UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10Q
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2001
( ) Transition report pursuant of Section 13 or 15(d) of the Securities
Exchange Act of 1939 for the transition period ____ to______
COMMISSION FILE NUMBER 0-21322
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OUT TAKES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-4363944
- ---------------------------------- -------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3811 Turtle Creek Blvd., Suite 350
Dallas, Texas 75219 Telephone (214)528-8200
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(Address of Principal Executive Offices, including Registrant's zip code
and telephone number)
NONE
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Former name, former address and former fiscal year, if changed
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities ExchangeActof1934
during the preceding 12 months (or for such shorter period that theregistrant
was required to file such reports,), and (2) has been subject tosuch filing
requirements for the past 90 days. Yes X No
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The number of shares of the registrant's common stock as of September
30,2001:20,788,122 shares.
Transitional Small Business Disclosure Format (check one): Yes No X
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TABLE OF CONTENTS
-----------------
Item 1. Financial Statements
(a) Balance Sheet
(b) Statement of Operations
(c) Statement of Changes in Financial Position
(d) Statement of Shareholders' Equity
(e) Notes to Financial Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Item 3. Risks
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults On Senior Securities
Item 4. Submission of Items to a Vote
Item 5. Other Information
Item 6
(a) Exhibits
(b) Reports on Form 8K
SIGNATURES
FINANCIAL DATA SCHEDULE
PART I. FINANCIAL INFORMATION
Out-Takes, Inc.
Consolidated Balance Sheets
September 30, March 31,
2001 2001
------------ --------
(Unaudited)
ASSETS
Current Assets
Cash $ - $ 52,745
Accounts receivable (net) 274,241 132,118
------------ --------
Inventories -
Prepaid Expenses -
Investments -
Total Current Assets 274,241 184,863
------------ --------
Property and Equipment (net) 162,458 183,712
Other Assets -
Deposits and advances 26,110 23,148
Goodwill (net of amortization) 4,008,035 4,062,321
------------ --------
Total Other Assets 4,034,145 4,085,469
------------ --------
Total Assets 4,470,844 4,454,044
============ ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Book overdraft $(2,189) $ -
Accounts Payable 80,359 25,766
Accrued expenses 225,026 251,567
Accrued interest 1,190,182 858,843
Compensation payable-related parties 171,034 81,274
Notes Payable-Short-Term 1,084,739 1,213,856
Deferred Income 6,971 6,971
Total Current Liabilities 2,756,123 2,438,277
------------ --------
Long-Term Liabilities
Notes payable-long term 4,004,000 4,000,459
Shareholders' Equity
Common Stock, par value $.01 per share
35,000,000 shares authorized;, 20,788,122
shares issued and outstanding of which
292,396 are in treasury 207,882 207,882
Preferred stock, par value $.01 per share
5,000,000 shares authorized; none issued -
Additional Paid in Capital 9,913,230 9,913,230
Accumulated deficit -
Accumulated deficit (12,301,985) (11,997,398)
------------ --------
Total Shareholders' Equity (2,180,873) 1,876,286
Treasury stock, as cost (108,406) (108,406)
------------ --------
Total Liabilities and Shareholders' Equity 4,470,844 4,454,044
=========== =========
F-1
Out-Takes, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
2001 2000
--------- ----------
(Unaudited)
Operating Activities:
Net Loss $(304,587) $(359,726)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 75,540 81,830
Changes in operating assets and liabilities:
Accounts receivable (142,123) (62,493)
Deposits (2,962)
Accounts payable, accrued expenses 28,052 13,970
Interest payable-related party 259,424
Accrued interest 331,339 -
Compensation payable - related party 89,760 45,000
Net cash provided by (used in)
operating activities 75,019 (21,995)
Investing Activities:
Note receivable - (6,000)
Equipment purchase -
Net cash used in investing activities - (6,000)
Financing Activities:
Proceed from issuance of stock
Advances from related parties (25,486)
Payments to related parties - -
Capital contribution -
Proceeds from short term debt - -
Notes & contracts payable (129,953) -
Net cash provided by (used in)
financing activities (129,953) (25,486)
Increase (decrease) in cash and cash
equivalents (54,934) (53,481)
Cash and cash equivalents-beginning of year 52,745 77,265
Cash and cash equivalents- end of year $(2,189) $23,784
Out-Takes, Inc.
Consolidated Statements of Operations
Three Months Ended Nine months Ended
September 30, September 30,
2001 2000 2001 2000
-------- --------- -------- -------
(Unaudited) (Unaudited)
Revenues $73,429 $53,258 $167,546 $221,853
Cost of revenues 27,680 76,795 87,917 98,645
-------- --------- -------- -------
Gross margin 45,749 (23,537) 79,629 123,208
Operating expenses 62,828 44,734 184,187 223,510
-------- --------- -------- -------
Loss from operations (17,079) (68,271) (104,558) (100,302)
-------- --------- -------- -------
Other Expenses
Interest income - - - -
Interest expense (100,000) (129,712) (200,029) (259,424)
-------- --------- -------- -------
Total Other Expenses (100,000) (129,712) (200,029) (259,424)
-------- --------- -------- -------
Provision for
income taxes - - - -
-------- --------- -------- -------
Total Income
Tax Expense - - - -
-------- --------- -------- -------
Net income (loss) $(117,079) $(197,983) $(304,587) $(359,726)
========== ========= ======== =========
Net loss per share $(0.01) $(0.01) $(0.01) $(0.02)
========== ========= ======== =========
Weighted average common
shares outstanding 20,788,122 20,495,726 20,788,122 20,495,726
========== ========= ======== =========
Out-Takes, Inc.
Consolidated Statement of Stockholders' Equity
Common Stock Additional
---------------- Paid-In Accumulated Treasury
Number of Capital Deficit Stock Total
Shares Amount
---------------- ------ --------- ------------ -------- -----
Balance,
March 31, 1998 20,788,122 $207,882 $9,905,430 ($11,091,161) ($108,406) ($1,086,255)
Acquisition of
subsidiary 342,784 342,784
Adjustments 7,800 7,800
Net loss for
the year
ended
March 31, 1999 (382,184) (382,184)
---------------- ------ --------- ------------ -------- -----
Balance, March 31, 1999 20,788,122 207,882 9,913,230 (11,130,561) (108,406) (1,117,855)
Net loss for the year
ended March 31, 2000 (884,110) (884,110)
---------------- ------ --------- ------------ -------- -----
Balance, March 31, 2000 20,788,122 207,882 9,913,230 (12,014,671) (108,406) (2,001,965)
Net loss for the year
ended March 31, 2001 17,273 17,273
---------------- ------ --------- ------------ -------- -----
Balance March 31, 2001 20,788,122 207,882 9,913,230 (11,997,398) (108,406) (1,984,692)
Net loss -
September 30, 2001 (304,587) (304,587)
Balance,
September 30, 2001 20,788,122 $207,882 $9,913,230 $(12,301,985)$(108,406) $(2,289,279)
================== ======= =========== ============= ======= ==========
F-3
Out-Takes, Inc.
Notes to Consolidated Financial Statements
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
- ------------------
The Company's principal business activity is the collection and distribution of
waste natural gas in the State of California, and the conversion of such
natural gas into electricity, which is then sold to retail providers of
consumer electricity.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates that affect the
reported amounts of assets, liabilities, revenues, expenses and the disclosure
of contingent assets and liabilities. Actual results could differ from these
estimates.
Basis of Presentation
- ---------------------
The accompanying financial statements include the accounts of Out-Takes, Inc.
and its wholly owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated.
Property, Plant and Equipment
- -----------------------------
Plant and equipment are recorded at cost. Depreciation is provided over the
estimated useful asset lives using the straight-line method over 5-7 years.
Cash and cash equivalents
- -------------------------
The Company classifies all highly liquid debt instruments, readily convertible
to cash and purchased with a maturity of three months or less at date of
purchase, as cash equivalents. The Company had no cash equivalents at September
30, 2001.
Accounts Receivable
- -------------------
Accounts receivable are shown net of the allowance for bad debts of $117,239 at
September 30, 2001.
Goodwill and acquisition related intangibles
- --------------------------------------------
Goodwill is recorded when the consideration paid for acquisitions exceeds the
fair value of net tangible and intangible assets acquired. Goodwill is
amortized on a straight-line basis over 40 years. Net goodwill at the
reporting dates is as follows:
September 30, 2001 March 31, 2001
-------------- --------------
Goodwill $4,342,874 $4,342,784
Accumulated amortization (334,839) (280,553)
--------- ---------
Net Goodwill $4,008,035 $4,062,321
========= =========
Amortization expense $ 54,286 $108,570
======= =======
F-5
Earnings per share
- ------------------
Earnings per share data in the financial statements have been calculated in
accordance with SFAS No. 128. Earnings per share reflects the amount of
earnings for the period available to each share of common stock outstanding
during the reporting period, while giving effect to all dilutive potential
common shares that were outstanding during the period, such as common shares
that could result from the potential exercise or conversion of securities into
common stock. As of September 30, 2001 and 2000, no contingently issuable
shares qualified as dilutive to be included in the earnings per share
calculation.
NOTE 2 - MERGERS AND ACQUISITIONS
On August 31, 1998, Out-Takes, Inc. acquired all of the issued and outstanding
equity interests of Los Alamos Energy, LLC, a California limited liability
company (LAE). This acquisition has been accounted for as an exchange between
companies under common control. The investment has been recorded at historical
cost in a manner similar to a pooling of interest, and the face value of the
note given has been adjusted down to the net equity value of LAE at the date of
the exchange.
The Company has executed a letter of intent with Atlas Engineering, LLC to the
effect that the Company shall acquire Atlas Engineering, LLC pursuant to the
provisions of a Purchase Agreement. As of September 30, 2001, the merger is in
process but had not yet been completed.
NOTE 3 - PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
September 30, 2001 March 31, 2001
---------------- ---------------
Computers and software 5,589 5,589
Equipment and furniture 350,633 350,633
Leased asset 19,000 19,000
Motor vehicle 2,500 2,500
------------ -------------
Total - At Cost 377,722 377,722
Less: Accumulated depreciation (215,264) (194,010)
------------- -------------
Net $ 162,458 $ 183,712
============= =============
NOTE 4 - NOTES PAYABLE
Note Payable - Consultant
- -------------------------
This is an unsecured note payable to a former financial consultant to the
Company pursuant to a settlement agreement dated August 17, 1994. The note is
non-interest bearing and payment is subject to availability of future cash
flows from the Company's operations. The note holder has threatened to
commence legal action, however management has advised the note holder that no
amount is due at the present time as the Company has not generated positive
cash flow. Counsel has advised the Company that no litigation has commenced
and counsel is unable to assess a possible outcome, should litigation be
commenced. The payable amount as of September 30, 2001 is$48,000.
Note Payable - Radovich
- -----------------------
This is an unsecured promissory note dated September 27, 1996. The note's
original maturity dated was thirty (30) days, no interest. The note's maturity
date has been extended indefinitely without interest. The payable amount as of
September 30, 2001 is $30,557.
Note Payable - Reeves
- ---------------------
This is an unsecured promissory note dated March 30, 1998. The note's original
maturity date was sixty days with interest at 10% per annum and is convertible
into Out-Takes, Inc. common stock at a rate to be negotiated between the
parties. The payable amount as of September 30, 2001 is$25,000.
Note Payable - Boyd
- -------------------
This is an unsecured promissory note dated August 14, 1998. The note's
original maturity date was sixty (60) days, 10% annum simple interest. The
note's maturity date was extended to December 31, 1999 with interest and the
parties are in negotiation for an additional extension. The payable amount as
of September 30, 2001 is $45,000
Note Payable - Atlas Engineering
- --------------------------------
This is an unsecured promissory note dated March 19, 1999. The note is
convertible into Out-Takes, Inc. common stock pursuant to a non-binding share
purchase agreement executed between the parties. The note includes interest at
10% per annum until paid or converted. The payable amount as of September 30,
2001 is $62,984.
Note Payable - Coastal Resources Corp.
- --------------------------------------
This note, dated June 15, 1999 is secured by the property, plant and equipment
of Los Alamos Energy, LLC and includes interest at 8% per annum beginning
October 1, 1999. The master loan agreement specifies a $300,000maximum
financing amount and was entered into pursuant to a non-binding merger
agreement between the parties. If the merger is consummated, then the loan
balance at that date shall be credited to Coastal Resources Corp. as part of
its proportionate equity interest in Out-Takes, Inc. If the merger is not
consummated, then the principal and interest is due and payable on the first
anniversary date of each advance ranging from June 2000 through August2000. The
payable amount as of September 30, 2001 is $219,036.
Note Payable - Los Alamos Energy, LLC Equity Holders
- ----------------------------------------------------
This note, dated August 31, 1998, is pursuant to a share Purchase Agreement
executed between Los Alamos Energy, LLC (LAE) and Out-Takes, Inc. The note
specifies interest at 10% per annum and is convertible into a aggregate ninety
percent of the issued and outstanding shares of common stock of Out-Takes, Inc.
as of the date of conversion. The agreement also requires asa condition of the
conversion that Out-Takes, Inc. effect a reverse stock split of one share for
every one-hundred issued and outstanding shares at the conversion date. As of
September 30, 2001, this conversion and reverse stock split has not been
completed. The payable amount as of September 30, 2001 is $4,000,000.
Note Payable - Joint Venture Working Interest
- ---------------------------------------------
These notes are pursuant to a Joint Venture Agreement executed between Los
Alamos Energy, LLC and the participants in development and generation of
electricity from waste natural gas activities. The agreement specifies that
participants may be required to convert their working interest into an equity
position when the Company merges with a publicly traded entity. Those
participants electing not to convert would be repaid their original
consideration plus a non-compounded annual yield of 12%. As of March 31, 2000,
this conversion or repayment has not been completed. The payable amount as of
September 30, 2001 is $250,279.
Note Payable - Hall
- --------------------
This is an unsecured promissory note dated January 4, 2000. The note's
maturity date is January 4, 2001 without interest. The payable amount as of
September 30, 2001 is $4,000.
Lease Payable - Fairfield Energy Corp.
- ---------------------------------------
The company is the lessee of a transformer under a capital lease expiring
July2003. The asset and liability under the capital lease is recorded at the
present value of the minimum lease payments. The asset is depreciated over the
lease term of 50 months. Depreciation of the asset under the capital lease is
included in depreciation expense for the year ended September 30, 2001. The
equipment held under capital lease at September 30, 2001 is valued at$19,000
less accumulated depreciation of $5,202.
Future minimum lease obligations are as follows:
Year ended March 31
-------------------
2001 $ 6,137
2002 6,137
2003 6,137
2004 2,046
--------
Total $ 20,457
Less interest 5,162
-------
Present value of net minimum lease payment $ 15,295
=======
NOTE 5 - RELATED PARTY TRANSACTIONS AND ASSET LEASE ASSIGNMENT
The Company holds an asset lease agreement that generates annual income for the
Company. On March 30, 2001, the Company assigned this asset lease agreement
in lieu of cash to payoff the loan payable to Photo Corporation Group (PCG),
including the accrued interest that was due to related party. In addition, the
related party also issued a $150,000 promissory note, dated September 30, 2001.
The note bears 10% interest per annum. Both principal and interest are due in
180 days.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company has an extended 12 month non-cancelable operating lease agreement
for an office facility.
Future minimum lease obligations are as follows:
Year ended March 31
-------------------
2002 $ 10,200
--------
Total $ 10,200
=========
The Company's facilities are subject to federal, state and local provisions
relating to the discharge of materials into the environment. Compliance with
these provisions has not had, nor does the Company expect such compliance to
have, any material effect on the capital expenditures, revenues or expenses, or
financial condition of the Company. Management believes that its current
practices and procedures for the control and disposition of materials comply
with all applicable federal, state and local requirements.
Los Alamos Energy, LLC (LAE) participates in certain agreements with respect to
the generation of electricity from waste natural gas whereby its managing
member also acts as the operator of the electrical power plant's development
and production activities. As its managing member and operator, LAE is
contingently liable for the activities of this venture.
NOTE 7 - INCOME TAXES
As of September 30, 2001, the Company has a net operating loss (NOL)
carryforward of approximately $12,143,851. The net operating loss
carryforwards expire between 2007 and 2016. No deferred tax asset has been
recorded for these losses since a valuation allowance has been recorded for the
portion of the NOL that is not expected to be realized.
NOTE 8 - NEW AUTHORITATIVE PRONOUNCEMENTS
The Company intends to adopt Statement of Financial Accounting Standards
(SFAS)No. 133, 'Accounting for Derivative Instruments and Hedging
Activities,'as of the beginning of its fiscal year 2001. The standard will
require the Company to recognize all derivatives on the balance sheet at fair
value. The effect of adopting the standard is not expected to have a material
effect on the Company's financial position or overall results in operations.
NOTE 9 - GOING CONCERN
The Company has been unsuccessful in generating net cash from operations. The
Company incurred a net loss from operation of $344,578 for the year ended March
31 2001 and has a working capital deficit as of March 31, 2001 of$2,254,565.
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The continuation
of the Company as a going concern is dependent upon its ability to generate net
cash from operations. The Company's recurring operating losses and net working
capital deficiency raises substantial doubt about the entity's ability to
continue as a going concern.
Management plans to expand its existing power plant to a four or five mega watt
facility, reduce expenses, expand operations to include direct service of
consumer electricity, and convert $4,250,279 of existing debt to equity which
will substantially reduce interest expense.
NOTE 10 - CONCENTRATIONS OF CREDIT RISK
All of the consolidated revenue of Out-Takes, Inc. is generated from the
leasing of photographic equipment to one customer and the sale of electricity
to Pacific Gas and Electric Company and Texaco.
NOTE 11 - SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash flows from operating activities include the following cash payments:
March 31, March 31, March 31,
2001 2000 1999
--------- --------- ---------
Income taxes $ - $ - $ -
Interest $ - $2,516 $7,650
Noncash investing and financing activities include the following amounts:
March 31, March 31, March 31,
2001 2000 1999
--------- --------- ---------
Capital lease of equipment $ - $19,000 $ -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
Item 2. Management's Discussion and Analysis Of Operations.
Overview
On August 31, 1998, the Company entered into a Share Purchase Agreement
(the"Acquisition Agreement") whereby the Company acquired (the
"Acquisition")all of the issued and outstanding equity interests in Los Alamos
Energy, LLC, a California limited liability company ("LAE"). The purchase price
to be paid for the equity interests of LAE is Four Million Dollars($4,000,000),
which waspaid by Promissory Notes (the "Notes") to the holders of LAE equity
(the"Equity Holders") calling for interest on all outstanding amounts to accrue
at the rate of ten percent (10%) per annum. Payments of principal and accrued
interest under the Notes shall be made monthly in arrears up to the maturity
date, which is the fifth anniversary of the Notes. The Notes may be prepaid at
any time without premium or penalty.
The Acquisition Agreement provides that, in the event the Equity Holders shall
desire to do so, they may convert their indebtedness to common stock of the
Company representing in the aggregate ninety percent (90%) of the issued and
outstanding shares of such common stock as of the date of such conversion. The
Acquisition Agreement provides that it is a condition of the conversion that
the Company effect a reverse stock split of one (1) share for every one
hundred(100) shares issued and outstanding as of such date. LAE contemplates
that a significant number of persons currently holding promissory notes and/or
working interests in its electricity production (collectively, "Interest
Holders") will exercise their rights to convert such interests into the equity
of LAE, and subsequently to join in the conversion of the Notes into common
stock of the Company. Presently, management of LAE anticipates that, prior to
the conversion of the Notes and after giving effect to the contemplated reverse
stock split, the Company will issue approximately three million (3,000,000)
additional shares of common stock, and that subsequent to completing the
conversion, the Equity Holders and Interest Holders will own, in the aggregate,
approximately two million eight hundred eighty thousand (2,880,000) shares of
the Company's common stock, representing ninety percent (90%) of the total
amount of common stock estimated to be issued and outstanding as of the date
such conversion rights are exercised. As of March 31, 2000, the holders have
not yet exercised their right to convert the note to common stock.
The indebtedness represented by the Notes is secured by (a) a Security
Agreement, granting a first lien and security interest upon all of the assets
of the Company; and (b) a pledge of the common stock of the Company held by
Photo Corporation Group Pty Limited, an Australian corporation, which is the
controlling stockholder of the Company. The stock pledge grants the Holders
specific rights under certain circumstances, including the right to receive
distributions made by the Company in respect of its common stock and the right
to vote the pledged shares, for so long as the Notes are in force.
The purchase price to be paid by the Company for all of the issued and
outstanding equity of LAE was negotiated based upon several factors, including,
without limitation, the asset value of LAE and its projected income from
operations based, in part, upon management's estimates of its natural gas
reserves and its current contracts.
LAE is engaged in the collection and distribution of natural gas from
properties owned or leased by it in the State of California, and management of
LAE intends to position LAE to become an important independent power producer,
and to benefit as a principal provider of electricity to consumers in
California and elsewhere as deregulation is implemented. LAE will be operated
as a wholly-owned subsidiary of the Company.
RECENT DEVELOPMENTS
1. Regulatory Matters.
a. Payment for Electricity Delivered
Los Alamos Energy has historically sold power to PG&E. Due to uncertainties
arising form PG&E's bankruptcy, Los Alamos Energy elected to terminate its
contract with PG&E, and instead entered into a Participating Generator
Agreement with the California Independent System Operator ("ISO"), and is
currently selling power to the CAISO through the Automated Power Exchange as
its Scheduling Agent.
Since September 2000, the ISO settlement procedures have included a two-payment
process. An initial payment is made to the Scheduling Coordinators based on
Preliminary Settlement Statement Invoices and receipts received in response to
them, and final payment is made based on receipts received in response to the
Final Settlement Statement Invoice.
A group of California generators filed a Motion with the Federal Energy
Regulatory Commission (?Commission?) to direct the ISO to enforce the
creditworthiness requirement of its open access transmission tariff (Tariff)and
the Commission's creditworthiness orders.
The ISO stated that because certain parties are in default on major payments
and because market "reruns" result in significant shifts in the payments
between the preliminary and final invoices, Scheduling Coordinators
are"netting" payments owed for one month's market transactions against amounts
due for transactions in a different month. Some Scheduling Coordinators have
also failed to make full payment on preliminary invoices on the belief that
they will not recover overpayments.
The ISO stated that these practices are contrary to payment obligations under
the ISO Tariff. The ISO indicated that it initiated several changes to its
billing and settlement procedures in response to the actions of market
participants. First, by Market Notice issued August 1, 2001, the ISO notified
market participants that it did not expect to make cash distributions based on
preliminary invoices for May, but would hold the payments and include them in
the cash distributions based on final invoices for May.
Second, by Market Notice issued August 30, 2001, the ISO notified market
participants that it would suspend, until further notice, cash distributions
based on preliminary invoices, effective September, 2001,until the ISO issues a
further market notice.
Third, by Market Notice issued September 4, 2001, the ISO notified market
participants that beginning with the July 2001 trade month, it would defer the
collection and disbursement of funds until the final invoices for each trade
month were prepared and distributed. According to the Market Notice, the ISO
would issue a single monthly invoice on the date that it issues the Final
Settlement Statement for the last trade day of the calendar month and
distributes payment received within five business days from the date the single
invoice was issued.
The ISO represented that it has modified the payment dates in the ISO Payments
Calendar to accommodate these changes. The ISO requested that its proposed
changes be made effective, on a temporary basis, beginning August1, 2001 (when
preliminary payments for the trade month May 2001 would have been disbursed),
until either the ISO notifies the Commission of its intent torevert, as of a
date specified, or until the Commission accepts and makeseffective a permanent
change to the settlement process. The ISO requestedwaiver of the prior notice
requirement to permit the tariff revisionsto be made effective on August 1,
2001.
The Commission has repeatedly directed the ISO to enforce its credit worthy
standards under the Tariff and have specifically held that the ISO Tariff
prevents the ISO from entering into transactions with third-party suppliers on
behalf of a non-creditworthy entity, absent credit support for such
transactions from a creditworthy counter party. As per the February 14 Order
and April 6 Order, and affirmed in the September 13 Order, the Tariff imposes a
duty on the ISO to enforce the Tariff's creditworthiness standards.
In the September 13 Order, it stated that "it would be unreasonable to limit
the ISO's creditworthiness enforcement duties to rejecting schedules from
non-creditworthy parties [and] conclude[d] that it would be reasonable to
require that the ISO obtain prior assurances of payment for all third-party
power supplied to [SoCal Edison] and PG&E, whether directly or through
purchases by DWR (or another creditworthy counter party) on their loads'
behalf."
It has stated our reasons for this requirement several times. First, it found
that the credit-support arrangements are necessary to ensure adequate assurance
of payment for third-party suppliers; second, that such arrangements are
necessary to avoid the unilateral shifting of unacceptable financial risks to
third-party suppliers; and third, that a lowering of the financial
creditworthiness standard without some assurance of payment for third-party
sales would further increase prices paid by consumers.
Although DWR represented that it is the guarantor of transactions for then
on-creditworthy UDCs, DWR has yet to pay for these net short positions. The
Tariff requires a creditworthy party to back the transaction before the
transaction is scheduled. Therefore, if the ISO does not provide a creditworthy
party to back the transaction, including, specifically the net short position
of the currently non-creditworthy UDCs, i.e., PG&E and So Cal Edison, the
must-offer requirement will not apply. The must-offer requirement assumes a
matching must-pay requirement. Thus, sellers will not be required to transact
with the ISO and will be free to negotiate with other in-state and out-of-state
buyers of their choosing with mutually acceptable terms and conditions.
The commission also disagreed with the ISO and DWR's representation that under
the Tariff the ISO must invoice the non-creditworthy UDCs, or that a new
contractual arrangement is necessary for DWR to assume financial responsibility
as the guarantor for the non-creditworthy UDCs. It noted that DWR has already
executed a Scheduling Coordinator Agreement with the ISO.
This agreement includes, among other things, an obligation by DWR to abide by
and perform all of the obligations under the ISO Tariff, without limitation.
This includes an obligation to pay for scheduled and unscheduled transactions
made on the Scheduling Coordinator's behalf by the ISO. Under the ISO Tariff
settlement and billing procedures, a Scheduling Coordinator shall discharge its
payment obligations and likewise, receive all payments owed to it under the ISO
Tariff only through the ISO. Although this agreement was entered into prior to
So Cal Edison and PG&E losing their creditworthy status, nothing in the
agreement limits the scope to DWR's scheduling of its own load, or
distinguishes DWR's functioning as the creditworthy party for the net short
position for the non-creditworthy UDCs.The ISO has acknowledged that DWR
assumed the obligations of Scheduling Coordinator for the net short load under
the Tariff. The ISO confirmed that: (1) both DWR and CERS have been assigned
Scheduling Coordinator identifications; (2) transactions backed by DWR and CERS
since January have been entered into using their Scheduling Coordinator
identifications; and (3) the UDCs provide CERS with a calculation of the net
short for this purpose.
In addition, it noted that AB1X provides that: "Upon delivery of power to them,
the retail end use customers shall be deemed to have purchased that power from
[DWR]. Payment for any sale shall be a direct obligation of there tail end use
customer to [DWR]."
Therefore, because DWR has assumed responsibility for purchases by the ISO, and
because DWR functions as a Scheduling Coordinator for this net short position
of PG&E and So Cal Edison, DWR must abide by the requirements of the ISO Tariff
and the Scheduling Coordinator Agreement. Therefore, the Commission disagreed
with the ISO's argument that under the Tariff, it is required to send invoices
to PG&E and So Cal Edison - rather than DWR - for generation it dispatches to
serve their respective loads. The ISO is obligated under its Tariff to invoice,
collect payments from and distribute payments to DWR, as the Scheduling
Coordinator for all scheduled and unscheduled transactions made on behalf of
DWR, including transactions where DWR serves as the creditworthy counterparty
for the applicable portion of PG&E's and So Cal Edison's load.
The Commission rejected the ISO's and DWR's argument that the Agreement
resolvesthe issues raised by the Generators in this proceeding. This Agreement
has never been filed with the Commission and, to the extent that payment is
negotiated for services under the Tariff, that Agreement is jurisdictional and
must be filed with and approved by the Commission under section 205 of the
Federal Power Act prior to implementation. The issue raised by Generators
regarding payment for providing minimum run energy is pending before the
Commission on rehearing in Docket Nos. EL00-95-001, et al., and will be
addressed in that proceeding.
The Commission believes that it is the ISO's obligation to enforce the
provisions of the Tariff uniformly and to ensure that all parties are treated
equitably and fairly. If the ISO enforced its Tariff provisions which require
all Scheduling Coordinators to pay each preliminary and final settlement
statement invoice in each settlement period, (thus enforcing no "netting"), it
would eliminate the need for the temporary suspension of the two-part
settlement process and render Amendment No. 40 unnecessary. It also believes
that under Amendment No. 40, Scheduling Coordinators will face a 75-day lag
between their market transactions and any receipt of payment for those
transactions and find this delay unacceptable. It found it imperative to the
marketplace that a prompt settlement process be in place that matches market
transactions and prompt payment for those transactions on a timely basis.
The Commission found that DWR does not have unilateral discretion to determine
the rates for purchases it makes on behalf of PG&E and So Cal Edison and
instead must accept and pay the rates set by the Commission. If DWR disagrees
with these rates, it may challenge the rates through an appropriate filing with
the Commission. Neither DWR nor any other party should be engaging in the types
of self-help described in this proceeding.
The ISO was on November 7, 2001 directed to comply with its Tariff and the
Commission's creditworthiness orders by: (1) enforcing its
billingandsettlementprocedures under its Tariff; (2) invoicing DWR for all
ISOtransactions it entered into on behalf of So Cal Edison and PG&E within 15
days from the date of the order; (3) filing a report with the Commission,
within 15 days from the date of the order, indicating overdue amounts from DWR
and a schedule for payment of those overdue amounts within 3 months of the date
of the order; and (4) reinstating the billing and settlement procedures under
the Commission-approved ISO Tariff. If the ISO fails to take these steps, the
Commission will consider it a violation of the Commissions' creditworthiness
orders and the ISO's Tariff warranting the Commission to seek injunctive relief
under section 314(a) of the Federal Power Act, 16 U.S.C. ? 825m(a) (1994).
b. Direct Access.
The Public Utilities Commission issued a restructuring order December 1995
(revised January 1996), providing for an independent systemoperator (ISO) and a
wholesale power exchange (PX) to be operational January 1, 1998. (The opening
of the ISO and PX were delayed until March 31, 1998). PUC rulings in 1997
established electric metering and billing as competitive services, and provided
that retail choice would be available to all consumers at once.
May 2000 marked the beginning of extreme price spikes at the PX and ISO, and
FERC attempted to address the market problems in a December 2000 order. The
order provided for a soft price cap of $150/mWh, a new governing board for the
ISO, elimination of the requirement for IOUs to buy and sell all power through
the PX, and a requirement for 95% of loads to be bid in the day-ahead market.
In January 2001 the PUC approved limited rate increases utilities, and
inlateMarch approved large rate increases for consumers using more than 130% of
a baseline. The baseline is set regionally and is about half of average
consumption levels. The March order also requires the utilities to usethe rate
increase to pay for power purchased from qualifying facilities andtheDepartment
of Water Resources. In April 2001 FERC approved marketmitigationmeasures that
set a rate formula once a stage 1 emergency is reached, and in September
broadened the order to apply to all times and to all western states.
In September 2001 the PUC ended the ability of customers' to choose their power
supplier; current retail choice customers can remain with their supplier
through the end of their contract.
In Spring 2001 the governor of California signed AB 29x approving
fundsforenergy conservation, SB 6x creating a state authority to build and
upgrade generation facilities, and SB 31x providing an additional $13.4billion
in bonding authority to the California Department of Water Resources. In
October 2001 the governor said he would veto SB 18xx, which creates a separate
charge on customer bills to cover bond repayments. The governor objects to the
bill because it allows PUC oversight of the Department of Water Resources
revenue needs.
2. Atlas Engineering.
Due to a reversal of electricity restructuring and customer direct access in
California, Atlas Engineering has elected to terminate its discussions with the
Company regarding the acquisition of Atlas by the Company.
RESULTS OF OPERATIONS
Period ended September 30, 2000 compared with September 30, 2001.
The net loss for the period ended September 30, 2001, was $146,453 compared
with $707,928 for the period ended September 30, 2000.
The Company overall generated $121,906 in revenues in the period ended
September30, 2001 compared to revenues of $53,258 in the fiscal year ended
March 31, 2000. Management attributes this increase to the sale of power to
entities other than PG&E and the acquisition of the Atlas Power revenue stream.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001 the Company had a working capital deficit
of$2,361,578as compared to a working capital deficit on March 31, 2001
of$2,254,565. The Company sees this changes as insignificant.
Net cash provided by operating activities was $72,496 for the period ended
September 30, 2001 compared to the utilization of $9,828 of cash for the same
period last year.
The Company does not anticipate that it will have any problems in meeting its
obligations for continuing fixed expenses, materials procurement or operating
labor.
PART II. OTHER INFORMATION
Item 1. Legal proceedings NONE
Item 2. Changes in securities and use of proceeds NONE
Item 3. Defaults on senior securities NONE
Item 4. Submission of items to a vote NONE
Item 5. Other information NONE
Item 6.
a) Exhibits NONE
b) Reports on 8K
Current Report on Form 8-K dated April 6, 2001
Current Report on Form 8-K dated January 23, 2001
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Out-Takes, Inc.
Dated: August 15, 2001 By: Jody P. Lenihan
--------------------------------
Jody P. Lenihan, Vice President