U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended December 31, 2000.
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from to
Commission File Number 1-12738
ONSITE ENERGY CORPORATION
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(Name of small business issuer in its charter)
Delaware 33-0576371
- ---------------------------------- -------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
701 Palomar Airport Road, Suite 200, Carlsbad, CA 92009
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (760) 931-2400
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
The number of Class A common stock, $0.001 par value, outstanding as of February
15, 2001 is 19,874,211.
2
Part I - Financial Information
Item 1. Financial Statements
Onsite Energy Corporation
Condensed Consolidated Balance Sheet
December 31, 2000
(Unaudited)
ASSETS
Current Assets:
Cash $ 267,533
Cash-restricted 6,496
Accounts receivable, net of allowance for doubtful accounts of $58,000 1,478,585
Costs and estimated earnings in excess of billings on uncompleted contracts 136,053
Other assets 79,830
-------------
TOTAL CURRENT ASSETS 1,968,497
Property and equipment, net of accumulated depreciation and amortization
of $428,859 346,738
Other assets 27,745
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TOTAL ASSETS $ 2,342,980
=============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable, current portion $ 228,781
Capitalized lease obligation, current portion 236,599
Liabilities in excess of assets held for sale 3,160,959
Accounts payable 2,507,458
Billings in excess of costs and estimated earnings on uncompleted contracts 474,957
Accrued expenses and other liabilities 1,232,353
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TOTAL CURRENT LIABILITIES 7,841,107
Long-Term Liabilities:
Notes payable, less current portion 59,844
Capitalized lease obligation, less current portion 66,295
Deferred income 797,902
-------------
TOTAL LIABILITIES 8,765,148
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Commitments and contingencies
Shareholders' Equity (Deficit):
Preferred Stock, Series C, $.001 par value, 842,500 shares authorized,
649,120 issued and outstanding
(aggregate $3,245,600 liquidation preference) 649
Preferred Stock, Series D, $.001 par value,
157,500 shares authorized, none issued and outstanding --
Preferred Stock, Series E, $.001 par value, 50,000 shares authorized,
issued and outstanding, (aggregate $1,000,000 liquidation preference) 50
Common stock, $.001 par value, 24,000,000 shares authorized:
Class A common stock, 23,999,000 shares authorized, 19,874,211 issued
and outstanding 19,874
Class B common stock, 1,000 shares authorized, none issued and outstanding --
Additional paid-in capital 27,748,127
Notes receivable - shareholders (699,871)
Accumulated deficit (33,490,997)
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TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (6,422,168)
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 2,342,980
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
Onsite Energy Corporation
Condensed Consolidated Statement of Operations
(Unaudited)
Three Months Ended December 31, Six Months Ended December 31,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Revenues $ 3,293,042 $ 2,481,315 $ 5,383,551 $ 11,942,471
Project incentive revenue 232,647 586,029 1,076,769 902,346
------------- ------------- ------------- -------------
Total revenues 3,525,689 3,067,344 6,460,320 12,844,817
Cost of sales 2,314,292 1,917,008 3,641,778 9,360,966
------------- ------------- ------------- -------------
Gross margin 1,211,397 1,150,336 2,818,542 3,483,851
Selling, general, and administrative expenses 638,037 2,167,620 1,642,281 5,146,972
Depreciation and amortization expense 59,599 131,248 129,399 274,873
Gain on sale of Property and equipment (15,045) -- (30,090) --
Recovery of reserve provided for sale
or disposal of subsidiary -- -- -- (358,670)
------------- ------------- ------------- -------------
Operating income (loss) 528,806 (1,148,532) 1,076,952 (1,579,324)
------------- ------------- ------------- -------------
Other income (expense):
Interest expense (51,667) (74,485) (80,440) (184,968)
Interest income -- 20,382 -- 26,005
Other income 20,242 -- 20,242 --
------------- ------------- ------------- -------------
Total other expense (31,425) (54,103) (60,198) (158,963)
------------- ------------- ------------- -------------
Income (loss) before provision for income taxes
and Extraordinary item 497,381 (1,202,635) 1,016,754 (1,738,287)
Provision for income taxes 17,000 200 17,000 3,800
------------- ------------- ------------- -------------
Net Income (loss) from operations 480,381 (1,202,835) 999,754 (1,742,087)
Extraordinary Item:
Gain on Extinguishment of Liabilities 444,577 -- 487,319 --
------------- ------------- ------------- -------------
Net Income (loss) $ 924,958 $ (1,202,835) $ 1,487,073 $ (1,742,087)
============= ============= ============= =============
Basic earnings (loss) per common share
Income (loss) from operations $ 0.02 $ (0.06) $ 0.04 $ (0.09)
Extraordinary item 0.02 -- 0.03 --
------------- ------------- ------------- -------------
Net income (loss) $ 0.04 $ (0.06) $ 0.07 $ (0.09)
============= ============= ============= =============
Diluted earnings (loss) per common share
Income (loss) from operations $ 0.02 $ (0.06) $ 0.04 $ (0.09)
Extraordinary item 0.01 -- 0.01 --
------------- ------------- ------------- -------------
Net income (loss) $ 0.03 $ (0.06) $ 0.05 $ (0.09)
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
Onsite Energy Corporation
Condensed Consolidated Statement of Cashflows
(Unaudited)
Six Months Ended December 31,
2000 1999
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Cash flows from operating activities:
Net Income (loss) $ 1,487,073 $(1,742,087)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Amortization of acquired contract costs -- 50,590
Provision for bad debts (3,185) (3,630)
Depreciation and amortization 129,399 274,873
Gain on sale of property and equipment (30,090) --
Recovery of reserve provided for sale or disposal of subsidiary -- (358,670)
Compensation related to stock issuance (28,837) 47,500
Stock issued to 401k 30,607 46,283
Gain on extinguishment of liabilities (487,319) --
(Increase) decrease:
Accounts receivable (1,032,344) 2,975,144
Capitalized contract costs 73,493 --
Costs and estimated earnings in excess of billings on uncompleted contracts (66,166) 493,271
Inventory -- 6,107
Other assets (26,970) (299,351)
Cash-restricted (6,496) 70,334
Increase (decrease):
Accounts payable 345,452 (639,328)
Billings in excess of costs and estimated earnings on uncompleted contracts 164,975 74,952
Accrued expenses and other liabilities (88,341) (603,355)
Deferred income (148,416) 7,877
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Net cash provided by operating activities 312,835 400,510
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Cash flows from investing activities:
Purchases of property and equipment (24,411) (28,185)
Loan to shareholders 50,128 (161,017)
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Net cash provided by (used in) investing activities 25,717 (189,202)
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Cash flows from financing activities:
Proceeds from issuance of preferred stock -- 1,000,000
Proceeds from exercise of stock options 17,558 --
Proceeds from borrowings 136,122 111,986
Payment for repurchase of preferred stock (158) --
Repayment of notes payable - related party -- (211,914)
Repayment of notes payable (450,621) (1,547,631)
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Net cash used in financing activities (297,099) (647,559)
------------- -------------
Net Increase (decrease) in cash 41,453 (436,251)
Cash, beginning of period 226,080 900,408
------------- -------------
Cash, end of period $ 267,533 $ 464,157
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
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 (the "Company") as of and for the year ended June 30, 2000
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 December 31, 2000, and the
consolidated statements of operations and cash flows for the six
months ended December 31, 2000 and 1999, represent the financial
position and results of operations of the Company. The results for the
interim period ended December 31, 2000, are not necessarily indicative
of results that will be obtained in future periods.
NOTE 3: Earnings per share calculations for the three and six month periods
ended December 31, 2000 and December 31, 1999 are as follows:
[Remainder of page intentionally left blank]
6
Three Months Six Months
Ended December 31, Ended December 31,
2000 1999 2000 1999
------------- ------------- ------------- -------------
BASIC EARNINGS (LOSS)
Net Income (Loss) $ 924,958 $ (1,202,835) $ 1,487,073 $ (1,742,087)
Less: Preferred stock dividends (81,040) -- (162,080) --
------------- ------------- ------------- -------------
Net income/(loss) allocated to common shareholders $ 843,918 $ (1,202,835) $ 1,324,993 $ (1,742,087)
============= ============= ============= =============
Weighted average number of common shares 19,531,071 18,663,907 19,113,900 18,646,373
============= ============= ============= =============
Basic earnings (loss) per common share $ 0.04 $ (0.06) $ 0.07 $ (0.09)
============= ============= ============= =============
DILUTED EARNINGS (LOSS)
Net income (loss) available to common shareholders $ 843,918 $ (1,202,835) $ 1,324,993 $ (1,742,087)
Preferred stock dividends 81,040 -- 162,080 --
------------- ------------- ------------- -------------
Net income (loss) available to common shareholders
plus assumed conversion $ 924,958 $ (1,202,835) $ 1,487,073 $ (1,742,087)
============= ============= ============= =============
Weighted average number of common shares 19,531,071 18,663,907 19,113,900 18,646,373
Common stock equivalent shares representing assumed
conversions of preferred stock 8,245,600 * 8,245,600 *
Common stock equivalent shares representing shares
issuable upon exercise of stock options 530,231 * 435,294 *
------------- ------------- ------------- -------------
Weighted average number of shares used in calculation
of diluted earnings (loss) per common share 28,306,902 18,663,907 27,794,794 18,646,373
============= ============= ============= =============
Diluted earnings (loss) per common share $ 0.03 $ (0.06) $ 0.05 $ (0.09)
============= ============= ============= =============
* Not applicable as effect would be anti-dilutive
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Background
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 to general economic and
political conditions, both domestically and internationally, changes in the law
and regulations governing the Company's activities as an energy services company
and the activities of the nation's regulators and public utilities seeking
7
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, 2000. Readers of this report are cautioned not to put undue reliance on
"forward looking" statements which are, by their nature, uncertain as reliable
indicators of future performance. The Company disclaims any intent or obligation
to publicly update these "forward looking" statements, whether as a result of
new information, future events or otherwise.
Business Discussion. The Company is an energy services company ("ESCO") that
assists energy customers in lowering their energy costs by developing,
engineering, installing, owning and operating efficient, environmentally sound
energy efficiency and onsite generation projects, and advising customers on the
purchasing of energy in deregulating energy markets. The Company offers its
services to industrial, commercial and institutional customers. By combining
development, engineering, analysis, and project and financial management skills,
the Company provides a comprehensive package of services, ranging from
feasibility assessment through construction and operation for projects
incorporating energy efficient lighting, energy management systems, heating,
ventilation and air conditioning (HVAC) upgrades, onsite generation systems and
other energy efficiency measures. In addition, the Company offers bill auditing,
tariff analysis, transmission and distribution analysis and upgrades, and
measurement and verification ("M&V") services. The Company also provides
professional consulting services in the areas of direct access planning, market
assessment, business strategies and public policy analysis. It is the Company's
mission to help customers save money through independent energy solutions.
As of June 30, 2000, the Company's auditors issued a qualified opinion subject
to the Company's ability to continue as a going concern. The going concern
issues are the result of continued operating losses, negative working capital
and negative shareholders' equity. See the Liquidity and Capital Resources
discussion below for details of the Company's plan for dealing with these
issues.
In October 1997, the Company acquired Westar Business Services, Inc., which was
renamed Onsite Business Services, Inc., and subsequently renamed Onsite Energy
Services, Inc. ("OES"). OES previously provided utility services and industrial
water services primarily in the states of Kansas, Missouri and Oklahoma.
However, as a result of the February 2000 sale of substantially all of the
assets of Onsite/Mid-States, Inc. ("OMS"), a wholly-owned subsidiary of OES, and
the loss of certain key employees of OES in connection with that transaction,
all as discussed in detail below, OES currently focuses solely on industrial
water services.
In February 1998, OES acquired the operating assets of Mid-States Armature
Works, Inc., through OES's newly-formed subsidiary, OMS. OMS provided
specialized medium and high voltage electrical fabrication, installation,
maintenance and repair services to municipal utility customers and others,
primarily in the states of Kansas, Nebraska, Missouri, Iowa and Oklahoma. In
February 2000, OMS completed a transaction to sell substantially all of its
assets to a private buyer in exchange for $300,000 cash plus uncollected
earnings on existing projects that were transferred as part of the assets. As
part of the transaction, all of the employees of OMS and certain key employees
of OES ceased employment with OMS and/or OES, as applicable, and began
employment with the buyer.
In April 1998, the Company formed Onsite Energy de Panama, S.A., a Panamanian
corporation, to facilitate the development and acquisition of potential projects
in Panama and Latin America. There has been no financial activity in this
subsidiary since its inception.
In June 1998, the Company acquired Lighting Technology Services, Inc. ("LTS").
LTS provides energy efficiency projects through retrofits of lighting and
controls either independently or as a subcontractor to other energy services
8
companies primarily in Southern California. Effective September 30, 1999, the
Company sold 95 percent of its interest in LTS. In exchange for the shares of
LTS, the Company received the 690,000 shares of the Company's Class A Common
Stock that it originally had issued in connection with the acquisition of LTS,
as well as a 10 year non-interest bearing note for approximately $936,000, which
may be repaid by LTS by providing lighting services to the Company. The Company
incurred a loss of approximately $651,000 as a result of the sale. In addition,
the note has been fully reserved due to uncertainty surrounding its
recoverability.
On June 30, 1998, the Company acquired the assets and certain liabilities of
SYCOM Enterprises, LLC ("SYCOM LLC"), through a newly-formed subsidiary, SYCOM
ONSITE Corporation ("SO Corporation"). SYCOM LLC was also an ESCO with customers
primarily on the East Coast of the United States. As discussed below, the
Company terminated the Sale and Noncompetition Agreement with SYCOM Corporation
effective June 30, 2000, but retained the project assets acquired from SYCOM LLC
in June 1998.
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 and certain liabilities of REEP, Inc. REEP provides residential energy
services while ERSI is a commercial lighting contractor. The operations of these
entities were discontinued effective June 30, 2000 in connection with the
termination of the Sale and Noncompetition Agreement with SYCOM Corporation
discussed below. Additionally, all contracts, subcontracts and projects in
development of ERSI and the rights related thereto, including all rights to
payment for services provided by ERSI thereunder after June 30, 2000, were
transferred to a related party in connection with the October 2000 asset sale
discussed below.
After the close of the SYCOM transaction in June 1998, Onsite experienced
significant losses and as a result terminated the Sale and Noncompetition
Agreement with SYCOM Corporation effective June 30, 2000. The Company, however,
retained the project assets purchased from SYCOM LLC in June 1998, as well as
projects developed since that date, with the exception of certain assets
transferred to a related party in connection with the October 2000 asset sale
discussed below. In connection with the termination, S. Lynn Sutcliffe resigned
as a director and the President of the Company.
The Company will maintain its subsidiary, SO Corporation, for the purpose of
completing several long-term construction projects as well as for the management
of other revenue generating activities and to meet its ongoing commitments for
M&V for projects primarily located on the East Coast. Efforts by SO Corporation
to develop any new business in this region ceased as of June 30, 2000, and, as
discussed below, certain assets of SO Corporation and the Company located on the
East Coast were transferred to a related party in October 2000.
On October 16, 2000, the Company, SO Corporation and a corporation recently
founded by a former officer, director and shareholder of the Company entered
into an asset acquisition agreement pursuant to which the Company and SO
Corporation sold certain assets (and accompanying liabilities) to this related
party in exchange for shares of stock of the related party (equaling 19 percent
of the then outstanding stock of the related party) plus approximately $139,500
cash and the payment by the related party of $81,385 to certain vendors of the
Company. The assets transferred under the agreement included (i) certain
contracts of the Company related to certain East Coast projects developed (or in
development) by the Company and SO Corporation's East Coast operations prior to
the June 30, 2000, termination of the Sale and Noncompetition Agreement; (ii)
all contracts, subcontracts and projects in development of ERSI, and all rights
related thereto and all rights to payments thereunder after June 30, 2000; and
(iii) certain intellectual property rights and fixed assets related to the
Company and SO Corporation's East Coast operations and offices.
Additionally, on October 17, 2000, as part of the on-going termination of the
SYCOM relationship, the Company, SYCOM LLC, SYCOM Corporation and SYCOM
Enterprises, L.P., entered into an agreement under which the parties agreed to
9
negotiate and execute agreements for (i) the sale by SYCOM LLC of the shares of
Class A Common Stock currently owned by SYCOM LLC; (ii) the management by the
Company of certain assets and liabilities; and (iii) the provision by SYCOM
Corporation of project management and other services for the Company's East
Coast projects. Also, in October 2000, a Voting Agreement entered into in June
1998 among certain principal shareholders of the Company, SYCOM LLC and SYCOM
Corporation as part of the SYCOM transaction was terminated by the parties.
Furthermore, in October 2000, the Company exercised its rights under a Share
Repurchase Agreement executed in June 1998 in connection with the SYCOM
transaction to repurchase all of the issued and outstanding shares of Series D
Convertible Preferred Stock (157,000 shares) for $0.001 per share.
As of October 15, 2000, and as a result of the Company's inability to issue
dividend payments because of its shareholders' deficit, the Company is in
default on its requirement to pay dividends on the Series C Preferred Stock for
four quarters. Under the Certificate of Designations for the Series C Stock if,
at any time, four or more quarterly dividends, whether or not consecutive, on
the Series C Stock are in default, in whole, or in part, the holders of the
Series C Stock are entitled to elect the smallest number of directors as would
constitute a majority of the Board of Directors of the Company and the holders
of the Company's Class A Common Stock as a class are entitled to elect the
remaining directors. Additionally, under the October 1997 Stock Subscription
Agreement entered into by Westar Capital, Inc. ("Westar") and the Company,
Westar agreed for a period of five years to limit its equity ownership of the
Company to 45 percent of the outstanding shares of the Class A Common Stock on a
fully diluted basis and to not take certain other actions related to controlling
or attempting to control the Company unless it receives the Company's permission
via the majority vote of the directors of the Company's Board of Directors who
are not directors designated by Westar or are affiliates of Westar. However, if,
at any time, Westar exercises its rights to elect the majority of the Board of
Directors because four or more quarterly dividends, whether or not consecutive,
on the Series C Stock are in default, in whole or in part, all directors are
entitled to vote on such ownership issue and not just the non-Westar designated
directors. In March 2000, the Company reached an agreement with Westar whereby
the dividends due on October 15, 1999, and January 15, 2000, were waived by
Westar in exchange for the Company's release of Westar and its parent, Western
Resources, Inc., from certain non-compete agreements. The amounts waived by
Westar were 16,208 shares of Series C stock related to the October 15, 1999
dividend, valued at $28,202, and $83,015 in cash related to the January 15, 2000
dividend. The Company remains delinquent on the July 15, 1999 (15,823 shares of
Series C Stock valued at $1,661), April 15, 2000 ($81,040 cash), July 15, 2000
($81,040 cash), October 15, 2000 ($81,040 cash) and January 15, 2001 ($81,040
cash) dividend requirements. While the Company has been unable to pay four
quarterly dividends, as of the date of quarterly report, Westar has not
exercised its right, discussed above, to elect a majority of the Board of
Directors.
As discussed above, the Company acquired OES, OMS, LTS and SO Corporation during
the fiscal year 1998, and REEP and ERSI during the fiscal year 1999. During
fiscal year 2000, the Company sold LTS and substantially all of the assets of
OMS, and limited the operation of OES to industrial water purification in
Kansas. In addition, the Company terminated its Sale and Noncompetition
Agreement with SYCOM Corporation, and discontinued the operations of REEP and
ERSI. In fiscal year 2001, the Company and SO Corporation sold certain assets
(and accompanying liabilities) related to the East Coast operations and certain
assets of ERSI to a related party.
The Company has gone through significant changes over the past few years that
involved aggressive growth through acquisition and the subsequent divestiture or
ceased operations of nearly all of the added/created subsidiaries. As a result,
the Company anticipates substantial reductions in revenues, cost of sales and
selling, general and administrative expenses (see Cautionary Statement for
Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation
Reform Act of 1995). The Company has refocused itself on its core business of
being an energy services company with primary emphasis in California markets.
10
Unless the context indicates otherwise, reference to the Company shall include
all of its wholly-owned subsidiaries.
Results of Operations
Six months ended December 31, 2000, compared to the six months ended December
31, 1999.
Revenues for the six month period ended December 31, 2000 were $6,460,320,
compared to $12,844,817 for the same period in 1999, a decrease of $6,384,497,
or 49.7 percent. The decrease reflects the sale of LTS and OMS, the discontinued
operations of REEP and ERSI, limiting the operation of OES to industrial water
purification in Kansas and the termination of its Sale and Noncompetition
Agreement with SYCOM Corporation. Revenues in the current year six month period
include approximately $566,000, with no associated costs, related to the sale of
project incentive revenues for several projects to an unrelated third party and
approximately $175,518 of revenue for projects sold to a related party.
Cost of sales for the six months ended December 31, 2000 was $3,641,778 (56.4
percent of revenues) compared to $9,360,966 (72.9 percent of revenues) for the
six months ended December 31, 1999, a decrease of $5,719,188, or 61.1 percent.
Cost of sales as a percentage of revenues is lower as a result of consulting
revenues with higher margins, and project incentive revenues (which have higher
margins) accounting for a higher percent of total revenues.
Gross margin for the six months ended December 31, 2000 was $2,818,542 (43.6
percent of revenues), compared to $3,483,851 (27.1 percent of revenues) for the
six month period ended December 31, 1999, a decrease of $665,309. Gross margin
as a percentage of revenues was higher in the current year as a result of
approximately $566,000 in project incentive revenues with no associated costs,
approximately $175,518 of revenue for projects sold to a related party, an
increase in consulting revenues with traditionally higher margins and an
increase in project incentive revenues as a percent of total revenues.
Selling, general and administrative ("SG&A") expense was $1,642,281 for the six
months ended December 31, 2000, compared to $5,146,972 for the six months ended
December 31, 1999, a decrease of $3,504,691, or 68.1 percent. The decrease
primarily is related to the discontinued and/or divested subsidiaries, the
termination of the Sale and Noncompetition Agreement with SYCOM Corporation in
June 2000, the negotiated termination of a customer contract pursuant to which
certain employees ceased employment with the Company and were hired by the
customer, and the ongoing efforts by management to reduce SG&A expenses. SG&A
expense includes $28,838 reduction in expense in the current six month period
associated with options accounted for under a variable plan due to the repricing
of stock options in June 2000.
Depreciation expense for the six month period ended December 31, 2000 was
$129,399 compared to $274,873 for the same six month period in the prior year, a
decrease of $145,474, or 52.9 percent. The decrease is the result of lower
property and equipment due to the discontinued and/or divested subsidiaries.
Recovery of reserve provided for in the sale or disposal of subsidiary was a
reduction in the operating loss of $358,670 for the three months ended September
30, 1999 and was a non-recurring item relating specifically to the sale of 95
percent of the Company's interest in LTS. In June 1999, the Company had decided
to sell LTS, and at that time established a reserve for possible loss of
$1,010,000 based upon estimates derived from the facts that existed prior to a
definitive agreement for sale. The ultimate sale resulted in a loss of
approximately $651,000.
Net other expense was $60,198 for the six month period ended December 31, 2000,
compared to net other expense of $158,963 for the same six months in 1999, a
decrease in expense of $98,765, or 62.1 percent. This decrease was primarily
attributable to a decrease in interest expense as a result of reduced interest
bearing obligations.
11
Net income for the six months ended December 31, 2000 was $1,487,073, or $0.07
per share, after inclusion of an extraordinary gain of $487,319 for the
reduction of liabilities at amounts that were less than the face value of
amounts due. Net loss for the six months ended December 31, 1999 was $1,742,087,
or $0.09 loss per share. The change from the net loss in the six month periods
ended December 31, 1999 to December 31, 2000 represents an improvement of
$3,229,160.
Three months ended December 31, 2000, compared to the three months ended
December 31, 1999.
Revenues for the three month period ended December 31, 2000 were $3,525,689,
compared to $3,067,344 for the same period in 1999, an increase of $458,345, or
14.9 percent. The increase was primarily due to increased project revenues for
projects in California. Revenues in the current three month period include
approximately $175,518 for projects sold to a related party.
Cost of sales for the three months ended December 31, 2000 was $2,314,292,
compared to $1,917,008 for the three months ended December 31, 1999, an increase
of $397,284, or 20.7 percent. The increase is the result of higher project
revenues.
Gross margin for the three months ended December 31, 2000 was $1,211,397 (34.4
percent of revenues), compared to $1,150,336 (37.5 percent of revenues) for the
three month period ended December 31, 1999, an increase of $61,061. The increase
is the result of higher project revenues.
SG&A expense was $638,037 for the three months ended December 31, 2000, compared
to $2,167,620 for the three months ended December 31, 1999, a decrease of
$1,529,583, or 70.6 percent. The decrease is primarily attributable to the
discontinuance and/or divestiture of certain subsidiaries, the termination of
the Sale and Noncompetition Agreement with SYCOM Corporation in June 2000, the
negotiated termination of a customer contract pursuant to which certain
employees of the Company ceased employment with the Company and were hired by
the customer, and the ongoing efforts by management to reduce SG&A expenses,
including through the reduction of locations. SG&A expense includes $205,740
reduction in expense in the current quarter associated with options accounted
for under a variable plan due to the repricing of stock options in June 2000.
Depreciation expense for the quarter ended December 31, 2000 was $59,599
compared to $131,248 for the same quarter in the prior year, a decrease of
$71,649, or 54.6 percent. The decrease is primarily attributable to the
reduction in depreciation related to discontinued and/or divested subsidiaries.
Net other expense was $31,425 for the three month period ended December 31,
2000, compared to net other expense of $54,103 for the same three months in
1999, a decrease in expense of $22,678, or 41.9 percent. This decrease was
primarily attributable to a decrease in interest expense and increase in
interest income.
Net income for the three months ended December 31, 2000 was $924,958, or $0.04
per share, after inclusion of an extraordinary gain of $444,577 for the
reduction of liabilities at amounts that were less than the face value of
amounts due. Net loss for the three months ended December 31, 1999 was
$1,202,835, or $0.06 loss per share. The change from the net loss in the quarter
ended December 31, 1999 to December 31, 2000 represents an improvement of
$2,127,793 in the current three month period.
Liquidity and Capital Resources
The Company's cash and cash equivalents were $267,533 as of December 31, 2000,
compared to $464,157 as of December 31, 1999. Working capital was a negative
$5,872,610 as of December 31, 2000, compared to a negative $6,706,634 as of
December 31, 1999, a decrease in negative working capital of $834,024, or 12.4
percent.
12
Cash flows provided by operating activities was $312,835 for the six months
ended December 31, 2000, compared to $400,510 for the same six month period in
the prior year, a decrease of $87,675. In the current six month period the
increase in net income was reduced by an increase in accounts receivable of
$1,032,344 compared to 1999 where the net loss was exceeded by the decrease in
accounts receivable.
Cash flows used in investing activities was $25,717 for the six months ended
December 31, 2000, compared to a negative $189,202 for the same six month period
in 1999, an increase of $214,919. The increase was primarily attributable to a
decrease in loans to shareholders.
Cash flows used in financing activities were $297,099 for the six months ended
December 31, 2000, compared to cash flows used in financing activities of
$647,559 for the same six month period last year, a decrease of $350,460. The
decrease is primarily due to reduction in repayments of notes payable.
The Company suffered significant losses from operations for the past two fiscal
years. For the years ended June 30, 2000 and 1999, the Company had net losses of
$6,637,046 and $6,477,458, respectively, and had a negative working capital of
$7,703,629 and an accumulated deficit of $34,978,075 as of June 30, 2000.
Management believes that the Company will be able to generate additional
revenues and improve operating efficiencies through a substantial reduction in
overhead, the addition of new projects as well as by other means to achieve
profitable operations. During the year ended June 30, 2000, the Company took
steps to mitigate the losses and enhance its future viability. During the fiscal
year, the Company sold its wholly-owned subsidiary, LTS, and substantially all
of the assets of another wholly-owned subsidiary, OMS, in an effort to raise
cash and reduce operating losses. In a further step to reduce operating losses,
the Company terminated the Sale and Noncompetition Agreement with SYCOM
Corporation, and discontinued the operations of REEP and ERSI. In the first two
quarters of fiscal year 2001, the Company has refocused its efforts on its core
business of being an energy services company focusing primarily in the
California markets. Management believes that all of the above actions will allow
the Company to continue as a going concern, with reduced revenues and reduced
expenses. Future cash requirements depend on the Company's profitability, its
ability to manage working capital requirements and its rate of growth. (See
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995 above.)
Seasonality and Inflation
Management does not believe that the business of the Company is effected by
seasonality or inflation.
Impact of Recently Issued Standards
In fiscal year 1999, the Federal Accounting Standards Board (the "FASB") issued
Standard Financial Accounting Statement ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measures those
instruments at fair value. Subsequently, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," which amends the effective date of
SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company plans to adopt SFAS No. 133 in fiscal year 2001 and currently
is assessing the impact this Statement will have on its consolidated financial
statements. Management believes that the impact of SFAS No. 133 will not be
significant to the Company.
13
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements."
SAB 101 establishes guidelines in applying generally accepted accounting
principles to the recognition of revenue in financial statements based on the
following four criteria: persuasive evidence of an arrangement exists; delivery
has occurred or services have been rendered; the seller's price to the buyer is
fixed or determinable; and collectibility is reasonably assured. SAB 101, as
amended by SAB 101A, is effective no later than the first fiscal quarter of the
fiscal year beginning after December 15, 1999, except that registrants with
fiscal years that begin between December 16, 1999 and March 15, 2000, may report
any resulting change in accounting principle no later than their second fiscal
quarter of the fiscal year beginning after December 15, 1999. The Company has
adopted SAB 101 with no material effect on its financial position or result of
operations.
Part II - Other Information
Item 1. Legal Proceedings. In January 2001, the Company settled an action filed
in October 2000, by three former employees of a third party (one of whom also
was a former officer of the Company) (Superior Court of New Jersey, Law
Division, Essex County, Case No. L9289-00) against the Company, the third party
and other parties, including two of the Company's current or former directors
and officers, for wages, bonuses and commissions (totaling $252,662) allegedly
due and owing, plus interest, costs of suit and other alleged damages. This
matter was previously disclosed by the Company in its Form 10-QSB for the
quarter ended September 30, 2000.
In January 2001, the Company settled an action filed in November 1999 (United
States District Court, District of New Jersey, Case No. 99-5159 (AET)), by
Independent Energy Services, Inc. ("IES"), a subcontractor to the Company,
against the Company and three of its directors and officers alleging breach of
contract and related causes of action in connection with one of the Company's
projects. The suit sought payment of monies ($434,234) allegedly due under a
subcontract, as well as consequential damages, interest and costs of suit. This
matter was previously disclosed by the Company in its Form 10-QSB for the
quarter ended December 31, 1999.
In January 2001, IES agreed to dismiss two other actions filed by IES in January
2000 (Superior Court of New Jersey, Morris County, Docket No. L-214-00) and
August 2000 (United States District Court, District of New Jersey, Camden
Vicinage, Civil Action No. 00CV942 (SMO)). As previously disclosed by the
Company in its Form 10-QSB for the quarter ended December 31, 1999, and in its
Form 10-KSB for fiscal year ended June 30, 2000, in January 2000 and August
2000, respectively, IES had filed two additional actions against the Company and
other parties, including General Accident Insurance Company of America ("General
Accident") and two of the Company's directors and officers, alleging breach of
contract and related causes of action in connection with another of the
Company's projects. Both actions sought payment of monies ($710,562) allegedly
due under a subcontract, as well as consequential damages, interest and costs of
suit. The August 2000 action is related to, and seeks damages substantially
similar to those sought in, the January 2000 action filed by IES (for breach of
contract and related causes of action).
Also, as previously disclosed by the Company in its Form 10-QSB for the quarter
ended March 31, 2000, in April 2000, the Company was served with two separate
actions (Superior Court of New Jersey, Law Division, Atlantic County, Docket No.
ATL-L-93-00 and Superior Court of New Jersey, Law Division, Morris County,
Docket No. L-214-00) by General Accident against the Company and other parties
alleging breach of contract and related actions in connection with one of the
Company's projects. The actions are related to the two actions filed by IES
discussed above and seek indemnification (in the amount of $710,562) allegedly
owed under an indemnity agreement executed by the Company, plus interest, costs
and other damages. In January 2001, General Accident and IES settled the IES
actions (and, as discussed above, IES agreed to dismiss the actions against the
Company). In late January 2001, General Accident filed a motion for partial
summary judgment against the Company and other third parties (Superior Court of
New Jersey, Law Division, Atlantic County, Docket No. ATL-L-93-00) seeking
14
indemnification allegedly owed under an indemnity agreement for the amount paid
by General Accident to IES and another third party ($579,041). The Company is in
the process of preparing its responsive pleadings to this motion.
As previously disclosed by the Company in its Form 10-KSB for the year ended
June 30, 2000, in August 2000, the Company received a copy of a complaint filed
by Johnson Controls, Inc. (United States District Court, District of New Jersey,
Civil Action No. 00-2533 (HAA)) against the Company and other parties, including
one of the Company's subsidiaries, alleging breach of contract and related
causes of action in connection with one of the Company's projects. The action
seeks payment of monies ($490,707) allegedly owed under a subcontract agreement,
plus interest, attorneys' fees, costs of suit and other alleged damages. While
the Company had received a copy of the filed complaint in August 2000, the
complaint was not property served until December 2000. The Company is in the
process of preparing its responsive pleadings, including certain applicable
counter-claims. The Company also continues to make efforts to settle this
matter, including applicable counter-claims; however, no settlement has been
reached.
As previously disclosed by the Company in its Form 10-QSB for the quarter ended
March 31, 2000, which disclosure was updated by the Company in its Form 10-KSB
for the year ended June 30, 2000, in March 2000, Powerweb Technologies, Inc.
("Powerweb"), a subcontractor to ERSI (ERSI Onsite, Inc.), filed an action
(Superior Court of New Jersey, Law Division, Essex County, Docket No.
ESX-L-2071-00) against ERSI and the Company alleging breach of contract and
related causes of action in connection with one of the Company's projects. The
suit sought payment of monies ($121,800) allegedly due under subcontracts, as
well as interest, costs of suit and punitive damages. Because the subcontracts
contain arbitration provisions requiring that any disputes between the parties
be settled by binding arbitration, the action was dismissed. In September 2000,
Powerweb filed a demand for arbitration, and arbitration was scheduled for
December 2000. However, the arbitration did not occur as scheduled, and the
arbitration has not been rescheduled. The Company and ERSI continue to work with
Powerweb to settle this matter.
The Company has recognized expenses associated with the amounts claimed under
the various legal proceedings in the Company's prior financial statements,
although the Company will continue to incur legal fees, expenses and costs
related to these proceedings until the various matters are resolved.
Item 2. Changes in Securities and Use of Proceeds - Not Applicable
Item 3. Defaults upon Senior Securities. As of October 15, 2000, and as a result
of the Company's inability to issue dividend payments because of its
shareholders' deficit, the Company is in default on its requirement to pay
dividends on the Series C Preferred Stock for four quarters. Under the
Certificate of Designations for the Series C Stock if, at any time, four or more
quarterly dividends, whether or not consecutive, on the Series C Stock are in
default, in whole, or in part, the holders of the Series C Stock are entitled to
elect the smallest number of directors as would constitute a majority of the
Board of Directors of the Company and the holders of the Company's Class A
Common Stock as a class are entitled to elect the remaining directors.
Additionally, under the October 1997 Stock Subscription Agreement entered into
by Westar and the Company, Westar agreed for a period of five years to limit its
equity ownership of the Company to 45 percent of the outstanding shares of the
Class A Common Stock on a fully diluted basis and to not take certain other
actions related to controlling or attempting to control the Company unless it
receives the Company's permission via the majority vote of the directors of the
Company's Board of Directors who are not directors designated by Westar or are
affiliates of Westar. However, if, at any time, Westar exercises its rights to
elect the majority of the Board of Directors because four or more quarterly
dividends, whether or not consecutive, on the Series C Stock are in default, in
whole or in part, all directors are entitled to vote on such ownership issue and
not just the non-Westar designated directors. In March 2000, the Company reached
an agreement with Westar whereby the dividends due on October 15, 1999, and
January 15, 2000, were waived by Westar in exchange for the Company's release of
Westar and its parent, Western Resources, Inc., from certain non-compete
15
agreements. The amounts waived by Westar were 16,208 shares of Series C stock
related to the October 15, 1999 dividend, valued at $28,202, and $83,015 in cash
related to the January 15, 2000 dividend. The Company remains delinquent on the
July 15, 1999 (15,823 shares of Series C Stock valued at $1,661), April 15, 2000
($81,040 cash), July 15, 2000 ($81,040 cash), October 15, 2000 ($81,040 cash)
and January 15, 2001 ($81,040 cash) dividend requirements. While the Company has
been unable to pay four quarterly dividends, as of the date of quarterly report,
Westar has not exercised its right, discussed above, to elect a majority of the
Board of Directors.
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
None
Exhibit 27 Financial Data Schedules
16
SIGNATURES
In accordance with the requirements of the Securities Exchange Act , the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ONSITE ENERGY CORPORATION
Date: February 19, 2001 By: \s\ RICHARD T. SPERBERG
-------------------------------
Richard T. Sperberg
President, Chief Executive
Officer, Chief Financial
Officer and Principal Accounting
Officer