UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-KSB
(Mark One)
XX ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended June 30, 2000.
-- 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 CORPORTION
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(Name of small business issuer in its charter)
Delaware 33-0576371
(State or other jurisdiction of incorporation or organization) (IRS
Employer Identification No.)
701 Palomar Airport Road, Suite 200
Carlsbad, California 92009
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(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
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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 XXX 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.............$18,207,612
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.........$2,158,000 as of October 5, 2000.
The number of shares of Common Stock outstanding as of October 5, 2000 is
18,620,450.
DOCUMENTS INCORPORATED BY REFERENCE
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<S> <C>
Documents Incorporated by Reference 10-K Part and Item Where Incorporated
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Definitive Proxy Statement for Annual Meeting of Part III: Items 9, 10, 11 and 12
Stockholders of the Registrant to be held December 5, 2000
</TABLE>
<PAGE>2
PART 1
Item 1. Description of Business
Introduction. Onsite Energy Corporation, a Delaware 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 deregulated 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
and public policy analysis. The Company has been accredited by the National
Association of Energy Service Companies ("NAESCO"). It is the Company's mission
to help customers save money through independent energy solutions.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995. With the exception of historical facts
stated herein, the matters discussed in this annual report are "forward looking"
statements that involve risks and uncertainties that could cause actual results
to differ materially from projected results. Such "forward looking" statements
include, but are not necessarily limited to, statements regarding anticipated
levels of future revenue and earnings from operations of the Company, projected
costs and expenses related to the Company's energy services agreements, and the
availability of future debt and equity capital on commercially reasonable terms.
Factors that could cause actual results to differ materially include, in
addition to the other factors identified in this report, the cyclical and
volatile price of energy, the inability to continue to contract with sufficient
customers to replace contracts as they become completed, unanticipated delays in
the approval of proposed energy efficiency measures by the Company's customers,
delays in the receipt of, or failure to receive necessary governmental or
utility permits or approvals, or the renewals thereof, risks and uncertainties
relating to general economic and political conditions, both domestically and
internationally, changes in the law and regulations governing the Company's
activities as an energy services company and the activities of the nation's
regulators and public utilities seeking energy efficiency as a cost effective
alternative to constructing new power generation facilities, results of project
specific and company working capital and financing efforts and market
conditions, and other risk factors detailed in this annual report. Readers of
this report are cautioned not to put undue reliance on "forward looking"
statements which are, by their nature, uncertain as reliable indicators of
future performance. The Company disclaims any intent or obligation to publicly
update these "forward looking" statements, whether as a result of new
information, future events or otherwise.
Subsidiaries/Partnerships. Substantially all of the Company's revenues are
generated through energy services and consulting services. The Company's
subsidiaries are as follows:
SYCOM ONSITE Corporation. Effective June 30, 1998, the Company, through
its 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, was, like the Company, accredited by NAESCO. SO Corporation
acquired the project assets and certain 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") convertible 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
<PAGE>3
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 were added to the Company's Board of Directors.
The acquisition added offices in New Jersey and Washington D.C. Effective June
30, 2000, the Company terminated the Sale and Noncompetition Agreement with
SYCOM Corporation. SO Corporation continues to operate as a subsidiary.
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 a Director and as the President of Onsite.
Lighting Technology Services, Inc. On June 13, 1998, the Company
completed the acquisition of Lighting Technology Services, Inc. ("LTS"), a Costa
Mesa, California based lighting services company. In exchange for all of the
outstanding shares of LTS, the Company initially issued a total of 690,000
shares of the Company's class A Common Stock and paid $500,000 to the former
stockholders of LTS. As a wholly-owned subsidiary of the Company, LTS pursued
independent lighting services opportunities in commercial, industrial and
educational markets while also providing lighting subcontractor services to the
Company and other ESCOs. Effective September 30, 1999, the Company sold 95
percent of the stock of LTS back to one of the LTS founders. 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 industrial
water services in the state of Kansas. Up until the sale of Onsite/Mid-States,
Inc. discussed below, OES also provided utility services in the states of
Kansas, Missouri and Oklahoma.
Onsite/Mid-States, Inc. In February 1998, OES, via its wholly-owned
subsidiary Onsite/Mid-States, Inc. ("OMS"), acquired the operating assets of
<PAGE>4
Mid-States Armature Works, Inc. ("Mid-States Armature"), for $290,000.
Mid-States Armature had 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 was located in
Salina, Kansas. The Company sold the assets of OMS to two former employees of
OES in February 2000. 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 certain specific liabilities. REEP provided
residential energy services while ERSI is a commercial lighting contractor.
REEP, Inc. is an affiliate of SYCOM Corporation and had been in business for 16
years. Effective June 30, 2000, in connection with the termination of the Sale
and Noncompetition Agreement with Sycom Corporation discussed above, the Company
discontinued the operations of REEP and 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. This corporation is not active.
Western Energy Management, Inc. The Company was formed via a merger in
February 1994, in which Western Energy Management, Inc. ("WEM") became a
wholly-owned subsidiary. WEM was engaged in the business of providing
comprehensive energy management services designed to reduce the utility costs of
its customers. Its current sole function is to monitor its remaining commitments
under contracts with customers that were entered into prior to February 1994.
Unless the context indicates otherwise, reference to the Company shall
include all its wholly-owned subsidiaries.
Risk Factors. In addition to other information presented in this annual report,
the following risk factors should be considered carefully in evaluating the
Company and its business. This annual report contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in this section and elsewhere in this annual report.
As of June 30, 2000, the Company's auditors issued a qualified opinion subject
to the Company's ability to continue as a going concern. The going concern
issues are the result of continued operating losses, negative working capital
and a negative shareholders' equity. See the Liquidity and Capital Resources
discussion below for details of the Company's plan for dealing with these
issues.
Loss from Operations, Possible Need for Additional Working Capital and
Potential Dilution to Existing Shareholders. The Company has suffered
significant losses from operations for the past two fiscal years. For the years
ended June 30, 2000 and 1999, the Company had net losses of $6,637,046 and
$6,477,458, respectively, and had a negative working capital of $7,703,629 and
an accumulated deficit of $34,978,075 as of June 30, 2000. Management believes
that the Company will be able to generate additional revenues and improve
operating efficiencies through a substantial reduction in overhead, the addition
of new projects as well as by other means to achieve profitable operations.
During the year ended June 30, 2000, the Company took steps to mitigate the
losses and enhance its future viability. In addition, during the fiscal year end
2000, the Company 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
<PAGE>5
of a portion of their salary in an effort to reduce cash outflows related to
compensation. During the current fiscal year, the Company sold its wholly-owned
subsidiaries, LTS and OMS in an effort to raise cash and reduce operating
losses. In a further step to reduce operating losses, the Company terminated its
Sale and Noncompetition agreement with Sycom Corporation and discontinued the
operations of REEP Onsite, Inc and ERSI Onsite, Inc. Management believes that
all of the above actions will allow the Company to continue as a going concern,
with reduced revenues and reduced expenses. Future cash requirements depend on
the Company's profitability, it's 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.
Divestiture of recently acquired subsidiaries. As discussed above, the
Company has divested itself of 95 percent of its interest in LTS through a stock
sale, sold all of the assets of OMS, substantially reduced the operations in New
Jersey through a termination of the Sale and Noncompetition Agreement with Sycom
Corporation, discontinued the operations of REEP and ERSI and has reduced the
operation of OES to exclusively providing industrial water services in the state
of Kansas. The thrust of these moves is part of an overall plan to return the
Company to its core business, a focused energy service company with primary
emphasis in California markets.
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 62.7 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.
Dependence on Limited Key and New Customers. For the fiscal years ended
June 30, 2000, and 1999, three customers in the aggregate accounted for
approximately 33 percent and 34 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, Frank J. Mazanec and
Elizabeth T. Lowe 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.
<PAGE>6
Penny Stock Regulations. The Securities and Exchange Commission (the
"SEC") has adopted regulations that generally define "penny stock" to be any
equity security that has a market price (as defined) less than $5.00 per share
subject to certain exceptions. The Company's securities may be covered by the
penny stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
accredited investors (generally, institutions with assets in excess of
$5,000,000 or individuals with net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouse). For
transactions covered by this rule, the broker-dealers must make a special
suitability determination for the purchase and receive the purchaser's written
agreement of the transaction prior to the sale. Consequently, the rule may
affect the ability of broker-dealers to sell the Company's securities and also
affect the ability of purchasers to sell their shares in the secondary market.
Competition. The energy efficiency business is highly competitive. As
discussed in Competition to the Company below, the Company will compete with
other firms, including utility affiliates, for a limited number of large
contracts. Competitors generally have substantially greater financial resources
than the Company and may expend considerably larger sums than the Company on
marketing. The successful operation of the Company will depend on its ability to
meet future competition.
Governmental Regulation. As discussed in Governmental
Regulations/Environmental Laws below, the Company will be subject to rates and
regulations of the Environmental Protection Agency, the Occupational Safety and
Health Administration and other state, county, municipal and federal agencies.
While the business of the Company will not entail any unusual or significant
environmental risks, the projects of the Company may involve "indirect"
environmental risks from its subcontractors handling or removal of hazardous
waste materials as defined under federal and state law. The Company does not
foresee having to incur material capital expenditures to comply with
environmental laws and regulations.
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>7
Major Events, Contracts and Customers. In addition to the acquisitions and
divestitures discussed above, the following is a list of major events and
contracts that occurred in the fiscal year ended June 30, 2000, and how they are
significant to the last two fiscal years' revenues.
$1,000,000 Private Placement. 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 of Class A Common Stock at $0.75 per share and warrants to
purchase 1,250,000 shares of Class A Common Stock at $0.50 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 was 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 $47,500 on the date of issuance and resulted in a
charge against earnings in the fiscal year ended June 30, 2000.
City of San Diego. The Company entered into a master contract with the
City of San Diego, CA for the implementation of energy efficiency projects. The
first of what is anticipated to be many projects identified under the agreement
involved lighting, controls and mechanical projects intended to reduce
consumption. This first project will result in revenues to the Company of
approximately $1.7 million.
Revenues to the Company were approximately $0.1 million for the fiscal year
ended June 30, 2000. There were no revenues to the Company in the fiscal year
ended June 30, 1999.
Sanwa Bank. The Company entered into a $1.2 million dollar contract to
replace Sanwa Bank's two 275-ton centrifugal chillers, install a new 325-ton
cooling tower as well as install adjustable speed drives to supply air, exhaust
fans and hot water pumps, provide and install a direct digital control system
and a high efficiency lighting system retrofit including new lamps and ballasts.
Revenues to the Company were approximately $1.0 million for the fiscal year
ended June 30, 2000. There were no revenues to the Company in the fiscal year
ended June 30, 1999.
Japanese ESCO Consulting Contract. The 2nd largest utility in Japan
engaged the Company to provide consulting and training services in a $950,000
contract. The services will focus on providing instruction and support to enable
a subsidiary to a utility in Japan to establish an ESCO there.
Revenues to the Company were approximately $.7 million for the fiscal year ended
June 30, 2000. There were no revenues to the Company in the fiscal year ended
June 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 $20,000 for the fiscal year ended
June 30, 2000. Revenues to the Company were approximately $6.9 million for the
fiscal year ended June 30, 1999
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.
<PAGE>8
Construction of both the Mall and the distribution system were completed in the
current fiscal year. The Company also will arrange purchases of electricity for
the Mall under New Jersey's new deregulation law.
Revenues to the Company were approximately $43,000 for the fiscal year
ended June 30, 2000. Revenues to the Company were approximately $3.3 million for
the fiscal year ended June 30, 1999
Middletown Board of Education. The Company has signed contracts under a
master energy services agreement with the Middletown Board of Education ("MBOE")
in Middletown, New Jersey, with total project costs of 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 $1.5 million in the fiscal
year ended June 30, 2000. Revenues to the Company were approximately $500,000 in
the fiscal year ended June 30, 1999.
National Railroad Passenger Corporation ("Amtrak"). The Company has
implemented several projects 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. These projects will generate approximately $1.3 million in
revenues for the Company.
Revenues to the Company were approximately $130,000 in the fiscal year
ended June 30, 2000. Revenues to the Company were approximately $927,000 in the
fiscal year ended June 30, 1999.
Newark Schools. In December 1998, the Company entered into an agreement
to perform work on state-operated educational facilities in the City of Newark,
New Jersey to total $7.5 million in revenues for the Company. This project
required the Company, as a subcontractor to Johnson Controls, Inc., to procure
and install certain lighting equipment designed to improve the efficiency with
which the Newark Schools use various forms of energy (electricity and gas) and
to reduce expenditures for that energy. The Company also arranged for, and
sponsored participation of the facilities in the Standard Offer Program offered
by Public Service Electric and Gas Company ("PSE&G"), through which PSE&G
purchases energy savings generated by the project.
Revenues to the Company were approximately $3.6 million for the fiscal
year ended June 30, 2000. Revenues to the Company were approximately $3.9
million for the fiscal year ended June 30, 1999.
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 are
$1.7 million.
Revenues to the Company were approximately $.3 million for the fiscal
year ended June 30, 2000. Revenues to the Company were approximately $1.4
million for the fiscal year ended June 30, 1999.
<PAGE>9
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. 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 approximately $60,000 in the fiscal year
ended June 30, 2000. Revenues to the Company were approximately $900,000 in the
fiscal year ended June 30, 1999.
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 were approximately $6.0 million. Construction was
substantially completed by the fiscal year end 1999. OES initially developed the
project, which included 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 to the Company were approximately $150,000 in the fiscal year
ended June 30, 2000. Revenues to the Company were $5.9 million in the fiscal
year ended June 30, 1999.
R.E. Thomason General Hospital. In 1996, the Company entered into an
agreement with R.E. Thomason General Hospital ("Thomason") for the operation and
maintenance ("O&M") of its central utility plant. The original agreement ran for
a 27-month period, commencing February 1996, with additional extensions at the
option of Thomason. In April 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. This contract expires September 30,
2000 and the Company has been notified by Thomason that the contract will not be
renewed.
Revenues for fiscal year ended June 30, 2000 were approximately
$873,000. 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>10
Consulting revenues to the Company were approximately $1.0 million and
$1.5 million for the fiscal years ended June 30, 2000, and 1999, respectively.
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 its customers
with comprehensive energy services. Such services include:
o An initial energy audit
o Evaluation of purchase options for electricity and fuel, including tariff
analysis
o Detailed economic and feasibility analysis
o Engineering and construction services
o Management of project implementation
o Verification of savings
o Monitoring of performance and maintenance during the service term
o Guaranteed savings and/or shared savings programs
o Performance contracting with utilities and customers
o Financing, including arranging for 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.
<PAGE>11
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
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) and Pacific Gas and Electric
Company ("PG&E") (August 1996); 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.
<PAGE>12
The Changing Environment for Energy Services. The electric utility
industry currently is going through fundamental changes that largely are a
result of the more competitive environment for electric power generation
developed over the last decade. The restructuring of the electric utility
industry will have significant impacts on the method by which electric power is
delivered to customers in the future, and also will affect the way energy
services are valued and provided. In the restructured electric industry, the
competition of the new marketers in the industry is anticipated to facilitate a
rapid evolution of energy value added services in the competitive marketplace.
New energy supply marketers are moving to diversify their electricity supply
services with other services, which will include energy efficiency services.
Deregulation of the electric utility industry is expanding the scope of
services offered by ESCOs in the competitive marketplace. To purchase electric
power in the deregulated market, large consumers will need to collect and
analyze their past, present and future electrical consumption data and profiles
in order to identify their demand, and procure cost-effective and reliable
electric power. The Company currently is performing and marketing these new
energy services for large electricity consumers in preparation for the
competitive market.
The Company has expanded its services and organized them to serve the
deregulating marketplace. In addition to the traditional ESCO services, the
Company is providing the following services directly to end-use customers or
through utility and new energy service companies that are concentrating on
marketing the energy commodity and using the Company as an alliance partner to
provide the other value-added services:
Services to Prepare Customers for Deregulation
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 offerred 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
<PAGE>13
engine or gas turbine generally fueled by natural gas, which drives an
electrical generator. A heat recovery system reclaims the heat produced by the
engine generator set, yielding steam or hot water to be used in the host
facility for domestic, process or space heating/cooling needs. Electrical
control relays and switch gear protect the equipment from overload, ensure
proper voltage and frequency, and interconnect with the local utility's power
grid. Since completing its first CHP system in 1984, the Company has been
associated with over 35 CHP projects. Electric industry restructuring in
California, New Jersey and Illinois as well as other parts of the U.S. is
creating a renewed interest in on-site (distributed) generation by customers and
utilities. Furthermore, CHP is getting increased attention by state and federal
environmental agencies as a generation source that can provide net environmental
quality benefits to help mitigate global climate change.
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.
Competition to the Company. In general, the Company's competitors are
other ESCOs, particularly the other 20 ESCOs accredited by NAESCO, that provide
similar comprehensive services to customers. Some of these competitors are large
companies, affiliated with utilities or equipment manufacturers, with more
assets and a larger manpower and resource base than the Company. Utility
companies and their affiliates can function as both competitors and partners for
the Company as discussed in Non-exclusive Alliances. Many utilities now are
entering the energy efficiency services market through wholly-owned subsidiaries
of holding companies in direct competition with ESCOs, including the Company.
However, the Company sometimes teams with utility service subsidiaries whereby
the utility subsidiary functions as a source of financing for energy efficiency
services projects developed and implemented by the Company.
An important competitive advantage for any ESCO is its ability to
provide financing and performance guarantees to the customer. This is the area
in which many small, independent ESCOs may be at a disadvantage when compared
with the larger companies and utilities. However, the Company has successfully
used financing sources such as Academic Capital, L.L.C. ("Academic"), Dana
Commercial Credit, Koch Financial ("Koch") and ABN AMRO Chicago Corporation (fka
ChiCorp Financial Services, Inc.) ("ABN"), among others, to provide financing
for qualified energy projects, thus maintaining this important advantage for the
Company. Over the last four years, Academic, ABN and Koch have provided
financing on most of the Company's projects that have been financed. More
recently, though, the Company has obtained financing from other sources and has
identified other potential sources of financing, thereby reducing its overall
dependence on a limited number of sources of project financing. In addition,
many of the Company's customers have the ability to obtain their own financing
or to pay for the cost of the project themselves.
The Company's competitive advantage historically has been its
independence from affiliation with commodity suppliers (utilities) and equipment
vendors, and its ability to offer a broader range of services and equipment than
<PAGE>14
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 does not 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 President of the Company is a past President of NAESCO.
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.
Open Book Pricing: The Company also provides many of its customers with
the option of open book pricing and sets forth the various cost components of a
project.
Accreditation: As discussed in National Accreditation above, the
Company is accredited by NAESCO. 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 requires its customers or subcontractors to
contract with certified hazardous waste removal companies. The Company obtains
<PAGE>15
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 October 5, 2000 the Company employed approximately 40 persons
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 to month basis. The Company has a
regional offices in San Ramon, California (lease of 2,000 square feet of office
space on a three year lease expiring March 2001) and Washington, D.C. (where it
shares space that is leased by Sycom Corporation).
The Company's subsidiaries are located in Somerset, New Jersey (SO
Corporation) and Topeka, Kansas (OES). Additionally, under a former agreement
with SYCOM Corporation, the Company was required to reimburse SYCOM Corporation
for the applicable continuing operating expenses (including rent) for the
offices and a small warehouse in Somerset, New Jersey. This agreement was
terminated effective June 30, 2000. 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 June 2000, the Company was served with an amended
complaint by D. Falasca Plumbing, Heating Cooling, Inc. ("Falasca") in an action
previously disclosed by the Company (Superior Court of New Jersey, Atlantic
County, Docket No. ATL-L-93-00). In July 2000, the Company was served with a
third party complaint by General Accident in response to the Falasca amended
complaint. Both actions are related to one of the Company's projects. The
General Accident action pleads similar causes of actions (breach of contract and
related actions), and seeks indemnification and damages substantially similar to
those sought in the prior action filed by General Accident. The Falasca action
seeks indemnification, and alleges breach of contract and seeks payment of
monies ($757,337) allegedly owed under a subcontract agreement, plus interest,
costs of suit, attorneys' fees and other costs. The Falasca action also pleads
similar causes of actions (breach of contract and related actions) and seeks
damages substantially similar to those sought in the prior cross-claims filed by
Falasca. Both prior actions were previously disclosed by the Company in its Form
10-QSB for the quarter ended March 31, 2000. The Company has filed its
responsive pleadings in both actions and continues to evaluate this matter.
In early August 2000, the Company was served with a complaint by Planergy, Inc.
("Planergy") (Superior Court of New Jersey, Law Division, Somerset County,
Docket No. SOM-L-1069-00) against the Company and other parties, including two
of the Company's subsidiaries, seeking payment in the amount of $94,428 (plus
interest) for equipment and services allegedly supplied by Planergy. The Company
is in the process of preparing its responsive pleadings in this matter.
In August 2000, the Company received a copy of a complaint (United States
District Court, District of New Jersey, Camden Vicinage, Civil Action No.
00cv942 (SMO)) filed by Independent Energy Services, Inc. ("IES"), a
subcontractor of the Company, against the Company and other parties, including
General Accident and two of the Company's current or former officers and
directors, alleging breach of contract and related causes of action in
connection with one of the Company's projects. The action seeks payment of
monies ($710,562.78) allegedly owed under a subcontract agreement, plus
interest, costs of suit and other alleged damages. This action is related to,
and seeks damages substantially similar to those sought in, another action filed
by IES (for breach of contract and related causes of action) and an action filed
by General Accident (for indemnification) (Superior Court of New Jersey, Morris
County, Docket No. L-214-00). Both prior actions by IES and General Accident
were previously disclosed by the Company in its Form 10-QSB for the quarter
ended December 31, 1999, and Form 10-QSB for the quarter ended March 31, 2000,
respectively. While the Company has received a copy of the filed complaint, the
<PAGE>16
Company has not been properly served in this action but nevertheless is in the
process of evaluating this claim. The Company continues to work with the parties
to settle this matter.
In August 2000, Falasca filed a complaint (Superior Court of New Jersey, Hudson
County, Law Division, Docket No. L-4713-00) against the Company and other
parties, including three of the Company's current or former directors and
officers, alleging breach of contract and related causes of actions in
connection with one of the Company's projects. The action seeks payment of
monies ($658,000) allegedly owed under a subcontract agreement, plus interest,
costs of suit and other alleged damages. The Company was served with the
complaint in late August and is in the process of preparing its responsive
pleadings.
In August 2000, the Company received a copy of a complaint filed by Johnson
Controls, Inc. (United States District Court, District of New Jersey, Civil
Action No. 00-2533 (HAA)) against the Company and other parties, including one
of the Company's subsidiaries, alleging breach of contract and related causes of
action in connection with one of the Company's projects. The action seeks
payment of monies ($490,707) allegedly owed under a subcontract agreement, plus
interest, attorneys' fees, costs of suit and other alleged damages. While the
Company has received a copy of the filed complaint, the Company has not been
properly served in this action but nevertheless is in the process of evaluating
this claim, including any applicable counter-claims. The Company also continues
to work with the parties to settle this matter.
As previously disclosed by the Company, in March 2000, Powerweb Technologies,
Inc. ("Powerweb"), a subcontractor to ERSI-Onsite, Inc. (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 sought 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 action was dismissed. In September 2000,
Powerweb filed a demand for arbitration. The Company and ERSI continue to make
efforts to settle this matter; however, no settlement agreement has been
reached.
The Company has recognized expense associated with the amounts claimed under the
various legal proceedings in the Company's prior financial statements, although
the Company will continue to incur legal fees, expenses and costs related to
these proceedings until the various matters are resolved.
Item 4. Submission of Matters to Vote of Security Holders
No matters have been submitted during the fiscal year ended June 30,
2000 to a vote of securities holders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Since August 2, 1995, the Company's Class A Common Stock has been
quoted on the Over-the-Counter (OTC) Electronic Bulletin Board under the symbol
"ONSE." The following table sets forth the high and low prices per share of the
Company's Class A Common Stock for the prior two fiscal years by quarters
Quarter Ended High Low
----------------------- --------- --------
September 30, 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
September 30, 1999 $0.4500 $0.2600
December 31, 1999 $0.3300 $0.1400
March 31, 2000 $0.5800 $0.1550
June 30, 2000 $0.2850 $0.0900
<PAGE>17
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 October 5, 2000, there were approximately 230 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 in the year ended June
30, 1999. Dividends were 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.
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, April 15, 2000, or July 15, 2000. Such, dividends were 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.
Under the Certificate of Designations for the Series C Stock 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.
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 amounts waived by
Westar were 16,208 shares of Series C stock related to the October 15, 1999
dividend, valued at $28,202 and $83,015 in cash related to the January 15, 2000
dividend. The Company remains delinquent on the July 15, 1999 (15,823 shares of
Series C Stock), the April 15, 2000 ($81,040 cash) and July 15, 2000 ($81,040
cash) dividend requirements
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
<PAGE>18
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.
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. During the fiscal year 2000, the Company sold LTS,
OMS and limited the operation OES to industrial water purification in Kansas. In
addition, the Company terminated its Sale and Noncompetition agreement with
SYCOM Corporation and discontinued the operations of REEP and ERSI. 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 and or divested subsidiaries.
The Company has gone through significant changes over the past few years that
involved aggressive growth through acquisition and the subsequent divestiture or
ceased operations of nearly all of the newly added/created subsidiaries. As a
result, the Company anticipates substantial reductions in revenues, cost of
sales and selling, general and administrative expenses. The Company has focused
itself back on its core business of being an energy services company with
primary emphasis in California markets.
Results of Operations.
Revenues. Revenues decreased in the fiscal year ended June 30, 2000, by
$25,893,797 or 58.71 percent. This decrease is primarily attributable to a
decline in revenues of approximately $12.9 million at SO Corporation and a drop
in revenues due to sale or disposition of other subsidiaries. After elimination
of revenues attributable to newly acquired and or divested subsidiaries,
revenues decreased by $19,126,956, or 60.40 percent from fiscal year ended June
30, 1999 to June 30, 2000. The decrease in revenues occurred as a result of the
decrease discussed above as well as a decrease in revenues at OES resulting from
the limiting in scope of OES to industrial water services whereas before OES was
involved in industrial energy projects. Revenues at Onsite Energy Corporation
("OEC") also declined due to the inclusion in the prior year of a single project
that contributed approximately $5 million in revenue.
Gross Margin. Gross margin for the fiscal year ended June 30, 2000 was
31.55 percent of revenues compared to 20.28 percent in fiscal year 1999. After
elimination of revenues and cost of sales attributable to newly acquired and or
divested subsidiaries, gross margin was 31.35 percent for the fiscal year 2000
compared to 21.75 percent in fiscal year 1999. 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 15 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 &
administrative ("SG&A") expenses were $8,724,692 or 47.92 percent of revenues in
the fiscal year ended June 30, 2000, compared to $11,193,561 or 25.38 percent of
revenues in fiscal year 1999. After elimination of revenues and SG&A expenses
attributable to newly acquired subsidiaries, SG&A as a percentage of revenues
was 56.24 percent for fiscal year end 2000 compared to 29.16 percent for the
fiscal year 1999. The increase was primarily due to the 58.71 percent decrease
in revenue without corresponding decreases to SG&A. However, there were several
significant changes in the fiscal year ended June 30, 2000 as discussed above
that will have a dramatic impact (decrease) on SG&A in the future.
<PAGE>19
Bad debt expense - related party was $2,518,160 for the fiscal year ending June
30, 2000. The expense is the result of an assessment of the underlying estimate
of collateral value and the result being much less than the then carrying value.
This is primarily due to the termination of the Sale and Noncompetition
agreement with SYCOM Corporation.
Impairment of property and equipment of $389,141 in the current year is also the
result of the termination of the Sale and Noncompetition agreement with SYCOM
Corporation. The Company will be surrendering title of these assets back to its
original owners and does not anticipate any consideration for them.
Depreciation and amortization expense was $514,293 for the fiscal year ended
June 30, 2000 compared to $1,074,855 as of June 30, 1999. The decrease of
$560,562 was the result of the inclusion of approximately $503,000 of
amortization of excess of purchase price over net assets acquired (goodwill) in
the prior year whereas the current year there was no amortization due to the
write off of goodwill relating to Sycom as of June 30, 1999.
Recovery of reserve provided for the sale of subsidiary was $358,670 reduction
in expense in the current year, whereas in the previous year, a reserve of
$1,010,000 was established for the estimated loss on disposition of LTS.
Loss on disposition of assets resulted from the sale of some of the assets of
OES and all of the assets of OMS offset by a gain recognized on the sale and
leaseback of certain assets.
Loss from Operations. Loss from operations increased in the fiscal year
ended June 30, 2000 by $58,009 or less than one percent. This increase was
mainly attributable to the loss recognized related to the decision to terminate
the Sale and Noncompetition agreement with SYCOM Corporation. In the current
year, the Company charged to expense a total of $2,907,301 due to impaired
values of amounts due from shareholders and the fixed assets of SO Corporation.
In fiscal 1999, 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. 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.
Other Income/Expense. Other expense increased $100,479 for the fiscal
year ended June 30, 2000. The change was attributable to a decrease in interest
income of $138,866 offset by a decrease of interest expense of $38,387. The
interest income in the fiscal year ending June 30, 1999 arose from notes
receivable from shareholders. Further accrual of interest was suspended as the
realizibility of the asset became questionable. 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.
Net Loss. Net loss for the year ended June 30, 2000 increased by
$159,588, or 2.5 percent from the loss for fiscal year 1999. This resulted in a
loss per share of $0.42, compared to the loss per share for fiscal year 1999 of
$0.36.
Liquidity and Capital Resources.
Working capital was a negative $7,703,629 as of June 30, 2000,
compared to a negative $6,511,390 as of June 30, 1999, an increase in negative
working capital of $604,803.
Cash flows used in operating activities for the year ended June 30,
2000 were $410,352, compared to $488,544 used for the year ended June 30, 1999.
Cash flows provided by investing activities for the fiscal year ended
June 30, 2000, were $1,192,891 compared to $2,840,421 in cash flows used in
investing activities for the fiscal year ended June 30, 1999, an increase of
$4,033,312. This change was primarily due to the reduction in loans to
shareholders acquired with the new subsidiaries as well as proceeds from the
sale of assets.
<PAGE>20
Cash flows used in financing activities was $1,456,867 in the fiscal
year ending June 30, 2000 compared to cash flows provided by financing
activities of $2,136,367, a change of $3,593,234. The change was due to a
decline in proceeds from issuance of preferred stock and notes payable of
$1,998,667 and an increase of repayments on notes payable of $1,571,088.
As of June 30, 2000, the Company's auditors issued a qualified opinion
subject to the Company's ability to continue as a going concern. The going
concern issues are the result of continued operating losses, negative working
capital and a negative shareholders' equity.
The Company has suffered significant losses from operations for the
past two fiscal years. For the years ended June 30, 2000 and 1999, the Company
had net losses of $6,637,046 and $6,477,458, respectively, and had a negative
working capital of $7,703,629 and an accumulated deficit of $34,978,075 as of
June 30, 2000. Management believes that the Company will be able to generate
additional revenues and improve operating efficiencies through a substantial
reduction in overhead, the addition of new projects as well as by other means to
achieve profitable operations. During the year ended June 30, 2000, the Company
took steps to mitigate the losses and enhance its future viability. In addition,
during the fiscal year end 2000, the Company 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. During the fiscal year, the Company sold its
wholly-owned subsidiaries, LTS and OMS in an effort to raise cash and reduce
operating losses. In a further step to reduce operating losses, the Company
terminated its Sale and Noncompetition agreement with Sycom Corporation,
discontinued the operations of REEP Onsite, Inc and ERSI Onsite, Inc. Management
believes that all of the above actions will allow the Company to continue as a
going concern, with reduced revenues and reduced expenses. Future cash
requirements depend on the Company's profitability, it's ability to manage
working capital requirements and its rate of growth.
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, 2000.
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.
Impact of Recently Issued Standards. In Fiscal 1999, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that an entity recognizes all
derivatives as either assets or liabilities in the statement of financial
position and measures those instruments at fair value.
<PAGE>21
Subsequently, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133, which amends the effective date of SFAS No. 133 to all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company plans to
adopt SFAS No. 133 in Fiscal Year 2001 and is currently assessing the impact
this statement will have on its consolidated financial statements. Management
believes that the impact of SFAS No. 133 will not be significant to the Company.
In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting bulletin (SAB) 101 "Revenue Recognition in Financial Statements". SAB
101 establishes guidelines in applying generally accepted accounting principles
to the recognition of revenue in financial statements based on the following
four criteria; persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the seller's price to the buyer is
fixed or determinable, and collectibility is reasonably assured. SAB 101, as
amended by SAB 101A, is effective no later than the first fiscal quarter of the
fiscal year beginning after December 15, 1999, except that registrants with
fiscal years that begin between December 16, 1999 and March 15, 2000, may report
any resulting change in accounting principle no later than their second fiscal
quarter of the fiscal year beginning after December 15, 1999. The Company does
not believe that the adoption of SAB 101 will have a material effect on its
financial position or result of operations.
Item 7. Financial Statements.
The Company's consolidated financial statements are attached as pages F-1
through F-27.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(b) of the Exchange Act.
The information included under the headings "Election of Directors,"
"Directors and Executive Officers" and "Compliance with Section 16 of the
Securities Exchange Act of 1934" in the Company's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on December 5, 2000, is
incorporated herein by reference.
Item 10. Executive Compensation.
The information included under the heading "Directors and Executive
Officers" in the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on December 5, 2000, is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information included under the heading "Voting Securities and Principal
Stockholders Thereof" in the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on December 5, 2000, is incorporated herein
by reference.
<PAGE>22
Item 12. Certain Relationships and Related Transactions.
Information with respect to certain relationships and related transactions,
appearing under the heading "Certain Relationships and Related Transactions" in
the Company's definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on December 5, 2000 is incorporated herein by reference.
[ Remainder of this page intentionally left blank ]
<PAGE>23
PART IV
Item 13. Exhibits and Reports on Form 8-K.
a) Exhibit
2.1 The Amended and Restated Agreement and Plan of Reorganization by and
between Western Energy Management, Inc. and Onsite Energy, as amended*
3.1 Certificate of Incorporation*
3.2 Form of Bylaws*
10.1 1993 Stock Option Plan*
10.2 Form of Employment Agreement between Onsite Energy Corporation and
Richard T. Sperberg*
10.3 Form of Employment Agreement between Onsite Energy Corporation and
William M. Gary III*
10.4 Form of Employment Agreement between Onsite Energy Corporation and
Frank J. Mazanec*
10.5 Form of Employment Agreement between Onsite Energy Corporation and
Hector A. Esquer*
10.11 Energy Services Agreement (between Western Energy Management, Inc.
and Tustin Unified School District dated October 1992)*
10.29 Television City Cogen L.P. Energy Services Agreement (between Onsite
Energy and CBS Operations & Engineering, a division of CBS Inc., dated
5/20/87)*
10.32A. Extension and Amendment to Agreement for $2,000,000 Note dated
9/27/93 (between Television City Cogen, L.P. and Shawmut Bank N.A.)*
B. Amended and Restated Term Loan for $2,000,000 dated 9/27/93
(between Television City Cogen, L.P. and Shawmut Bank, N.A.)*
10.46 EUA/Onsite, L.P., and Santa Ana Unified School District, as amended*
10.47 EUA/Onsite, L.P., and Chino Unified School District, as amended*
10.48 Energy Services Agreement between Western Energy Management, Inc.,
and R. E. Thomason General Hospital*
10.50 Agreement between Onsite Energy and EUA Cogenex Corporation**
10.51 Agreement for the Sale and Purchase of Stock (to acquire Lanikai
Lighting, Inc.)**
10.52 Debt Conversion and Preferred Stock Purchase Agreement**
10.53 Settlement Agreement and Release with George T. McLaughlin, dated
July 21, 1995***
10.54 Master Energy Efficiency Services Agreement between Onsite and
Hercules Incorporated, predecessor-in-interest to Alliant Techsystems
Inc., dated February 8, 1995***
<PAGE>24
10.55 Master Energy Efficiency Services Agreement between Onsite and IHC
Hospitals, Inc., dated February 28, 1995***
10.56 Master Energy Efficiency Services Agreement between Onsite and First
Security Bank of Utah, N.A., dated February 17, 1995***
10.57 Master Energy Efficiency Services Agreement between Onsite and Utah
National Guard, dated December 30, 1994***
10.58 Master Energy Efficiency Services Agreement between Onsite and The
Boyer Company, dated August 18, 1995***
10.59 Southern California Edison Company Demand Side Management Bidding
Pilot Industrial & Large Commercial Energy Efficiency Agreement
between Onsite and Southern California Edison Company, dated May 4,
1994***
10.60 Southern California Edison Company Demand Side Management Bidding
Pilot Industrial & Large Commercial Energy Efficiency Agreement
between KENETECH Energy Management, Inc., and Southern California
Edison Company, dated May 4, 1994, acquired by Onsite on June 20,
1995***
10.61 Energy Service Agreement between Onsite and Ford Motor Company, dated
August 2, 1995***
10.62 Standard Energy Savings Agreement between Onsite and Public Service
Electric and Gas Company, dated July 21, 1995***
10.63 Purchase Order No. B11 PO95 470871, from Ford Motor Company to
Onsite, dated August 30, 1995
10.64 Conservation Purchase Agreement with Puget Sound Power & Light
Company, dated June 21, 1994***
10.65 Peak Load Reduction Agreement with Nevada Power Company, dated May
31, 1994***
10.66 Agreement to Accept Proceeds from Sale of Stock for Services
Rendered, dated January 30, 1995***
10.67 Purchase Order No. 7-6R0212 to Onsite from Hughes Aircraft Company,
dated October 20, 1995****
10.68 Purchase Order No. 7-6R0213 to Onsite from Hughes Aircraft Company,
dated October 20, 1995****
10.69 Engineering, Procurement and Construction Agreement between Onsite
and Parke Industries, Inc., dated November 21, 1995****
10.70 Engineering, Procurement and Construction Agreement between Onsite
and General Motors Corporation, Truck & Bus Division, dated
December 20, 1995****
10.71 Master Lease Agreement between Onsite and General Motors Corporation,
Truck & Bus Division, dated December 20, 1995****
<PAGE>25
10.72 Master Lease Agreement, Supplemental Terms, between Onsite and
General Motors Corporation, Truck & Bus Division, dated December 20,
1995****
10.73 Equipment Schedule No. 1 to Master Lease Agreement, between Onsite
and General Motors Corporation, Truck & Bus Division, dated December
20, 1995****
10.74 Financing Agreement, Agreement for Purchase and Sale of Equipment and
Assignment of Rights between Onsite and ChiCorp Financial Services,
Inc., dated December 1995****
10.76 Engineering, Procurement and Construction Agreement between Onsite
and Geissenberger Manufacturing Corp. dba The Robert Group, dated
January 11, 1996****
10.77 Master Engineering, Procurement and Construction Agreement between
Onsite and Ram Air Engineering, dated September 30, 1995****
10.78 Acquisition and Release Agreement for Lanikai Lighting, Inc. among
Joel Hemington, Tom Halvorsen, Onsite and Lanikai Lighting, Inc.,
dated February 20, 1996*****
10.79 Contract Change Order No. 1 [Amendment No. 1] to Engineering,
Procurement and Construction Agreement between Onsite and General
Motors Corporation, Truck & Bus Division, dated March 1, 1996*****
10.80 Amendment No. 1 dated March 1, 1996, to Equipment Schedule No. 1 to
Master Lease Agreement, between Onsite and General Motors Corporation,
Truck & Bus Division, dated March 1, 1996*****
10.81 Pacific Gas & Electric Company Demand Side Management Agreement
between Onsite and Pacific Gas & Electric Company, dated March 5,
1996*****
10.82 Purchase and Assignment Agreement between Onsite and KENETECH Energy
Management, Inc., dated March 20, 1996*****
10.83 Operation and Maintenance Agreement between Onsite and El Paso County
Hospital District dated June 1996 (executed March 1, 1996)*****
10.84 Master Energy Efficiency Services Agreement between Onsite and West
Covina Unified School District, dated June 3, 1996******
10.85 Financing Agreement, Agreement for Purchase and Sale of Equipment and
Assignment of Rights between Onsite and ChiCorp Financial Services,
Inc., dated June 3, 1996******
10.86.A Master Energy Efficiency Services Agreement between Onsite and
California State University, Fresno, dated June 28, 1996******
10.86.B Energy Services Agreement No. 97-031 A, dated January 27, 1997,
between Onsite Energy Corporation and State of Washington, Department
of General Administration, Energy Conservation Services, Northern
State Multi-Service Center, Sedro Woolley, Washington*******
A. Energy Services Agreement Amendment No. 1 dated July 14, 1997
B. Energy Services Agreement Amendment No. 2 dated August 4, 1997
<PAGE>26
10.88.1Performance Based Energy Savings Agreement dated March 31, 1998,
between Onsite Energy Corporation and Unified School District No. 500,
Wyandotte County, Kansas********
10.89 Engineering, Procurement and Construction Agreement between Onsite
Energy Corporation and Lighting Technology Services, Inc., dated as of
March 31, 1998********
10.90 Engineering, Procurement and Construction Agreement between Onsite
Energy Corporation and The Fagan Company, dated as of March 31,
1998********
10.91 Performance Based Energy Savings Agreement dated March 3, 1998,
between Onsite Business Services, Inc. and the City of Anthony, Kansas
21 Subsidiaries of the Registrant
23.1 Consent of Hein + Associates LLP
------------------------
* Previously filed as exhibits to Onsite's Registration Statement,
Form S-4, Registration No. 33-66010, filed with the Securities
and Exchange Commission on December 20, 1993.
** Previously filed as exhibits to Onsite's Form 10-KSB, as amended
and restated on July 19, 1995.
*** Previously filed as exhibits to Onsite's Form 10-KSB, as filed for the
year ended June 30, 1995.
**** Previously filed as exhibits to Onsite's Form 10-QSB, as filed for
the quarter ended December 31, 1995.
***** Previously filed as exhibits to Onsite's Form 10-QSB, as filed for
the quarter ended March 31, 1996.
****** Previously filed as exhibits to Onsite's Form 10-KSB, as filed for
the year ended June 30, 1996.
******* Previously filed as exhibits to Onsite's Form 10-KSB, as filed for the
year ended June 30, 1997.
******** Previously filed as exhibits to Onsite's Form 10-QSB, as filed for the
quarter ended March 31, 1998.
b) Reports on Form 8-K
<PAGE>27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Form 10-KSB to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: October 10, 2000 By: /s/ RICHARD T. SPERBERG
----------------------------------
Richard T. Sperberg
Chief Executive Officer
(Principal Executive
Officer), Director
Date: October 10, 2000 By: /s/ J. BRADFORD HANSON
----------------------------------
J. Bradford Hanson, CPA
Chief Financial Officer,
Principal Financial and Accounting
Officer
<PAGE>28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Form 10-KSB to be signed on its
behalf by the undersigned, thereunto duly authorized.
ONSITE ENERGY CORPORATION
Date: October 10, 2000 By: /s/ CHARLES C. MCGETTIGAN
-------------------------
Charles C. McGettigan
Chairman of the Board and
Outside Director
Date: October 10, 2000 By: /s/ RICHARD T. SPERBERG
-------------------------
Richard T. Sperberg
Chief Executive Officer,
President and Director
By:
-------------------------
H. Tate Holt
Outside Director
Date: October 10, 2000 By: /s/ FRANK J. MAZANEC
-------------------------
Frank J. Mazanec
Director
Senior Vice President
<PAGE>F-1
<TABLE>
<S> <C>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report ....................................................................F-2
Consolidated Balance Sheet - June 30, 2000 ......................................................F-3
Consolidated Statements of Operations - For the Years ended
June 30, 2000 and 1999......................................................................F-4
Consolidated Statement of Shareholders' Equity (Deficit) - For the Years ended
June 30, 2000 and 1999......................................................................F-5
Consolidated Statements of Cash Flows - For the Years ended
June 30, 2000 and 1999......................................................................F-6
Notes to Consolidated Financial Statements ......................................................F-7
</TABLE>
<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 sheet of Onsite Energy
Corporation and subsidiaries (the "Company") as of June 30, 2000 and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the years ended June 30, 2000 and 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 audits 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, 2000, and the results of
their operations and their cash flows for the years ended June 30, 2000 and
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 $7,703,629, and an accumulated
deficit of $34,978,075. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with regard
to these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of reported asset amounts or the amounts and classification of
liabilities that might result from the outcome of this uncertainty.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
September 9, 2000
<PAGE>F-3
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2000
<TABLE>
<S> <C>
ASSETS
-------
Current Assets:
Cash $ 226,080
Accounts receivable, net of allowance for doubtful accounts of $61,000 794,068
Capitalized project costs 87,793
Other assets 42,659
------------
TOTAL CURRENT ASSETS 1,150,600
Property and equipment, net of accumulated depreciation and
amortization of $302,000 451,726
Other assets 30,948
------------
TOTAL ASSETS $ 1,633,274
============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Notes payable, current portion $ 126,091
Capitalized lease obligation, current portion 212,120
Liabilities in excess of assets held for sale 5,274,803
Accounts payable 1,714,934
Billings in excess of costs and estimated earnings on uncompleted contracts 155,515
Accrued expenses and other liabilities 1,370,766
------------
TOTAL CURRENT LIABILITIES 8,854,229
Long-Term Liabilities:
Notes payable , less current portion 76,196
Capitalized lease obligation, less current portion 171,174
Deferred income 846,102
------------
TOTAL LIABILITIES 9,947,701
------------
Commitments and contingencies (Notes 3 and 14)
Shareholders' Equity (Deficit):
Preferred Stock, Series C, $.001 par value, 842,500 shares authorized, 649,120
issued and outstanding
(aggregate $3,245,600 liquidation preference) 649
Preferred Stock, Series D, $.001 par value,
157,500 shares authorized, issued and outstanding and held in escrow -
Preferred Stock, Series E, $.001 par value, 50,000 shares authorized,
issued and outstanding,(aggregate $1,000,000 liquidation preference) 50
Common stock, $.001 par value, 24,000,000 shares authorized:
Class A common stock, 23,999,000 shares authorized, 18,069,267 issued and
outstanding 18,069
Class B common stock, 1,000 shares authorized, none issued and outstanding --
Additional paid-in capital 27,394,880
Notes receivable - shareholders (750,000)
Accumulated deficit (34,978,075)
------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (8,314,427)
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 1,633,274
============
</TABLE>
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, 2000 and 1999
<TABLE>
<S> <C> <C>
2000 1999
------------- --------------
Revenues $ 17,010,408 $ 43,534,737
Utility Revenues 1,197,204 566,672
------------- --------------
Total revenues 18,207,612 44,101,409
Cost of sales 12,464,008 35,157,469
------------- --------------
Gross margin 5,743,604 8,943,940
Selling, general, and administrative expenses 8,724,692 11,193,561
Bad debt expense - related party 2,518,160 --
Impairment of property and equipment 389,141 --
Depreciation and amortization expense 514,293 1,074,855
Recovery of reserve/reserve provided for sale
of subsidiary (358,670) 1,010,000
Impairment of excess of purchase price
over net assets acquired 205,433 1,918,851
Loss on disposition of assets 61,891 --
-------------- --------------
Operating loss (6,311,336) (6,253,327)
-------------- --------------
Other income (expense):
Interest expense (326,680) (365,067)
Interest income 7,570 146,436
-------------- --------------
Total other expense (319,110) (218,631)
-------------- --------------
Loss before provision for income taxes (6,630,446) (6,471,958)
Provision for income taxes 6,600 5,500
-------------- --------------
Net loss $ (6,637,046) $ (6,477,458)
============== ==============
Net loss allocated to common shareholders $ (7,593,096) $ (6,682,026)
============== ==============
Loss per common share - basic and diluted: $ (0.42) $ (0.36)
============== ==============
Weighted average number of shares
used in per common share calculation - basic and diluted: 18,185,543 18,469,094
============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-5
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended June 30, 2000 and 1999
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock
------------------------------------------------------------- -------------------------
Series C Series D Series E Class A
Shares Amount Shares Amount Shares Amount Shares Amount
--------- --------- -------- --------- -------- -------- ----------- ------------
Balances, July 1, 1998 208,205 $ 208 -- $ -- -- $ -- 18,243,188 $ 18,243
Exercise of stock options -- -- -- -- -- -- 75,334 75
Issued to Onsite 401k plan -- -- -- -- -- -- 266,331 267
Sale of Series C preferred stock 400,000 400 -- -- -- -- -- --
Series C preferred stock dividend 40,915 41 -- -- -- -- -- --
Notes receivable from shareholders
acquired in acquisitions -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
--------- --------- -------- --------- -------- -------- ----------- ------------
Balances, June 30, 1999 649,120 649 -- -- -- -- 18,584,853 18,585
Issued to Onsite 401k plan -- -- -- -- 154,414 154
Sale of Series E preferred stock -- -- -- -- 50,000 50 -- --
Beneficial conversion element of
Series E preferred stock -- -- -- -- -- -- -- --
Compensation recognized upon
issuance of preferred stock -- -- -- -- -- -- -- --
Acquisition of stock on sale of
subsidiary -- -- -- -- -- -- (690,000) (690)
Dividends waived in exchange
for release of non-compete
agreement -- -- -- -- -- -- -- --
Common stock issued for services -- -- -- -- -- -- 20,000 20
Repayment of notes receivable from
shareholders acquired in acquisitions -- -- -- -- -- -- -- --
Write-down to realizable value notes
receivable from shareholders
acquired in acquisitions -- -- -- -- -- -- -- --
Compensation expense recognized
upon repricing of stock options -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
--------- --------- -------- --------- -------- -------- ----------- ------------
Balances, June 30, 2000 649,120 $ 649 -- $ -- 50,000 $ 50 18,069,267 $ 18,069
========= ========= ======== ========= ======== ======== =========== ============
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Additional Notes
Paid-In Receivable Accumulated
Capital Shareholders Deficit Total
------------- -------------- ------------- -------------
Balances, July 1, 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
Sale of Series C preferred stock 1,999,600 -- -- 2,000,000
Series C preferred stock dividend 204,527 -- (204,568) --
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)
Issued to Onsite 401k plan 46,129 -- -- 46,283
Sale of Series E preferred stock 999,950 -- -- 1,000,000
Beneficial conversion element of
Series E preferred stock 762,762 -- (762,762) --
Compensation recognized upon
issuance of preferred stock 47,500 -- -- 47,500
Acquisition of stock on sale of (192,512) -- -- (193,202)
subsidiary
Dividends waived in exchange
for release of non-compete
agreement 111,217 -- (111,217) --
Common stock issued for services 7,180 -- -- 7,200
Repayment of notes receivable from
shareholders acquired in acquisitions -- 824,939 -- 824,939
Write-down to realizable value notes
receivable from shareholders
acquired in acquisitions -- 2,518,160 -- 2,518,160
Compensation expense recognized
upon repricing of stock options 28,838 -- -- 28,838
Net loss -- -- (6,637,046) (6,637,046)
------------- -------------- ------------- -------------
Balances, June 30, 2000 $ 27,394,880 $ (750,000) $(34,978,075) $ (8,314,427)
============= ============== ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-6
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended June 30, 2000 and 1999
<TABLE>
<S> <C> <C>
2000 1999
------------- -------------
Cash flows from operating activities:
Net loss $(6,637,046) $(6,477,458)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Bad debt expense - related party 2,518,160 --
Adjustment resulting from impairment of property and equipment 389,141 --
Amortization of excess purchase price over net assets acquired -- 502,390
Adjustment resulting from impairment of estimated carrying
value of excess in purchase price over net assets acquired 205,433 1,918,851
Amortization of acquired contract costs -- 50,196
Estimated loss on disposal of subsidiary -- 1,010,000
Loss on sale of assets 61,891 --
Provision for bad debts 26,000 35,000
Depreciation and amortization 514,293 572,465
Recovery of reserve provided for sale or disposal of subsidiary (358,670) --
Compensation recognized upon issuance of stock 312,912 --
Expense related to issuance of common stock to 401k plan 107,102 83,046
Compensation recognized upon repricing of stock options 28,838 --
(Increase) decrease:
Accounts receivable 4,604,625 (3,831,418)
Costs and estimated earnings in excess of billings
on uncompleted contracts 729,348 (252,419)
Inventory 6,411 (7,347)
Other assets 69,704 (44,588)
Capitalized project costs 16,569 --
Cash-restricted 147,838 9,998
Increase (decrease):
Accounts payable (2,464,716) 6,847,535
Billings in excess of costs and estimated earnings
on uncompleted contracts (836,080) (1,124,173)
Accrued expenses and other liabilities 210,838 75,403
Deferred income (62,943) 143,975
------------- -------------
Net cash used in operating activities (410,352) (488,544)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (37,872) (82,539)
Repayment of loans to shareholders 511,673 --
Loans to shareholders -- (2,757,882)
Proceeds from sale of assets 719,090 --
------------- -------------
Net cash provided by (used in) investing activities 1,192,891 (2,840,421)
------------- -------------
(continued)
</TABLE>
<PAGE>F-7
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - Continued
For the Years Ended June 30, 2000 and 1999
<TABLE>
<S> <C> <C>
2000 1999
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 1,000,000 2,000,000
Proceeds from notes payable 384,286 1,382,953
Proceeds from exercise of stock options -- 23,479
Repayment of notes payable - related party (215,694) (256,415)
Repayment of notes payable (2,625,459) (1,013,650)
------------ ------------
Net cash provided by (used in) financing activities (1,456,867) 2,136,367
------------ ------------
Net decrease in cash (674,328) (1,192,598)
Cash, beginning of period 900,408 2,093,006
------------ ------------
Cash, end of period $ 226,080 $ 900,408
============ ============
Supplemental disclosures of non-cash transactions:
Purchase of equipment with notes payable $ 421,543 $ --
============ ============
Deferral of gain on sale/leaseback of equipment $ 98,624 $ --
============ ============
Beneficial conversion feature of Series E preferred stock $ 762,762 $ --
============ ============
Dividends waived on Series C preferred stock in exchange
for release of covenant not to compete $ 111,217 $ --
============ ============
Sale of LTS in exchange for return of Class A common stock $ 193,202 $ --
============ ============
Payment of Series C preferred stock dividends
with Series C Preferred stock $ -- $ 204,568
============ ============
Payment of accrued liabilities with common stock $ 19,192 $ 79,119
============ ============
Supplemental disclosures of cash transactions:
Interest paid $ 232,170 $ 390,558
============ ============
Income taxes paid $ 6,600 $ 5,500
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>F-8
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations:
Onsite 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 help customers save money
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 Onsite Business Services, Inc. and
subsequently changed its name to Onsite Energy Services, Inc.
("OES") (see Note 4). OES provides industrial water services in the
state of Kansas.
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 provided
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. The Company sold the assets of OMS to two
former employees of OES in February 2000. (See note 4)
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, 2000, 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. Effective September 30, 1999, the Company sold the stock of
LTS back to one of LTS' founders. (See note 4)
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. While SO Corporation continues to exist to meet
commitment and servicing requirements of existing customers, its new
business development activities have been discontinued.
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. Effective June 30, 2000, the Company
ceased the operations of REEP and ERSI.
Unless the context indicates otherwise, reference to the Company shall
include all of its wholly-owned subsidiaries.
<PAGE>F-9
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 projects are
recorded using the percentage of completion method. Under this method,
the revenue recognized is that portion of the total contract price that
the cost expended to date bears to the anticipated final total costs
based on current estimates of the costs to complete the project. The
implementation period for a typical project is approximately three to
six months. The implementation period for larger projects (those in
excess of $2,000,000) can range from six to twenty four months.
When the total estimated costs to complete a project exceed the total
contract amount, thereby indicating a loss, the entire anticipated loss
is recognized currently.
Revenues attributable to the Company's share of utility incentive
payments resulting from savings on implemented projects are recognized
as billed to the utility.
In addition to the installation of energy savings measures at a
customer site, the Company is generally engaged to provide 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 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 costs are incurred using the percent
complete method of accounting. In many instances, the Company has been
paid or receives payments in advance of providing the service. In these
<PAGE>F-10
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
instances, amounts attributable to future services to be performed have
been treated as deferred income and will be recognized as services are
performed and/or costs are incurred.
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, 2000 and 1999, there were no cash equivalents outstanding.
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")
represented the purchase price in excess of the fair value of the net
assets of acquired businesses and was being amortized using the
straight-line method over its estimated useful life. The carrying value
is evaluated at least annually. The Company considers current facts and
circumstances, including expected future operating income and cash
flows to determine whether it is probable that impairment has occurred.
As a result of the operating losses of SO Corporation, management
determined that the carrying value of excess of purchase price over net
assets acquired had been impaired as of June 30, 1999. The effect of
this determination was a charge against earnings (additional loss) of
$1,918,851, the unamortized balance as of June 30, 1999.
As a result of REEP's poor operating performance and due to the
termination of the Sale and Noncompetition agreement with SYCOM
Corporation that resulted in the termination of the ERSI operations,
the excess purchase price over net assets acquired at REEP and ERSI was
deemed to have been impaired. As a result, $205,433 was charged against
earnings (additional loss) in the fiscal year ending June 30, 2000.
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
$956,050 and $204,568 of preferred stock dividends to net loss for the
<PAGE>F-11
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended June 30, 2000 and 1999, 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 into an aggregate of 31,388,045 and 23,692,958 for
the years ending June 30, 2000 and 1999, 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.
Impact of Recently Issued Standards
In Fiscal 1999, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that an entity
recognizes all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair
value. Subsequently, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133, which amends the effective
date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company plans to adopt SFAS No. 133
in Fiscal Year 2001 and is currently assessing the impact this
statement will have on its consolidated financial statements.
Management believes that the impact of SFAS No. 133 will not be
significant to the Company.
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin (SAB) 101 "Revenue Recognition in Financial
Statements". SAB 101 establishes guidelines in applying generally
accepted accounting principles to the recognition of revenue in
financial statements based on the following four criteria; persuasive
evidence of an arrangement exists, delivery has occurred or services
have been rendered, the seller's price to the buyer is fixed or
determinable, and collectibility is reasonably assured. SAB 101, as
amended by SAB 101A, is effective no later than the first fiscal
quarter of the fiscal year beginning after December 15, 1999, except
that registrants with fiscal years that begin between December 16, 1999
and March 15, 2000, may report any resulting change in accounting
principle no later than their second fiscal quarter of the fiscal year
beginning after December 15, 1999. The Company does not believe that
the adoption of SAB 101 will have a material effect on its financial
position or result of operations.
<PAGE>F-12
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company's financial statements are based upon a number of
significant estimates, including the allowance for doubtful accounts,
percentage of completion on long term contracts, the estimated useful
lives selected for property and equipment and intangible assets,
realizability of deferred tax assets and realizability of shareholders
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, 2000, the estimated fair values of notes payable approximate
their carrying values.
Concentrations of Credit Risk
Credit risk represents the accounting loss that would be recognized at
the reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off balance
sheet) that arise from financial instruments exist for groups of
customers or groups of counterparties when they have similar economic
characteristics that would cause their ability to meet contractual
obligations to be similarly effected by changes in economic or other
conditions. In accordance with FASB No. 105, "Disclosure of Information
about Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk," the credit risk
amounts shown in Note 17 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, 1999 to conform with the current
year presentation. Such reclassifications had no effect on net loss.
3. Basis of Presentation
As shown in the accompanying financial statements, the Company has
suffered significant losses from operations for the past two fiscal
years. For the years ended June 30, 2000 and 1999, the Company had net
losses of $6,637,046 and $6,477,458, respectively, and had a negative
working capital of $7,703,629 and an accumulated deficit of $34,978,075
as of June 30, 2000. Management believes that the Company will be able
to generate additional revenues and improve operating efficiencies
through a substantial reduction in overhead, the addition of new
<PAGE>F-13
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
projects as well as by other means to achieve profitable operations.
During the year ended June 30, 2000, the Company took steps to mitigate
the losses and enhance its future viability. In addition, during the
fiscal year ended June 30, 2000, the Company 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 and warrants to
purchase Class A Common Stock in lieu of a portion of their salary in
an effort to reduce cash outflows related to compensation. During the
fiscal year, the Company sold its wholly-owned subsidiaries, LTS and
OMS (see note 4) in an effort to raise cash and reduce operating
losses. In a further step to reduce operating losses, the Company
terminated its Sale and Noncompetition agreement with SYCOM Corporation
and ceased operations of REEP Onsite, Inc and ERSI Onsite, Inc. (see
note 4) 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, it's ability to manage working
capital requirements, its ability to sell or dispose of certain assets
of the Company or for which it is a secured creditor, and its rate of
growth. Additional financing through the sale of securities may have an
ownership dilution effect on existing shareholders.
The Company's ability to continue as a going concern is dependent on
its ability to obtain necessary working capital and ultimately achieve
profitable operations, none of which can be assured. The accompanying
consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or the amount and classification of liabilities or any other
adjustment that might be necessary should the Company be unable to
continue as a going concern.
4. Acquisitions/Dispositions
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. The Company sold the assets of OMS
and some of the assets of OES to two former employees of OES for
$290,000 cash plus any unpaid earnings on projects in progress in
February 2000. As a result of the sale, the Company incurred a loss of
$72,521.
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
<PAGE>F-14
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Effective
September 30,1999, the Company sold 95 percent of its interest in LTS.
The Company received the 690,000 shares of the Company's Class A Common
Stock that it had originally issued in connection with the acquisition
of LTS as well as a ten year non-interest bearing note for
approximately $936,000, which may be repaid by LTS by providing
lighting services to the Company. In addition, the note has been fully
reserved due to uncertainty surrounding the collectibility of the note.
In fiscal year 1999, when the Company had made the decision to dispose
of LTS, it had established a reserve for the loss on disposition of
$1,010,000. The actual loss to the Company was $651,330 resulting in a
recovery of reserve for loss of $358,670 in the fiscal year ended June
30, 2000.
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. and
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 Company terminated the Sale and Noncompetition Agreement
with SYCOM Corporation effective June 30, 2000. The Company will retain
the project assets purchased from SYCOM, LLC as well as the projects
developed over the past two years. 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
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. Due to the uncertainty of
the ultimate issuance of these shares, no value was ever attributed to
the Preferred shares. As of September 9, 2000, the Company had not
repurchased the Series D Stock.
In connection with the Sale and Noncompetition Agreement, the Company
had 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. As
a result of the termination of the Sale and Noncompetition Agreement,
the advances were deemed to have been impaired and written down to its
estimated realizable value of $750,000, the estimated value of
underlying collateral. The charge against earnings (increase to loss)
was $2,518,160 in the year ended June 30, 2000.
<PAGE>F-15
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Effective June 30, 2000, the Company ceased the
operations of REEP and ERSI.
5. Accounts Receivable
Accounts Receivable consisted of the following as of June 30, 2000:
Contracts Receivable:
Completed Contracts $ 20,717
Contracts in Progress 84,827
Trade receivables 749,524
Less: Allowance for doubtful accounts 61,000
-----------
Total $ 794,068
===========
6. Cost and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts as of June 30,
2000 consisted of the following:
Costs incurred $ 905,203
Estimated earnings 273,382
------------
1,178,585
Less: Billings to date 1,334,100
------------
$ (155,515)
============
Included in the accompanying Balance Sheet under
the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ --
Billings in excess of costs and earnings
on uncompleted contracts 155,515
-----------
$ 155,515
===========
<PAGE>F-16
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Property and Equipment
Property and equipment at June 30, 2000 consisted of:
<TABLE>
<S> <C> <C>
Estimated Useful Lives
-----------------------
Office furniture and equipment $ 47,295 5-7 years
Water treatment plants, under
capital lease 421,543 50 to 56 months
Equipment and tools 262,489 7-10 years
Vehicles 2,450 5 years
Leasehold improvements 19,949 5-20 years
---------------
753,726
Less: Accumulated depreciation and
amortization (302,000)
---------------
$ 451,726
===============
</TABLE>
Depreciation and amortization expense amounted to $514,293 and $572,465
for the years ended June 30, 2000 and 1999, respectively.
<TABLE>
<S> <C>
8. Notes Payable
Notes payable at June 30, 2000 consisted of the following:
Notes payable, collateralized by utility incentive payments with
interest at 12% $ 202,287
Less: Current portion 126,091
-------------
Total Long Term Notes Payable $ 76,196
=============
Future scheduled principal payments for notes payable are as follows:
Year Ending June 30,
2001 $ 126,091
2002 76,196
-------------
$ 202,287
=============
</TABLE>
<PAGE>F-17
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Accrued expenses and other liabilities
At June 30, 2000 accrued expenses and other liabilities consisted of
the following:
Accrued utility commitments $ 437,052
Payroll and related payroll taxes 376,584
Stock in lieu of pay 258,212
Deferred income 131,744
Accrued interest 61,601
Consideration related to acquisition 50,000
Accrued legal settlements 47,911
Other accrued liabilities 7,662
----------------
$ 1,370,766
================
10. 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 a total of an additional 400,000 shares of Series C
Convertible Preferred Stock for $2 million.
Class A and Class B Common Stock
Holders of Class A Common Stock are entitled to one vote per share for
the election of directors and other corporate matters which
shareholders are entitled or permitted to vote. Holders of Class B
Common Stock shall not be entitled to vote but are entitled to receive
dividends ratably with Class A Common Stock when and as declared by the
Board of Directors. As of June 30, 2000, 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 at $0.4185 per
share, through June 30, 2003, to entities affiliated with a director as
<PAGE>F-18
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
On August 2, 1999, in connection with the issuance of Series E
Preferred Stock, the Company issued warrants to purchase 1,250,000
shares of Class A Common Stock at an exercise price of $0.50 per share
and 1,250,000 shares of Class A Common Stock at an exercise price of
$0.75 per share expiring on August 2, 2009. All but 250,000 of these
warrants were issued to parties related to the Company.
On August 2, 1999, in connection with the stock in lieu of pay, the
Company issued warrants to purchase 189,437 shares of Class A Common
Stock at an exercise price of $0.50 per share and 189,437 shares of
Class A Common Stock at an exercise price of $0.75 per share expiring
on August 2, 2009.
As of June 30, 2000, the Company has issued and outstanding a total of
3,564,872 warrants to purchase shares of its Class A Common Stock. The
exercise prices range from $0.1875 to $0.75 per share with expiration
dates ranging from September 2002 through August 2009.
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 were paid in
the form of 40,915 shares of Series C Preferred Stock during the year
ended June 30, 1999.
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, April 15, 2000, or July 15,
2000. Such, dividends were 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.
Under the Certificate of Designations for the Series C Stock 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, all of the issued and outstanding shares of Series C
Stock are held by Westar. 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
<PAGE>F-19
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
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
amounts waived by Westar were 16,208 shares of Series C stock related
to the October 15, 1999 dividend, valued at $28,202 and $83,015 in cash
related to the January 15, 2000 dividend. The Company remains
delinquent on the July 15, 1999 (15,823 shares of Series C Stock,
valued at $1,661), the April 15, 2000 ($81,040 cash) and July 15, 2000
($81,040 cash) dividend requirements. The total cash value of dividends
in arrears as of June 30, 2000 was $82,071.
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).
Each holder of a share of Series E Convertible Preferred Stock ("Series
C") is entitled to one vote per share for each share of Class A Common
Stock that Series E is convertible into. Holders of Series E
Convertible Preferred Stock are entitled to receive dividends if and
when declared by the Board. Each share of Series E is convertible, at
the option of the holder, into 100 shares of Class A Common Stock.
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 an exercise price of $0.50 per share and warrants to
purchase 1,250,000 shares of Class A Common Stock at exercise price of
$0.75 per share. The preferred shares were convertible at a rate which
was below market on the date of issuance, resulting in a beneficial
conversion element. The shares are immediately convertible and the
beneficial conversion element of $762,762 was recorded as a preferred
stock dividend in the fiscal year ending June 30, 2000. A portion of
the securities was sold to a director. The intrinsic value of preferred
shares sold to the director was $47,500, and resulted in a charge
against earnings (increased loss) in the fiscal year ending June 30,
2000.
As a condition to the investment in the Series E Preferred Stock
discussed above, certain employees of the Company accepted a reduction
in their base salary over a six month period totaling $151,500 in
exchange for 757,748 shares of Class A Common Stock and warrants to
purchase Class A Common Stock at an exercise price above the then
existing market price. The purchase price of the stock was at a price
below market at the time the agreements were entered into, resulting in
additional compensation expense of $113,662.
Notes Receivable - Shareholders
As of June 30, 2000 notes receivable shareholders includes amounts due
from affiliates of SYCOM, LLC in the amount of $3,268,160
collateralized by certain assets of these affiliates. Such amounts are
classified as contra-equity. The Company wrote off, as uncollectible, a
<PAGE>F-20
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
total of $2,518,160 in the current fiscal year as a result of the
termination of the SYCOM agreement discussed in Note 4. As a result of
the write off, the net carrying value of these notes is $750,000, the
estimated value of its underlying collateral.
11. 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, 2000 or 1999. As of June 30, 2000, all 85,000 options
outstanding under the plan were exercisable at $5.3125 through January
15, 2003.
The Onsite 1993 Stock Option Plan
During fiscal year 1994, the Company adopted the Onsite 1993 Stock
Option Plan (the "1993 Plan"). The 1993 Plan, as amended, provides for
the granting of options to directors, officers, employees and
consultants to purchase up to 3,300,000 shares of Class A Common Stock
and is administered by a committee of outside directors appointed by
the Board of Directors. The maximum term for grants under the 1993 Plan
is 10 years with a maximum vesting period of three years for options
granted prior to June 10, 1998. Any grants subsequent to June 10, 1998
have a maximum vesting period of four years.
As of June 30, 2000, the status of the 1993 Plan was as follows:
<TABLE>
<S> <C> <C> <C> <C>
Weighted
Average
Outstanding Exercise Price Exercise Exercisable
Options Per Share Price Options
------------- ----------------- ------------- ------------
July 1, 1998 2,998,258 $0.23 - $5.3125 $ 0.6259 1,596,651
=============
Options granted 394,000 $0.36 - $1.2180 $ 0.5364
Options exercised (75,334) $0.25 - $0.5000 $ 0.3302
Options cancelled (326,691) $0.25 - $1.1250 $ 0.5289
-------------
June 30, 1999 2,990,233 $0.23 - $5.3125 $ 0.6326 1,588,626
Options granted 3,111,808 $0.0975 - $0.336 $ 0.106
Options exercised -- -- --
Options cancelled (3,215,234) $0.155 - $5.3125 $ 0.473
------------ ------------
June 30, 2000 2,886,807 $0.0975 - $0.105 $ 0.098 2,357,912
============ ============
</TABLE>
At June 30, 2000, no additional options were available for granting to
purchase shares of Class A Common Stock.
<PAGE>F-21
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average contractual life for all options as of June 30,
2000, was approximately six years, with exercise prices ranging from
$.0975 to $.105.
On June 1, 2000 the Company repriced 2,883,808 existing options under
the plan to $.0975 price per share, the average between the bid and ask
closing market price on that date. As a result of the repricing, these
options will be accounted for as variable plan options under the
provisions of APB 25 for the life of the options. As such, future
increases in the market price of the Company's Class A Common Stock
will result in additional compensation expense. In the fiscal year
ended June 30, 2000, $28,838 was recorded as compensation expense
related to these repriced options.
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 2000 and 1999 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,
2000 1999
---------------- -------------------
Net Loss $ (6,880,961) $ (7,093,388)
================ ===================
Basic and Diluted Loss Per
Common Share $ (0.38) $ (0.38)
================ ===================
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 were used: expected volatility of 125.33 percent for the
year ended June 30, 2000, 117.83 percent for the year ended June 30,
1999, 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 2000 and 1999
respectively.
The weighted average fair value of stock options granted to employees
during the fiscal years ending June 30, 2000 and 1999 was $0.08 and
$0.38 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.
<PAGE>F-22
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of Non-Plan Option transactions during the years ended June
30, 2000, and 1999 is as follows:
<TABLE>
<S> <C> <C> <C>
Outstanding Exercise Price Exercisable
Options Per Share Options
------------------- ------------------------ -------------------
July 1, 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
Options granted - - -
Options exercised - - -
Options cancelled (32,000) $0.4185 -
------------------- -------------------
June 30, 2000 856,126 $0.3850 - $0.5465 787,876
=================== ===================
</TABLE>
The weighted-average exercise price of stock options exercisable under
the Non Plan Options at June 30, 2000 and 1999, was $0.4184 and
$0.4185, respectively.
12. Income Taxes
Income tax expense for the years ended June 30, 2000 and 1999 is
comprised of the following:
<TABLE>
<S> <C> <C> <C>
Year ended June 30, 2000 Current Deferred Total
Federal $ - $ - $ -
State 6,600 - 6,600
--------------- ----------------- -----------------
$ 6,600 $ - $ 6,600
=============== ================= =================
Year ended June 30, 1999 Current Deferred Total
Federal $ - $ - $ -
State 5,500 - 5,500
--------------- ----------------- -----------------
$ 5,500 $ - $ 5,500
=============== ================= =================
</TABLE>
The actual income tax expense differs from the "expected" tax (benefit)
(computed by applying the U.S. Federal corporate income tax rate of 34
percent for each period) as follows:
<TABLE>
<S> <C> <C>
2000 1999
-------------- ---------------
Amount of expected tax (benefit) $ (2,254,300) $ (2,200,400)
Non-deductible expenses 2,800 450,000
State taxes, net 4,400 3,600
Change in valuation allowance for deferred tax
assets 2,253,700 1,752,300
-------------- ---------------
Total $ 6,600 $ 5,500
============== ===============
</TABLE>
<PAGE>F-23
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax asset recognized as of June 30,
2000, are as follows:
Current deferred tax assets (liabilities):
Litigation settlement accrual $ 14,000
Vacation accrual and deferred compensation 130,000
Inventory reserve 26,200
Deferred revenue 45,400
Book compensation on issuance of stock
options 64,300
Allowance for doubtful accounts 32,900
Other 900
------------
313,700
Valuation allowance (313,700)
------------
Net current deferred tax asset $ --
============
Long-term deferred tax assets (liabilities):
Net operating loss carryforwards $ 10,083,700
Goodwill due to difference in amortization 1,181,500
Depreciation 112,800
Alternative minimum tax credit 11,200
------------
11,389,200
Valuation allowance (11,389,200)
------------
Net current deferred tax asset $ --
============
The deferred tax asset also includes the future benefit of the tax
deduction for the exercise of stock options of $84,000. 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, 2000, the Company has net operating loss carryforwards of
approximately $28,739,000, which expire in the years 2006 through 2020.
The Company has California net operating loss carryforwards at June 30,
2000 of $3,536,000, which expire in years 2000 through 2005.
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.
13. 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. No
such fees were incurred during the fiscal year ended June 30, 2000.
As of June 30, 2000, OES has outstanding accounts receivable with
Western Resources, Inc., the parent company of a shareholder of the
Company, in the amount of $41,326 in relation to water treatment plants
in Lawrence, Kansas and Tecumseh, Kansas. OES recognized $465,354 in
revenue from Western related to these water treatment facilities.
<PAGE>F-24
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Westar Capital has guaranteed any shortfalls of energy savings on the
Company's contract with one customer. Such guaranty is backed by an
insurance policy 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 Note 10).
14. Commitments and Contingencies
Leases
The Company leases its administrative facility under a non-cancellable
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 to month basis, a 250 square foot storage facility in
Carlsbad, CA.
The Company sold its water treatment plants for $421,543 in April 2000.
The plants were leased back from the purchaser for a period of 22
months. The resulting lease is being accounted for as a capital lease,
and the resulting gain of $110,325 is being amortized over the life of
the lease. During the fiscal year ended June 30, 2000, $11,701 of the
gain was recognized. The lease requires the Company to customary
operating and repair expenses and requires a $50,000 buyback at the end
of the term.
Future minimum lease payments under operating and capital leases
(including equipment) is as follows:
<TABLE>
<S> <C> <C>
Operating
Year Ending June 30, Leases Capital Leases
------------------------------------------------- ------------------ -----------------------
2001 $ 411,000 $ 251,380
2002 73,000 180,730
2003 27,000 -
2004 16,000 -
2005 - -
------------------- -----------------------
Total minimum lease payments $ 527,000 432,110
===================
Less: amount representing interest 48,816
-----------------------
Present value of capitalized lease
payments 383,294
Less: current portion 212,120
-----------------------
$ 171,174
=======================
</TABLE>
Total rent expense, including month-to-month equipment rentals, was
approximately $416,000 and $467,000 in 2000 and 1999, respectively.
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
<PAGE>F-25
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2000, 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 $4.0 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
The Company is currently involved in approximately 13 lawsuits, or
suits about to be filed aggregating approximately $4.0 million for
non-payment to its subcontractors on various projects implemented by
the Company. In almost every matter, the party is seeking payment of
amounts due them plus interest and legal costs incurred. The Company
has accrued amounts claimed under the various legal proceedings and
included it in the financial statements in accounts payable. The
Company will continue to incur legal fees, expenses and costs related
to these proceedings until the various matters are resolved.
Sale or Disposal of Subsidiaries
The Company terminated its Sale and Noncompetition Agreement with SYCOM
Corporation (see also Note 4). As a result, SO Corporation operations
are limited to projects acquired from Sycom LLC and projects developed
since acquisition. New business development efforts from this
subsidiary have been terminated. SO Corporation has ongoing servicing
commitments, uncompleted projects and other revenue generating
activities that will either be sold or contracted out to SYCOM
Corporation or other parties. As a result, the assets and liabilities
of SO Corporation have been reclassified to the category "liabilities
in excess of assets held for sale".
The termination of the Sale and Noncompetition Agreement affected the
realizability of amounts due from shareholders as well as property and
equipment. As a result of these determinations, the notes receivable
from shareholders was written down by $2,518,160 to a net carrying
value of $750,000, the estimated value of underlying collateral and
property and equipment was written down by $389,141 to a zero net
carrying value as the Company expects it will not realize anything for
<PAGE>F-26
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
these assets. A total of $2,907,301 was charged against earnings
(increased loss) in the fiscal year ending June 30, 2000 for these
write downs.
The amounts included in the financial statements as of June 30, 2000,
related to SO Corporation, consisted of the following:
ASSETS:
Accounts receivable $ 1,120,936
Cost and estimated earnings in excess of billings on
uncompleted contracts 375,380
-----------------
Total assets 1,496,316
-----------------
LIABILITIES:
Accounts payable $ 5,199,215
Notes payable 579,476
Billings in excess of costs and estimated earnings on
uncompleted contracts 405,167
Deferred income 262,132
Accrued expenses and other liabilities 325,129
-----------------
Total liabilities 6,771,119
-----------------
Liabilities in excess of assets held for sale $ 5,274,803
=================
Total revenues generated by SO Corporation was approximately $7.1
million and $20.0 million for the years ended June 30, 2000 and 1999,
respectively. Loss before taxes for these subsidiaries was
approximately $6.1 and $3.8 for the years ended June 30, 2000 and 1999,
respectively.
15. 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, 2000
and 1999, the Company's matching contribution expense was $107,103 and
$83,046, respectively. The Company match was in the form of Class A
Common Stock issued to the plan's fiduciary. Shares issued or issuable
in matching were 673,725 and 266,331 for the fiscal years 2000 and
1999, respectively.
16. Significant Customers
Revenues from the three largest customers accounted for 33 percent (20
percent, 8 percent and 5 percent each) of total revenues in fiscal
2000, and revenues from three other customers accounted for 34 percent
(16 percent, 11 percent, 9 percent each) of total revenues in fiscal
1999.
17. Concentration of Credit Risk
The Company operates in one industry segment, energy efficiency
and 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.
<PAGE>F-27
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2000, accounts receivable totaled $794,068, and the Company
has provided an allowance for doubtful accounts of $61,000.
For the years ended June 30, 2000, and 1999, bad debts totaled $30,000
and $123,000 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, 2000, the Company maintained cash balances with a
commercial bank, which were approximately $126,000 in excess of FDIC
insurance limits.
