiaries as of June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three year period ended June 30, 1999, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has a working capital deficit of $6,511,390, and an accumulated
deficit of $27,467,050. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with regard
to these matters are also described in Note 3. The consolidated financial
statement do not include any adjustments relating to the recoverability and
classification of reported asset amounts or the amounts and classification of
liability that might result from the outcome of this uncertainty.
As discussed in Note 3 to the consolidated financial statements, the Company has
restated certain financial statement amounts related to the recognition of
contract revenues and expenses.
/s/HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
September 3, 1999, except for the Financial Statement Restatement section of
Note 3, which is as of June 20, 2000
<PAGE>F-3
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
1999 1998
------------- -------------
ASSETS
Current Assets:
Cash $ 900,408 $ 2,093,006
Accounts receivable, net of allowance for
doubtful accounts of $35,000 and $15,030 6,071,729 3,468,191
Inventory 185,562 178,215
Capitalized project costs 147,022 -
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,109,315 944,820
Other current assets 50,634 611,195
------------- -------------
TOTAL CURRENT ASSETS 8,464,670 7,295,427
Cash-restricted 147,838 157,836
Property and equipment, net of accumulated
depreciation and amortization of $1,258,000 1,413,918 1,958,178
Excess of purchase price over net assets
acquired, net - 3,563,718
Other assets 101,483 28,142
------------- -------------
TOTAL ASSETS $ 10,127,909 $ 13,003,301
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable - related party $ 211,914 $ 468,329
Note payable, current portion 2,903,230 2,130,140
Accounts payable 9,035,325 3,380,271
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,445,790 2,888,659
Accrued expenses and other liabilities 1,143,940 1,688,542
Liabilities in excess of assets held for sale 235,861 -
------------- -------------
TOTAL CURRENT LIABILITIES 14,976,060 10,555,941
Long-Term Liabilities:
Deferred income 1,072,553 897,263
Notes payable, less current portion 36,395 443,289
------------- -------------
TOTAL LIABILITIES 16,085,008 11,896,493
------------- -------------
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) 649 208
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 18,243
Class B common stock, 1,000 shares
authorized, none issued and outstanding - -
Additional paid-in capital 25,583,816 23,208,598
Notes receivable - shareholders (4,093,099) (1,335,217)
Accumulated deficit (27,467,050) (20,785,024)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (5,957,099) 1,106,808
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT) $ 10,127,909 $ 13,003,301
============= =============
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>F-4
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 $ 43,534,737 $ 12,055,601 $ 8,527,143
Utility Revenue 566,672 390,035 110,581
------------- ------------- ------------
Total Revenues 44,101,409 12,445,636 8,637,724
Cost of sales 35,157,469 10,013,324 6,738,149
------------- ------------- ------------
Gross margin 8,943,940 2,432,312 1,899,575
Selling, general, and administrative expenses 11,193,561 3,879,237 3,139,018
Depreciation and amortization expense 1,074,855 539,499 587,077
Reserve on sale or disposal of subsidiary 1,010,000 - -
Loss on disposition of partnership interest - - 425,240
Impairment of excess of purchase price over
net assets acquired 1,918,851 - -
Gain on sale of assets - - (17,686)
------------- ------------- ------------
Operating loss (6,253,327) (1,986,424) (2,234,074)
Other income (expense):
Interest expense (365,067) (130,265) (199,030)
Interest income 146,436 25,283 43,402
------------- ------------- ------------
Total other expense (218,631) (104,982) (155,628)
------------- ------------- ------------
Loss before provision for income taxes (6,471,958) (2,091,406) (2,389,702)
Provision for income taxes 5,500 7,500 8,500
------------- ------------- ------------
Net loss ($6,477,458) ($2,098,906) ($2,398,202)
============= ============= ============
Net loss allocated to common shareholders ($6,682,026) ($2,148,053) ($2,398,202)
============= ============= ============
Basic and diluted loss per common share: ($0.36) ($0.16) ($0.22)
============= ============= ============
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, 1998 and 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------------------------------------------------- --------------------
Series A Series B Series C Series D Class A
--------------- ---------------- --------------- -------------- --------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ -------- ------ ------- ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1996,
as originally reported 3,810 $ 4 605,641 $ 605 - $ - - $ - 6,263,463 $ 6,263
Prior period adjustments - - - - - - - - - -
------ ------ -------- ------ ------- ------ ------ ------ -------- --------
Balance, July 1, 1996,
as restated 3,810 4 605,641 605 - - - - 6,263,463 6,263
Issued to Onsite 401k plan - - - - - - - - 48,562 49
Conversion of accounts
payable to Class A
common stock - - - - - - - - 62,077 62
Common shares issued for
Series A and B preferred
dividends - - - - - - - - 347,048 347
Conversion of Series
A preferred stock (3,810) (4) - - - - - - 3,571,494 3,572
Conversion of Series
B preferred stock - - (605,641) (605) - - - - 605,641 605
Exercise of stock option - - - - - - - - 45,887 46
Net Loss - - - - - - - - - -
------ ------ -------- ------ ------- ------ ------ ------ ---------- -------
Balance, June 30, 1997 - - - - - - - - 10,944,172 10,944
</TABLE>
<TABLE>
<CAPTION>
Common Additional Notes
Shares Paid-In Receivable Accumulated
Issuable Capital Shareholders Deficit Total
-------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1996,
as originally reported $ 608,439 $ 16,336,469 $ - $ (15,758,615) $ 1,193,165
Prior period adjustments - - - (480,154) (480,154)
---------- ------------ ---------- ------------- ------------
Balance, July 1, 1996,
as restated 608,439 16,336,469 - (16,238,769) 713,011
Issued to Onsite 401k plan - 24,931 - 24,980
Conversion of accounts
payable to Class A
common stock - 66,973 - - 67,035
Common shares issued for
Series A and B preferred
dividends (608,439) 608,092 - - -
Conversion of Series
A preferred stock - (3,568) - - -
Conversion of Series
B preferred stock - - - - -
Exercise of stock option - 20,064 - - 20,110
Net Loss - - - (2,398,202) (2,398,202)
---------- ------------ ---------- ------------- ------------
Balance, June 30, 1997 - 17,052,961 - (18,636,971) (1,573,066)
</TABLE>
<PAGE>F-6
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended June 30, 1999, 1998 and 1997
(continued)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------------------------------------------------- --------------------
Series A Series B Series C Series D Class A
--------------- ---------------- --------------- -------------- --------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ -------- ------ ------- ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 - $ - - $ - - $ - - $ - 10,944,172 $ 10,944
Issued to Onsite 401k Plan - - - - - - - - 49,912 50
Issued pursuant to private
offering net of expenses - - - - - - - - 2,000,000 2,000
Stock issued for
acquisitions - - - - - - - - 4,940,000 4,940
Exercise of stock options - - - - - - - - 309,104 309
Sale of Series C preferred
stock - - - - 200,000 200 - - - -
Series C preferred stock
dividend - - - - 8,205 8 - - - -
Compensation recognized upon
issuance of warrants - - - - - - - - -
Notes receivable from
shareholders acquired in
acquisitions - - - - - - - - - -
Net Loss - - - - - - -
------ ------ -------- ------ ------- ------ ------ ------ ---------- --------
Balance, June 30, 1998 - $ - - $ - 208,205 $ 208 - $ - 18,243,188 $ 18,243
Exercise of stock options - - - - - - - - 75,334 75
Issued to Onsite 401k Plan - - - - - - - - 266,331 267
Series C preferred stock
dividend - - - - 40,915 41 - - - -
Sale of Series C preferred
stock - - - - 400,000 400 - - - -
Notes receivable from
shareholders acquired in
acquisitions - - - - - - - - - -
Net Loss - - - - - - - - - -
------ ------ -------- ------ ------- ------ ------ ------ ---------- --------
Balances June 30, 1999 - - - - 649,120 $ 649 - - 18,584,853 $ 18,585
====== ====== ======== ====== ======= ====== ====== ====== ========== ========
</TABLE>
<PAGE>F-7
<TABLE>
<CAPTION>
Common Additional Notes
Shares Paid-In Receivable Accumulated
Issuable Capital Shareholders Deficit Total
-------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997 $ 17,052,961 $ - $ (18,636,971) $ (1,573,066)
Issued to Onsite 401k Plan 17,399 - 17,449
Issued pursuant to private
offering net of expenses 951,542 953,542
Stock issued for
acquisitions 4,031,923 - 4,036,863
Exercise of stock options 86,854 - 87,163
Sale of Series C preferred
stock 999,800 - 1,000,000
Series C preferred stock
dividend 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 - (2,098,906) (2,098,906)
-------- ------------ ------------ ------------- ------------
Balance, June 30, 1998 $ 23,208,598 $ (1,335,217) $ (20,785,024) $ 1,106,808
Exercise of stock options 23,404 23,479
Issued to Onsite 401k Plan 147,687 147,954
Series C preferred stock
dividend 204,527 (204,568) -
Sale of Series C preferred stock 1,999,600 2,000,000
Notes receivable from
shareholders acquired in
acquisitions (2,757,882) (2,757,882)
Net Loss - (6,477,458) (6,477,458)
-------- ------------ ------------ ------------- ------------
Balances June 30, 1999 $ 25,583,816 $ (4,093,099) $ (27,467,050) $ (5,957,099)
======== ============ ============ ============= ============
</TABLE>
The accompanying notes are in integral part of these consolidated financial
statements.
<PAGE>F-8
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,477,458) $ (2,098,906) $ (2,398,202)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of excess purchase price over
net assets acquired 502,390 280,927 400,000
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 - 399,032
Estimated loss on disposal of subsidiary 1,010,000 -
Provision for bad debts 35,000 30,192 37,093
Depreciation 572,465 258,572 187,077
Compensation recognized upon issuance of
stock warrants - 18,980 -
Loss on disposition of partnership interest - - 425,240
Gain on sale of assets - - (17,686)
Accounts receivable (3,831,418) (731,113) 747,923
Increase in costs and estimated earnings
in excess of billings on uncompleted
contracts (252,419) (225,324) 2,051,592
Inventory (7,347) (5,758) -
Other assets (44,588) (346,432) 260,322
Cash-restricted 9,998 115,331 (50,467)
Accounts payable 6,847,535 1,351,806 (1,464,594)
Increase (decrease) in billings in excess
of costs and estimated earnings on
uncompleted contracts (1,124,173) 1,739,390 (1,130,080)
Accrued expenses and other liabilities 158,449 637,335 (325,864)
Deferred income 143,975 2,832 (17,190)
------------ ------------ ------------
Net cash provided by (used in)
operating activities (488,544) 1,027,832 (895,804)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (82,539) (119,075) (4,473)
Proceeds from sale of assets - - 540,081
Loan to shareholders (2,757,882) (7,911) -
Acquisition of businesses, net of cash acquired - (1,203,805) -
------------ ------------ ------------
Net cash provided by (used in) investing
activities (2,840,421) (1,330,791) 535,608
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 1,382,953 359,348 1,026,422
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 45,090
Repayment of notes payable - related party (256,415) (46,804) (1,071,571)
Repayment of notes payable (1,013,650) (484,178) (89,321)
------------ ------------ ------------
Net cash provided by (used in)
financing activities 2,136,367 1,869,071 (89,380)
------------ ------------ ------------
Net increase (decrease) in cash (1,192,598) 1,566,112 (449,576)
Cash, beginning of year 2,093,006 526,894 976,470
------------ ------------ ------------
Cash, end of year $ 900,408 $ 2,093,006 $ 526,894
============ ============ ============
Supplemental disclosures of non-cash transactions:
Payment of Series A and B Preferred Stock
dividends with Common Stock $ - $ - $ 347
------------ ------------ ------------
Payment of Series C Preferred Stock dividends
with Series C Preferred stock $ 204,568 $ 49,147 $ -
============ ============ ============
Payment of accrued liabilities with common stock $ 147,954 $ 17,449 $ 67,035
============ ============ ============
Liabilities accrued for acquisition costs $ - $ 285,594 $ -
============ ============ ============
Fair market value of assets, less liabilities
of businesses acquired with common stock $ - $ 4,036,863 $ -
============ ============ ============
Conversion of preferred stock to common stock $ - $ - $ 4,167
------------ ------------ ------------
Supplemental disclosures of cash transactions:
Interest paid $ 390,558 $ 140,521 $ 180,288
============ ============ ============
Income taxes paid $ 5,500 $ 36,175 $ 41,290
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>F-9
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-10
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unless the context indicates otherwise, reference to the Company shall
include all of its wholly-owned subsidiaries.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all of its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Revenue Recognition
Revenues on development and construction of energy efficiency projects 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 earned
which coincides with invoicing to the utility.
In addition to the installation of energy savings measures at a customer
site, the Company is generally engaged to provide measurement and
verification ("M&V") services of actual savings as compared to expected, or
estimated savings identified in the engineering, or pre-implementation
stages of the contract. This service is typically performed for the purpose
of billing the local host utility for incentive payments due to either the
customer and/or the Company based upon achieved savings. The Company
generally performs M&V as a separate service to the construction contract
for which it is compensated as services are rendered. Revenue related to
the M&V services are recognized as the services are performed. Revenue
arising from the Company's share of utility incentive payments is
recognized in the period that actual savings are achieved.
Revenues for consulting, development, management, marketing and other
similar services are recognized as the services are performed.
Operation and Maintenance Agreements
Commencing July 1, 1993, the Company, on a limited basis, began entering
into long-term operation and maintenance ("O&M") and 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
<PAGE>F-11
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 (December 1999) provided certain conditions and milestones
are achieved. In the event that conditions or milestones are not achieved,
the Company may be required to forfeit its right to some or all of the
funds on deposit. As of June 30, 1999, the Company has $43,000 reserved for
funds that have a low probability of return. Of the remaining balance of
$147,838, the Company believes that all conditions and milestones will be
achieved and that no additional funds under these projects will be subject
to forfeiture.
Inventory
Inventory consists of materials for use in installation and maintenance of
energy efficiency projects and are stated at the lower of cost, determined
by the first-in, first-out method, or market.
Property and Equipment
Property and equipment are recorded at cost. Replacements and improvements
are capitalized, while repairs and maintenance are charged to expense as
incurred. Depreciation and amortization are provided using the
straight-line method over the assets estimated useful lives ranging from 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
<PAGE>F-12
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
<PAGE>F-13
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impact of Recently Issued Standards
FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("FASB 133") was issued in June 1998. This statement
establishes accounting and reporting standards for derivative instruments
and for hedging activities. This statement was amended by FASB No. 137,
issued in June 1999, such that it is effective for the Company's financial
statements for the year ended June 30, 2002. The adoption of this standard
is not expected to have a material effect on the Company's financial
statements.
FASB Statement No. 134, "Accounting for Mortgage-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" was issued in 1998. FASB Statement No. 135, "Rescission
of FASB Statement No. 75 and Technical Corrections" and FASB Statement No.
136, "Transfers of Assets to a Not-for-Profit Organization or Charitable
Trust That Raises or Holds Contributions for Others" were issued in 1999.
These pronouncements are not expected to impact the Company regarding
future financial statement disclosures, results of operations or financial
position.
Use of Estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company's financial statements are based upon a number of significant
estimates, including the allowance for doubtful accounts, percentage of
completion on long term contracts, the estimated useful lives selected for
property and equipment and intangible assets, realizability of deferred tax
assets and realizability of shareholder notes receivable. 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
<PAGE>F-14
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 three fiscal years. For the years ended
June 30, 1999, 1998, and 1997, the Company had net losses of $6,477,458,
$2,098,906 and $2,398,202, respectively, and had negative working capital
of $6,511,390 and an accumulated deficit of $27,467,050 as of June 30,
1999. Management believes that the Company will be able to generate
additional revenues and operating efficiencies through its acquisitions as
well as by other means to achieve profitable operations. During the year
ended June 30, 1999, the Company took steps to mitigate the losses and
enhance its future viability. In addition, during the fiscal year end 1999,
the Company exercised its right under a stock subscription agreement to
require Westar Capital to purchase an additional 400,000 shares of Series C
Convertible Preferred Stock for $2,000,000. Subsequent to its most recent
fiscal year end, the Company also privately placed shares of newly created
Series E Convertible Preferred Stock ("Series E Stock") to existing
shareholders for $1,000,000. Concurrent with this private placement,
members of senior management of the Company have agreed to receive shares
of the Company's Class A Common Stock in lieu of a portion of their salary
in an effort to reduce cash outflows related to compensation. Subsequent to
June 30, 1999, a decision was made to explore the sale or disposition of
the Company's lighting subsidiaries, which could provide capital, reduce
operating losses and will allow management to better focus on its core ESCO
business activities. In addition, the Company is exploring strategic
relationships with companies that could involve an investment in the
Company. The Company may also raise cash through the sale of long term
future revenue streams that it currently owns or has rights to. The Company
is also examining ways to further reduce overhead including, but not
limited to, the possibility of targeted staff reductions. Further, the
Company, through the acquisition of other energy service companies, expects
to continue to gain economies of scale through the use of a consolidated
management team and the synergies of marketing efforts of the different
entities. Management believes that all of the above actions will allow the
Company to continue as a going concern. Future cash requirements depend on
the Company's profitability, its ability to manage working capital
requirements and its rate of growth. Additional financing through the sale
of securities may have an ownership dilution effect on existing
shareholders.
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
<PAGE>F-15
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
The SEC took exception to certain applications of accounting principles as
applied by the Company in the areas of the timing of revenue recognition
where utility incentive payments are a part of the Company'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. As a result, the Company
restated its previously filed financial statements for each of the fiscal
years ending June 30, 1997, 1998 and 1999, as well as the first (a second
amendment) and second fiscal quarters ended September 30, 1999 and December
31, 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 over 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 and other ongoing 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>F-16
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompany financial statements for 1999, 1998 and 1997 and accumulated
deficit at the beginning of 1997 have been restated to correct the
recognition of revenues and expenses discussed above. Beginning accumulated
deficit for 1997 has been increased by $480,154 which had no associated tax
benefit. The impact of these corrections on the company's financial results
as originally reported is summarized below:
<TABLE>
<CAPTION>
1999 1999 1998 1998 1997 1997
As Originally Filed As restated As Originally Filed As restated As Originally Filed As restated
------------------- ------------- ------------------- ------------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 43,557,902 $ 44,101,409 $ 12,267,148 $ 12,445,636 $ 9,561,375 $ 8,637,724
------------- ------------- ------------- ------------- ------------- -------------
Net loss $ (6,909,011) $ (6,477,458) $ (2,218,482) $ (2,098,906) $ (1,388,598) $ (2,398,202)
------------- ------------- ------------- ------------- ------------- -------------
Loss per share
basic and diluted $ (0.39) $ (0.36) $ (0.16) $ (0.16) $ (0.13) $ (0.22)
============= ============= ============= ============= ============= =============
Accumulated deficit,
end of year $ (26,528,421) $ (27,467,050) $ (19,414,842) $ (20,785,024) $ (17,147,213) $ (18,636,971)
============= ============= ============= ============= ============= =============
</TABLE>
4. Acquisitions
On October 28, 1997, the Company entered into a Plan and Agreement of
Reorganization with Westar Capital to acquire Westar Capital's wholly-owned
subsidiary WBS (now OES). The Company acquired all of WBS's issued and
outstanding stock in exchange for 1,700,000 shares of the Company's Class A
Common Stock. This stock issuance was valued at the average of the closing
bid and ask prices for three days before and after the acquisition was
agreed to by the Company and Westar Capital. On March 31, 1998, the Company
released an additional 800,000 shares of Class A Common Stock from an
escrow established pursuant to the Plan and Agreement. The subsequent stock
issuance was valued at the average of the bid and ask stock prices on the
date of issuance. The transaction was accounted for as a purchase and
accordingly the inclusion of the operations of OES in the consolidated
operations commenced on the acquisition date. The resulting purchase price
including acquisition costs was $1,498,716 which resulted in no amounts
being allocated to excess of purchase price over assets acquired.
In February 1998, OES acquired the operating assets of Mid-States Armature
for $290,000 through its newly created subsidiary, OMS. The transaction was
accounted for as a purchase and accordingly, the inclusion of the
operations of OMS in the consolidated operations commenced on the
acquisition date.
Effective June 13, 1998, the Company acquired all of the outstanding common
shares of LTS, in exchange for 690,000 shares of the Company's Class A
Common Stock plus $500,000. This stock issuance was valued at the average
of the closing bid and ask prices for three days before and after the
acquisition was agreed to by the Company and LTS. The transaction was
accounted for as a purchase and accordingly, the inclusion of the
operations of LTS in the consolidated operations commenced on the
acquisition date. The resulting purchase price including acquisition costs
was $995,788 which resulted in $1,445,922 being allocated to excess of
purchase price over net assets acquired. The excess of purchase price over
net assets acquired was being amortized over a period of 60 months
beginning July 1998. Subsequent to its fiscal year end, the Company made a
<PAGE>F-17
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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).
<PAGE>F-18
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Year Ended
June 30, 1999 June 30, 1998 June 30, 1997
------------- ------------- -------------
Revenue $ 45,935,000 $ 41,390,000 $ 48,802,000
============= ============= =============
Operating Income (Loss) $ (6,438,000) $ (10,088,000) $ 2,663,000
============= ============= =============
Net Loss $ (6,773,000) $ (12,631,000) $ (1,079,000)
============= ============= =============
Basic and Diluted loss
per common share $ (0.37) $ (0.92) $ (0.10)
============= ============= =============
<PAGE>F-19
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Accounts Receivable
Accounts Receivable consisted of the following as of June 30, 1999 and 1998:
1999 1998
------------ ------------
Contracts Receivable:
Completed Contracts $ 705,561 $ 472,590
Contracts in Progress 4,077,057 2,382,102
Trade receivables 1,324,111 628,529
Less: Allowance for doubtful accounts (35,000) (15,030)
------------ ------------
Total $ 6,071,729 $ 3,468,191
============ ============
6. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on contracts as of June 30, 1999 and 1998,
consisted of the following:
1999 1998
------------ ------------
Costs incurred $ 28,496,874 $ 11,796,701
Estimated earnings 7,477,447 2,234,198
------------ ------------
35,974,321 14,030,899
Less: Billings to date (36,310,796) (15,974,738)
------------ ------------
$ (336,475) $ (1,943,839)
============ ============
Included in the accompanying
Balance Sheet under the
following captions:
Costs and estimated earnings in
excess of billings on
uncompleted contracts $ 1,109,315 $ 944,820
Billings in excess of costs and
earnings on uncompleted contracts (1,445,790) (2,888,659)
------------ ------------
$ (336,475) $ (1,943,839)
============ ============
<PAGE>F-20
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Property and Equipment
Property and equipment at June 30, 1999 and 1998 consisted of:
Estimated Useful
1999 1998 Lives
------------ ----------- ----------------
Office furniture and equipment $ 1,287,071 $ 474,915 5-7 years
Land 44,000 44,000 -
Building 80,000 80,000 31.5 years
Contract life
Water treatment plants 993,517 993,516 (50 to 56 months)
Equipment and tools 201,832 722,639 7-10 years
Vehicles 23,674 39,971 5 years
Leasehold improvements 41,824 42,135 5-20 years
------------ ------------
$ 2,671,918 $ 2,397,176
Less: Accumulated Depreciation (1,258,000) 438,998
------------ ------------
$ 1,413,918 $ 1,958,178
============ ============
Depreciation expense amounted to $572,465, $258,572 and $187,077 for the
years ended June 30, 1999, 1998 and 1997, respectively.
<PAGE>F-21
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Notes Payable
Notes payable at June 30, 1999 and 1998, consisted of the following:
1999 1998
----------- -----------
Notes payable, collateralized by utility
incentive payments with interest at 12% $ 440,170 $ 723,549
Note payable to a third party, interest
at 12.00% with all unpaid interest and
principal due July 31, 1998 unsecured - 7,532
Notes payable with payments upon completion
of certain milestones with interest at 18.%,
past due, secured by accounts receivable
and other assets 69,049 1,132,961
Notes payable with payments upon completion
of certain milestones, interest at 12.5% to
18% collateralized by accounts receivable
and other assets 2,430,406 669,126
Notes payable with monthly installments
of $1,175 including interest at 10.75%,
maturing August through September 1998,
collateralized by certain automobiles - 8,667
Notes payable, non-interest bearing, due
in monthly installments of $1,000, unsecured - 6,777
Note payable, due in monthly installments
of $200, including interest at 10.75%,
maturing December 1998, collateralized by
certain computer equipment - 1,839
Note payable, due in monthly installments
of $1,631, including interest at 9% maturing
September 1999, unsecured - 22,978
----------- -----------
Total notes payable 2,939,625 2,573,429
Less: Current portion 2,903,230 2,130,140
----------- -----------
Total Long Term Notes Payable $ 36,395 $ 443,289
=========== ===========
<PAGE>F-22
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Note Payable - related party
Note payable - related party at June 30, 1999 and 1998 consisted of the
following:
1999 1998
----------- -----------
Note payable due on demand to related
party, interest at 12.0% per annum in
1999 and 8% at June 30, 1998 $ 211,914 $ 178,329
Note payable due to related party,
interest at 12.0% per annum, due
April 1999 - 290,000
----------- -----------
$ 211,914 $ 468,329
=========== ===========
10. Accrued expenses and other liabilities
At June 30, 1999 and 1998, accrued expenses and other liabilities consisted
of the following:
1999 1998
----------- -----------
Payroll and related payroll taxes $ 266,798 $ 383,910
Accrued job costs 305,912 798,476
Accrued utility commitments 448,497 -
Accrued interest 57,858 83,349
Deferred income 59,423 60,890
Other accrued liabilities 5,452 161,917
Consideration related to acquisition - 200,000
----------- -----------
$ 1,143,940 $ 1,688,542
=========== ===========
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-23
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and 1998, 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.
As of June 30, 1998, the Company had issued and outstanding a total of
952,833 warrants to purchase shares of its Class A Common Stock. The
exercise prices range from $0.1875 to $4.00 per share with expiration dates
ranging from December 1998 through June 2003.
Preferred Stock
On October 23, 1997, the Company amended its Certificate of Incorporation
to eliminate the Series A and B Convertible Preferred Stock.
Each holder of a share of Series C Convertible Preferred Stock ("Series C")
is entitled to one vote per share for each share of Class A Common Stock
that Series C is convertible into and to an annual dividend at the rate of
9.75 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-24
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 as of June 30, 1999 are amounts due from affiliates of SYCOM,
LLC in the amount of $3,787,473.
As of June 30, 1998, Notes Receivable -- Shareholders includes receivables
with the previous owners of LTS, who are current employees and directors of
LTS, in the amount of $180,027. Such loans accrue interest at 10% per annum
and are due in March 2003.
Also included, as of June 30, 1998, are amounts due from affiliates of
SYCOM Enterprises, LLC in the amount of $1,155,190. The loan accrues
interest at 9.75% per annum, is due on or before June 30, 2006 and is
collateralized by certain assets of an affiliate of SYCOM Enterprises, LLC.
Additionally, see Note 4.
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.
12. Stock Option Plans:
WEM 1991 Non-Statutory Stock Option Plan
Effective February 15, 1994, Onsite adopted the WEM 1991 Non-Statutory
Stock Option Plan (the "1991 Plan"). The 1991 Plan provides for the
granting of options to non-employee directors, officers, employees and
consultants to purchase up to 160,000 shares of the Company's Class A
Common Stock. The maximum term for grants under the 1991 Plan is 10 years
with a maximum vesting period of three years. The 1991 Plan is administered
by a committee of outside directors appointed by the Board of Directors.
There was no option activity under the 1991 plan for the years ended June
30, 1999 or 1998. As of June 30, 1999, all 85,000 options outstanding under
the plan were exercisable at $5.3125 through January 15, 2003.
<PAGE>F-25
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Onsite 1993 Stock Option Plan
During fiscal year 1994, the Company adopted the Onsite 1993 Stock Option
Plan (the "1993 Plan"). The 1993 Plan, as amended, provides for the
granting of options to directors, officers, employees and consultants to
purchase up to 3,300,000 shares of Class A Common Stock and is administered
by a committee of outside directors appointed by the Board of Directors.
The maximum term for grants under the 1993 Plan is 10 years with a maximum
vesting period of three years for options granted prior to June 10, 1998.
Any grants subsequent to June 10, 1998 have a maximum vesting period of
four years.
As of June 30, 1999, the status of the 1993 Plan was as follows:
Outstanding Exercise Price Exercisable
Options Per Share Options
----------- --------------- -----------
July 1, 1996 1,807,483 $0.25 - $5.625 1,395,901
========= =========
Options granted 1,508,440 $0.25 - $5.3125
Options canceled (816,645) $0.25 - $0.50
Options exercised (42,553) $0.25 - $0.50
---------
June 30, 1997 2,456,725 $0.24 - $5.3125 1,729,593
========= =========
Options granted 880,954 $0.23 - $0.9063
Options exercised (206,004) $0.25 - $0.5000
Options cancelled (133,417) $0.25 - $0.2956
---------
June 30, 1998 2,998,258 $0.23 - $5.3125 1,596,651
========= =========
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.
<PAGE>F-26
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of option transactions under the 1993 plan during the years ended
June 30, 1999, 1998 and 1997 is as follows:
Weighted-Average
Fixed Options Shares Exercise Price
------------- --------- ----------------
July 1, 1996 1,807,483 $ 0.7573
=========
Granted 1,508,440 $ 0.2909
Exercised (42,553) $ 0.4628
Canceled (816,645) $ 0.4764
---------
June 30, 1997 2,456,725 $ 0.5789
=========
Granted 880,954 $ 0.6224
Exercised (206,004) $ 0.2752
Cancelled (133,417) $ 0.2797
---------
June 30, 1998 2,998,258 $ 0.6259
=========
Granted 394,000 $ 0.5364
Exercised (75,334) $ 0.3302
Cancelled (326,691) $ 0.5289
---------
June 30, 1999 2,990,233 $ 0.6326
=========
The weighted average contractual life for all options as of June 30, 1999,
was approximately six years, with exercise prices ranging from $0.23 to
$5.31.
Proforma Information
As stated in Note 2, the Company has not adopted the fair value accounting
prescribed by FASB 123 for employees. Had compensation cost for stock
options issued to employees been determined based on the fair value at
grant date for awards in 1999, 1998 and 1997 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 1997
------------ ------------ ------------
Net Loss $ (7,093,388) $ (2,360,441) $ (2,480,932)
============ ============ ============
Basic and Diluted Loss Per
Common Share $ (0.38) $ (0.17) $ (0.23)
============ ============ ============
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 for the year ended June
30, 1999, 116.8 percent for grants during the year ended June 30, 1998,
<PAGE>F-27
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
116.9 percent for the year ended June 30, 1997, 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,
1998, and 1997 respectively.
The weighted-average fair value of stock options granted to employees
during the years ended June 30, 1999, 1998 and 1997, was $0.38, $0.36 and
$0.19, 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-28
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Income Taxes
Income tax expense for the years ended June 30, 1999, 1998 and 1997 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
========= ========== =========
Year ended June 30, 1997 Current Deferred Total
Federal $ - $ - $ -
State 8,500 - 8,500
--------- ---------- ---------
$ 8,500 $ - $ 8,500
========= ========== =========
The actual income tax expense differs from the "expected" tax (benefit)
(computed by applying the U.S. Federal corporate income tax rate of 34
percent for each period) as follows:
1999 1998 1997
------------ ---------- ----------
Amount of expected tax (benefit) $ (2,200,400) $ (711,000) $ (812,500)
Non-deductible expenses 450,000 13,900 4,400
State taxes, net 3,600 4,900 5,600
Effect of change in state tax rate - 27,600 --
Change in valuation allowance for
deferred tax assets 1,752,300 672,100 811,000
============ ========== ==========
Total $ 5,500 $ 7,500 $ 8,500
============ ========== ==========
<PAGE>F-29
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Vacation accrual 70,100 44,400
Inventory reserve 26,200 6,000
Deferred Revenue 602,600 645,600
Book compensation on issuance of
stock options - 7,600
Allowance for doubtful accounts 14,400 6,000
Other 800 600
------------ ------------
720,900 726,200
Valuation allowance (720,900) (726,200)
------------ ------------
Net current deferred tax asset $ - $ -
============ ============
1999 1998
------------ ------------
Long-Term deferred tax assets (liabilities):
Net operating loss carryforwards $ 7,865,500 $ 6,943,200
Goodwill due to difference in
amortization 1,202,100 453,300
Depreciation 700 (137,100)
Capital loss carryforward - -
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.
<PAGE>F-30
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The benefit of the net operating losses to offset future taxable income is
subject to reduction or limitation of use as a result of certain
consolidated return filing regulations and additional limitations relating
to a 50 percent change in ownership due to various stock transactions.
14. Related Parties
During the fiscal year ended June 30, 1999, the Company paid one director
of the Company professional fees in the amount of $14,535.
As of June 30, 1999, OES has outstanding accounts receivable with Western
Resources, Inc., the parent company of a shareholder of the Company, in the
amount of $47,415 in relation to water treatment plants in Lawrence, Kansas
and Tecumseh, Kansas. OES has recognized $471,336 in revenue related to
these water treatment facilities.
Westar Capital has guaranteed any shortfalls of energy savings on the
Company's contract with one customer. Such guaranty is backed by an
insurance police purchased by the Company for a short fall of energy
savings. In addition, Westar Capital and an affiliate have indemnified a
bonding company for bid and performance bonds obtained by the Company.
(Also see Notes 9 and 11).
15. Commitments and Contingencies
Leases
The Company leases its administrative facility under a noncancellable
operating lease expiring in 2001 with a three-year renewal option. As of
August 1, 1998, the Company increased its office space that is included
under the current lease. The Company expanded its regional offices to
include San Ramon, California, where office space is rented on a three year
lease that expires March 2001. The Company also leases, on a month by month
basis, a 250 square foot storage facility in Carlsbad, 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
===========
<PAGE>F-31
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total rent expense, including month-to-month equipment rentals, was
$467,000, $202,000 and $272,641 in 1999, 1998 and 1997, respectively.
Employment Agreements
Effective April 1, 1998, the Company entered into employment agreements
with the President and Chief Operating Officer, and with the Vice President
and Responsible Managing Officer of LTS which expire on March 31, 2000.
Such agreements provide for minimum salary levels totaling $235,000 per
year excluding bonuses, as well as severance payments upon termination of
employment without cause. (See also Note 20).
Ongoing Maintenance for Water Treatment Plants
OES has two contracts with Western Resources whereby OES constructed and
maintains equipment for supplying demineralized water for boiler makeup
water at Lawrence Energy Center and Tecumseh Energy Center. Both contracts
terminate on December 31, 2001, unless renewed at the end of the term as
agreed upon by both parties. OES is responsible for producing the quality
of demineralized water as specified. If damage occurs due to the specified
quality of demineralized water not being produced, OES is liable for the
cost of the repairs to the equipment limited to a maximum of $300,000 per
incident. There have been no damage occurrences since the inception of both
contracts and management believes the likelihood of 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
<PAGE>F-32
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the year 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.
Additionally, see Note 20.
Sale or Disposal of Subsidiaries
Subsequent to its fiscal year end, 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.
<PAGE>F-33
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amounts included in the financial statements as of June 30, 1999
consisted of the following:
ASSETS:
Accounts receivable $ 1,192,880
Cost and estimated earnings in excess of
billings on uncompleted contracts 87,924
Property and equipment, net 54,335
Other assets 467,066
-----------
Total assets 1,802,205
-----------
LIABILITIES:
Accounts payable $ 1,192,481
Billings in excess of costs and estimated
earnings on uncompleted contracts 318,696
Accrued expenses and other liabilities 526,889
-----------
Total liabilities 2,038,066
-----------
Liabilities in excess of assets held for sale $ 235,861
===========
Total revenues generated by these subsidiaries were $7,704,000 and $233,000
for the years ended June 30, 1999 and 1998, respectively. Income (loss)
before taxes for these subsidiaries was ($1,392,000) and $19,000 for the
years ended June 30, 1999 and 1998, respectively.
16. Defined Contribution Plan
The Company sponsors a 401(k) defined contribution plan, which covers
substantially all employees. Company matching contributions are determined
annually at the discretion of management and vest at the rate of 20 percent
per year of employment. For the current year, the company match was 75
percent of the employee contribution up to 6 percent of their annual
salary. During the years ended June 30, 1999, 1998 and 1997, the Company's
matching contribution expense was $83,046, $53,480 and $43,088,
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,
49,912 and 48,562 for the fiscal years 1999, 1998 and 1997, respectively.
17. Significant Customers
Revenues from the three largest customers accounted for 34 percent (16
percent, 11 percent and 9 percent each) of total revenues in fiscal 1999,
and revenues from three other customers accounted for 31percent (11
percent, 10 percent, 10 percent each) of total revenues in fiscal 1998.
Revenues from three other customers accounted for 32 percent (10%, 9%, 13%
each) of total revenues in fiscal year 1997.
<PAGE>F-34
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. At June 30,
1998, accounts receivable totaled $3,468,191 and the Company had provided
an allowance for doubtful accounts of $15,030.
For the years ended June 30, 1999, 1998 and 1997, bad debts totaled
$123,000, $30,000 and $37,000 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 digits to define the applicable year. Any of
the Company's or its suppliers' and customers' computer programs that have
date sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Company believes that
substantially all software applications currently being used for the
financial and operational systems have adequately addressed any year 2000
issues. All hardware systems have been assessed and plans have been
developed to address systems modification requirements. The costs incurred
to date related to its Year 2000 activities have not been material to the
Company, and based upon current estimates, the Company does not believe
that the total cost of its Year 2000 readiness programs will have a
material adverse impact on the Company's results of operations or financial
position. Any risks the Company faces are expected to be external to
ongoing operations. The Company has numerous alternative vendors for
critical supplies, materials and components. Current vendors and
subcontractors who have not adequately prepared for the year 2000 can be
substituted in favor of those that have prepared.
20. Subsequent Events (unaudited)
In November 1999, the sale of LTS was completed and resulted in an actual
loss of approximately $651,000. The Company had established a reserve for
loss on this sale of $1,010,000 as of June 30, 1999.
The company shut down the operation of REEP during its third fiscal quarter
and it continues to examine options with regards to ERSI.
<PAGE>F-35
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2000, the Company sold the assets of OMS at a loss of
approximately $37,000. Concurrent with the closing of the asset sale, OES
was reduced to one employee and its operations became limited to the
operation of two industrial water plants in Kansas.
Since the close of the Sycom transaction in June 1998, Onsite has
experienced significant losses and as a result has been unable to provide
sufficient loans to SYCOM Corporation to enable SYCOM Corporation and its
affiliate, SYCOM Enterprises, L.P. ("SYCOM LP"), to make the requisite
payments on a previous loan from Public Service Conservation Resources
Corporation ("PSCRC") to SYCOM LP. PSCRC has given a notice to SYCOM
Corporation and SYCOM LP alleging a default by SYCOM LP under its
agreements with PSCRC. Onsite's notice to SYCOM Corporation of the
termination of the Sale and Noncompetition Agreement, given in accordance
with Onsite's rights under that Agreement, is a result of the PSCRC default
notice and Onsite's continuing losses. Onsite, however, will retain the
project assets purchased from SYCOM LLC in June 1998 as well as projects
developed since. In connection with the termination, S. Lynn Sutcliffe
resigned as the President of Onsite.
The Company will maintain its subsidiary, SO Corporation, for the purpose
of completing several long-term construction projects as well as for the
management of other revenue generating activities and to meet its ongoing
commitments for M&V located primarily on the East Coast. Efforts by SO
Corporation to develop any new business in this region will cease as of
June 30, 2000.
In the fiscal year ended June 30, 1999, SO Corporation accounted for
approximately $20 million in revenues and approximately $3.7 million in
gross margin. In addition, SO Corporation had approximately $5.4 million in
S,G&A expenses. It is anticipated that the revenue and margin contribution
will be substantially less in the fiscal year ended June 30, 2000 and that
all revenue and expense amounts will continue to decline in future years.
As a result of the disposition of subsidiaries and the decision to
terminate its arrangement with Sycom, the Company has been reduced to
essentially how it existed at the end of the fiscal year 1997. The Company
has become a smaller ESCO, without as broad a national exposure as it had
over the course of the last two fiscal years. The Company, as it exists
today, will generate significantly less in revenues and expenses than it
had generated in fiscal 1999 and what is expected in the fiscal year ending
June 30, 2000.
Pursuant to the Certificate of Designations for the Series C Convertible
Preferred Stock (the "Series C Stock"), each holder of Series C Stock is
entitled, when and as declared by the Board of Directors of the Company and
out of any funds legally available therefore to an annual dividend at the
rate of 9.75 percent of the liquidation preference ($5 per share), which
dividend is payable quarterly. All of the issued and outstanding shares of
Series C Stock are held by Westar Capital, Inc. ("Westar"). Under the
Certificate of Designations if, at any time, four or more quarterly
dividends, whether or not consecutive, on the Series C Stock are in
default, in whole, or in part, the holders of the Series C Stock are
entitled to elect the smallest number of directors as would constitute a
majority of the Board of Directors of the Company and the holders of the
Company's Class A Common Stock as a class are entitled to elect the
remaining directors. Additionally, under the October 1997 Stock
Subscription Agreement entered into by Westar and the Company, Westar
agreed for a period of five years to limit its equity ownership of the
Company to 45 percent of the outstanding shares of the Class A Common Stock
on a fully diluted basis and to not take certain other actions related to
controlling or attempting to control the Company unless it receives the
Company's permission via the majority vote of the directors of the
Company's Board of Directors who are not directors designated by Westar or
are affiliates of Westar. However, if, at any time, Westar exercises its
rights to elect the majority of the Board of Directors because four or more
quarterly dividends, whether or not consecutive, on the Series C Stock are
in default, in whole or in part, all directors are entitled to vote on such
ownership issue and not just the non-Westar designated directors.
Dividends were declared and paid as required for each of the quarters
through April 15, 1999. While the Board has authorized the payment of
dividends to the extent such declaration and payment is allowed under
applicable Delaware corporate law, under Delaware law, dividends on the
Series C Stock could not be declared and paid as required on July 15, 1999,
October 15, 1999, January 15, 2000 or April 15, 2000. In March 2000, the
Company reached an agreement with Westar whereby the dividends due on
October 15, 1999, and January 15, 2000, were waived by Westar in exchange
for the Company's release of Westar and its parent, Western Resources,
Inc., from certain non-compete agreements. The Company remains delinquent
on the July 15, 1999 (15,823 shares of Series C Stock) and the April 15,
2000, dividend ($81,040 cash dividend) requirements. The amounts waived
were 16,208 shares of Series C stock related to the October 15, 1999,
dividend and $83,015 in cash dividends related to the January 15, 2000,
dividend.
<PAGE>F-36
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation update. 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 Company settled this matter in
April 2000.
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 sought reimbursement for expenses allegedly incurred by ECCI in the
preparation of an audit and lost profits. OES settled this matter in
December 1999, and execution of the final settlement agreement is pending.
The settlements of the two matters discussed above were immaterial.
In November 1999, Independent Energy Services, Inc. ("IES"), a
subcontractor to the Company, filed a suit (United States District Court,
District of New Jersey, Case No. 99-5159 (AET)) against the Company and
three of its directors and officers alleging breach of contract and related
causes of action in connection with one of the Company's projects. The suit
seeks payment of monies ($434,234) allegedly due under a subcontract, as
well as consequential damages, interest and costs of suit. In January 2000,
IES filed a second action (Superior Court of New Jersey, Morris County,
Docket No. L-214-00) against the Company and two of its directors and
officers alleging similar breach of contract and related causes of action
in connection with another of the Company's projects. This suit seeks
payment of monies ($710,562) allegedly due under a subcontract, as well as
consequential damages, interest and costs of suit. The Company has filed
its answers in both actions, which included counterclaims alleging, among
other things, that IES breached the applicable subcontracts by failing to
comply with their respective terms.
Additionally, in January 2000, EUA Cogenex Corporation ("Cogenex") filed a
suit (United States District Court, District of Massachusetts, Case No.
00-10128) alleging, among other things, breach of contract in connection
with a Forbearance Agreement entered into by the Company and Cogenex. The
Company negotiated a settlement of this matter that involves the execution
and filing of an amended standstill order and a stipulated judgment if the
Company fails to make certain agreed-upon payments to Cogenex.
In March 2000, Powerweb Technologies, Inc., a subcontractor to ERSI, filed
an action (Superior Court of New Jersey, Law Division, Essex County, Docket
No. ESX-L-2071-00) against ERSI and the Company alleging breach of contract
and related causes of action in connection with one of the Company's
projects. The suit seeks payment of monies ($121,800) allegedly due under
subcontracts, as well as interest, costs of suit and punitive damages.
Because the subcontracts contain arbitration provisions requiring that any
disputes between the parties be settled by binding arbitration, the Company
has filed a motion to dismiss the action. The Company and ERSI are making
efforts to settle this matter; however, no settlement agreement has been
reached.
In April 2000, the Company was served with two separate actions by General
Accident Insurance Company of America (Superior Court of New Jersey, Law
Division, Atlantic County, Docket No. ATL-L-93-00 and Superior Court of New
Jersey, Law Division, Morris County, Docket No. L-214-00) against the
Company and other parties alleging breach of contract and related actions
in connection with one of the Company's projects. The actions seek
indemnification (in the amount of $710,562) allegedly owed under an
indemnity agreement executed by the Company, plus interest, costs and other
damages. The Company has filed its answers in both actions. Additionally,
<PAGE>F-37
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in May 2000, D. Falasca Plumbing, Heating, Cooling, Inc., a subcontractor
to the Company on this project, filed certain cross-claims against the
Company in the above actions alleging breach of contract and related causes
of actions in connection with this project. The cross-claims seek payment
of monies ($757,337) allegedly owed under certain agreements, including a
subcontract, plus interest, costs of suit and other alleged damages. The
Company was served with copies of these claims in late May and early June
2000, and is in the process of preparing its responsive pleadings.
<PAGE>F-38
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. Restated Quarterly Financial Statements (unaudited)
The Company was required to restate previously issued financial statements
(additionally, see note 3) for a change in the timing of the recording of
certain revenue and expense items. The impact of these corrections on
company's financial results for the quarters in the fiscal years ending June
30, 1998 and 1999 is summarized below:
<TABLE>
<CAPTION>
Three month periods ended,
September 30, September 30, December 31, December 31,
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 2,184,918 $ 9,312,759 $ 3,250,691 $ 9,314,702
Utility Revenue 97,509 141,668 97,509 141,668
------------ ------------ ------------ ------------
Total Revenues 2,282,427 9,454,427 3,348,200 9,456,370
Cost of sales 1,575,806 7,902,823 2,544,083 7,767,131
------------ ------------ ------------ ------------
Gross margin 706,621 1,551,604 804,117 1,689,239
Selling, general, and administrative
expenses 596,047 2,982,080 1,096,902 3,021,839
------------ ------------ ------------ ------------
Operating income (loss) 110,574 (1,430,476) (292,785) (1,332,600)
Other income (expense) (30,201) (72,142) (22,004) (66,510)
------------ ------------ ------------ ------------
Income (loss) before provision for
income taxes 80,373 (1,502,618) (314,789) (1,399,110)
Provision for income taxes 6,738 - 5,499 -
------------ ------------ ------------ ------------
Net income (loss) $ 73,635 $ (1,502,618) $ (320,288) $ (1,399,110)
============ ============ ============ ============
Net income (loss) allocated to
common stockholders $ 73,635 $ (1,528,193) $ (320,288) $ (1,449,478)
============ ============ ============ ============
Basic income (loss) per common share $ 0.01 $ (0.08) $ (0.02) $ (0.08)
============ ============ ============ ============
Diluted income (loss) per common share $ 0.01 $ (0.08) $ (0.02) $ (0.08)
============ ============ ============ ============
Weighted average shares outstanding -
basic 10,944,172 18,295,536 13,519,572 18,488,514
============ ============ ============ ============
Weighted average shares outstanding -
diluted 10,944,172 18,295,536 13,519,572 18,488,514
============ ============ ============ ============
</TABLE>
<PAGE>F-39
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three month periods ended,
March 31 March 31
1998 1999
-------------- --------------
Revenues $ 3,399,765 $ 12,626,593
Utility Revenue 97,509 141,668
------------ ------------
Total Revenue 3,497,274 12,768,261
------------ ------------
Cost of sales 2,666,717 9,309,107
------------ ------------
Gross margin 830,557 3,459,154
Selling, general, and administrative
expenses 1,185,266 2,950,054
------------ ------------
Operating income (loss) (354,709) 509,100
Other income (expense) (69,727) (26,425)
------------ ------------
Income (loss) before provision for
income taxes (424,436) 482,675
Provision for income taxes - -
------------ ------------
Net income (loss) $ (424,436) $ 482,675
============ ============
Net income (loss) allocated to common
stockholders $ (448,811) $ 431,079
============ ============
Basic income (loss) per common share $ (0.03) $ 0.02
============ ============
Diluted income (loss) per common share $ (0.03) $ 0.02
============ ============
Weighted average shares outstanding 14,714,361 18,537,128
============ ============
Weighted average shares outstanding 14,714,361 22,567,490
============ ============
