10-Q 1 out93001.txt 10-Q 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 -------- OUT TAKES, INC. ------------------------------------------ (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 ------------------------------------------------------------------------------ (Address of Principal Executive Offices, including Registrant's zip code and telephone number) NONE -------------------------------------------------------------- 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 --- --- 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 --- ---- 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