To the Stockholders of Onsite Energy Corporation:
On behalf of Onsite Energy Corporation (dba ONSITE SYCOM Energy Corporation )
("ONSITE SYCOM"), I would like to invite you to attend the 1999 Annual Meeting
of the Stockholders of ONSITE SYCOM. The meeting will be held on Wednesday,
March 22, 2000, at 8:00 a.m. (California time) at the San Diego/Del Mar Hilton,
15575 Jimmy Durante Boulevard, Del Mar, CA 92014.
The accompanying Notice of the Annual Meeting of the Stockholders and Proxy
Statement set forth the matters to be considered and acted upon at the meeting.
The Proxy Statement contains important information concerning the election of
directors, the approval of an amendment to ONSITE SYCOM's 1993 Stock Option Plan
to increase the number of shares available for grant under the Plan, and the
approval of amendments to ONSITE SYCOM's certificate of incorporation increasing
the number of shares available for issuance by ONSITE SYCOM and changing the
name of ONSITE SYCOM from Onsite Energy Corporation to ONSITE SYCOM Energy
Corporation. Additional information about these proposals is included in the
accompanying materials, and I urge you to read the same carefully, and to give
all of these matters your close attention.
I hope that you will be able to attend the meeting. If you cannot attend the
meeting, however, it is important that your shares be represented. Accordingly,
I urge you to mark, sign, date and return the enclosed proxy promptly. You may,
of course, withdraw your proxy if you attend the meeting and choose to vote in
person.
Thank you for your continued commitment to ONSITE SYCOM.
Very truly yours,
ONSITE ENERGY CORPORATION
dba ONSITE SYCOM Energy Corporation
Richard T. Sperberg
Chief Executive Officer
February 18, 2000
<PAGE>ii
ONSITE ENERGY CORPORATION
(dba ONSITE SYCOM Energy Corporation)
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
(760) 931-2400
NOTICE OF THE 1999 ANNUAL MEETING OF STOCKHOLDERS
To Be Held On March 22, 2000
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of the Stockholders of
Onsite Energy Corporation, a Delaware corporation (dba ONSITE SYCOM Energy
Corporation) ("ONSITE SYCOM"), will be held on Wednesday, March 22, 2000, at
8:00 a.m. (California time). The meeting will be held at the San Diego/Del Mar
Hilton, 15575 Jimmy Durante Boulevard, Del Mar, CA 92014, for the following
purposes, all of which are more completely discussed in the accompanying Proxy
Statement:
1. To elect three (3) directors of ONSITE SYCOM to hold office until the 2000
Annual Meeting of Stockholders, and to elect three (3) directors of ONSITE
SYCOM to hold office until the 2001 Annual Meeting of Stockholders, and
until their successors are elected and qualified;
2. To approve an amendment to ONSITE SYCOM's 1993 Stock Option Plan to
increase the number of shares available for grant under the Plan;
3. To approve amendments to ONSITE SYCOM's Certificate of Incorporation to (i)
increase the authorized number of shares available for issuance by ONSITE
SYCOM; and (ii) change the name of Onsite Energy Corporation to ONSITE
SYCOM Energy Corporation; and
4. To transact such other business as may properly come before the meeting or
any adjournments thereof.
Only Class A Common Stock, Series C Convertible Preferred Stock and Series E
Convertible Preferred Stock stockholders of record at the close of business on
February 11, 2000, are entitled to notice of and to vote on the above proposals
at the 1999 Annual Meeting of the Stockholders.
By Order of the Board of Directors
ONSITE ENERGY CORPORATION
dba ONSITE SYCOM Energy Corporation
Audrey Nelson Stubenberg
Secretary
February 18, 2000
YOU ARE CORDIALLY INVITED TO ATTEND ONSITE SYCOM'S 1999 ANNUAL MEETING OF
STOCKHOLDERS. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE
NUMBER YOU OWN. EVEN IF YOU PLAN TO BE PRESENT AT THE ANNUAL MEETING, YOU ARE
URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE
ENVELOPE PROVIDED. IF YOU ATTEND THE MEETING, YOU MAY VOTE EITHER IN PERSON OR
BY PROXY. ANY PROXY GIVEN MAY BE REVOKED BY YOU IN WRITING OR IN PERSON AT ANY
TIME PRIOR TO THE EXERCISE THEREOF.
<PAGE>1
PROXY STATEMENT
of
ONSITE ENERGY CORPORATION
(dba ONSITE SYCOM Energy Corporation)
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
(760) 931-2400
Information Concerning the Solicitation
This Proxy Statement is furnished to the stockholders of Onsite Energy
Corporation, a Delaware corporation (dba ONSITE SYCOM Energy Corporation)
("ONSITE SYCOM"), in connection with the solicitation of proxies on behalf of
ONSITE SYCOM's Board of Directors for use at ONSITE SYCOM's 1999 Annual Meeting
of the Stockholders (the "Meeting"), including any adjournments thereof. The
Meeting will be held on Wednesday, March 22, 2000, at 8:00 a.m. (California
time), at the San Diego/Del Mar Hilton, 15575 Jimmy Durante Boulevard, Del Mar,
CA 92014. Only stockholders of record on February 11, 2000, are entitled to
notice of and to vote at the Meeting.
The proxy solicited hereby (if properly signed and returned to ONSITE SYCOM, and
not revoked prior to its use) will be voted at the Meeting in accordance with
its instructions. Absent any contrary instructions, each proxy received will be
voted "FOR" the nominees for the Board of Directors, "FOR" the proposed
amendment to ONSITE SYCOM's 1993 Stock Option Plan, and "FOR" the proposed
amendments to ONSITE SYCOM's Certificate of Incorporation. Additionally, each
proxy received will be voted (at the proxy holders' discretion) on such other
matters, if any, that may properly come before the Meeting (including any
proposal to adjourn the Meeting).
Any stockholder giving a proxy may revoke it at any time before it is exercised.
To revoke a proxy, a stockholder must either (i) file with ONSITE SYCOM written
notice of its revocation (addressed to the Secretary, Onsite Energy Corporation
(dba ONSITE SYCOM Energy Corporation), 701 Palomar Airport Road, Suite 200,
Carlsbad, CA 92009); (ii) submit a duly executed proxy bearing a later date; or
(iii) appear in person at the Meeting and give the Secretary notice of the
stockholder's intention to vote in person.
ONSITE SYCOM bears the entire cost of preparing, assembling, printing and
mailing proxy materials furnished by the Board of Directors to stockholders.
Copies of proxy materials are furnished to brokerage houses, fiduciaries and
custodians to be forwarded to beneficial owners of ONSITE SYCOM's Class A Common
Stock. In addition to the solicitation of proxies by mail, some of the officers,
directors, employees and agents of ONSITE SYCOM may, without additional
compensation, solicit proxies by telephone or personal interview. ONSITE SYCOM
bears the cost of these additional solicitations.
A copy of ONSITE SYCOM's Annual Report on Form 10-KSB for the year ended June
30, 1999, accompanies this Proxy Statement and proxy.
This Proxy Statement and proxy were first mailed to stockholders on or about
February 18, 2000.
Record Date and Voting Rights
ONSITE SYCOM is authorized to issue up to twenty-three million nine hundred
ninety-nine thousand (23,999,000) shares of Class A Common Stock, par value
$0.001, one thousand (1,000) shares of Class B Common Stock, par value $0.001,
and one million (1,000,000) shares of preferred stock, par value $0.001. As of
November 15, 1999, eighteen million six hundred forty-one thousand three hundred
two (18,641,302) shares of Class A Common Stock were issued and outstanding. No
<PAGE>2
shares of Class B Common Stock, Series A Convertible Preferred Stock or Series B
Convertible Preferred Stock are outstanding. Six hundred forty-nine thousand one
hundred twenty (649,120) shares of Series C Convertible Preferred Stock, one
hundred fifty-seven thousand five hundred (157,500) shares of Series D
Convertible Preferred Stock were issued and outstanding, and fifty thousand
(50,000) shares of Series E Convertible Preferred Stock were issued and
outstanding.
Each share of Class A Common Stock is entitled to one (1) vote on all matters
submitted for stockholder approval. Each share of Series C Convertible Preferred
Stock and Series E Convertible Preferred Stock is entitled to vote on all
matters submitted for stockholder approval as if each share was converted to
Class A Common Stock. Each share of Series C Convertible Preferred Stock is
convertible into five (5) shares of Class A Common Stock. Thus each share of
Series C Convertible Preferred Stock is entitled to the equivalent of five (5)
votes on all matters submitted for stockholder approval. Each share of Series E
Convertible Preferred Stock is convertible into one hundred (100) shares of
Class A Common Stock. Thus each share of Series E Convertible Preferred Stock is
entitled to the equivalent of one hundred (100) votes on all matters submitted
for stockholder approval. The Class A Common Stock, the Series C Convertible
Preferred Stock and the Series E Convertible Preferred Stock vote together as
one (1) class. The Series D Convertible Preferred Stock has no voting rights.
The record date for determination of stockholders of Class A Common Stock
entitled to notice of and to vote at the Meeting is February 11, 2000. ONSITE
SYCOM's Certificate of Incorporation does not provide for cumulative voting.
The plurality of the votes of the Class A Common Stock, the Series C Convertible
Preferred Stock (voting on an as-converted basis) and the Series E Convertible
Preferred Stock (voting on an as-converted basis), voting together as one (1)
class, present in person or represented by proxy at the Meeting and entitled to
vote on the election of directors shall elect the nominees for the Board of
Directors. The affirmative vote of a majority of the Class A Common Stock, the
Series C Convertible Preferred Stock (voting on an as-converted basis) and the
Series E Convertible Preferred Stock (voting on an as converted basis), voting
together as one (1) class, present in person or represented by proxy at the
Meeting and entitled to vote on Proposal No. 2 described below (which shares
voting affirmatively also constitute at least a majority of the required quorum)
is necessary to approve Proposal No. 2. The affirmative vote of a majority of
the Class A Common Stock, the Series C Convertible Preferred Stock (voting on an
as-converted basis) and the Series E Convertible Preferred Stock (voting on an
as-converted basis) outstanding, voting together as one (1) class, and entitled
to vote on Proposal No. 3 described below (which shares voting affirmatively
also constitute at least a majority of the required quorum), is necessary to
approve Proposal No. 3. Under Delaware law, abstentions and broker non-votes are
counted to determine quorum. Broker non-votes are not counted, however, to
calculate voting power (that is, shares present in person or represented by
proxy, and entitled to vote on a measure). Abstentions, however, are counted to
calculate voting power.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
General Information
Under Article III, Section 2 of ONSITE SYCOM's Bylaws, the authorized number of
directors is required to be between five (5) and eleven (11), as set by the
Board of Directors. The Board has fixed the current number at eight (8).
<PAGE>3
The Board of Directors is divided into two (2) classes of four (4) directors
each. Each class expires in alternating years. Directors of the first class were
elected at the 1996 annual meeting of stockholders (held on December 4, 1996) to
hold office for a term originally scheduled to expire in 1998 meeting (and until
their successors are elected and qualified). Directors of the second class were
elected at the 1997 annual meeting (held on December 5, 1997), to hold office
for a term expiring at the Meeting (and until their successors are elected and
qualified). Accordingly, the directors of the first class elected at the Meeting
will hold office for a term expiring at the 2000 annual meeting (and until their
respective successors have been duly elected and qualified), and the directors
of the second class elected at the Meeting will hold office for term expiring at
the 2001 annual meeting (and until their respective successors have been duly
elected and qualified).
In October 1997, ONSITE SYCOM entered into a Stock Subscription Agreement with
Westar Capital, Inc. ("Westar Capital"), a wholly-owned subsidiary of Western
Resources, Inc. ("Western Resources"). Under the Stock Subscription Agreement,
Westar Capital purchased two million (2,000,000) shares of ONSITE SYCOM Class A
Common Stock at fifty cents ($0.50) per share, and two hundred thousand
(200,000) shares of ONSITE SYCOM Series C Convertible Preferred Stock at Five
Dollars ($5.00) per share. Additionally, under the terms of the Stock
Subscription Agreement, Westar Capital had the initial right to elect one (1)
director to ONSITE SYCOM's Board of Directors, and selected Rita A. Sharpe. Ms.
Sharpe served as a director until October 5, 1998, when she resigned in order to
assume a new position with Western Resources. Mr. Leroy P. Wages subsequently
was appointed a director to fill the vacancy created by Ms. Sharpe's
resignation. Mr. Wages resigned as a director on December 16, 1998, and Westar
Capital has not designated an individual to replace Mr. Wages.
Further, Westar Capital entered into a Stockholders Agreement with certain
principal stockholders of ONSITE SYCOM that held, in the aggregate with Westar
Capital, more than fifty percent (50%) of the voting stock of ONSITE SYCOM.
Under the terms of the Stockholders Agreement, (i) Westar Capital currently has
the right to nominate a number of directors equal to the number of directors
that Westar Capital would have the ability to elect if ONSITE SYCOM utilized
cumulative voting (and without regard to classes of directors) less one (1) (but
not less than one (1) director) and the principal stockholders to the
Stockholders Agreement have agreed to vote for Westar Capital's nominees; and
(ii) Westar Capital has agreed to vote for the remaining nominees selected by
ONSITE SYCOM's Nominating Committee.
In addition, as part of a transaction with SYCOM Enterprises, LLC ("SYCOM LLC")
(and certain related companies) discussed under Proposal No. 3 below, certain of
ONSITE SYCOM's principal stockholders entered into a Voting Agreement with SYCOM
LLC and SYCOM Corporation. Under the terms of the Voting Agreement, SYCOM LLC
and SYCOM Corporation currently have the right to nominate two (2) of the eight
(8) ONSITE SYCOM directors. SYCOM LLC and SYCOM Corporation have selected S.
Lynn Sutcliffe (to the first class) and Richard L. Wright (to the second class).
Upon the release of certain escrowed shares, SYCOM LLC and SYCOM Corporation
will have the right to nominate up to an additional three (3) directors. ONSITE
SYCOM has the right to nominate the remaining directors (including the
nominee(s) required under the Westar Capital Stockholders Agreement). The
stockholders to the Voting Agreement have agreed to vote for all of the ONSITE
SYCOM, SYCOM LLC and SYCOM Corporation nominees.
As discussed above, in December 1998, Mr. Wages resigned as a director. In
February 1999, Mr. William M. Gary III also resigned as a director. Mr. Wages
was a director of the second class, whose term expires at the Meeting, and Mr.
Gary was a director of the first class. Since Mr. Gary's resignation, the Board
has not actively sought a replacement for Mr. Gary. Additionally, as discussed
above, Westar Capital has not designated a replacement for Mr. Wages.
Consequently two (2) vacancies exist on the Board.
Messrs. H. Tate Holt, Timothy G. Clark and Sutcliffe, current directors of
ONSITE SYCOM of the first class (and whose terms were scheduled to expire in
1998) are nominees to hold office until the 2000 annual meeting. Messrs. Charles
C. McGettigan, Richard T. Sperberg and Richard L. Wright, current directors of
<PAGE>4
ONSITE SYCOM of the second class (and whose terms are scheduled to expire at the
Meeting) are nominees to hold office until the 2001 annual meeting. The holders
of ONSITE SYCOM's Class A Common Stock, Series C Convertible Preferred Stock
(voting on an as-converted basis) and Series E Convertible Preferred Stock
(voting on an as-converted basis), voting together as one (1) class, will be
entitled to vote on the election of Messrs. Holt, Clark and Sutcliffe, and of
Messrs. McGettigan, Sperberg and Wright.
Unless authority is withheld, the enclosed proxy will be voted for the above
nominees. In the event that any nominee should unexpectedly decline or be
unavailable to act as a director, the enclosed proxy may be voted for a
substitute nominee to be designated by the Board of Directors. The Board of
Directors has no reason to believe that the nominees will become unavailable,
and has no present intention to nominate any person in addition to, or in lieu
of, the nominees.
The Board of Directors held twelve (12) meetings during the last fiscal year.
Each director attended at least seventy-five percent (75%) of all meetings and
meetings of committees on which they serve or served.
During the 1999 fiscal year, Messrs. McGettigan, Holt and Clark comprised the
Audit Committee; Messrs. McGettigan and Holt comprised the Compensation
Committee; and Messrs. McGettigan, Sperberg, Gary (until his resignation in
February 1999) and Sutcliffe comprised the Nominating Committee. Mr. McGettigan
has served as the Chairman of the Board since December 1994.
The primary functions of the Audit Committee are to review the scope and result
of the audit performed by ONSITE SYCOM's independent accountants, ONSITE SYCOM's
internal accounting controls, non-audit services performed by the independent
accountants and the cost of accounting services. This Committee is comprised of
disinterested directors. The Compensation Committee administers ONSITE SYCOM's
1993 Stock Option Plan and approves certain employees' compensation. This
Committee is comprised only of non-employee directors, within the meaning of
paragraph (b)(3)(i) of Rule 16b-3, which has been adopted by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended. The
Nominating Committee acts as the selection committee to nominate candidates for
election to the Board of Directors.
Directors Nominated for Election
The following table sets forth certain information about the individuals
nominated by the Board of Directors for election (to the first and second
classes of directors) by the holders of Class A Common Stock, Series C
Convertible Preferred Stock (voting on an as-converted basis) and the Series E
Convertible Preferred Stock (voting on an as-converted basis), voting together
as one (1) class, as directors.
Directors of the First Class:
<TABLE>
<S> <C> <C>
Nominee Age Director Since
- --------------------------------------- -------------------------------------- -------------------------------------
H. Tate Holt 47 1994
Timothy G. Clark 60 1994
S. Lynn Sutcliffe 56 1998
</TABLE>
<PAGE>5
Background of Nominees of the First Class
H. Tate Holt. Mr. Holt has been a director of ONSITE SYCOM since May 1994. Mr.
Holt currently is the President and Chief Executive Officer of Newstar Ltd.
("Newstar"), a technology firm. Prior to joining Newstar, Mr. Holt served as the
President of Holt & Associates, a corporate growth management consulting firm,
and held that position from July 1990 through August 1999. Previously, from 1987
to 1990, Mr. Holt was Senior Vice President of Automatic Data Processing, Inc.
("ADP"), in Santa Clara, California. Mr. Holt has over twenty (20) years of
experience in various senior sales and marketing positions with Fortune 50 and
Inc. 500 companies, including IBM, Triad Systems and ADP. He has participated in
major restructuring and strategic planning in several divisions of each of these
companies. Additionally, in his position with Holt & Associates, Mr. Holt
assisted small and medium-sized clients in developing and achieving aggressive
growth targets. Mr. Holt currently serves on the Boards of Directors of DBS
Industries, Inc., and AremisSoft Corporation. He is the author of the book "The
Business Doc - Prescriptions for Growth." Mr. Holt holds an A.B. from Indiana
University.
Timothy G. Clark. Mr. Clark began serving as a director of ONSITE SYCOM in
October 1994. The former President and Chief Executive Officer of KA Industries,
Inc., a privately-owned corporation that manufactures and sells premium gift
baked goods, Mr. Clark currently serves as a consultant to a variety of clients
through his own firm, T.G. Clark & Associates. From 1991 to 1994, Mr. Clark was
a managing partner at Hankin & Co., a consulting company focusing on business
and financial planning, including turnarounds. Mr. Clark holds an A.B. from the
University of Southern California and a Master of Business Administration from
the Harvard University Graduate School of Business.
S. Lynn Sutcliffe. In addition to serving as a director since 1998, Mr.
Sutcliffe currently serves as the President of ONSITE SYCOM. Since 1990, Mr.
Sutcliffe also has served as the President and Chief Executive Officer of SYCOM
Corporation, which is the general partner of SYCOM Enterprises, L.P. From 1968
through 1977, Mr. Sutcliffe was General Counsel of the U.S. Senate Commerce
Committee, which had jurisdiction over all electric and gas utility issues. Mr.
Sutcliffe left the Commerce Committee to become one of the founding partners of
Van Ness, Feldman, Sutcliffe & Curtis, P.C., a law firm nationally recognized
for its expertise in energy law and policy. Mr. Sutcliffe participated in this
law firm until 1990. Mr. Sutcliffe's expertise includes a wide range of
legislative, regulatory, contractual, financial and developmental issues
associated with the energy industry. From 1994 through 1996, Mr. Sutcliffe
served as the President of the National Association of Energy Services Companies
(NAESCO), and was a member of the Energy and Transportation Task Force of the
President's Council on Sustainability in 1996. He currently serves as the
Vice-Chairman of the Distributed Power Coalition of America (DPCA). Mr.
Sutcliffe brings to ONSITE SYCOM's Board over twenty-four (24) years of
experience in the energy services industry. He holds an A.B. from Princeton
University, and a Juris Doctorate from the University of Washington.
Directors of the Second Class:
<TABLE>
<S> <C> <C>
Nominee Age Director Since
- --------------------------------------- -------------------------------------- -------------------------------------
Charles C. McGettigan 54 1993
Richard T. Sperberg 48 1982 (1)
Richard L. Wright 56 1998
</TABLE>
(1) Includes time of service with Onsite Energy, a California corporation
("Onsite-Cal").
<PAGE>6
Background of Nominees of the Second Class
Charles C. McGettigan. Mr. McGettigan has been a director of ONSITE SYCOM since
its inception in 1993, and began serving as the Chairman of the Board in
December 1994. In May 1992, Mr. McGettigan became a director of Western Energy
Management, Inc. ("WEM"), which currently is a wholly-owned subsidiary of ONSITE
SYCOM as a result of the reorganization of Onsite-Cal and WEM into Onsite Energy
Corporation. He was a founding partner in 1991 and is a general partner of
Proactive Investment Managers, L.P., which is the general partner of Proactive
Partners, L.P., a merchant banking fund. Mr. McGettigan co-founded McGettigan,
Wick & Co., Inc., an investment banking firm, in 1988. From 1984 to 1988, he was
a Principal, Corporate Finance, of Hambrecht & Quist, Inc. He currently serves
on the Boards of Directors of Modtech, Inc., PMR Corporation, Sonex Research,
Inc., Tanknology - NDE Corporation and Wray-Tech Instruments, Inc. Mr.
McGettigan is a graduate of Georgetown University, and received his Master of
Business Administration from The Wharton School of Business of the University of
Pennsylvania.
Richard T. Sperberg. Mr. Sperberg has been a director and the Chief Executive
Officer of ONSITE SYCOM since its inception, served as ONSITE SYCOM's President
through October 1998, when Mr. Sutcliffe was elected President, and served as
ONSITE SYCOM's Chief Financial Officer from May 1997 through July 1998. He has
been the Chief Executive Officer of WEM since January 1993, and began serving as
a director of WEM in February 1994. In 1982, Mr. Sperberg co-founded Onsite-Cal,
and served as President, Chief Executive Officer and a director until February
1994, when Onsite-Cal and WEM reorganized into Onsite Energy Corporation. Mr.
Sperberg has been involved in project management of energy efficiency, advanced
energy technologies, alternative energy and cogeneration projects for over
twenty-three (23) years, with specific management experience with Onsite-Cal,
the Gas Research Institute, and the U.S. Department of Energy. He holds a
Masters of Science in Nuclear Engineering from the University of California, Los
Angeles, and a Bachelor of Science in Nuclear Engineering from the University of
California, Santa Barbara. Mr. Sperberg previously served on the Boards of
Directors of the American Cogeneration Association and the San Diego
Cogeneration Association, and currently serves as the President of the National
Association of Energy Service Companies (NAESCO), and as a member of its Board
of Directors.
Richard L. Wright. Mr. Wright has served as a director of ONSITE SYCOM since
1998, and served as the Treasurer of SYCOM Corporation and SYCOM Enterprises,
L.P. from 1995 through June 1999, during which time he has performed project
development and strategic planning functions at the executive level. Mr. Wright
has over eleven (11) years of experience in developing and financing energy
related companies and projects. He has extensive knowledge of the federal and
state legislative processes as well as of the decision-making processes at the
county and municipal level. In 1977, Mr. Wright served on the White House Energy
Task Force and later as the Assistant Secretary at the Department of Energy.
Prior to joining the SYCOM Entities, Mr. Wright served as the Chief of Staff of
the former Governor of New Jersey from 1993 through 1994, and as the Associate
Treasurer of the State of New Jersey from 1990 through 1993. Mr. Wright earned a
Bachelor of Arts in Religion from Princeton University, and a Juris Doctorate
from the University of California Boalt Hall School of Law.
Vote Required
The plurality of votes of the shares of Class A Common Stock, Series C
Convertible Preferred Stock (voting on an as-converted basis) and Series E
Convertible Preferred Stock (voting on an as-converted basis), voting together
as one (1) class, present in person or represented by proxy and entitled to vote
on this measure is required to elect Messrs. Holt, Clark and Sutcliffe,
directors of the first class, and Messrs. McGettigan, Sperberg and Wright,
directors of the second class.
THE BOARD OF DIRECTORS RECOMMENDS VOTING FOR THE NOMINEES IN THE ELECTION OF
DIRECTORS.
<PAGE>7
PROPOSAL NO. 2
APPROVAL OF AMENDMENT TO THE ONSITE SYCOM
1993 STOCK OPTION PLAN
In February 1994, ONSITE SYCOM's stockholders approved the 1993 Stock Option
Plan (the "Plan"). The Plan is administered by the Compensation Committee. At
the 1997 annual meeting, stockholders approved an amendment to the Plan
increasing the number of shares subject to the Plan by an additional three
hundred fifty thousand (350,000) shares. Under the Plan, as amended, a total of
three million three hundred thousand (3,300,000) shares of Class A Common Stock
may be issued, of which three million eight thousand two hundred thirty-four
(3,008,234) shares were subject to options as of December 21, 1999.
The Plan is a "dual plan" that provides for the grant of both Incentive and
Nonqualified Stock Options. The majority of options granted to date have been
Incentive Stock Options. Subject to stockholder approval, the Compensation
Committee and the Board of Directors have approved an amendment to the Plan to
increase the number of shares subject to the Plan by an additional six hundred
thousand (600,000) shares.
The purpose of the Plan is to attract and retain for ONSITE SYCOM the best
personnel, and to give option recipients a greater personal stake in the success
of the business. All employees, consultants, officers and directors of ONSITE
SYCOM and any subsidiary are eligible for grants of options under the Plan. The
amendment to the Plan would increase the number of shares of Class A Common
Stock subject to the Plan, and therefore available for grant to eligible
individuals.
Except for non-discretionary grants of options, the Compensation Committee
determines the recipients of options and the terms of options granted, including
the exercise price, number of shares subject to the options and the conditions
to exercise thereof, and the terms of any direct sales of shares underlying
options. The exercise price for all options currently is to be determined by the
Compensation Committee, except for non-discretionary options; provided, however,
that for Incentive Stock Options, the exercise price must be fair market value
(except for Incentive Stock Options for employees who own more than ten percent
(10%) of all classes of the ONSITE SYCOM voting stock combined, in which case
the exercise price must be one hundred ten percent (110%) of fair market value).
At the 1997 annual meeting, the stockholders approved an amendment to the Plan
allowing the Board of Directors to make discretionary grants of options to
non-employee directors of ONSITE SYCOM. The Board determines the exercise price
for such grants. In no case does the exercise period for any option exceed ten
(10) years, and, in the case of an Incentive Stock Option for an employee who
owns more than ten percent (10%) of all classes of ONSITE SYCOM's voting stock
combined, the exercise period does not exceed five (5) years.
Currently the Plan can be terminated at any time by the Board of Directors. If
the Plan is terminated, options previously granted nevertheless shall continue
in accordance with the provisions of the Plan without materially affecting the
recipients' rights under such options.
Vote Required
The affirmative vote of the majority of shares of Class A Common Stock, Series C
Convertible Preferred Stock (voting on an as-converted basis) and Series E
Convertible Preferred Stock (voting on an as-converted basis), voting together
as one (1) class, present in person or represented by proxy and entitled to vote
on this measure is required to approve Proposal No. 2.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF AN AMENDMENT TO THE
ONSITE SYCOM 1993 STOCK OPTION PLAN INCREASING THE NUMBER OF SHARES AVAILABLE
FOR GRANT THEREUNDER.
<PAGE>8
PROPOSAL NO. 3
APPROVAL OF AMENDMENT TO ONSITE SYCOM'S CERTIFICATE OF INCORPORATION TO INCREASE
THE AUTHORIZED NUMBER OF SHARES AVAILABLE FOR ISSUANCE BY ONSITE SYCOM
ONSITE SYCOM filed its Certificate of Incorporation on July 9, 1993. Thereafter,
amendments to the Certificate abolishing the Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock and Certificates of Designation
creating the Series C Convertible Preferred Stock, Series D Convertible
Preferred Stock and Series E Convertible Preferred Stock have been filed. The
amendments abolishing the Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock were filed after the holders of such shares
voluntarily converted their shares to Class A Common Stock in 1996.
The Series C Convertible Preferred Stock was created in October 1997, in
connection with the Stock Subscription Agreement executed by ONSITE SYCOM and
Westar Capital, discussed under Proposal No. 1 above. As a result of the October
1997 transaction with Westar Capital, the exercise by ONSITE SYCOM of two (2)
additional calls on Westar Capital to purchase additional shares of Series C
Convertible Preferred Stock and the payment of dividends on the Series C
Convertible Preferred Stock (paid in shares of Series C Convertible Preferred
Stock), Westar Capital currently is the holder of four million five hundred
thousand (4,500,000) shares of Class A Common Stock and six hundred forty-nine
thousand one hundred twenty (649,120) shares of Series C Convertible Preferred
Stock. Each share of Series C Convertible Preferred Stock is convertible into
five (5) shares of Class A Common Stock and convertible in the aggregate into
shares three million two hundred forty-five thousand six hundred (3,245,600)
shares of ONSITE SYCOM Class A Common Stock.
The Series D Convertible Preferred Stock was created in June 1998, in connection
with the SYCOM transaction, discussed further below. In exchange for one hundred
fifty-seven thousand five hundred (157,500) shares of Series D Convertible
Preferred Stock, SYCOM Corporation and SYCOM Enterprises, L.P. ("SYCOM LP")
entered into a non-compete agreement with SYCOM ONSITE and its wholly-owned
subsidiary, SYCOM ONSITE Corporation ("SO Corporation"). The Series D
Convertible Preferred Stock is convertible in the aggregate into fifteen million
seven hundred fifty thousand (15,750,000) shares of ONSITE SYCOM Class A Common
Stock.
The Series E Convertible Preferred Stock was created in August 1999, in
connection with a private placement transaction with a few current shareholders
of ONSITE SYCOM. In exchange for One Million Dollars ($1,000,000), ONSITE SYCOM
issued fifty thousand (50,000) shares of Series E Convertible Preferred Stock to
four (4) current shareholders of ONSITE SYCOM, including Mr. McGettigan. The
Series E Convertible Preferred Stock currently is convertible in the aggregate
into five million (5,000,000) shares of ONSITE SYCOM Class A Common Stock. In
addition to shares of Series E Convertible Preferred Stock, the purchasers were
granted warrants to purchase one million two hundred fifty thousand (1,250,000)
shares of ONSITE SYCOM Class A Common Stock at seventy-five cents ($0.75) per
share, and one million two hundred fifty thousand (1,250,000) shares of ONSITE
SYCOM Class A Common Stock at fifty cents ($0.50) per share.
ONSITE SYCOM currently is authorized to issue up to twenty-three million nine
hundred ninety-nine thousand (23,999,000) shares of Class A Common Stock, par
value $0.001, one thousand (1,000) shares of Class B Common Stock, par value
<PAGE>9
$0.001, and one million (1,000,000) shares of preferred stock, par value $0.001.
As of November 15, 1999, eighteen million six hundred forty-one thousand one
hundred twelve (18,641,302) shares of Class A Common Stock were issued and
outstanding. Six hundred forty-nine thousand one hundred twenty (649,120) shares
of Series C Convertible Preferred Stock, one hundred fifty-seven thousand five
hundred (157,500) shares of Series D Convertible Preferred Stock, and fifty
thousand (50,000) shares of Series E Convertible Preferred Stock were issued and
outstanding. No shares of Class B Common Stock, Series A Convertible Preferred
Stock or Series B Convertible Preferred Stock are outstanding.
Increase in Authorized Number of Shares
A sufficient number of authorized shares of Class A Common Stock is not
available to cover the conversion of the Series C Convertible Preferred Stock,
Series D Convertible Preferred Stock and Series E Convertible Preferred Stock
into Class A Common Stock. Upon the conversion of the Series C Convertible
Preferred Stock, the Series D Convertible Preferred Stock and the Series E
Convertible Preferred Stock, twenty-three million nine hundred ninety-five
thousand six hundred (23,995,600) additional shares of Class A Common Stock will
need to be available for issuance by ONSITE SYCOM. In order to give ONSITE SYCOM
a sufficient reserve of shares of Class A Common Stock for future issuances, and
enable ONSITE SYCOM to have sufficient shares available upon and after the
conversion of the Series C Convertible Preferred Stock, the Series D Convertible
Preferred Stock and the Series E Convertible Preferred Stock, stockholder
approval is being sought for an amendment to ONSITE SYCOM's Certificate of
Incorporation to increase the number of shares authorized and available for
issuance.
Additionally, the ability to issue preferred stock provides ONSITE SYCOM with a
valuable tool in the future development of transactions designed to continue to
contribute to ONSITE SYCOM's growth. The Series C Convertible Preferred Stock,
the Series D Convertible Preferred Stock and the Series E Convertible Preferred
Stock currently account for all of the authorized shares of preferred stock.
Accordingly, stockholder approval is being sought for an amendment to ONSITE
SYCOM's Certificate of Incorporation increasing the authorized number of
preferred shares reserved for issuance.
The proposed amendment to ONSITE SYCOM's Certificate of Incorporation would
increase the number of shares available for issuance by forty-five million
(45,000,000) shares, to a total of seventy million (70,000,000) shares. Of these
seventy million (70,000,000) shares, sixty-seven million nine hundred
ninety-nine thousand (67,999,000) would be designated as Class A Common Stock.
The amendment also would increase the authorized number of preferred shares
reserved for issuance by one million (1,000,000), to two million (2,000,000).
Hence the remaining two million (2,000,000) of the seventy million (70,000,000)
shares would be reserved for issuance as preferred shares. ONSITE SYCOM has no
present agreement to issue the additional preferred shares.
Additional Information Regarding the SYCOM Transaction
ONSITE SYCOM completed a transaction with SYCOM LLC (and certain related
companies) on June 30, 1998. Through this transaction, ONSITE SYCOM acquired all
of the project assets and assumed specific project liabilities of SYCOM LLC in
exchange for one million seven hundred fifty thousand (1,750,000) shares of
ONSITE SYCOM Class A Common Stock. Under a Sale and Noncompetition Agreement, SO
Corporation acquired the right to the services and expertise of SYCOM
Corporation's employees in exchange for one hundred fifty-seven thousand five
hundred (157,500) shares of ONSITE SYCOM Series D Convertible Preferred Stock,
which is convertible into fifteen million seven hundred fifty thousand
(15,750,000) shares of Class A Common Stock. SYCOM Corporation and SYCOM LP also
are parties to the Sale and Noncompetition Agreement. The project assets
acquired by ONSITE SYCOM included a number of contractual rights for providing
energy services to certain SYCOM LLC customers and the acquisition was intended
to increase ONSITE SYCOM's customer base and secure the services of additional
<PAGE>10
highly qualified personnel. Additionally, the electric utility industry
currently is undergoing fundamental changes that largely are the result of the
more competitive environment for electric power generation developed over the
last decade. Deregulation of the electric utility industry is expanding the
scope of services offered by energy services companies such as ONSITE SYCOM. The
acquisition of the SYCOM LLC assets and securing of the services of SYCOM
Corporation's qualified personnel has helped provide ONSITE SYCOM with an
opportunity to expand its services and organize them to serve the deregulating
marketplace.
The shares of Series D Convertible Preferred Stock are held in an escrow
account. Under the terms of the escrow agreement, the Series D Convertible
Preferred Stock will be released when ONSITE SYCOM Class A Common Stock reaches
Two Dollars ($2.00) per share and annualized after-tax earnings total fifteen
cents ($0.15) per share over four consecutive quarters, and the debts of SYCOM
Corporation and SYCOM LP have been satisfied. The share values and earnings
thresholds increase by ten percent (10%) per year after December 31, 1999. Under
a Share Repurchase Agreement, ONSITE SYCOM has the right to repurchase the
escrowed shares for nominal consideration if, among other things, the share
value and earnings thresholds will not be achieved.
As discussed under Proposal No. 1, certain of ONSITE SYCOM's principal
stockholders also executed a Voting Agreement with SYCOM LLC and SYCOM
Corporation. Under the terms of the Voting Agreement, SYCOM LLC and SYCOM
Corporation currently have the right to nominate two (2) of the eight (8)
directors. Upon a release of the escrowed shares, SYCOM LLC and SYCOM
Corporation will have the right to nominate up to an additional three (3)
directors. ONSITE SYCOM has the right to nominate the remaining directors.
The SYCOM transaction was accounted for as a purchase. In anticipation of
federal and state income taxes resulting from the sale of the project assets to
ONSITE SYCOM and, as part of the transaction, ONSITE SYCOM agreed to lend to
certain shareholders of SYCOM LLC and SYCOM Corporation up to One Million
Dollars ($1,000,000) for payment of taxes resulting from this transaction. The
loans will bear interest at the rate of nine and three-quarter percent (9.75%)
per annum and may be repaid in cash or shares of ONSITE SYCOM Class A Common
Stock acquired in the transaction. To date, no such loans have been made. The
acquisition of the SYCOM LLC assets and issuance of securities by ONSITE SYCOM
did not result in any changes to the rights, preferences or privileges of
existing ONSITE SYCOM stockholders. No federal or state regulatory requirements
or approvals were necessary in connection with the SYCOM transaction and ONSITE
SYCOM has not defaulted in the payment of principal or interest in respect of
any securities as a result of the SYCOM transaction. In addition, the
declaration and payment of dividends has not been affected and no unpaid
dividends exist as a result of this transaction (see, however, footnote (18) of
the stock ownership table set forth in VOTING SECURITIES AND PRINCIPAL
STOCKHOLDERS THEREOF).
A copy of the audited financial statements for SYCOM LLC as of December 31, 1997
and 1996, and the audited financial statements for ONSITE SYCOM as of June 30,
1998, June 30, 1999, and September 30, 1999, accompany this Proxy Statement. A
representative of ONSITE SYCOM's accountants, Hein + Associates, will be present
at the Meeting, and Mr. Sperberg, the Chief Executive Officer of ONSITE SYCOM,
Mr. Sutcliffe, the President, and J. Bradford Hanson, the Chief Financial
Officer, will be available to answer questions concerning this transaction.
The executive offices of SYCOM LLC, SYCOM Corporation and SYCOM LP are located
at 27 Worlds Fair Drive, Somerset, NJ 08873, phone number (732) 748-4200. SYCOM
Corporation is an independent energy services company who, like ONSITE SYCOM, is
accredited by the National Association of Energy Services Companies (NAESCO), an
organization that awards accreditation only after an extensive independent
review. Only twenty-one (21) energy services companies in the country have
obtained such accreditation. SYCOM Corporation, SYCOM LLC and SYCOM LP provide
services substantially similar to the services provided by ONSITE SYCOM, tha
<PAGE>11
is, assisting energy customer in lowering their energy bills by developing,
engineering, installing, owning and operating efficient, environmentally sound
energy efficiency and power supply projects, and advising customers on the
purchasing of energy in deregulating marketplaces.
Proposed Name Change
The SYCOM transaction combined two of the most experienced independent energy
services companies that, as discussed above, are accredited by the National
Association of Energy Services Companies (NAESCO), and the transaction resulted
in the creation of the largest accredited independent energy services company in
the deregulating energy marketplace. The SYCOM group of companies is located
primarily on the East coast (New Jersey and Washington, D.C.). ONSITE SYCOM has
offices in California (Southern and Northern), Kansas, Texas, Illinois and
Washington, D.C. Both ONSITE SYCOM and the SYCOM companies conduct business
nationally. Thus, in an effort to both capture the name recognition associated
with both Onsite Energy Corporation and the SYCOM companies, and emphasize the
creation of the largest accredited independent energy services company,
shareholder approval is being sought for an amendment to the Certificate of
Incorporation changing the name of Onsite Energy Corporation to ONSITE SYCOM
Energy Corporation.
As discussed above, the ONSITE SYCOM Certificate of Incorporation has been
amended and/or certificate of designations included therein several times in the
past. In an effort to consolidate all of the prior amendments together with the
proposed amendments into one document, upon stockholder approval of the above
amendments, the Certificate of Incorporation will be amended and restated to
incorporate all prior amendments and current certificates of designation, and
include the above amendments. The form of amendments to ONSITE SYCOM's
Certificate of Incorporation is attached hereto as Exhibit A.
Vote Required
The affirmative vote of the majority of shares of Class A Common Stock, Series C
Convertible Preferred Stock (voting on an as-converted basis) and Series E
Convertible Preferred Stock (voting on an as-converted basis) outstanding,
voting together as one (1) class, and entitled to vote on this measure is
required to approve Proposal No. 3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF AMENDMENTS TO
ONSITE SYCOM'S CERTIFICATE OF INCORPORATION TO (i) INCREASE THE AUTHORIZED
NUMBER OF SHARES AVAILABLE FOR ISSUANCE BY ONSITE SYCOM; AND (ii) CHANGE THE
NAME OF ONSITE ENERGY CORPORATION TO ONSITE SYCOM ENERGY CORPORATION.
[Remainder of page intentionally left blank]
<PAGE>12
DIRECTORS AND EXECUTIVE OFFICERS
Current Directors
For information on the persons currently serving as directors of ONSITE SYCOM,
see Directors Nominated for Election above.
Executive Officers
The following table sets forth certain information with respect to the current
executive officers of ONSITE SYCOM.
<TABLE>
<S> <C> <C> <C>
Name Positions with ONSITE SYCOM Age Office Held Since
- ---------------------------------- ------------------------------------- -------------- ----------------------------
Charles C. McGettigan Chairman of the Board 54 1994
- ---------------------------------- ------------------------------------- -------------- ----------------------------
Richard T. Sperberg Chief Executive Officer 48 1982 (1)
- ---------------------------------- ------------------------------------- -------------- ----------------------------
S. Lynn Sutcliffe President 56 1998
- ---------------------------------- ------------------------------------- -------------- ----------------------------
J. Bradford Hanson Chief Financial Officer 44 1995 (2)
- ---------------------------------- ------------------------------------- -------------- ----------------------------
Frank J. Mazanec Senior Vice President 51 1992 (1)
- ---------------------------------- ------------------------------------- -------------- ----------------------------
Keith G. Davidson Senior Vice President 49 1994
- ---------------------------------- ------------------------------------- -------------- ----------------------------
Hector A. Esquer Vice President 41 1991 (1)
- ---------------------------------- ------------------------------------- -------------- ----------------------------
J. Derek Shockley Vice President 39 1997
- ---------------------------------- ------------------------------------- -------------- ----------------------------
Elizabeth T. Lowe Vice President 36 1997
- ---------------------------------- ------------------------------------- -------------- ----------------------------
Bruce A. Hedman Vice President 48 1998
- ---------------------------------- ------------------------------------- -------------- ----------------------------
Dominick J. Aiello Vice President 40 1998
- ---------------------------------- ------------------------------------- -------------- ----------------------------
Roger Dower Vice President 49 1998
- ---------------------------------- ------------------------------------- -------------- ----------------------------
Christian J. Bitters Vice President 42 1998
- ---------------------------------- ------------------------------------- -------------- ----------------------------
Audrey Nelson Stubenberg Secretary/General Counsel 36 1998
- ---------------------------------- ------------------------------------- -------------- ----------------------------
</TABLE>
(1) Includes time of service with Onsite-Cal.
(2) Mr. Hanson served as Chief Financial Officer of ONSITE SYCOM from August
1995 through May 1997, rejoining ONSITE SYCOM in October 1998.
<PAGE>13
Executive officers are elected periodically by the Board of Directors and serve
at the pleasure of the Board. No family relationship exists between any of the
officers or directors.
Background of Executive Officers
For the business backgrounds of Messrs. McGettigan, Sperberg, Sutcliffe and
Wright, see Directors Nominated for Election above.
J. Bradford Hanson. Mr. Hanson has over fifteen (15) years of financial
accounting, administration and shareholder relations experience in the energy
efficiency services, financial, manufacturing, software development and retail
market sectors. Mr. Hanson, who has served as ONSITE SYCOM's Chief Financial
Officer since October 1998, served as ONSITE SYCOM's Chief Financial Officer
from August 1995 through May 1997. From May 1997 through October 1998, Mr.
Hanson worked for Sports Group International, Inc., and as an independent
financial and accounting consultant. From 1991 through mid-1995, Mr. Hanson
worked as an independent financial and accounting consultant for small
businesses. Prior to 1991, he held various Chief Financial Officer, Controller
and Senior Auditing positions with companies such as DAROX Company, BSD Bancorp,
Inc., International Totalizator Systems, Inc., and KPMG Peat Marwick. Mr. Hanson
earned a Bachelor of Science from San Diego State University and is a Certified
Public Accountant.
Frank J. Mazanec. Since 1992, Mr. Mazanec has been employed by ONSITE SYCOM and
its predecessor, Onsite-Cal. Mr. Mazanec is a licensed professional engineer in
Colorado, and currently serves as Senior Vice President of Onsite. Over the past
twenty (20) years, he has developed and managed over One Hundred Million Dollars
($100,000,000) in energy generation, waste management and environmental
projects. Prior to joining Onsite-Cal in 1992, Mr. Mazanec served as West Coast
Regional Director for Wheelabrator Technologies, which included responsibility
for the Spokane and Pierce County, Washington and Baltimore, Maryland,
Waste-to-Energy facilities. In 1990, he formed Integrated Waste Management,
Inc., through which he served as a consultant to Onsite-Cal until joining
Onsite-Cal in 1992. Mr. Mazanec is responsible for managing one of ONSITE
SYCOM's internal business units. Mr. Mazanec has a Bachelor of Science in Civil
Engineering from the University of Vermont, a Bachelor of Science in Economics
and Finance from Fairleigh Dickinson University, and a Master of Business
Administration from the University of Southern California.
Keith G. Davidson. Mr. Davidson has been a Vice President of ONSITE SYCOM since
1994, and currently serves as Senior Vice President. Mr. Davidson has over
twenty (20) years of diversified management experience in energy and
environmental technology, product commercialization and market development. Mr.
Davidson is responsible for one of ONSITE SYCOM's internal business units. Prior
to joining ONSITE SYCOM in 1994, Mr. Davidson was a Director at the Gas Research
Institute ("GRI") in Chicago, Illinois, where he led the gas industry's
collaborative development programs directed at natural gas growth markets of
electric power generation, cogeneration and natural gas vehicles. Mr. Davidson
was past President of the American Cogeneration Association, and a member of the
American Society of Heating, Refrigerating and Air Conditioning Engineers, and
previously served as the co-Chairman of CADER. He is the recipient of several
industry honors, including the Association of Energy Engineers' Cogeneration
Professional of the Year and the American Gas Association's Industrial and
Commercial Hall of Flame. Mr. Davidson earned a Bachelor of Science in
Mechanical Engineering from the University of Missouri and a Master of Science
in Mechanical Engineering from Stanford University.
Hector A. Esquer. Mr. Esquer is a professional engineer licensed in the states
of California and Kansas. Mr. Esquer joined Onsite-Cal in 1986, and as Vice
President is responsible for the overall management of project implementation
for ONSITE SYCOM's West Coast operations. Over the past twelve (12) years, Mr.
Esquer has managed the implementation of over Thirty Million Dollars
($30,000,000) of energy efficiency projects for ONSITE SYCOM. Mr. Esquer
previously was a Project Engineer for San Diego Gas & Electric Company and Fluor
<PAGE>14
Corporation. He holds a Bachelor of Science in Electrical Engineering from San
Diego State University and is a Certified Energy Manager.
J. Derek Shockley. Mr. Shockley is responsible for managing Onsite Energy
Services, Inc. (fka Onsite Business Services, Inc.), and Onsite/Mid-States,
Inc., direct and indirect wholly-owned subsidiaries of ONSITE SYCOM. These
subsidiary companies provide medium and high voltage electrical services, as
well as industrial water treatment services to municipal, industrial, large
commercial and institutional customers. Mr. Shockley has over thirteen (13)
years of diversified experience in the energy industry that includes planning,
sales, marketing, and project development work in the areas of demand side
management, electrotechnologies and applied research. He was a member of the
Water & Wastewater Research Project steering committee for the Electric Power
Research Institute ("EPRI") in Palo Alto, California, and a past member of the
Kansas Energy & Natural Resources advisory committee. Mr. Shockley is the
recipient of several national awards, including the EEI Common Goals
Environmental Award, and the EPRI Technology Innovators Award. Prior to joining
ONSITE SYCOM, Mr. Shockley held a number of positions with Western Resources,
including Director of Business Development, Manager of National and
Institutional Accounts, and an energy use consultant. Mr. Shockley holds a
Bachelor of Arts in Business Administration (with an emphasis on Finance) from
Washburn University.
Elizabeth T. Lowe. As Vice President, Ms. Lowe heads up ONSITE SYCOM's Northern
California office. She is responsible for marketing, operations and regulatory
representation in Northern California. Ms. Lowe also adds to ONSITE SYCOM's
consulting capabilities in the areas of natural gas and electricity purchases
and overall customer strategies to reduce energy costs. Ms. Lowe joined ONSITE
SYCOM in 1997. Prior to joining ONSITE SYCOM, Ms. Lowe served as Vice President
of Western Operations for DukeSolutions, Inc. (formerly Duke/Louis Dreyfus),
heading up the Western region operations for this Duke Energy subsidiary. The
Western region group worked with retail and wholesale customers to develop and
implement overall energy purchasing strategies through negotiations training,
strategic alliances, and engineering and pricing solutions. Prior to joining
DukeSolutions, Ms. Lowe spent ten (10) years in energy and environmental
consulting, and most recently developed and directed Barakat & Chamberlin's
Corporate Energy Management practice. In this capacity, she assisted large
energy consumers in the development of energy cost reduction strategies through
procurement and management of fuels, tariff and contract negotiations,
aggregation strategies and demand-side management planning. Ms. Lowe earned a
Master of Environment Management in Resource Economics and Policy from Duke
University's Nicholas School of Environment and a Bachelor of Arts in Public
Policy Studies from Duke University's School of Policy Studies and Public
Affairs. Ms. Lowe is an associate member of the California Manufacturers
Association and the California League of Food Processors, and is the President
of the Power Association of Northern California.
Dr. Bruce A. Hedman. Dr. Hedman joined ONSITE SYCOM in 1998, as Vice President,
Consulting Services, and together with Mr. Davidson is responsible for ONSITE
SYCOM's consulting services business. Dr. Hedman has over twenty (20) years of
experience in energy and environmental technology development, new product
commercialization, and market research and development. Before joining ONSITE
SYCOM, Dr. Hedman was Executive Director of the Industrial Center Inc. in
Arlington, Virginia, a natural gas industry technology transfer and market
development organization that supports commercial introduction of new natural
gas technologies in the industrial market. Prior to this, he was Senior Program
Manager at Battelle Pacific Northwest Laboratory's Washington, DC offices,
providing strategic planning and policy analysis support on natural gas issues
and end-use research, development and commercialization. Dr. Hedman started his
career at the GRI in Chicago, holding a variety of research management positions
in power generation, alternative fueled vehicles and industrial end-use. When he
left GRI in 1994, Dr. Hedman was Group Manager, Industrial and Power Generation
Products and responsible for the development and commercialization of new
natural gas technologies for these priority markets. Dr. Hedman has a Bachelor
of Science, Master of Science and Ph.D. in Mechanical Engineering from Drexel
University in Philadelphia, Pennsylvania.
<PAGE>15
Dominick J. Aiello. Mr. Aiello, an employee of SYCOM Corporation, currently
serves as ONSITE SYCOM's Vice President, and is directly responsible for
overseeing ONSITE SYCOM's Project Development efforts primarily in the Eastern
U.S. Mr. Aiello has more than five (5) years experience in developing energy
efficiency projects in both the public and private sectors. He is responsible
for managing a national sales force of eight (8) project developers. Mr. Aiello
also has been a key contributor in implementing a sales training curriculum for
both the current sales team and new hires. Prior to joining SYCOM Corporation,
Mr. Aiello served as a Sales Manager for IBM.
Roger Dower. Mr. Dower, ONSITE SYCOM's Vice President, manages ONSITE SYCOM's
Washington, D.C. business unit, where he oversees the development activity for
trade associations and federal projects as well as regional development. Mr.
Dower, an employee of SYCOM Corporation, also provides legislative and
regulatory support for ONSITE SYCOM and the energy service industry's energy and
environmental agenda. Mr. Dower is an expert in energy and environmental
economics, policy, regulation and legislation. Prior to joining SYCOM
Corporation and ONSITE SYCOM, Mr. Dower was Director of the Climate, Energy and
Pollution Program at the World Resources Institute from 1990 to 1996. Prior to
that, Mr. Dower was the head of the Energy and Environment Unit at the
Congressional Budget Office from 1985 to 1990. Mr. Dower has also served as a
consultant to the Executive Office of the President of the United States from
1979 to 1980 and was the Research Director and a Board Member of the
Environmental Law Institute from 1976 to 1985. With over eighteen (18) years of
experience in the energy business, Mr. Dower has an in-depth understanding of
energy markets, the role of energy efficiency and the environmental effects of
energy. Mr. Dower received a Masters of Science and Bachelor of Science in
Resource Economics from the University of Maryland.
Christian J. Bitters. Mr. Bitters serves as Vice President of Operations for
ONSITE SYCOM. In this capacity, Mr. Bitters, an employee of SYCOM Corporation,
oversees the project management and engineering teams responsible for
implementation of all of ONSITE SYCOM's projects primarily in the Eastern U.S.,
and has over eight (8) years of experience in managing the implementation of
energy efficiency projects in commercial, industrial, governmental and
institutional facilities. Mr. Bitters is responsible for recruiting and training
new team members and developed a sophisticated Project Management Manual that
defines the roles, responsibilities, methods, procedures and specifications for
implementing ONSITE SYCOM's projects. Mr. Bitters' experience includes project
management of commercial office space and recruiting, training and managing
project managers and engineers. Prior to joining SYCOM Corporation, he served as
a Senior Project Manager for OMNI Construction, Inc., in Washington, D.C. for
ten (10) years, where he managed construction and renovation projects with a
total value of Two Hundred Five Million Dollars ($205,000,000). Mr. Bitters
holds a Master of Science and Bachelor of Science in Civil Engineering from the
University of Maryland.
Audrey Nelson Stubenberg, Esq. Ms. Nelson Stubenberg has over ten (10) years
experience as a practicing transactional attorney and currently serves as ONSITE
SYCOM's Secretary and General Counsel. She joined ONSITE SYCOM in 1994. Prior to
joining ONSITE SYCOM, Ms. Nelson Stubenberg was an associate with the San Diego
law firm of Procopio, Cory, Hargreaves and Savitch, a business and commercial
transactions firm. A member of the California State Bar and the American Bar
Association, Ms. Nelson Stubenberg earned a Bachelor of Arts from the University
of Redlands and a Juris Doctorate from the University of San Diego School of
Law.
Directors' Compensation
Prior to June 1, 1998, directors who are not employees of ONSITE SYCOM were not
compensated, other than the grant of stock options, for their service on the
Board of Directors. Beginning June 1, however, non-employee directors are paid a
fixed fee for personal attendance at a Board meeting (One Thousand Dollars
<PAGE>16
($1,000) per meeting), or for attendance at a meeting via telephone (Seven
Hundred Fifty Dollars ($750)). Additionally, non-employee directors'
out-of-pocket expenditures currently are reimbursed.
As previously discussed, non-employee directors currently receive periodic
grants of stock options issued under the Plan. Each non-employee director
automatically is granted an option to purchase twenty-five thousand (25,000)
shares of ONSITE SYCOM Class A Common Stock on the date he or she becomes a
director of ONSITE SYCOM, and on each anniversary date thereafter. The exercise
price is the fair market value of the ONSITE SYCOM Class A Common Stock on the
date of becoming a director and on the anniversary date, as appropriate. Each
option when granted is immediately exercisable and has a five (5) year term.
Directors who also are officers of ONSITE SYCOM do not receive additional
compensation for serving as directors.
Executive Compensation
The following table sets forth the aggregate cash compensation paid for the past
three (3) fiscal years by ONSITE SYCOM and its predecessors for services of Mr.
Sperberg (Chief Executive Officer), and the four (4) most highly compensated
executive officers whose compensation exceeds One Hundred Thousand Dollars
($100,000) per year: Messrs. Sutcliffe (President), Mazanec (Senior Vice
President), Davidson (Senior Vice President) and Aiello (Vice President).
[Remainder of page intentionally left blank]
<PAGE>17
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLE
Long Term Compensation
--------------------------
Annual Compensation Awards Payouts
- ---------------------------- -------- ------------- ------------ ---------------- ----------- -------------- ----------- -----------
Restricted
Securities
Other Annual Stock Underlying LTIP All Other
Name and Fiscal Salary Bonus Compensation Award(s) Options Payouts Compensation
Principal Position Year ($) ($) ($) $ (#) ($) ($)
- ---------------------------- -------- ------------- ------------ ---------------- ----------- -------------- ---------- ------------
Richard T. Sperberg 1999 $175,000 $ -0- $ 12,372 (4) -0- -0- -0- $ -0-
CEO 1998 $149,125 (2) $32,500 $ 17,889 (4) -0- 126,954 (7) -0- $ -0-
1997 $136,000 $ -0- $ 15,781 (4) -0- 314,616 (8) -0- $ -0-
- ---------------------------- -------- ------------- ------------ ---------------- ----------- -------------- ----------- -----------
S. Lynn Sutcliffe (1) 1999 $278,486 $ -0- $ 6,600 (4) -0- -0- -0- $ -0-
President
- ---------------------------- -------- ------------- ------------ ---------------- ----------- -------------- ----------- ----------
Frank J. Mazanec 1999 $140,000 $40,000 $ 8,909 (4) -0- -0- -0- $ -0-
Senior Vice 1998 $137,154 (2) $22,083 $10,923 (4) (5) -0- 75,000 (9) -0- $ -0-
President 1997 $127,000 $ -0- $64,471 (4) (5) -0- 268,352 (10) -0- $ -0-
- ---------------------------- -------- ------------- ------------ ---------------- ----------- -------------- ----------- -----------
Keith G. Davidson 1999 $140,000 $40,000 $ 8,385 (4) -0- -0- -0- $ -0-
Senior Vice 1998 $121,342 (2) $23,333 $ 7,702 (4) (5) -0- 140,000 (11) -0- $ -0-
President 1997 $102,000 $ -0- $20,838 (4) (5) -0- 119,118 (12) -0- $ -0-
- ---------------------------- -------- ------------- ------------ ---------------- ----------- -------------- ----------- ----------
Dominick J. Aeillo (1) 1999 $120,000 $36,000(3) $65,741 (4) (6) -0- 164,281 (13) -0- $ -0-
Vice President
</TABLE>
(1) Messrs. Sutcliffe and Aiello are executive officers of ONSITE SYCOM but
employees of SYCOM Corporation. In connection with the acquisition of the
assets of SYCOM LLC, and as an integral part of the transactions
contemplated by the underlying asset purchase and sale agreement, pursuant
to a Sale and Noncompetition Agreement ONSITE SYCOM acquired the right to
the services and expertise of all of the employees of SYCOM Corporation,
including Messrs. Sutcliffe and Aiello. In accordance with the terms and
conditions of the Sale and Noncompetition Agreement, ONSITE SYCOM
reimburses SYCOM Corporation for the costs of the SYCOM Corporation
employees at their current salary and fringe benefit levels (including
reasonable general and administrative costs). Because Messrs. Sutcliffe and
Aiello became officers of ONSITE SYCOM in fiscal year 1999, information for
Messrs. Sutcliffe and Aiello is being reported for fiscal year 1999 only.
(2) In fiscal year 1997, certain executive officers agreed to defer certain
portions of their base salary and other compensation from approximately
December 1, 1996 through June 30, 1997. This deferred compensation was
repaid on December 31, 1997, with simple interest at the rate of fifteen
percent (15%) per annum.
(3) Mr. Aiello was entitled to a management bonus of $72,000, and he agreed to
accept payment of one-half of this bonus, plus certain commissions as
disclosed in footnote (6) below, in the form of a five year option to
purchase 164,281 shares of ONSITE SYCOM's Class A Common Stock at $0.4185
per share, which options are fully vested.
<PAGE>18
(4) Includes a company car or car expense allowance and premiums for life
insurance.
(5) Includes commissions paid or advanced in connection with negotiated
customer contracts pursuant to the commission policy of ONSITE SYCOM.
(6) Pursuant to the commission policy of SYCOM Corporation, Mr. Aiello was
entitled to certain commissions payable in cash, and he agreed to accept
payment of one-half of these commissions, plus certain bonuses as disclosed
in footnote (3) above, in the form of a five-year option to purchase
164,281 shares of ONSITE SYCOM's Class A Common Stock at $0.4185 per share,
which options are fully vested.
(7) Includes a five year option to purchase 126,954 shares of Class A Common
Stock at $0.704 per share granted on April 1, 1998, subject to vesting as
follows: 42,318 shares vested on April 1, 1999, and 42,318 shares will vest
on April 1 in each of fiscal year 2000 and 2001.
(8) Includes (i) a five year option to purchase 250,000 shares of Class A
Common Stock at $0.3251 per share granted on March 13, 1997, subject to
vesting as follows: 83,334 shares vested on each of March 13, 1998, and
March 13, 1999; and 83,333 shares vest on March 13, 2000; and (ii) a 10
year option to purchase 64,616 shares of Class A Common Stock at $0.2956
per share, as repriced on March 13, 1997 (which options are fully vested).
Mr. Sperberg previously reported five year options to purchase (i) 38,100
shares of Class A Common Stock at $0.2956 per share, as repriced on March
13, 1997, which options were exercised in January 1998; and (ii) 4,000
shares of Class A Common Stock at $0.2956 per share, as repriced on March
13, 1997, which options were exercised in February 1999.
(9) Includes a five year option to purchase 75,000 shares of Class A Common
Stock at $0.64 per share granted on April 1, 1998, subject to vesting as
follows: 25,000 shares vested on April 1, 1999; and 25,000 shares vest on
April 1 in each of fiscal year 2000 and 2001.
(10) Includes (i) a 10 year option to purchase 250,000 shares of Class A Common
Stock at $0.2956 per share granted on March 13, 1997, subject to vesting as
follows: 83,334 shares vested on each of March 13, 1998 and 1999; and
83,333 shares vest on March 13, 2000; and (ii) a 10 year option to purchase
18,352 of Class A Common Stock at $0.2956 per share, as repriced on March
13, 1997 (which options are fully vested). Mr. Mazanec previously reported
five year options to purchase (i) 9,300 shares of Class A Common Stock at
$0.2956 per share, as repriced on March 13, 1997, which options were
exercised in December 1997 (500) and January 1998 (8,800); and (ii) 4,000
shares of Class A Common Stock at $0.2956 per share, as repriced on March
13, 1997, which options were exercised in February 1999.
(11) Includes 10 year options to purchase (i) 40,000 shares of Class A Common
Stock at $0.53 per share granted on October 27, 1997, subject to vesting as
follows: 13,334 shares vested on each of October 27, 1998 and 1999; and
13,333 shares vest on October 27, 2000; and (ii) 100,000 shares of Class A
Common Stock at $0.64 per share granted on April 1, 1998, subject to
vesting as follows: 33,334 shares vested on April 1, 1999; and 33,333
shares vest on April 1 in each of fiscal year 2000 and 2001.
(12) Includes 10 year options to purchase (i) 100,000 shares of Class A Common
Stock at $0.2956 per share granted on March 13, 1997, subject to vesting as
follows: 33,334 shares vested on each of March 13, 1998 and 1999; and
33,333 shares vest on March 13, 2000; and (ii) 19,118 shares of Class A
Common Stock at $0.2956 per share granted on May 22, 1996, as repriced on
March 13, 1997 (which options are fully vested).
(13) As disclosed in footnotes (3) an (6) above, includes a five year option to
purchase 164,281 shares of Class A Common Stock at $0.4185 per share
granted on May 26, 1999, which options are fully vested.
<PAGE>19
The following table sets forth options granted by ONSITE SYCOM to the
individuals listed in the Summary Compensation Table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<S> <C> <C> <C> <C> <C>
Number of Percentage of
Securities Total
Underlying Options/SARs
Options/SARs Granted to Exercise or Market
Granted Employees Base Price Price on Date Expiration
Name (#) In Fiscal Year ($/Share) of Grant Date
- --------------------------- ---------------- ------------------ ---------------- ---------------- ----------------
Richard T. Sperberg -0- N/A N/A N/A N/A
- ---------------------------- ---------------- ------------------ ---------------- ----------------- ----------------
S. Lynn Sutcliffe -0- N/A N/A N/A N/A
- ---------------------------- ---------------- ------------------ ---------------- ----------------- ----------------
Frank J. Mazanec -0- N/A N/A N/A N/A
- ---------------------------- ---------------- ------------------ ---------------- ----------------- ----------------
Keith G. Davidson -0- N/A N/A N/A N/A
- ---------------------------- ---------------- ------------------ ---------------- ----------------- ----------------
Dominick J. Aiello 164,281 12.7 (1) $0.4185 $0.4185 5/26/04
- ---------------------------- ---------------- ------------------ ---------------- ----------------- ----------------
</TABLE>
(1) Mr. Aiello's options are non-plan options, and were not granted under
ONSITE SYCOM's 1993 Stock Option Plan. This percentage is calculated based
upon the total number of options granted to employees of both ONSITE SYCOM
under the 1993 Stock Option Plan and SYCOM Corporation as non-plan options.
[Remainder of page intentionally left blank]
<PAGE>20
<TABLE>
<S> <C> <C> <C> <C>
AGGREGATED OPTION/SARS EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SARS VALUES
- ------------------------------ ---------------- ---------------- ------------------------- -------------------------
Number of Value of
Securities Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Options/SARs at FY End Options
On Value (#) at FY End
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable *
- ------------------------------ ---------------- ---------------- ------------------------- -------------------------
Richard T. Sperberg 4,000 $1,568 584,190/167,969 $16,242/$1,650
- ------------------------------ ---------------- ---------------- ------------------------- -------------------------
S. Lynn Sutcliffe -0- $ -0- -0-/-0- $ -0-/$ -0-
- ------------------------------ ---------------- ---------------- ------------------------- -------------------------
Frank J. Mazanec 4,000 $2,193 264,571/133,333 $ 9,140/$4,117
- ------------------------------ ---------------- ---------------- ------------------------- -------------------------
Keith G. Davidson -0- $ -0- 250,932/126,665 $10,888/$1,647
- ------------------------------ ---------------- ---------------- ------------------------- -------------------------
Dominick J. Aiello -0- $ -0- 164,281/-0- $ -0-/$ -0-
- ------------------------------ ---------------- ---------------- ------------------------- -------------------------
</TABLE>
* Based upon the average price of $0.345 as of June 30, 1999.
ONSITE SYCOM 1993 Stock Option Plan
Please see discussion under PROPOSAL NO. 2 above.
ONSITE SYCOM 401(k) Plan
Since 1990, ONSITE SYCOM has maintained a 401(k) plan. The ONSITE SYCOM 401(k)
plan provides for broad based employee participation and all ONSITE SYCOM
employees are eligible to enroll after meeting certain criteria such as the
length of employment, hours worked and age. Pursuant to a 1994 amendment to the
401(k) plan, ONSITE SYCOM provides a matching contribution in Class A Common
Stock of seventy-five percent (75%) of the employees' contribution (up to six
percent (6%) of salary, subject to customary limitations on contributions by
highly compensated individuals).
The shares contributed by ONSITE SYCOM are subject to certain vesting periods.
Certain officers and directors who cease participation in the ONSITE SYCOM
401(k) plan may not participate for at least six (6) months. Further, except in
limited distributions such as termination of employment, retirement, disability
or death, any ONSITE SYCOM Class A Common Stock distributed to any officer or
director from the ONSITE SYCOM 401(k) plan must be held by the participant for
<PAGE>21
six (6) months prior to sale. At the end of ONSITE SYCOM's fiscal year, three
hundred fourteen thousand six hundred eighty-seven (314,687) shares of ONSITE
SYCOM Class A Common Stock were earned by all participants of the ONSITE SYCOM
401(k) plan, of which ninety thousand one hundred fifteen (90,115) shares in the
aggregate (eighty-nine thousand nine hundred ninety-five (89,995) shares vested)
have been earned by Messrs. Sperberg, Sutcliffe, Mazanec, Davidson and Aiello.
VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS THEREOF
The following table sets forth certain information about the ownership of ONSITE
SYCOM's Class A Common Stock as of December 21, 1999, by (i) those persons known
by ONSITE SYCOM to be the beneficial owners of more than five percent (5%) of
the total number of outstanding shares of any class entitled to vote; (ii) each
director and highly compensated officer; and (iii) all directors and officers of
ONSITE SYCOM as a group. The table includes Class A Common Stock issuable upon
the exercise of Options or Warrants that are exercisable within sixty (60) days.
Except as indicated in the footnotes to the table, the named persons have sole
voting and investment power with respect to all shares of ONSITE SYCOM Class A
Common Stock shown as beneficially owned by them, subject to community property
laws where applicable. The ownership figures in the table are based on the books
and records of ONSITE SYCOM.
<TABLE>
<S> <C> <C>
Class A Common Stock
------------------------------------------
Name and Address Amount of Percent of Class
of Beneficial Owner Ownership
------------------------------------------------------- -------------------- ---------------------
Dominick J. Aiello 164,281 (1) *
27 Worlds Fair Drive, First Floor
Somerset, NJ 08873
------------------------------------------------------- -------------------- ---------------------
Timothy G. Clark 175,000 (2) *
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
------------------------------------------------------- -------------------- ---------------------
Keith G. Davidson 298,295 (3) 1.58
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
------------------------------------------------------- -------------------- ---------------------
William M. Gary III 1,837,947 (4) 9.85
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
------------------------------------------------------- -------------------- ---------------------
Gruber & McBaine Capital Management., LLC 4,502,073 (5) 20.45
50 Osgood Place
San Francisco, CA 94133
------------------------------------------------------- -------------------- ---------------------
<PAGE>22
Jon D. Gruber 9,675,041 (6) 38.13
50 Osgood Place
San Francisco, CA 94133
------------------------------------------------------- -------------------- ---------------------
H. Tate Holt 348,082 (7) 1.85
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
------------------------------------------------------- -------------------- ---------------------
Lagunitas Partners, L.P. 4,233,102 (8) 19.28
50 Osgood Place
San Francisco, CA 94133
------------------------------------------------------- ------------------- ---------------------
Thomas Lloyd-Butler 4,510,073 (9) 20.05
50 Osgood Place
San Francisco, CA 94133
------------------------------------------------------- -------------------- ---------------------
Frank J. Mazanec 703,709 (10) 3.72
Mazanec Family Trust
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
------------------------------------------------------- -------------------- ---------------------
J. Patterson McBaine 9,668,441 (11) 38.10
50 Osgood Place
San Francisco, CA 94133
------------------------------------------------------- -------------------- ---------------------
Charles C. McGettigan 5,554,468 (12) 24.97
50 Osgood Place
San Francisco, CA 94133
------------------------------------------------------- -------------------- ---------------------
Proactive Investment Managers, L.P. 5,049,468 (13) 22.95
50 Osgood Place
San Francisco, CA 94133
------------------------------------------------------- -------------------- ---------------------
Proactive Partners, L.P. 4,909,633 (14) 22.40
50 Osgood Place
San Francisco, CA 94133
------------------------------------------------------- -------------------- ---------------------
<PAGE>23
Richard T. Sperberg 3,115,082 (15) 15.93
701 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
------------------------------------------------------- -------------------- ---------------------
S. Lynn Sutcliffe 1,750,000 (16) 9.39
27 Worlds Fair Drive, First Floor
Somerset, NJ 08873
------------------------------------------------------- -------------------- ---------------------
SYCOM Enterprises, LLC 1,750,000 (17) 9.39
27 Worlds Fair Drive, First Floor
Somerset, NJ 08873
------------------------------------------------------- -------------------- ---------------------
Westar Capital, Inc. 7,745,600 (18) 35.39
818 South Kansas Street
Topeka, KS 66601
------------------------------------------------------- -------------------- ---------------------
Myron A. Wick III 5,049,468 (19) 22.95
50 Osgood Place
San Francisco, CA 94133
------------------------------------------------------- -------------------- ---------------------
All Directors and Officers as a Group (17) 13,073,266 (20) 52.45
------------------------------------------------------- -------------------- ---------------------
</TABLE>
(1) Includes Options to purchase 164,281 shares of Class A Common Stock
exercisable until May 26, 2004. Additionally, in August 1999 in
connection with the private placement of shares of Series E Convertible
Preferred Stock to certain existing shareholders of ONSITE SYCOM,
certain executive officers of ONSITE SYCOM, including Mr. Aiello,
entered into Salary Reduction Agreements pursuant to which they agreed
to reductions in salary and/or commissions owed (for a six month period
from August 1999 through January 2000) in exchange for shares of Class
A Common Stock and certain Warrants. Under the terms of the Salary
Reduction Agreements, the shares of Class A Common Stock and Warrants
are subject to forfeiture in the event the officer voluntarily
terminates his or her employment during the six-month reduction period.
In the event of involuntary termination by ONSITE SYCOM, however, the
officer is entitled to a prorata portion of such stock and Warrants (as
earned through the date of termination). Thus the table does not
reflect all or any prorata portion of 50,000 shares of Class A Common
Stock and 25,000 shares of Class A Common Stock underlying Warrants
expiring August 13, 2009, that Mr. Aiello will be entitled to
(immediately or upon the exercise of the Warrants) under the terms of
his Salary Reduction Agreement.
Each of the Salary Reduction Agreements entered into by certain
executive officers of ONSITE SYCOM, as described above, hereinafter in
these footnotes shall be referred to as the "Salary Reduction
Agreement."
(2) Includes Options to purchase 50,000, 25,000, 25,000, 25,000, 25,000 and
25,000 shares of Class A Common Stock exercisable until January 25,
2001, October 3, 2001, April 23, 2002, October 3, 2002, October 3,
2003, and October 3, 2004, respectively.
<PAGE>24
(3) In addition to 34,030 shares of Class A Common Stock over which Mr.
Davidson has sole voting and investment power (which number includes
30,600 shares held by Mr. Davidson's minor children), the table
reflects 264,265 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Options expiring August 9, 2005 (70,000
shares), November 20, 2005 (37,072 shares), January 25, 2006 (11,407
shares), May 22, 2006 (19,118 shares), March 13, 2007 (66,667 shares),
October 28, 2007 (26,667) and April 1, 2008 (33,334). The table does
not reflect 33,333 shares of Class A Common Stock that may be acquired
upon the exercise of Options expiring March 13, 2007, in the event a
change in control is deemed to have occurred. In this event, Mr.
Davidson's percent of class ownership would be 1.75%.
Additionally, as previously disclosed, in August 1999 certain executive
officers of ONSITE SYCOM, including Mr. Davidson, entered into a Salary
Reduction Agreement. Thus the table does not reflect all or any prorata
portion of 90,000 shares of Class A Common Stock and 50,000 shares of
Class A Common Stock underlying Warrants expiring August 13, 2009, that
Mr. Davidson will be entitled to (immediately or upon the exercise of
the Warrants) under the terms of his Salary Reduction Agreement.
(4) The table also reflects an aggregate of 1,545,926 shares of Class A
Common Stock (which number includes 130,000 shares held by Mr. Gary's
minor children and family members), of which 1,159,016 shares are
subject to a Stockholders Agreement among certain stockholders of
ONSITE SYCOM, including Mr. Gary, and Westar Capital (the "Stockholders
Agreement"). Under the Stockholders Agreement Westar Capital (i) has
the right to nominate a certain number of directors, and the principal
stockholders of ONSITE SYCOM that are a party to the Stockholders
Agreement, including Mr. Gary, have agreed to vote for Westar Capital's
nominees; and (ii) shall vote for the remaining nominees selected by
the Nominating Committee of ONSITE SYCOM. The Stockholders Agreement
terminates the earlier of (i) five years after the date of the
Agreement; or (ii) the date upon which the stockholdings of Westar
Capital and its affiliates, counted on an as-converted basis, falls
below ten percent (10%) of the outstanding Common Stock of ONSITE
SYCOM, calculated on a fully-diluted basis as specified in the
Stockholders Agreement.
Additionally the table reflects 292,021 shares of Class A Common Stock
that are subject to an Agreement of Stock Purchase and Sale among
Messrs. Gary, Esquer, Mazanec and Sperberg. Messrs. Gary, Esquer and
Sperberg have entered into such Agreement whereby they have sold,
subject to payment and vesting schedules, shares of Onsite-Cal to
Messrs. Esquer and Mazanec. Until a share is paid for all voting and
dispositive rights remain with the seller. Upon vesting and payment,
each such purchaser of the Onsite-Cal shares became entitled to the
same number of ONSITE SYCOM Class A Common Stock received by the
sellers, pursuant to the Reorganization, with respect to the shares
sold. The table reflects all adjustments for shares that have vested
and been paid for in full.
(5) Gruber & McBaine Capital Management, LLC ("Gruber & McBaine"), the
successor-in-interest to Gruber & McBaine Capital Management, Inc., a
California corporation, is an investment advisor and a general partner
of Lagunitas Partners, L.P. Consequently, Gruber & McBaine has or
shares voting or dispositive power over 3,377,073 shares of Class A
Common Stock (which number includes 2,250,000 shares of Class A Common
Stock underlying 22,500 shares of Series E Convertible Preferred Stock)
and 1,125,000 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Warrants expiring August 2, 2009. See
also footnote (8).
(6) Mr. Gruber is a member of Gruber & McBaine Capital Management, LLC,
which is an investment advisor and a general partner of Lagunitas
Partners, L.P., and is a general partner of Proactive Investment
Managers, L.P., which also is an investment advisor and general partner
of Proactive Partners, L.P., and Fremont Proactive Partners, L.P.
Consequently, in addition to 123,500 shares of Class A Common Stock
over which Mr. Gruber has sole voting and investment power (which
number includes shares held by Mr. Gruber's family members and
foundations), Mr. Gruber also has or shares voting or dispositive power
over 7,066,541 shares of Class A Common Stock (which number includes
4,250,000 shares of Class A Common Stock underlying 42,500 shares of
Series E Convertible Preferred Stock) and 2,485,000 shares of Class A
Common Stock that may be immediately acquired upon the exercise of
Warrants expiring September 11, 2002, June 30, 2003, and August 2,
2009. See also footnotes (8) and (14).
<PAGE>25
(7) Includes 175,000 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Options expiring January 25, 2001 (50,000
shares), May 4, 2001 (25,000 shares), April 23, 2002 (25,000 shares),
May 4, 2002 (25,000 shares), May 4, 2003 (25,000 shares), and May 4,
2004 (25,000). Additionally the table reflects 30,000 shares held by
Mr. Holt's children.
The table also reflects 143,082 shares of Class A Common Stock that are
subject to a Voting Agreement among certain stockholders of ONSITE
SYCOM, including Mr. Holt as the President of Holt & Associates, SYCOM
Enterprises, LLC ("SYCOM LLC") and SYCOM Corporation (the "Voting
Agreement"). Under the Voting Agreement (i) SYCOM LLC and SYCOM
Corporation have the right to nominate a certain number of directors,
and the principal stockholders of ONSITE SYCOM that are a party to the
Voting Agreement, including Mr. Holt, have agreed to vote for such
nominees; (ii) SYCOM LLC and SYCOM Corporation have agreed to vote for
the remaining director nominees selected by ONSITE SYCOM; and (iii) all
parties to the Voting Agreement, including Mr. Holt, have agreed to
vote at the next annual meeting to authorize the issuance of additional
common stock to permit the conversion of the Series D Convertible
Preferred Stock to Class A Common Stock in accordance with the terms of
the Sale and Noncompetition Agreement among ONSITE SYCOM, SYCOM
Corporation and others. The Voting Agreement terminates June 30, 2001.
(8) Includes 2,250,000 shares of Class A Common Stock underlying 22,500
shares of Series E Convertible Preferred Stock and 1,125,000 shares of
Class A Common Stock that may be immediately acquired upon the exercise
of Warrants expiring August 2, 2009, and over which Lagunitas Partners,
L.P. ("Lagunitas") has sole voting and investment power. The table also
reflects an aggregate of 858,102 shares of Class A Common Stock(i) of
which 550,982 shares are subject to the Stockholders Agreement among
certain stockholders of ONSITE SYCOM, including Lagunitas, and Westar
Capital; and (ii) all of which are subject to the Voting Agreement
among certain stockholders of ONSITE SYCOM, including Lagunitas, SYCOM
LLC and SYCOM Corporation.
(9) Mr. Lloyd-Butler is a member of Gruber & McBaine Capital Management,
LLC, an investment advisor and a general partner of Lagunitas Partners,
L.P. Consequently, in addition to the 8,000 shares of Class A Common
Stock over which he has sole voting and investment power, Mr.
Lloyd-Butler has or shares voting or dispositive power over 3,377,073
shares of Class A Common Stock (which number includes 2,250,000 shares
of Class A Common Stock underlying 22,500 shares of Series E
Convertible Preferred Stock) and 1,125,000 shares of Class A Common
Stock that may be immediately acquired upon the exercise of Warrants
expiring August 2, 2009. See also footnote (8).
(10) Includes 264,571 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Options expiring November 20, 2005 (7,736
shares), January 25, 2006 (46,816 shares), May 22, 2006 (18,352
shares), March 13, 2007 (166,667 shares), and April 1, 2008 (25,000).
Additionally, the table reflects 162,757 shares of Class A Common Stock
over which Mr. Mazanec, as a trustee of the Mazanec Family Trust, has
or shares voting or dispositive power. The table does not reflect
83,333 shares of Class A Common Stock that may be acquired upon the
exercise of Options expiring March 13, 2007, in the event a change in
control is deemed to have occurred. In this event, Mr. Mazanec's
percent of class ownership would be 4.14%.
The table also reflects 276,381 shares of Class A Common Stock that are
subject to an Agreement of Stock Purchase and Sale among Messrs.
Mazanec, Esquer, Gary and Sperberg. As previously disclosed, Messrs.
Esquer, Gary and Sperberg have entered into such Agreement whereby they
have sold, subject to payment and vesting schedules, shares of
Onsite-Cal to Messrs. Esquer and Mazanec. Until a share is paid for all
voting and dispositive rights remain with the seller. Upon vesting and
payment, each such purchaser of the Onsite-Cal shares became entitled
to the same number of ONSITE SYCOM Class A Common Stock received by the
sellers, pursuant to the Reorganization, with respect to the shares
sold. The table reflects all adjustments for shares that have vested
and been paid for in full.
Additionally, as previously disclosed, in August 1999 certain executive
officers of ONSITE SYCOM, including Mr. Mazanec, entered into a Salary
Reduction Agreement. Thus the table does not reflect all or any prorata
portion of 90,000 shares of Class A Common Stock and 50,000 shares of
Class A Common Stock underlying Warrants expiring August 13, 2009, that
<PAGE>26
Mr. Mazanec will be entitled to (immediately or upon the exercise of
the Warrants) under the terms of his Salary Reduction Agreement.
(11) Mr. McBaine is a member of Gruber & McBaine Capital Management, LLC, an
investment advisor and a general partner of Lagunitas Partners, L.P.,
and is a general partner of Proactive Investment Managers, L.P., also
an investment advisor and a general partner of Proactive Partners,
L.P., and Fremont Proactive Partners, L.P. Consequently, in addition to
the 116,900 shares of Class A Common Stock over which he has sole
voting and investment power (which number includes shares held by Mr.
McBaine's family members), Mr. McBaine has or shares voting or
dispositive power over 7,066,541 shares of Class A Common Stock (which
number includes 4,250,000 shares of Class A Common Stock underlying
42,500 shares of Series E Convertible Preferred Stock) and 2,485,000
shares of Class A Common Stock that may be immediately acquired upon
the exercise of Warrants expiring September 11, 2002, June 30, 2003,
and August 2, 2009. See also footnotes (8) and (14).
(12) Includes Options to purchase 75,000, 25,000, 25,000, 25,000, 25,000 and
25,000 shares of Class A Common Stock exercisable until January 25,
2001, July 13, 2001, April 23, 2002, July 13, 2002, July 13, 2003, and
July 13, 2004, respectively. In addition to 305,000 shares of Class A
Common Stock in which Mr. McGettigan has sole voting and investment
power (which number includes 250,000 shares of Class A Common Stock
underlying 2,500 shares of Series E Convertible Preferred Stock), Mr.
McGettigan is a general partner of Proactive Investment Managers, L.P.,
an investment advisor and a general partner of Proactive Partners,
L.P., and Fremont Proactive Partners, L.P., and is a general partner of
McGettigan, Wick & Co., Inc., and consequently has or shares voting or
dispositive power over 3,689,468 shares of Class A Common Stock (which
number includes 2,250,000 shares of Class A Common Stock underlying
22,500 shares of Series E Convertible Preferred Stock), and 1,360,000
shares of Class A Common Stock that may be immediately acquired upon
the exercise of Warrants expiring September 11, 2002, June 30, 2003,
and August 2, 2009. See also footnote (14).
(13) Proactive Investment Managers, L.P. ("PIM"), is a general partner of
Proactive Partners, L.P., and Fremont Proactive Partners, L.P., and
consequently has or shares voting or dispositive power over 3,689,468
shares of Class A Common Stock (which number includes 2,250,000 shares
of Class A Common Stock underlying 22,500 shares of Series E
Convertible Preferred Stock) and 1,280,000 shares of Class A Common
Stock that may be immediately acquired upon the exercise of Warrants
expiring September 11, 2002, June 30, 2003, and August 2, 2009. The
table also reflects 80,000 shares of Class A Common Stock that may be
immediately acquired upon the exercise of Warrants expiring June 30,
2003, and over which PIM has sole voting and investment power. See also
footnote (14).
(14) In addition to 2,036,678 shares of Class A Common Stock over which
Proactive Partners, L.P. ("Proactive") has sole voting and investment
power (which number includes 2,000,000 shares of Class A Common Stock
underlying 20,000 shares of Series E Convertible Preferred Stock), the
table reflects 1,280,000 shares of Class A Common Stock that may be
immediately acquired upon the exercise of Warrants expiring September
11, 2002, June 30, 2003, and August 2, 2009. The table also reflects an
aggregate of 1,592,955 shares of Class A Common Stock (i) of which
1,073,905 shares are subject to the Stockholders Agreement among
certain stockholders of ONSITE SYCOM, including Proactive, and Westar
Capital; and (ii) all of which shares are subject to the Voting
Agreement among certain stockholders of ONSITE SYCOM, including
Proactive, SYCOM LLC and SYCOM Corporation.
(15) Includes 584,190 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Options expiring August 9, 2005 (150,000
shares), November 20, 2005 (107,781 shares), January 25, 2006 (52,808
shares), May 22, 2006 (64,616 shares), March 13, 2002 (166,667 shares),
and April 1, 2003 (42,318), 325,998 shares of Class A Common Stock that
may be immediately acquired upon the exercise of Warrants expiring
September 11, 2002, 4,090 shares over which Mr. Sperberg has sole
voting and investment power, and 70,545 shares held by Mr. Sperberg's
minor son. The table does not reflect 83,333 shares of Class A Common
Stock that may be acquired upon the exercise of Options expiring March
13, 2002, in the event a change in control is deemed to have occurred.
In this event, Mr. Sperberg's percent of class ownership would be
15.93%.
The table also reflects an aggregate of 1,848,922 shares of Class A
Common Stock (including 110,545 shares held by Mr. Sperberg's minor
son), (i) of which 1,216,097 shares are subject to the Stockholders
<PAGE>27
Agreement among certain stockholders of ONSITE SYCOM, including Mr.
Sperberg, and Westar Capital; and (ii) all of which shares are subject
to the Voting Agreement among certain stockholders of ONSITE SYCOM,
including Mr. Sperberg, and SYCOM LLC and SYCOM Corporation.
Additionally the table reflects 351,892 shares of Class A Common Stock
that are subject to an Agreement of Stock Purchase and Sale among
Messrs. Sperberg, Esquer, Gary and Mazanec. As previously disclosed,
Messrs. Sperberg, Esquer and Gary have entered into such Agreement
whereby they have sold, subject to payment and vesting schedules,
shares of Onsite-Cal to Messrs. Esquer and Mazanec. Until a share is
paid for all voting and dispositive rights remain with the seller. Upon
vesting and payment, each such purchaser of the Onsite-Cal shares
became entitled to the same number of ONSITE SYCOM Class A Common Stock
received by the sellers, pursuant to the Reorganization, with respect
to the shares sold. The table reflects all adjustments for shares that
have vested and been paid for in full.
Finally, as previously disclosed, in August 1999 certain executive
officers of ONSITE SYCOM, including Mr. Sperberg, entered into a Salary
Reduction Agreement. Thus the table does not reflect all or any prorata
portion of 87,500 shares of Class A Common Stock and 43,750 shares of
Class A Common Stock underlying Warrants expiring August 13, 2009, that
Mr. Sperberg will be entitled to (immediately or upon the exercise of
the Warrants) under the terms of his Salary Reduction Agreement.
(16) Mr. Sutcliffe is the majority shareholder of SSBKK, Inc., the sole
member of SYCOM LLC and of SYCOM Corporation, and consequently has or
shares voting or dispositive power over 1,750,000 shares of Class A
Common Stock. Additionally, as previously disclosed, in August 1999
certain executive officers of ONSITE SYCOM, including Mr. Sutcliffe,
entered into a Salary Reduction Agreement. Thus the table does not
reflect all or any prorata portion of 139,000 shares of Class A Common
Stock and 69,500 shares of Class A Common Stock underlying Warrants
expiring August 13, 2009, that Mr. Sutcliffe will be entitled to
(immediately or upon the exercise of the Warrants) under the terms of
his Salary Reduction Agreement. The table also does not reflect 157,500
shares of Series D Convertible Preferred Stock (or the 15,750,000
shares of Class A Common Stock underlying the same) issued to SYCOM
Corporation that currently is being held in escrow under an Escrow
Agreement because such shares are non-voting and the conditions
precedent to the release of such shares will not be satisfied within
the next 60 days. See also footnote (17).
(17) Represents 1,750,000 shares of Class A Common Stock that are subject to
the Voting Agreement among certain stockholders of ONSITE SYCOM, SYCOM
LLC and SYCOM Corporation.
(18) Includes the following securities that are subject to the Stockholders
Agreement among certain stockholders of ONSITE SYCOM and Westar
Capital: 4,500,000 shares of Class A Common Stock, and 3,245,600 shares
of Class A Common Stock underlying 649,120 shares of Series C
Convertible Preferred Stock. The table does not reflect unpaid
dividends of 32,031 shares of Series C Convertible Preferred Stock.
(19) Mr. Wick is a general partner of Proactive Investment Managers, L.P.,
an investment advisor and a general partner of Proactive Partners,
L.P., and Fremont Proactive Partners, L.P., and is a general partner of
McGettigan, Wick & Co., Inc., and consequently has or shares voting or
dispositive power over 3,689,468 shares of Class A Common Stock and
1,360,000 shares of Class A Common Stock that may be immediately
acquired upon the exercise of Warrants expiring September 11, 2002,
June 30, 2003, and August 2, 2009. See also footnote (14).
(20) Includes the aggregate of ownership of Messrs. Aiello, Clark, Davidson,
Holt, Mazanec, McGettigan, Sperberg and Sutcliffe as set forth in
footnotes (1), (2), (3), (7), (10), (12), (15) and (16), and an
aggregate of 417,720 shares of Class A Common Stock held by other
officers and directors, 524,149 shares of Class A Common Stock that may
be acquired within the next sixty (60) days upon the exercise of
options held by other officers (but not including any shares of Class A
Common Stock and/or shares of Class A Common Stock underlying Warrants
expiring August 13, 2009, that such officers will be entitled to
(immediately or upon the exercise of the Warrants) under the terms of
their respective Salary Reduction Agreements), and 374,372 shares of
Class A Common Stock that are subject to a Stock Purchase Agreement
among Hector A. Esquer, and Messrs. Gary, Mazanec and Sperberg. For
<PAGE>28
purposes of calculating this footnote, the number of shares
attributable to Mr. Sperberg does not include 351,892 shares that are
subject to the above Stock Purchase Agreement because these shares are
counted as owned by Messrs. Mazanec and Esquer.
* Less than one percent (1%).
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
ONSITE SYCOM directors, executive officers and persons who own more than ten
percent (10%) of ONSITE SYCOM's Class A Common Stock to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Directors, officers and stockholders of more than ten percent (10%)
of ONSITE SYCOM's Class A Common Stock are required by the SEC regulations to
furnish ONSITE SYCOM with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to ONSITE SYCOM, or
written representations that such filings were not required, ONSITE SYCOM
believes that since July 1, 1998, through the end of the 1999 fiscal year, all
Section 16(a) filing requirements applicable to its directors, officers and
stockholders of more than ten percent (10%) of ONSITE SYCOM's Class A Common
Stock were complied with except as follows: (i) one report (Form 3) covering one
transaction inadvertently was filed late by Mr. Aiello; (ii) one report (Form 3)
covering one transaction inadvertently was filed late by Mr. Dower; (iii) one
report (Form 3) covering one transaction inadvertently was filed late by Mr.
Bitters; (iv) two reports (Form 4 and Form 5) covering two transactions
inadvertently were filed late by Mr. McGettigan; (v) one report (Form 4)
covering one transaction inadvertently was filed late by Mr. Esquer; and (vi)
one report (Form 5) covering one transaction inadvertently was filed late by Mr.
Mazanec. Additionally, ONSITE SYCOM has not received copies of a Form 5 from two
(2) former officers and three (3) former directors of ONSITE SYCOM.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ONSITE SYCOM's Class A Common Stock currently is traded on the NASD
Over-the-Counter (OTC) Electronic Bulletin Board. The following table sets forth
the high and low prices per share of Class A Common Stock for the prior two (2)
fiscal years (1998 and 1999) by quarters. The following market quotation
reflects inter-dealer prices without retail mark-ups, mark-downs or commissions,
and may not represent actual transactions.
[Remainder of page intentionally left blank]
<PAGE>29
<TABLE>
<S> <C> <C>
Quarter Ended High Low
-------------------------------- ------------------------------- ------------------------------
September 30, 1997 $0.34 $0.18
December 31, 1997 $0.9375 $0.26
March 31, 1998 $0.6875 $0.50
June 30, 1998 $1.4375 $0.5625
September 30, 1998 $1.25 $0.7812
December 31, 1998 $0.781 $0.4687
March 31, 1999 $0.9062 $0.50
June 30, 1999 $0.625 $0.3125
</TABLE>
As of November 15, 1999, there were approximately two hundred twenty-eight (228)
holders of record of ONSITE SYCOM's Class A Common Stock.
ONSITE SYCOM has not paid any dividends on its Common Stock, nor does ONSITE
SYCOM anticipate paying dividends on its Common Stock in the foreseeable future.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Guaranty of Bonds
In connection with ONSITE SYCOM's acquisition of OBS, ONSITE SYCOM entered into
a Transition Agreement pursuant to which Westar Energy, Inc. ("Westar Energy"),
a sister corporation to Westar Capital, a shareholder of ONSITE SYCOM, agreed,
for a period of one year after the closing of the OBS acquisition (November
1997), to maintain an indemnity agreement with Westar Capital at a level
sufficient to provide credit support to OBS for bid and performance bonds
required to be posted in connection with OBS's business. OBS pays all actual and
out-of-pocket fees and costs associated with these bonds. OBS (individually or
with ONSITE SYCOM) currently has three (3) bonds outstanding on projects that
are complete or are in the final stages of completion and for which Westar
Energy and/or Westar Capital have provided the requisite credit support. Westar
Capital is a five percent (5%) or more shareholder of ONSITE SYCOM.
Westar Transaction
In February 1998, Onsite/Mid-States, Inc., an indirect wholly-owned subsidiary
of ONSITE SYCOM, acquired the operating assets of a Kansas corporation in
exchange for Two Hundred Ninety Thousand Dollars ($290,000). In connection with
this transaction, ONSITE SYCOM executed an agreement with Westar Energy pursuant
to which Westar Energy agreed to loan to ONSITE SYCOM an amount equal to the
amount paid by ONSITE SYCOM for the operating assets. In April 1998, this loan
was made by Westar Energy to ONSITE SYCOM, and was to be repaid by the first
anniversary of the closing of the asset acquisition. Pursuant to a February 1999
settlement agreement entered into by ONSITE SYCOM, Westar Capital, Westar Energy
<PAGE>30
and Western Resources in connection with litigation among the parties, Westar
Energy, Westar Capital and Western Resources agreed to apply certain payments
due from Western Resources to Onsite Energy Services, Inc., under existing water
treatment plant contracts to repayment of the subject loan in the event the same
was not repaid as above. This loan was repaid in full in November 1999. Ms.
Sharpe, a former director of ONSITE SYCOM, is an employee of Western Resources,
the parent company of Westar Capital, and Mr. Wages, a former director of ONSITE
SYCOM, is the President of Westar Capital, which is a shareholder of ONSITE
SYCOM.
Guaranty of Performance
In March 1998, ONSITE SYCOM entered into an energy services agreement with a
customer to install energy efficient equipment in a large number of the
customer's facilities. A condition precedent to the customer's execution of its
agreement, however, was the customer's receipt of a guaranty from Westar
Capital, guaranteeing the payment obligations of ONSITE SYCOM under the customer
agreement. Accordingly, in exchange, and as consideration for, Westar Capital's
execution of the guaranty, ONSITE SYCOM agreed, in essence, to indemnify Westar
Capital in the event Westar Capital must perform under its guaranty, executed a
promissory note to cover any amounts ONSITE SYCOM may owe to Westar Capital as a
result of Westar Capital's performance under its guaranty, and granted Westar
Capital a security interest in ONSITE SYCOM's assets to secure its payment of
the note. The security agreement includes certain exceptions in the security
interest granted therein. No amounts currently are outstanding under the note.
Westar Capital is a five percent (5%) or more shareholder of ONSITE SYCOM.
Engagement of Investment Advisor
In connection with the SYCOM transaction, ONSITE SYCOM engaged McGettigan Wick &
Co., Inc., an investment banking firm ("McGettigan Wick"), to assist ONSITE
SYCOM in the structure and negotiation of the transaction. Under the terms of
the engagement, ONSITE SYCOM agreed to pay McGettigan Wick Fifty Thousand
Dollars ($50,000) one year after the closing the transaction (which was June 30,
1998), and issue warrants to McGettigan Wick (which warrants immediately were
transferred by McGettigan Wick to its affiliates, Proactive and Proactive
Investment Managers, L.P. ("PIM")) to acquire one hundred sixty thousand
(160,000) shares of Class A Common Stock of ONSITE SYCOM at the exercise price
of $1.17 per share, which was the current price of ONSITE SYCOM's Class A Common
Stock on the OTC Electronic Bulletin Board on June 30, 1998. These warrants were
subsequently repriced on May 26, 1999, to $0.4185 per share, which was the
current price of ONSITE SYCOM's Class A Common Stock on the OTC Electronic
Bulletin Board on May 26, 1999. Mr. McGettigan is a general partner of Proactive
and PIM, shareholders of ONSITE SYCOM, and is the Chairman of the Board of
Directors of ONSITE SYCOM.
August 1999 Private Placement
In August 1999, ONSITE SYCOM completed a private placement of shares of Series E
Convertible Preferred Stock and the issuance of warrants to purchase shares of
ONSITE SYCOM Class A Common Stock with Mr. McGettigan, the Chairman of the
Board, and other related investors, including Proactive and Lagunitas Partners,
L.P., current shareholders of ONSITE SYCOM. Terms of the placement include the
issuance of fifty thousand (50,000) shares of Series E Convertible Preferred
Stock (which is convertible initially into five million (5,000,000) shares of
Class A Common Stock) in exchange for One Million Dollars ($1,000,000), warrants
to purchase one million two hundred fifty thousand (1,250,000) shares of ONSITE
SYCOM Class A Common Stock at fifty cents ($0.50) per share, and warrants to
purchase one million two hundred fifty thousand (1,250,000) shares of ONSITE
SYCOM Class A Common Stock at seventy-five cents ($0.75) per share. Mr.
McGettigan is a general partner of Proactive, a shareholder of ONSITE SYCOM,
and, as stated above, is the Chairman of the Board of Directors of ONSITE SYCOM.
<PAGE>31
OTHER MATTERS
Relationship With Independent Accountants
Hein + Associates, LLP ("Hein") has served as ONSITE SYCOM's independent
accountants since July 1995. ONSITE SYCOM has had no disagreements with the
accountants on accounting and financial disclosures. For the fiscal year 2000
the Board of Directors has continued to retain, and expects to continue retain,
Hein; however, the Board may seek competitive bids for its annual audit. A
representative of Hein may be present at the Meeting to be available to respond
to appropriate questions from stockholders.
Other Matters
The Board of Directors of ONSITE SYCOM knows of no other matters that may be or
are likely to be presented at the Meeting. However, if additional matters are
presented at the Meeting, the persons named in the enclosed proxy will vote such
proxy in accordance with their best judgment on such matters pursuant to the
discretionary authority granted to them by the terms and conditions of the
proxy.
Stockholder Proposals
Stockholder proposals to be included in ONSITE SYCOM's Proxy Statement and proxy
for ONSITE SYCOM's next annual meeting must meet the requirements of Rule 14a-8
promulgated by the SEC, and must be received by ONSITE SYCOM no later than June
25, 2000.
Additional Information
A copy of ONSITE SYCOM's Form 10-KSB for fiscal year ended June 30, 1999,
containing ONSITE SYCOM's 1999 audited financial statements, including the
report of its independent public accountants, accompanies this Proxy Statement.
Stockholders, however, may obtain additional copies by written request addressed
to ONSITE SYCOM's Secretary, Audrey Nelson Stubenberg.
ONSITE ENERGY CORPORATION
dba ONSITE SYCOM Energy Corporation
By Order of the Board of Directors
Audrey Nelson Stubenberg
Secretary
Carlsbad, CA
February 18, 2000
<PAGE>32
Appendix A
ONSITE ENERGY CORPORATION
(a Delaware corporation)
FORM OF
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
RESOLVED: That the Certificate of Incorporation of the Corporation be
amended by changing ARTICLES I and IV so that, as amended, these
Articles shall read in their entirety as follows:
ARTICLE I
The name of the Corporation is ONSITE SYCOM Energy Corporation.
ARTICLE IV
The aggregate number of shares which the Corporation shall have the
authority to issue is seventy million (70,000,000) of which sixty-seven
million nine hundred ninety-nine thousand (67,999,000) shares will be
Class A Common Stock, par value $.001 per share, one thousand (1,000)
shares shall be Class B Common Stock, par value $.001 per share, and
two million (2,000,000) shares will be Preferred Stock, par value
$.001.
The Preferred Stock may be issued in any number of series, as
determined by the Board of Directors. The Board may, by resolution, fix
the designation and number of shares of any such series, and may
determine, alter or revoke the rights, including voting rights,
preferences, privileges and restrictions pertaining to any wholly
unissued series. The Board may thereafter in the same manner increase
or decrease the number of shares of any such series (but not below the
number of shares of that series then outstanding).
<PAGE>33
Class A Common Stock PROXY
ONSITE ENERGY CORPORATION (dba ONSITE SYCOM Energy Corporation)
1999 Annual Meeting of Stockholders To Be Held March 22, 2000
This proxy is solicited on behalf of the Board of Directors
Revoking any such prior appointment, the undersigned, a stockholder of Onsite
Energy Corporation (dba ONSITE SYCOM Energy Corporation) ("ONSITE SYCOM"),
hereby appoints Charles C. McGettigan and Richard T. Sperberg, and each of them
(collectively, the "Proxies"), attorneys and agents of the undersigned, with
full power of substitution, to vote all shares of the Class A Common Stock of
the undersigned in ONSITE SYCOM at the 1999 Annual Meeting of Stockholders of
ONSITE SYCOM to be held at the San Diego/Del Mar Hilton, 15575 Jimmy Durante
Boulevard, Del Mar, CA 92014, on March 22, 2000, at 8:00 a.m. (California time),
and at any adjournments thereof, as fully and effectually as the undersigned
could do if personally present and voting, hereby approving, ratifying and
confirming all that the Proxies or their substitutes may lawfully do in place of
the undersigned as indicated below. In their discretion, the Proxies also are
authorized to vote upon such other matters as may properly come before the
meeting.
This proxy, when properly executed, will be voted as directed. If no direction
is indicated for a proposal, this proxy will be voted FOR Proposal Nos. 1, 2 and
3.
1. Election of Directors.
FOR all nominees listed below _____ WITHOUT AUTHORITY ____
(except as marked to the contrary (to vote for all nominees below)
below)
(INSTRUCTIONS: To withhold authority to vote for any individual nominee, strike
a line through the nominee's name in the list below.)
<TABLE>
<S> <C> <C> <C> <C> <C>
H. Tate Holt Timothy G. Clark S. Lynn Sutcliffe Charles C. McGettigan Richard T. Sperberg Richard L. Wright
</TABLE>
2. Proposal to approve an amendment to the ONSITE SYCOM Energy Corporation
1993 Stock Option Plan increasing the number of shares available for grant
under the Plan.
FOR AGAINST ABSTAIN
3. Proposal to approve amendments to ONSITE SYCOM's Certificate of
Incorporation to (i) increase the authorized number of shares available for
issuance by ONSITE SYCOM; and (ii) change the name of Onsite Energy
Corporation to ONSITE SYCOM Energy Corporation.
FOR AGAINST ABSTAIN
4. Upon any other matters that may properly come before the meeting or any
adjournments thereof.
FOR AGAINST ABSTAIN
Please sign exactly as
name appears below.
Dated: _______________, 2000
--------------------------------
Signature
--------------------------------
When shares are held by joint tenants
both should sign. When signing as
attorney, executor, administrator, trustee
or guardian, please give full title as
such. If a corporation, please sign in
full corporate name by President or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
Please mark, sign, date and return the proxy card promptly using the enclosed
envelope.
<PAGE>
AUDITED FINANCIAL STATEMENTS OF ONSITE ENERGY CORPORATION
(as of June 30, 1999, June 30, 1998 and September 30, 1999)
<PAGE>i
ONSITE ENERGY CORPORATION
FINANCIAL STATEMENTS - JUNE 30, 1999
<PAGE>F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report ....................................................................F-2
Consolidated Balance Sheet - June 30, 1999.......................................................F-3
Consolidated Statements of Operations - For the Years ended
June 30, 1999 and 1998......................................................................F-4
Consolidated Statement of Shareholders' Equity (Deficit) - For the Years ended
June 30, 1999 and 1998......................................................................F-5
Consolidated Statements of Cash Flows - For the Years ended
June 30, 1999 and 1998......................................................................F-6
Notes to Consolidated Financial Statements.......................................................F-7
</TABLE>
<PAGE>F-2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Onsite Energy Corporation
Carlsbad, California
We have audited the accompanying consolidated balance sheet of Onsite Energy
Corporation and subsidiaries (the "Company") as of June 30, 1999 and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the years ended June 30, 1999 and 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Onsite Energy
Corporation and subsidiaries at June 30, 1999 and the results of their
operations and their cash flows for the years ended June 30, 1999 and 1998 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has a working capital deficit of $6,357,699, and an accumulated
deficit of $26,528,421. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with regard
to these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of reported asset amounts or the amounts and classification of
liabilities that might result from the outcome of this uncertainty.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
September 3, 1999
<PAGE>F-3
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1999
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash $ 900,408
Accounts receivable, net of allowance for doubtful accounts of $35,000 6,071,729
Inventory 185,562
Capitalized project costs 147,022
Costs and estimated earnings in excess of billings on uncompleted contracts 1,109,315
Other current assets 50,634
-----------------
TOTAL CURRENT ASSETS 8,464,670
Cash-restricted 147,838
Property and equipment, net of accumulated depreciation and amortization of $1,258,000 1,413,918
Other assets 101,483
-----------------
TOTAL ASSETS $ 10,127,909
=================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable - related party $ 211,914
Notes payable 2,499,455
Accounts payable 9,035,325
Billings in excess of costs and estimated earnings on uncompleted contracts 1,445,790
Accrued expenses and other liabilities 1,394,024
Liabilities in excess of assets held for sale 235,861
------------------
TOTAL CURRENT LIABILITIES 14,822,369
Long-Term Liabilities:
Accrued future operation and maintenance costs associated with energy services
agreements 324,010
-------------------
TOTAL LIABILITIES 15,146,379
-------------------
Commitments and contingencies (Notes 2, 3, 4, 8, 11, 12, 14, 15, 20)
Shareholders' Equity (Deficit):
Preferred Stock, Series C, 842,500 shares authorized, 649,120 issued and
outstanding (Aggregate $3,245,600 liquidation preference) 649
Preferred Stock, Series D, 157,500 shares authorized, issued and outstanding and held
in escrow -
Common Stock, $.001 par value, 24,000,000 shares authorized:
Class A common stock, 23,999,000 shares authorized, 18,584,853 issued and
outstanding 18,585
Class B common stock, 1,000 shares authorized, none issued and outstanding -
Additional paid-in capital 25,583,816
Notes receivable - shareholders (4,093,099)
Accumulated deficit (26,528,421)
------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (5,018,470)
------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 10,127,909
==================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>F-4
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 1999 and 1998
<TABLE>
<S> <C> <C>
1999 1998
----------------- -------------------
Revenues $ 43,557,902 $ 12,267,148
Cost of sales 35,118,295 10,057,277
----------------- -------------------
Gross margin 8,439,607 2,209,871
Selling, general, and administrative expenses 11,193,561 3,879,237
Depreciation and amortization expense 1,074,855 539,499
Reserve on sale or disposal of subsidiary 1,010,000 -
Impairment of excess of purchase price
over net assets acquired 1,918,851 -
----------------- -------------------
Operating loss (6,757,660) (2,208,865)
----------------- -------------------
Other income (expense):
Interest expense (292,287) (27,400)
Interest income 146,436 25,283
----------------- -------------------
Total other expense (145,851) (2,117)
----------------- -------------------
Loss before provision for income taxes (6,903,511) (2,210,982)
Provision for income taxes 5,500 7,500
----------------- -------------------
Net loss $ (6,909,011) $ (2,218,482)
================= ===================
Net loss allocated to common shareholders $ (7,113,579) $ (2,267,629)
================= ===================
Basic and diluted loss per common share: $ (0.39) $ (0.16)
================= ===================
Weighted average number of shares
used in per common share calculation: 13,790,185
18,469,094
================= ===================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-5
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended June 30, 1999 and 1998
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock Preferred Stock
------------------------------------ --------------------------------------------------------------
Class A Series C Series D
------------------------------------ -------------------------------- -----------------------------
Total
Additional Notes Accum- Shareholders
Paid-In Receivable- ulated Equity
Shares Amount Shares Amount Shares Amount Capital Shareholders Deficit (Deficit)
-------- -------- -------- ------ ------ ------ ----------- -------------- ------------ ------------
Balances July 1, 1997 10,944,172 $ 10,944 - $ - - $ - $17,052,961 $ - $(17,147,213) $ (83,308)
Issued to Onsite 401k Plan 49,912 50 - - - - 17,399 - - 17,449
Issued pursuant to private
offering net of expenses 2,000,000 2,000 - - - - 951,542 - - 953,542
Stock issued for acquisitions 4,940,000 4,940 - - - - 4,031,923 - - 4,036,863
Exercise of stock options 309,104 309 - - - - 86,854 - - 87,163
Sale of Series C preferred
stock - - 200,000 200 - - 999,800 - - 1,000,000
Series C preferred stock
dividend - - 8,205 8 - - 49,139 - (49,147) -
Compensation recognized upon
issuance of warrants - - - - - - 18,980 - - 18,980
Notes receivable from
shareholders acquired in
acquisitions - - - - - - - (1,335,217) - (1,335,217)
Net Loss - - - - - - - - (2,218,482) (2,218,482)
------------ --------- ------- ---- ---- ----- ----------- ----------- ------------ ------------
Balances June 30, 1998 $ 18,243,188 18,243 208,205 $208 - $ - $23,208,598 $(1,335,217) $(19,414,842) $2,476,990
Exercise of stock options 75,334 75 - - - - 23,404 - - 23,479
Issued to Onsite 401k Plan 266,331 267 - - - - 147,687 - - 147,954
Series C preferred stock
dividend - - 40,915 41 - - 204,527 - (204,568) -
Sale of Series C preferred
stock - - 400,000 400 - - 1,999,600 - - 2,000,000
Notes receivable from
shareholders acquired in
acquisitions - - - - - - - (2,757,882) - (2,757,882)
Net Loss - - - - - - - - (6,909,011) (6,909,011)
----------- -------- -------- ---- ---- ----- ----------- ----------- ------------ ------------
Balances June 30, 1999 18,584,853 $18,585 649,120 $649 - $ - $25,583,816 $(4,093,099) $(26,528,421) $(5,018,470)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-6
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1999 and 1998
<TABLE>
<S> <C> <C>
1999 1998
--------------------- ---------------------
Cash flows from operating activities:
Net loss $ (6,909,011) $ (2,218,482)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization of excess purchase price over net assets
acquired 502,390 280,927
Adjustment resulting from impairment in estimated carrying
value of excess purchase price over net assets acquired 1,918,851
Amortization of acquired contract costs 50,196
-
Estimated loss on disposal of subsidiary 1,010,000
-
Accrued future operation and maintenance costs (39,174) 43,927
Provision for bad debts 35,000 30,192
Depreciation 572,465 258,572
Compensation recognized upon issuance of stock warrants - 18,980
Accounts receivable (3,780,739) (781,792)
Increase in costs and estimated earnings
in excess of billings on uncompleted contracts (252,419) (225,324)
Inventory (7,347) (5,758)
Other assets 44,100 (435,120)
Cash-restricted 9,998 115,331
Accounts payable 6,847,535 1,351,806
Increase (decrease) in billings in excess of costs
and estimated earnings on uncompleted contracts (1,124,173) 1,739,390
Accrued expenses and other liabilities 164,117 641,631
Deferred income 186,288 -
--------------------- ---------------------
Net cash provided by (used in) operating activities (771,923) 814,280
-------------------- ---------------------
Cash flows from investing activities:
Purchases of property and equipment (82,539) (119,075)
Loan to shareholders (2,757,882) (7,911)
Acquisition of businesses, net of cash acquired - (1,203,805)
--------------------- ---------------------
Net cash used in investing activities (2,840,421) (1,330,791)
--------------------- ---------------------
Cash flows from financing activities:
Proceeds from notes payable 1,178,108 290,000
Proceeds from issuance of common stock - 953,542
Proceeds from issuance of preferred stock 2,000,000 1,000,000
Proceeds from exercise of stock options 23,479 87,163
Repayment of notes payable - related party (256,415) (46,804)
Repayment of notes payable (525,426) (201,278)
--------------------- ---------------------
Net cash provided by financing activities 2,419,746 2,082,623
--------------------- ---------------------
Net increase (decrease) in cash (1,192,598) 1,566,112
Cash, beginning of year 2,093,006 526,894
--------------------- ---------------------
Cash, end of year $ 900,408 $ 2,093,006
===================== =====================
Supplemental disclosures of non-cash transactions:
Payment of Series C Preferred Stock dividends
with Series C Preferred stock $ 204,568 $ 49,147
===================== =====================
Payment of accrued liabilities with common stock $ 147,954 $ 17,449
===================== ====================
Liabilities accrued for acquisition costs $ - $ 285,594
===================== ===================
Fair market value of assets, less liabilities of
businesses acquired with common stock $ - $ 4,036,863
===================== =====================
Supplemental disclosures of cash transactions:
Interest paid $ 312,110 $ 33,385
===================== =====================
Income taxes paid $ 5,500 $ 36,175
===================== =====================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-7
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations:
Onsite Energy Corporation, which does business as ONSITE SYCOM Energy
Corporation (the "Company"), is an energy efficiency services company
("ESCO") that develops, designs, constructs, owns and operates
comprehensive energy efficiency and on-site generation projects and assists
customers in reducing the cost of purchased electricity and fuel. The
Company also offers bill auditing, tariff analysis, transmission and
distribution analysis and upgrade and aggregation services. In addition,
the Company offers professional consulting services in the areas of market
assessment, business strategies, public policy analysis, environmental
studies and utility deregulation. It is the Company's mission to save its
customers money and improve the quality of the environment through
independent energy solutions.
The Company was formed pursuant to a reorganization between Western Energy
Management, Inc., a Delaware corporation ("WEM"), and Onsite Energy, a
California corporation, which was effective February 15, 1994.
In October 1997, the Company acquired Westar Business Services, Inc.
("WBS"), which was renamed OBS and subsequently changed its name to Onsite
Energy Services, Inc. ("OES") (see Note 4). OES provides utility services
and industrial water services primarily in the states of Kansas, Missouri
and Oklahoma.
In February 1998, OES acquired the operating assets of Mid-States Armature
Works, Inc. ("Mid-States Armature") through a newly formed subsidiary
Onsite/Mid-States, Inc. ("OMS") (see Note 4). OMS provides specialized
medium and high voltage electrical fabrication, installation, maintenance
and repair services to municipal utility customers and others, primarily in
the states of Kansas, Nebraska, Missouri, Iowa, and Oklahoma.
On April 8, 1998, the Company formed Onsite Energy de Panama, S.A., a
Panamanian corporation to facilitate the acquisition of potential projects
in Panama and Latin America. As of June 30, 1999, there has been no
operating activity in this subsidiary.
In June 1998, the Company acquired Lighting Technology Services, Inc.
("LTS") (see Note 4). LTS provides energy efficiency projects through
retrofits of lighting and controls either independently or as a
subcontractor to the Company and other ESCOs primarily in Southern
California.
On June 30, 1998, the Company acquired the assets and certain liabilities
of SYCOM Enterprises, LLC through a newly-formed subsidiary SYCOM ONSITE
Corporation ("SO Corporation") (See Note 4). SO Corporation is also an ESCO
with customers primarily on the east coast of the United States.
Effective April 1, 1999, the Company formed REEP Onsite, Inc. ("REEP") and
ERSI Onsite, Inc. ("ERSI") for the purpose of acquiring substantially
all of the assets of REEP, Inc. for assumption of certain liabilities
(see Note 4). The aquired assets were allocated between REEP and ERSI. REEP
provides residential energy services while ERSI is a commercial lighting
contractor.
Unless the context indicates otherwise, reference to the Company shall
include all of its wholly-owned subsidiaries.
<PAGE>F-8
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all of its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Revenue Recognition
Revenues on development and construction of energy efficiency projects are
recorded using the percentage of completion method. Under this method, the
revenue recognized is that portion of the total contract price that the
cost expended to date bears to the anticipated final total costs based on
current estimates of the costs to complete the project. The implementation
period for a typical project is approximately three to six months. The
implementation period for larger projects (those in excess of $2,000,000)
can range from six to twenty four months.
When the total estimated costs to complete a project exceed the total
contract amount, thereby indicating a loss, the entire anticipated loss is
recognized currently.
In addition to the installation of energy savings measures at a customer
site, the Company is generally engaged to provide measurement and
verification ("M&V") services of actual savings as compared to expected, or
estimated savings identified in the engineering, or pre-implementation
stages of the contract. This service is typically performed for the purpose
of billing the local host utility for incentive payments due to either the
customer and/or the Company based upon achieved savings. The Company
generally performs M&V as a separate service to the construction contract
for which it is compensated as services are rendered. Revenue related to
the M&V services are recognized as the services are performed. Revenue
arising from the Company's share of utility incentive payments is
recognized in the period that actual savings are achieved.
Revenues for consulting, development, management, marketing and other
similar services are recognized as the services are performed.
Operation and Maintenance Agreements
Commencing July 1, 1993, the Company, on a limited basis, began entering
into long term operation and maintenance ("O&M") M&V agreements with some of its
customers. These agreements, where they exist, are components of the
construction contracts that provide for ongoing service on the installed energy
efficiency projects. These agreements are entered into as a condition of the
implementation contract and are not a primary service of the Company and are
accounted for as a component cost on the installed energy efficiency project. In
the instances where estimated costs exceed estimated revenue, the Company
discounts the estimated future deficit cash flows at an appropriate long-term
interest rate and recognizes expense and a related liability in its financial
statements during the construction period. In instances where revenues
associated with the operation and maintenance exceed estimated costs, the
revenues are recognized as services are
<PAGE>F-9
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
performed. Estimated costs associated with these revenues are accrued at
the time the revenues are recognized. As of June 30, 1999, the total
liability for deferred operations and maintenance costs is $426,185, of
which $102,175 is expected to be incurred in the next fiscal year.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with an
original maturity of three months or less to be cash equivalents. As of
June 30, 1999 and 1998, there were no cash equivalents outstanding.
Restricted Cash
Restricted cash consists of amounts on deposit with financial institutions
for the purpose of securing performance milestones under one of the
Company's demand side management ("DSM") contracts and for project
implementation commitments. Under the DSM deposit, funds become available
to the Company over a period of 12 to 36 months following completion of the
last contract provided certain conditions and milestones are achieved
(December 1999). In the event that conditions or milestones are not
achieved, the Company may be required to forfeit its right to some or all
of the funds on deposit. As of June 30, 1999, the Company has $43,000
reserved for funds that have a low probability of return. Of the remaining
balance of $147,838, the Company believes that all conditions and
milestones will be achieved and that no additional funds under these
projects will be subject to forfeiture.
Inventory
Inventory consists of materials for use in installation and maintenance of
energy efficiency projects and are stated at the lower of cost, determined
by the first-in, first-out method, or market.
Property and Equipment
Property and equipment are recorded at cost. Replacements and improvements
are capitalized, while repairs and maintenance are charged to expense as
incurred. Depreciation and amortization are provided using the
straight-line method over the assets estimated useful lives ranging from
five to 31.5 years. Leasehold improvements and leased equipment are
amortized over the useful life or term of the respective lease, whichever
is less. When an asset is sold or otherwise disposed of, the cost and
accumulated depreciation or amortization is removed from the accounts and
any resulting gain or loss is recognized currently.
Excess of Purchase Price Over Net Assets Acquired
Excess of purchase price over net assets acquired ("Goodwill") represents
the purchase price in excess of the fair value of the net assets of
acquired businesses and is being amortized using the straight-line method
over its estimated useful life. The carrying value is evaluated at least
annually. The Company considers current facts and circumstances, including
<PAGE>F-10
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
expected future operating income and cash flows to determine whether it is
probable that impairment has occurred. As a result of the operating losses
of SO Corporation, management determined that the carrying value of excess
of purchase price over net assets acquired had been impaired as of June 30,
1999. The effect of this determination was a charge against earnings
(additional loss) of $1,918,851, the unamortized balance as of June 30,
1999.
Income Taxes
The Company accounts for income taxes under the liability method, which
requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Deferred tax assets and liabilities
are determined based on the difference between financial statement and tax
basis of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse.
Earnings Per Common and Common Equivalent Share
Basic earnings per share excludes dilution and is calculated by dividing
income (loss) available to common shareholders by the weighted-average
number of common shares outstanding for the period. Loss applicable to
common shareholders was calculated by adding $204,568 and $49,147 of
preferred stock dividends to net loss for the years ended June 30, 1999 and
1998, respectively. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Options, warrants and preferred stock convertible to an aggregate of
23,692,958 and 20,827,116 for the years ending June 30, 1999 and 1998,
respectively were excluded in the earnings per share computation because
their effect was anti-dilutive.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost of assets
may be impaired, an evaluation of recoverability would be performed. If an
evaluation were required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow is
required.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations
in accounting for its employee stock options. In accordance with FASB
Statement No. 123 "Accounting for Stock-Based Compensation" ("FASB 123"),
the Company will disclose the impact of adopting the fair value accounting
of employee stock options. Transactions in equity instruments with
non-employees for goods or services have been accounted for using the fair
<PAGE>F-11
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
value method as prescribed by FASB 123.
Impact of Recently Issued Standards
FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("FASB133") was issued in June 1998. This statement
establishes accounting and reporting standards for derivative instruments
and for hedging activities. This statement was amended by FASB No. 137,
issued in June 1999, such that it is effective for the Company's financial
statements for the year ended June 30, 2002. The adoption of this standard
is not expected to have a material effect on the Company's financial
statements.
FASB Statement No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise" was issued in 1998. FASB Statement No.
135, "Rescission of FASB Statement No. 75 and Technical Corrections"
and FASB Statement No. 136, "Transfers of Assets to a Not-for-Profit
Organization or Charitable Trust That Raises or Holds Contributions
for Others" were issued in 1999. These pronouncements are not
expected to impact the Company regarding future financial statement
disclosures, results of operations or financial position.
Use of Estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company's financial statements are based upon a number of significant
estimates, including the allowance for doubtful accounts, percentage of
completion on long term contracts, the estimated useful lives selected for
property and equipment and intangible assets, realizability of deferred tax
assets, and accrued future operation and maintenance costs associated with
energy services agreements. Due to the uncertainties inherent in the
estimation process, it is at least reasonably possible that these estimates
will be further revised in the near term and such revisions could be
material.
Fair Value of Financial Instruments
The estimated fair values for financial instruments under FASB Statement
No. 107, "Disclosures about Fair Value of Financial Instruments," are
determined at discrete points in time based on relevant market information.
These estimates involve uncertainties and cannot be determined with
precision. The fair value of cash is its demand value which is equal to its
carrying value. The fair value of notes payable are based upon borrowing
rates that are available to the Company for loans with similar terms,
collateral and maturity. As of June 30, 1999, the estimated fair values of
notes payable approximate their carrying values.
<PAGE>F-12
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Concentrations of Credit Risk
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off balance sheet)
that arise from financial instruments exist for groups of customers or
groups of counterparties when they have similar economic characteristics
that would cause their ability to meet contractual obligations to be
similarly effected by changes in economic or other conditions. In
accordance with FASB No. 105, "Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk," the credit risk amounts shown in Note 18 do
not take into account the value of any collateral or security.
Reclassification
Certain reclassifications have been made to the consolidated financial
statements for the year ended June 30, 1998 to conform with the current
year presentation.
3. Basis of Presentation
As shown in the accompanying financial statements, the Company has suffered
losses from operations for the past two fiscal years. For the years ended
June 30, 1999, and 1998, the Company had net losses of $6,909,011 and
$2,218,482, respectively, negative working capital of $6,357,699 and an
accumulated deficit of $26,528,421 as of June 30, 1999. Management believes
that the Company will be able to generate additional revenues and operating
efficiencies through its acquisitions as well as by other means to achieve
profitable operations. During the year ended June 30, 1999, the Company
took steps to mitigate the losses and enhance its future viability. In
addition, during the fiscal year end 1999, the Company exercised its right
under a stock subscription agreement to require Westar Capital to purchase
an additional 400,000 shares of Series C Convertible Preferred Stock for
$2,000,000. Subsequent to its most recent fiscal year end, the Company also
privately placed shares of newly created Series E Convertible Preferred
Stock ("Series E Stock") to existing shareholders for $1,000,000.
Concurrent with this private placement, members of senior management of the
Company have agreed to receive shares of the Company's Class A Common Stock
in lieu of a portion of their salary in an effort to reduce cash outflows
related to compensation. Subsequent to June 30, 1999, a decision was made
to explore the sale or disposition of the Company's lighting subsidiaries,
which could provide capital, reduce operating losses and will allow
management to better focus on its core ESCO business activities. In
addition, the Company is exploring strategic relationships with companies
that could involve an investment in the Company. The Company may also raise
cash through the sale of long term future revenue streams that it currently
owns or has rights to. The Company is also examining ways to further reduce
overhead including, but not limited to, the possibility of targeted staff
reductions. Further, the Company, through the acquisition of other energy
service companies, expects to continue to gain economies of scale through
the use of a consolidated management team and the synergies of marketing
efforts of the different entities. Management believes that all of the
above actions will allow the Company to continue as a going concern. Future
cash requirements depend on the Company's profitability, its ability to
manage working capital requirements and its rate of growth. Additional
financing through the sale of securities may have an ownership dilution
effect on existing shareholders.
<PAGE>F-13
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company's ability to continue as a going conern is dependent on its
ability to obtain necessary working capital and ultimately achieve
profitable operations, none of which can be assured. The accompanying
consolidated financial statements do not include any adjustments relating
to the recoerability and classification of recorded asset amounts or the
amount and classification of liabilities or any other adjustment that might
be necessary should the Company be unable to continue as a going concern.
4. Acquisitions
On October 28, 1997, the Company entered into a Plan and Agreement of
Reorganization with Westar Capital to acquire Westar Capital's wholly-owned
subsidiary WBS (now OES). The Company acquired all of WBS's issued and
outstanding stock in exchange for 1,700,000 shares of the Company's Class A
Common Stock. This stock issuance was valued at the average of the closing
bid and ask prices for three days before and after the acquisition was
agreed to by the Company and Westar Capital. On March 31, 1998, the Company
released an additional 800,000 shares of Class A Common Stock from an
escrow established pursuant to the Plan and Agreement. The subsequent stock
issuance was valued at the average of the bid and ask stock prices on the
date of issuance. The transaction was accounted for as a purchase and
accordingly the inclusion of the operations of OES in the consolidated
operations commenced on the acquisition date. The resulting purchase price
including acquisition costs was $1,498,716 which resulted in no amounts
being allocated to excess of purchase price over assets acquired.
In February 1998, OES acquired the operating assets of Mid-States Armature
for $290,000 through its newly created subsidiary, OMS. The transaction was
accounted for as a purchase and accordingly, the inclusion of the
operations of OMS in the consolidated operations commenced on the
acquisition date.
Effective June 13, 1998, the Company acquired all of the outstanding common
shares of LTS, in exchange for 690,000 shares of the Company's Class A
Common Stock plus $500,000. This stock issuance was valued at the average
of the closing bid and ask prices for three days before and after the
acquisition was agreed to by the Company and LTS. The transaction was
accounted for as a purchase and accordingly, the inclusion of the
operations of LTS in the consolidated operations commenced on the
acquisition date. The resulting purchase price including acquisition costs
was $995,788 which resulted in $1,445,922 being allocated to excess of
purchase price over net assets acquired. The excess of purchase price over
net assets acquired was being amortized over a period of 60 months
beginning July 1998. Subsequent to its fiscal year end, the Company made
a decision to explore the sale or disposition of its lighting
subsidiaries. A reserve for the sale or disposition of the lighting
subsidiaries was recorded at June 30, 1999 in the amount of
$1,010,000.
On June 30, 1998, the Company acquired all the assets and specific
liabilities of SYCOM Enterprises, LLC ("SYCOM, LLC") through a
newly-created subsidiary (SO Corporation) in exchange for 1,750,000 shares
of the Company's Class A Common Stock. This stock issuance was valued at
the average of the closing bid and ask prices for three days before and
after the acquisition was agreed to by the Company and SYCOM, LLC. In
addition, under a Sale and Noncompetition Agreement SO Corporation acquired
the right to the services and expertise of all of the employees of SYCOM
Corporation and SYCOM Enterprises, L.P., affiliates of SYCOM, LLC, in
exchange for the right to receive 157,500 shares of Series D Convertible
Preferred Stock ("Series D Stock") that is convertible into 15,750,000
shares of the Company's Class A Common Stock. The Series D Stock (including
the shares of the Company's Class A Common Stock into which the Series D
Stock is convertible) will be held in escrow and will be released if and
when: (i) the market value of the Company's Class A Common Stock reaches
$2.00 per share; (ii) annualized after-tax earnings total $0.15 per share
(including the Class A Common Shares into which the Series D Stock is
convertible) over four consecutive quarters; and (iii) certain debts of
<PAGE>F-14
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SYCOM Corporation and SYCOM Enterprises, L.P. (including those to the
Company and its affiliates) have been satisfied. These share values and
earnings thresholds increase by 10 percent per year after December 31,
1999. Pursuant to the terms of a Share Repurchase Agreement, the Company
may repurchase the escrowed Series D Stock (including the Company's Class A
Common Stock into which the Series D Stock is convertible) for $0.001 per
share if: (i) the Sale and Noncompetition Agreement is terminated; and (ii)
after June 30, 2000, such repurchase is justifiable based on the reasonable
business judgment of the Company's Board of Directors considering the
following factors: (a) the key employees of SYCOM Corporation no longer are
being retained by SO Corporation; and (b) there is no reasonably
foreseeable likelihood that all of the following conditions shall be
satisfied: specific debts to a third party and the Company will be
satisfied, and both share performance benchmarks described in the Escrow
Agreement shall be achieved. The Company also may repurchase the escrowed
Series D Stock (and the Company's Class A Common Stock into which the
Series D Stock is convertible) during the 30 day period prior to the
scheduled release date (that is, June 30, 2006) if any one of the specified
conditions for release of the Series D Stock has not been satisfied. Due to
the uncertainty of the ultimate issuance of the preferred shares, no value
will be attributed to such preferred shares until they are released from
escrow.
The Company has agreed to make loans to SYCOM Corporation and SYCOM
Enterprises, L.P. from time to time equal to their general and
administrative expenses and debt service to third parties with interest at
9.75 percent per annum. (See Note 11). The Company may require immediate
repayment of such loans if certain earnings thresholds are not met. If the
Company requires immediate repayment, then certain third party debt owing
by SYCOM Corporation and/or SYCOM Enterprises, L.P. must be repaid by a
like amount. The debt repayment to the Company can be in the form of cash
or a reduction in the number of the escrowed shares of the Series D Stock
(or Class A Common Stock into which the Series D Stock can be converted).
The debt repayment to the third party lender can be in the form of cash or
a distribution of the escrowed shares of the Series D Stock (or Class A
Common Stock into which the Series D Stock can be converted).
In addition, the Company agreed to pay $50,000 and issued warrants to
purchase 160,000 shares of Class A Common Stock which are currently
exercisable at $0.4185 per share, through June 30, 2003, to entities
affiliated with a director of the Company as consideration for services
rendered in connection with the acquisition. The Company recognized $92,016
related to these warrants which was accounted for as additional purchase
price. The transaction was accounted for as a purchase and accordingly, the
inclusion of the operations of SO Corporation in the consolidated
operations commenced on the acquisition date. The resulting purchase price
including acquisition costs was $2,060,439 with $2,132,056 being allocated
<PAGE>F-15
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
to excess of purchase price over net assets acquired. As a result of the
operating losses of SO Corporation, a further evaluation of the carrying
value of excess purchase price over net assets acquired as of June 30, 1999
resulted in the write-off of $1,918,851 through a charge to earnings.
Effective April 1, 1999, the Company, through two newly formed
entities, REEP Onsite, Inc. and ERSI Onsite, Inc., acquired
substantially all of the assets of REEP, Inc. for assumption of
certain liabilities.
The following presents pro forma information as if the April 1, 1999
acquisitions described immediately above occurred on July 1, 1997:
<TABLE>
<S> <C> <C>
Year Ended Year Ended
June 30, 1999 June 30, 1998
------------- -------------
Revenue $ 45,391,000 $ 41,212,000
================= ================
Operating Income (Loss) $ (6,942,000) $ (10,310,000)
================= ==================
Net Loss $ (7,205,000) $ (12,751,000)
================= ==================
Basic and Diluted loss per common share $ (0.39) $ (0.79)
================= =================
</TABLE>
5. Accounts Receivable
Accounts Receivable consisted of the following as of June 30, 1999:
Contracts Receivable:
Completed Contracts $ 705,561
Contracts in Progress 4,077,057
Trade receivables 1,324,111
Less: Allowance for doubtful accounts (35,000)
-------------
Total $ 6,071,729
============
6. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on contracts as of June 30, 1999, consisted of
the following:
Costs incurred $ 28,496,874
Estimated earnings 7,477,447
-------------
35,974,321
Less: Billings to date (36,310,796)
------------
$ (336,475)
=============
<PAGE>F-16
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Included in the accompanying Balance Sheet
under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 1,109,315
Billings in excess of costs and earnings on
uncompleted contracts (1,445,790)
--------------
$ (336,475)
==============
Property and Equipment
Property and equipment at June 30, 1999 consisted of:
<TABLE>
<S> <C> <C>
Estimated Useful Lives
---------------------------
Office furniture and equipment $ 1,287,071 5-7 years
Land 44,000 -
Building 80,000 31.5 years
Water treatment plants 993,517 Contract life (50 to 56
months)
Equipment and tools 201,832 7-10 years
Vehicles 23,674 5 years
Leasehold improvements 41,824 5-20 years
------------------------
$ 2,671,918
Less: Accumulated Depreciation (1,258,000)
------------------------
$ 1,413,918
========================
</TABLE>
Depreciation expense amounted to $572,465 and $258,572 for the years ended June
30, 1999 and 1998, respectively.
<PAGE>F-17
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<S> <C>
8. Notes Payable
Notes payable at June 30, 1999, consisted of the following:
Note payable with payments due upon completion of certain contractual
milestones with interest at 18.0%, past due, collateralized
by accounts receivable and other assets $ 69,049
Notes payable with payments due upon completion of certain
contractual milestones with interest at 12.5% to 18%, collateralized
by accounts receivable and other assets 2,430,406
----------------
$ 2,499,455
================
9. Note Payable - related party
Note payable - related party at June 30, 1999 consisted of the following:
Note payable due on demand to related party, interest at
12.0% per annum 211,914
----------------
$ 211,914
=================
10. Accrued expenses and other liabilities
At June 30, 1999, accrued expenses and other liabilities consisted of the
following:
Payroll and related payroll taxes $ 266,798
Accrued job costs 305,912
Accrued utility commitments 448,497
Accrued interest 49,054
Deferred income 216,136
Accrued operation and maintenance costs associated with energy
services agreements 102,175
Other accrued liabilities 5,452
---------------
$ 1394,024
===============
</TABLE>
11. Shareholders' Equity
Stock Subscription Agreement
On October 28, 1997, the Company entered into a Stock Subscription
Agreement (the "Stock Agreement") with Westar Capital. Pursuant to the
Stock Agreement, the Company completed a private placement of 2,000,000
shares of the Company's Class A Common Stock at $0.50 per share and 200,000
shares of the Company's newly-created Series C Convertible Preferred Stock
at $5.00 per share. Each share of Series C Convertible Preferred Stock is
convertible into five (5) shares of the Company's Class A Common Stock.
<PAGE>F-18
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Conversion can take place by the holder at any time. The Company has the
right to require conversion if the average closing price of the Company's
Class A Common Stock equals or exceeds $2.00 per share.
On July 14, 1998 and February 12, 1999, the Company exercised its right
under the Stock Subscription Agreement to require Westar Capital to
purchase an additional 400,000 shares of Series C Convertible Preferred
Stock for $2 million.
Class A and Class B Common Stock
Holders of Class A Common Stock are entitled to one vote per share for the
election of directors and other corporate matters which shareholders are
entitled or permitted to vote. Holders of Class B Common Stock shall not be
entitled to vote but are entitled to receive dividends ratably with Class A
Common Stock when and as declared by the Board of Directors. As of June 30,
1999, there were no shares of Class B Common Stock issued and outstanding.
Warrants
On September 11, 1997, the Company issued warrants to purchase 525,988
shares of Class A Common Stock at $0.1875 per share, which expire on
September 11, 2002, to an officer and to an entity affiliated with a
director as consideration for posting collateral and guaranteeing
performance bonds. The Company recognized $18,980 in expense related to
these warrants.
On June 30, 1998, the Company agreed to pay $50,000 and issued warrants to
purchase 160,000 shares of Class A Common Stock which are exercisable at
$0.4185 per share, through June 30, 2003, to entities affiliated with a
director as consideration for services rendered in the acquisition of the
assets of SYCOM, LLC. The Company recognized $92,016 related to these
warrants which was accounted for as additional purchase price of SO
Corporation.
As of June 30, 1999, the Company has issued and outstanding a total of
685,998 warrants to purchase shares of its Class A Common Stock. The
exercise prices range from $0.1875 to $0.4185 per share with expiration
dates ranging from September 2002 through June 2004.
<PAGE>F-19
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Preferred Stock
On October 23, 1997, the Company amended its Certificate of Incorporation
to eliminate the Series A and B Convertible Preferred Stock.
Each holder of a share of Series C Convertible Preferred Stock ("Series C")
is entitled to one vote per share for each share of Class A Common Stock
that Series C is convertible into and to an annual dividend at the rate of
9.75 percent of the Series C liquidation preference ($5.00 per share)
payable quarterly. Dividends are cumulative. Each share of Series C is
convertible at the option of the holder into five shares of Class A Common
Stock. Dividends in the amount of $204,568 and $49,147 were paid in the
form of 40,915 and 8,205 shares, respectively, of Series C during the years
ended June 30, 1999 and 1998, respectively.
Holders of Series D Convertible Preferred Stock ("Series D") are not
entitled to dividends or to vote. Each share of Series D is convertible, at
the option of the holder, into 100 shares of Class A Common Stock. All
shares of Series D are held in escrow (see Note 4).
Notes Receivable - Shareholders
As of June 30, 1999, Notes Receivable - Shareholders - includes receivables
with the previous owners of LTS, who are current employees and directors of
LTS, in the amount of $305,626. Such loans accrue interest at 10 percent
per annum and are due in March 2003.
Also included are amounts due from affiliates of SYCOM, LLC in the amount
of $3,787,473. Some of the amounts accrue interest at 9.75 percent per
annum, are due on or before June 30, 2006 and are collateralized by certain
assets of an affiliate of SYCOM, LLC. (Additionally, see Note 4.)
12. Stock Option Plans:
WEM 1991 Non-Statutory Stock Option Plan
Effective February 15, 1994, Onsite adopted the WEM 1991 Non-Statutory
Stock Option Plan (the "1991 Plan"). The 1991 Plan provides for the
granting of options to non-employee directors, officers, employees and
consultants to purchase up to 160,000 shares of the Company's Class A
Common Stock. The maximum term for grants under the 1991 Plan is 10 years
with a maximum vesting period of three years. The 1991 Plan is administered
by a committee of outside directors appointed by the Board of Directors.
There was no option activity under the 1991 plan for the years ended June
30, 1999 or 1998. As of June 30, 1999, all 85,000 options outstanding under
the plan were exercisable at $5.3125 through January 15, 2003.
<PAGE>F-20
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Onsite 1993 Stock Option Plan
During fiscal year 1994, the Company adopted the Onsite 1993 Stock Option
Plan (the "1993 Plan"). The 1993 Plan, as amended, provides for the
granting of options to directors, officers, employees and consultants to
purchase up to 3,300,000 shares of Class A Common Stock and is administered
by a committee of outside directors appointed by the Board of Directors.
The maximum term for grants under the 1993 Plan is 10 years with a maximum
vesting period of three years for options granted prior to June 10, 1998.
Any grants subsequent to June 10, 1998 have a maximum vesting period of
four years.
As of June 30, 1999, the status of the 1993 Plan was as follows:
<TABLE>
<S> <C> <C> <C>
Outstanding Exercise Price Exercisable
Options Per Share Options
--------------------------------------------------------------------
July 1, 1997 2,456,725 $0.24 - $5.3125 1,729,593
===================== ====================
Options granted 880,954 $0.23 - $0.9063
Options exercised (206,004) $0.25 - $0.5000
Options cancelled (133,417) $0.25 - $0.2956
---------------------
June 30, 1998 2,998,258 $0.23 - $5.3125 1,596,651
===================== ====================
Options granted 394,000 $0.36 - $1.2180
Options exercised (75,334) $0.25 - $0.5000
Options cancelled (326,691) $0.25 - $1.1250
---------------------
June 30, 1999 2,990,233 $0.23 - $5.3125 1,588,626
===================== ====================
</TABLE>
At June 30, 1999, no additional options were available for granting to purchase
shares of Class A Common Stock.
<PAGE>F-21
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A summary of option transactions under the 1993 plan during the years ended
June 30, 1999, and 1998, is as follows:
Weighted-Average
Fixed Options Shares Exercise Price
----------------------- --------------------- ----------------------
July 1, 1997 2,456,725 $ 0.5789
==============
Granted 880,954 $ 0.6224
Exercised (206,004) $ 0.2752
Cancelled (133,417) $ 0.2797
--------------
June 30, 199 2,998,258 $ 0.6259
==============
Granted 394,000 $ 0.5364
Exercised (75,334) $ 0.3302
Cancelled (326,691) $ 0.5289
-------------
June 30, 1999 2,990,233 $ 0.6326
=============
The weighted average contractual life for all options as of June 30, 1999,
was approximately six years, with exercise prices ranging from $0.23 to
$5.31.
Proforma Information
As stated in Note 2, the Company has not adopted the fair value accounting
prescribed by FASB 123 for employees. Had compensation cost for stock
options issued to employees been determined based on the fair value at
grant date for awards in 1999 and 1998 consistent with the provisions of
FASB 123, the Company's net loss and net loss per share would have been
adjusted to the proforma amounts indicated below:
Year Ended June 30,
1999 1998
------------------ -----------------
Net Loss $ (7,524,941) $ (2,480,017)
================== =================
Basic and Diluted Loss
Per Common Share $ (0.41) $ (0.18)
================== ================
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted-average
assumptions: expected volatility of 117.83 percent, 116.8 percent for
grants during the year ended June 30, 1998, an expected life of three years
for option shares, no dividends would be declared during the expected term
of the options, and a risk-free interest rate using the monthly U.S.
Treasury T-Strip Rate at the option grant date for fiscal years ended 1999,
and 1998, respectively.
The weighted-average fair value of stock options granted to employees
during the years ended June 30, 1999 and 1998, was $0.38 and $0.36,
respectively.
<PAGE>F-22
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SYCOM Non Plan Options
During fiscal year 1999, the Company issued stock options that were not
part of the 1993 Plan (the "Non-Plan Options"). The maximum term for
Non-Plan Option grants is five years with a maximum vesting period of four
years.
As of June 30, 1999, the status of the Non-Plan Options was as follows:
<TABLE>
<S> <C> <C> <C>
Outstanding Exercise Price Exercisable
Options Per Share Options
--------------------- -------------------- -----------------
June 30, 1998 - -
===================== ===============
Options granted 899,126 $0.3850 - $0.8125 765,126
Options exercised - -
Options cancelled (11,000) $0.4185 - $0.8125 -
---------------------
June 30, 1999 888,126 $0.3850 - $0.5465 765,126
===================== ===============
13. Income Taxes
Income tax expense for the years ended June 30, 1999 and 1998, is comprised
of the following:
Year ended June 30, 1999 Current Deferred Total
----------------- --------------------- --------------------
Federal $ - $ - $ -
State 5,500 - 5,500
----------------- --------------------- --------------------
$ 5,500 $ - $ 5,500
================= ===================== ====================
Year ended June 30, 1998 Current Deferred Total
----------------- --------------------- --------------------
Federal $ - $ - $ -
State 7,500 - 7,500
----------------- --------------------- --------------------
$ 7,500 $ - $ 7,500
================= ===================== ====================
</TABLE>
<PAGE>F-23
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The actual income tax expense differs from the "expected" tax (benefit)
(computed by applying the U.S. Federal corporate income tax rate of 34
percent for each period) as follows:
<TABLE>
<S> <C> <C>
1999 1998
------------------- -------------------
Amount of expected tax (benefit) $ (2,347,100) $ (751,800)
Non-deductible expenses 450,000 13,900
State taxes, net 3,600 4,900
Effect of change in state tax rate - 27,600
Change in valuation allowance for deferred
tax assets 1,899,000 712,900
=================== ===================
Total $ 5,500 $ 7,500
=================== ===================
The components of the net deferred tax asset recognized as of June 30, 1999
and 1998, are as follows:
1999 1998
------------------- -------------------
Current deferred tax assets (liabilities):
Litigation settlement accrual $ 6,800 $ 16,000
Deferred operation and maintenance
reserve 169,800 185,400
Vacation accrual 70,100 44,400
Inventory reserve 26,200 6,000
Book compensation on issuance of
stock options - 7,600
Allowance for doubtful accounts 14,400 6,000
Other 800 600
------------------- -------------------
288,100 266,000
Valuation allowance (288,100) (266,000)
------------------- -------------------
Net current deferred tax asset $ - $ -
=================== ===================
1999 1998
------------------- -------------------
Long-Term deferred tax assets (liabilities):
Net operating loss carryforwards $ 7,865,500 $6,943,200
Goodwill due to difference in
amortization 1,202,100 453,300
Depreciation 700 (137,100)
Alternative minimum tax credit 11,200 11,200
Other 900 800
------------------- -------------------
9,080,400 7,271,400
Valuation allowance (9,080,400) (7,271,400)
=================== ===================
Net current deferred tax asset $ - $ -
=================== ===================
</TABLE>
The deferred tax asset includes the future benefit of the LTS
pre-acquisition deductible temporary differences and net operating losses
of $184,100. The deferred asset has been fully reserved through the
valuation allowance. Any future tax benefit realized for these items will
first reduce any goodwill remaining from this acquisition and then reduce
income tax expense.
<PAGE>F-24
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The deferred tax asset also includes the future benefit of the tax
deduction for the exercise of stock options of $33,000. The deferred asset
is fully reserved through the valuation allowance. Any future tax benefit
realized for this item will be a credited to paid-in capital.
At June 30, 1999, the Company has net operating loss carryforwards of
approximately $22,686,000, which expire in the years 2006 through 2019. The
Company has California net operating loss carryforwards at June 30, 1999 of
$1,722,000, which expire in years 2000 through 2004.
The benefit of the net operating losses to offset future taxable income is
subject to reduction or limitation of use as a result of certain
consolidated return filing regulations and additional limitations relating
to a 50 percent change in ownership due to various stock transactions.
14. Related Parties
During the fiscal year ended June 30, 1999, the Company paid one director
of the Company professional fees in the amount of $14,535.
As of June 30, 1999, OES has outstanding accounts receivable with Western
Resources, Inc., the parent company of a shareholder of the Company, in the
amount of $47,415 in relation to water treatment plants in Lawrence, Kansas
and Tecumseh, Kansas. OES has recognized $471,336 in revenue related to
these water treatment facilities.
Westar Capital has guaranteed any shortfalls of energy savings on the
Company's contract with one customer. Such guaranty is backed by an
insurance police purchased by the Company for a short fall of energy
savings. In addition, Westar Capital and an affiliate have indemnified a
bonding company for bid and performance bonds obtained by the Company.
Also see Notes 9 and 11.
15. Commitments and Contingencies
Leases
The Company leases its administrative facility under a noncancellable
operating lease expiring in 2001 with a three-year renewal option. As of
August 1, 1998, the Company increased its office space that is included
under the current lease. The Company expanded its regional offices to
include San Ramon, California, where office space is rented on a three year
lease that expires March 2001. The Company also leases on a month by month
basis a 250 square foot storage facility in Carlsbad, California. OES
leases office space that has a one year lease with an option to renew,
expiring November 1999. OMS leased a small building from the former owner
on a month-by-month basis to store testing equipment. This lease
terminated in July 1999. LTS currently has a three-year lease that
expires August 2002.
<PAGE>F-25
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Future minimum lease payments under operating leases (including equipment)
is as follows:
Year ending June 30,
2000 454,000
2001 436,000
2002 70,000
2003 21,000
2004 9,000
--------------------
Total minimum lease payments $ 990,000
====================
Total rent expense, including month-to-month equipment rentals, was
$467,000 and $202,000 in 1999, and 1998, respectively.
Employment Agreements
Effective April 1, 1998, the Company entered into employment agreements
with the President and Chief Operating Officer, and with the Vice President
and Responsible Managing Officer of LTS which expire on March 31, 2000.
Such agreements provide for minimum salary levels totaling $235,000 per
year excluding bonuses, as well as severance payments upon termination of
employment without cause. (See also Note 20).
Ongoing Maintenance for Water Treatment Plants
OES has two contracts with Western Resources whereby OES constructed and
maintains equipment for supplying demineralized water for boiler makeup
water at Lawrence Energy Center and Tecumseh Energy Center. Both contracts
terminate on December 31, 2001, unless renewed at the end of the term as
agreed upon by both parties. OES is responsible for producing the quality
of demineralized water as specified. If damage occurs due to the specified
quality of demineralized water not being produced, OES is liable for the
cost of the repairs to the equipment limited to a maximum of $300,000 per
incident. There have been no damage occurrences since the inception of both
contracts and management believes any future loss to be remote.
Environmental Costs
The Company is subject to federal, state and local environmental laws and
regulations. Environmental expenditures are expensed or capitalized
depending on their future economic benefit. Expenditures that relate to an
existing condition caused by past operations and that has no future
economic benefits are expensed. Liabilities for expenditures of a
non-capital nature are recorded when environmental assessments are
probable, and the costs can be reasonably estimated.
Guaranteed Savings
The Company is contingently liable to some of its customers pursuant to
contractual terms in the event annual guaranteed savings are not achieved
by the customer. These guarantees are derived from conservative engineering
estimates and generally are guaranteed at a level of less than 100 percent
of the total estimated savings. As of June 30, 1999, projects with
associated savings guarantees had an aggregate annual savings of
approximately $5.4 million of which the Company has guaranteed an aggregate
of approximately $4.2 million annually. To date, the Company has not
<PAGE>F-26
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
incurred any losses associated with these guarantees and any risk of future
losses attributable to these guarantees is considered by management to be
remote.
Litigation
In October 1998, Energy Conservation Consultants, Inc. ("ECCI"), a
Louisiana-based company, filed a suit (United States District Court,
Eastern District of Louisiana, Case No. 98-2914) against OES alleging
breach of contract in connection with one of the Company's projects. The
suit seeks reimbursement for expenses allegedly incurred by ECCI in the
preparation of an audit and lost profits. Discovery is ongoing and
management is continuing its attempts to settle the matter, including
through mediation; however, no agreement has been reached. A continuance
has been granted and trial now is set for February 2000.
Additionally, in June 1999, a former officer of the Company (July 1998
through October 1998) filed a suit (Superior Court of the State of
California, County of San Diego, North County Branch, Case No. N081711)
alleging fraud, negligence and wrongful discharge in connection with his
employment termination in October 1998. The action seeks compensatory
damages and punitive damages in excess of $25,000. The parties have agreed
to mediation in an effort to settle this matter; however, no settlement
agreement has been reached.
16. Defined Contribution Plan
The Company sponsors a 401(k) defined contribution plan, which covers
substantially all employees. Company matching contributions are determined
annually at the discretion of management and vest at the rate of 20 percent
per year of employment. For the current year, the company match was 75
percent of the employee contribution up to 6 percent of their annual
salary. During the years ended June 30, 1999 and 1998, the Company's
matching contribution expense was $83,046 and $53,480, respectively. The
Company match was in the form of Class A Common Stock issued to the plan's
fiduciary. Shares issued in matching were 266,331 and 49,912 for the fiscal
years 1999 and 1998, respectively.
17. Significant Customers
Revenues from the three largest customers accounted for 34 percent
(16 percent, 11 percent and 9 percent each) of total revenues in fiscal
1999, and revenues from three other customers accounted for 31 percent (11
percent, 10 percent, 10 percent each) of total revenues in fiscal 1998.
18. Concentration of Credit Risk
The Company operates in one industry segment, energy consulting services.
The Company's customers generally are located in the United States.
Financial instruments that subject the Company to credit risk consist
principally of accounts receivable.
At June 30, 1999, accounts receivable totaled $6,071,729, and the Company
has provided an allowance for doubtful accounts of $35,000.
<PAGE>F-27
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
For the years ended June 30, 1999, and 1998, bad debts totaled $123,000 and
$30,000 respectively. The Company performs periodic credit evaluations on
its customers' financial condition and believes that the allowance for
doubtful accounts is adequate.
At June 30, 1999, the Company maintained cash balances with a commercial
bank, which were approximately $387,000 in excess of FDIC insurance limits.
19. Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's or its suppliers' and customers' computer programs that have date
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations including, among other things, a
temporary inability to process transactions, send invoices, or engage in
similar normal business activities. The Company believes that substantially
all software applications currently being used for the financial and
operational systems have adequately addressed any year 2000 issues. All
hardware systems have been assessed and plans have been developed to
address systems modification requirements. The costs incurred to date
related to its Year 2000 activities have not been material to the Company,
and based upon current estimates, the Company does not believe that the
total cost of its Year 2000 readiness programs will have a material adverse
impact on the Company's results of operations or financial position. Any
risks the Company faces are expected to be external to ongoing operations.
The Company has numerous alternative vendors for critical supplies,
materials and components. Current vendors and subcontractors who have not
adequately prepared for the year 2000 can be substituted in favor of those
that have prepared.
20. Subsequent Events
Private Placement of Securities
In August 1999, the Company completed a private placement of equity
securities with its Chairman of the Board and other related investors.
Terms of the placement include the issuance of 50,000 shares of Series E
Convertible Preferred Stock that is convertible into 5,000,000 shares of
Class A Common Stock, warrants to purchase 1,250,000 shares of Class A
Common Stock at $.50 per share and warrants to purchase 1,250,000 shares of
Class A Common Stock at $.75 per share. The preferred shares are
convertible at a rate which is below market on the date of issuance,
resulting in a beneficial conversion element. The shares are immediately
convertible and the beneficial conversion element of approximately $763,000
will be recorded as a preferred stock dividend in the first quarter ending
September 30, 1999. A portion of the securities was sold to a director. The
intrinsic value of preferred shares sold to the director was $47,000, and
will result in a charge against earnings in the first quarter ending
September 30,1999.
Sale or Disposal of Subsidiaries
On September 28, 1999, the Company decided to explore the sale or
disposition of its interests in the lighting contracting subsidiaries,
namely, LTS, REEP and ERSI. As a result of this decision, the Company
<PAGE>F-28
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
recorded a reserve on the disposition of the combined entities of
$1,010,000 at June 30, 1999. Further, the assets and liabilities of these
entities have been reclassified to the category liabilities in excess of
assets held for sale.
The amounts included in the financial statements as of June 30, 1999
consisted of the following:
ASSETS:
Accounts receivable $ 1,192,880
Cost and estimated earnings in excess of billings
on uncompleted contracts 87,924
Property and equipment, net 54,335
Other assets 467,066
------------------
Total assets 1,802,205
------------------
LIABILITIES:
Accounts payable $ 1,192,481
Billings in excess of costs and estimated
earnings on uncompleted contracts 318,696
Accrued expenses and other liabilities 526,889
------------------
Total liabilities 2,038,066
------------------
Liabilities in excess of assets held for sale $ 235,861
==================
Total revenues generated by these subsidiaries were $7,704,000 and $233,000
for the years ended June 30, 1999 and 1998, respectively. Income (loss)
before taxes for these subsidiaries was ($1,392,000) and $19,000 for the
years ended June 30, 1999 and 1998, respectively.
<PAGE>ii
ONSITE ENERGY CORPORATION
FINANCIAL STATEMENTS - JUNE 30, 1998
<PAGE>F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report ..............................................F-2
Consolidated Balance Sheet - June 30, 1998.................................F-3
Consolidated Statements of Operations - For the Years ended
June 30, 1998 and 1997..................................................F-4
Consolidated Statement of Stockholders' Equity (Deficit) -
For the Years ended June 30, 1998 and 1997..............................F-5
Consolidated Statements of Cash Flows - For the Years ended
June 30, 1998 and 1997..................................................F-7
Notes to Consolidated Financial Statement..................................F-8
<PAGE>F-2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Onsite Energy Corporation
Carlsbad, California
We have audited the accompanying consolidated balance sheet of Onsite Energy
Corporation and subsidiaries (the "Company") as of June 30, 1998 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years ended June 30, 1998 and 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Onsite Energy
Corporation and subsidiaries at June 30, 1998 and the results of their
operations and their cash flows for the years ended June 30, 1998 and 1997 in
conformity with generally accepted accounting principles.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
September 28, 1998, except for the last paragraph of Note 20 which is as of
October 16, 1998
<PAGE>F-3
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1998
ASSETS
Current Assets:
Cash $ 2,093,006
Cash-restricted 157,836
Accounts receivable, net of allowance for doubtful
accounts of $15,030 3,518,870
Inventory 178,215
Costs and estimated earnings in excess of billings
on uncompleted contracts 944,820
Other assets 611,195
-------------
TOTAL CURRENT ASSETS 7,503,942
Property and equipment, net of accumulated depreciation
and amortization 1,958,178
Excess of purchase price over net assets acquired, net
of amortization of $14,261 3,563,718
Other 116,830
-------------
TOTAL ASSETS $ 13,142,668
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - related parties $ 468,329
Current portion of notes payable 1,846,870
Accounts payable 3,380,271
Billings in excess of costs and estimated earnings on
uncompleted contracts 2,888,659
Accrued expenses and other liabilities 1,613,180
-------------
TOTAL CURRENT LIABILITIES 10,197,309
Long-Term Liabilities:
Accrued future operation and maintenance costs
associated with energy services agreements 465,359
Notes payable, less current portion 3,010
-------------
TOTAL LIABILITIES 10,665,678
-------------
Commitments and contingencies
(Notes 3, 4, 15, 17, 18, 19 and 20) -
Stockholders' Equity:
Preferred Stock, Series C, 842,500 shares
authorized, 208,205 issued and outstanding
(Aggregate $1,041,025 liquidation preference) 208
Preferred Stock, Series D, 157,500 shares authorized,
issued and outstanding and held in escrow (Note 4) -
Common Stock, $.001 par value, 24,000,000 shares authorized:
Class A common stock, 23,999,000 shares
authorized, 18,243,188 issued and outstanding 18,243
Class B common stock, 1,000 shares authorized,
none issued and outstanding -
Additional paid-in capital 23,208,598
Notes receivable - related parties (1,335,217)
Accumulated deficit (19,414,842)
-------------
TOTAL STOCKHOLDERS' EQUITY 2,476,990
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,142,668
=============
The accompanying notes are an integral part of these financial statements
<PAGE>F-4
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------------- -----------------
<S> <C> <C>
Revenues $12,267,148 $ 9,561,375
Cost of sales 10,057,277 6,692,198
----------- -----------
Gross margin 2,209,871 2,869,177
Selling, general, and administrative expenses 3,879,237 3,139,018
Depreciation and amortization 539,499 587,077
Loss on disposition of partnership interests - 425,240
Gain on sale of assets - (17,686)
----------- -----------
Operating loss (2,208,865) (1,264,472)
Other income (expense):
Interest (expense) (27,400) (159,028)
Interest income 25,283 43,402
----------- -----------
Total other income (expense) (2,117) (115,626)
----------- -----------
Loss before provision for income taxes (2,210,982) (1,380,098)
Provision for income taxes 7,500 8,500
----------- -----------
Net loss $(2,218,482) $(1,388,598)
=========== ===========
Net loss allocated to common stockholders $(2,267,629) $(1,388,598)
=========== ===========
Basic and diluted loss per common share $ (0.16) $ (0.13)
========== ==========
Weighted average shares outstanding 13,790,185 10,818,498
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-5
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock PREFERRED STOCK
----------------------- -------------------------------------------------------------------------
Class A Series A Series B Series C
----------------------- ----------------------- ----------------------- -----------------------
SHARES AMOUNT SHARES Amount SHARES Amount SHARES Amount
----------- ----------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance July 1, 1996 6,263,463 $6,263 3,810 $ 4 605,641 $ 605 - $ -
Issued to Onsite 401k plan 48,562 49 - - - - - -
Conversion of accounts
payable to Class A
common stock 62,077 62 - - - - - -
Common shares issued for
Series A and B
preferred dividends 347,048 347 - - - - - -
Conversion of Series A
preferred stock 3,571,494 3,572 (3,810) (4) - - - -
Conversion of Series B
preferred stock 605,641 605 - - (605,641) (605) - -
Exercise of stock option 45,887 46 - - - - - -
Net Loss - - - - - - - -
--------------------------------------------------------------------------------------------------
Balance June 30, 1997 10,944,172 10,944 - - - - - -
Issued to Onsite 401k plan 49,912 50 - - - - - -
Issued pursuant to private
offering, Net of expenses 2,000,000 2,000 - - - - -
Stock issued for acquisitions 4,940,000 4,940 - - - - - -
Exercise of stock options 309,104 309 - - - - - -
Sale of Series C
preferred stock - - - - - - 200,000 200
Series C preferred
stock dividends - - - - - - 8,205 8
Compensation recognized upon
issuance of warrants - - - - - - - -
Notes receivable acquired in
acquisitions - - - - - - - -
Net loss - - - - - - - -
--------------------------------------------------------------------------------------------------
Balance June 30, 1998 18,243,188 $18,243 - $ - - $ - 208,205 $ 208
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>F-6
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended June 30, 1998 and 1997
(CONTINUED)
<TABLE>
<CAPTION>
NOTES
Common ADDITIONAL RECEIVABLE
SHARES PAID-IN RELATED ACCUMULATED
ISSUABLE CAPITAL PARTIES DEFICIT TOTAL
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance July 1, 1996 $ 608,439 $16,336,469 $ - $ (15,758,615) $1,193,165
Issued to Onsite 401k plan - 24,931 - - 24,980
Conversion of accounts
payable to Class A
common stock - 66,973 - - 67,035
Common shares issued for
Series A and B
preferred dividends (608,439) 608,092 - - -
Conversion of Series A
preferred stock - (3,568) - - -
Conversion of Series B
preferred stock - - - - -
Exercise of stock option - 20,064 - - 20,110
Net Loss - - - (1,388,598) (1,388,598)
-------------------------------------------------------------------------------
Balance June 30, 1997 - 17,052,961 - (17,147,213) (83,308)
Issued to Onsite 401k plan - 17,399 - - 17,449
Issued pursuant to private
offering, Net of expenses - 951,542 - - 953,542
Stock issued for acquisitions - 4,031,923 - - 4,036,863
Exercise of stock options - 86,854 - - 87,163
Sale of Series C preferred stock - 999,800 - - 1,000,000
Series C preferred stock dividends - 49,139 - (49,147) -
Compensation recognized upon
issuance of warrants - 18,980 - - 18,980
Notes receivable acquired in
acquisitions - - (1,335,217) - (1,335,217)
Net loss - - - (2,218,482) (2,218,482)
-------------------------------------------------------------------------------
Balance June 30, 1998 $ - $23,208,598 $ (1,335,217) $(19,414,842) $ 2,476,990
===============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>F-7
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For
the Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,218,482) $ (1,388,598)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization of goodwill 280,927 400,000
Amortization of acquired contract costs - 399,032
Additions (reductions) to reserve for future operation
and maintenance costs 43,927 (45,925)
Provision for bad debts 30,192 37,093
Depreciation 258,572 187,077
Compensation recognized upon issuance of stock warrants 18,980 -
Loss on disposition of partnership interests - 425,240
Gain on sale of assets - (17,686)
Change in operating assets and liabilities:
Accounts receivable (781,792) 747,923
(Increase) decrease in costs and estimated earnings
in excess of billings on uncompleted contracts (225,324) 2,051,592
Inventory (5,758) -
Other assets (435,120) 260,322
Cash-restricted 115,331 (50,467)
Accounts payable 1,351,806 (1,464,594)
Increase (decrease) in billings in excess of costs
and estimated earnings on uncompleted contracts 1,739,390 (1,130,080)
Accrued expenses and other liabilities 641,631 (344,632)
Deferred income - (25,000)
------------ ------------
Net cash provided by operating activities 814,280 41,297
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (119,075) (4,473)
Proceeds from sale of assets - 540,081
Loan to Shareholders (7,911) -
Acquisition of businesses, net of cash acquired (1,203,805) -
------------ ------------
Net cash provided by (used in) investing activities (1,330,791) 535,608
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable - related party 290,000 -
Proceeds from issuance of common stock 953,542 -
Proceeds from issuance of preferred stock 1,000,000 -
Proceeds from exercise of stock options 87,163 45,090
Repayment of notes payable - related party (46,804) (1,071,571)
Repayment of long-term debt (201,278) -
------------ ------------
Net cash provided by (used in) in financing activites 2,082,623 (1,026,481)
------------ ------------
Net increase (decrease) in cash 1,566,112 (449,576)
Cash, beginning of year 526,894 976,470
------------ ------------
Cash, end of year $ 2,093,006 $ 526,894
============ ============
Supplemental disclosures of non-cash transactions:
Payment of Series A and B Preferred Stock dividends
with common stock $ - $ 347
============ ============
Payment of Series C Preferred Stock dividends
with Series C Preferred Stock $ 49,147 $ -
============ ============
Payment of accrued liabilities with common stock $ 17,449 $ 67,035
============ ============
Liabilities accrued for acquisition costs $ 285,594 $ -
============ ============
Conversion of preferred stock to common stock $ - $ 4,176
============ ============
Fair market value of assets, less liabilities of
businesses acquired with common stock $ 4,036,863 $ -
============ ============
Supplemental disclosures of cash transactions:
Interest paid $ 33,385 $ 159,028
============ ============
Income taxes paid $ 36,175 $ 41,290
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>F-8
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations:
Onsite Energy Corporation, which does business as ONSITE SYCOM Energy
Corporation ("the Company"), is an energy efficiency services company ("ESCO")
that develops, designs, constructs, owns and operates comprehensive energy
efficiency projects and assists customers in reducing the cost of purchased
electricity and fuel. The Company also offers professional consulting services
in the areas of market assessment, business strategies, public policy analysis,
environmental studies and utility deregulation. It is the Company's mission to
save its customers money and improve the quality of the environment through
independent energy solutions.
The Company was formed pursuant to a reorganization between Western Energy
Management, Inc., a Delaware corporation ("WEM"), and Onsite Energy Corporation,
a California corporation formed in 1982 ("Onsite-Cal"), which was effective
February 15, 1994. Under the reorganization, Onsite-Cal merged with and into the
Company and a newly formed subsidiary of the Company merged with and into WEM,
which survived and became a wholly owned subsidiary of the Company. This
transaction was accounted for as a purchase of Onsite-Cal by the Company.
In October 1997, the Company acquired Westar Business Services, Inc.("WBS"),
which was renamed Onsite Business Services, Inc. ("OBS") (see Note 4). OBS
provides utility services and industrial water services primarily in the states
of Kansas, Missouri and Oklahoma.
In February 1998, OBS acquired the operating assets of Mid-States Armature
Works, Inc. ("Mid-States") through a newly formed subsidiary Onsite/Mid-States,
Inc. ("OMS") (see Note 4). OMS provides specialized medium and high voltage
electrical fabrication, installation, maintenance and repair services to
municipal utility customers and others, primarily in the states of Kansas,
Nebraska, Missouri, Iowa, and Oklahoma.
On April 8, 1998, the Company formed Onsite Energy de Panama, S.A., a Panamanian
corporation to facilitate the acquisition of potential projects in Panama and
Latin America. As of June 30, 1998, there has been no operating activity in this
subsidiary.
In June 1998, the Company acquired Lighting Technology Services, Inc. ("LTS")
(see Note 4). LTS provides energy efficiency projects through retrofits of
lighting and controls either independently or as a subcontractor to the Company
and other energy services companies primarily in Southern California.
On June 30, 1998, the Company acquired the assets and certain liabilities of
SYCOM Enterprises, LLC through a newly-formed subsidiary SYCOM ONSITE
Corporation ("SO Corporation") (see Note 4). SO Corporation is also an ESCO with
customers primarily on the east coast of the United States.
The Company also owned general and limited partnership interests in Television
City Cogen, L.P., a California limited partnership ("TCC"). Effective February
17, 1997, the Company sold its interests in TCC.
<PAGE>F-9
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Unless the context indicates otherwise, reference to the Company shall include
all of its wholly-owned subsidiaries.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all of its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Revenue Recognition
Revenues on development and construction of energy efficiency projects requiring
contract performance prior to commencement of deliveries are recorded using the
percentage of completion method. Under this method, the revenue recognized is
that portion of the total contract price that the cost expended to date bears to
the anticipated final total costs based on current estimates of the costs to
complete the project. When the total estimated costs to complete a project
exceed the total contract amount, thereby indicating a loss, the entire
anticipated loss is recognized currently.
Ongoing revenues on contracts containing guaranteed savings to customers are
generally recognized when the guaranteed savings are achieved. No warranties or
reserves are applicable to these contracts.
Revenues for development, management, marketing and similar services are
recognized as the services are performed.
Operation and Maintenance Agreements
Commencing July 1, 1993, the Company began entering into long term operation and
maintenance agreements with its customers. In instances where estimated costs
exceed estimated revenue, the Company discounts the estimated future deficit
cash flows at an appropriate long-term interest rate and recognizes expense and
a related liability in its financial statements. As of June 30, 1998, the
liability for deferred operations and maintenance costs is $465,359.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with an original
maturity of three months or less to be cash equivalents.
<PAGE>F-10
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Restricted Cash
Restricted cash consists of amounts on deposit with financial institutions for
the purpose of securing performance milestones under several of the Company's
demand side management ("DSM") contracts. Funds become available to the Company
over a period of 24 to 36 months following completion of the last contract
provided certain conditions and milestones are achieved. In the event that
conditions or milestones are not achieved, the Company will be required to
forfeit its right to some or all of the funds on deposit. As of June 30, 1998,
the Company believes that all conditions and milestones will be achieved and
that no funds under these DSM contracts will be subject to forfeiture.
Property and Equipment
Property and equipment are recorded at cost. Replacements and improvements are
capitalized, while repairs and maintenance are charged to expense as incurred.
Depreciation and amortization are provided using the straight-line method over
the assets estimated useful lives ranging from five to thirty one and one-half
years. Leasehold improvements and leased equipment are amortized over the useful
life or term of the respective lease, whichever is less. When an asset is sold
or otherwise disposed of, the cost and accumulated depreciation or amortization
is removed from the accounts and any resulting gain or loss is recognized
currently.
Excess of Purchase Price Over Net Assets Acquired
Excess of purchase price over net assets acquired ("Goodwill") represents the
purchase price in excess of the fair value of the net assets of acquired
businesses and is being amortized using the straight-line method over its
estimated useful life. The carrying value is evaluated at least annually. The
Company considers current facts and circumstances, including expected future
operating income and cash flows to determine whether it is probable that
impairment has occurred.
Income Taxes
The Company accounts for income taxes under the liability method, which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the financial statements or
tax returns. Deferred tax assets and liabilities are determined based on the
difference between financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse.
Earnings Per Common and Common Equivalent Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued a new
statement titled "Earnings per Share" ("FASB128"). The new statement is
effective for both interim and annual periods ending after December 15, 1997.
FASB128 replaces the presentation of primary and fully diluted earnings per
share with the presentation of basic and diluted earnings per share. Basic
earnings per share excludes dilution and is calculated by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Income available to common stockholders is
calculated by subtracting preferred stock dividends from net income. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue
<PAGE>F-11
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. Common
stock equivalents for the years ending June 30, 1998 and 1997 were anti-dilutive
and excluded in the earnings per share computation.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost of assets may
be impaired, an evaluation of recoverability would be performed. If an
evaluation were required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash flow is required.
There were no impairments of long-lived assets for the years ended June 30, 1998
or 1997.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB25") and related interpretations
in accounting for its employee stock options. In accordance with FASB Statement
No. 123 "Accounting for Stock-Based Compensation" ("FASB123"), the Company will
disclose the impact of adopting the fair value accounting of employee stock
options. Transactions in equity instruments with non-employees for goods or
services have been accounted for using the fair value method as prescribed by
FASB123.
Impact of Recently Issued Standards
The FASB has issued Statement of Financial Accounting Standards 130, "Reporting
Comprehensive Income" ("FASB130") and Statement of Financial Accounting
Standards 131 "Disclosures About Segments of an Enterprise and Related
Information" ("FASB131"). FASB130 establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, FASB130 requires that all components of comprehensive income shall
be classified based on their nature and shall be reported in the financial
statements in the period in which they are recognized. A total amount for
comprehensive income shall be displayed in the financial statements where the
components of other comprehensive income are reported. FASB131 supersedes
Statement of Financial Accounting Standards 14 "Financial Reporting for Segments
of a Business Enterprise." FASB131 establishes standards on the way that public
companies report financial information about operating segments in annual
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. FASB131 defines operating segments as components of a company about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance.
<PAGE>F-12
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FASB130 and FASB131 are effective for financial statements for periods beginning
after December 15, 1997 and require comparative information for earlier years to
be restated. Results of operations and financial position will be unaffected by
implementation of these standards.
FASB Statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," ("FASB132") was issued in February 1998. This
statement revises the disclosure requirement for pensions and other
postretirement benefits. This statement is effective for the Company's financial
statements for the year ended June 30, 1999 and the adoption of this standard is
not expected to have a material effect on the Company's financial statements.
FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("FASB133") was issued in June 1998. This statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for the Company's
financial statements for the year ended June 30, 2001 and the adoption of this
standard is not expected to have a material effect on the Company's financial
statements.
Use of Estimates
The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates.
The Company's financial statements are based upon a number of significant
estimates, including the allowance for doubtful accounts, percentage of
completion on long term contracts, the estimated useful lives selected for
property and equipment and intangible assets, realizability of deferred tax
assets, and accrued future operation and maintenance costs associated with
energy services agreements. Due to the uncertainties inherent in the estimation
process, it is at least reasonably possible that these estimates will be further
revised in the near term and such revisions could be material.
Fair Value of Financial Instruments
The estimated fair values for financial instruments under FASB Statement No.
107, "Disclosures about Fair Value of Financial Instruments," are determined at
discrete points in time based on relevant market information. These estimates
involve uncertainties and cannot be determined with precision. The estimated
fair values of the Company's financial instruments, which includes all cash,
accounts receivables, accounts payable, long-term debt and other debt,
approximates the carrying value in the consolidated financial statements at June
30, 1998.
<PAGE>F-13
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Concentrations of Credit Risk
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on or off balance sheet) that arise from
financial instruments exist for groups of customers or groups of counterparties
when they have similar economic characteristics that would cause their ability
to meet contractual obligations to be similarly effected by changes in economic
or other conditions. In accordance with FASB No. 105, "Disclosure of Information
about Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk," the credit risk amounts shown
in Note 18 do not take into account the value of any collateral or security.
3. Basis of Presentation
As shown in the accompanying financial statements, the Company has reported net
losses of $2,218,482 and $1,388,598 for the years ended June 30, 1998 and 1997,
respectively, and has an accumulated deficit of $19,414,842 and a working
capital deficit of $2,693,367 as of June 30, 1998.
During the year ended June 30, 1998, the Company took steps to mitigate the
losses and enhance its future viability. Management believes that the Company
will be able to generate additional revenues and operating efficiencies through
its acquisitions as well as by other means to achieve profitable operations. In
addition, subsequent to year-end, the Company has exercised its right under a
stock subscription agreement to require Westar Capital, Inc., ("Westar Capital")
to purchase an additional 200,000 shares of Series C Convertible Preferred Stock
for $1,000,000 (see Note 20). The Company can require Westar Capital to purchase
an additional 200,000 shares of Series C Convertible Preferred Stock for
$1,000,000. Management believes that these actions will allow the Company to
continue as a going concern.
4. Acquisitions and Dispositions
On October 28, 1997, the Company entered into a Plan and Agreement of
Reorganization with Westar Capital to acquire WBS (now OBS). The Company
acquired all of WBS's issued and outstanding stock in exchange for 1,700,000
shares of the Company's Class A Common Stock. On March 31, 1998, the Company
issued an additional 800,000 shares of Class A Common Stock pursuant to the
agreement. The stock issuances were valued at the average of the bid and ask
stock prices on the date of issuance. The transaction was accounted for as a
purchase. The resulting purchase price including acquisition costs was
$1,498,716 which resulted in no amounts being allocated to excess of purchase
price over assets acquired.
In February 1998, OBS acquired the operating assets of Mid-States for $290,000
through its newly created subsidiary, OMS. The transaction was accounted for as
a purchase.
Effective June 13, 1998, the Company acquired all of the outstanding common
shares of LTS, in exchange for 690,000 shares of the Company's Class A Common
Stock plus $500,000. The stock issuances were valued at the average of the bid
and ask stock prices on the date of issuance. The
<PAGE>F-14
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
former LTS shareholders also may receive a one-time earn-out payment in 1999,
payable in either cash, or, at the Company's option, the Company's Class A
Common Stock. The earn-out payment will be based on LTS' actual pre-tax earnings
contribution for a 12 month period ending March 31, 1999. The transaction was
accounted for as a purchase. The resulting purchase price including acquisition
costs was $995,788 which resulted in $1,445,922 being allocated to excess of
purchase price over net assets acquired.
On June 30, 1998, the Company acquired all the assets and specific liabilities
of SYCOM Enterprises, LLC through a newly-created subsidiary (SO Corporation) in
exchange for 1,750,000 shares of the Company's Class A Common Stock. The stock
issuances were valued at the average of the bid and ask stock prices on the date
of issuance. In addition, under a Sale and Noncompetition Agreement SO
Corporation acquired the right to the services and expertise of all of the
employees of SYCOM Corporation and SYCOM Enterprises, L.P., affiliates of Sycom
Enterprises, LLC. in exchange for the right to receive 157,500 shares of Series
D Convertible Preferred Stock that is convertible into 15,750,000 shares of the
Company's Class A Common Stock. The Series D Stock (including the shares of the
Company's Class A Common Stock into which the Series D Stock is convertible)
will be held in escrow and will be released when: (i) the market value of the
Company's Class A Common Stock reaches $2.00 per share; (ii) annualized
after-tax earnings total $0.15 per share (including the Class A Common Shares
into which the Series D Stock is convertible) over four consecutive quarters;
and (iii) certain debts of SYCOM Corporation and SYCOM Enterprises, L.P.
(including those to the Company and its affiliates) have been satisfied. These
share values and earnings thresholds increase by 10 percent per year after
December 31, 1999. Pursuant to the terms of a Share Repurchase Agreement, the
Company may repurchase the escrowed Series D Stock (including the Company's
Class A Common Stock into which the Series D Stock is convertible) for $0.001
per share if: (i) the Sale and Noncompetition Agreement is terminated; and (ii)
after June 30, 2000, such repurchase is justifiable based on the reasonable
business judgment of the Company's Board of Directors considering the following
factors: (a) the key employees of SYCOM Corporation no longer are being retained
by SO Corporation; and (b) there is no reasonably foreseeable likelihood that
all of the following conditions shall be satisfied: specific debts to a third
party and the Company will be satisfied, and both share performance benchmarks
described in the Escrow Agreement shall be achieved. The Company also may
repurchase the escrowed Series D Stock (and the Company's Class A Common Stock
into which the Series D Stock is convertible) during the 30 day period prior to
the scheduled release date (that is, June 30, 2006) if any one of the specified
conditions for release of the Series D Stock has not been satisfied. Due to the
uncertainty of the ultimate issuance of the preferred shares, no value will be
attributed to such preferred shares until they are released from escrow.
The Company has agreed to make loans to SYCOM Corporation and SYCOM Enterprises,
L.P. from time to time equal to their recurring general and administrative
expenses and debt service to third parties with interest at 9.75% per annum.
(See Note 11). The Company may require immediate repayment of such loans if
certain earnings thresholds are not met. If the Company requires immediate
repayment then certain third party debt owing by SYCOM Corporation and/or SYCOM
Enterprises, L.P. must be repaid by a like amount. The debt repayment to the
Company can be in the form of cash or a reduction in the number of the escrowed
shares of the Series D Stock (or Class A Common Stock into which the Series D
Stock can be converted). The debt repayment to the third party lender can be in
the form of cash or a distribution of the escrowed shares of the Series D Stock
(or Class A Common Stock into which the Series D Stock can be converted). The
Company has also agreed to lend up to $1,000,000 to
<PAGE>F-15
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SYCOM Enterprises, LLC, to allow its shareholders to pay anticipated income
taxes resulting from the sale. Any amounts loaned will accrue interest at 9.75%
per annum and will be secured by the Company's Class A Common Stock issued in
the acquisition at the rate of 1.75 common shares per $1.00 loaned.
The resulting purchase price including acquisition costs was $2,060,439 with
$2,132,056 being allocated to excess of purchase price over net assets acquired.
The following presents pro forma information as if all of the acquisitions
described above occurred on July 1, 1996:
Year Ended
June 30, 1998 June 30, 1997
Revenue $ 38,225,107 $ 49,725,191
============= ==============
Operating Income (Loss) $ (9,416,694) $ 3,632,789
============= ==============
Net Loss $ (11,730,057) $ (69,870)
============= ==============
Basic and Diluted loss per common share $ (0.64) $ **
============= ==============
**per share value less than one cent.
5. Accounts Receivable
Accounts Receivable consisted of the following as of June 30, 1998:
Contract receivables
Completed contracts $ 472,590
Contracts in progress 2,432,781
------------
2,905,371
Trade receivables 628,529
------------
3,533,900
Less: Allowance for doubtful accounts (15,030)
------------
$ 3,518,870
============
<PAGE>F-16
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on contracts as of June 30, 1998, consisted of
the following:
Costs incurred $ 11,796,701
Estimated earnings 2,234,198
-------------
14,030,899
Less: Billings to date (15,974,738)
-------------
$ (1,943,839)
=============
Included in the accompanying Balance Sheet
under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 944,820
Billings in excess of costs and earnings on
uncompleted contracts (2,888,659)
-------------
$ (1,943,839)
=============
7. Property and Equipment
Property and equipment at June 30, 1998, consisted of:
Estimated
Useful Lives
------------
Office furniture $ 474,915 5-7 years
Equipment and Tools 722,639 7-10 years
Vehicles 39,971 5 years
Water Treatment Plants 993,516 Contract life
(50 to 56 months)
Land 44,000 -
Building 80,000 31.5 years
Leasehold improvements 42,135 5-20 years
------------
2,397,176
Less: Accumulated depreciation
and amortization (438,998)
------------
$ 1,958,178
============
Depreciation expense amounted to $258,572 and $187,077 for the years ended June
30, 1998 and 1997, respectively.
<PAGE>F-17
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. Notes Payable
Notes payable at June 30, 1998, consisted of the following:
Note payable to a third party, interest at 12.00%,
with all unpaid interest and principal due July 31, 1998,
unsecured $ 7,532
Notes payable with payments upon completion of certain
milestones with interest at 18.0%, past due, secured
by accounts receivable and other assets 1,132,961
Notes payable with payments upon completion of certain
milestones, interest at 13.5% due July 1998 through
December 1998, secured by accounts receivable and
other assets 669,126
Notes payable with monthly installments of $1,175
including interest at 10.75%, maturing August through
September 1998, collateralized by certain automobiles 8,667
Notes payable, non-interest bearing, due in monthly
installments of $1,000, unsecured 6,777
Note payable, due in monthly installments of $200,
including interest at 10.75%, maturing December 1998,
collateralized by certain computer equipment 1,839
Note payable, due in monthly installments of $1,631,
including interest at 9% maturing September 1999, unsecured 22,978
-----------
Total notes payable 1,849,880
Less: Current portion 1,846,870
-----------
Total Long Term Notes Payable $ 3,010
===========
<PAGE>F-18
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. Notes Payable - related parties
Notes payable - related parties consisted of the following at June 30, 1998:
Note payable to related party, interest at 8.0%,
due on demand $ 178,329
Note payable due to related party, interest at
12.0% per annum, due April 1999 290,000
-----------
$ 468,329
===========
10. Accrued expenses and other liabilities
At June 30, 1998, accrued expenses and other liabilities consisted of the
following:
Payroll and related payroll taxes $ 383,910
Accrued Interest 68,877
Additional consideration related to acquisition 200,000
Accrued job costs 798,476
Other accrued liabilities 161,917
------------
Total $ 1,613,180
============
11. Stockholders' Equity
Stock Subscription Agreement
On October 28, 1997, the Company entered into a Stock Subscription Agreement
(the "Stock Agreement") with Westar Capital. Pursuant to the Stock Agreement,
the Company completed a private placement of 2,000,000 shares of the Company's
Class A Common Stock at $0.50 per share and 200,000 shares of the Company's
newly-created Series C Convertible Preferred Stock at $5.00 per share. Each
share of Series C Convertible Preferred Stock is convertible into five (5)
shares of the Company's Class A Common Stock. Conversion can take place by the
holder at any time. The Company has the right to require conversion if the
average closing price of the Company's Class A Common Stock equals or exceeds
$2.00 per share.
Class A and Class B Common Stock
Holders of Class A Common Stock are entitled to one vote per share for the
election of directors and other corporate matters which shareholders are
entitled or permitted to vote. Holders of Class B Common Stock shall not be
entitled to vote but are entitled to receive dividends ratably with Class A
Common Stock when and as declared by the Board of Directors. As of June 30,
1998, there were no shares of Class B Common Stock issued and outstanding.
<PAGE>F-19
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Warrants
On September 11, 1997, the Company issued warrants to purchase 525,988 shares of
Class A Common Stock at $0.1875 per share, which expire on September 11, 2002,
to an officer and to an entity affiliated with a director as consideration for
posting collateral and guaranteeing performance bonds. The Company recognized
$18,980 in expense related to these warrants.
On June 30, 1998, the Company paid $50,000 and issued warrants to purchase
160,000 shares of Class A Common Stock at $1.125 per share, which expire on June
30, 2003, to entities affiliated with a director as consideration for services
rendered in the acquisition of the assets of SYCOM Enterprises, LLC. The Company
recognized compensation expense in the amount of $92,016 related to these
warrants which has been accounted for as additional purchase price.
As of June 30, 1998, the Company has issued and outstanding a total of 952,833
warrants to purchase shares of its Class A Common Stock. The exercise prices
range from $0.1875 to $4.00 per share with expiration dates ranging from
December 1998 through June 2003.
Preferred Stock
On October 23, 1997, the Company amended its Certificate of Incorporation to
eliminate the Series A and B Convertible Preferred Stock.
Each holder of a share of Series C Convertible Preferred Stock ("Series C") is
entitled to one vote per share for each share of Class A Common Stock that
Series C is convertible into and to an annual dividend at the rate of 9.75% of
the Series C liquidation preference ($5.00 per share) payable quarterly.
Dividends are cumulative. Each share of Series C is convertible at the option of
the holder into five shares of Class A Common Stock. Dividends in the amount of
$49,147 were paid in the form of 8,205 shares of Series C during the year ended
June 30, 1998.
Holders of Series D Convertible Preferred Stock ("Series D") are not entitled to
dividends or to vote. Each share of Series D is convertible, at the option of
the holder, into 100 shares of Class A Common Stock. All shares of Series D are
held in escrow (see Note 4).
Notes Receivable - Related Parties
As of June 30, 1998, Notes Receivable - Related Parties includes receivables
with the previous owners of LTS, who are current employees and directors of LTS,
in the amount of $180,027. Such loans accrue interest at 10% per annum and are
due in March 2003.
Also included are amounts due from affiliates of SYCOM Enterprises, LLC in the
amount of $1,155,190. The loan accrues interest at 9.75% per annum, is due on or
before June 30, 2006 and is collateralized by certain assets of an affiliate of
SYCOM Enterprises, LLC. Additionally see Note 4.
<PAGE>F-20
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. Stock Option Plans:
WEM 1990 Non-Statutory Stock Option Plan (formerly WEM Stock Option Plan)
Effective February 15, 1994, the Company adopted the WEM 1990 Non-Statutory
Stock Option Plan (the "1990 Plan"). The 1990 Plan provides for the granting of
options to directors, officers, employees and consultants to purchase up to
100,000 shares of the Company's Class A Common Stock. The 1990 Plan is
administered by a committee of outside directors appointed by the Board of
Directors.
As of June 30, 1998, the status of the 1990 Plan was as follows:
Outstanding Exercise Price Exercisable
Options Per Share Options
----------- -------------- -----------
July 1, 1996 500 $6.10 500
Options Granted 500 $0.2956 =====
Options Cancelled (500) $6.10
----------
June 30, 1997 500 $0.2956 500
Options Exercised (500) $0.2956 =====
----------
June 30, 1998 0 0
========== ======
WEM 1991 Non-Statutory Stock Option Plan
Effective February 15, 1994, Onsite adopted the WEM 1991 Non-Statutory Stock
Option Plan (the "1991 Plan"). The 1991 Plan provides for the granting of
options to non-employee directors, officers, employees and consultants to
purchase up to 160,000 shares of the Company's Class A Common Stock. The 1991
Plan is administered by a committee of outside directors appointed by the Board
of Directors.
As of June 30, 1998, the status of the 1991 Plan was as follows:
Outstanding Exercise Price Exercisable
Options Per Share Options
----------- -------------- -----------
July 1, 1996 90,000 $5.3125 - $29.70 90,000
Options cancelled (5,000) $29.70 ======
---------
June 30, 1997 and
1998 85,000 $5.3125 85,000
========= ======
Non-Plan Options
During fiscal year 1993, WEM issued stock options that were not part of the 1990
Plan or the 1991 Plan (the "Non-Plan Options"). Effective February 15, 1994, the
Company adopted the Non-Plan Options, and has provided for the granting of
options to various parties to purchase up to 113,000 shares of the Company's
Class A Common Stock.
As of June 30, 1998, the status of the Non-Plan Options was as follows:
<PAGE>F-21
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Outstanding Exercise Price Exercisable
Options Per Share Options
----------- -------------- -----------
July 1, 1996 105,000 $5.3125 - $6.10 105,000
Options Cancelled (1,000) $5.3125 =======
Options Granted 104,000 $0.2956
Options Cancelled (104,000) $5.3125 - $6.10
----------
June 30, 1997 104,000 $0.2956 104,000
Options Exercised (103,100) $0.2956 =======
Options Cancelled (900) $0.2956
---------
June 30, 1998 0 0
========= =======
The Onsite 1993 Stock Option Plan
During fiscal 1994, the Company adopted the Onsite 1993 Stock Option Plan (the
"1993 Plan"). The 1993 Plan, as amended, provides for the granting of options to
directors, officers, employees and consultants to purchase up to 3,300,000
shares of Class A Common Stock and is administered by a committee of outside
directors appointed by the Board of Directors.
As of June 30, 1998, the status of the 1993 Plan was as follows:
Outstanding Exercise Price Exercisable
Options Per Share Options
----------- -------------- -----------
July 1, 1996 1,807,483 $0.25 - $5.625 1,395,901
Options granted 1,508,440 $0.25 - $5.3125 =========
Options cancelled (816,645) $0.25 - $0.50
Options exercised (42,553) $0.25 - $0.50
----------
June 30, 1997 2,456,725 $0.24 - $5.3125 1,729,593
Options granted 880,954 $0.23 - $0.9063 =========
Options exercised (206,004) $0.25 - $0.5000
Options cancelled (133,417) $0.25 - $0.2956
----------
June 30, 1998 2,998,258 $0.23 - $5.3125 1,596,651
========= =========
At June 30, 1998, no additional options were available for granting to purchase
shares of Class A Common Stock.
<PAGE>F-22
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A summary of option transactions under the 1993 Plan during the years ended
June 30, 1998, and 1997, is as follows:
Weighted-Average
Fixed Options Shares Exercise Price
--------------------- -------------------- -----------------------
July 1, 1996 1,807,483 $ 0.7573
Granted 1,508,440 $ 0.2909
Exercised (42,553) $ 0.4628
Cancelled (816,645) $ 0.4764
----------
June 30, 1997 2,456,725 $ 0.5789
Granted 880,954 $ 0.6224
Exercised (206,004) $ 0.2752
Cancelled (133,417) $ 0.2797
---------
June 30, 1998 2,998,258 $ 0.6259
=========
During the year ended June 30, 1997, the Compensation Committee and Board of
Directors approved a repricing for 400,440 options to $0.2956 with original
exercise prices ranging between $1.94 and $6.10. This was accounted for as a
reprice of options to the fair market value on the date of the repricing. The
weighted average contractual life for all options as of June 30, 1998, was
approximately six years, with exercise prices ranging from $0.23 to $5.31.
Proforma Information
As stated in Note 2, the Company has not adopted the fair value accounting
prescribed by FAS 123 for employees. Had compensation cost for stock options
issued to employees been determined based on the fair value at grant date for
awards in 1998 and 1997 consistent with the provisions of FAS 123, the Company's
net loss and net loss per share would have been adjusted to the proforma amounts
indicated below:
Year Ended June 30,
-----------------------------
1998 1997
----------- --------
Net Loss $ (2,480,017) $ (1,471,328)
============= =============
Basic and Diluted Loss
Per Common Share $ (0.18) $ (0.14)
============= =============
<PAGE>F-23
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model using the following weighted-average
assumptions: expected volatility of 116.9%, an expected life of three years for
option shares, no dividends would be declared during the expected term of the
options, and a risk-free interest rate using the monthly US Treasury T-Strip
Rate at the option grant date for fiscal years ended 1998, and 1997,
respectively.
The weighted-average fair value of stock options granted to employees during the
years ended June 30, 1998 and 1997, was $0.36 and $0.19, respectively.
13. Income Taxes
Income tax expense for the years ended June 30, 1998 and 1997 is comprised of
the following:
Year ended June 30, 1998 Current Deferred Total
------------ ---------- ----------
Federal $ - $ - $ -
State 7,500 - 7,500
------------ ---------- ----------
$ 7,500 $ - $ 7,500
============ ========== ==========
Year ended June 30, 1997 Current Deferred Total
------------ ---------- ----------
Federal $ - $ - $ -
State 8,500 - 8,500
------------ ---------- ----------
$ 8,500 $ - $ 8,500
============ ========== ==========
The actual income tax expense differs from the "expected" tax (benefit)
(computed by applying the U.S. Federal corporate income tax rate of 34% for each
period) as follows:
1998 1997
------------ ----------
Amount of expected tax (benefit) $ (751,800) $ (469,200)
Non-deductible expenses 13,900 4,400
State taxes, net 4,900 5,600
Effect of change in state tax rate 27,600 -
Change in valuation allowance for deferred
tax assets 712,900 467,700
----------- -----------
Total $ 7,500 $ 8,500
=========== ===========
<PAGE>F-24
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The components of the net deferred tax asset recognized as of June 30, 1998 and
1997, are as follows:
1998 1997
----------- ---------
Current deferred tax assets (liabilities):
Litigation settlement accrual $ 16,000 $ 6,700
Deferred operation and maintenance
reserve 185,400 169,200
Vacation accrual 44,400 29,100
Deferred compensation - 27,300
Inventory reserve 6,000 -
Book compensation on issuance of
stock options 7,600 -
Allowance for doubtful accounts 6,000 -
Other 600 35,000
----------- ---------
266,000 267,300
Valuation allowance (266,000) (267,300)
----------- ---------
Net current deferred tax asset $ - $ -
=========== =========
1998 1997
------------ ------------
Long-Term deferred tax assets (liabilities):
Net operating loss carryforwards $ 6,943,200 $ 4,504,600
Goodwill due to difference in
amortization 453,300 392,500
Depreciation (137,100) -
Capital loss carryforward - 66,100
Alternative minimum tax credit 11,200 15,200
Other 800 -
------------ ------------
7,271,400 $ 4,978,400
Valuation allowance (7,271,400) (4,978,400)
------------ ------------
Net current deferred tax asset $ - $ -
============ ============
The deferred tax asset includes the future benefit of the LTS pre-acquisition
deductible temporary differences and net operating losses of $184,100. The
deferred asset has been fully reserved through the valuation allowance. Any
future tax benefit realized for these items will first reduce any goodwill
remaining from this acquisition and then reduce income tax expense.
The deferred tax asset also includes the future benefit of the tax deduction for
the exercise of stock options of $13,000. The deferred asset is fully reserved
through the valuation allowance. Any future tax benefit realized for this item
will be a credited to paid in capital.
At June 30, 1998, the Company has net operating loss carryforwards of
approximately $19,116,000, which expire in the years 2006 through 2013. The
Company has California net operating loss carryforwards at June 30, 1998 of
$5,018,000, which expire in years 1999 through 2003.
<PAGE>F-25
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The benefit of the net operating losses to offset future taxable income is
subject to reduction or limitation of use as a result of certain consolidated
return filing regulations and additional limitations relating to a 50% change in
ownership due to various stock transactions.
14. Related Parties
During the fiscal year ended June 30, 1998, the Company paid two directors of
the Company, professional fees for due diligence in the amount of $48,078 and
$6,451, respectively.
As of the fiscal year end June 30, 1998, OBS has outstanding accounts receivable
with Western Resources, Inc. the parent company of a shareholder of the Company,
in the amount of $69,924 in relation to water treatment plants in Lawrence,
Kansas and Tecumseh, Kansas. OBS has recognized $323,454 in revenue related to
these water treatment facilities. OBS also has outstanding accounts payable with
Western Resources in the amount of $369,961. In addition, OBS has accrued
liabilities with Western Resources in the amount of $254,409.
Westar Capital has guaranteed any shortfalls of energy savings on the Company's
contract with a customer. Such guaranty is backed by an insurance police
purchased by the Company for a short fall of energy savings. In addition, Westar
Capital and an affiliate have indemnified a bonding company for bid and
performance bonds obtained by the Company.
Also see Notes 9 and 11.
15. Commitments and Contingencies
Leases
The Company leases its administrative facility under a noncancellable operating
lease expiring in 2001 with a three-year renewal option. As of August 1, 1998,
the Company increased its office space that is included under the current lease.
The Company expanded its regional offices to include Kansas City, Kansas, where
there is a one year lease expiring May 1999, and San Ramon, California, where
office space is rented on a three year lease that expires March 2001. OBS leases
office space that has a one year lease with an option to renew, expiring
November 1998. OMS leases a small building from the former owner on a month by
month basis to store testing equipment. This lease will continue indefinitely.
LTS currently has a one-year lease that expires July 1999.
<PAGE>F-26
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Future minimum lease payments under operating leases is as follows:
Year ending June 30,
1999 $ 448,704
2000 377,399
2001 377,399
2002 1,440
2003 1,440
Thereafter 1,440
------------
Total minimum lease payments $ 1,207,822
============
Total rent expense, including month-to-month equipment rentals, was $201,995 and
$272,641 in 1998, and 1997, respectively.
Employment Agreements
Effective April 1, 1998, the Company entered into employment agreements with the
President and Chief Operating Officer, and with the Vice President and
Responsible Managing Officer of LTS which expire on March 31, 2000. Such
agreements provide for minimum salary levels totaling $235,000 per year
excluding bonuses, as well as severance payments upon termination of employment
without cause.
Ongoing Maintenance for Water Treatment Plants
OBS has two contracts with Western Resources whereby OBS constructed and
maintains equipment for supplying demineralized water for boiler makeup water at
Lawrence Energy Center and Tecumseh Energy Center. Both contracts terminate on
December 31, 2001, unless renewed at the end of the term as agreed upon by both
parties. OBS is responsible for producing the quality of demineralized water as
specified. If damage occurs due to the specified quality of demineralized water
not being produced, OBS is liable for the cost of the repairs to the equipment
limited to a maximum of $300,000 per incident.
Environmental Costs
The Company is subject to federal, state and local environmental laws and
regulations. Environmental expenditures are expensed or capitalized depending on
their future economic benefit. Expenditures that relate to an existing condition
caused by past operations and that has no future economic benefits are expensed.
Liabilities for expenditures of a non-capital nature are recorded when
environmental assessments are probable, and the costs can be reasonably
estimated. In February 1998, the Company received a notice from the South Coast
Air Quality Management District for alleged reporting violations in calendar
year 1996 on the facility previously owned by TCC. No remedial action is
required. The Company may be subject to certain penalties, but management does
not believe this matter will have a material adverse impact on the Company's
financial condition or results of operations. Although the level of future
expenditures for environmental matters cannot be determined
<PAGE>F-27
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
with any degree of certainty, it is management's opinion that such costs when
determined will not have a material adverse effect on the financial position or
results of operations of the Company.
Guaranteed Savings
The Company is contingently liable to its customers pursuant to contractual
terms in the event annual guaranteed savings are not achieved by the customer.
Litigation
In January 1998, the Oregon Bureau of Labor and Industries (the "BLI") filed a
suit against LTS and two other parties for alleged unpaid wages in the amount of
$509,205 for 32 employees who worked on a lighting retrofit project in the state
of Oregon. A trial date of April 13, 1999 has been set, but the parties are
attempting to obtain the approval of mediation rules in order to mediate this
matter. Management also has had discussions with the BLI to resolve this issue;
however, no agreement has been reached. Management believes, based on current
information, that any settlement would not have a material adverse impact on the
Company.
16. Defined Contribution Plan
The Company sponsors a 401(k) defined contribution plan, which covers
substantially all employees. Company contributions are determined annually at
the discretion of management and vest at the rate of 20% per year of employment.
During the years ended June 30, 1998 and 1997, the Company's matching
contribution was $53,480 and $43,088, respectively.
17. Significant Customers
Revenues from the three largest customers accounted for 31% (11%, 10%, 10% each)
of total revenues in fiscal 1998, and revenues from three other customers
accounted for 32% (10%, 9%, 13% each) of total revenues in fiscal 1997.
18. Concentration of Credit Risk
The Company operates in one industry segment, energy services. The Company's
customers generally are located in the United States. Financial instruments that
subject the Company to credit risk consist principally of accounts receivable.
At June 30, 1998, accounts receivable totaled $4,478,720, and the Company has
provided an allowance for doubtful accounts of $15,030.
<PAGE>F-28
ONSITE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
For the years ended June 30, 1998, and 1997, bad debts totaled $30,192 and
$37,093 respectively. The Company performs periodic credit evaluations on its
customers' financial condition and believes that the allowance for doubtful
accounts is adequate.
At June 30, 1998, the Company maintained cash balances with a commercial bank,
which were approximately $1,552,187 in excess of FDIC insurance limits.
19. Year 2000
The Company is developing plans to address issues related to the impact on its
computer systems of the year 2000. The Company believes that substantially all
software applications currently being used for the financial and operational
systems have adequately addressed any year 2000 issues. Most hardware systems
have been assessed and plans are being developed to address systems modification
requirements. The financial impact of making any required systems changes is not
expected to be material to the Company's consolidated financial position,
liquidity or results of operations. Any risks the Company faces are expected to
be external to ongoing operations. The Company has numerous alternative vendors
for critical supplies, materials and components. Current vendors and
subcontractors who have not adequately prepared for the year 2000 can be
substituted in favor of those that have prepared.
20. Subsequent Events
On July 14, 1998, the Company exercised its right under the Stock Subscription
Agreement to require Westar Capital to purchase an additional 200,000 shares of
Series C Preferred Stock for $1,000,000.
On October 16, 1998, Energy Conservation Consultants, Inc. ("ECCI"), a
Louisiana-based company, filed a suit (United States District County, Eastern
District of Louisiana, Case No. 98-2914) against OBS alleging breach of contract
in connection with one of the Company's projects. The suit seeks reimbursement
for expenses allegedly incurred by ECCI in the preparation of an audit and lost
profits in the aggregate amount of $748,000. Management is attempting to settle
the matter; however, no agreement has been reached. Management believes, based
on current information, that any settlement would not have a material adverse
impact on the Company.
<PAGE>iii
ONSITE ENERGY CORPORATION
FINANCIAL STATEMENTS - September 30, 1999
<PAGE>1
Onsite Energy Corporation
Condensed Consolidated Balance Sheet
September 30, 1999
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash $ 585,325
Accounts receivable, net of allowance for doubtful accounts of $35,000 4,690,765
Inventory 183,760
Capitalized project costs 206,169
Costs and estimated earnings in excess of billings on uncompleted contracts 723,299
Assets held for sale 328,172
Other current assets 43,423
--------------
TOTAL CURRENT ASSETS 6,760,913
Cash-restricted 118,775
Property and equipment, net of accumulated depreciation and amortization
$1,122,000 1,284,791
Other assets 41,221
--------------
TOTAL ASSETS $ 8,205,700
==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable - related parties $ 81,456
Notes payable 1,499,394
Accounts payable 9,384,270
Billings in excess of costs and estimated earnings on uncompleted contracts 955,798
Accrued expenses and other liabilities 893,922
--------------
TOTAL CURRENT LIABILITIES
12,814,840
Long-Term Liabilities:
Accrued future operation and maintenance costs associated with energy
services agreements 324,010
--------------
TOTAL LIABILITIES 13,138,850
--------------
Commitments and contingencies
Shareholders' Equity (Deficit):
Preferred Stock, Series C, 842,500 shares authorized, 649,120 issued and
outstanding (Aggregate $3,245,600 liquidation preference) 649
Preferred Stock, Series D, 157,500 shares authorized, issued and
outstanding and held in escrow -
Preferred Stock, Series E, 50,000 shares authorized, issued and outstanding 50
Common Stock, $.001 par value, 24,000,000 shares authorized: Class A common
stock, 23,999,000 shares authorized, 18,641,302 issued and outstanding 18,641
Class B common stock, 1,000 shares authorized, none issued and outstanding -
Additional paid-in capital 27,413,164
Notes receivable - stockholders (4,335,523)
Accumulated deficit (28,030,131)
--------------
TOTAL SHAREHOLDERS' DEFICIT (4,933,150)
--------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 8,205,700
==============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>2
Onsite Energy Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<S> <C>
Three Months Ended September 30,
1999 1998
--------------- ---------------
Revenues $ 9,575,572 $ 9,318,550
Cost of sales 7,443,959 7,893,029
-------------- ---------------
Gross margin 2,131,613 1,425,521
Selling, general, and administrative 2,979,350 2,691,458
expenses
Depreciation and amortization expense 143,625 290,622
Recovery of reserve provided for sale
or disposal of subsidiary (358,670) -
-------------- ---------------
Operating loss (632,692) (1,556,559)
-------------- --------------
Other income (expense):
Interest expense (108,284) (91,871)
Interest income 5,623 37,924
-------------- --------------
Total other expense (102,661) (53,947)
-------------- --------------
Loss before provision for income taxes (735,353) (1,610,506)
Provision for income taxes 3,600 -
-------------- --------------
Net loss $ (738,953) $ (1,610,506)
============== ==============
Net loss allocated to common shareholders $ (1,501,715) $ (1,636,081)
============== ==============
Basic and diluted loss per common share: $ (0.08) $ (0.09)
============== ==============
Weighted average number of shares
used in per common share calculation: 18,628,894 18,295,536
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>3
Onsite Energy Corporation
Condensed Consolidated Statement of Cash Flows
<TABLE>
<S> <C>
Three Months Ended September 30,
1999 1998
--------------- ---------------
Cash flows from operating activities:
Net loss $ (738,953) $ (1,610,506)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Amortization of excess purchase price over net
assets acquired 8,279 125,598
Amortization of acquired contract costs (59,147) -
Non-cash compensation related to stock issuance 47,500
Provision for bad debts - 74,970
Depreciation 135,345 165,024
Recovery of reserve provided for sale or disposal
of subsidiary (358,670) -
(Increase) decrease:
Accounts receivable 705,086 (2,544,304)
Costs and estimated earnings in excess of billings
on uncompleted contracts 381,431 204,360
Inventory 1,802 16,786
Other assets (15,387) 318,343
Cash-restricted 29,063 -
Increase (decrease):
Accounts payable 980,634 2,082,451
Billings in excess of costs and estimated earnings
on uncompleted contracts (440,965) -
Accrued expenses and other liabilities (591,842) (170,664)
Deferred income (5,130) -
------------- ---------------
Net cash provided by (used in) operating activities 79,046 (1,337,942)
------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment (21,186) (38,544)
Loan to shareholders (242,424) (806,735)
------------- ---------------
Net cash used in investing activities (263,610) (845,279)
------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 1,000,000 1,000,000
Proceeds from exercise of stock options - 15,301
Proceeds from borrowings, net - 366,690
Repayment of notes payable - related party (130,458) (143,794)
Repayment of notes payable (1,000,061) -
------------- ---------------
Net cash provided by financing activities (130,519) 1,238,197
------------- ---------------
Net decrease in cash (315,083) (945,024)
Cash, beginning of year 900,408 2,093,006
------------- ---------------
Cash, end of quarter $ 585,325 $ 1,147,982
============= ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>5
ONSITE ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: As contemplated by the Securities and Exchange Commission under Item
310 of Regulation S-B, the accompanying financial statements and
footnotes have been condensed and do not contain all disclosures
required by generally accepted accounting principles and, therefore,
should be read in conjunction with the Form 10-KSB for Onsite Energy
Corporation dba ONSITE SYCOM Energy Corporation (the "Company") as of
and for the year ended June 30, 1999 and all other subsequent filings.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments consisting of normal recurring
adjustments) necessary to present fairly its financial position and
results of its operations for the interim period.
NOTE 2: The consolidated balance sheet as of September 30, 1999, and the
consolidated statements of operations and cash flows for the three
months ended September 30, 1999 and 1998, represent the financial
position and results of operations of the Company.
NOTE 3: 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 quarterly report are "forward looking" statements that involve
risks and uncertainties that could cause actual results to differ
materially from projected results. The "forward looking" statements
contained herein are cross-referenced to this paragraph. Such "forward
looking" statements include, but are not necessarily limited to,
statements regarding anticipated levels of future revenue and earnings
from operations of the Company, projected costs and expenses related
to the Company's energy services agreements, and the availability of
future debt and equity capital on commercially reasonable terms.
Factors that could cause actual results to differ materially include,
in addition to the other factors identified in this report, the
cyclical and volatile price of energy, the inability to continue to
contract sufficient customers to replace contracts as they become
completed, unanticipated delays in the approval of proposed energy
efficiency measures by the Company's customers, delays in the receipt
of, or failure to receive necessary governmental or utility permits or
approvals, or the renewals thereof, risks and uncertainties relating
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 the Company's Securities and Exchange Commission
filings including the risk factors set forth in the Company's Form
10-KSB for the fiscal year ended June 30, 1999. Readers of this report
are cautioned not to put undue reliance on "forward looking"
<PAGE>6
statements which are, by their nature, uncertain as reliable
indicators of future performance. The Company disclaims any intent or
obligation to publicly update these "forward looking" statements,
whether as a result of new information, future events or otherwise.
<PAGE>IV
AUDITED FINANCIAL STATEMENTS OF SYCOM LLC
(as of December 31, 1997 and 1996)
<PAGE>F-1
INDEX TO FINANCIAL STATEMENTS
OF
SYCOM ENTERPRISES
Independent Auditors' Report F-2
Combined Financial Statements
Balance sheets F-3 to F-4
Statements of operations and accumulated deficit F-5
Statements of cash flows F-6 to F-7
Notes to combined financial statements F-8 to F-28
<PAGE>F-2
Independent Auditors' Report
To the Board of Directors
SYCOM Enterprises
We have audited the accompanying combined balance sheets of SYCOM Enterprises as
of December 31, 1997 and 1996 and the related combined statements of operations,
capital deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of SYCOM Enterprises at
December 31, 1997 and 1996 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations,
has negative cash flows from operations and has significant working capital and
net capital deficiencies that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Notes 2 and 13. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As described in Note 1, the Company changed its method of accounting for certain
contract revenue in 1997 and 1996.
\s\ BDO SEIDMAN, LLP
Certified Public Accountants
Washington, D.C.
April 3, 1998, except
for Note 13 which is
as of June 30, 1998
<PAGE>F-3
SYCOM Enterprises
Combined Balance Sheets
<TABLE>
<S> <C> <C>
Restated
December 31, 1997 1996
- ------------ ------------- --------------
Assets
Current assets
Cash $ 195,598 $ 1,088,131
Restricted cash (Note 4) 1,965,723 1,570,910
Accounts receivable, net allowance of $170,000
and $70,000 (Note 5) 3,937,781 5,936,707
Costs and estimated earnings in excess
of billings on uncompleted contracts (Note 5) 284,753 -
Inventories 82,273 -
Prepaids and other 2,927 28,009
-------------- ------------
Total current assets 6,469,055 8,623,757
Property and equipment, net (Note 6) 479,950 264,134
Contract rights and costs, net of
amortization of $1,654,265 and $1,429,625 623,330 847,970
Projects being installed (Note 1) - 8,067,246
Projects in commercial operation, net of
amortization of $24,156,114 and $23,578,027 (Note 1) 23,007,069 21,559,291
Other assets 99,650 48,818
-------------- ------------
$ 30,679,054 $39,411,216
============== ============
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>F-4
SYCOM Enterprises
Combined Balance Sheets (cont.)
<TABLE>
<S> <C> <C>
Restated
December 31, 1997 1996
- ----------- -------------- --------------
Liabilities and Capital Deficit
Current liabilities
Current maturities of long-term debt (Notes 7 and 12) $ 4,852,618 $ 3,633,782
Current maturity of loan for project
in commercial operation (Note 8) 141,539 24,222
Current maturity of other long-term payable (Note 9) 10,500 -
Accounts payable 4,145,931 3,715,946
Accrued expenses 1,023,391 559,374
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note 5) 363,530 -
Accrued interest expense 870,441 2,855,981
-------------- -----------
Total current liabilities 11,407,950 10,789,305
Deferred revenue (Note 3) 1,228,595 11,997,391
Long-term debt, net of current maturities (Notes 7 and 12) 16,350,383 7,843,613
Loan for project in commercial operation, net of
current maturities (Note 8) 15,034,239 13,601,002
Other long-term payable, net of current maturity (Note 9) 1,049,794 1,161,719
------------- ----------
Total liabilities 45,070,961 45,393,030
Commitments (Note 11)
Capital deficit
Common stock, $.01 par value, 10,000 shares
authorized, 8,492 shares issued and outstanding 85 85
Accumulated deficit (14,391,992) (5,981,899)
------------- ------------
Total capital deficit (14,391,907) (5,981,814)
============= ============
$ 30,679,054 $39,411,216
============= ============
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>F-5
SYCOM Enterprises
Combined Statements of Operations and Accumulated Deficit
<TABLE>
<S> <C> <C>
Years ended December 31, 1997 1996
- ------------------------------------------ ------------- ------------
Revenue (Note 1) $ 17,830,114 $ 35,322,291
Costs and expenses
Cost of sales (Note 1) 17,821,601 26,650,965
General and administrative expenses 5,169,606 2,804,993
------------ -----------
Total costs and expenses 22,991,207 29,455,958
------------ -----------
(Loss) income from operations (5,161,093) 5,866,333
------------ -----------
Other (expense) income
Other (expense) income 30,538 (33,914)
Interest expense, net (3,758,894) (1,473,767)
------------ -----------
Net other expense (3,728,356) (1,507,681)
------------ -----------
Net (loss) income before cumulative effect of
a change in accounting principle (8,889,449) 4,358,652
Cumulative effect of a change
in accounting principle (Note 1) 479,356 -
------------ -----------
Net (loss) income (8,410,093) 4,358,652
Accumulated deficit, beginning of year (5,981,899) (10,340,551)
------------- --------------
Accumulated deficit, end of year $(14,391,992) $ (5,981,899)
============= ==============
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>F-6
SYCOM Enterprises
Combined Statements of Cash Flows
<TABLE>
<S> <C> <C>
Years ended December 31, 1997 1996
- ------------------------------------------------------ ----------- --------------
Cash Flows From Operating Activities
Net (loss) income $(8,410,093) $ 4,358,652
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Write-off of projects being installed 8,067,246 -
Revenue previously deferred (4,364,849) (7,630,913)
Depreciation and amortization 1,905,861 9,208,114
Allowance for doubtful accounts 100,000 70,000
Loss on disposal of assets 21,933 29,215
(Increase) decrease in assets
Restricted cash (394,813) (756,328)
Accounts receivable 1,898,926 (3,417,300)
Inventories (82,273) -
Costs and estimated earnings in excess
of billings on uncompleted contracts (284,753) -
Projects being installed - (4,587,480)
Projects in commercial operation (3,009,712) (14,831,769)
Other assets (25,750) 172,762
Increase (decrease) in liabilities
Accounts payable 429,985 1,035,245
Accrued expenses 464,017 392,671
Deferred revenue - 2,579,393
Billings in excess of costs and estimated
earnings on uncompleted contracts 363,530 -
Accrued interest 698,613 607,308
Deferred charges - (7,478)
------------ ------------
Net cash used in operating activities (2,622,132) (12,777,908)
============ =============
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>F-7
SYCOM Enterprises
Combined Statements of Cash Flows
<TABLE>
<S> <C> <C>
Years Ended December 31, 1997 1996
- -------------------------------------------------- --------- ---------
Cash Flows From Investing Activities
Proceeds from sale of assets 3,600 1,550
Purchases of property and equipment (360,636) (183,389)
----------- -------------
Net cash used in investing activities (357,036) (181,839)
----------- -------------
Cash Flows From Financing Activities
Borrowings under debt agreements 9,376,733 16,460,598
Principal payments on debt (7,290,098) (2,783,004)
----------- -------------
Net cash provided by financing activities 2,086,635 13,677,594
----------- -------------
Net (decrease) increase in cash (892,533) 717,847
Cash, at beginning of year 1,088,131 370,284
----------- -------------
Cash, at end of year 195,598 1,088,131
=========== =============
Supplemental Disclosure
Cash paid for interest $ 3,111,663 $ 1,190,256
========== =============
</TABLE>
see accompanying notes to combined financial statements
<PAGE>F-8
SYCOM Enterprises
Notes to Combined Financial Statements
1. Summary of Accounting Policies
Basis of Combination
The combined financial statements reflect the activities of six entities
(collectively "the Company"). SYCOM Corporation ("SYCOM" or "general partner")
and SSBKK, Inc. ("SSBKK" or "limited partner") are partners of SYCOM Enterprises
Limited Partnership (the "Partnership") and own 100% of SB Linden, LLC ("SB
Linden"), SC Wood, LLC ("SC Wood") and SYCOM Enterprises, LLC ("Sycom LLC"). The
Company's activities have been combined to reflect the common ownership by the
stockholders of SYCOM and SSBKK. All material accounts and transactions between
the Companies have been eliminated.
Organization
SYCOM was incorporated in Delaware in August 1986 under the name Restaurant
Conservation Corp. to provide commercial energy conservation services. During
1988, the company changed its name to RCC Corp., and is currently doing business
as SYCOM Corporation. During 1990, SYCOM entered into a partnership agreement
through which it owns 50.1% of the Partnership. As the general partner, SYCOM
functions primarily as the project management company for the Partnership. SSBKK
was incorporated in Delaware in 1993. During 1995, SSBKK purchased the 49.9%
interest in the Partnership from the former limited partners.
The Partnership assumed certain contract rights and associated liabilities
of the general partner at inception. The combined financial statements do not
reflect assets or liabilities that the partners may have outside their interests
in the Partnership.
SB Linden and SC Wood were organized in Delaware in 1996 and 1997,
respectively, to provide commercial energy conservation services to specific
individual projects. (See Note 13).
SYCOM Enterprises, LLC was organized in 1997 in the same business as the
Partnership. (See Note 13).
<PAGE>F-9
Nature of Business
The Company provides services for the reduction of energy consumption and
related energy costs to its customers through the use of engineering analyses
and the acquisition, operation, management and maintenance of energy savings
devices installed on customers' premises. Long-term contracts with utility
companies provide one source of revenue that is directly related to the level of
savings generated. Another source of revenue is provided by energy services
agreements entered into with non-utility customers. These agreements provide the
Company with a share of the savings or a negotiated fee, based upon the savings
realized by the customer. The future recoverability of the costs associated with
these projects, which the Company has deferred, is dependent upon the successful
operation of the energy savings devices. Management has prepared a business plan
which includes forecasted revenues which are sufficient to recover the deferred
costs. Management believes that these forecasted revenues are reasonable based
upon the detailed analyses and feasibility studies performed for each project as
well as management's past experiences. An additional source of revenue is also
provided by the maintenance and monitoring services performed by the Company
over the life of the contract.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses uring the reporting
period. Actual results could differ from those estimates.
Risk and Uncertainties
The most significant risk facing the Company is its ability to continue to
obtain financing to fund future project development, as well as liquidate trade
accounts payable and current debt maturities. Additionally, the Company
currently derives a majority of its business by offering customers incentive
payments through public utility energy savings programs. As a regulated
industry, some public utilities currently offer incentives to their customers
and third parties such as the Company to conserve energy. Future deregulation of
<PAGE>F-10
the utility industry or a reduction in the incentives to conserve energy could
have a direct impact on the Company.
Change of Accounting Principle
During 1997 the Company changed its method of revenue recognition for
customer-funded contracts from the completed contract method to the percentage
of completion method. The percentage of completion method of revenue recognition
was adopted because the Company believes it results in a better matching of
expenses with revenues and is the predominant method used in its industry. Also,
beginning in 1997 the Company is able to sufficiently estimate its future costs
to allow adoption of the percentage of completion method of revenue recognition.
The Company applied the percentage of completion method to all customer-funded
contracts in progress at December 31, 1997. The effect of the change in 1997 was
to decrease the net loss by $430,929. The cumulative effect of applying the
percentage of completion method to customer-funded contracts in progress at
December 31, 1996 of $479,356 is included in income of 1997 as the cumulative
effect of a change in accounting principle.
During 1996 the Company, based on historical trends over the past five
years, changed its revenue recognition policy related to projects in commercial
operation. Prior to 1996, it was the Company's policy to wait one year after the
date of commercial operation ("DOCO") before recognizing revenue. The purpose of
the delay was to allow the Company to better evaluate the amount of future
warranty claims that would reduce revenue. Experience has now shown that
warranty claims have had no impact on the profitability of projects and that
revenue recognition therefore should not be delayed. Approximately 14%
($4,900,000) of the 1996 revenue would have been recognized in subsequent
periods under the previous revenue recognition policy.
<PAGE>F-11
Revenue Recognition
The Company derives its revenue from two primary sources: the management,
maintenance, monitoring and construction of customer-funded energy savings
contracts including lease-financed projects paid from energy savings; and long
term shared energy savings contracts. On customer-funded contracts the Company
receives revenue for the management and installation of energy savings devices
at customer premises.
Contract revenues, related to customer-funded contracts, are recognized
using the percentage-of-completion method, measured by the percentage of
contract costs incurred to estimated total contract costs for each contract.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance such as indirect labor, supplies, tools,
repairs and depreciation. Selling, general, and administrative costs are charged
to expense as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Changes in job
performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined. Profit incentives are included in revenues
when their realization is reasonably assured. An amount equal to contract costs
attributable to claims is included in revenues when realization is probable and
the amount can be reliably estimated.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
The Company also enters into long-term contracts to provide sustained
levels of energy savings to its customers. Once completed, these projects will
earn revenue from both contracts with customers and incentive payments from
utility companies for the duration of the contract based on actual energy
savings achieved. The energy savings are largely quantifiable at the beginning
of the contract life insofar as the measurement formula is based on empirical
specifications of the installed energy savings equipment and measured operating
hours or on contract provisions designed to limit the financial impact of
<PAGE>F-12
significant changes to baseline measurements. The Company recognizes revenue as
the energy savings are measured. Management forecasts that the revenue
attributable to Projects in Commercial Operation for which there is no current
recognition is $79,924,900.
With respect to the second source of revenue, during 1992, the Partnership
entered into an agreement with a company whereby the Partnership agreed to
develop energy savings projects and sell the resulting income streams to the
company at a discount. Projected revenue attributable to the sale of project
income streams for which there is no current recognition is $6,848,000.
The Company receives revenue on both types of contracts over the life of
the project as reimbursement for maintenance and other costs incurred.
Income Taxes
There is no provision for income taxes for the Company as taxable income
passes through to and is reported by the general and limited partners
individually. The partners have each elected S Corporation status. Therefore,
their respective shares of any income or loss are included in the shareholders'
individual income tax returns.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
various methods over the estimated useful lives of the assets which range from
three to ten years.
Contract Rights and Costs
Contract rights represent the excess of liabilities assumed over assets
acquired upon transfer of certain contracts from the general partner. The
contract rights are being amortized on a straight line basis over the 10-year
life of the related contracts. Management evaluates the recoverability of
contract rights on a periodic basis and, if necessary, recognizes any
impairment.
<PAGE>F-13
Projects Being Installed and Projects In Commercial Operation
Projects Being Installed and Projects in Commercial Operation consist of
costs incurred to purchase energy savings devices, install the devices and
manage their installation plus an allocation of overhead on shared savings
contracts. Once a project is placed in service, the costs of Projects Being
Installed are classified as Projects in Commercial Operation and amortized as
energy savings revenue is recognized. For those projects where the revenues are
sold, the costs are offset against the revenue from the sale. Management
periodically evaluates the recoverability of Projects Being Installed and
Projects in Commercial Operation and, if necessary, recognizes any impairment.
Upon adoption of the percentage of completion method of revenue recognition on
January 1, 1997, the Company wrote off the amount associated with projects being
installed since it had recognized the related contract revenue.
Interest Costs
The Company capitalizes interest costs on borrowings incurred to finance
the development and construction of its projects. Once the project is completed
and the project goes into commercial operation, capitalization of interest costs
ceases. During the years ended December 31, 1997 and 1996, the Company incurred
interest expense of $3,859,599 and $1,797,564, and capitalized interest of
$275,144 and $2,293,975, respectively.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable and
future amounts due under energy savings agreements. The Company's customer base
is concentrated on the east coast of the United States. In addition, companies
in the energy services industry are either directly or indirectly involved in
all projects developed by the Company. The Company reviews a customer's credit
history before extending credit, and establishes an allowance for doubtful
accounts based on factors surrounding the credit risk of specific customers and
historical trends. In 1997 and 1996, five customers accounted for approximately
75% and 51% of total revenues, respectively.
<PAGE>F-14
Financial Instruments
The Company utilizes interest rate agreements to manage interest rate
exposure. The principle objective of such contracts is to minimize the risks
and/or costs associated with financing activities. The Company does not utilize
financial instruments for trading or speculative purposes. The counterparties to
these contractual arrangements are financial institutions with which the Company
also has other financial relationships. The Company is exposed to credit loss in
the event of nonperformance by these counterparties. However, the Company does
not anticipate nonperformance by the other parties.
Prior Period Adjustment
The Company's financial statements as of December 31, 1996, have been
restated to reflect a liability that existed for interest associated with the
other long-term payable. The effect of the restatement is as follows:
As previously As
December 31, 1996 reported restated
- ----------------- ------------------- -------------
Balance sheet:
Projects in commercial operation $21,158,135 $ 21,559,291
Accrued interest expense $ 2,454,825 $ 2,855,981
- -------------------------------------------------------------------------------
Reclassification
Certain amounts reported in the prior year have been reclassified to
conform with the presentation of related amounts in the current year. The
reclassifications have no effect on previously reported results of operations.
2. Going Concern
The accompanying combined financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has sustained
recurring operating losses and cash flow deficits. Also, the Company has
significant cash commitments to trade creditors and amounts due under note
agreements with unrelated third parties (see Notes 7, 8, 11 and 12). The
Company's ability to meet its obligations is dependent primarily on attracting
<PAGE>F-15
additional debt or equity, in the near term, and ultimately generating
sufficient net income and related cash flows from operations to meet these
commitments as they become due.
3. Deferred revenues
Deferred revenues consist of amounts advanced to the Company for project
Revenues installation. During 1992, the Partnership entered into an agreement
with an unrelated company (Public Service Conservation Resources Corporation
("PSCRC") which provides for the sale of the income streams from certain
existing and future projects. Under the terms of the agreement, the Partnership
receives advances toward the sale of these income streams upon achievement of
certain milestone events during the installation phase of the project. Advances
under this agreement totaled $8,488,094 at December 31, 1996. Advances at
December 31, 1997 were transferred to a note payable from the Company to PSCRC
as part of the litigation settlement with PSCRC (see Note 12).
4. Restricted cash
The restricted collateralizes letters of credit issued to a company to Cash
cover potential liquidated damages if projects are not installed by specified
dates, or if energy savings performance on projects drops below certain levels.
Management does not believe the Company is in jeopardy of missing the
installation deadlines or incurring the performance penalties.
5. Contracts in Progress
Accounts receivables consist of the following at December 31, 1997:
- ------------------------------------------------------------------------
Billed:
Completed contracts $2,806,386
Contracts in progress 808,499
Unbilled and other 492,896
-----------
4,107,781
Allowance for doubtful accounts (170,000)
------------
Net accounts receivables $3,937,781
============
<PAGE>F-16
The billed and unbilled accounts receivables at December 31, 1997 are
expected to be collected before December 31, 1998.
Costs and estimated earnings on uncompleted contracts consist of the
following at December 31, 1997:
- -------------------------------------------------------------------------------
Costs incurred on uncompleted contracts $ 3,015,335
Estimated earnings 555,622
Billings to date (3,649,734)
--------------
Net accounts receivables $ (78,777)
==============
Included in the accompanying consolidated balance sheets under the
following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 284,753
Billings in excess of costs and estimated
earnings on uncompleted contracts (363,530)
--------------
$ (78,777)
==============
At December 31, 1997, contracts in progress have future estimated contract
revenues and costs to complete of approximately $4,221,000 and $2,656,000,
respectively.
<PAGE>F-17
6. Property and Equipment
Major classes of property and equipment consist of the following:
December 31, 1997 1996
- ----------------------------- ------------ ------------
Leasehold improvements $ 21,965 $ 7,674
Computer equipment 323,302 291,130
Computer software 58,784 28,223
Equipment, furniture and fixtures 390,447 159,899
Automobiles 5,224 19,890
------------- ------------
799,722 506,816
Less accumulated depreciation (319,772) (242,682)
------------- ------------
Net property and equipment $ 479,950 $ 264,134
============== =============
7. Debt
The Company's debt financing can be categorized into project financing and
working capital financing.
Project Financing
The Company has entered into loan agreements to fund the construction of
certain projects. Under the terms of the loan agreements, amounts borrowed
during the project construction period bear interest at various rates and are
due on demand upon completion of the project unless converted to permanent
financing at the Company's option. The Company is not required to make any
periodic payments under the terms of the construction loan provision.
The Company treats each construction loan converted to permanent financing
as a separate note with monthly payments bearing interest at a bank's prime
interest rate, fixed at that date, plus eight percent. At the time of conversion
to permanent financing, the Company classifies the construction loan as
long-term debt.
As of December 31, 1997 and 1996, the outstanding borrowings on the
agreements for uncompleted contracts, excluding any amounts converted to
permanent financing, were $112,503 and $1,451,824, respectively.
<PAGE>F-18
Working Capital Financing
On July 2, 1993, the Partnership entered into a revolving credit and term
loan agreement ("Agreement"). The Agreementt permitted the Partnership to borrow
a maximum of $1,800,000 under a revolving credit line based on future funding
requirements of the Partnership which were to be established on December 31 and
June 30 of each fiscal year through June 30, 1999. During 1995, the Partnership
exercised an option to convert the outstanding amount to a five year term loan.
The agreement also provided the Partnership with a $1,200,000 term loan which
was due on June 30, 1999.
The loans were collateralized by certain service and termination reserves
due under existing and future contracts to sell project income streams (See Note
3). The Partnership used the proceeds from these loans to fund its operations in
1996. These loans were transferred to a note payable as part of the litigation
settlement with PSCRC (Notes 12 and 13).
<PAGE>F-19
Long-term project debt and working capital debt at December 31 consisted
of the following:
<TABLE>
<S> <C> <C> <C>
1997 1996
------------------------------ ------------- -----------
Note payable to a company with
interest at 10%. See note 12. $14,910,915 -
Note payable to a company with
interest at 14.5%, monthly
payments of principal and interest of
$18,318, due March 2007. 1,157,293 -
Note payable to a company with
interest at 13.5%, due in installments
through July 1998, collateralized
by certain equipment, fixtures and
receivables.
1,148,722 -
Note payable to a company with interest at 14%,
monthly installments of principal and interest
of $28,306, due March 2000; collateralized by
certain equipment, fixtures, inventory,
receivables and intangibles.
838,725 1,019,182
Note payable to a company with interest at
14.5%, monthly installments of principal and
interest of $23,907, due August 1999;
collateralized by certain equipment, fixtures,
inventory, receivables
and intangibles. 824,225 904,711
<PAGE>F-20
1997 1996
----------------------------------------------- ----------- -----------
Note payable to a company with interest at 16%,
monthly installments of principal and interest
of $17,660, due August 1999; collateralized by
certain equipment, fixtures, inventory,
receivables and intangibles.
445,486 493,762
Note payable to a company with
interest at 13.5%, due April 1998,
collateralized by certain equipment,
fixtures and receivables 323,605 -
Note payable to a bank with interest at 10%,
monthly installments of principal and interest
of $6,641, due October 2002; collateralized by
certain equipment, fixtures, inventory,
receivables and
intangibles 304,506 351,177
Note payable to a company with
interest at 13.5%, due July 1998,
collateralized by certain equipment,
fixtures and receivables 249,530 -
Note payable to a company with
interest at 13.5%, due October 2002,
collateralized by certain equipment,
fixtures and receivables 163,500 -
<PAGE>F-21
1997 1996
----------------------------------------------- ------------ -----------
Note payable to a company with interest at 14%,
monthly installments of principal and interest
of $14,894 due November, 2000; collateralized
by certain equipment, fixtures, inventory,
receivables and intangibles.
158,469 372,074
Note payable to a company with
interest at 13.5%, due January 1998,
collateralized by certain equipment,
fixtures and receivables 137,964 -
Notes payable to a company with
interest at 13.5%, due June 1998,
collateralized by certain equipment,
fixtures and receivables 97,765 -
Note payable to bank with interest at 10%,
monthly installments of $1,453 plus interest,
due October 2002; collateralized by certain
equipment, fixtures, inventory, receivables
and intangibles 66,657 76,873
Note payable to bank with interest at 10%,
monthly installments of $1,354 plus interest,
due October 2002; collateralized by certain
equipment, fixtures, inventory, receivables
and intangibles 62,127 71,649
Note payable to a company with interest at
10.5%, monthly payments of principal and
interest of $25,126, due November 1997;
unsecured. 49,601 285,048
<PAGE>F-22
Note payable to a company with interest at
10.5%, monthly installments of principal and
interest of $1,600, due March 2000;
collateralized by certain equipment, fixtures,
inventory, receivables
and intangibles. 38,212 52,570
Note payable to a company with interest at 14%,
monthly installments of principal and interest
of $2,310, due December 1998; collateralized by
certain equipment, fixtures, inventory,
receivables and intangibles. 36,351 53,787
Note payable to a company with interest at 15%,
monthly payments of principal and interest of
$68,444, due December 2004; collateralized by
certain future project income streams and
contract rights - 3,813,991
Demand note payable to a company with
interest at 15%, unsecured - 1,013,716
Note payable to a company with interest at 20%
the first year and the remaining 5 years at an
annual rate ranging from 15% to 7% in the final
year, monthly payments of principal and
interest of $33,052, due June 1999;
collateralized by certain service and
termination reserves as well as future project
income streams. - 881,836
<PAGE>F-23
1997 1996
------------------------------------------------- ------------ ----------
Demand note payable to a company with
interest at 15%, secured - 397,500
Note payable to a company with interest at 14%,
monthly installments of principal and interest
of $2,056, due December 2002; collateralized by
certain equipment, fixtures, inventory,
receivables and intangibles.
- 71,088
Demand note payable to a company with
interest at 15%, unsecured. - 63,870
Note payable to a company with interest at 14%,
monthly installments of principal and interest
of $6,336, due October 1997; collateralized by
certain equipment, fixtures, inventory,
receivables and intangibles. - 45,467
Construction loans payable 112,503 1,451,824
Other notes payable 76,845 57,270
----------- -----------
21,203,001 11,477,395
Less current maturities (4,852,618) (3,633,782)
----------- -----------
$16,350,383 $ 7,843,613
=========== =============
</TABLE>
<PAGE>F-24
Scheduled repayments at December 31, 1997 are as follows:
1998 $ 4,852,618
1999 1,422,091
2000 1,971,328
2001 1,817,936
2002 1,943,245
Thereafter 9,195,783
------------
Total $21,203,001
============
8. Loan for Profect in Commercial Operations
On August 15, 1996, the Company entered into a project finance agreement
(the Project in "Agreement") with an international bank. The Agreement provided
for financing in the amount of up to $15,200,000 for the acquisition and
installation of certain natural gas engines and engine driven pumps at a
customer's facility. On February 27, 1997, the bank converted the loan from a
construction to a permanent loan. This loan is collateralized by all assets as
well as all future project income streams. The principal due at December 31,
1997 and 1996 was $15,175,778 and $13,625,224, respectively.
The loan is payable in quarterly installments through January 2011 with
interest accruing at LIBOR + 1.375% in years 1-5; 1.625% in years 6-10 and
1.875% in years 11-14.5.
Scheduled repayments at December 31, 1997 are as follows:
1998 $ 141,539
1999 249,056
2000 390,545
2001 533,937
2002 483,975
Thereafter 13,376,726
------------
Total $ 15,175,778
============
<PAGE>F-25
The Company has entered into interest rate swap agreements to reduce the
impact of changes in interest rates on its floating rate debt. The swap
agreements are contracts to exchange floating rate for fixed interest payments
quarterly over the life of the agreements without the exchange of the underlying
notional amounts. The notional amounts of interest rate agreements are used to
measure interest to be paid or received and do not represent the amount of
exposure to credit loss. For interest rate instruments that effectively hedge
interest rate exposure, the net cash amounts paid or received on the agreements
are accrued and recognized as an adjustment to interest expense. If an
arrangement is replaced by another instrument and no longer qualifies as a hedge
instrument, then it is marked to market and carried on the balance sheet at fair
value.
As of December 31, 1997 and 1996, the Company had the following interest
rate swap in effect:
1997 1996
----------- ----------
Notional amount $15,175,778 $13,625,224
Average pay rate 7.063% 7.063%
Average receive rate 5.678% 6.665%
Period Matures January, 2011
9. Other Long-Term Payable
Other long-term payable consists of accrued interest and the remaining
turnkey payment payable to an engineering and construction company that procured
and installed the energy conservation measures.
10. Related Party Transactions
The Partnership also has subcontracting services provided by an affiliated
company. These amounted to approximately $3,515,303, in 1997 and $4,337,083 in
1996. Accounts payable included $217,991 and $1,189,731 related to these
services at December 31, 1997 and 1996, respectively.
<PAGE>F-26
11. Commitments
Rent expense, exclusive of amounts allocated to projects, was $157,081 for
1997 and $144,686 for 1996. At December 31, 1997, future minimum rental and
lease payments are as follows:
1998 $ 350,503
1999 305,542
2000 308,657
2001 312,257
2002 210,802
------------
Total $1,487,761
============
12. Litigation Settlement
During 1997 PSCRC delivered a letter to the Partnership formally demanding
repayment of funds borrowed by, or advanced to, the Partnership, inclusive of
interest, late charges and attorneys' fees. On March 31, 1997, PSCRC filed a
lawsuit against the Partnership in the Superior Court of New Jersey seeking
repayment of principal and interest, plus late charges, expenses and attorney's
fees. The Partnership filed a counterclaim and was awarded satisfaction on a
part of that claim. On January 8, 1998, the Company entered into an agreement
with PSCRC in settlement of all amounts owed to PSCRC by the Company. The
settlement amount totaled $14,910,215 and has been recorded effective December
31, 1997.
The settlement is payable in monthly payments of principal and interest
commencing June 1, 1998, and continuing on the first day of each month until the
balance with all accrued interest is paid in full, or January 7, 2005, when all
outstanding principal and interest is due and payable.
<PAGE>F-27
Scheduled repayments of principal and interest, under the settlement
agreement, are as follows in the years ended December 31,
1998 $ 2,819,394
1999 1,580,044
2000 2,715,132
2001 2,715,132
2002 2,715,132
2003 2,715,132
2004 2,715,132
2005 4,366,185
-------------
Total 22,341,283
Less interest portion (7,430,368)
--------------
Principle balance $14,910,915
==============
13. Sale of Affiliates
Subsequent to December 31, 1997, the Company entered into negotiations with
a contractor to sell SC Wood. The terms of the agreement sold the assets and
future revenues of the Colonial project operated by SC Wood to the contractor
for the sum of $1 plus forgiveness of certain amounts owed the contractor. The
settlement of accounts is as follows:
Assets sold:
Accounts receivable $ (27,977)
Projects in commercial operation, net (809,883)
Amounts received or forgiven:
Accounts payable 444,065
Accrued expenses 763,265
Amounts payable from agreement (181,564)
Cash received 1
---------
Gain on sale of SC Wood $ 187,906
=========
<PAGE>F-28
On June 30, 1998, Onsite Energy Corporation ("Onsite") acquired all of the
assets and assumed certain specific liabilities of Sycom LLC. As consideration
for this purchase, Onsite issued 1,750,000 shares of its Class A common stock to
Sycom LLC. As part of the purchase Onsite, Sycom and the Partnership executed an
employment and noncompete agreement with substantially all of the existing
officers and employees. In consideration for the right to retain the services of
these employees Onsite placed in escrow 157,500 shares of its Series D
Convertible Preferred Stock, convertible into 15,750,000 shares of Onsite common
stock. The convertible preferred stock will be released to Sycom when the PSCRC
debt has been liquidated (see Note 12), when any loans from Onsite to Sycom or
the Partnership have been liquidated and when the average closing market price
of Onsite's common stock over any period of 20 days is not less than $2.00 per
share and net income per share for four consecutive quarters is not less than
$.15.
As part of the employment agreement, Onsite agrees to lend Sycom and the
Partnership an amount equal to any remaining general and administrative expenses
and debt service to third parties which Sycom or the Partnership cannot pay. Any
amounts borrowed will bear interest at 9.75%. Sycom may repay any loans in cash
or with shares of the convertible preferred stock.
Also, Onsite agreed to loan the shareholders of Sycom and SSBKK up to
$1,000,000 to pay anticipated federal and state income taxes resulting from the
sale. Such loans will bear interest at 9.75%. The shareholders may repay any
amounts borrowed in cash or Onsite common stock obtained from the sale of the
assets of Sycom LLC.
