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, 1998.
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ______ to _____
Commission File Number 1-12738
ONSITE ENERGY CORPORATION
(Name of small business issuer in its charter)
Delaware 33-0576371
(State or other jurisidiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701 Palomar Airport Road, Suite 200, Carlsbad, CA 92009
(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 No X
The number of Class A common stock, $0.001 par value, outstanding as of February
11, 1999 is 18,540,342.
2
Onsite Energy Corporation
Condensed Consolidated Balance Sheet
December 31, 1998
(Unaudited)
ASSETS
Current Assets:
Cash $ 628,594
Cash-restricted 82,266
Accounts receivable, net of allowance for doubtful
accounts of $13,000 5,752,267
Inventory 187,338
Capitalized Project Costs 75,575
Costs and estimated earnings in excess of billings
on uncompleted contracts 1,579,048
Other current assets 465,239
-------------
TOTAL CURRENT ASSETS 8,770,327
Cash-restricted 75,570
Property and equipment, net of accumulated depreciation
and amortization 1,711,152
Excess of purchase price over net assets acquired, net of
amortization of $265,000 3,312,523
Other assets 58,186
-------------
TOTAL ASSETS $ 13,927,758
=============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable - related parties $ 273,748
Notes payable 1,419,127
Accounts payable 6,179,000
Billings in excess of costs and estimated earnings
on uncompleted contracts 4,816,441
Accrued expenses and other liabilities 1,437,288
-------------
TOTAL CURRENT LIABILITIES 14,125,604
Long-Term Liabilities:
Accrued future operation and maintenance costs
associated with energy services agreements 465,359
-------------
TOTAL LIABILITIES 14,590,963
-------------
Commitments and contingencies
Shareholders' Deficit:
Preferred Stock, Series C, 842,500 shares authorized,
423,354 issued and outstanding (Aggregate $2,066,400
liquidation preference) 423
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, 18,500,510 issued and outstanding 18,500
Class B common stock, 1,000 shares authorized,
none issued and outstanding -
Additional paid-in capital 24,408,716
Notes receivable - stockholders (2,482,755)
Accumulated deficit (22,608,089)
-------------
TOTAL SHAREHOLDERS' DEFICIT (663,205)
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 13,927,758
=============
The accompanying notes are an integral part of the financial statements
3
Onsite Energy Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended December 31, Six Months Ended December 31,
1998 1997 1998 1997
-------------- ---------------- --------------- ---------------
Revenues $ 9,320,493 $ 3,303,578 $ 18,639,043 $ 5,541,383
Cost of sales 7,757,337 2,555,071 15,650,366 4,141,865
------------- ------------- ------------- -------------
Gross margin 1,563,156 748,507 2,988,677 1,399,518
Selling, general,
and administrative expenses 2,756,837 944,254 5,448,297 1,441,262
Depreciation and amortization expense 265,002 158,147 555,623 263,924
------------- ------------- ------------- -------------
Operating loss (1,458,683) (353,894) (3,015,243) (305,668)
------------- ------------- ------------- -------------
Other income (expense):
Interest expense (76,440) - (168,311) (8,588)
Interest income 28,125 9,271 66,049 13,374
Other expense - (5,559) - (5,559)
------------- ------------- ------------- -------------
Total other income (expense) (48,315) 3,712 (102,262) (773)
------------- ------------- ------------- -------------
Net loss $ (1,506,998) $ (350,182) $ (3,117,505) $ (306,441)
============= ============= ============= =============
Net loss allocated to common shareholders $ (1,557,366) $ (350,182) $ (3,193,248) $ (306,441)
============= ============= ============= =============
Basic and diluted loss per common share $ (0.08) $ (0.03) $ (0.17) $ (0.03)
============= ============= ============= =============
Weighted average shares outstanding 18,488,514 13,519,572 18,381,886 12,231,872
============= ============= ============= =============
The accompanying notes are an integral part of the financial statements
4
Onsite Energy Corporation
Condensed Consolidated Statements of Cashflows
Six Months Ended
December 31,
1998 1997
---------------- ---------------
Cash flows from operating activities:
Net loss $ (3,117,505) $ (306,441)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of goodwill 251,195 200,000
Amortization of acquired contract costs 121,643 -
Provision for bad debts 90,000 -
Depreciation 304,428 63,924
Change in operating assets and liabilities:
Accounts receivable (2,323,397) (1,235,923)
Billings related to costs and estimated earnings
on uncompleted contracts 1,293,554 (331,264)
Inventory (9,123) -
Other assets 7,382 (116,753)
Cash-restricted - 41,252
Accounts payable 2,798,729 1,054,863
Accrued expenses and other liabilities (71,272) -
-------------- -------------
Net cash used in operating activities (654,366) (630,342)
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (57,402) (123,190)
Loans to stockholders (1,147,537) -
-------------- -------------
Net cash used in investing activities (1,204,939) (123,190)
Cash flows from financing activities:
Proceeds from exercise of stock options 20,227 4,964
Proceeds from issuance of stock 1,000,000 1,947,287
Repayment of notes payable-related party (194,581) (83,104)
Payments on borrowings, net (430,753) -
-------------- -------------
Net cash provided by financing activities 394,893 1,869,147
-------------- -------------
Net increase (decrease) in cash (1,464,412) 1,115,615
Cash, beginning of year 2,093,006 526,894
-------------- -------------
Cash, end of period $ 628,594 $ 1,642,509
============== =============
The accompanying notes are an integral part of the 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 dba ONSITE
SYCOM Energy Corporation (the "Company") as of and for
the year ended June 30, 1998. 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, 1998,
and the consolidated statements of operations and cash
flows for the three and six months ended December 31, 1998
and 1997, represent the financial position and results of
operations of the Company.
NOTE 3: Earnings per share calculations for the three and six
month periods ended December 31, 1998 and 1997 are as
follows:
Three Months Six Months
Ended December 31, Ended December 31,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Net Loss $ (1,506,998) $ (350,182) $ (3,117,505) $ (306,441)
Less: Preferred stock dividends (50,368) - (75,743) -
------------- ------------ ------------ ------------
Net loss allocated to common shareholders $ (1,557,366) $ (350,182) $ (3,193,248) $ (306,441)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.08) $ (0.03) $ (0.17) $ (0.03)
============ ============ ============ ============
Weighted average shares outstanding 18,488,514 13,519,572 18,381,886 12,231,872
============ ============ ============ ============
NOTE 4: 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
6
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, ability to complete
contracts within budgets, 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 regulators and public utilities
regarding energy efficiency and other related energy
policies, 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 10KSB for the fiscal year ended June 30, 1998.
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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Background
The Company is an energy efficiency services company (ESCO) that develops,
designs, constructs, owns and operates comprehensive energy efficiency projects
and also 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.
In October 1997, the Company acquired Westar Business Services, Inc., which was
renamed Onsite Business Services, Inc. ("OBS"). OBS provides high voltage
electrical construction and engineering services and high purity 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. through a newly formed subsidiary, Onsite Mid-States, Inc. ("OMS").
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.
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 other Latin American countries.
7
In June 1998, the Company acquired Lighting Technology Services, Inc. ("LTS").
LTS provides energy efficiency projects through high efficiency lighting
retrofits and lighting 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, ("SYCOM") through a newly-formed subsidiary, SYCOM
ONSITE Corporation ("SO Corporation"). SYCOM was also an ESCO, with customers
primarily in the Mid-Atlantic region of the United States.
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, 1998 compared to the six months ended December 31,
1997
Revenues for the six months ended December 31, 1998 were $18,639,043 compared to
$5,541,383 for the six months ended December 31, 1997, an increase of
$13,097,660 or 236.4 percent. The increase in revenues was primarily due to the
inclusion of revenues from the newly acquired subsidiaries, SO Corporation, LTS
and OMS. After the elimination of the subsidiaries not included in the previous
year, revenues for the six-month period ended December 31, 1998 were $8,716,383
compared to $5,541,383 for the six months ended December 31, 1997. The increase
of $3,175,000, or 57.3, percent was attributable to three larger projects for
Onsite and OBS.
Cost of sales for the period ended December 31, 1998 were $15,650,366, compared
to $4,141,865 for the period ended December 31, 1997, an increase of
$11,508,501, or 277.9 percent. After elimination of the subsidiaries not
included in the previous year, costs of sales for the six-month period ended
December 31, 1998 were $6,550,142 compared to $4,141,865 for the same period in
1997, an increase of $2,408,277 or 58.1 percent. The increase is largely
attributed to the increase in project costs (associated with increased revenues)
for the three major projects mentioned above for Onsite and OBS.
Gross margin for the six months ended December 31, 1998 was $2,988,677 or 16.0
percent of revenues, compared to $1,399,518, or 25.3 percent of revenues, for
the six months ended December 31, 1997. The decrease in gross margin as a
percentage of sales was primarily the result of several larger contracts in the
current period with lower than historical margins. In addition, the newly
acquired subsidiary, LTS, a lighting contractor, traditionally operates on
narrower margins and had three contracts in the period where margins were
negative, due to unanticipated installation cost overruns. After elimination of
gross margin from the subsidiaries not included in the previous period, gross
margin for the six months ended December 31, 1998 was $2,166,241, or 24.9
percent of revenues, compared to $1,399,518, or 25.3 percent of revenues for the
six months ended December 31, 1997.
Selling, General and Administrative expenses ("SG&A") were $6,003,920 for the
six month period ended December 31, 1998, compared to $1,705,186 for the six
months ended December 31, 1997. The increase of $4,298,734, or 252.1 percent, is
largely attributable to the addition of the activity of the three subsidiaries
mentioned above. After elimination of SG&A from the subsidiaries not included in
the previous year, SG&A for the six months ended December 31, 1998 was
$3,330,690 compared to $1,705,186 for the six months ended December 31, 1997, an
increase of $1,625,504, or 95.3 percent. This change was primarily attributable
to the increase of legal and accounting expenses due to acquisitions and related
8
audits, the increase in staff at the corporate office and the addition of a
branch office in Northern California.
Net other expense was $102,262 for the six months ended December 31, 1998,
compared to $773 for the same period in 1997. The increase is largely due to
additional interest expense from the newly acquired subsidiaries and their
existing interest bearing debts offset by an increase in interest income from
the same subsidiary. After elimination of the subsidiaries not included in the
previous year, net other income was $57,079 for the period ended December 31,
1998, compared to net expense of $773 for the six month period ended December
31, 1997. The increase of $57,852 was primarily attributable to interest income
from loans to stockholders.
Net loss for the six months ended December 31, 1998 was $3,117,505 or $0.17 loss
per share, compared to a net loss of $306,441, or approximately $0.03 loss per
share for the six-month period ended December 31, 1997. After elimination of net
loss from the subsidiaries not included in the previous year, net loss was
$1,107,370, compared to a net loss of $306,441 loss for the same period last
year.
Three months ended December 31, 1998 compared to the three months ended December
31, 1997
Revenues for the three month period ended December 31, 1998 were $9,320,493,
compared to $3,303,578 for the three months ended December 31, 1997, an increase
of $6,016,915 or 182.1 percent. The increase is primarily due to the additional
revenues of the newly acquired subsidiaries. After elimination of revenues from
the acquired subsidiaries not included in the previous period, revenues for the
three-month period ended December 31, 1998 were $3,805,908, compared to
$3,303,578 for the same period in 1997. The increase of $502,330, or 15.2
percent, is primarily due to increased revenues on contracts at OBS and an
increase in consulting revenues at Onsite.
Cost of sales for the three month period ended December 31, 1998 were
$7,757,337, compared to $2,555,071 for the same period ended December 31, 1997,
an increase of $5,202,266, or 203.6 percent. As previously discussed, the
increase in cost of sales is due to the unanticipated cost overruns on three
projects for LTS. After elimination of the subsidiaries not included in the
previous year, cost of sales for the quarter ended December 31, 1998 were
$2,497,995, compared to $2,555,071 for the same period in 1997, a decrease of
57,076, or 2.2 percent.
Gross Margin was $1,563,156 or 16.8 percent of revenues for the three-month
period ended December 31, 1998, compared to $748,507, or 22.7 percent of
revenues for the three-month period ended December 31, 1997. The decrease in
margin resulted primarily from previously mentioned losses on three lighting
projects of LTS and slightly lower margins overall. After the elimination of the
activity from the newly acquired subsidiaries, the gross margin for the
three-month period ended December 31, 1998 was $1,307,913, or 34.4 percent of
revenues, compared to $748,507, or 22.7 percent of revenues, in the three months
ended December 31, 1997. This increase of $559,406 in gross margin is largely
attributable to the increase in consulting revenues in the three-month period
ended December 31, 1998
SG&A was $3,021,839 for the three months ended December 31, 1998, compared to
$1,102,401 for the three months ended December 31, 1997, an increase of
$1,919,438 or 174.1 percent. The change was attributable to the additional SG&A
associated with the newly acquired subsidiaries. After the elimination of the
activity from the newly acquired subsidiaries, SG&A for the three-month period
ended December 31, 1998 was $1,921,413, compared to $1,102,401 for the same
period in 1997. The increase of $819,012, or 74.3 percent, was primarily
9
attributable to the addition of staff at the corporate office and expenses
related to these employees and others in a new office in Northern California.
Net other expense was $48,315 in the three months ended December 31, 1998,
compared to net other income of $3,712 for the three month period ended December
31, 1997, a decrease of $52,027. The increase in net other expense was
substantially attributable to the additional interest expense related to
liabilities acquired from the subsidiaries. After the elimination of the
activity from the newly acquired subsidiaries, net other income was $28,681,
compared to net other income of $3,712 for the three-month period ended December
31, 1997. The increase of $24,969, or 672.7 percent, was primarily due to the
interest income on loans to shareholders.
Net loss for the three months ended December 31, 1998 was $1,506,998, or $0.08
loss per share, compared to net loss of $350,182, or approximately $0.03 loss
per share. After elimination of net income/(loss) from the acquired subsidiaries
not included in the previous period, net loss for the three months ended
December 31, 1998 was $584,819, compared to the quarter ended December 31, 1997
net loss of $350,182, an increase of $234,637, or 67.0 percent.
Liquidity and Capital Resources
Cash flows used in operating activities during the six months ended December 31,
1998 were $654,366, compared to cash flows used in operating activities of
$630,342 for the six months ended December 31, 1997, an increase of $24,024, or
3.8 percent. The company has a working capital deficit of $5,355,277, as of
December 31, 1998, compared to a deficit of $2,693,367 as of June 30, 1998.
Cash flows used in investing activities was $1,204,939 during the six months
ended December 31, 1998, compared to $123,190 during the same period in 1997.
The increase of $1,081,749 is mainly attributable to loans to stockholders of
newly acquired subsidiaries.
Cash flows provided by financing activities were $394,893 during the six months
ended December 31, 1998, compared to cash flows provided by financing activities
of $1,869,147 for the comparable period last year. The decrease of $1,474,254 in
cash provided by financing activities is attributable to a reduction in proceeds
from the sale of stock and additional repayment of long-term debt.
During the second quarter ended December 31, 1998, the Company exercised its
right under a stock Subscription Agreement to require Westar Capital to purchase
200,000 shares of Series C Convertible Preferred Stock for $1,000,000. However,
Westar Capital filed suit seeking declaratory judgment that it was not required
to purchase the Series C Convertible Preferred Stock due to an alleged breach by
the Company of such agreement. (See Part II, Item 1. Legal Proceedings). As a
result of this non-payment, the Company has experienced increased cash flow
difficulties. On February 12, 1999, the Company settled its lawsuit with Westar
Capital, and Westar Capital agreed to purchase the Series C Preferred Stock for
$1,000,000. Further, under the terms of the settlement agreement, the Company
was required to concurrently repay to Western Resources, Inc. ("Western"), an
affiliate of Westar Capital, $663,025 for services rendered. Management believes
that with the net proceeds from the Series C Preferred Stock subscription and
anticipated revenues from other contracts, the Company will have sufficient cash
flow to sustain operations for the fiscal year ended June 30, 1999. However, in
the event that anticipated contracts, or payment under such contracts are
delayed, there may be an adverse effect on the Company's liquidity. Management
believes that the above actions will allow the Company to continue as a going
10
concern. Cash requirements beyond the next six months depend upon the Company's
profitability, its ability to manage and obtain additional working capital
requirements and its rate of growth. (See Note 4 Cautionary Statement for
Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation
Reform Act of 1995.)
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 and thus current vendors and
subcontractors who have not adequately prepared for the year 2000 can be
substituted in favor of those that have prepared. (See Note 4 Cautionary
Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995.)
Part II - Other Information
Item 1. Legal Proceedings
In October 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. The parties have agreed to
mediation in a continuing effort to settle the matter; however, no agreement has
been reached. Management believes, based on current information, that any
settlement would not have a material impact on the Company.
On December 17, 1998, Western filed suit against OBS, a subsidiary of the
Company, in the Third Judicial District for Shawnee County, Kansas (Case No.
98CV1628 Division 6). Western alleged that OBS breached its contract by failing
to pay Western for services performed. On that same date, Westar Capital, an
affiliate of Western, filed suit against the Company in the United States
District Court for the District of Kansas (Civil Action No. 98-2579-KHV). In its
complaint, Westar Capital sought declaratory judgment that it was not obligated
to purchase $1,000,000 of the Company's Series C Convertible Preferred Stock
because the Company breached its obligations under a stock Subscription
Agreement entered into between Westar Capital and the Company. On February 12,
1999, the Company, OBS, Western, and Westar Energy settled their litigation.
Under the terms of the settlement agreement, Westar Capital agreed to purchase
$1,000,000 of the Company's Series C Convertible Preferred Stock, and OBS agreed
to pay Western $663,025 for services performed. Further, under the terms of the
settlement agreement, the Company agreed to repay a loan in the amount of
$290,000, plus interest, to Westar Energy, Inc., an affiliate of Westar Capital
and Western, by March 17, 1999. The loan was used by the Company to purchase
certain assets of Mid-States Armature Works, Inc. As a result of the settlement,
the two lawsuits were dismissed with prejudice.
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults upon Senior Securities - Not Applicable
11
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedules
12
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 16, 1999 By: \s\ Richard T. Sperberg
-----------------------------
Richard T. Sperberg
Chief Executive Officer
By: \s\ J. Bradford Hanson
-----------------------------
J. Bradford Hanson
Chief Financial Officer and
Principal Accounting Officer