AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 13, 1996
REGISTRATION NO. 333-04612
==========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------
U.S. ENERGY SYSTEMS, INC.
(Formerly U.S. Envirosystems, Inc.)
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
-----------------
DELAWARE 4931 52-1216347
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Classification Code Number) Identification No.)
of incorporation or
organization)
515 NORTH FLAGLER DRIVE, RICHARD H. NELSON
SUITE 202 PRESIDENT
WEST PALM BEACH, FL 33401 U.S. ENERGY SYSTEMS, INC.
(407) 820-9779 515 NORTH FLAGLER DRIVE, SUITE 202
(ADDRESS AND TELEPHONE NUMBER OF WEST PALM BEACH, FL 33401
PRINCIPAL (407) 820-9779
EXECUTIVE OFFICES AND PRINCIPAL (NAME, ADDRESS AND TELEPHONE
PLACE OF BUSINESS) NUMBER OF AGENT FOR SERVICE)
Copies to:
David Alan Miller, Esq.
Gregory Katz, Esq. Noah Scooler, Esq.
Reid & Priest LLP Graubard Mollen & Miller
40 West 57th Street 600 Third Avenue
New York, New York 10019 New York, New York 10016
(212) 603-2000 (212) 818-8800
-----------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.[ ]
-----------------
CALCULATION OF REGISTRATION FEE
=============================================================================
TITLE
OF EACH PROPOSED PROPOSED
CLASS OF MAXIMUM MAXIMUM
SECURITIES AMOUNT OFFERING AGGREGATE AMOUNT OF
TO BE TO BE PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER UNIT(1) PRICE FEE
-----------------------------------------------------------------------------
Common Stock,
par value $.01... 1,868,750(2) $ 4.00 $7,475,000 $2,578
-----------------------------------------------------------------------------
Redeemable
Common Stock
Purchase
Warrants ........ 1,868,750(3)(8) $ .10 $186,875 $64
-----------------------------------------------------------------------------
Common Stock,
par value $.01... 1,868,750(4)(8) $ 4.00 $7,475,000 $2,578
-----------------------------------------------------------------------------
Common Stock,
par value $.01... 162,500(5)(8) $ 5.55 $901,875 $311
-----------------------------------------------------------------------------
Redeemable
Common Stock
Purchase
Warrants......... 162,500(6)(8) $ .13875 $22,547 $8
-----------------------------------------------------------------------------
Common Stock,
par value $.01... 1,805,000(9) $ 4.00 $7,220,000 $2,490
-----------------------------------------------------------------------------
Redeemable
Common Stock
Purchase Warrants 500,000(10) $ .10 50,000 $17.24
-----------------------------------------------------------------------------
Common Stock,
par value $.01... 162,500(7)(8) $ 4.00 $650,000 $224
-----------------------------------------------------------------------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,270.24
=============================================================================
----------------
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457.
(2) Includes 243,750 Shares which the Underwriters have the option to
purchase to cover over-allotments, if any.
(3) Includes 243,750 Redeemable Common Stock Purchase Warrants
("Warrants") which the Underwriters have the option to purchase to
cover over-allotments, if any.
(4) Represents shares issuable upon exercise of the Warrants registered
hereunder.
(5) Represents shares issuable upon exercise of an option to be issued to
the Representative (the "Representative's Purchase Option").
(6) Represents Warrants issuable upon exercise of the Representative's
Purchase Option.
(7) Represents shares issuable upon exercise of Warrants subject to the
Representative's Purchase Option.
(8) Pursuant to Rule 416 of the Securities Act of 1933, as amended, the
number of Warrants and shares issuable upon exercise of the Warrants
are subject to the antidilution provisions of the Warrants and the
Representative's Purchase Option.
(9) Represents shares issuable in a concurrent secondary offering.
(10) Represents shares issuable upon exercise of the warrants registered in
a concurrent secondary offering.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its Effective Date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
===========================================================================
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED ___________, 1996
PROSPECTUS
U.S. ENERGY SYSTEMS, INC.
1,625,000 SHARES OF COMMON STOCK AND
1,625,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
U.S Energy Systems, Inc. (the "Company") hereby offers (the "Offering")
1,625,000 shares of Common Stock (the "Common Stock") and 1,625,000
Redeemable Common Stock Purchase Warrants (the "Warrants" and, together
with the Common Stock, the "Securities"). Each Warrant entitles the holder
to purchase one share of Common Stock for $4.00 during the four-year period
commencing one year from the date of this Prospectus. The Warrants are
redeemable at a price of $.01 per Warrant, at any time after the Warrants
become exercisable, upon not less than 30 business days prior written
notice, if the last sale price of the Common Stock has been at least 150%
(initially $6.00) of the exercise price of the Warrants for the 20
consecutive trading days ending on the third day prior to the date on which
the notice of redemption is given. See "Description of Securities."
The Company's Common Stock is sporadically traded on the NASD OTC
Bulletin Board. Prior to this Offering, there has been no public market
for the Warrants nor has there been an established trading market for the
Common Stock. There can be no assurance that such a market will develop
for the Securities as a result of this Offering. The Company has applied
for inclusion of the Common Stock and the Warrants on the Nasdaq SmallCap
Market under the proposed symbols USEE and USEEW, respectively. For
information regarding the factors considered in determining the initial
public offering prices of the Securities and the exercise price of the
Warrants, see "Underwriting."
-----------------------------
THESE SECURITIES ARE SPECULATIVE IN NATURE, INVOLVE A HIGH DEGREE OF RISK
AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS
WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE
"RISK FACTORS" BEGINNING ON PAGE 8 AND
"DILUTION" ON PAGE 19.
-----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
=======================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-----------------------------------------------------------------------
Per Share ..... $4.00 $.40 $3.60
-----------------------------------------------------------------------
Per Warrant ... $.10 $.01 $.09
-----------------------------------------------------------------------
Total (3) ..... $6,662,500 $666,250 $5,996,250
=======================================================================
(1) Does not include a 3% non-accountable expense allowance payable to the
Representative. The Company has also agreed to grant to the
Representative an option (the "Representative's Purchase Option") to
purchase 162,500 shares of Common Stock at $5.55 per share and/or
162,500 Warrants at $.13875 per Warrant and to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, including the
Representative's non-accountable expense allowance of $199,875
($229,856 if the Underwriters' over-allotment option is exercised in
full), estimated at $371,375.
(3) The Company has granted the Underwriters an option, exercisable within
45 days from the date of this Prospectus, to purchase up to an
additional 243,750 shares of Common Stock and/or an additional 243,750
Warrants upon the same terms and conditions as set forth above, solely
to cover over-allotments, if any. If such over-allotment option is
exercised in full, the total Price to Public, Underwriting Discounts
and Commissions and Proceeds to Company will be $7,661,875, $766,188
and $6,895,687, respectively. See "Underwriting."
The Securities being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject
to the approval of certain legal matters by counsel and to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or
modify the Offering and to reject any order in whole or in part. It is
expected that delivery of the certificates representing the Securities will
be made against payment therefor at the offices of the Representative in
New York City on or about ________________, 1996.
GAINES, BERLAND INC.
The date of this Prospectus is _______________, 1996
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company with the Commission
can be inspected without charge and copied at prescribed rates at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street N.W., Washington, D.C. 20549 and at the Commission's regional
offices located at Seven World Trade Center, Suite 1300, New York, New York
10048, and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661. The Company's Common Stock is quoted on the NASD OTC
Bulletin Board and certain of the Company's reports, proxy materials and
other information may be available for inspection at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on
Form SB-2 under the Securities Act of 1933, as amended ("Securities Act"),
with respect to the securities offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement,
certain parts of which have been omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the securities offered hereby, reference is made to the
Registration Statement, including the exhibits filed as part thereof and
otherwise incorporated therein. Copies of the Registration Statement and
the exhibits may be inspected, without charge, at the offices of the
Commission, or obtained at prescribed rates from the Public Reference
Section of the Commission at the address set forth above.
-------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT
OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF
THE COMMON STOCK OR WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. Each prospective investor is urged to read
this Prospectus in its entirety. At or prior to the consummation of the
Offering, the Company will consummate the following transactions (the
"Closing Transactions"): (i) a private placement to two investors of
1,600,000 shares of the Company's 11% cumulative redeemable convertible
preferred stock (the "11% Preferred Stock") and 500,000 warrants ("Private
Warrants") having the same terms and conditions as the Warrants for an
aggregate consideration of $3,500,000 (the "Private Placement"), (ii) the
acquisition of a 50% interest in two geothermal plants known as Steamboat 1
and 1A for $4,982,000 (including $50,000 as a downpayment which was
previously paid by the Company) (the "Steamboat Acquisition"), (iii) the
conversion of $500,000 of convertible subordinated debentures (the
"Convertible Debentures") into 125,000 shares of Common Stock and 125,000
Private Warrants (the "Debenture Conversion") and (iv) the exchange of the
57,500 currently outstanding shares of the Company's Series One Preferred
Stock for 205,000 shares of Common Stock (the "Preferred Stock Exchange").
The consummation of this Offering is a condition to the consummation of the
Closing Transactions and the consummation of the Closing Transactions is a
condition to the consummation of this Offering. Accordingly, if any of the
Closing Transactions is not consummated, this Offering will be terminated.
Except as otherwise indicated, all information in this Prospectus assumes
no exercise of the Underwriters' over-allotment option, the
Representative's Purchase Option, the Warrants offered hereby or any of the
Company's other outstanding options and warrants to purchase Common Stock.
All numbers and amounts specified herein reflect a one for forty reverse
stock split effective May 6, 1996, unless otherwise indicated.
THE COMPANY
U.S. Energy Systems, Inc. is engaged in the cogeneration and independent
power plant ("IPP") industries as a project developer, owner and operator.
Cogeneration is the process of producing two or more energy forms
(typically electricity and heat) simultaneously from the same fuel source.
A cogeneration facility is a power plant which produces electricity and,
simultaneously, recovers waste heat to use in place of heat which would
otherwise be made from conventional sources such as furnaces or boilers. An
IPP is a power plant which is not owned and operated by a regulated public
electric utility company. Frequently, IPPs are cogeneration facilities.
Federal and state laws have been promulgated to promote competition in the
sale of electric energy and to encourage cogeneration and independent power
facilities.
The Company's strategy is to seek projects requiring power production or
cogeneration and to become an equity participant with the owners,
developers or other involved parties in return for the Company's expertise
in the structuring, design, management and operation of the projects.
Often, at the time of the Company's initial involvement, such projects will
have advanced beyond the conceptualization stage to a point where the
engineering, management and project coordination skills the Company offers
are required to proceed. Projects in which the Company is involved or is
negotiating to become involved include (a) acquiring and operating existing
IPPs and cogeneration facilities in the United States, (b) developing,
constructing, and operating new IPPs and cogeneration facilities in the
United States and in certain overseas markets, (c) designing and
constructing cogeneration and IPPs for third party owners, and (d)
developing, constructing and selling energy-efficient products using
cogeneration technology such as non-electric air conditioning.
As a major element of its strategy, the Company intends to focus on
projects such as shopping malls, healthcare centers, food processing
centers, hotels and other facilities where large quantities of electricity,
air conditioning and hot water are required on a continuous and
simultaneous basis. The Company has signed an agreement with the owners of
Bluebeard's Castle, a large resort and commercial complex in St. Thomas,
USVI, to build and operate a 3 megawatt Cogeneration plant and a 120,000
gallon per day water recovery system in the resort's property. The Company
and the resort owners will own the cogeneration plant and water system and
share revenues equally. The Company has received initial funding from the
resort owners and the first of six engine generators is being installed
during the month of August. The Company has also entered into a joint
development agreement with the Cowen Investment Group ("Cowen") to develop,
build and operate cogeneration plants at shopping malls. Toward this end,
the joint venture has been in discussions with two of the major mall owners
in the United States. Savings from the cogeneration system would be shared
equally by the mall owners and the joint development company (in which the
Company will have a 40% profit interest). Under the joint development
agreement, the Company will perform all project development functions other
than securing the financing. See "Business - Current Operations and On-
Going Projects."
The Company has a history of losses substantially throughout its
existence and has not had revenues since emerging from bankruptcy in 1993.
To provide the Company with a source of revenues to enable it to expand its
business, concurrently with the Offering, the Company will acquire, for a
total investment of $4,982,000 (including $50,000 as a downpayment which
was previously paid by the Company), a 50% interest in two geothermal power
plants, known as Steamboat 1 and 1A, in Steamboat Hills, Nevada (the
"Steamboat Facilities"), which it will operate under a co-management
agreement with its partner. Electricity is produced in geothermal plants
by extracting steam from the earth to drive turbines, thereby generating
the electricity. Geothermal power is considered a highly environmentally
sound method of producing electricity, but it can only be produced in areas
where specific geological formations exist. A substantial portion of the
net proceeds of this Offering and the Private Placement will be used for
the Steamboat Acquisition. The Company regards the Steamboat Acquisition
as a key element toward achieving its objectives in the independent power
industry.
In January 1994, the Company purchased a 50% equity interest in a
limited liability company which owns a cogeneration facility in Lehi, Utah.
The Company expects the Lehi plant to be operational in the third quarter
of this fiscal year. However, the Company and its partners may decide to
sell a portion of the operating machinery and to purchase replacement
equipment, thereby increasing the plant's output capacity and efficiency.
If such sale and replacement is undertaken, the receipt of operational
revenues would be delayed until the second quarter of the next fiscal year.
As there are no contracts in effect at this time for the sale of power from
this plant, receipt of revenues will also be dependent upon the Company
entering into such contracts with customers. See "Business - Current
Operations and On-Going Projects - Lehi Cogeneration Project."
The Steamboat and Lehi projects enable the Company to participate in
what it believes is a growing market for independently produced electricity
in the western United States. Additionally, in 1994 the Company acquired a
50% interest in a partnership which owns and operates a cogeneration plant
which produces 2.5 megawatts of electricity and 25 million British Thermal
Units ("BTUs") for heating at Plymouth State College in Plymouth, New
Hampshire. The Plymouth facility provides 100% of the electrical and
heating requirements for the campus, which is part of the University of New
Hampshire system, under a twenty year contract.
The Company also intends to pursue projects which can utilize
alternative fuels or waste products, such as used motor oil and tires,
which provide environmental and ecological benefits and also provide
potential for earnings because of low fuel costs.
The Company was incorporated in the State of Delaware on May 6, 1981.
The executive offices of the Company are located at 515 North Flagler
Drive, Suite 202, West Palm Beach, Florida 33401. The telephone number is
(407) 820-9779.
CLOSING TRANSACTIONS
Concurrently with the closing of the Offering, the Company will
consummate the Private Placement pursuant to which it will sell (i)
1,600,000 shares of the 11% Preferred Stock to Enviro Partners, L.P.
("Enviro") for $3,100,000 and (ii) 500,000 Private Warrants to Energy
Management Corporation ("EMC") for $400,000. The 11% Preferred Stock will
be convertible on a share-for-share basis into Common Stock, will vote on a
share-for-share basis with the Common Stock, will have a preferential
dividend of 11% (payable in additional shares of 11% Preferred Stock during
the first two years and thereafter in cash or in shares of 11% Preferred
Stock at the option of the Company) and a liquidation preference of
$3,100,000 plus accrued dividends. The 11% Preferred Stock is redeemable
at the option of the Company at any time after four years from issuance and
is mandatorily redeemable ten years after issuance, at a redemption price
equal to the liquidation preference. See "Description of Securities."
Also concurrently with the closing of the Offering, the Company will
acquire a 50% interest in Steamboat Envirosystems, L.C. ("Steamboat LLC"),
which will purchase the Steamboat Facilities from Far West Electric Energy
Fund, L.P. (the current owner of Steamboat 1) and 1-A Enterprises (the
current owner of Steamboat 1-A). The Company will contribute a total of
$4,982,000 (including $50,000 as a downpayment which was previously paid by
the Company) to Steamboat LLC from the proceeds of the Offering and the
Private Placement to enable Steamboat LLC to complete the acquisition and
retire a mortgage and certain royalty interests to which the Steamboat
Facilities are subject. See "Use of Proceeds - Steamboat Acquisition" and
"Business - Current Operation and On-Going Projects - Steamboat Geothermal
Power Plants."
The Debenture Conversion and the Preferred Stock Exchange will also
occur concurrently with the Closing of the Offering. These transactions,
combined with the repayment of debt to be made with a portion of the
proceeds of the Offering and the Private Placement, will result in a
substantial reduction of the Company's indebtedness. See "Use of Proceeds"
and Pro Forma Financial Statements.
THE OFFERING
Securities Offered . . . . 1,625,000 shares of Common Stock and
1,625,000 Warrants. Each Warrant
entitles the holder to purchase one
share of Common Stock for $4.00 during
the four-year period commencing one year
from the date of this Prospectus. Each
Warrant is redeemable at a price of $.01
per Warrant at any time after the
Warrants become exercisable, upon not
less than 30 business days prior written
notice, if the last sale price of the
Common Stock on Nasdaq has been at least
150% (initially $6.00) of the then-
exercise price of the Warrants for the
20 consecutive trading days ending on
the third day prior to the date on which
the notice of redemption is given. See
"Description of Securities."
Common Stock outstanding
Prior to the Offering . . 439,650 shares
Common Stock to be outstanding
After the Offering . . . 2,394,650 shares(1)(2)
----------------
(1) Includes (i) 125,000 shares of Common Stock to be issued in the
Debenture Conversion and (ii) 205,000 shares of Common Stock
to be issued in the Preferred Stock Exchange.
(2) Does not include an aggregate of 4,594,975 shares of Common Stock
reserved and to be reserved for issuance following completion
of the Offering including (i) 291,850 shares issuable on exercise
of currently outstanding options and warrants, (ii) 2,575,000
shares issuable on exercise of the Warrants, the Representative's
Purchase Option and the Warrants issuable on exercise of the
Representative's Purchase Option and the Private Warrants
being issued in the Private Placement and the Debenture Conversion,
(iii) 1,600,000 shares issuable upon conversion of 11% Preferred
Stock to be issued to Enviro, and (iv) 128,125 shares issuable
upon conversion of Convertible Debentures which will remain
outstanding after the Offering.
<PAGE>
Use of Proceeds . . . . . . The net proceeds to be received from the
sale of the Securities offered hereby
are estimated to be approximately
$5,425,000 (approximately $6,275,000 if
the Underwriters' over-allotment option
is exercised in full). Such net
proceeds and the $3,500,000 in proceeds
from the Private Placement will be used
as follows: (i) $4,932,000 for the
Steamboat Acquisition, (ii) $2,626,000
to repay indebtedness (including $50,000
which was borrowed to make a downpayment
on the Steamboat Acquisition) and (iii)
the balance for working capital. See
"Use of Proceeds" and "Business."
Proposed Nasdaq SmallCap
Market Symbols . . . . . Common Stock: USEE
Warrants: USEEW
RISK FACTORS
The securities offered hereby are speculative and involve a high degree
of risk and substantial dilution. Among the principal risks to be
considered are: (i) the Company has incurred and continues to incur
substantial losses, (ii) the Company's profitability will be dependent, to
a significant extent, on the continued successful operations of the
Steamboat Facilities, (iii) prior to this Offering, the Company has
significant working capital and stockholders' equity deficits, and (iv) the
Company may require additional capital to undertake future projects. See
"Risk Factors" and "Dilution."
SUMMARY FINANCIAL DATA
(In thousands, except per share data)
The Summary Financial Information set forth below is derived from the
historical financial statements appearing elsewhere in this Prospectus and
should be read in conjunction with such financial statements, including the
notes thereto. The Pro Forma Statements of Operations data for the year
ended January 31, 1996 and the three months ended April 30, 1996 give
effect to the acquisition of a 50% interest in Steamboat LLC as if it had
occurred at the beginning of the periods. The Pro Forma Balance sheet data
as at April 30, 1996 give effect to the Offering and to the Closing
Transactions as if such transactions had occurred on such date. See Pro
Forma Financial Statements, "Use of Proceeds" and historical financial
statements.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
YEAR ENDED YEAR ENDED
JANUARY 31, 1996 JANUARY 31, 1995
---------------- ----------------
HISTORICAL PRO FORMA HISTORICAL
USE USE/SB (1) USE
---------- ---------- ----------
<S> <C> <C> <C>
Income (loss) from
Joint Ventures . . $ (17) $ 1,863 $ (76)
Operating expenses . (853) (853) (1,006)
Interest expense (2) (604) (116) (319)
---- ---- ----
Income (loss) before
income taxes . . . (1,474) 894 (1,401)
Income taxes (3) . . -- (292) --
----- ----- ------
Income (loss) before
extraordinary items (1,474) 602 (1,401)
Preferred dividends (21)(4a) (341)(4b)
----- ----- -------
Income (loss)
available for
common stockholders (1,495) 261 (1,401)
Net (loss) per share
of Common Stock . . (3.41) (3.38)
Pro forma net income
per share of
Common Stock (5) . 0.14
----
Shares used in
computing net
income per share of
Common Stock (5) . 483,773 1,813,851 415,022
------- --------- -------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
THREE MONTHS
THREE MONTHS ENDED ENDED
APRIL 30, 1996 APRIL 30, 1995
------------------ --------------
HISTORICAL PRO FORMA HISTORICAL
USE USE/SB (1) USE
---------- ---------- --------------
<S> <C> <C> <C>
Income (loss) from
Joint Ventures . . $ (39) $ 510 $ (34)
Operating expenses . (221) (221) (202)
Interest expense (2) (170) (29) (99)
---- --- ---
Income (loss) before
income taxes . . . (430) 260 (335)
Income taxes (3) . . -- (53) --
------ ---- ------
Income (loss) before
extraordinary items (430) 207 (335)
Preferred dividends (14)(4a) (85)(4b)
--- --- -------
Income (loss)
available for
common stockholders (444) 122 (335)
Net (loss) per share
of Common Stock . . (1.01) (0.77)
Pro forma net income
per share of
Common Stock (5) . 0.06
----
Shares used in
computing net
income per share of
Common Stock (5) . 439,622 2,013,936 436,167
------- --------- -------
</TABLE>
BALANCE SHEET DATA:
APRIL 30, 1996
--------------------------
HISTORICAL PRO FORMA(6)
---------- ------------
Current assets......... $ 3 $ 1,420
Investment in joint
ventures............. 1,834 6,819
Total assets........... 1,998 8,239
Current liabilities.... 2,345 977
Long-term liabilities.. 2,812 1,342
11% Preferred Stock.... 3,100
Working capital........ (2,342) 433
Stockholders' equity
(deficit)............. $(3,159) $ 2,820
---------------
(1) Includes (a) adjusted operating results of the Steamboat
Facilities for the year ended December 31, 1995, and the three
months ended March 31, 1996, (b) elimination of deferred note
payable discount, elimination of interest payments on notes
payable and bridge loans to be repaid from the proceeds of this
Offering, and (c) elimination of interest on $500,000 principal
amount of Convertible Debentures converted into Common Stock and
Private Warrants, with the remainder paying interest at 9% per
annum.
(2) Adjusted for reduction of debenture interest to 9%, and removal
of interest costs on bridge loans and notes payable which will
have been paid from the proceeds of this Offering. Also adjusts
for the elimination of certain unamortized deferred costs of
these notes and loans.
(3) A pro forma provision for income taxes was calculated after
providing for a limit on the net operating loss deduction
assuming an ownership change had taken place at the beginning of
the fiscal year and the beginning of the three month period ended
April 30, 1996.
(4a) Provision for dividends on Series One Preferred Stock.
(4b) Provision for dividends on 11% Preferred Stock to be sold to
Enviro Partners, L.P. for $3,100,000. Dividends are payable in
11% Preferred Stock.
(5) Pro forma net income per share is based on the weighted average
number of shares outstanding, the shares issued in the Debenture
Conversion and the Preferred Stock Exchange and the dividend on
the 11% Preferred Stock. Assumed exercise of options and
warrants and the conversion of the 11% Preferred Stock have not
been reflected as they would be anti-dilutive.
(6) Reflects the sale of Securities offered hereby, the Private
Placement, the Debenture Conversion, the Preferred Stock Exchange
and the anticipated use of proceeds for the Steamboat Acquisition
and the repayment of indebtedness, including accrued interest to
September 15, 1996, as contemplated in "Use of Proceeds."
RISK FACTORS
Prospective purchasers of the securities offered hereby should carefully
consider the following factors, as well as the information contained
elsewhere in this Prospectus.
HISTORY OF LOSSES; WORKING CAPITAL AND STOCKHOLDERS' EQUITY DEFICITS;
AUDITORS' OPINION WITH EXPLANATORY PARAGRAPH
The Company has a history of losses substantially throughout its
existence and has not had revenues since emerging from bankruptcy in 1993.
To date, the Lehi power plant has not been operational. See "Current
Operations and On-Going Projects." The Company believes that there will be
profit and cash flow to the Company starting in the third quarter of this
fiscal year. Operations would be delayed until the second quarter of the
next fiscal year if the Company decides to sell some of its operating
machinery and to replace it by purchasing equipment that would ultimately
increase output capacity and efficiency. The Plymouth cogeneration plant
has not provided revenues or cash flow to the Company because of costs
related to equipment adjustments and operational reserves required by the
terms of the financing. However, revenues and cash flow are expected to
commence in the third quarter of the year.
For the years ended January 31, 1996 and 1995, the Company incurred net
losses of $1,391,000 and $1,316,000 respectively, and for the three months
ended April 30, 1996, the Company incurred a net loss of $430,000. At
April 30, 1996, as a result of these accumulated losses, the Company had a
working capital deficit of $2,342,000 and a stockholders' equity deficit of
$3,159,000. There can be no assurance that the Company will ever be able
to generate cash flows sufficient to meet its obligations and sustain
operations. The independent auditors' report for the fiscal year ended
January 31, 1996 states that these factors raise substantial doubt about
the Company's ability to continue as a going concern. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and the Company's Financial Statements.
LIMITED AVAILABLE CAPITAL; POSSIBLE NEED FOR ADDITIONAL FINANCING
While the Company believes that the proceeds from this Offering and the
Private Placement, together with anticipated revenues, will be sufficient
to meet its anticipated cash requirements for the next twelve months, there
is no assurance in this regard. The Company's continued existence will be
dependent upon its ability to generate cash flows from its operations
sufficient to meet its obligations as they become due. Unless the Company
can generate cash flows from operations to fund its working capital needs,
the Company will be required to obtain additional equity or debt financing
to continue to operate its business. If the Company should require
additional capital, there can be no assurance that such capital will be
available to the Company, or if available, it would be on terms acceptable
to the Company. If additional funds are raised by issuing equity
securities, significant dilution to existing stockholders may result. Any
inability by the Company to obtain additional financing, if required, will
have a material adverse effect on the operations of the Company, including
the possible cessation of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and "Use of Proceeds."
PRIOR BANKRUPTCY
In late 1986, the Company, then called Cogenic Energy Systems, Inc., was
impaired by a $2,100,000 judgment resulting from a contractual dispute.
Although ultimately settled, the protracted court case caused delays in
planned expansion and sales and led to a serious cash shortage. In mid-
1989, the Company filed for protection under Chapter 11 of the Bankruptcy
Code and a Plan of Reorganization was confirmed by the bankruptcy court in
1993. The Plan required the payment of outstanding taxes. Of those taxes,
$110,000 was required to be paid upon the merger of Utility Systems
Florida, Inc. ("USF") into the Company (see "Business - The Company"), but
has been deferred pursuant to a verbal agreement with the Internal Revenue
Service as long as the Company continues to meet its remaining pre-
bankruptcy tax obligations ($373,000 at July 31, 1996), which it is
amortizing on a monthly basis over a six year period. The Company does not
intend to pay this deferred $110,000 amount out of the proceeds of this
Offering but to continue the deferral until either the Internal Revenue
Service requires payment or the Board of Directors deems cash flow to be
satisfactory.
EMERGING INDUSTRY; UNCERTAINTY OF MARKET ACCEPTANCE
Although the cogeneration and IPP industries have been in existence for a
number of years, they are still in their development stages. As is
typically the case in an emerging industry, demand and market acceptance
for their products and services are subject to a high level of uncertainty.
The Company has not yet commenced significant marketing activities and
currently has limited marketing experience and limited financial, personnel
and other resources to undertake extensive marketing activities.
PROJECT DEVELOPMENT RISKS
It is anticipated that certain types of projects, if undertaken, will
require the Company to raise additional capital and there can be no
assurance that such capital will be available on acceptable terms. The
Company's ability to develop new projects is also dependent on a number of
other factors outside its control, including obtaining power agreements,
governmental permits and approvals, fuel supply and transportation
agreements, electrical transmission agreements, site agreements and
construction contracts, and there can be no assurance that the Company will
be successful in doing so. Project development is subject to environmental,
engineering and construction risks. If additional financing is not
available on acceptable terms, the Company may have to cancel or defer new
projects. Further, projects which are successfully developed may still
face risks inherent in start-up businesses, such as lack of market
acceptance.
POTENTIAL REDUCTION IN REVENUE FROM STEAMBOAT GEOTHERMAL PROJECTS
The current power purchase agreements with Sierra Pacific Power Company
("Sierra") provide for price adjustments in December 1996 for Steamboat 1
and in December 1998 for Steamboat 1A. Under the contracts, Steamboat LLC
is required to sell power to Sierra for additional 10-year periods at the
then-prevailing short-term avoided costs for electricity for Sierra. If
the price adjustments were to be made now, the new prices based on the
contract formula would be substantially less than the existing contract
rates, although Management believes that revenues generated will still be
in excess of the costs of production. There is no assurance that future
prices at which the electricity generated by the Steamboat Facilities may
be sold will provide an attractive or economic return. The Company will
pay $1,000,000 into Steamboat LLC for the purpose of buying out certain
royalty interests and to fund certain improvements to the Steamboat
Facilities. While the Company and its partners believe that these
interests can be bought out, there are no agreements with the royalty
owners as yet. Should the Company not be able to come to an agreement with
any of them, the expected earnings of Steamboat LLC will be adversely
affected. See "Business - Cogeneration and Independent Power Production"
and "Management's Discussion and Analysis of Financial Condition and Plan
of Operation - Plan of Operation."
RELIANCE ON PRESIDENT
The Company will be highly dependent upon its executive officers and key
employees, particularly its President, Richard Nelson. The unexpected loss
of the services of Mr. Nelson could have a detrimental effect on the
Company. Although the Company plans to add additional full-time employees
after the Offering, the Company presently has only three current full-time
employees and contracts with independent contractors for the conduct of
certain engineering, accounting, administrative and legal functions.
GENERAL OPERATING RISKS
The operation of power generation facilities involves many risks,
including the breakdown or failure of power generation equipment,
transmission lines or other equipment or processes and performance below
expected levels of output or efficiency. Although the facilities in which
the Company is or will be involved contain certain redundancies and back-up
mechanisms, there can be no assurance that any such breakdown or failure
would not prevent the affected facility from performing under applicable
power agreements. The development and operation of geothermal energy
resources are subject to risks and uncertainties similar to those
experienced in the development of oil and gas resources. The successful
exploitation of a geothermal energy resource ultimately depends upon the
heat content of the extractable fluids, the geology of the reservoir, the
total amount of recoverable reserves, and operational factors relating to
the extraction of fluids, including operating expenses, energy price
levels, and capital expenditure requirements relating primarily to the
drilling of new wells. In connection with the development of a project,
the Company estimates the productivity of the geothermal resource and the
expected decline in such productivity. The productivity of a geothermal
resource may decline more than anticipated, resulting in insufficient
recoverable reserves being available for sustained generation of the
electrical power capacity desired. See "Business - Current Operations and
On-Going Projects."
GOVERNMENT REGULATION
Under present federal law, the Company is not and will not be subject to
regulation as a holding company under the Public Utilities Holding Company
Act ("PUHCA") as long as each power plant in which it has an interest is a
qualifying facility ("QF") under the Public Utility Regulation Policy Act
of 1978 ("PURPA"). A QF that is a cogeneration facility must produce not
only electricity but also useful thermal energy for use in an industrial or
commercial process or heating or cooling applications in certain
proportions to the facility's total energy output and must meet certain
energy efficiency standards. Under the Public Utility Regulatory Policy
Act ("PURPA"), a regulated public electric utility company must purchase
electricity at its avoided cost from an IPP which has QF status. QF status
is granted to IPP's which use fossil fuel in a manner which allows for
recovery and use of a certain percentage of otherwise rejected heat thereby
achieving a higher degree of fuel efficiency. QF status is also granted to
IPP's which use renewable energy sources such as geothermal, hydro, solar,
wind, and waste products without regard to heat recovery. An IPP using
fossil fuel, which loses its ability to use recovered heat, could fall
below the efficiency standards and thereby lose its QF status. The
regulated public electric utility company, which may have been required to
purchase electricity from the IPP, could thereafter refuse to purchase such
electricity. IPP's which have QF status, and which are not fossil fuel
driven, cannot lose QF status. See "Business - Government Regulation."
The construction and operation of power generation facilities require
numerous permits, approvals and certificates from appropriate federal,
state and local governmental agencies, as well as compliance with
environmental protection legislation and other regulations. While the
Company believes that the projects in which it is involved have the
requisite approvals for existing operations and are operated in accordance
with applicable laws, they remain subject to a varied and complex body of
laws and regulations that both public officials and private individuals may
seek to enforce. There can be no assurance that new or existing laws and
regulations which would have a materially adverse affect would not be
adopted or revised, nor can there be any assurance that the Company will be
able to obtain all necessary licenses, permits, approvals and certificates
for proposed projects or that completed facilities will comply with all
applicable permit conditions, statutes or regulations. In addition,
regulatory compliance for the construction of new facilities is a costly
and time consuming process, and intricate and changing environmental and
other regulatory requirements may necessitate substantial expenditures for
permitting and may create a significant risk of expensive delays or
significant loss of value in a project if the project is unable to function
as planned due to changing requirements or local opposition.
ENVIRONMENTAL RISKS
As is the case in all power projects, strict environmental regulations
established by federal, state and local authorities involving air and other
emissions must be met. While the Company takes every precaution to insure
that such regulations are met at all times, and projects are not entered
into which do not or cannot meet such regulations, there is no assurance
that such regulations can always be met. Should a condition occur in which
emissions standards at a specific project fall beneath allowable standards,
there could be costs involved in remediating such conditions. Additionally,
as with all industrial sites, there are standards for the safe handling of
fuels and chemicals which must be met. Again, the Company takes every
precaution to insure such standards are met. Exigencies may occur - a fuel
spillage for example - which would require remediation with attendant
costs.
Areas in which the Company is acquiring geothermal projects are subject
to frequent low-level seismic disturbances, and more significant seismic
disturbances are possible. While such power generation facilities are
built to withstand relatively significant levels of seismic disturbance,
and the Company believes it will be able to maintain adequate insurance
protection, there can be no assurance that earthquake, property damage or
business interruption insurance will be adequate to cover all potential
losses sustained in the event of serious seismic disturbances or that such
insurance will continue to be available on commercially reasonable terms.
UNCERTAINTY OF COMPETITIVE ENVIRONMENT
In addition to competition from electric utilities in the markets where
the projects are located, the Company also faces competition from
approximately 150 companies currently involved in the cogeneration and
independent power market. Most of these companies are larger and better
financed than the Company. Although the Company believes that it will be
entering segments of the marketplace where it will not face extensive
competition, there is no assurance that it will be able to do so, and it
will thereby be disadvantaged if it has to compete with the larger and
better financed companies. The entire industry also may face competition
from existing investor owned utility companies.
INSURANCE
Although the Company maintains insurance of various types to cover many
of the risks that apply to its operations, including $2,000,000 of general
liability insurance as well as separate insurance for each project, the
Company's planned insurance will not cover every potential risk associated
with its operations. The occurrence of a significant adverse event, the
risks of which are not fully covered by insurance, could have a material
adverse effect on the Company's financial condition and results of
operations. Moreover, no assurance can be given that the Company will be
able to maintain adequate insurance in the future at rates it considers
reasonable.
SUBSTANTIAL PORTION OF PROCEEDS TO PAY DEBTS; POTENTIAL CONFLICTS OF
INTEREST BETWEEN THE COMPANY AND CERTAIN OF ITS OFFICERS
A substantial amount of the net proceeds of this Offering and the Private
Placement will be used to repay the Company's current indebtedness. A
portion of such repayment will benefit directly or indirectly several of
the Company's officers. In order to induce all holders of Convertible
Debentures to convert at least one-third of their Convertible Debentures,
the Company agreed to reduce the conversion rate from $16 per share to the
same price as that being offered to the public, $4.00 per share. There are
26 holders of Convertible Debentures of whom Theodore Rosen, Chairman, is
the only officer or director. Mr. Rosen, who holds $125,000 principal
amount of Convertible Debentures, will receive $26,200 in deferred
interest, accrued through September 15, 1996, in deferred interest and
obtain the same favorable conversion rate as that afforded to the other
holders of Convertible Debentures. Messrs. Richard Nelson, Rosen, and
Ronald Moody, the Company's President, Chairman of the Board and Director,
respectively, will benefit by the repayment to them of $30,376, $30,284 and
$90,814 respectively, (including accrued interest to September 15, 1996)
for a loan made by them to enable the Company to obtain its interest in the
co-generation facility at Plymouth State College in New Hampshire.
Additionally, Messrs. Nelson and Rosen have each deferred portions of their
salaries and $219,250 and $162,500, respectively, will be owed to them as
of September 15, 1996. Such amounts will not be paid from net proceeds of
this Offering, but from cash flow, if and when, in the opinion of the Board
of Directors, cash flow is sufficient. Messrs. Nelson and Rosen will also
benefit from the release of their pledges of an aggregate of 97,250 shares
of the Company's Common Stock owned by them in connection with certain
bridge loans made to the Company by Anchor Capital Company, LLC ("Anchor")
and Solvation, Inc. ("Solvation"), which loans are being repaid with a
portion of the proceeds. See "Use of Proceeds" and "Certain Transactions."
CONCENTRATION OF VOTING POWER
Following the Offering and the Private Placement, Enviro will own
1,600,000 shares of 11% Preferred Stock, which votes with and is
convertible into, on a share-for-share basis, the Common Stock.
Accordingly, Enviro will hold approximately 40.1% of the combined voting
power of the 11% Preferred Stock and Common Stock immediately after the
Offering. The 11% Preferred Stock, as a class, will have the right to
designate two directors (the "Designated Directors") out of the five
members of the Board of Directors, and no action may be taken by the Board
of Directors without the approval of at least one of the Designated
Directors. Therefore, Enviro will have the ability to influence or control
most of the Company's actions. This concentration of voting power may also
have the effect of delaying or preventing any change of control of the
Company not approved by Enviro. If the 500,000 Private Warrants held by
EMC were exercised, the combined voting power of Enviro and EMC -- entities
that are indirectly owned by different members of the same family -- would
represent 46.7% of total voting power, assuming no other issuances of
Common Stock prior to such exercise.
LIMITED MARKET FOR THE COMMON STOCK; OFFERING PRICES DETERMINED BY
NEGOTIATION
Prior to the Offering, there has been a limited trading market for the
Common Stock and no trading market for the Warrants. Although the Common
Stock has been sporadically traded on the OTC Bulletin Board, and the
Common Stock and Warrants will trade on the Nasdaq SmallCap Market upon
conclusion of the Offering, there can be no assurance that an active public
trading market for the Common Stock or Warrants will develop and continue
after the Offering. The initial offering prices of the Securities in the
Offering have been determined by negotiations between the Company and the
Representative and may bear no relation to the market prices of the Common
Stock and Warrants after the Offering. See "Underwriting."
EFFECT OF WARRANTS, OPTIONS AND CONVERTIBLE SECURITIES OUTSTANDING AFTER
OFFERING
The Company has outstanding options and warrants which provide for the
purchase of an aggregate of 291,850 shares of Common Stock at prices
ranging from $4.00 to $10.00 per share. The Warrants, if exercised, would
result in the issuance of 1,625,000 shares of Common Stock. The
Underwriters' over-allotment option, if fully exercised, including the
related Warrants, would result in the issuance of 487,500 shares of Common
Stock. The Representative's Purchase Option, if fully exercised, including
the related Warrants, would result in the issuance of 325,000 shares of
Common Stock. The 11% Preferred Stock to be issued will be convertible
into 1,600,000 shares of Common Stock. See "Description of Securities -
11% Preferred Stock." The Private Warrants to be issued, if exercised,
would result in the issuance of 625,000 shares of Common Stock. See
"Description of Securities - Warrants." An additional 128,125 shares of
Common Stock are issuable upon conversion of remaining Convertible
Debentures. These issuances of Common Stock, totalling 5,082,475 shares,
would have a dilutive effect on the Company's stockholders by decreasing
their percentage ownership in the Company. Moreover, the holders of such
securities would be most likely to exercise or convert such securities at a
time when the Company could obtain capital by a new offering of securities
on terms more favorable than those provided by such securities.
Consequently, the terms on which the Company could obtain additional
capital may be adversely affected. See "Capitalization" and
"Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
This Offering involves an immediate dilution of approximately $2.82 per
share of Common Stock, (approximately 71% of the offering price of the
Common Stock) between the offering price per share of the Common Stock and
the pro forma net tangible book value per share of the Common Stock
immediately after the completion of this Offering and the Closing
Transactions. See "Dilution."
REGISTRATION RIGHTS
This Registration Statement includes a shelf registration (the "Shelf
Registration") to enable Enviro to sell to the public the 1,600,000 shares
of 11% Preferred Stock and the underlying shares of Common Stock into which
the shares of 11% Preferred Stock are convertible. Enviro has agreed that
it will not sell such shares for a period of nine months from the closing
of the Secondary Offering without the Representative's consent. The Shelf
Registration also covers the 500,000 Private Warrants being acquired by EMC
and the underlying shares of Common Stock issuable on the exercise of such
Private Warrants. EMC has given Theodore Rosen, the Company's Chairman of
the Board, a right of first refusal to purchase such Private Warrants if at
any time during the nine month period following the date of this Prospectus
EMC decides to sell such Private Warrants. Mr. Rosen has agreed with the
Representative that he will exercise such right of first refusal in the
event EMC decides to sell the Private Warrants during such nine month
period and that any Private Warrants purchased by Mr. Rosen will not be
sold by him until at least 13 months from the date of this Prospectus. The
Shelf Registration also enables the holders of the 205,000 shares of Common
Stock to be issued in the Preferred Stock Exchange to sell their shares.
The 125,000 shares of Common Stock to be issued in the Debenture Conversion
and the 11,400 shares of Common Stock previously issued in the acquisition
of Plymouth Cogeneration Limited Partnership ("Plymouth Cogeneration") are
not included in the Shelf Registration, however they are available for sale
in accordance with Rule 144. The Common Stock to be issued in the
Preferred Stock Conversion is subject to an agreement with the
Representative regarding restrictions on resale. See "Shares Eligible for
Future Sale - Registration Rights."
POSSIBLE RULE 144 SALES
Upon consummation of the Offering, the Company will have outstanding
2,394,650 shares of Common Stock. All of the 1,625,000 shares sold in the
Offering (assuming no exercise of the Underwriters' over-allotment option),
will be freely transferable by persons other than affiliates (as defined in
regulations under the Securities Act) without restriction or further
registration under the Securities Act.
Of the 439,650 shares of Common Stock outstanding prior to the Offering
64,650 are "restricted securities" within the meaning of Rule 144 under the
Securities Act and may not be sold in the absence of registration under the
Securities Act, unless an exemption from registration is available,
including the exemption provided by Rule 144. Under Rule 144 as currently
in effect, of such 64,650 shares, 35,000 shares are currently eligible for
sale, an additional 8,750 shares will be eligible for such sale in or after
August 1996, and the remaining 21,400 shares will be eligible for such sale
in or after June 1998, subject in each instance to the volume limitations
of the Rule. The 205,000 shares of Common Stock to be issued in the
Preferred Stock Exchange and the 125,000 shares of Common Stock to be
issued upon the Debenture Conversion will be restricted securities but may
be resold pursuant to the shelf registration thereof. Anchor will not sell
the 205,000 shares of Common Stock it will receive in the Preferred Stock
Exchange without the Representative's prior written approval for a period
of 9 months from the date of this Prospectus. The foregoing does not give
effect to any shares issuable on exercise of outstanding options and
warrants. The effect of the offer and sale of such shares may be to
depress the market price for the Company's Common Stock. See
"Underwriting" and "Shares Eligible for Future Sale - Possible Rule 144
Sales."
POTENTIAL ADVERSE EFFECT OF WARRANT REDEMPTION
The Warrants may be called for redemption by the Company once they become
exercisable and the Representative has given its prior consent at a
redemption price of $.01 per Warrant upon not less than 30 business days'
prior written notice if the last sale price of the Common Stock has been at
least $6.00 (150% of the exercise price of the Warrants) on all 20 of the
last trading days ending on the third day prior to the date on which notice
is given. Notice of redemption of the Warrants could force the holders to
exercise the Warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so, to sell the Warrants at the current
market price when they may otherwise wish to hold the Warrants, or to
accept the redemption price, which would be substantially less than the
market value of the Warrants at the time of redemption. The Company is
required to maintain the effectiveness of a current registration statement
relating to the exercise of the Warrants and, accordingly, the Company will
be unable to redeem the Warrants unless there is a currently effective
prospectus and registration statement under the Securities Act covering the
issuance of underlying securities. Also, lack of qualification or
registration under applicable state securities laws may mean that the
Company would be unable to issue securities upon exercise of the Warrants
to holders in certain states, including at the time when the Warrants are
called for redemption. See "Description of Securities - Warrants."
AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER
PROVISIONS
The Company's Certificate of Incorporation authorizes the issuance of
Preferred Stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without stockholder approval, to issue
Preferred Stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of
holders of the Company's Common Stock. In the event of issuance, the
Preferred Stock could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change in control of the Company,
which could have the effect of discouraging bids for the Company and,
thereby, preventing stockholders from receiving a premium for their shares
over the then-current market prices. See "Description of Securities."
The Delaware General Corporation Law includes provisions which are
intended to encourage persons considering unsolicited tender offers or
other unilateral takeover proposals to negotiate with the Company's
directors rather than pursue non-negotiated takeover attempts. These
existing takeover provisions may have a significant effect on the ability
of a stockholder to benefit from certain kinds of transactions that may be
opposed by the incumbent directors. See "Description of Securities - Anti-
Takeover Provisions."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS
The Company will be able to issue shares of its Common Stock upon
exercise of the Warrants only if there is then a current prospectus
relating to the issuance of such Common Stock and only if such Common Stock
is qualified for sale or exempt from qualification under applicable
securities laws of the jurisdictions in which the various holders of the
Warrants reside. The Company has undertaken to keep current a prospectus
which will permit the purchase and sale of the Common Stock underlying the
Warrants, but there can be no assurance that the Company will be able to do
so. Although the Company intends to seek to qualify for sale the shares of
Common Stock underlying the Warrants in those states in which the
securities are to be offered, no assurance can be given that such
qualification will be obtained. The Warrants may be deprived of any value
and the market for the Warrants may be limited if a current prospectus
covering the Common Stock issuable upon the exercise of the Warrants is not
kept effective or if such Common Stock is not qualified or exempt from
qualification in the jurisdictions in which the holders of the Warrants
then reside. See "Description of Securities - Warrants."
QUALIFICATION REQUIREMENTS FOR NASDAQ SECURITIES; RISKS OF LOW-PRICED
SECURITIES
Application has been made for quotation of the Common Stock on the Nasdaq
SmallCap Market, which is administered by the National Association of
Securities Dealers, Inc. (the "NASD"). For the Company's securities to be
eligible for inclusion on Nasdaq, the Company must, among other things,
maintain at least $2,000,000 in total assets and have at least $1,000,000
of capital and surplus and the bid price of the Common Stock must be at
least $1.00 per share, provided, however, that, if the Company's stock
falls below such minimum bid price, it will remain eligible for continued
inclusion if the market value of the public float is at least $1,000,000
and the Company has at least $2,000,000 in capital and surplus. Although
the Company anticipates satisfying the listing criteria following the
consummation of the Offering, there can be no assurance that it will be
able to continue to meet the required standards once it is listed. If it
should fail to meet one or more of such standards, its securities would be
subject to deletion from Nasdaq. If this should occur, trading, if any, in
the Common Stock and the Warrants would then continue to be conducted in
the over-the-counter market on the OTC Bulletin Board, an NASD-sponsored
inter-dealer quotation system, or in what are commonly referred to as "pink
sheets." As a result, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the market value of, the
Company's securities. In addition, if the Company's securities cease to be
quoted on Nasdaq and the Company fails to meet certain other criteria, they
would be subject to Commission rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other
than established customers and accredited investors. For transactions
covered by these rules, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. The broker-dealer also must
provide the customer with current bid and offer quotations for the
securities, the compensation of the broker-dealer and its salesperson in
the transaction, and monthly account statements showing the market value of
each such security held in the customer's account. In addition, prior to
effecting a transaction in such a security the broker-dealer must deliver a
standardized risk disclosure document prepared by the Commission that
provides information about low-priced securities and the nature and level
of risks in the market for such securities. Consequently, if the Company's
securities were no longer quoted on Nasdaq, these rules may affect the
ability of broker-dealers to sell the Company's securities and the ability
of purchasers in this Offering to sell their securities in the secondary
market.
LIMITATIONS ON REPRESENTATIVE'S MARKET MAKING ACTIVITIES
The Representative has the right to act as the Company's agent in
connection with any future solicitation of warrantholders to exercise their
Warrants. Unless granted an exemption by the Commission from Rule 10b-6
promulgated under the Exchange Act, the Representative will be prohibited,
during certain periods when the Warrants are exercisable, from engaging in
any market-making activities with regard to the Company's securities until
the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Representative
may have to receive a fee for soliciting the exercise of the Warrants. The
Warrants are not exercisable until one year after the date of this
Prospectus. As a result, the Representative may be unable to continue to
provide a market for the Company's securities during certain periods while
the Warrants are exercisable. Such limitations could impair the liquidity
and market prices of the Common Stock and Warrants.
DIVIDENDS UNLIKELY
The Company has never declared or paid dividends on its Common Stock and
currently does not intend to pay dividends in the foreseeable future. The
payment of dividends in the future will be at the discretion of the Board
of Directors and will be payable only after payment of dividends on the
Preferred Stock. See "Dividend Policy."
LIMITED LIABILITY OF DIRECTORS
The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be liable to the
corporation or its stockholders for expenses incurred in derivative or
third party actions arising from a breach of their fiduciary duty as
directors, except in certain circumstances. Accordingly, except in such
circumstances, the Company's directors will not be liable to the Company or
its stockholders for breach of such duty.
USE OF PROCEEDS
The net proceeds to be received from the sale of the securities offered
hereby are estimated to be approximately $5,425,000 (approximately
$6,275,000 if the Underwriters' over-allotment is exercised in full). The
proceeds from the Offering together with $3,500,000 obtained in the Private
Placement will be used as follows and are more fully described below:
Steamboat Acquisition:
For purchase of Steamboat
Facilities . . . . . . . . . . . $1,575,000
Less deposit already paid . . . . . (50,000)
---------
1,525,000
Mortgage purchase and
contribution . . . . . . . . . . 2,407,000
Additional contribution for
purchase of royalty
interests and capital
expenditures to fund
improvements to Steamboat 1,000,000
Facilities . . . . . . . . . . . ---------
Total Steamboat Acquisition . . . . . 4,932,000 55.3%
Repayment of debt, with interest to
September 15, 1996:
Plymouth loan . . . . . . . . . . $1,209,000
Anchor bridge loan . . . . . . . 756,000
Solvation bridge loan . . . . . . 263,000
Other bridge loan . . . . . . . . 62,000
Accrued interest on debentures . 336,000
-------
Total repayment of debt . . . . . . . 2,626,000 29.4%
---------
Total proceeds used . . . . . . . . . 7,558,000
Balance to working capital . . . . . 1,367,000 15.3%
---------
Total proceeds as above . . . . . . . $8,925,000 100.0%
--------- -----
See "Business." Until the net proceeds of the Offering are fully utilized,
the Company intends to invest such proceeds in short-term investment grade
interest-bearing obligations.
STEAMBOAT ACQUISITION
A limited liability company, Steamboat LLC, will be formed to acquire two
existing, income producing geothermal power projects known as the
Steamboat Facilities, located in Steamboat Hills, Nevada. Steamboat LLC
will acquire the Steamboat Facilities from Far West Electric Energy Fund
L.P. and 1-A Enterprises subject to a mortgage (the "Mortgage") held by of
an institutional lender and certain net revenue or royalty interests in
steam extraction rights. The Company will obtain a 50% interest in
Steamboat LLC by contributing to Steamboat LLC the $1,575,000 cash purchase
price (less $50,000 down payment previously paid by the Company) for the
Steamboat Facilities. The Mortgage, on which the last quarterly principal
payment was made on July 20, 1996, will have a face value of $4,196,000 at
September 15, 1996 net of an escrowed reserve, and will be acquired by the
Company for $2,407,000 and contributed to Steamboat LLC. An additional
$1,000,000 in cash will be contributed by the Company to Steamboat LLC to
allow the Company to acquire certain of the royalty interests (leaving
outstanding only a royalty of 10% of power revenues of the Steamboat
Facilities) and to fund certain improvements to the Steamboat Facilities.
Before sharing net income from Steamboat LLC with its 50% partner, the
Company will have a priority distribution from the projects of $1,800,000
per year, with income above this priority amount to be divided equally
between the Company and its partner, Far West Capital, Inc., a Utah
corporation ("Far West Capital"). The Company and Far West Capital will co-
manage the project. See "Business - Current Operations and On-Going
Projects.
REPAYMENT OF DEBT
An aggregate of $2,626,000 of the net proceeds of the Offering and the
Private Placement will be used to retire the following obligations of the
Company (including all interest through September 15, 1996):
Plymouth Loan. $1,209,000 will be used to repay a loan of $1,000,000
(plus accrued interest of $209,000) made to the Company in October 1994 by
certain directors, officers and other affiliates of the Company to provide
funds for the Company's purchase of its 50% equity interest in the owner of
the Plymouth State College Cogeneration Facility in Plymouth, New Hampshire
(the "Plymouth Loan"). The Plymouth Loan bears interest at a rate 2.5% per
annum above the prime rate and is repayable upon the first to occur of (i)
the consummation of an offering by the Company of equity securities
providing net proceeds of at least $1,000,000 or of debt securities
providing net proceeds of at least $4,000,000 or (ii) October 31, 1997. In
consideration for making the Plymouth Loan, the lenders (other than two of
the Company's officers) received warrants to purchase an aggregate of
114,000 shares of Common Stock at the rate of 120 warrants per $1,000
loaned, which are exercisable until October 31, 1999 at $5.00 per share.
See "Business - Current Operations and On-Going Company Projects - Plymouth
State College, New Hampshire" and "Certain Transactions."
Anchor Bridge Loan. $756,000 will be used to repay a loan of $600,000
(plus accrued interest of $156,000) made to the Company in June 1995 by
Anchor to provide funds for expenses of this Offering, the $50,000 deposit
in connection with the Steamboat Acquisition described above and working
capital (the "Anchor Loan"). The Anchor Loan bears interest at the rate of
18% per annum and is repayable upon the first to occur of the consummation
of this Offering or September 15, 1996. In consideration for making the
Anchor Loan, the lender received 57,500 shares of Series One Preferred
Stock, which will be exchanged for 205,000 shares of Common Stock upon the
consummation of this Offering. The Anchor Loan is cross-collateralized
(together with the Solvation Loan described below) by a first lien on all
of the assets of the Company and 97,250 shares of Common Stock owned by
officers of the Company. See "Certain Transactions."
Solvation Bridge Loan. $263,000 will be used to repay a loan of $250,000
(plus $13,000 accrued interest) made to the Company in December 1995 by
Solvation to provide funds for expenses of this Offering and working
capital (the "Solvation Loan"). The Solvation Loan bears interest at the
rate of 10% per annum and is repayable upon the first to occur of the
consummation of this Offering or September 15, 1996. The Solvation Loan is
cross-collateralized with the Anchor Loan by a first lien on all of the
assets of the Company and 97,250 shares of Common Stock owned by officers
of the Company. EMC is a subsidiary of Solvation. Solvation and Enviro
are indirectly owned by different members of the same family. See "Certain
Transactions."
Other Bridge Loan. $62,000 will be used to repay a loan of $50,000 (plus
accrued interest of $12,000) made to the Company in May 1995 by a non-
affiliated individual to provide funds for working capital. This loan
bears interest at the rate of 18% per annum and is repayable upon the
consummation of this Offering.
Accrued Interest on Debentures. $336,000 will be used to pay interest on
the Company's Convertible Debentures, including $26,200 to Theodore Rosen,
Chairman of the Board. In December 1994 the holders of the Convertible
Debentures agreed to accept interest payments at a rate one-half of the
stated 18% rate and to defer and accrue the remaining one-half until the
consummation of an underwritten offering of the Company's securities.
Thereafter, the interest rate on the outstanding Convertible Debentures
will be 9% per annum. See "Description of Securities - Convertible
Debentures" and "Certain Transactions."
PRICE RANGE OF COMMON STOCK
The Common Stock has traded on the NASD OTC Bulletin Board under the
symbol USEN since the second quarter of the 1995 fiscal year. The following
table sets forth, for the periods indicated, the high and low closing bid
quotations for the Common Stock, as reported by the NASD OTC Bulletin
Board. The following quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
BID
--------------
HIGH LOW
---- ---
Fiscal Year Ended January 31, 1995:
Second Quarter . . . . . . . . . . $ 4.40 $3.60
Third Quarter . . . . . . . . . . $10.00 $8.40
Fourth Quarter . . . . . . . . . . $10.00 $10.00
Fiscal Year Ended January 31, 1996:
First Quarter . . . . . . . . . . . $10.00 $10.00
Second Quarter . . . . . . . . . . $10.00 $10.00
Third Quarter . . . . . . . . . . . $ 8.40 $ 6.00
Fourth Quarter . . . . . . . . . . $ 4.00 $ 2.40
Fiscal Year Ending January 31, 1997:
First Quarter . . . . . . . . . . $ 2.92 $ 2.48
Second Quarter . . . . . . . . . . $ 2.00 $ 1.50
As of August 2, 1996, there were 590 record holders of the Company's
Common Stock and approximately 907 beneficial holders of the Company's
Common Stock.
On August 2, 1996, the high bid price was $1.50 and low bid price was
$1.50.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The 1,600,000
shares of 11% Preferred Stock to be issued to Enviro have an aggregate
liquidation preference of $3,100,000 and will carry a preferential annual
cumulative dividend rate of 11% of the liquidation preference ($341,000 per
year). During the first two years after issuance, the 11% Preferred Stock
dividend will be payable in additional shares of 11% Preferred Stock
(valued at $1.9375 per share). Thereafter the 11% Preferred Stock dividend
will be payable in either shares of 11% Preferred Stock or cash, at the
option of the Company. No dividends may be paid on the Common Stock so
long as the Company is not current on payment of dividends on the 11%
Preferred Stock. See "Description of Securities - 11% Preferred Stock."
DILUTION
The difference between the public offering price per share of Common
Stock included in the Offering and the pro forma net tangible book value
per share of Common Stock after this Offering and the Closing Transactions
is referred to herein as the dilution to investors in this Offering. Net
tangible book value per share of Common Stock is determined by dividing the
net tangible book value (total assets less intangible assets and less total
liabilities and preferred stock equity) by the number of outstanding shares
of Common Stock.
As of April 30, 1996, the Company had a negative net tangible book value
of ($3,842,000) or ($8.74) per share of Common Stock. After giving effect
to the application of the net proceeds from the sale of the Securities
offered hereby and the Closing Transactions including payment of accrued
interest and additional bridge loan borrowing to September 15, 1996, the
net tangible book value at that date would be $2,820,000 or $1.18 per share
of Common Stock ($3,633,750 ($1.38 per share) if the Underwriters' over-
allotment option is exercised). This represents an immediate increase in
net tangible book value of $9.92 per share to existing stockholders, and an
immediate dilution of $2.82 (71%) per share to new investors ($2.62 (66%)
per share if the Underwriters' over-allotment option is exercised).
The following table illustrates the dilution per share of Common Stock:
Public offering price per share of the Common Stock
included in the Offering . . . . . . . . . . . . . . $4.00
Net tangible book value (deficit) per share before the
Offering (1) . . . . . . . . . . . . . . . . . . . . ($8.74)
Increase to existing common stockholders in net
tangible book value due to the Offering and the 9.92
Closing Transactions (2)(3) . . . . . . . . . . . . . ------
$1.18
Pro forma net tangible book value after the Offering . ----
$2.82
Pro forma dilution to new investors . . . . . . . . . . ====
--------------------------
(1) Based on 439,650 shares of Common stock issued and outstanding. Net
tangible book value is adjusted to provide for the $575,000
liquidation value of the Series One Preferred Stock.
(2) Gives effect to the Preferred Stock Exchange, the Debenture Conversion
and the issuance of 1,625,000 shares of Common Stock in this Offering.
(3) Net tangible book value is adjusted to provide for the $3,100,000
liquidation value of the 11% Preferred Stock.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
April 30, 1996 and as adjusted to reflect (i) the sale of the Securities in
this Offering, (ii) the consummation by the Company of the Private
Placement, the Debenture Conversion and the Preferred Stock Exchange, and
(iii) the application of the net proceeds from the foregoing, including the
completion of the Steamboat Acquisition and the repayment of debt including
accrual of interest and additional bridge loan borrowing to September 15,
1996. See "Use of Proceeds." This table should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto and
the Pro Forma Financial Statements included in this Prospectus.
APRIL 30, 1996
----------------------------
PRO FORMA
HISTORICAL AS ADJUSTED
--------- -----------
Long-term debt, net of unamortized
discount of $30,000 . . . . . . . . . . $ 2,812,000 $ 1,342,000
Loans Payable . . . . . . . . . . . . . . 910,000
Pre-reorganization income taxes payable, 182,000 182,000
current . . . . . . . . . . . . . . . . ------- -------
3,904,000 1,524,000
11% cumulative redeemable convertible
preferred stock, to be issued
and outstanding 1,600,000 shares . . . 3,100,000
Stockholders' equity:
Preferred stock, $0.01 par value,
5,000,000 shares authorized; issued
and outstanding, 57,500 shares . . . 1,000
Common stock, $0.01 par value,
35,000,000 shares authorized;
issued and outstanding, 439,650
shares; to be issued and outstanding
2,394,650 shares(1)(2) . . . . . . . 4,000 23,000
Additional paid-in capital . . . . . . 112,000 6,311,000
(3,276,000) (3,514,000)(3)
Accumulated (deficit) . . . . . . . . . ---------- ----------
(3,159,000) 2,820,000
Total stockholders' equity (deficit) . . ---------- ---------
$ 745,000 $ 7,444,000
Total capitalization . . . . . . . . . . ========== ==========
-------------------------
(1) Includes (i) 125,000 shares of Common Stock to be issued in the
Debenture Conversion and (ii) 205,000 shares of Common Stock to be
issued in the Preferred Stock Exchange.
(2) Does not include an aggregate of 4,594,975 shares of Common Stock
reserved and to be reserved for issuance following completion of the
Offering including (i) 291,850 shares issuable on exercise of
currently outstanding options and warrants, (ii) 2,575,000 shares
issuable on exercise of the Warrants, the Representative's Purchase
Option and the Warrants issuable on exercise of the Representative's
Purchase Option and the Private Warrants being issued in the Private
Placement and the Debenture Conversion, (iii) 1,600,000 shares
issuable upon conversion of 11% Preferred Stock to be issued to
Enviro, and (iv) 128,125 shares issuable upon conversion of
Convertible Debentures which will remain outstanding after the
Offering.
(3) Change in accumulated (deficit) reflects the write off of unamortized
debt discount of $30,000 in connection with repayment of certain debt
and the accrual of interest to September 15, 1996.
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF APRIL 30, 1996
The following Pro Forma Condensed Balance Sheet gives effect to the
following transactions as if they had occurred on April 30, 1996: (a) sale
of 1,600,000 shares of Preferred Stock and 500,000 Private Warrants for an
aggregate of $3,500,000, (b) sale of 1,625,000 shares of Common Stock and
1,625,000 Warrants offered by this Prospectus for net proceeds of
$5,425,000, (c) acquisition of a 50% interest in two geothermal power
plants (the Steamboat Facilities) for an aggregate of $4,982,000 (including
$50,000 as a downpayment which was previously paid by the Company), (d)
repayment of notes payable and other liabilities in the aggregate amount of
$2,626,000 adjusting for accrual of interest and additional bridge loan
financing to September 15, 1996, (e) conversion of 57,500 shares of Series
One Preferred Stock into 205,000 shares of Common Stock, and (f) conversion
of $500,000 principal amount of the existing Convertible Debentures to
125,000 shares of Common Stock and 125,000 Private Warrants. The Pro Forma
Condensed Balance Sheet should be read in conjunction with Pro Forma
Statement of Operations and the historical financial statements of the
Company, Lehi Independent Power Associates, L.C. ("LIPA") and Plymouth
Cogeneration included in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
-------------
HISTORICAL DEBIT
---------- -----
A S S E T S
-----------
<S> <C> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . . $ 2,000 $ 3,500,000(a)
5,425,000(b)
50,000(d1)
Other current assets . . . . . . . . . . . 1,000
-----
Total current assets . . . . . . . 3,000
Investments in Joint Ventures - at equity:
Lehi Independent Power Associates, L.C. . . 1,150,000
Plymouth Cogeneration Limited Partnership . 684,000
Steamboat Envirosystems, L.C. . . . . . . . 53,000 4,932,000(c)
Deferred costs of registration . . . . . . . . 108,000
-------
TOTAL . . . . . . . . . . . . . . . $ 1,998,000
==========
LIABILITIES and STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
------------------------------------
Liabilities:
Loans payable . . . . . . . . . . . . . . . . $ 910,000 960,000(d2)
Pre-reorganization income taxes payable . . . 182,000
Other current liabilities (including due to
related parties of $642,000 and $402,000 1,253,000 666,000(d2)
Pro Forma). . . . . . . . . . . . . . . . . ---------
Total current liabilities . . . . . 2,345,000
Convertible subordinated secured debentures
(including due to related parties of
$325,000 and $218,000 Pro Forma). . . . . . 1,525,000 500,000(f)
Notes payable (including due to related
parties of $775,000) . . . . . . . . . . . 970,000 1,000,000(d2)
Other liabilities (including due to related 317,000
parties of $12,000) . . . . . . . . . . . . -------
Total liabilities . . . . . . . . . 5,157,000
---------
11% cumulative redeemable convertible
preferred stock, $.01 par value (issued and
outstanding, none; to be issued and
outstanding, 1,600,000 shares)
Stockholders' Equity (Capital Deficiency):
Preferred stock, $.01 par value (issued and
outstanding, 57,500 shares; to be issued and
outstanding, none) . . . . . . . . . . . . 1,000 1,000(e)
Common stock, $.01 par value (issued and
outstanding, 439,650 shares; to be issued
and outstanding, 2,394,650 shares) . . . . 4,000
Additional paid-in capital . . . . . . . . . 112,000 108,000(b)
1,000(e)
208,000(d1)
Accumulated deficit . . . . . . . . . . . . . (3,276,000) 30,000(g)
---------- --------
Total stockholders' equity (capital (3,159,000)
deficiency) . . . . . . . . . . . ----------
T O T A L . . . . . . . . . . . . . $ 1,998,000 $17,381,000
========== ==========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
----------------
PRO
CREDIT FORMA
------ -----
A S S E T S
-----------
<S> <C> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 4,932,000(c) $ 1,419,000
2,626,000(d2)
Other current assets . . . . . . . . . . . . . . . . 1,000
-----
Total current assets . . . . . . . . . . . 1,420,000
Investments in Joint Ventures - at equity:
Lehi Independent Power Associates, L.C. . . . . . . 1,150,000
Plymouth Cogeneration Limited Partnership . . . . . 684,000
Steamboat Envirosystems, L.C. . . . . . . . . . . . 4,985,000
Deferred costs of registration . . . . . . . . . . . . 108,000(b)
------- ----------
TOTAL . . . . . . . . . . . . . . . . . . . $ 8,239,000
==========
LIABILITIES and STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
-------------------------------------
Liabilities:
Loans payable . . . . . . . . . . . . . . . . . . . . 50,000(d1)
Pre-reorganization income taxes payable . . . . . . . $ 182,000
Other current liabilities (including due to related 208,000(d1) 795,000
parties of $642,000 and $402,000 Pro Forma) . . . . ------- -------
Total current liabilities . . . . . . . . . 977,000
Convertible subordinated secured debentures (including
due to related parties of $325,000 and $218,000
Pro Forma). . . . . . . . . . . . . . . . . . . . . 1,025,000
Notes payable (including due to related parties of
$775,000) . . . . . . . . . . . . . . . . . . . . . 30,000(g)
Other liabilities (including due to related parties of 317,000
$12,000) . . . . . . . . . . . . . . . . . . . . . -------
Total liabilities . . . . . . . . . . . . . 2,319,000
---------
11% cumulative redeemable convertible preferred stock,
$.01 par value (issued and outstanding, none; to
be issued and outstanding, 1,600,000 shares) 3,100,000(a) 3,100,000
Stockholders' Equity (Capital Deficiency):
Preferred stock, $.01 par value (issued and
outstanding, 57,500 shares; to be issued and
outstanding, none) . . . . . . . . . . . . . . . .
Common stock, $.01 par value (issued and outstanding,
439,650 shares; to be issued and outstanding,
2,394,650 shares) . . . . . . . . . . . . . . . . . 16,000(b) 23,000
2,000(e)
1,000(f)
Additional paid-in capital . . . . . . . . . . . . . 400,000(a) 6,311,000
5,409,000(b)
499,000(f)
Accumulated deficit . . . . . . . . . . . . . . . . . (3,514,000)
-------- ---------
Total stockholders' equity (capital 2,820,000
deficiency) . . . . . . . . . . . . . . ---------
T O T A L . . . . . . . . . . . . . . . . . $17,381,000 $ 8,239,000
========== ==========
</TABLE>
Notes to Pro Forma Condensed Consolidated Balance Sheet
---------------
(a) To reflect sale of 1,600,000 shares of 11% Preferred Stock and
500,000 Private Warrants.
(b) To reflect sale of 1,625,000 shares of Common Stock and
1,625,000 Warrants for net proceeds of $5,425,000.
(c) To reflect purchase of a 50% interest in Steamboat LLC, which is
acquiring the Steamboat Facilities.
(d1) To reflect additional bridge loan received after
April 30, 1996 . . . . . . . . . . . . . . . . . $50,000
And accrual of interest from May 1 to
September 15, 1996 . . . . . . . . . . . . . . . $208,000
(d2) To reflect assumed repayment of debt:
Note payable . . . . . . . . . . . . . . . . . . $1,000,000
Bridge loans . . . . . . . . . . . . . . . . . . 960,000
Accrued interest . . . . . . . . . . . . . . . . 666,000
----------
$2,626,000
==========
(e) To reflect conversion of existing Series One Preferred Stock
into 205,000 shares of Common Stock.
(f) To reflect conversion of $500,000 principal amount of the
existing Convertible Debentures to 125,000 shares of Common
Stock and 125,000 Private Warrants.
(g) To eliminate unamortized debt discount on debt repaid. This
charge will be treated as an extraordinary loss in the statement
of operations during the period this Offering is consummated.
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The following Pro Forma Condensed Consolidated Statement of Operations
combines the results of operations of the Company for the year ended
January 31, 1996 and the three months ended April 30, 1996 with the
Company's share of the pro forma results of operations of the Steamboat
Facilities for the year ended December 31, 1995 and the three months ended
March 31, 1996 as if the proposed Steamboat Acquisition has taken place at
the beginning of the periods in a transaction accounted for as a purchase.
The Pro Forma Condensed Consolidated Statement of Operations also gives
effect to the following: (a) sale of Common Stock and Warrants and sale of
Preferred Stock and Private Warrants to the extent necessary to fund the
acquisition of a 50% interest in the Steamboat Facilities and repay debt,
(b) conversion of 57,500 shares of Series One Preferred Stock into 205,000
shares of Common Stock, (c) restructure of existing Convertible Debentures
by converting $500,000 principal amount to 205,000 shares of Common Stock
and 125,000 Private Warrants and reducing the interest rate from 18% to 9%
on the remaining balance. This statement should be read in conjunction
with the Steamboat Envirosystems, L.C. Pro Forma Condensed Balance Sheet as
of March 31, 1996, the Steamboat Envirosystems Power Plants Pro Forma
Condensed Combined Statement of Operations and the historical financial
statements of the Company, LIPA and Plymouth Cogeneration, Far West
Electric Energy Fund, L.P. and 1-A Enterprises, included in this
Prospectus. LIPA, Plymouth, Far West Electric Energy Fund, L.P. and 1-A
Enterprises each have a fiscal year end of December 31 which differs to the
fiscal year end of the Company. No material adjustment is necessary to
reconcile the December 31 year end to the Company's January 31 year end.
The pro forma results of operations are not necessarily indicative of
future results of operations or what the results would have been if the
acquisition had taken place at the beginning of the periods.
<TABLE>
YEAR ENDED JANUARY 31, 1996
---------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
DR./(CR.)
<S> <C> <C> <C>
Income (loss) from joint $ (17,000) $(1,880,000)(1) $1,863,000
venture . . . . . . . . ---------- ---------- ---------
Operating expenses . . . (853,000) (853,000)
(604,000) (488,000)(2) (116,000)
Interest expense (5) . . ---------- ------------ --------
Income (loss) before
income taxes . . . . . (1,474,000) 894,000
292,000 (3) 292,000
Income taxes . . . . . . ---------- ---------
Income (loss) before
extraordinary item . . (1,474,000) 602,000
Dividends on preferred 21,000 (4a) 341,000 (4b) 362,000
stock . . . . . . . . . ----------- --------- ---------
Income (loss) available
for common $(1,495,000) $ 240,000
stockholders (6) . . . ========== =========
$(3.41) $0.14
Net income per share (7) ----- -----
Shares used in computing
net income per 438,773 1,813,851
share (7) . . . . . . . ======= =========
</TABLE>
<TABLE>
THREE MONTHS ENDED APRIL 30, 1996
----------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ---------
DR./(CR.)
<S> <C> <C> <C>
Income (loss) from joint $ (39,000) $(549,000)(1) $ 510,000
venture . . . . . . . . -------- -------- --------
Operating expenses . . . (221,000) (221,000)
(170,000) (141,000)(2) (29,000)
Interest expense (5) . . --------- -------- -------
Income (loss) before
income taxes . . . . . (430,000) 260,000
53,000 (3) 53,000
Income taxes . . . . . . ---------- -------
Income (loss) before
extraordinary item . . (430,000) 207,000
Dividends on preferred 14,000 (4a) 85,000(4b) 99,000
stock . . . . . . . . . ------ ------
Income (loss) available
for common $(444,000) $ 108,000
stockholders (6) . . . ======== ========
$(1.01) $0.06
Net income per share (7) ---- ----
Shares used in computing
net income per 439,622 2,013,936
share (7) . . . . . . . ======= =========
</TABLE>
--------------
(1) To reflect the Company's allocated pro forma income of Steamboat
LLC.
(2) To reflect the reduction in interest expenses as a result of
repayment of Notes Payable and Loans Payable, conversion of
$500,000 Convertible Subordinated Secured Debentures to 125,000
shares of Common Stock and 125,000 Private Warrants, and reduction
of interest rate from 18% to 9% on the remaining balance of the
Convertible Debentures. The reduction of the interest rate to 9%
will be accounted for prospectively.
(3) To reflect provision for federal and state taxes at 38%, after
providing for a limit on the net operating loss deduction assuming
an ownership change had taken place at the beginning of the fiscal
year and the beginning of the three month period ended April 30,
1996. A deferred tax benefit was not provided in the historical
financial statements since the likelihood of realization of such
benefit cannot be determined.
(4a) Provision for dividends on Series One Preferred Stock.
(4b) Provision for dividends on 11% Preferred Stock to be sold to Enviro
Partners for $3,100,000. Dividends are payable in 11% Preferred
Stock.
(5) The historical amounts during the year ended January 31, 1996 and
the three months ended April 30, 1996 include approximately
$146,000 and $35,000, respectively, of interest on debts owed to
related parties.
(6) The net income (loss) available to common stockholders during the
period the 57,500 shares of Series One Preferred Stock are
converted into 205,000 shares of Common Stock will be reduced by a
nonrecurring amount of approximately $791,000 representing the
excess of fair value of the Common Stock transferred to the holders
of the Preferred Stock over the carrying amount of the Preferred
Stock in the Company's balance sheet.
(7) Pro forma net income per share is based on the weighted average
number of shares outstanding, the shares issued in the Debenture
Conversion and the Preferred Stock Exchange, the dividend on the
11% Preferred Stock and shares issued in the Offering to obtain
funds required for the acquisition of the Steamboat Facilities and
the retirement of debt (1,119,461 shares at January 31, 1996 and
1,244,286 shares at April 30, 1996). Assumed exercise of options,
warrants and the conversion of the 11% Preferred Stock have not
been reflected as they would be anti-dilutive.
STEAMBOAT ENVIROSYSTEMS, L.C.
PRO FORMA CONDENSED BALANCE SHEET
AS OF MARCH 31, 1996
The following Pro Forma Condensed Balance Sheet gives effect to the
acquisition of two geothermal plants (the "Steamboat Facilities") accounted
for as a purchase by the Company (50% ownership interest) and Far West
Capital (50% ownership interest) for an aggregate of $5,256,000 as if such
acquisition had taken place on March 31, 1996. The total is made up of
$4,982,000 contributed by the Company and $274,000 contributed by Far West
Capital, Inc. The Company's contribution will consist of (1) $1,575,000 to
be distributed to the limited partners and owners of the predecessor
entities (other than Far West Capital, Inc.) to obtain a 50% interest in
Steamboat Envirosystems, L.C., (2) $2,407,000 to be used to pay all
outstanding mortgages on the Steamboat Facilities and (3) $1,000,000 in
cash to be contributed to the Partnership to allow the purchase and
cancellation of certain royalty interests and to fund certain improvements
to the Steamboat Facilities. Far West Capital is contributing its limited
partnership interest in Steamboat 1, valued at $274,000 to Steamboat LLC.
Far West Capital has a 5.14% ownership interest in Steamboat 1 and is not
participating in the distributions of the purchase price paid by the
Company. The Pro Forma Condensed Balance Sheet should be read in
conjunction with Pro Forma Condensed Combined Operations of Steamboat
Envirosystems, L.C. and the historical financial statements of the Company,
Far West Electric Energy Fund, L.P. and 1-A Enterprises included in this
Prospectus.
PRO FORMA ADJUSTMENTS
---------------------
DEBIT CREDIT PRO FORMA
----- ------ ---------
ASSETS
Cash............ $4,982,000(a) 1,575,000(c)
1,000,000(d)
2,407,000(f)
Other Assets.... 3,000(a) 3,000
Property, Plant
and Equipment.. 274,000(b) 5,256,000
1,575,000(c)
1,000,000(d)
2,407,000(e)
----------
Total $5,259,000
LIABILITIES
==========
Notes payable... $2,407,000(f) 2,407,000(e)
MEMBER'S EQUITY
U.S. Energy
Systems, Inc.. 4,985,000(a) $4,985,000
Far West Capital,
Inc. ......... 274,000(b) 274,000
---------- --------- ----------
Total $12,648,000 $12,648,000 $5,259,000
=========== =========== ==========
-----------------------
(a) To reflect cash contribution of U.S. Energy Systems, Inc. including
$50,000 deposit previously paid.
(b) To reflect contribution of Far West Capital Inc. of its 5.14% limited
partnership interest in Far West Electric Energy Fund, L.P.
(c) To reflect distributions to limited partners of Far West Electric
Energy Fund, L.P. and owners of 1-A Enterprises.
(d) To reflect the purchase and cancellation of certain royalty
interests.
(e) To reflect assumption of the Mortgage.
(f) To reflect payment of the Mortgage.
STEAMBOAT FACILITIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
The following Pro Forma Condensed Combined Statement of Operations of
the Steamboat Facilities reflects the combined results of operations of the
Steamboat Facilities for the year ended December 31, 1995 and the three
months ended March 31, 1996, adjusted to eliminate those costs which will
no longer exist as a result of the purchase of interests by the Company and
Far West Capital. Steamboat LLC will acquire the Steamboat Facilities from
Far West Electric Energy Fund L.P. and 1-A Enterprises subject to a
mortgage in favor of an institutional lender and certain net revenue or
royalty interests in steam extraction rights. The $4,982,000 contributed
by the Company to Steamboat LLC will be applied as follows: (1) $1,575,000
cash purchase price (less $50,000 down payment previously paid by the
Company) will be used to obtain a 50% interest in Steamboat LLC, (2) a
mortgage on the Steamboat Facilities, on which the last quarterly principal
payment was made on July 20, 1996, which had a face value of $4,196,000 as
at September 15, 1996 net of an escrowed reserve, and will be acquired by
the Company for $2,407,000 and contributed to Steamboat LLC, and (3)
$1,000,000 in cash will be contributed by the Company to Steamboat LLC to
allow it to purchase and cancel certain of the royalty interests and to
fund certain improvements to the Steamboat Facilities. This statement is
not necessarily indicative of what results of operations would have been
had the Company acquired its interest in the Steamboat Facilities at the
beginning of the periods or of what future results of operations may be.
This statement should be read in conjunction with the historical financial
statements of Far West Electric Energy Fund, L.P. (of which Steamboat 1 is
a part) and 1-A Enterprises (Steamboat 1-A) included in this Prospectus.
<TABLE>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------
HISTORICAL
---------------------------------------------------------
FAR WEST
ELECTRIC
ENERGY FUND, 1-A
L.P.(1) ENTERPRISES COMBINED
------------ ----------- --------
<S> <C> <C> <C>
Revenue:
Electric power . $2,529,000 $875,000 $3,404,000
Other . . . . . . 145,000 145,000
--------- --------- ---------
Total revenues
2,674,000 875,000 3,549,000
--------- --------- ---------
Expenses:
Operations:
Depreciation . 631,000 104,000 735,000
Royalty . . . 405,000 210,000 615,000
Other . . . . 824,000 237,000 1,061,000
Interest . . . . . 655,000 161,000 816,000
--------- --------- ---------
Total expenses 2,515,000 712,000 3,227,000
--------- --------- ---------
Net income . . $ 159,000 $163,000 $ 322,000
========= ========= =========
Resulting income to
U.S. Energy
Systems, Inc.:
Preferred 18% .
50% of balance
Total . . . .
</TABLE>
<TABLE>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1995 MARCH 31, 1996
---------------------------- ----------------
HISTORICAL
----------
FAR WEST
1 AND 1-A ELECTRIC
PRO FORMA ENERGY FUND,
ADJUSTMENTS ADJUSTED L.P.
----------- -------- ------------
<S> <C> <C> <C>
Revenue:
Electric power . . $3,404,000 $838,000
Other . . . . . . . 145,000 33,000
--------- ---------
Total revenues . 3,549,000 871,000
--------- ---------
Expenses:
Operations:
Depreciation . . $ (547,000)(2) 188,000 159,000
Royalty . . . . . (275,000)(3) 340,000 130,000
Other . . . . . . 1,061,000 216,000
Interest . . . . . . (816,000)(4) 180,000
--------- --------- ---------
Total expenses . (1,638,000) 1,589,000 685,000
--------- --------- ---------
Net income . . . $ 1,638,000 $1,960,000 $186,000
========= ========= =========
Resulting income to
U.S. Energy
Systems, Inc.:
Preferred 18% . . $1,800,000
50% of balance . 80,000
---------
Total . . . . . $1,880,000
=========
</TABLE>
<TABLE>
THREE MONTHS ENDED MARCH 31, 1996
----------------------------------------------------------------
HISTORICAL
--------------------------------
PRO FORMA
1-A 1 AND 1-A
ENTERPRISES COMBINED ADJUSTMENTS ADJUSTED
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Electric power . $194,000 $1,032,000 $1,032,000
Other . . . . . . 33,000 33,000
-------- --------- ---------
Total revenues 194,000 1,065,000 1,065,000
-------- --------- ---------
Expenses:
Operations:
Depreciation . 26,000 185,000 $(135,000)(2) 50,000
Royalty . . . . 49,000 179,000 (76,000)(3) 103,000
Other . . . . . 48,000 264,000 264,000
Interest . . . . . 37,000 217,000 (217,000)(4)
--------- --------- ---------
Total expenses . 160,000 845,000 (428,000) 417,000
--------- --------- --------- ---------
Net income . . . $ 34,000 $ 220,000 $ 428,000 $ 648,000
========= ========= ========= =========
Resulting income to
U.S. Energy
Systems, Inc.:
Preferred 18% . $ 450,000
50% of balance 99,000
---------
Total . . . . $ 549,000
=========
</TABLE>
-----------------
(1) Does not include the operations of Crystal Springs Project or the
gain on sale of Crystal Springs Project. Crystal Springs Project
was sold by Far West Energy Fund, L.P. in February 1995 and will
not be part of the Steamboat Facilities.
(2) To record estimated reduction of depreciation for new basis in
assets acquired, assuming a 30-year depreciation period.
(3) To eliminate royalty expense of certain royalty agreements bought
out and contributed to Steamboat LLC. No agreements have yet been
reached for these buyouts.
(4) To eliminate interest expense due to elimination of debt.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION
RESULTS OF OPERATIONS
Year ended January 31, 1996 compared to year ended January 31, 1995
The Company had no revenues during the two fiscal years because (i) the
Lehi project acquired during that period was dormant, (ii) in the Plymouth
project, depreciation offset all earnings and (iii) efforts to arrange
financing were just beginning. In the fiscal year ended January 31, 1996,
the Company had a loss from operations of $1,474,000. This was reduced by
an extraordinary gain of $83,000 arising from the restructuring of a
liability, resulting in a net loss for the fiscal year of $1,391,000. In
the earlier fiscal year the loss from operations was $1,401,000 and the net
loss was $1,316,000.
The elements making up the losses in the two fiscal years were:
1996 1995
---- ----
Operating expenses $ 27,000 $ 109,000
Selling and administrative 826,000 897,000
expenses
Interest expense 604,000 319,000
Loss from Joint Ventures 17,000 76,000
--------- ---------
Totals $1,474,000 $1,401,000
Operating expenses of $27,000 and $109,000 in the fiscal years ended
January 31, 1996 and 1995 resulted from the adjudication of legal action on
a project which had been completed and reported in an earlier year. There
will be no further costs associated with this project.
Major items in the selling and administrative expenses were:
1996 1995
---- ----
Salaries and consulting fees $431,000 $407,000
Corporate expenses 70,000 85,000
Legal and professional costs 148,000 202,000
While there was no revenue during the two years, it was nevertheless
necessary to expend funds for salaries and consulting fees to evaluate new
proposals and structure joint ventures and new projects for planned growth.
The Company estimates that $75,000 of the salaries and consulting costs are
non-recurring or applicable to specific projects which will absorb future
costs.
Included in Corporate expenses in the fiscal year ended January 31, 1996
is a non-recurring cost of $25,000 for a previous planned public offering
that was never consummated.
Legal and professional costs were lower in the 1996 fiscal year due to
the fact that there were no start-up costs for the Company in this year.
Costs already incurred in connection with this Prospectus, approximately
$50,000 as of January 31, 1996, have been deferred.
Interest expense increased in the 1996 fiscal year due to the additional
borrowings in notes payable and bridge loans. The bulk of the increase is
accounted for as follows: The $1,000,000 in notes payable were in
existence only part of the 1995 fiscal year and the interest on them
accrued in that year totaled $28,000, whereas for the full 1996 fiscal year
the interest was $137,000. The bridge loans came into being in June, 1995,
so did not affect the 1995 fiscal year at all. The interest expense in
the 1996 fiscal year was $169,000.
Loss from joint ventures of $17,000 in the 1996 fiscal year and $76,000
in the 1995 fiscal year include $59,000 and $55,000 respectively for
amortization of purchase price over net equities in the net assets of LIPA
and Plymouth Cogeneration. For the period ended January 31, 1996, the
Company's allocated share of income or loss from joint ventures equalled
$86,000 gain from LIPA, and $44,000 loss from Plymouth. The Company's gain
from LIPA includes $118,000 gain from sale of unused plant equipment.
Three Months Ended April 30, 1996 Compared to 1995
The Company had no revenues for either of these periods. The losses
shown were made up of the following major elements:
1996 1995
---- ----
Selling and administrative expenses:
Salaries and consulting fees $121,000 $ 84,000
Legal and professional fees 51,000 33,000
Corporate expenses 6,000 32,000
All other 43,000 53,000
------- -------
Total selling and administrative expenses $221,000 $202,000
======= =======
Interest expenses $170,000 $ 99,000
Consulting agreements which began during 1995 and were not in existence
during the 1995 quarter accounted for the increase in salaries and
consulting fees.
Legal and professional fees were higher in the current quarter due to the
additional costs related to the additional bridge loans, amortized over the
terms of the loans. Costs incurred in connection with the public and
private financing have been deferred. As of April 30, 1996, these amounted
to $108,000.
Interest expenses increased in the 1996 quarter due principally to the
additional borrowings in bridge loans, which came into being starting in
June 1995.
The three-month joint venture loss totaling $39,000 was similar to the
previous year's $34,000, and was composed of $20,000 from Lehi Independent
Power Associates, L.C., and $19,000 from Plymouth Cogeneration Limited
Partnership.
LIQUIDITY AND CAPITAL RESOURCES
The Company has no contractual commitment for capital expenditures at
this time. The Company has employment agreements with two of its officers
which expire five years from the date of this Prospectus. The agreements
provide for minimum annual payments totaling $210,000. Payments under
these agreements will not be made until the working capital of the Company
permits.
As a result of accumulated losses, the Company had a negative working
capital of $1,910,000, and a capital deficiency of $2,729,000 at
January 31, 1996, and $2,342,000 and $3,159,000, respectively, at April 30,
1996. The independent auditors' report for the fiscal year ended January
31, 1996 states that these factors raise substantial doubt about the
Company's ability to continue as a going concern. As a result of this
Offering, the Company's pro forma working capital at April 30, 1996 would
be a positive $443,000.
During the fiscal year ended January 31, 1996, net cash used in operating
activities was $641,000. Cash used in investing activities was $29,000,
with $53,000 having been used in connection with the Steamboat Acquisition,
offset in part by collections of a loan receivable from an officer of the
Company.
During the 1996 fiscal year, $34,000 was received from the sale of Common
Stock and $785,000 was received as proceeds from notes and loans payable.
Other adjustments brought the total cash flow provided by financing
activities to $664,000.
During the fiscal year ended January 31, 1995, net cash used in operating
activities was $874,000. Cash used in investing activities totaled
$694,000, of which $647,000 was for investment in and advances to joint
ventures. Cash provided by financing activities totaled $1,396,000 with
$139,000 derived from sale of Common Stock and $1,375,000 from borrowings.
During the quarter ended April 30, 1996, cash flow was carefully
conserved. Salaries were deferred and additional bridge loan borrowings
amounting to $125,000 were received. Fifty percent of interest payments to
holders of the Convertible Debentures continued to be deferred until paid
out of the proceeds of this Offering, by agreement of the holders of the
Convertible Debentures.
PLAN OF OPERATION
The net proceeds of the Offering will be approximately $5,425,000 and the
Private Placement of 11% Preferred Stock and Private Warrants will provide
$3,500,000 for a total net proceeds of $8,925,000. Of this total, the
Company's acquisition of 50% of Steamboat LLC will use $4,932,000 (plus
$50,000 that had already been paid as a deposit.) Other liabilities
required to be paid have been adjusted to include additional bridge loan
borrowings and interest accruals through September 15, 1996. The bridge
loans, including interest, total $1,081,000, secured notes payable,
including interest, total $1,209,000, and accrued interest on the
Convertible Debentures required to be paid as part of the restructuring of
these instruments, total $335,000. The funds remaining as working capital,
together with the income from the projects including the Steamboat
Facilities, will be sufficient to meet the requirements of the Company for
the next 12 months of operation without having to raise additional funds.
The steps taken to reduce the Company's interest costs include (i) the
capitalization of $500,000 of the Convertible Debentures and the reduction
of the interest rate on the balance after consummation of this Offering
from 18% to 9%, (ii) the payment of the secured notes totaling $1,000,000,
and (iii) repayment of all bridge loans.
In addition, the Steamboat Acquisition should give the Company a positive
cash flow from all joint ventures in the current fiscal year. This will
not be impacted by payment of dividends since the existing convertible
preferred stock and the sale of additional convertible preferred stock will
not require cash payment of dividends. The shares issued to Anchor for the
initial bridge loan are being converted to 205,000 shares of common stock,
and the dividends on the preferred stock issued to Enviro Partners, L.P.,
will be paid in additional preferred stock during the first two years after
they are issued, and thereafter in cash or preferred stock at the Company's
option.
Negotiations for the sale of power from the Steamboat Facilities for the
period subsequent to the end of the current contracts (December 1996 for
Steamboat 1 and December 1998 for Steamboat 1-A) with Sierra are under way.
While there is no assurance that the present rate of revenues will
continue, management has confidence that cash flow from this project will
continue to provide an attractive return in future years. The basis for
this confidence is that the major expense of the projects is the existing
debt that the projects have carried. Upon acquisition of the projects by
the Company, this debt is retired, thus materially reducing carrying costs
for the projects and allowing the projects to sell electric output at
substantially reduced rates while maintaining a satisfactory cash flow.
Under the present power purchase agreements with Sierra, Steamboat LLC is
required to continue to sell power to Sierra, however, Sierra has indicated
that it would release Steamboat LLC from the power purchase agreements if
Steamboat LLC finds a market for the output of the Steamboat Facilities
outside of Sierra's service territory. Therefore, if rates offered by
Sierra are not satisfactory, the Company and its partners may decide to
terminate the existing contracts. The Company believes that under new
retail wheeling regulations it will be able to sell output of electricity
directly to retail customers or to sell to other electric utility grids at
more favorable prices. A second element is the reduction of present costs
due to the purchase and cancellation of certain royalty interests. While
no agreements are yet in place, the Company expects that such agreements
will be executed, which will increase cash flow in future years. Finally,
the Company will receive 100% of the profits up to $1,800,000.
In 1995, the Company and its partners concluded a sale of non-essential
engines and parts of the Lehi, Utah plant for a gain of approximately
$236,000, with 50% or $118,000 as the Company's share. The partnership is
using a portion of the funds from this contract to upgrade the remaining
two engines and place them in service. Currently there are no contracts
for the sale of the power output of the Lehi Plant. However, negotiations
for such contracts will begin as soon as the plant is in operational
status, and it is anticipated that cash flow will be generated during the
third quarter of the fiscal year. Alternatively, the Company may decide to
sell two of its engines and to replace them with a larger and more
efficient gas turbine. If such sale is made, the Company would benefit
through its 50% share of the revenue from the sale, however, operations
would be delayed until the second quarter of the next fiscal year. The
cost of the new engine is expected to be fully financed directly through
the manufacturer without additional investment by the Company.
The Plymouth, NH plant has been operating since January 1995. The start-
up costs of this plant resulted in only minor cash flow to the Company
until now, but the plant is operating at projected efficiencies and current
expectations are that regular cash flow will commence before the end of the
current fiscal year. In addition, switching the plant's fuel supply to
less expensive waste oil, as is presently being contemplated, could add
significantly to cash flow starting during the next fiscal year, as the
Partnership has an agreement with the university to share equally in any
fuel savings. There are also plans being studied to expand the size of the
project to serve other New Hampshire college system campuses through
wheeling, as described in "Business," which should take place during fiscal
year 1998.
The Company also expects revenues from other projects that will be under
way during the next twelve months but are not yet under contract. There
are five other projects, not including Steamboat, currently being
negotiated, at least four of which the Company believes will be secured and
from which revenues are expected to commence within the next twelve months.
These include two projects for two separate shopping malls in El Paso, TX,
a large resort and commercial center in St. Thomas, USVI, a residential and
commercial center at a kibbutz in Haifa, Israel, and a steel mill in
Raipur, India. With regard to the shopping malls and the St. Thomas
resort, the Company and its joint development partners in each case will
own and operate the cogeneration facilities. The Company has signed an
agreement with the owners of Bluebeard's Castle, a large resort and
commercial complex in St. Thomas, USVI, to build and operate a 3 megawatt
Cogeneration plant and a 120,000 gallon per day water recovery system in
the resort's property. The Company and the resort owners will own the
cogeneration plant and water system and share revenues equally. The
Company has received initial funding from the resort owners and the first
of six engine generators will be installed during the month of August.
While the Company will commence realizing revenues for its engineering and
equipment sales to the projects immediately upon the start of construction,
the main stream of revenue will be sale of energy to the host facilities
over the fifteen year terms of the contracts. In the case of the Israeli
kibbutz project, the Company would be selling the hardware and providing
engineering services for installation to the kibbutz, and the Company's
revenues will be derived from these sales. In the case of the Raipur steel
mill, the Company will provide consulting services to the steel mill for
the acquisition, shipping and installation of the hardware. The consulting
fee will be a percentage of total cost.
These other projects should not require capital outlays, as they will be
self-financed. The working capital remaining after the closing of this
Offering, together with the regular income from Steamboat LLC, will be
adequate for operational needs during the next twelve months.
While the Company does not conduct research and development per se, it
will expend funds to investigate and develop new projects. It is
anticipated that a total of approximately $100,000 will be spent in such
endeavors, which will come from working capital as available. Although
each project which comes on stream has its own project staff which becomes
a cost of the specific project, the Company does plan to add at least three
more employees to headquarters staff to assist management. Expenses for
such staff increase, as well as expenses for outside consultants, have been
taken into account in planning for the Company's budget over the coming
year.
RESTRUCTURING OF DEBT
Concurrently with the consummation of this Offering and the other
Closing Transactions, the Convertible Debentures, of which an aggregate
principal amount of $1,525,000 is outstanding, will be restructured by
converting $500,000 principal amount into 125,000 shares of Common Stock
and 125,000 Private Warrants and reducing the conversion rate of the
remainder to $8.00 per share from the present $16 per share, making the
remainder convertible into 128,125 shares of Common Stock. From and after
the consummation of the Offering, the interest rate will be 9% instead of
the present 18%.
ACCOUNTING STANDARDS
During the fiscal year ending January 31, 1997, the Company will be
required to adopt Statement of Financial Accounting Standard ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets," and
SFAS 123, "Accounting for Stock-Based Compensation," neither of which is
expected to have a material effect in the Company's financial statements.
IMPACT OF INFLATION
The Company's contracts include adjustments for changes in inflation
indices. The impact on Company earnings and cash flows would be minimal.
BUSINESS
THE COMPANY
The Company, formerly called Cogenic Energy Systems, Inc. and U.S.
Envirosystems, Inc., was incorporated under the laws of the State of
Delaware in 1981 in order to engage in the design, assembly, turn-key sale
and installation of factory built cogeneration systems powered by diesel
oil and/or natural gas. Richard H. Nelson, President of the Company, is one
of the two founders of the Company and acted as its Chief Executive Officer
until 1989. In late 1986, the Company was impaired by a $2,100,000
judgment resulting from a contractual dispute in California. Although
ultimately settled, the protracted court case caused serious delays in
planned expansion and in sales. Despite extensive restructuring, the
increasingly recessionary economic climate during that period led to a
serious cash shortage. By mid-1989, the Company filed for protection under
Chapter 11 of the Bankruptcy Code.
Utility Systems Florida, Inc. ("USF") was formed by Richard H. Nelson in
late 1991 with the objective of entering into the alternative energy
industry. USF proposed a Plan of Reorganization for the Company with the
intent of merging USF with the reorganized company. The Plan of
Reorganization was approved by the creditors and stockholders of the
Company, and the U.S. Bankruptcy Court, Southern District New York,
confirmed the Plan in March 1993. Pursuant to the Plan, USF was merged into
the Company and the Company was renamed U.S. Envirosystems, Inc.
On May 17, 1996, the Company changed its name from U.S. Envirosystems,
Inc. to U.S. Energy Systems, Inc.
BUSINESS OF THE COMPANY
Since its reorganization, the Company has been engaged in the independent
power plant ("IPP") industry as a project developer, owner and operator.
IPP's produce electricity for sale to either direct end users or to
regulated public electric utility companies. Regulated public electric
utility companies have historically produced electricity and have held the
exclusive distribution rights of the electricity thus produced to end users
in specific geographic territories. The exclusive right to the
distribution of electric power within a specific territory is a right
granted to the regulated public utility company by the various state public
utility commissions where such regulated public utility companies are
located. Because the exclusive franchise right is in effect a monopoly,
the rates charged for electric power and other services, as well as overall
operations, are regulated by the state public utility commissions. In
recent years, however, federal and state laws have been promulgated to
reduce and/or eliminate the regulated public electric utility industry's
monopoly over the production and sale of electric power in order to enhance
competition among electricity providers, hence, the emergence of IPP's. In
addition to conserving natural resources and reducing atmospheric pollution
by encouraging more efficient production of electric power, competition
should result in lower consumer costs for energy. "Independent power
plants" and "cogeneration plants" are frequently used interchangeably to
describe the power industry which is an alternative to the regulated power
industry. IPP's generally, but not always, produce power through a process
known as "cogeneration." Cogeneration is defined as the production of two
or more energy forms (typically electricity and heat), simultaneously, and
from the same fuel source. While producing electricity, otherwise wasted
heat is recovered from the exhaust and/or engine cooling water. This
recovered heat can be used to replace heat which would otherwise be made
from conventional furnaces and boilers. Other IPP's may not technically be
"cogenerators" but rather utilize renewable fuel sources such as
geothermal, wind, solar, hydro, and waste products such as waste oil, waste
wood and other bio-mass waste, or landfill gas. The favorable economics of
cogeneration or innovative and inexpensive renewable fuel sources allow
IPP's to compete with the longer established regulated power industry.
The Company's strategy is to seek projects requiring power production or
cogeneration and to become an equity participant with the owners,
developers or other involved parties in return for the Company's expertise
in the structuring, design, management and operation of the projects.
Often, at the time of the Company's initial involvement, such projects will
have advanced beyond the conceptualization stage to a point where the
engineering, management and project coordination skills the Company offers
are required to proceed. Although the Company has only been in existence
since 1993 and has only begun to develop projects, the president and key
consultants of the Company have been involved in the power generation
industry for over twenty years and alternative energy business for over
fifteen years and have built over 200 power projects in the United States
and abroad ranging in size from 100 kilowatts to 50 megawatts. Innovative
power projects developed by the principal executive include cogeneration
systems for ocean-going U.S. Coast Guard and Navy vessels.
In furtherance of its strategy, the Company is opportunistically
pursuing: (i) existing IPPs and cogeneration facilities which can be bought
at favorable prices; (ii) independent power and cogeneration projects not
yet built but for which another developer has successfully negotiated the
basic requirements for a plant including power purchase agreements,
environmental permits, etc., and (iii) special market opportunities for
cogeneration and energy savings projects (such as large shopping malls,
resorts, etc.) where such energy applications are not presently in common
use and where the Company can enter into joint development agreements with
the property owners to own and operate such facilities. With regard to the
latter, the Company possesses designs for, and will continue to seek out or
develop, special energy-efficient products such as natural gas powered air
conditioning with emphasis on the health care, food processing, shopping
mall and hotel markets where large quantities of electricity, air
conditioning and hot water are required on a continuous and simultaneous
basis.
The Company believes the greatest future potential for the Company in the
independent power plant/cogeneration market within the United States is in
facilities in the 3 to 50 megawatt size range. Additionally, the Company
believes that the largest potential for "inside-the-fence" facilities
(where all the energy forms produced are consumed at the power plant
location) falls into this size category. This range is advantageous
because, within this range, and depending on geographic location, these
plants usually fall below thresholds requiring prolonged environmental and
air quality permit procedure and may achieve more favorable pricing for its
electricity from either the utility grids or local customers. The reasons
for more favorable pricing are that plants of this size can be located in
specific areas of power capacity shortages. Regulated utility companies
purchasing such power to assist in meeting shortages are frequently willing
to pay more than "avoided cost" (i.e., their cost to produce an incremental
kilowatt), and local end users are frequently willing to pay full retail
prices which are more cost effective than interruptions of service due to
shortage induced brown-outs.
Also, the air quality permitting process for the size range contemplated
by the Company is generally faster, easier and more assured than in the
larger projects. In the smaller size range, so-called "inside-the-fence"
projects, nearly all of the electrical and thermal output can be utilized
by the host site. The thermal output of the cogeneration system replaces
conventional thermal output from the host's boilers and furnaces with
substantially less atmospheric emissions of nitrous oxide (NOX) and carbon
monoxide (CO) because of the emission control technology available to
cogeneration engines which is not available to boilers and furnaces. Since
the cogeneration system results in a net reduction in emissions for the
specific site, air quality permitting authorities will generally respond
quickly and favorably. In contrast, while the larger projects (over 50
megawatts) usually have no problems in placing the electrical output, there
is a problem in finding suitable thermal hosts who can use the vast
quantities of heat produced. Under such circumstances, even if all of the
host's thermal requirements are offset, there is still an increase in net
emissions in the area of the power plant. A prolonged and difficult
permitting process is the result.
The Company has begun to develop several projects in the 3 to 50 megawatt
size range with emphasis on "inside the fence" applications. Although
natural gas has proven to be a superior and economical fuel choice for many
sites, the Company also intends to emphasize projects which can utilize
alternative and/or renewable fuels, since such projects not only serve the
interests of the public from an environmental and ecological standpoint but
also have the greatest potential for earnings when fuel costs are lowest.
In addition to potential within the United States, there are substantial
opportunities overseas for such projects, especially in Latin America and
Asia. The Company believes that dramatic energy shortages, combined with
national policies to privatize power production in many developing
countries, are creating an increasing potential for U.S. companies in the
independent power industry. In addition to international agencies such as
the World Bank and the Inter-American Development Bank, there are a growing
number of private institutional lenders who provide project financing for
such developments. The Company has commenced an effort to create
consortiums with both foreign companies and other U.S. companies to pursue
this market since the Company does not presently have the financial
resources or personnel to pursue such projects by itself. For example, in
Panama, the Company is working with a large Panamanian financial group (the
host country partner), and has commenced discussions with a large foreign
manufacturer of diesel engines and an American shipyard with the purpose of
creating a consortium to offer barge mounted power plants in Panama and
other Central American countries. (See also "Other Potential Projects for
the Company.") Similarly, there are numerous opportunities in India which
have been brought to the Company, and for which the Company has held
discussions with a large Indian industrial firm (host country partner),
with the international subsidiary of a major electric utility company and
with a large U.S. manufacturer of gas turbines. In all cases, the Company
would act as a consortium manager on behalf of the host country partner.
COGENERATION AND INDEPENDENT POWER PRODUCTION
Cogeneration is the process of producing two or more energy forms
(typically electricity and heat) simultaneously from the same fuel source.
In order to encourage the conservation of natural resources such as fossil
fuels and to foster development of non-fossil fuel energy sources, the
federal government enacted PURPA, which mandated that all state public
utility commissions require public electric utility companies to cooperate
with privately owned cogeneration facilities, both by purchasing
electricity from such facilities at the utility company's "avoided cost"
(i.e., the utility company's incremental cost for generating such
electricity itself) and by providing standby power to such privately owned
facilities.
When electricity is produced, whether in a small cogeneration facility or
in a large central utility power plant, the energy efficiency of the fuel
used (the electrical output expressed in BTUs divided by the amount of BTU
input to the engines) does not exceed 35%. The remaining 65% of available
energy efficiency from the fuel is waste heat, either expelled from the
exhaust or removed from the engine's jacket water by radiators. By
recovering substantial portions of this otherwise wasted heat, and by
converting this heat into useful thermal purposes, the fuel efficiency of a
cogeneration facility can approach 75%. This converted waste heat replaces
heat that would otherwise have to be made using yet another fuel. Central
utility power plants have the ability to recover such heat, but the long
distances of such plants from customers who could utilize thermal energy
makes recovery and transport impractical.
In March 1995 the Federal Energy Regulatory Commission ("FERC") stated
that "retail wheeling" should be federally mandated and commenced
promulgating regulations to effect the process, setting the stage for a
total deregulation of the utility industry. Retail wheeling is the process
under which consumers of electricity may choose any electric producer, and
the local electric utility company must deliver (i.e., "wheel") the power
purchased elsewhere to that consumer through the utility company's
transmission lines. On April 25, 1996 FERC promulgated a regulation which
orders all electric utility companies to open their transmission lines to
independent power producers thus allowing wholesale purchase of power by
the utilities from distant independent producers. While the federal
regulation does not mandate that the transmission lines be opened for
direct sale of power by independent producers to retail end users, FERC is
expected to phase in such regulations in the future. Meanwhile, individual
state public utility commissions are free to promulgate regulations to
allow direct intra-state retail wheeling from independent producers to end-
users and several states have already commenced such procedures. See
"Business - Government Regulation."
CURRENT OPERATIONS AND ON-GOING PROJECTS
Steamboat Geothermal Power Plants. The Company has signed an agreement
to form Steamboat LLC, a limited liability company which will acquire two
geothermal power plants, referred to as the Steamboat Facilities, in
Steamboat Hills, Nevada. Electricity is produced in these geothermal
plants through the use of heat in the form of hot water from the earth.
The electricity is produced through a "binary system" in which geothermal
hot water is circulated in one closed loop and, in another closed loop,
inert gas is compressed and heated. The compressed inert gas drives
turbines to generate the electricity. The geothermal water is reinjected
into the earth to be re-heated again through the earth's sub strata magma
formation. Because there are virtually no atmospheric emissions or
pollutants in the process, because the natural resource (water) is
constantly returned to the earth to avoid depletion of the underground
aquifer water table, and because the heat source is the earth's natural
magma layer, geothermal power is considered one of the most environmentally
sound methods of producing electricity. However, it can only be produced
in locations where specific geological formations exist.
Steamboat LLC will acquire the Steamboat Facilities from Far West
Electric Energy Fund L.P. ("FWEEF") and I-A Enterprises subject to a
mortgage (the "Mortgage") in favor of an institutional lender and certain
net revenue or royalty interests in steam extraction rights. Far West
Capital is the general partner and a limited partner in FWEEF. The Company
will obtain a 50% interest in Steamboat LLC by contributing to Steamboat
LLC the $1,575,000 cash purchase price (less $50,000 down payment
previously paid by the Company) for the Steamboat Facilities. Far West
Capital will own the other 50%. The Mortgage, on which the last quarterly
principal payment was made on July 20, 1996, will have a face value of
$4,196,000 at September 15, 1996 net of an escrowed reserve, and will be
acquired by the Company for $2,407,000 and contributed to Steamboat LLC.
While the Mortgage is in technical default, the holder of the Mortgage has
waived its rights and has negotiated with the Company the payment for the
Mortgage. An additional $1,000,000 in cash will be contributed by the
Company to Steamboat LLC to allow it to acquire certain of the royalty
interests (leaving outstanding only a royalty of 10% of power revenues of
the Steamboat Facilities) and to fund certain improvements to the Steamboat
Facilities. Negotiations with the royalty owners will begin during the
beginning of August, but agreements have not yet been reached. Far West
Capital has a 5.14% ownership interest in FWEEF and is contributing to
Steamboat LLC the debt owed to it by FWEEF. Far West Capital will not
receive any portion of the purchase price paid by the Company. Before
sharing net income from Steamboat LLC with Far West Capital, the Company
will have a priority income distribution from the project of $1,800,000 per
year, with income above this priority amount to be divided equally between
the Company and Far West Capital. The Company and Far West Capital will
co-manage the project. Far West Capital was established in 1983 and has
been a developer and operator of cogeneration and independent power
projects, principally hydroelectric and geothermal, in the western United
States and is the Company's current partner in LIPA. The two Steamboat
geothermal plants were built in 1986 and 1988, respectively, by Far West
Capital. A substantial portion of the net proceeds of this Offering and
the Private Placement will be used for this acquisition, which will
generate immediate cash flow for the Company, thereby allowing it to pursue
and launch additional projects.
The Steamboat Facilities are currently managed by the professional
operations staff of SB Geo, Inc. The principals of Far West Capital own the
majority interest in SB Geo, Inc. After the Company has purchased its
equity interest in Steamboat LLC, SB Geo, Inc. will continue to manage the
day-to-day operations of the Steamboat Facilities and a joint management
committee, composed of representatives of the Company and Far West Capital,
will determine and resolve the significant management issues. Charges by SB
Geo, Inc. for services rendered will be negotiated at arms length, and may
not exceed charges for similar services which could be obtained from other
sources.
The two geothermal plants produce 15 megawatts of electric power which is
sold under two power purchase agreements to Sierra. The plants have
operated at 99% capacity since inception. The current power purchase
agreements have price adjustments in December 1996 for Steamboat 1 and in
December 1998 for Steamboat 1-A, which require Sierra to purchase and
Steamboat LLC to provide electricity at Sierra's then-prevailing short-term
avoided cost. The Company and its partners believe that the power purchase
agreements, with the price adjustments, will be at an acceptable price to
the Company. In addition, if Sierra were to consent to releasing the
Company from the existing power purchase agreements, the Company would be
free to sell the power elsewhere, as permitted under new retail wheeling
regulations proposed by FERC. Despite these retail wheeling regulations,
Sierra remains obligated to buy power from Steamboat LLC. However, Sierra
has indicated a willingness to release Steamboat LLC from the power
purchase agreements, provided that Steamboat LLC finds a market for the
output of the Steamboat Facilities outside of Sierra's territory.
There are currently five geothermal power projects operating in Steamboat
Hills, Nevada, totalling approximately 62 megawatts of output. In addition
to the 15 megawatt Steamboat 1 and 1-A projects which came on line in 1986
and 1988, respectively, the 35 megawatt Steamboat 2 and 3 projects were
developed and built by Far West Capital in 1992 and remain owned by Far
West Capital. In addition, Caithness Power, Inc. brought a 12 megawatt
project on line in 1995. There is currently a total of approximately 170
megawatts of geothermal power being produced in Nevada with production from
the Steamboat Hills area accounting for approximately 35%.
Plymouth State College, New Hampshire. In 1994 the Company, through its
subsidiary, Plymouth Envirosystems, Inc., acquired a 50% interest in
Plymouth Cogeneration which owns and operates a cogeneration plant which
produces 2.5 megawatts of electricity and 25 million BTUs for heat at
Plymouth State College, in Plymouth, New Hampshire. The facility provides
100% of the electrical and heating requirements for the campus, which is a
part of the University of New Hampshire system, under a twenty year
contract. The project, which cost $7 million to construct, is comprised of
a combination of diesel engine-generators, heat recovery and supplemental
boilers, and the complete civil works tying all campus buildings into a
single heating loop. The project was financed prior to the Company's
acquisition of a 50% interest through $5,500,000 in State of New Hampshire
tax exempt revenue bonds and $1,500,000 in equity. The Company paid a total
of $636,000 in cash and 11,400 shares of Common Stock for its 50% interest.
The Company's partners in Plymouth Cogeneration are Central Hudson
Cogeneration, Inc., a wholly owned subsidiary of Central Hudson Electric
Company of New York, and Independent Energy Finance Corporation of
Connecticut ("IEFC"). The project was completed in November 1994 and put
into full commercial service in January 1995. The plant is currently
operating at 98% capacity. IEC Plymouth, Inc. ("IEC Plymouth"),a wholly-
owned subsidiary of IEFC, runs the day-to-day operations of the plant and
the management decisions are resolved by a management committee which is
composed of representatives of the Company, IEFC and Central Hudson
Cogeneration, Inc.
The State of New Hampshire has initiated a study to determine the
feasibility of expanding the existing facility to 10 megawatts to wheel
electric power to two other state college campuses. Additionally, Plymouth
Cogeneration is bidding to sell 5 megawatts of expanded power to the local
electric cooperative. Under New Hampshire law, retail wheeling is
permitted to three customers from a single "inside-the-fence" cogeneration
plant. Also, plans are currently being developed by Plymouth Cogeneration
to install special fuel treatment equipment which will allow the existing
engines to burn less costly and more efficient fuels. Fuel cost savings
would be shared equally between the college and the partnership. There can
be no assurance that such fuel treatment equipment will be installed or
that such fuel cost savings will be realized.
Lehi Cogeneration Project. In January 1994, the Company, through its
subsidiary, Lehi Envirosystems, Inc., ("LEI") purchased a 50% equity
interest in LIPA, which owns a 17 megawatt cogeneration facility in Lehi,
Utah and the underlying real estate, hardware and permits to operate.
Although the facility has been dormant since 1990, work is underway to
commence operations at the facility and the Company believes it is capable
of future operations. The Company estimates that it will cost $30,000 to
commence operations. The successful operation of the plant also requires
the negotiation of an agreement with a utility company to purchase the
electrical output. LIPA has been negotiating with the municipal authority
and the town of Lehi. No agreements are yet in place and there can be no
assurance that the Company will be able to successfully negotiate any
contracts. The Company and its partners, who own the remaining 50% of
LIPA, share on a pro-rata basis the ownership, retrofitting costs, annual
expenses, and revenues associated with the project. The Company financed
its acquisition cost of $1,225,000 for this interest through the issuance
of Convertible Debentures. In addition to payment of interest, the Company
is obligated to pay the holders of the Convertible Debentures a pro rata
portion of 50% of LIPA's share of the net revenue (net of funds required
for the payment of interest) resulting from LIPA's energy sales. See
"Description of Securities - Convertible Debentures." The Company's
partners in the Lehi project are Far West Capital and ReComp, Inc.
("ReComp"), a Utah company with interests in waste-to-energy projects. The
Lehi facility is managed by a management committee which is composed of
representatives of Far West Capital, ReComp and the Company.
Lehi originally had three engine generators totaling 17 megawatts. One
unit which would have required extensive and costly repairs was sold in
December 1995, resulting in a gain of approximately $236,000. The two
remaining units totaling 10 megawatts are currently being prepared to start
commissioning in order to allow them to be put in operation during the
third quarter. Concurrently with readying these engines for operational
status, the LIPA partnership has received an offer to purchase these
engines and is evaluating this option. If a satisfactory sales price is
obtained, LIPA would thereafter begin plans to acquire and install a 35
megawatt gas turbine, which would have substantially greater efficiency.
If the engines were sold, operations would be delayed from the third
quarter of the current fiscal year until the second quarter of the next
fiscal year. The proceeds from the sale of these engines would provide
sufficient operating capital for the partnership until the larger gas
turbine was operational. Financing for the gas turbine, if this option is
selected, would be provided by the engine manufacturer.
Shortly after the Company's interest in the project was purchased, Micron
Technologies, Inc. ("Micron") announced it intended to build a $1.5 billion
manufacturing facility in the town of Lehi, on property one mile from the
Lehi Cogeneration Facility. The town announced that it would supply power
to Micron through its municipal power authority. The town does not have a
power generation capability, but acquires power through the Utah
Association of Municipal Power Systems ("UAMPS"). Over one year was spent
in discussions with Micron, the town of Lehi, and UAMPS as to the
feasibility of increasing the capacity from the facility to serve the 35
megawatt requirements of Micron. As a result of these discussions, the
Company and its partners decided to sell one seven megawatt engine which
was non-functional in order to make room in the plant for a larger and more
efficient engine. It was also decided during this period that it was
premature to put the plant in operation before its full intended
utilization was determined. During this prolonged period, however, it was
neither advisable nor practical, for business and political reasons, to
negotiate with other potential power purchasers. In April 1995, Micron
announced cutbacks and stopped all construction on the Lehi facility.
The Lehi cogeneration plant was originally built in 1987 at a cost in
excess of $20,000,000. The plant operated successfully as a small power
production facility under "qualifying facility" status granted by FERC from
date of commissioning until 1990, selling its electric output to Utah Power
and Light and its recovered heat to a large adjacent greenhouse operation.
In 1990 the original developer, which suffered financial problems not
associated with this project, filed for protection under the bankruptcy
laws. The Lehi plant, along with a number of other assets, were sold by the
bankruptcy court in April 1993. The Lehi plant was purchased by a Salt Lake
City group, Lehi Co-Gen Associates, L.C., with the intention of either
reselling the component equipment contained within the plant or re-
establishing the cogeneration operation in partnership with interested
parties. Extensive engineering and economic due diligence studies were
conducted on the project by Southern Electric International, a subsidiary
of the Southern Company, one of the largest electric utility companies in
the United States, in conjunction with the Company, resulting in a decision
to restore the plant to full operational status. The studies estimated that
the salvage value of the hardware and parts alone should be in excess of
$3,000,000. LIPA purchased the facility from Lehi Co-Gen Associates, L.C.
in early 1994 for approximately $292,000.
The Lehi plant uses dual fuel configuration reciprocating engines. These
engines can run on either diesel fuel or natural gas, or a combination
thereof. The plant can be operated on 5% diesel fuel and 95% natural gas,
for optimum environmental and economic efficiency. The plant is totally
self-contained, with state-of-the-art switchgear and computerized
electronic controls. Full environmental assessments have been conducted
which indicate that no environmental hazards are present or likely to
occur. One of the most important features of the plant is its extant Air
Quality Permit, allowing the plant to operate with emissions of up to 300
tons of nitrous oxide ("NOX") annually. With expanded and upgraded
hardware, this permit will allow the plant to increase operational output
substantially.
Shopping Malls. The Company has entered into a joint development
agreement with Cowen to develop, build and operate cogeneration plants in
the United States. Cowen is a financier of real estate projects. Under the
joint development agreement, Cowen will provide the customers and the
cogeneration project financing. Cowen will retain 60% of the profit
interests in the projects and the Company will retain 40%. The Company's
responsibility is to provide the technical expertise, design, equipment
selection and installation services. The joint venture is negotiating with
a major real estate company which owns and operates approximately 200
shopping malls throughout the United States. Three of the malls have been
considered for initial test sites and engineering has begun for the first
site. The Company is carrying the cost of preliminary engineering which
will be reimbursed from the project if it is undertaken. The Company and
its joint development partner have also begun discussions with a second
major owner and operator of over 40 malls and has begun feasibility studies
to determine the best initial sites. The targeted shopping malls are all
enclosed structures with an average interior space of 500,000 square feet.
Such malls have substantial electric demand, with 18 hours of daily power
plant operation, seven days per week, and with almost year-round air
conditioning requirements without regard to geographic location. The
average cogeneration system configuration for such malls would consist of 4
megawatts in electric generation, with recovered heat utilized for
absorption air conditioning (in which the recovered heat causes inert gases
to expand and compress to produce chilled air, as opposed to conventional
compression powered by electric motors.) The systems would also require up
to 1000 tons of supplemental non-electric air conditioning. The
supplemental non-electric air conditioning, in most cases, would be
provided by engine driven chillers ("EDC"). An EDC produces chilled water
by utilizing conventional compressors, but powering the compressors with
natural gas fueled engines as opposed to electric motors. The EDC units
would be manufactured by sub-contractors from designs developed and owned
by the Company. While initial plans have been drawn and reviewed with the
mall owners, there can be no assurance that the joint effort with Cowen
will lead to any contracts being signed with mall owners or cogeneration
systems being installed.
Under the plan discussed with the mall owners, the joint development
company would engineer, build and operate the cogeneration facilities, with
financing arranged by the Company's joint development partner. The joint
development company and the mall owner would share energy savings for a
fifteen year period, after which time the cogeneration plant ownership
would revert to the mall owners. The proposed agreement calls for at least
ten such installations. The mall owner has indicated, however, that
installations of cogeneration systems would be contemplated at all malls
where certain basic economic criteria for cogeneration exists. The Company
and its joint development partners believe that approximately one-third of
the malls can meet the economic criteria of a minimum of twenty-five
percent annual energy savings. Since all of the malls are of similar
configuration and have similar energy patterns, there would be an economy
of scale: project design could be replicated at multiple locations with
only modest configuration changes. A contract for the first mall is
expected to be signed in the third fiscal quarter of 1996 with construction
commencing shortly thereafter, although there can be no assurance that this
will occur.
U.S. Virgin Islands. The Company has signed agreement with and is
currently in final contract preparation with Bluebeard Holding Company to
build a 3 megawatt cogeneration project for Bluebeard's Castle, a major
resort in St. Thomas, U.S. Virgin Islands. Utility services for the
Islands, like many other areas of the Caribbean, were severely impacted
during the 1995 hurricane season, and the Company believes that many public
and private buildings are presently considering "inside-the-fence"
cogeneration facilities in order to assure reliability of electric and hot
water services as well as to reduce present high costs of utility provided
services.
It is contemplated that the Company and the resort owner will form a
limited liability entity, with equal equity ownership, which will own and
operate the cogeneration facility, selling discounted power to the hotel
and adjacent commercial buildings. It is also contemplated that the
cogeneration facility will include a 120 thousand gallon per day reverse
osmosis water purification system to convert sea water to potable water.
Supplies of fresh water, which are always in short supply in the islands,
were even further reduced as a result of the storms. It is contemplated
that the resort's holding company will arrange twenty-percent equity for
the project, with the balance being financed through local banks. The
Company will provide design, equipment selection and installation services
for the project. The holding company is also in the planning stage for a
large, new resort, apartment and shopping complex on the eastern end of St.
Thomas for which a cogeneration facility is planned. It is contemplated
that the limited liability entity to be formed by the Company and Bluebeard
Holding Company will own and operate this future facility and will seek
additional resort facilities for cogeneration throughout the Virgin Islands
and other islands in the Caribbean. While final contracts are in
preparation, the project has already begun with the receipt of initial
funding from Bluebeard and the scheduled installation of the first of six
engine generators to be used in the project.
Waste Motor Oil Project. In November 1992, the Company was engaged to
design and build a three megawatt cogeneration plant in Virginia for a
private energy investment fund under a turn-key contract for $1,600,000.
The plant was built and put into commercial service in July 1993, eight
months after commencement of the project. The private energy fund had
signed a long term contract with Virginia Electric Power Company ("VEPCO")
to provide 3 megawatts of demand capacity to the VEPCO grid, and contracted
with the Company to provide an operational system both rapidly and cost
effectively. The Company created a distinct design utilizing rebuilt, very
low RPM internal combustion engines, which have the capability of utilizing
waste motor oil as fuel. The use of waste motor oil not only reduces the
fuel costs for the project, but also solves a local environmental problem
of disposing of over 800,000 gallons annually. The Company will employ the
techniques developed on this job in future projects. The Company has no
ongoing equity interest in this project.
OTHER POTENTIAL PROJECTS FOR THE COMPANY
ALTHOUGH PRELIMINARY EFFORTS HAVE BEEN UNDERTAKEN IN CONNECTION WITH THE
FOLLOWING PROJECTS, THERE IS NO ASSURANCE THAT ANY OF THEM WILL BE
DEVELOPED.
India. The Company, through USE International, LLC, has proposed a 52
megawatt combined cycle cogeneration project for a major steel mill in
Raipur, M.P., India. The project would utilize naphtha as a fuel source to
power a General Electric 40 megawatt gas turbine which will also provide
sufficient steam recovery to power a 12 megawatt steam turbine. The use of
recovered heat in the form of steam to power a second form of electric
production is known as a "combined cycle system." The steel mill intends to
purchase the system on a turnkey basis, and the Company would act as
project manager and coordinator being compensated on a percentage-of-cost
basis. The steel mill is presently awaiting funding from its financial
institutions in order to proceed. Inside-the-fence projects of this size
are growing in popularity in India because no central or local government
permissions are required and financing is easier since it is based entirely
on the credit-worthiness of the customer. USE International, LLC is 50%-
owned by the Company and the remaining 50% is owned by Indus, Inc. Ravi
Singh, a consultant to the Company, is the President and principal
shareholder of Indus, Inc.
Panama. The Company has formed a company, Panavisa Envirosystems, S.A.,
in order to qualify and bid on several potential power projects in Panama.
Panavisa, a wholly-owned subsidiary of the Company, is the corporate
vehicle which would be the joint venture partner with others when specific
projects are developed. The Company is working with a large Panamanian
financial group to form a consortium to design, build, and operate barge-
mounted power plants for Instituto de Recursos Hidraulicos y
Electrificacion, the Panamanian national electric company, which would
purchase electricity from the consortium under a negotiated long-term
contract. The Company's role would be to act as consortium manager.
Percentages of ownership among the various potential consortium partners
have not yet been negotiated. The barge-mounted power plant design would
utilize very low speed diesel engines capable of burning Orimulsion, an
emulsified tar recovered from reserves under the Orinoco River in
Venezuela. The Company would be working with Bitor USA, a wholly owned
subsidiary of Petrolanos Venezuela, which holds the patents on the
Orimulsion process. Specific opportunities for such power plants presently
exist in Panama as well as other Central American countries, which are
facing severe power shortages as a result of aging thermal power plants and
reductions in available hydroelectricity. Advantages of barge mounted
systems are quick delivery and total fabrication in the United States.
Israel. The Company submitted bids to a kibbutz to provide a three
megawatt cogeneration facility with 800 tons of absorption cooling using
Israeli technology for the absorbers. The Company was advised that it was
low bidder. The next procedure requires the kibbutz authority to authorize
a purchase contract and to arrange financing. If the contract is
ultimately awarded, as management believes it will be, the Company will do
final design work, acquire all hardware, have the system fabricated in the
United States by qualified sub-contractors, ship the entire system in four
containers to Israel, and send engineers to oversee installation by local
mechanical and electrical contractors. The Company is working in
association with Coolingtec Ltd., of Israel, which is the patent holder and
manufacturer of a new design absorption chilling unit, which is capable of
delivering substantially lower temperatures than other absorbers currently
on the market. Absorbtion chillers utilize recovered heat from the
cogeneration engines as their power source.
Native American Reservation. The Company is in discussions with an East
Coast Native American nation to assist it in developing an infrastructure
industry on its reservation involving independent power production. The
Company has recommended, and the Tribal Council has preliminarily approved,
a plan whereby the Company and the Native American nation would form a
joint development company to build, own and operate an independent power
plant of from 50 to 100 megawatts on the reservation. Output from the plant
would be sold to the grid and to neighboring municipalities.
U.S. Plastics Manufacturer. The Company has been asked to evaluate the
potential for an inside-the-fence cogeneration project of approximately 5
megawatts for a large U.S. manufacturer of plastic products in Illinois.
Recovered heat from the engine generators would be used in the plastics
extrusion operation. If the project proves economically feasible, the
Company would design and build the facility on a turn-key basis for the
plastics manufacturer.
Locating New Projects. The executives of the Company communicate
frequently with numerous individuals and companies in the industry. Most
of the projects in which the Company is now involved have come from these
contacts. The Company has established several informal and non-exclusive
relationships with other cogeneration developers and with non-regulated
subsidiaries of utility companies to pursue other business opportunities in
areas of interest to the Company. In certain special markets that the
Company seeks to develop, the Company identifies specific potential
customers and makes direct approaches to those customers.
COMPETITION
There are approximately 150 companies nationwide currently involved with
independent power plants. The Company currently occupies a relatively
minor position in the industry. The independent power industry is basically
divided into three areas: (1) very large power plants (over 50 megawatts);
(2) standard power plants (under 50 megawatts); and (3) "inside-the-fence"
plants, which can be of varying sizes, and so called because they are built
especially to serve the electrical and thermal needs of a specific building
or group of buildings rather than to sell the power to the utility grid and
are located literally "inside-the-fence" of the end user's property. The
very large plants are generally owned and operated by non-regulated
subsidiaries of public utility companies, which have been established by
the utility companies to participate in the IPP industry. Presently, there
are about thirty such companies operating. Because the staffing and
corporate philosophy of these companies emanates from the parent public
utilities, these operations are generally geared to the largest sized
plants. While some of these non-regulated utility subsidiaries have been
highly successful in the development of larger plants, they are limited by
federal law to 50% of project ownership. In many instances, they make ideal
partners for projects and the Company intends to work with many of these
companies when it locates specific projects fitting the non-regulated
subsidiaries' parameters.
In the category of standard sized independent power plants (under 50
megawatts), the vast majority of the developers so involved are either
subsidiaries of other non-utility industrial companies, small privately
owned partnerships, or energy funds established to invest in such projects.
"Inside-the-fence" plants are generally owned and operated by the end user,
although a number of such plants are built, owned and operated for the end
user by third parties.
EMPLOYEES
At present the Company has three full time employees and five contract
staff members. The Company retains outside contract staff as required for
engineering, fabrication, construction and maintenance services. Management
believes present staffing is adequate, although it expects that the number
of full time employees will expand over the next year as new projects come
on stream. Partnership projects such as Lehi, Plymouth, and the Steamboat
Facilities have their own professional staffs. These staffs report to a
Management Group in each of the individual partnerships, and a senior
Company officer is an active member of each of the Management Groups.
DESCRIPTION OF PROPERTY
The Lehi project is owned by LIPA, a Utah limited liability company. The
Company owns 50% of LIPA. The property includes two acres of land in Lehi,
Utah and all buildings, engine/generators, ancillary generating equipment,
heat recovery equipment, switchgear and controls, storage tanks, spare
parts, tools, and permits to operate a cogeneration facility with emissions
of up to 300 tons of NOX annually. All costs associated with LIPA and the
operation of the plants, and all income derived therefrom, is divided pro-
rata among the Company and the owners of the remaining 50% of LIPA. Other
than the Company's obligations to its debenture holders and bridge lenders,
there are no other encumbrances or debt associated with LIPA or the Lehi
cogeneration project. Management believes the plant is adequately covered
by insurance.
The Plymouth State College Cogeneration project is owned by Plymouth
Cogeneration, a Delaware partnership. The Company owns 50% of Plymouth
Cogeneration, which, in turn, owns all the plant and equipment associated
with the cogeneration project including the diesel engines, generators,
three auxiliary boilers, switchgear, controls and piping. The state
university system has two contracts with Plymouth Cogeneration: (1) a 20
year lease on the above equipment, and (2) a 20 year management contract.
Both contracts have escalation clauses. Management believes the equipment
is adequately covered by insurance.
The Company leases, on a year to year basis, 1,100 square feet of office
space in a commercial office building in West Palm Beach, Florida where its
executive offices are located. Contract employees work out of their own
offices. Management believes that the current space will remain adequate
through the current lease period, which expires in September 1997.
GOVERNMENT REGULATION
Under present federal law, the Company is not and will not be subject to
regulation as a holding company under PUHCA as long as each power plant in
which it has an interest is a QF under PURPA or are subject to another
exemption. In order to be a QF, a facility must be not more than 50% owned
by an electric utility or electric utility holding company. A QF that is a
cogeneration facility must produce not only electricity but also useful
thermal energy for use in an industrial or commercial process or heating or
cooling applications in certain proportions to the facility's total energy
output and must meet certain energy efficiency standards. Therefore, loss
of a thermal energy customer could jeopardize a cogeneration facility's QF
status. If one of the power plants in which the Company has an interest
were to lose its QF status and not receive another PUHCA exemption, the
project subsidiary or partnership in which the Company has an interest that
owns or leases that plant could become a public utility company, which
could subject the Company to various federal, state and local laws,
including rate regulation. In addition, loss of QF status could allow the
power purchaser to cease taking and paying for electricity or to seek
refunds of past amounts paid and thus could cause the loss of some or all
contract revenues or otherwise impair the value of a project and could
trigger defaults under provisions of the applicable project contracts and
financing agreements. There can be no assurance that if a power purchaser
ceased taking and paying for electricity or sought to obtain refunds of
past amounts paid the costs incurred in connection with the project could
be recovered through sales to other purchasers. A geothermal plant will be
a QF if it meets PURPA's ownership requirements and certain other
standards. Each of Steamboat 1 and Steamboat 1-A meet such ownership
requirements and standards and is therefore a QF. Also, IPP's which are
fossil fuel driven, and which do not sell electricity to a regulated public
electric utility, but rather sell electricity to private customers, do not
have the same risk if QF status is lost for any reason. A regulated public
electric company purchases electricity from an IPP with QF status only
because of that QF status. Other commercial customers of an IPP purchase
electricity for a variety of other reasons unrelated to QF status.
Additionally, under new rules proposed by FERC in order to achieve
deregulation of the power industry, requirements for attaining and
maintaining QF status are being relaxed and the requirement of QF status to
achieve certain benefits will ultimately be withdrawn completely as a
requirement. The ultimate effect will be to allow IPP's greater
flexibility in choosing location and a larger potential customer base.
Presently, IPP's who sell to municipal power authorities or to a power pool
are considered "Exempted Wholesale Generators" and do not require QF
status.
The construction and operation of power generation facilities require
numerous permits, approvals and certificates from appropriate federal,
state and local governmental agencies, as well as compliance with
environmental protection legislation and other regulations. While the
Company believes that the projects in which it is involved have the
requisite approvals for existing operations and are operated in accordance
with applicable laws, they remain subject to a varied and complex body of
laws and regulations that both public officials and private individuals may
seek to enforce. There can be no assurance that new or existing laws and
regulations which would have a materially adverse affect would not be
adopted or revised, nor can there be any assurance that the Company will be
able to obtain all necessary licenses, permits, approvals and certificates
for proposed projects or that completed facilities will comply with all
applicable permit conditions, statutes or regulations. In addition,
regulatory compliance for the construction of new facilities is a costly
and time consuming process, and intricate and changing environmental and
other regulatory requirements may necessitate substantial expenditures for
permitting and may create a significant risk of expensive delays or
significant loss of value in a project if the project is unable to function
as planned due to changing requirements or local opposition.
LEGAL PROCEEDINGS
There are no legal proceedings currently pending or threatened against
the Company.
The owner of a farm adjacent to the LIPA facility in Lehi, Utah, has sued
LIPA for "nuisance, trespass, and negligence" alleging that in May 1995
diesel fuel from the power plant invaded the drainage ditch dividing the
two properties. The drainage ditch feeds a watering hole on the farmer's
property. The plaintiff's suit alleges that one bull died and five calves
were aborted as a result of petroleum toxosis from ingestion of the fuel in
the ditch and the watering hole. The suit, filed in Utah state court on
January 25, 1996, seeks damages "in excess of $20,000." Depositions of
both sides have been completed and discussions. Although there was a spill
of several hundred gallons of fuel on the LIPA property in 1991, prior to
ownership by either the Company or its partners, the 1991 spill was
remediated. Prior to the Company's purchase of its interest in the power
plant in 1994, Phase I and Phase II Environmental Assessments were
conducted which did not identify any environmental problems. There is no
pathology evidence that the bull died of petroleum toxosis, or that the
calves were aborted as a result of petroleum toxosis in the mother cows.
No other cattle drinking from the same water hole appeared to be affected.
While neither the Company nor its partners believe the plaintiff has a
strong case, LIPA is exploring settlement options with the plaintiff which
would be less costly than the further extensive testing, expert analyses
and litigation.
MANAGEMENT
The directors and executive officers of the Company are presently as
follows:
Age Position(s)
--- -----------
Theodore Rosen 71 Chairman of the Board of Directors
Richard H. Nelson 56 President, Chief Executive Officer and
Director
Fred Knoll 40 Director
Ronald Moody 62 Director
Evan Evans 70 Director
Seymour J. Beder 69 Treasurer and Chief Financial Officer
At the conclusion of this Offering, in accordance with the terms of the
Private Placement, Messrs. Knoll and Moody will resign and two new
directors, who will be designated by Enviro as the holders of the 11%
Preferred Stock (the "Designated Directors"), will be elected by the
remaining directors to fill the vacancies. Pursuant to the terms of the
11% Preferred Stock, no action may be taken by the Board of Directors
without the approval of at least one of the Designated Directors.
Theodore Rosen. Mr. Rosen has been a Director of the Company and
Chairman of the Board of Directors since November 1993. Since June 1993,
Mr. Rosen has been Managing Director of Burnham Securities. He was Senior
Vice President of Oppenheimer & Co. from January 1991 to June 1993, and was
Vice President of Smith Barney & Co. from 1989 to 1991. Mr. Rosen also
currently serves as a director of Waterhouse Investors Cash Management Co.,
an investment management company engaged in management of money market
mutual funds. Mr. Rosen holds a BA degree from St. Lawrence University and
did graduate work at both Albany Law School and Columbia University School
of Business.
Richard H. Nelson. Mr. Nelson has been President, Chief Executive
Officer and Director of the Company since November 1993. Mr. Nelson has
been engaged in the power plant industry for more than twenty years and has
been involved with over 200 power projects throughout the world, 125 of
which have been cogeneration projects. In 1973, Mr. Nelson formed Sartex
Corp., which was merged into the Company, then called Cogenic Energy
Systems, Inc. ("Cogenic"), in 1981. Mr. Nelson served as president of
Cogenic until 1989. Cogenic filed for reorganization under Chapter 11 of
the Bankruptcy Code in 1989. From January 1989 until January 1991, Mr.
Nelson was president of Utility Systems Corp., a subsidiary of Cogenic
which was not party to the Chapter 11 filing. In January 1991 Mr. Nelson
formed USF where he served as president until November 1993. A Plan of
Reorganization was confirmed for Cogenic in March 1993, after which USF and
Cogenic merged, with Cogenic being the surviving corporation and changing
its name to U.S. Envirosystems, Inc. Mr. Nelson was Special Assistant to
the Director of the Peace Corps from 1961 to 1962; thereafter he served as
Military Aide to the Vice President of the United States from 1962 to 1963
and Assistant to the President of the United States from 1963 to 1967.
From 1967 to 1969, Mr. Nelson was Vice President of American International
Bank, and from 1969 to 1973 he was Vice President of Studebaker-Worthington
Corp. Mr. Nelson received his BA degree from Princeton University.
Ronald Moody. Mr. Moody has been a Director of the Company since January
1994. Mr. Moody entered the investment community in 1967 as a senior
partner of a Canadian investment house until 1976, and since that time has
been a private investor for his own account. After several years with the
Royal Bank of Canada, Mr. Moody joined the Montreal Trust Company in 1962
as a manager of pension fund and individual trust accounts. Mr. Moody
received his BA from the University of Western Ontario.
Fred Knoll. Mr. Knoll has been a Director of the Company since August
1994. During the last five years, Mr. Knoll has been chairman and CEO of
Knoll Capital Management, an investment and cash management firm, in New
York. Mr. Knoll is the Chairman of the Board of Thinking Tools and of
Lamar Signal Processing and a Director of Spradling Holdings, Raphael Glass
and the Columbus Fund. From 1989 until 1993, Mr. Knoll was Chairman of the
Board of Directors of C3/Telos Corporation, a computer systems company. Mr.
Knoll received his B.S. degree in Computer Sciences from M.I.T. and also a
B.S. degree in Management from the Sloan School at M.I.T. He received his
MBA from Columbia University.
Evan Evans. Mr. Evans has been a Director of the Company since August
1995. Since 1983 he has been chairman of Holvan Properties, Inc.
("Holvan"), a real estate developer, and was managing director of Easco
Marine, Ltd. from 1983 to 1988. Also, from 1985 to 1986 Mr. Evans was
general manager of Belgian Refining Corporation ("BRC"), pursuant to a
contract between BRC and Holvan. From 1981 to 1983 he was vice president
of Getty Trading and Transportation Company and president of its
subsidiary, Getty Trading International, Inc. From 1970 to 1981 Mr. Evans
was vice president and member of the board of directors of United Refining
Corp. He is currently on the board of directors of Holvan and BRC. Mr.
Evans received his BS degree in Mathematics from St. Lawrence University
and his BS in Civil Engineering from M.I.T.
Seymour J. Beder has been Secretary, Treasurer, Controller and Chief
Financial Officer of the Company since November 1993. From 1970 through
1980 he was Chief Financial Officer for Lynnwear Corporation, a textile
company, and from 1980 to September 1993, Mr. Beder was president of
Executive Timeshare, Inc., a provider of executive consulting talent. Mr.
Beder is a Certified Public Accountant, and a member of the New York State
Society of Certified Public Accountants and the American Institute of
Certified Public Accountants. Mr. Beder received his BA degree from City
College of New York.
In addition, the following persons, who are not officers or directors,
are affiliated with the operations of the Company as consultants:
Donald A. Warner. Mr. Warner has acted as director of development and a
consultant to the Company since 1993. For over 20 years, Mr. Warner has
been closely involved with the energy and environmental industries, and has
been consultant and attorney to numerous environmental and energy project
developments in both the public and private sector. The Company expects
Mr. Warner to work for the Company full-time after the completion of this
Offering. Mr. Warner holds his BA degree from Rochester University and his
JD degree from Syracuse University. He also holds an LLM degree from
Washington University.
Patrick McGovern. Mr. McGovern has been a consultant to the Company
since 1993. From 1973 to 1981, Mr. McGovern was Engine Sales Manager for
Virginia Tractor Company (Caterpillar). From 1981 to 1984, he was Vice
President Engineering for the Company. From 1984 to present, he has been
president of Power Management Corp. Mr. McGovern holds both his BSEE and
MBA degrees from Louisiana State University.
Ravi Singh. Mr. Singh has been President of USE International, LLC, 50%
of which is owned by the Company, since 1995. Mr. Singh is president of
Indus LLC, a company he formed in 1994 to develop new investment
opportunities throughout southeast Asia and Oceania regions. From 1988
until 1994 he was a partner and Managing Director for International
Investment Banking at Cowen & Company. Prior to his time at Cowen &
Company, Mr. Singh had been affiliated with Coopers & Lybrand LLP with
advisory responsibilities for cross-border mergers and acquisitions,
notably in Japan. Mr. Singh was also affiliated with Komatsu Ltd. of Japan
where he was responsible for business development in India. Mr. Singh
received his BS in Engineering from the University of Delhi and his MBA
from Columbia University.
Nils A. Kindwall. Mr. Kindwall was Vice Chairman of Freeport McMoran,
Inc. from 1975 until his retirement in 1993. At Freeport McMoran, he was
principally responsible for developing and financing major natural resource
projects throughout the world. He has served on the National Advisory Board
of Chemical Bank, and is on the board of John Wiley & Sons, Inc. and Metall
Mining Corporation. Mr. Kindwall received his BA degree in Economics from
Princeton University and his MBA from Columbia University.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation includes provisions which
limit the liability of its Directors. As permitted by applicable
provisions of the Delaware General Corporation Law (the "Delaware Law"),
Directors will not be liable to the Company for monetary damages arising
from a breach of their fiduciary duty as Directors in certain
circumstances. This limitation does not affect liability for any breach of
a Director's duty to the Company or its stockholders (i) with respect to
approval by the Director of any transaction from which he or she derives an
improper personal benefit, (ii) with respect to acts or omissions involving
an absence of good faith, that the Director believes to be contrary to the
best interests of the Company or its stockholders, that involve intentional
misconduct or a knowing and culpable violation of law, that constitute an
unexpected pattern or inattention that amounts to an abdication of his or
her duty to the Company or its stockholders, or that show a reckless
disregard for duty to the Company or its stockholders in circumstances in
which he or she was, or should have been aware, in the ordinary course of
performing his or her duties, of a risk of a serious injury to the Company
or its stockholders, or (iii) based on transactions between the Company and
its Directors or another corporation with interrelated Directors or on
improper distributions, loans or guarantees under applicable sections of
Delaware Law. This limitation of Directors' liability also does not affect
the availability of equitable remedies, such as injunctive relief or
rescission.
The Company's Bylaws obligate the Company to indemnify its directors and
officers to the full extent permitted by Delaware Law, including
circumstances in which indemnification is otherwise discretionary under
Delaware Law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company, pursuant to the foregoing provisions or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
EXECUTIVE COMPENSATION
The following table shows the total compensation paid by the Company
during the fiscal years ended January 31, 1996, 1995 and 1994, and during
the three months ended April 30, 1996 to Mr. Richard H. Nelson, the
Company's President and Chief Executive Officer. There were no other
executives of the Company who received total compensation in excess of
$100,000 during any of such years.
<TABLE>
<S> <C> <C> <C> <C>
LONG TERM
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION
--------------------------- ----------- ------ ----- ------------
Richard H. Nelson,
President and Chief 1997
Executive Officer . . . . (to April 30, 1996) $37,500(1)
1996 150,000(2) - -
1995 $149,850 - -
1994 $24,500 - -
</TABLE>
(1) This entire amount has been deferred and will be paid by the Company
when working capital is adequate, which shall be determined by the Board of
Directors.
(2) Includes $125,500 at January 31, 1996, which has been deferred and will
be paid by the Company when working capital is adequate, which shall be
determined by the Board of Directors.
Compensation of Directors. Directors are not compensated for attendance
at meetings of the Board, although certain travel expenses relating to
attending meetings are reimbursed.
Employment Contracts. Mr. Nelson has an employment contract with the
Company to serve as its Chief Executive Officer for a term of five years
from the date of this Prospectus. Mr. Nelson's contract provides for an
annual salary of $150,000 plus normal benefits. Mr. Nelson has volunteered
to defer 50% of this salary until the Company's cash flow is, in the
opinion of the Board of Directors, sufficient. Under the terms of Mr.
Nelson's employment agreement, he may not disclose any confidential
information pertaining to the Company nor compete with the Company during
the term of his employment with the Company. Mr. Nelson works for the
Company full-time. As of September 15, 1996, the amount of deferred
compensation owed to Mr. Nelson will be $219,250.
Mr. Rosen has an employment contract with the Company to serve as its
Chairman of the Board for a term of five years from the date of this
Prospectus. Mr. Rosen's contract commenced December 1, 1993 and allows an
annual salary of $60,000 which is being deferred until the Company's cash
flow is, in the opinion of the Board of Directors, sufficient. Mr. Rosen
devotes a minimum of 40 hours per week to the Company. Under the terms of
Mr. Rosen's employment agreement, Mr. Rosen agrees that he will not
disclose any confidential information pertaining to the Company nor compete
with the Company during the term of his employment with the Company. As of
September 15, 1996, the amount of deferred compensation owed to Mr. Rosen
will be $162,500.
Stock Options. The Board of Directors has reserved 400,000 shares of the
Company's Common Stock for the issuance of non-qualified options to
existing and future directors, executives and employees of the Company.
CERTAIN TRANSACTIONS
The Plan of Reorganization of Cogenic Energy Systems, Inc. (the "Plan")
was originally filed and financed by Richard Nelson, who was then the sole
shareholder and sole director of USF. The Plan was confirmed by the
bankruptcy court in March 1993. Under the Plan, 100,000 shares of the
reorganized debtor were issued to Richard Nelson as the proponent and
financier of the Plan. An additional 125,000 shares (the "merger shares")
were issued to USF upon consummation of the Plan and upon the merger of the
reorganized debtor with USF. These merger shares were distributed to
individuals and companies who purchased shares of USF for purposes of
providing USF with the financing to acquire the Company and to allow the
Company to continue as the surviving corporation.
Messrs. Nelson, Theodore Rosen and Ronald Moody, President, Chairman of
the Board and Director, respectively, are participants in the Plymouth Loan
(having loaned $25,000, $25,000 and $75,000, respectively), which bears
interest at the rate of 2.5% per annum above the prime rate, and in which
the lenders, other than Messrs. Nelson and Rosen, received five-year
warrants to purchase 120 shares of the Company's Common Stock for each
$1,000 loaned, which warrants are exercisable at $5.00 per share. Messrs.
Nelson, Rosen, and Moody will benefit by the payment to them from the net
proceeds of the Offering and the Private Placement of $30,376, $30,284 and
$90,814, respectively (including accrued interest to September 15, 1996) in
connection with the repayment of the Plymouth Loan. Mr. Rosen is also a
holder of $125,000 in principal amount of the Company's Convertible
Debentures, which has accrued interest, adjusted to September 15, 1996, of
$26,200 which will be repaid with the proceeds of the Offering. As part of
the Debenture Conversion, the conversion rate of the Convertible Debentures
which remain outstanding after the Debenture Conversion, including Mr.
Rosen's Convertible Debentures, will be reduced to $8.00 per share from the
present $16.00 per share and the interest rate will be reduced to 9% from
the present 18%. See "Use of Proceeds" and "Description of Securities -
Convertible Debentures."
In June 1995, the Company issued 57,500 shares of Series One Preferred
Stock to Anchor under the terms of the Anchor Loan by which Anchor loaned
the Company the sum of $600,000 bearing interest at the rate of 18% per
annum. The Anchor Loan is cross-collateralized (together with the
Solvation Loan described below) by a first lien on all of the assets of the
Company and 97,250 shares of Common Stock owned by Messrs. Nelson and
Rosen. The purpose of the Anchor Loan was to finance the costs and
expenses of the proposed public offering and provide other funding to the
Company for various costs and expenses. The maturity of the Anchor Loan
has been extended from March 11, 1996 to September 15, 1996. The Anchor
Loan is to be repaid at the date of closing of the Offering or at the date
of closing of any public or private offering of debt or equity securities
in the gross amount of $5,000,000 or more and/or the sale of any of the
Company's assets or any part thereof. $600,000 of the proceeds of the
Offering and the Private Placement will be used to repay the Anchor Loan
and $156,000 of accrued interest on such loan. The 57,500 shares of Series
One Preferred Stock will be exchanged for 205,000 shares of Common Stock in
the Preferred Stock Exchange. See "Use of Proceeds - Anchor Bridge Loan"
and "Description of Securities - Preferred Stock - Series One Preferred
Stock."
Private Placement. In December 1995, Solvation loaned the Company
$200,000, which carries an interest rate of 10% per annum and which is due
when the Offering is closed, but no later than September 15, 1996. A
further $50,000 was loaned to the Company in May 1996 on the same terms and
conditions. The Solvation Loan is cross-collateralized with the Anchor
Loan by a first lien on all of the assets of the Company and 97,250 shares
of Common Stock owned by Messrs. Nelson and Rosen. See "Use of Proceeds -
Solvation Loan." Concurrently with the closing of the Offering, the
Company will issue to Enviro for $3,100,000, 1,600,000 shares of 11%
Preferred Stock convertible into 1,600,000 shares of Common Stock of the
Company. See "Description of Securities - Preferred Stock - 11% Preferred
Stock." The Company will also issue 500,000 Private Warrants to EMC for
$400,000. See "Description of Securities - Warrants - Private Warrants."
EMC is a subsidiary of Solvation. Solvation and Enviro are indirectly
owned by different members of the same family. The terms for the Private
Placement were negotiated at arms-length.
In connection with the Anchor Loan, Richard Nelson and Theodore Rosen,
the Company's President and Chairman of the Board, respectively, pledged an
aggregate of 97,250 shares of the Company's Common Stock to Anchor. (The
pledge was later extended to secure the Solvation Loan.) These shares will
be released from such pledge upon repayment of the Anchor Loan and the
Solvation Loan. See "Use of Proceeds."
PRINCIPAL STOCKHOLDERS
The following table lists the number of shares of Common Stock owned as
of January 31, 1996 by (i) persons known to hold more than five percent of
the shares of outstanding Common Stock, (ii) each director of the Company,
(iii) any executive officers named in the Summary Compensation Table, (iv)
all officers and directors of the Company as a group. Each person named in
the table has sole investment power and sole voting power with respect to
the shares of the Common Stock set forth opposite his or its name, except
as otherwise indicated.
<TABLE>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1) AFTER OFFERING(1)
-------------------------- -------------------------
NAME AND ADDRESS OF
BENEFICIAL OWNER(1) SHARES PERCENTAGE SHARES PERCENTAGE
------------------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Richard Nelson . . . . . . . . 82,446 18.7% 82,446 3.4%
Theodore Rosen . . . . . . . . 88,333(2) 17.4% 100,833(2a) 4.1%
Ronald Moody . . . . . . . . . 21,500(3) 4.8% 21,500(3) 0.9%
Fred Knoll . . . . . . . . . . 171,333(4) 28.6% 191,334(4a) 7.5%
Evan Evans . . . . . . . . . . 2,500(5) 0.6% 2,500(5) 0.1%
S. Marcus Finkle . . . . . . . 63,833(6) 13.9% 68,833(6a) 2.9%
117 AABC
Aspen, CO
Guernroy, Ltd. . . . . . . . . 38,158(7) 8.6% 43,158(7a) 1.8%
c/o Royal Bank of Canada
Channel Isles, UK
Enviro Partners, L.P. . . . . . 0 0.0% 1,600,000(8) 40.1%
885 Third Avenue, 34th Floor
New York, NY 10036
Anchor Capital Company, LLC . . 205,000(9) 31.8% 205,000(9) 7.9%
1140 Avenue of the Americas
New York, NY 10036
All officiers and directors . . 381,113(2)(2a) 55.2% 413,613(2)(2a) 15.6%
as a group (6 persons) (3)(4) (3)(4)
(5) (4a)(5)
</TABLE>
-------------
(Notes are on following page)
<PAGE>
(1) The tabular information gives effect to the exercise of warrants or
options exercisable within 60 days of the date of this table owned in
each case by the person or group whose percentage ownership is set
forth opposite the respective percentage and is based on the
assumption that no other person or group exercises its option. The
address of each of the officers and directors is 515 North Flagler
Drive, Suite 202, West Palm Beach, Florida 33401.
(2) Includes 8,333 shares issuable upon conversion of Convertible
Debentures, and 60,250 shares issuable upon exercise of non-qualified
options at an exercise price of $8 per share which became exercisable
on December 1, 1995.
(2a) Includes 10,417 shares issuable upon conversion of Convertible
Debentures, and 60,250 shares issuable upon exercise of non-qualified
options at an exercise price of $8 per share which became exercisable
on December 1, 1995. Excludes 10,417 shares issuable upon exercise of
Private Warrants which are not exercisable until one year after the
closing of the Debenture Conversion. Also excludes 500,000 shares of
Common Stock underlying 500,000 Private Warrants held by EMC which are
subject to Mr. Rosen's right of first refusal for nine months from the
date of this Prospectus.
(3) Includes 9,000 shares issuable on exercise of warrants at an exercise
price of $5 per share which became exercisable on October 31, 1994.
(4) Includes (i) 67,500 shares issuable upon exercise of non-qualified
options at an exercise price of $8 per share which became exercisable
on December 1, 1995 and (ii) 91,333 shares owned by Europa
International Inc. ("Europa"), including 13,333 shares issuable to
Europa upon conversion of Convertible Debentures and 78,000 shares
issuable to Europa on exercise of warrants at an exercise price of $5
per share which became exercisable on October 31, 1994. Knoll Capital
Management has the sole voting power of the shares owned by Europa.
Mr. Knoll is the President and sole shareholder of Knoll Capital
Management.
(4a) Includes Europa holdings of 16,667 shares issuable upon conversion of
Convertible Debentures and 78,000 shares issuable on exercise of
warrants at an exercise price of $5 per share which became exercisable
on October 31, 1994. Knoll Capital Management has the sole voting
power of the shares owned by Europa. Mr. Knoll is the President and
sole shareholder of Knoll Capital Management. Excludes 16,667 shares
issuable upon exercise of Private Warrants which are not exercisable
until one year after the closing of the Debenture Conversion.
(5) Includes 1,250 shares issuable upon exercise of non-qualified options
at an exercise price of $4 per share which became exercisable on
January 25, 1995.
(6) Includes 3,333 shares issuable upon conversion of Convertible
Debentures and 18,000 shares issuable on exercise of warrants at an
exercise price of $5 per share which became exercisable on October 31,
1994.
(6a) Includes 4,167 shares issuable upon conversion of Convertible
Debentures and 18,000 shares issuable on exercise of warrants at an
exercise price of $5 per share which became exercisable on October
31, 1994. Excludes 4,167 shares issuable upon exercise of Private
Warrants which are not exercisable until one year after the Debenture
Conversion.
(7) Includes 3,333 shares issuable upon conversion of Convertible
Debentures.
(7a) Includes 4,167 shares issuable upon conversion of Convertible
Debentures. Excludes 4,167 shares issuable upon exercise of warrants
which are not exercisable until one year after the Debenture
Conversion.
(8) Represents shares issuable upon conversion of 11% Preferred Stock.
Excludes 500,000 shares issuable to EMC upon exercise of Private
Warrants which are not exercisable until one year after the Private
Placement. Enviro and EMC are indirectly owned by different members of
the same family.
(9) Represents shares issuable upon conversion of 57,500 shares of Series
One Preferred Stock.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 35,000,000 shares of
Common Stock, par value $.01 per share (the "Common Stock"), and 5,000,000
shares of Preferred Stock, par value $.01 per share. The following summary
of certain terms of the Common Stock and Preferred Stock does not purport
to be complete and is subject to, and qualified in its entirety by, the
provisions of the Company's Certificate of Incorporation and By-laws, which
are included as exhibits to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
The Company has 439,650 shares of Common Stock issued and outstanding.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Accordingly, holders of a majority of the shares
entitled to vote in any election of Directors may elect all of the
Directors standing for election. Subject to preferences that may be
applicable to any then outstanding Preferred Stock, the holders of the
Common Stock are entitled to receive such dividends, if any, as may be
declared by the Board of Directors from time to time out of legally
available funds. Upon liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets of the Company that are legally available for distribution, after
payment of all debts and other liabilities and subject to the prior rights
of holders of the Preferred Stock then outstanding. The holders of Common
Stock have no preemptive, subscription, redemption or conversion rights.
The rights, preferences and privileges of holders of Common Stock are
subject to the rights of the holders of shares of any series of Preferred
Stock that the Company will issue in the future.
WARRANTS
Each Warrant entitles the registered holder to purchase one share of
Common Stock at a price of $4.00 per share, subject to adjustments in
certain circumstances, during the period commencing one year and ending
five years from the date of this Prospectus.
The Warrants are redeemable by the Company, at the option of the
Company, with the prior consent of the Representative, at a price of $.01
per Warrant at any time after the Warrants become exercisable, upon not
less than 30 business days' written notice, provided that the last sales
price of the Common Stock equals or exceeds 150% (initially $6.00) of the
then-exercise price of the Warrants (the "Redemption Threshold") for the 20
consecutive trading days ending on the third day prior to the notice of
redemption to warrantholders. The warrantholders shall have the right to
exercise the Warrants until the close of business on the date fixed for
redemption. The Company is required to maintain the effectiveness of a
current registration statement relating to the exercise of the Warrants
and, accordingly, the Company will be unable to redeem the Warrants unless
there is a currently effective prospectus and registration statement under
the Securities Act covering the issuance of underlying securities. Also,
lack of qualification or registration under applicable state securities
laws may mean that the Company would be unable to issue securities upon
exercise of the Warrants to holders in certain states, including at the
time when the Warrants are called for redemption.
The Warrants will be issued in registered form under a Warrant Agreement
between the Company and American Stock Transfer & Trust Company as Warrant
Agent. Reference is made to such Warrant Agreement (which has been filed
as an exhibit to the Registration Statement of which this Prospectus is a
part) for a complete description of the terms and conditions applicable to
the Warrants (the description herein contained being qualified in its
entirety by reference to such Warrant Agreement).
The exercise price, number of shares of Common Stock issuable on
exercise of the Warrants and Redemption Threshold are subject to adjustment
in certain circumstances, including in the event of a stock dividend,
recapitalization, reorganization, merger or consolidation of the Company.
However, the Warrants are not subject to adjustment for issuances of Common
Stock at a price below their exercise price.
The Company has the right, in its sole discretion, to decrease the
exercise price of the Warrants for a period of not less than 30 days on not
less than 30 days' prior written notice to the warrantholders. In
addition, the Company has the right, in its sole discretion, to extend the
expiration date of the Warrants on five business days' prior written notice
to the warrantholders. The Company will comply with all applicable tender
offer rules, including Rule 13e-4, in the event the Company reduces the
exercise price for a limited period of time.
The Warrants may be exercised upon surrender of the Warrant Certificate
representing the Warrants on or prior to the expiration date at the offices
of the Warrant Agent, with the exercise form on the reverse side of the
Warrant Certificate completed and executed as indicated, accompanied by
full payment of the exercise price (by certified check, payable to the
Company) for the number of Warrants being exercised. The warrantholders do
not have the rights or privileges of holders of Common Stock.
No Warrants will be exercisable unless at the time of exercise the
Company has filed with the Commission a current prospectus covering the
shares of Common Stock issuable upon exercise of such Warrants and such
shares have been registered or qualified or are exempt under the securities
laws of the state of residence of the holder of such Warrants.
No fractional shares will be issued upon exercise of the Warrants. The
Company will pay to such warrantholder, in lieu of the issuance of any
fractional share which is otherwise issuable to such warrantholder, an
amount in cash based on the market value of the Common Stock on the last
trading day prior to the exercise date.
Private Warrants. On May 3, 1996 EMC entered into an agreement with the
Company whereby EMC agreed to purchase for $400,000, concurrently with
consummation of this Offering, Private Warrants to purchase 500,000 shares
of Common Stock of the Company. Terms of the agreement were negotiated by
the two parties. The Private Warrants are to have the same terms and
conditions as the Warrants. The Company has agreed to keep a shelf
registration statement in effect, covering the Private Warrants to be
received by EMC and the shares into which such Private Warrants are
convertible. EMC has given Theodore Rosen, the Company's Chairman of the
Board, a right of first refusal to purchase such Private Warrants if at any
time during the nine-month period following the date of this Prospectus EMC
decides to sell such Private Warrants. Mr. Rosen has agreed with the
Representative that he will exercise such right of first refusal in the
event EMC decides to sell the Private Warrants during such nine-month
period and that any Private Warrants purchased by Mr. Rosen will not be
sold by him until at least 13 months from the date of this Prospectus.
125,000 Private Warrants are also being issued in connection with the
Debenture Conversion. The terms of the Private Warrants were negotiated at
arms-length.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock,
par value $0.01 per share, in one or more series. The Board of Directors,
without further approval of the stockholders, is authorized to fix the
rights and terms relating to dividends, conversion, voting, redemption,
liquidation preferences, sinking funds and any other rights, preferences,
privileges and restrictions applicable to each such series of Preferred
Stock. The issuance of Preferred Stock, while providing flexibility in
connection with possible financing, acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of
the holders of Common Stock and, under certain circumstances, be used as a
means of discouraging, delaying or preventing a change in control of the
Company. Other than its agreement to issue the shares of the 11% Preferred
Stock and the Series One Preferred Stock, the Company has no shares of
Preferred Stock outstanding and has no plans to issue any shares.
Series One Preferred Stock. In June 1995, the Board of Directors
designated 100,000 of the Company's Preferred Stock as "Series One
Exchangeable and Convertible Preferred Stock." The Company issued 57,500
shares of such Series One Exchangeable and Convertible Preferred Stock (the
"Series One Preferred Stock") to Anchor under the terms of the Anchor Loan.
See "Certain Transactions." Under the terms of the Anchor Loan, upon the
consummation of this Offering and the other Closing Transactions, the
57,500 shares of Series One Preferred Stock will be exchanged for 205,000
shares of Common Stock. The holders are also entitled to receive
cumulative dividends equal to $1.00 per share and have a liquidation
preference of $10.00 per share plus any dividends accrued and unpaid. The
holders of Series One Preferred Stock have no voting rights except for
certain corporate actions. The Series One Preferred Stock is redeemable at
the option of the Company at a price of $10.00 per share, plus accrued and
unpaid dividends, under certain conditions, commencing January 1, 1999.
11% Preferred Stock. On May 3, 1996 Enviro entered into an agreement
with the Company whereby Enviro agreed to purchase for $3,100,000,
concurrently with consummation, 1,600,000 shares of 11% Preferred Stock,
which will be convertible into 1,600,000 shares of Common Stock of the
Company. The 11% Preferred Stock has an aggregate liquidation preference of
$3,100,000 plus accrued dividends and will carry a preferential annual
cumulative dividend rate of 11% of the liquidation preference. During the
first two years after issuance, dividends on the 11% Preferred Stock will
be payable in additional shares of 11% Preferred Stock (valued at $1.8375
per share). Thereafter dividends on the 11% Preferred Stock will be
payable in either shares of 11% Preferred Stock or cash, at the option of
the Company. The Company has agreed to keep a shelf registration statement
in effect covering the shares into which the 11% Preferred Stock is
convertible. The 11% Preferred Stock will vote with the Common Stock on a
one vote per share basis on all matters other than the election of
directors.
The 11% Preferred Stock, as a class, will have the right to designate
two directors (the "Designated Directors") out of the five members of the
Board of Directors, and no action may be taken by the Board of Directors
without the approval of at least one of the Designated Directors.
The 11% Preferred Stock is redeemable at the option of the Company at
any time after four years from issuance, at a redemption price equal to the
liquidation preference and it is mandatorily redeemable ten years after
issuance.
The terms of the 11% Preferred Stock were negotiated at arms-length.
CONVERTIBLE DEBENTURES
Concurrently with the consummation of this Offering and the other
Closing Transactions, the Convertible Debentures, of which an aggregate
principal amount of $1,525,000 is outstanding, will be restructured by
converting $500,000 principal amount into 125,000 shares of Common Stock
and 125,000 Private Warrants and reducing the conversion rate of the
remainder to $8.00 per share from the present $16 per share, making the
remainder convertible into 128,125 shares of Common Stock. From and after
the consummation of the Offering, the interest rate will be 9% instead of
the present 18%. The Convertible Debentures were issued in June 1994 and
mature on January 25, 2004. In addition to payment of interest, the
Company shall pay the holders of the Convertible Debentures a pro rata
portion of 50% of LIPA's share of the net revenue (net of funds required
for the payment of interest) resulting from LIPA's energy sales (the
"Supplemental Participation"). See "Business - Current Operations and On-
Going Projects - Lehi Cogeneration Project."
Pursuant to the terms and conditions of a pledge agreement between the
Company and Richard Nelson and Theodore Rosen, acting jointly as pledge
agent for all of the holders of the Convertible Debentures, payment of
principal and interest on the Convertible Debentures and, if applicable,
any Supplemental Participation due is secured by a security interest in all
of the issued and outstanding shares of common stock of LEI, all of which
issued and outstanding shares are owned by the Company. Until such time as
the Company's obligations for the payment of the principal and interest on
the Convertible Debentures and, if applicable, any Supplemental
Participation due are paid in full, the Company shall not cause LEI to
issue any additional shares of common stock unless the security interest
granted in LEI shall be extended to such additional shares.
The Convertible Debentures are subordinate and subject in right of
payment to the prior payment of all "Senior Indebtedness" of the Company.
"Senior Indebtedness" is the principal of, premium, if any, and interest
(including any interest accruing after the filing of a petition in
bankruptcy) on and other amounts due or in connection with any indebtedness
of the Company including without limitation, the liabilities as defined in
and arising under any loan or security agreement with a bank, insurance
company, or other financial institution or affiliate of any thereof whether
outstanding on the date of the Convertible Debentures, or any indebtedness
thereafter created, incurred, assumed or guaranteed by the Company, and, in
each case, all renewals, extensions, and refundings thereof, except
indebtedness which by the terms of the instrument creating or evidencing
such indebtedness created, incurred, assumed, or guaranteed after the date
of the Convertible Debentures is expressly made equal to or subordinate and
subject in right of payment to, the payment of principal of an interest on
the Convertible Debentures. Notwithstanding anything herein to the
contrary, Senior Indebtedness shall not include (i) indebtedness
representing the repurchase price of any preferred stock or other capital
stock of the Company or any dividend or distribution with respect thereto;
(ii) indebtedness of the Company owed directly to any employee, officer or
director thereof; and (iii) indebtedness which, by its terms, is
subordinate in right of payment to the indebtedness of the Company
evidenced by the Convertible Debentures.
To the extent the Company shall have funds legally available for such
payment, commencing January 25, 1998, the Company may redeem at its option
the Convertible Debentures, in whole or in part, at a redemption price
equal to 102% of the principal amount of each Convertible Debenture, plus
any unpaid and accrued interest of the Supplemental Participation. Upon
any such redemption, the Company must issue each holder whose Convertible
Debenture(s) have been redeemed a warrant to purchase a number of shares of
the Company's Common Stock equal to the number of shares into which the
principal amount being redeemed is then convertible. The exercise price of
these warrants would be the same as the conversion price at the time of
redemption (currently $8.00 per share).
ANTI-TAKEOVER PROVISIONS
The Company is governed by the provisions of Section 203 of the General
Corporation Law of Delaware, an anti-takeover law. In general, this
statute prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became
an interested stockholder, unless the business combination is approved in a
prescribed manner. A "business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder. An "interested stockholder"is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or
more of the Company's voting stock.
The Delaware Statute may discourage certain types of transactions
involving an actual or potential change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and warrant agent
for the Warrants is American Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Possible Rule 144 Sales. Upon completion of the Offering by the Company
described in this Prospectus, the Company will have outstanding 2,394,650
shares of Common Stock. All of the 1,625,000 shares sold in the Offering
(assuming no exercise of the Underwriters' over-allotment option) will be
freely transferable by persons other than affiliates (as defined in
regulations under the Securities Act) without restriction or further
registration under the Securities Act.
Of the 439,650 shares of Common Stock outstanding prior to the Offering,
64,650 shares of Common Stock outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act and may not be sold
in the absence of registration under the Securities Act, unless an
exemption from registration is available, including the exemption provided
by Rule 144. Under Rule 144 as currently in effect, of such 64,650 shares,
35,000 shares are currently eligible for sale (none of which are subject to
the agreements described below restricting their sale), an additional 8,750
shares will be eligible for such sale in or after August 1996, and the
remaining 21,400 shares will be eligible for such sale in or after June,
1998, subject in each instance to the volume limitations of the Rule. The
holders of record of _________ of these shares have agreed with the
Representative not to sell their shares until thirteen months from the date
of this Prospectus without the prior written approval of the
Representative. The 205,000 shares of Common Stock to be issued in the
Preferred Stock Exchange and the 125,000 shares of Common Stock to be
issued upon the Debenture Conversion will be restricted securities but may
be resold pursuant to the shelf registration thereof. Anchor has agreed
not to sell the 205,000 shares of Common Stock it will receive in the
Preferred Stock Exchange without the Representative's prior written
approval, for a period of nine months following the consummation of the
Offering. The foregoing does not give effect to any shares issuable on
exercise of outstanding options and warrants. The effect of the offer and
sale of such shares may be to depress the market price for the Company's
Common Stock.
In general, under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated for purposes of Rule 144) who
beneficially owns Restricted Securities with respect to which at least two
years have elapsed since the later of the date the shares were acquired
from the Company or from an affiliate of the Company, is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock of the
Company, or (ii) the average weekly trading volume in Common Stock during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain manner-of-sale provisions and notice requirements, and
to the availability of current public information about the Company. A
person who is not an affiliate, has not been an affiliate within 90 days
prior to sale and who beneficially owns Restricted Securities with respect
to which at least three years have elapsed since the later of the date the
shares were acquired from the Company or from an affiliate of the Company,
is entitled to sell such shares under Rule 144(k) without regard to any of
the volume limitations or other requirements described above.
Registration Rights. This Registration Statement includes a shelf
registration (the "Shelf Registration") to enable Enviro to sell to the
public the 1,600,000 shares of Common Stock into which the shares of 11%
Preferred Stock are convertible. Enviro has agreed that it will not sell
such shares for a period of nine months from the closing of the Offering
without the Representative's consent. The Shelf Registration also covers
the 500,000 Private Warrants being acquired by EMC and the underlying
shares of Common Stock issuable on the conversion of the 11% Preferred
Stock and the exercise of such Private Warrants. These Private Warrants
are not subject to any agreement restricting resale. The Shelf
Registration also enables the holders of the 205,000 shares of Common Stock
to be issued in the Preferred Stock Exchange to sell their shares. The
125,000 shares of Common Stock to be issued in the Debenture Conversion and
the 11,400 shares of Common Stock previously issued in the acquisition of
Plymouth Cogeneration are not included in the Shelf Registration, however
they are available for sale in accordance with Rule 144. The Common Stock
to be issued in the Preferred Stock Conversion is subject to a nine month
restriction on resale subject to earlier waiver of such restriction by the
Representative in its sole discretion.
UNDERWRITING
The Underwriters named in herein, for whom Gaines, Berland Inc. is
acting as representative ("Representative"), have severally agreed, subject
to the terms and conditions of the Underwriting Agreement, to purchase a
total of 1,625,000 shares of Common Stock and 1,625,000 Warrants. The
number of shares of Common Stock and Warrants which each Underwriter has
agreed to purchase is set forth opposite its name:
NUMBER OF SHARES NUMBER OF
UNDERWRITER OF COMMON STOCK WARRANTS
----------- ---------------- ---------
Gaines, Berland Inc. . . . ---------- ----------
Total 1,625,000 1,625,000
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to approval of certain legal matters by counsel to
the Underwriters, the consummation of the Closing Transactions and various
other conditions precedent, and that the Underwriters are obligated to
purchase all the Securities offered hereby (other than the Securities
covered by the over-allotment option described below) if any are purchased.
The Representative has advised that the Underwriters propose to offer
the Securities to the public at the initial public offering prices set
forth on the cover page of this Prospectus and that they may allow to
certain dealers a concession not in excess of $______ per share of Common
Stock and $___ per Warrant, of which amount a sum not in excess of $______
per share of Common Stock and $____ per Warrant may, in turn, be reallowed
by such dealer to other dealers.
The Company has granted to the Underwriters an option, exercisable
during the 45-day period after the date of this Prospectus, to purchase
from the Company at the offering price set forth on the cover page of this
Prospectus, less underwriting discounts and commissions, up to 243,750
additional shares of Common Stock and/or an additional 243,750 Warrants for
the sole purpose of covering over-allotments, if any.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company
also has agreed to pay the Representative an expense allowance on a non-
accountable basis equal to 3% of the gross proceeds derived from the sale
of the Securities underwritten (including the sale of any Securities
subject to the Underwriters' over-allotment option), $50,000 of which has
been paid to date. The Company also has agreed to pay all expenses in
connection with qualifying the shares offered hereby for sale under the
laws of such states as the Representative may designate and filing this
Offering with the NASD, including fees and expenses of counsel retained for
such purposes by the Underwriters, and the costs of investigatory searches
of the Company's executive officers.
In connection with the Offering, the Company has agreed to sell to the
Representative, for nominal consideration, the right to purchase up to an
aggregate of 162,500 shares of Common Stock and/or an aggregate of 162,500
Warrants (the "Representative's Purchase Option"). The Representative's
Purchase Option is exercisable at a price of $5.55 per share of Common
Stock and $.13875 per Warrant for a period of four years commencing one
year from the date of this Prospectus. The Securities purchasable upon the
exercise of the Representative's Purchase Option are identical to those
offered hereby. The Representative's Purchase Option grants to the holders
thereof certain "piggyback" rights and one demand right for a period of
seven and five years, respectively, from the date of this Prospectus with
respect to the registration under the Securities Act of the securities
directly and indirectly issuable upon exercise of the Representative's
Purchase Option. The Representative's Purchase Option cannot be
transferred, sold, assigned or hypothecated during the one year period
following the date of this Prospectus, except to officers of the
Representative and to the Underwriters and selected dealers and their
officers or partners.
Prior to this Offering, there has been only a limited public market for
the Company's Common Stock, and no public market for the Warrants.
Accordingly, the offering price of the Securities and the terms of the
Warrants included therein have been arbitrarily determined by negotiation
between the Company and the Representative, and do not necessarily bear any
relation to established valuation criteria. Factors considered in
determining such prices and terms, in addition to prevailing market
conditions and the market price of the Common Stock immediately prior to
the date of this Prospectus, include an assessment of the prospects for the
industry in which the Company competes, the Company's management and the
Company's capital structure.
Pursuant to the Underwriting Agreement, all of the Company's present
officers and directors and certain other stockholders of the Company, who
own of record in the aggregate _______________ shares of Common Stock
("Principals"), have entered into agreements with the Company and the
Representative not to sell such shares of Common Stock without the prior
written consent of the Representative other than in a private sale in which
the transferee agrees to be bound by the provisions of such agreement until
thirteen months (in the case of Anchor, with respect to the 205,000 shares
of Common Stock acquired by them in connection with the Preferred Stock
Exchange, ____ months) following the date of this Prospectus. In addition,
during the five years following the date of this Prospectus, the
Representative has the right to purchase for its account or sell for the
account of the Principals any securities sold by them pursuant to Rule 144
under the Act.
The Underwriting Agreement provides that, for a period of five years
from the date of this Prospectus, the Company will permit the
Representative to designate a nominee for election to the Board of
Directors or to send an individual to observe meetings of the Board of
Directors. Such observer will not be a member of the Board of Directors
and will not be entitled to vote on any matters before the Board but will
be entitled to the same notices and communications sent by the Company to
its Directors and to be reimbursed for his expenses in attending the
meetings. No designation has been made as of the date hereof.
The Company has engaged the Representative on a non-exclusive basis, as
its agent for the solicitation of the exercise of the Warrants. Other NASD
members may be engaged by the Representative in its solicitation efforts.
To the extent not inconsistent with the guidelines of the NASD and the
rules and regulations of the Commission, the Company has agreed to pay the
Representative for bona fide services rendered a commission equal to 5% of
the exercise price for each Warrant exercised more than one year from the
date of this Prospectus if the exercise was solicited by the
Representative. In addition to soliciting, either orally or in writing,
the exercise of the Warrants, such services may also include disseminating
information, either orally or in writing, to warrantholders about the
Company in the market for the Company's securities, and assisting in the
processing of the exercise of the Warrants. No compensation will be paid
to the Representative in connection with the exercise of the Warrants if
the market price of the underlying shares of Common Stock is lower than the
exercise price, the holder of the Warrants has not confirmed in writing
that the Representative solicited such exercise, the Warrants are held in a
discretionary account, the Warrants are exercised in an unsolicited
transaction or the arrangement to pay the commission is not disclosed in
the prospectus provided to warrantholders in connection with such exercise.
In addition, unless granted an exemption by the Commission from Rule 10b-6
under the Exchange Act, while it is soliciting exercise of Warrants, the
Representative will be prohibited from engaging in any market-making
activities or solicited brokerage activities with regard to the Company's
securities unless the Representative has waived its right to receive a fee
for the exercise of the Warrants.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for
the Company by the firm of Reid & Priest LLP, New York, New York. Graubard
Mollen & Miller, New York, New York, has served as counsel to the
Underwriters in connection with this Offering.
EXPERTS
The financial statements of the Company as at January 31, 1996 and for
each of the years in the two-year period then ended, appearing in the
Prospectus, have been audited by Richard A. Eisner & Company, LLP,
independent auditors, to the extent and for the years indicated in their
report appearing elsewhere herein and in the Registration Statement. Such
financial statements have been included in reliance upon such report and
upon the authority of that firm as experts in accounting and auditing.
The financial statements of Lehi Independent Power Associates, L.C. as
of December 31, 1995 and 1994 for the year then ended and the period
January 24, 1994 (date of inception) through December 31, 1994, appearing
in this Prospectus, have been audited by Traveller Winn & Mower, PC,
independent auditors, to the extent and for the years indicated in their
report appearing elsewhere herein and in the Registration Statement. Such
financial statements have been included in reliance upon such report and
upon the authority of that firm as experts in accounting and auditing.
The financial statements of Far West Electric Energy Fund, L.P. as of
December 31, 1994 and 1995 and for the years then ended, appearing in this
Prospectus, have been audited by Robison, Hill & Co., PC, independent
auditors, to the extent and for the years indicated in their report
appearing elsewhere herein and in the Registration Statement. Such
financial statements have been included in reliance upon such report and
upon the authority of that firm as experts in accounting and auditing.
The financial statements of 1-A Enterprises as of December 31, 1994 and
1995 and for the two-year period then ended, appearing in this Prospectus,
have been audited by Robison, Hill & Co., PC, independent auditors, to the
extent and for the years indicated in their report appearing elsewhere
herein and in the Registration Statement. Such financial statements have
been included in reliance upon such report and upon the authority of that
firm as experts in accounting and auditing.
<PAGE>
U.S. ENVIROSYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
--------
U.S. ENERGY SYSTEMS, INC.
Report of Independent Auditor . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheet as at
January 31, 1996 and April 30, 1996
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Operations for
the Years Ended January 31, 1996 and
January 31, 1995 and for the Three Months
Ended April 30, 1996 (Unaudited) and
April 30, 1995 (Unaudited) . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Changes in
Capital Deficiency for the Years Ended
January 31, 1996 and January 31, 1995 and
For the Three Months Ended April 30, 1996
(Unaudited) and April 30, 1995 (Unaudited) . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for
the Years Ended January 31, 1996 and
January 31, 1995 and for the Three Months
Ended April 30, 1996 (Unaudited) and
APRIL 30, 1995 (Unaudited) . . . . . . . . . . . . . . . . . . F-7
Notes to Financial Statements . . . . . . . . . . . . . . . . . F-8
FAR WEST ELECTRIC ENERGY FUND, L.P.
Independent Auditors' Report . . . . . . . . . . . . . . . . . F-21
Balance Sheets, December 31, 1995 and 1994 . . . . . . . . . . F-22
Statements of Income, for the Years Ended
December 31, 1995, 1994, and 1993 . . . . . . . . . . . . . . F-24
Statements of Partners' Capital, for the
Years Ended December 31, 1995, 1994, and 1993 . . . . . . . . F-25
Statements of Cash Flows, for the Years ended
December 31, 1995, 1994, and 1993 . . . . . . . . . . . . . . F-26
Notes to Financial Statements . . . . . . . . . . . . . . . . . F-29
Schedule I, Condensed Financial Information of
Registrant (All Required Information Reported
in Financial Statements and Notes to the
Financial Statements)
Schedule II, Valuation of Qualifying Accounts
(All Required Information Reported in Note 2)
1-A ENTERPRISES
Independent Auditor's Report . . . . . . . . . . . . . . . . . F-42
Balance Sheet, December 31, 1995 and 1994 . . . . . . . . . . . F-43
Statements of Income, For the Years Ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . F-45
Statements of Partners' Capital, For the Years Ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . F-46
Statements of Cash Flows, For the Years Ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . F-47
Notes to Financial Statements
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . F-49
LEHI INDEPENDENT POWER ASSOCIATES, L.C.
Report of Independent Auditors . . . . . . . . . . . . . . . . F-55
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . F-56
Statements of Operations . . . . . . . . . . . . . . . . . . . F-57
Statement of Changes in Members' Equity . . . . . . . . . . . . F-58
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . F-59
Notes to Financial Statements . . . . . . . . . . . . . . . . . F-61
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
Report of Independent Auditors . . . . . . . . . . . . . . . . F-64
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . F-65
Statement of Operations . . . . . . . . . . . . . . . . . . . . F-66
Statement of Changes in Partners' Capital . . . . . . . . . . . F-67
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . F-68
Notes to Financial Statements . . . . . . . . . . . . . . . . . F-69
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
U.S. Energy Systems, Inc.
(formerly U.S. Envirosystems, Inc.)
We have audited the accompanying consolidated balance sheet of U.S.
Energy Systems, Inc. (formerly U.S. Envirosystems, Inc.) and subsidiaries
as at January 31, 1996 and the related consolidated statements of
operations, changes in capital deficiency and cash flows for each of the
years in the two-year period then ended. These statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the financial position of U.S.
Energy Systems, Inc. and subsidiaries at January 31, 1996, and the results
of its operations and its cash flows for each of the years in the two-year
period then ended in accordance with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note A to
the financial statements, the Company has incurred significant losses and
as at January 31, 1996, has a working capital deficiency of approximately
$1,910,000 and a capital deficiency of $2,729,000 which raise substantial
doubt about its ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note A. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Richard A. Eisner & Company, LLP
Richard A. Eisner & Company, LLP
New York, New York
March 1, 1996
With respect to Note J[4]
May 6, 1996
With respect to Note A (change of name to U.S. Energy Systems, Inc.)
May 17, 1996
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
CONSOLIDATED BALANCE SHEET
A S S E T S January 31, April 30,
----------- 1996 1996
(Note G) ----------- ---------
(Unaudited)
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . $ 2,000 $ 2,000
16,000 1,000
Other current assets . . . . . . . . . . . . ---------- ----------
Total current assets . . . . . . . . . . . . 18,000 3,000
Investments in Joint Ventures - at equity:
Lehi Independent Power Associates, L.C. (Note
C[1]) . . . . . . . . . . . . . . . . . . . 1,170,000 1,150,000
Plymouth Cogeneration Limited Partnership
(Note C[2]) . . . . . . . . . . . . . . . . 703,000 684,000
103,000 161,000
Other assets . . . . . . . . . . . . . . . . . ---------- ----------
$1,994,000 $1,998,000
TOTAL . . . . . . . . . . . . . . . . . . . ========== ==========
L I A B I L I T I E S
---------------------
Current liabilities:
Accrued expenses and other current
liabilities (including due to related
parties of $467,000 and $642,000,
respectively) (Notes D and L) . . . . . . . $ 990,000 $1,253,000
Pre-reorganization income taxes payable and
accrued interest - current (Note E) . . . . 172,000 182,000
766,000 910,000
Loans payable (Note G) . . . . . . . . . . . ---------- ----------
Total current liabilities . . . . . . . . . 1,928,000 2,345,000
Convertible subordinated secured debentures
(including due to related parties of $325,000)
(Notes H and L) . . . . . . . . . . . . . . . 1,525,000 1,525,000
Notes payable (including due to related parties
of $775,000) (Notes I and L) . . . . . . . . 965,000 970,000
Deferred interest (including due to related
parties of $12,000) (Notes H and L) . . . . . 114,000 114,000
Pre-reorganization income taxes payable and
accrued interest (Note E) . . . . . . . . . . 176,000 184,000
15,000 19,000
Advances from Joint Ventures (Note C[2]) . . . ---------- ----------
4,723,000 5,157,000
Total liabilities . . . . . . . . . . . . . ---------- ----------
Commitments and contingencies (Note K)
CAPITAL DEFICIENCY
-------------------
(Notes A and J)
Preferred stock, $.01 par value, authorized
5,000,000 shares; issued and outstanding
57,500 (liquidating preference $575,000) . . 1,000 1,000
Common stock, $.01 par value, authorized
35,000,000 shares; issued and outstanding
439,650 . . . . . . . . . . . . . . . . . . . 4,000 4,000
Additional paid-in capital . . . . . . . . . . 112,000 112,000
(2,846,000) (3,276,000)
Accumulated deficit . . . . . . . . . . . . . . ---------- ----------
(2,729,000) (3,159,000)
Total capital deficiency . . . . . . . . . . ---------- ----------
$1,994,000 $1,998,000
TOTAL . . . . . . . . . . . . . . . . . . . ========== ==========
The accompanying notes to financial statements
are an integral part hereof.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Three Months Ended
January 31, April 30,
----------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
Cost and expenses:
Operating expenses . $ 27,000 $ 109,000
Administrative
expenses . . . . . . 826,000 897,000 $ 221,000 $ 202,000
Interest expense . . 604,000 319,000 170,000 99,000
Loss from Joint
Ventures . . . . . . 17,000 76,000 39,000 34,000
----------- ---------- --------- ---------
Total cost and
expenses . . . . . 1,474,000 1,401,000 430,000 335,000
----------- --------- --------- ---------
(Loss) before
extraordinary item . .(1,474,000) (1,401,000) (430,000) (335,000)
Extraordinary gain from
restructuring of
liabilities . . . . . 83,000 85,000
----------- --------- --------- ---------
NET (LOSS) . . . . . .(1,391,000)$(1,316,000) (430,000) $(335,000)
=========== =========
Dividends on preferred (21,000) (14,000)
stock . . . . . . . . --------- ---------
(Loss) applicable to
common $(1,412,000) $(444,000)
stock . . . . . . . .========== =========
(Loss) per share before $ (3.41) $ (3.38) $ (1.01) $ (0.77)
extraordinary item . . ======== ======= ========= =========
Net (loss) per share . $ (3.22) $ (3.17) $ (1.01) $ (0.77)
======== ======= ========= =========
Weighted average shares 438,773 415,022 439,622 436,167
outstanding . . . . . ========= ======== ========= =========
The accompanying notes to financial statements
are an integral part hereof.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
(Notes A and J)
Preferred Stock Common Stock
--------------- ------------
Number Number
of of
Shares Amount Shares Amount
------ ------ ------ ------
Balance - January 31, 1994 391,250 $4,000
Sale of common stock . . . . . . 32,000
Compensation attributable
to options and warrants . . . .
Shares issued for interest
in Joint Ventures . . . . . . . 11,400
Value assigned to warrants
issued in connection with notes
payable
Net (loss) for the year
ended January 31, 1995 . . . . ------ ------ ------- ------
Balance - January 31, 1995 434,650 4,000
Sale of common stock . . . . . . 5,000
Value assigned to
preferred stock issued in
connection with loans payable . 57,500 $1,000
Value assigned to
additional warrants issued in
connection with notes payable .
Net (loss) for the year
ended January 31, 1996 . . . . ------ ------ ------- ------
Balance - January 31, 1996 . . . 57,500 1,000 439,650 4,000
Net (loss) for the three
months ended April 30, 1996 . . ------ ------ ------- ------
BALANCE - APRIL 30, 1996 57,500 $1,000 439,650 $4,000
(UNAUDITED) . . . . . . . . . . ====== ====== ======= ======
Common Stock
------------
Additional Accumulated
Paid-In Capital Deficit Total
--------------- -------- -----
Balance - January 31, 1994 $(306,000) $ (139,000) $ (441,000)
Sale of common stock . . . 139,000 139,000
Compensation attributable
to options and warrants . 48,000 48,000
Shares issued for interest
in Joint Ventures . . . . 114,000 114,000
Value assigned to warrants
issued in connection with
notes payable 46,000 46,000
Net (loss) for the year (1,316,000) (1,316,000)
ended January 31, 1995 . --------- ----------- -----------
Balance - January 31, 1995 41,000 (1,455,000) (1,410,000)
Sale of common stock . . . 34,000 34,000
Value assigned to
preferred stock issued in
connection with loans
payable . . . . . . . . . 28,000 29,000
Value assigned to
additional warrants issued
in connection with notes
payable . . . . . . . . . 9,000 9,000
Net (loss) for the year (1,391,000) (1,391,000)
ended January 31, 1996 . --------- ----------- -----------
Balance - January 31, 1996 112,000 (2,846,000) (2,729,000)
Net (loss) for the three (430,000) (430,000)
months ended April 30, 1996 --------- ----------- -----------
BALANCE - APRIL 30, 1996 $112,000 $(3,276,000)$(3,159,000)
(UNAUDITED) . . . . . . . ========= =========== ===========
The accompanying notes to financial statements
are an integral part hereof.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended January 31,
----------------------
1996 1995
---- ----
Cash flows from operating activities:
Net (loss) . . . . . . . . . . . . . . . . . $(1,391,000) $(1,316,000)
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
Amortization of debt discount . . . . . . . 42,000 3,000
Amortization of purchase price in excess of
equity in Joint Ventures . . . . . . . . . 59,000 55,000
Amortization of deferred financing costs . . 72,000
Value assigned to options and warrants . . . 48,000
Gain from restructuring of liabilities . . . (83,000) (85,000)
Equity in (income)/loss of Joint Ventures,
net of distributions . . . . . . . . . . . (13,000) 21,000
Loss from legal proceedings . . . . . . . . 102,000
Deferred interest . . . . . . . . . . . . . 114,000
Accrued interest on pre-reorganization
income taxes payable . . . . . . . . . . . 39,000
Changes in operating assets and liabilities:
(Increase) decrease in other assets . . . 2,000 (1,000)
Decrease in current assets . . . . . . . .
Increase in accounts payable and accrued 671,000 146,000
expenses . . . . . . . . . . . . . . . . ----------- -----------
(641,000) (874,000)
Net cash (used in) operating activities . ----------- -----------
Cash flows from investing activities:
Security deposit on proposed acquisition. . . (50,000)
Cost incurred in connection with the Proposed
Acquisitions . . . . . . . . . . . . . . . . (3,000)
Investment in Joint Ventures . . . . . . . . (636,000)
Advances to Joint Ventures . . . . . . . . . (9,000) (11,000)
Loans (to) from officers . . . . . . . . . . (47,000)
33,000
Collections of loans receivable - officer . . ----------- -----------
Net cash provided by (used in) investing (29,000) (694,000)
activities . . . . . . . . . . . . . . . . ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of convertible
subordinated debt . . . . . . . . . . . . . 400,000
Proceeds from issuance of common stock . . . 34,000 139,000
Proceeds from issuance of notes payable . . . 25,000 975,000
Proceeds from loans payable and preferred
stocks . . . . . . . . . . . . . . . . . . . 785,000
Payment of deferred financing costs . . . . . (102,000)
Payment of pre-reorganization payroll taxes
payable . . . . . . . . . . . . . . . . . . (34,000) (105,000)
Payment of pre-reorganization income taxes
payable . . . . . . . . . . . . . . . . . . (9,000) (13,000)
Advances from Joint Ventures . . . . . . . . 15,000
(50,000)
Deferred registration costs . . . . . . . . . ----------- -----------
664,000 1,396,000
Net cash provided by financing activities . ----------- -----------
NET (DECREASE) IN CASH . . . . . . . . . . . . (6,000) (172,000)
8,000 180,000
Cash - beginning of the period . . . . . . . . ----------- -----------
$ 2,000 $ 8,000
CASH - END OF THE PERIOD . . . . . . . . . . . =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid for interest . . . . . . . . . . . $ 93,000 $ 163,000
Supplemental schedule of noncash investing
activity:
Fair market value of common stock issued and
contributed to investment in Joint Ventures 114,000
Three Months Ended
April 30,
------------------
1996 1995
---- ----
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net (loss) . . . . . . . . . . . . . . . . . . $(430,000) $(335,000)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Amortization of debt discount . . . . . . . . 5,000 3,000
Amortization of purchase price in excess of
equity in Joint Ventures . . . . . . . . . . 14,000 14,000
Amortization of deferred financing costs . . . 19,000
Value assigned to options and warrants . . . .
Gain from restructuring of liabilities . . . .
Equity in (income)/loss of Joint Ventures, net
of distributions . . . . . . . . . . . . . . 25,000 20,000
Loss from legal proceedings . . . . . . . . .
Deferred interest . . . . . . . . . . . . . . 53,000
Accrued interest on pre-reorganization income
taxes payable . . . . . . . . . . . . . . . 4,000 2,000
Changes in operating assets and liabilities:
(Increase) decrease in other assets . . . .
Decrease in current assets . . . . . . . . . 15,000
Increase in accounts payable and accrued 280,000 151,000
expenses . . . . . . . . . . . . . . . . . --------- ---------
(68,000) (92,000)
Net cash (used in) operating activities . . --------- ---------
Cash flows from investing activities:
Security deposit on proposed acquisition. . . .
Cost incurred in connection with the Proposed
Acquisitions . . . . . . . . . . . . . . . . .
Investment in Joint Ventures . . . . . . . . .
Advances to Joint Ventures . . . . . . . . . .
Loans (to) from officers . . . . . . . . . . . 40,000
16,000
Collections of loans receivable - officer . . . ---------
Net cash provided by (used in) investing 56,000
activities . . . . . . . . . . . . . . . . . ---------
Cash flows from financing activities:
Proceeds from issuance of convertible
subordinated debt . . . . . . . . . . . . . . 25,000
Proceeds from issuance of common stock . . . . 9,000
Proceeds from issuance of notes payable . . . .
Proceeds from loans payable and preferred stocks 125,000
Payment of deferred financing costs . . . . . .
Payment of pre-reorganization payroll taxes
payable . . . . . . . . . . . . . . . . . . .
Payment of pre-reorganization income taxes
payable . . . . . . . . . . . . . . . . . . . (3,000) (8,000)
Advances from Joint Ventures . . . . . . . . . 4,000 3,000
(58,000)
Deferred registration costs . . . . . . . . . . --------- ---------
68,000 29,000
Net cash provided by financing activities . . --------- ---------
NET (DECREASE) IN CASH . . . . . . . . . . . . . - 0 - (7,000)
2,000 8,000
Cash - beginning of the period . . . . . . . . . --------- ---------
$ 2,000 $ 1,000
CASH - END OF THE PERIOD . . . . . . . . . . . . ========= =========
Supplemental disclosure of cash flow
information:
Cash paid for interest . . . . . . . . . . . . . $ 34,000 $ 15,000
Supplemental schedule of noncash
investing activity:
Fair market value of common stock
issued and contributed to
investment in Joint Ventures . . . . . . . .
The accompanying notes to financial statements
are an integral part hereof.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company:
----------------------
U.S. Energy Systems, Inc. ("USE") and subsidiaries (collectively, the
"Company") are the successors to Cogenic Energy Systems, Inc. ("Cogenic").
Cogenic emerged from Chapter 11 Bankruptcy Proceedings on March 22, 1993.
The Plan of Reorganization, as amended, provided that Cogenic merge with
Utilities Systems Florida, Inc. ("USF") and change the name of the
reorganized Cogenic to U.S. Envirosystems, Inc.
On May 17, 1996, the Company amended its Certificate of Incorporation
to change the name of the Company to U.S. Energy Systems, Inc.
The Company is in the business of owning, developing and operating
cogeneration and independent power plants through Joint Ventures.
The Company has incurred significant losses since its reorganization
in 1993 and, as at January 31, 1996 has a working capital deficiency of
approximately $1,910,000 and a capital deficiency of approximately
$2,729,000. These factors raise substantial doubt about its ability to
continue as a going concern. Management's plans for which it has letters
of intent or agreements include the following:
a) Obtain $3,500,000 through the sale of convertible preferred stock
and warrants.
b) Obtain net proceeds of approximately $5,425,000 through the sale
of 1,625,000 shares of common stock and warrants in a public
offering (the "Proposed Public Offering").
c) Convert the existing preferred stock into 205,000 shares of common
stock.
d) Convert $500,000 of the existing Debentures into 125,000 shares of
common stock and warrants.
e) Acquire 50% interest in two operating geothermal power plants
("Steamboat 1 and 1A") for an aggregate of $5,400,000 in cash
consideration (the "Proposed Acquisitions").
f) Repay notes payable and other liabilities of approximately
$2,139,000.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company: (continued)
----------------------
All of the above are dependent upon the successful completion of the
proposed public offering referred to in (b) above and to certain other
conditions including the completion of all of the above. There is no
assurance that the above plans can be accomplished. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
The financial information presented as of April 30, 1996 and for the
three-month periods ended April 30, 1996 and April 30, 1995 is unaudited,
but in the opinion of management contains all adjustments (consisting of
only normal recurring adjustments) necessary for a fair presentation of
such financial information. Results of operations for interim periods are
not necessarily indicative of those to be achieved for full fiscal years.
(NOTE B) - Significant Accounting Policies:
------------------------------------------
Significant accounting policies followed in the preparation of the
financial statements are as follows:
[1] Consolidation:
-------------
The consolidated financial statements of the Company include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in the
consolidated balance sheet.
[2] Investments in Joint Ventures:
-----------------------------
Investments in Joint Ventures are accounted for under the equity
method. LIPA and Plymouth each have a fiscal year end December 31 which
differs to the fiscal year end of the Company. No material adjustment is
necessary to reconcile the December 31 year end to the Company's January 31
year end.
[3] Net (loss) per share:
--------------------
Net (loss) per share is computed using the weighted average
number of common shares outstanding during the period and, when dilutive,
common stock equivalents.
[4] Recent pronouncements:
---------------------
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company will adopt the disclosure
requirements of SFAS 123 during the Company's fiscal year ending
January 31, 1997 but will continue to account for its stock option plans
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Significant Accounting Policies: (continued)
--------------------------------------------
under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" as permitted under FAS 123.
In addition, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS 121 is also effective for the Company's fiscal year ending
January 31, 1997. The Company believes adoption of SFAS No. 121 will not
have a material impact on its financial statements.
[5] Use of estimates:
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(NOTE C) - Investment in Joint Ventures:
---------------------------------------
[1] Lehi Independent Power Associates, L.C.:
---------------------------------------
In January 1994, Lehi Envirosystems, Inc. ("LEHI"), a subsidiary
of the Company, purchased a 50% equity interest in a limited liability
company called Lehi Independent Power Associates, L.C. ("LIPA"), which
wholly owns a cogeneration project (the "Project") located in Lehi, Utah.
The operating agreement of LIPA provides for, among other
matters, the allocation of the net profits and net losses to the owners in
proportion to their ownership interest. The agreement also provides for
additional contributions totalling $875,000 to be shared by the owners in
the event that any modification, as defined, is required to bring the
Project back to full operational condition. LIPA terminates in January
2024, unless sooner dissolved by certain conditions as set forth in the
operating agreement.
During the two-year period ended January 31, 1996 and the three-
month period ended April 30, 1996, the Project was not in operation.
In the Proposed Acquisitions, Far West Capital Inc., the other
50% owner of LIPA, will own 50% of Steamboats in the event the Proposed
Acquisitions are consummated.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE C) - Investment in Joint Ventures: (continued)
---------------------------------------
[2] Plymouth Cogeneration Limited Partnership ("PCLP"):
--------------------------------------------------
In November 1994, Plymouth Envirosystems, Inc. ("Plymouth"), a
subsidiary of the Company, acquired a 5% general partner interest and a 35%
limited partner interest in PCLP for cash contributions of $636,000.
The amended and restated agreement of limited partnership (the
"Agreement") provides for, among other matters, the allocation of net
profits and net losses in accordance with the respective ownership
interests of the partners. The terms, conditions and provisions of the
Agreement expire in November 2024 or until its termination or dissolution
in accordance with the provisions of the Agreement.
The partnership is engaged in the business of owning and
operating a cogeneration facility designed, developed, and constructed for
the production of electricity and steam (the "Plymouth Project"). The
management, supervision and control of, and the determination of all
matters relating to the ownership and operation of the Plymouth Project and
the operations of PCLP are delegated to PSC, the managing partner.
In December 1994, Plymouth acquired a 36.4% limited partner
ownership interest in PSC, the managing partner of PCLP, for a contribution
of 11,400 shares of the Company's common stock with a fair market value of
approximately $114,000. With this transaction, the Company's combined
ownership interest in PCLP is effectively 50%.
In November 1994, the Company entered into an agreement with IEC,
a general partner of PSC. The agreement provides for advances by IEC to
the Company equal to 50% of the development commissions, as defined,
received by IEC from PSC for a period of five years commencing in 1995.
During the fiscal year ended January 31, 1996, the Company received
advances from IEC of $15,000. The advances will be repaid by the Company
from the proceeds of capital distributions received from PSC. The Company
is required to repay the advances in five equal annual installments
commencing July 1, 2004.
[3] At acquisition, LEHI s equity in the net assets of LIPA was
approximately $146,000 and Plymouth s equity in the net assets of PCLP was
approximately $668,000. The excess of purchase price over the underlying
equities of LEHI and Plymouth have been allocated to the plants of LIPA and
PCLP, respectively, and is being amortized over the remaining life of such
assets. At January 31, 1996, the estimated remaining life of the plants is
as follows:
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE C) - Investment in Joint Ventures: (continued)
--------------------------------------
LIPA - Buildings - 28 years
Machinery and equipment - 6 years
Plymouth - plant - 19 years
[4] The following is summarized financial information of LIPA and
PCLP:
December 31, 1995
-----------------
LIPA PCLP
---- ----
Current Assets . . . . . . . . . . . . . . . . . $ 158,000 $ 158,000
Property, plant and equipment at cost (net) . . . 257,000 5,593,000
828,000
Other assets . . . . . . . . . . . . . . . . . . ---------- ----------
Total assets . . . . . . . . . . . . . . . . . 415,000 6,579,000
Current liabilities . . . . . . . . . . . . . . . (9,000) (343,000)
(4,987,000)
Long-term debt . . . . . . . . . . . . . . . . . ---------- ----------
$ 406,000 $1,249,000
Equity . . . . . . . . . . . . . . . . . . . . . ========== ==========
Equity in Joint Ventures . . . . . . . . . . . . $ 203,000 $ 625,000
Investments in Joint Ventures in excess of 967,000 78,000
equity . . . . . . . . . . . . . . . . . . . . ---------- ----------
$1,170,000 $ 703,000
Total investments in Joint Ventures . . . . . ========== ==========
March 31, 1996
--------------
LIPA PCLP
---- ----
Current Assets . . . . . . . . . . . . . . . $ 148,000 $ 260,000
Property, plant and equipment at cost (net) . 254,000 5,524,000
852,000
Other assets . . . . . . . . . . . . . . . . ---------- ----------
Total assets . . . . . . . . . . . . . . . 402,000 6,636,000
Current liabilities . . . . . . . . . . . . . (10,000) (432,000)
(4,989,000)
Long-term debt . . . . . . . . . . . . . . . ---------- ----------
$ 392,000 $1,215,000
Equity . . . . . . . . . . . . . . . . . . . ========== ==========
Equity in Joint Ventures . . . . . . . . . . $ 196,000 $ 608,000
Investments in Joint Ventures in excess of 954,000 76,000
equity . . . . . . . . . . . . . . . . . . ---------- ----------
$1,150,000 $ 684,000
Total investments in Joint Ventures . . . ========== ==========
Year Ended December 31,
-----------------------
LIPA PCLP
---- ----
1995 1994 1995
---- ---- ----
$1,150,000
Revenue . . . . . . . . . . . . . . . . ==========
$236,000
Gain on sale of fixed assets . . . . . ========
$172,000 $(41,000) $ (87,000)
Net income (loss) . . . . . . . . . . . ======== ======== ==========
Equity in net income (loss) . . . . . . $ 86,000 $(21,000) $ (44,000)
Amortization of purchase price over (55,000) (55,000) (4,000)
equity . . . . . . . . . . . . . . . -------- -------- ----------
$ 31,000 $(76,000) $ (48,000)
Net income (loss) from Joint Ventures . ======== ======== ==========
Three Months Ended March 31,
----------------------------
LIPA PCLP
---- ----
1996 1995 1996 1995
---- ---- ---- ----
$290,000 $301,000
Revenue . . . . . . . . . . . . . ======== ========
Gain on sale of fixed assets . .
$(14,000) $(10,000) $(35,000) $(29,000)
Net income (loss) . . . . . . . . ======== ======== ======== ========
Equity in net income (loss) . . . $(7,000) $(5,000) $(17,000) $(15,000)
Amortization of purchase price (13,000) (14,000) (2,000)
over equity . . . . . . . . . . -------- -------- -------- --------
Net income (loss) from Joint $(20,000) $(19,000) $(19,000) $(15,000)
Ventures . . . . . . . . . . . ======== ======== ======== ========
Plymouth Project commenced operations on January 1, 1995.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE D) - Accounts Payable and Accrued Expenses:
------------------------------------------------
Accrued expenses and other current liabilities are comprised of the
following:
January 31, April 30,
1996 1996
----------- ---------
Professional fees . . . . . . . . . $293,000 $ 376,000
Accrued interest . . . . . . . . . 417,000 499,000
Accrued payroll and related taxes . 238,000 336,000
Other . . . . . . . . . . . . . . . 42,000 42,000
-------- ----------
$990,000 $1,253,000
Total . . . . . . . . . . . . ======== ==========
(NOTE E) - Pre-Reorganization Income Taxes Payable:
--------------------------------------------------
Pursuant to the Plan of Reorganization of Cogenic, the pre-
reorganization income taxes payable were to be paid in full, plus interest
at the rate set by applicable statute, by making a payment of $110,000 upon
the merger with USF and by making equal monthly installments, commencing
one year after the merger, over a period not exceeding six years after the
date of assessment of such pre-reorganization income taxes payable. The
$110,000 payment has not been made since the effective date of the merger.
The remaining payments of pre-reorganization income taxes and accrued
interest are as follows:
January 31, April 30,
1996 1996
----------- ---------
1997 . . . . . . . . . . . $172,000 $183,000
1998 . . . . . . . . . . . 41,000 46,000
1999 . . . . . . . . . . . 43,000 44,000
2000 . . . . . . . . . . . 46,000 47,000
2001 . . . . . . . . . . . 46,000 46,000
-------- --------
Total . . . . . . . . $348,000 $366,000
======== ========
During the two-year period ended January 31, 1996, the Company reached
settlements with the tax authorities resulting in extraordinary gains from
restructuring of liabilities of $83,000 and $85,000 during the years ended
January 31, 1996 and January 31, 1995, respectively.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - Income Taxes:
-----------------------
The deferred tax asset is as follows:
January 31, April 30,
1996 1996
----------- ---------
Benefit of post-reorganization
operating loss carryforward . . . . $ 801,000 $ 920,000
Expenses for financial reporting, not
yet deductible for taxes . . . . . 132,000 52,000
(933,000) (972,000)
Valuation allowance. . . . . . . . . --------- ---------
$ - 0 - $ - 0 -
========= =========
The Company has fully reserved against the deferred tax asset since
the likelihood of realization cannot be determined.
During the years ended January 31, 1996 and 1995, and the three-month
period ended April 30, 1996, the difference between the statutory tax rate
of 34% and the Company's effective tax rate of 0% is due to an increase in
the valuation allowance of $410,000, $503,000 and $39,000, respectively.
During the three-month period ended April 30, 1995, the difference is due
to a decrease in the valuation allowance of $1,000.
Prior to the reorganization, Cogenic had available a net operating
loss carryforward, which expires through 2008, of approximately $19,000,000
for tax purposes and tax credit carryforwards of $216,000 expiring from
1997 to 2000. Utilization of the acquired net operating loss and tax
credit carryforwards may be subject to limitations as a result of the
reorganization, or in the event of other significant changes in ownership.
Accordingly, the Company has not recognized the deferred tax asset
attributable to the acquired net operating loss and tax credit
carryforwards.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Loans Payable (the "Loans"):
--------------------------------------
Loans payable consist of the following:
January 31, April 30,
1996 1996
----------- ---------
18% loan, payable on the earlier of
May 31, 1996 or closing of the
proposed public offering, net of debt
discount of $19,000 at January 31,
1996 (effective rate 39.68%) (a) . . . $616,000 $660,000
10% loan, payable on the earlier of
May 31, 1996 or closing of the
proposed public offering (b) . . . . . 100,000 200,000
18% unsecured loan payable upon closing
of the proposed public offering . . . . 50,000 50,000
-------- --------
$766,000 $910,000
======== ========
(a) Collateralized by first lien on all the assets of the Company and by
97,250 shares of the Company's common stock owned by officers.
(b) Collateralized by the Company's interest in LIPA and PCLP Joint
Ventures, subject to prior lien.
(NOTE H) - Convertible Subordinated Secured Debentures:
------------------------------------------------------
The Company's Convertible Subordinated Debentures (the "Debentures")
bear interest at 18% and are due on January 25, 2004. In addition to the
interest payments, the Debenture holders are entitled to 50% of the
Company's share of net profits (net of provision for the 18% interest on
the Debentures) of LIPA ("Supplemental Participation"). The Debentures are
collateralized by a security interest in the outstanding shares of Lehi and
are subject to subordination to senior indebtedness. Commencing
January 25, 1998, the Company has the option to redeem the Debentures at
102, plus unpaid and accrued interest and Supplemental Participation.
Commencing January 25, 1996, each Debenture may be converted at any time,
at the option of the Debenture holders, into the Company s common stock.
Subject to certain adjustments, each $1,000 principal amount of Debentures
is initially convertible into 62 shares of the Company's common stock.
Commencing January 25, 1997, the Company will have the right to convert all
the then outstanding Debentures into common stock at the then current
conversion number if the market price, as defined, of the common stock
equals or exceeds $40.00 for more than twenty (20) consecutive days prior
to the date fixed for conversion by the Company.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - Convertible Subordinated Secured Debentures: (continued)
------------------------------------------------------
In December 1994, the Company requested from its Debenture holders
that one-half of the 18% interest be deferred commencing with the
December 25, 1994 interest payment until the earlier to occur of completion
of new financing or commencement of cash flow from LIPA (see Note C[1]).
In the event of default, the Debenture holders have the right to demand
immediate payment of all or any portion of the outstanding principal amount
and any unpaid interest, if the default is not remedied within 120 days
after it has occurred. As of May 15, 1995, the Debenture holders have
agreed to the terms of the partial deferment. In connection with the 9%
deferment, the Company increased the number of shares that each Debenture
can be converted into from 62 shares for each $1,000 principal amount to 66
shares for each $1,000 principal amount.
At January 31, 1996 and April 30, 1996, the 9% interest deferred,
included in accrued expenses and other current liabilities, was $160,000
and $194,000, respectively.
(NOTE I) - Notes Payable:
------------------------
In connection with the acquisition of PCLP (see Note C[2]), the
Company borrowed $1,000,000 from a group comprised principally of officers,
directors and affiliates of the Company. The interest on the Secured
Promissory Notes (the "Notes") is the prime rate plus 2.5% (11% at
January 31, 1996) adjusted quarterly during the term of the Notes. The
interest on the Notes is payable quarterly but only to the extent that the
net after tax cash flow of Plymouth is sufficient to make such interest
payment. The Company has not paid interest on these Notes since the
inception of the Notes. At January 31, 1996 and April 30, 1996, the unpaid
interest on these Notes was $141,000 and $169,000, respectively, included
in accrued expenses and other current liabilities. The Notes are
collateralized by the shares of common stock of Plymouth. The Notes and
unpaid interest, are to be paid on the earlier of: (1) USE's receipt of
not less than $1,000,000 in net proceeds from the Company's next public
offering of equity securities, or (2) USE's receipt of an aggregate of not
less than $4,000,000 in net proceeds from a private debt financing of USE,
or (3) October 31, 1997.
In conjunction with the issuance of these Notes, the Company granted
to the investors warrants to purchase 95,000 shares of the Company's common
stock at $16.00 per share before October 31, 1999. The Company valued the
warrants issued at $46,000, which is being accounted for as debt discount.
In connection with the Company's Loans (Note G), the Company was required
to grant certain security interests in the Company's assets including its
ownership interest in Plymouth. In June 1995, in return for granting the
security interests, the Company granted the noteholders additional warrants
to purchase 19,000 shares of the Company's common stock (the "Additional
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Notes Payable: (continued)
------------------------
Warrants"). The Additional Warrants have the same terms as those warrants
initially granted to the noteholders. The Company valued the Additional
Warrants issued at $9,500, which is being accounted for as additional debt
discount. In March 1996, the Company reduced the exercise price of the
warrants including the additional warrants from $16.00 per share to $5.00
per share. The effective interest rates at January 31, 1996 and
January 31, 1995 are 13.60% and 10.72%, respectively.
(NOTE J) - Stockholders' Equity:
-------------------------------
[1] Preferred stock:
---------------
In June 1995, the Board of Directors designated 100,000 shares of
preferred stock as Series One Exchangeable and Convertible Preferred Stock
("Series One Preferred Stock"). The holders of Series One Preferred Stock
are entitled to (i) convert to common stock equal to $10.00 per share of
Series One Preferred Stock divided by the conversion price, as defined, and
subject to adjustments for changes in capital stock, (ii) no voting rights
except for certain corporate actions, (iii) receive cumulative dividends
equal to $1.00 per share, (iv) liquidation preference of $10.00 per share
plus any dividends accrued and unpaid.
The Series One Preferred Stock is redeemable at the option of the
Company at a price of $10.00 per share, plus accrued and unpaid dividends,
under certain conditions, commencing the earlier of: (i) 3 years after the
effective date of the Proposed Public Offering or (ii) January 1, 1999.
The Series One Preferred Stock rank senior to all other equity securities
of the Company including any other series or classes of preferred stock
with respect to dividend rights and rights upon liquidation, winding up and
dissolution.
In connection with the Company's Loans, the Company issued 57,500
shares of Series One Preferred Stock which are convertible into 205,000
shares of common stock. The Company estimated the fair value of these
shares of Series One Preferred Stock at approximately $29,000 and this
amount is treated as a loan discount which is being amortized over the life
of the loan.
In calculating the net income per share, the net income (loss)
available for common stockholders during the period the 57,500 shares of
Series One Preferred Stock are converted into 205,000 shares of common
stock will be reduced by a nonrecurring amount of approximately $791,000
which represents the excess of the fair value of the common stock
transferred to the holders of the preferred stock over the carrying amount
of the preferred stock.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - Stockholders' Equity: (continued)
-------------------------------
[2] Stock options:
-------------
Stock option activity is summarized as follows:
Shares Option Price Expiration Date
------ ------------ ---------------
(per share)
Granted - year ended $4.00 - April 1999 -
January 31, 1995 . 20,100 $10.00 January 2000
Granted - year ended 154,000 $4.00 - January 2000 -
January 31, 1996 . ------- $8.00 December 2000
Balance at
January 31, 1996 and
April 30, 1996
(174,100 exercisable
at option prices
$4.00 to $10.00) . 174,100
During the year ended January 31, 1995 the Company recorded a
compensation charge of $46,000 in connection with the issuance of certain
options in that year.
[3] Common stock reserved:
---------------------
The Company has reserved shares of common stock for issuance upon
conversion of the Debentures and exercise of warrants and options as
follows:
(i) Convertible subordinated secured
debentures (Note H). . . . . . . . . 100,000
(ii) Warrants issued in conjunction with
notes payable (Note I) . . . . . . . 114,000
(iii) Warrants issued in connection with
consulting services. Exercisable
at $16.00 per share, expires
October 31, 1999. In connection
therewith, the Company recorded a
noncash charge of $2,000, in 1995. . 3,750
(iv) Stock options outstanding
(Note J[2]). . . . . . . . . . . . . 174,100
(v) Series One Preferred Stock
(Note J[1]). . . . . . . . . . . . . 205,000
In connection with the proposed transactions referred to in
Note A, the Company anticipates issuing warrants to purchase approximately
2,125,000 shares of common stock.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - Stockholders' Equity: (continued)
-------------------------------
[4] Reorganization:
--------------
In February 1996, the shareholders approved a 1 for 40 reverse
stock split, effective May 6, 1996, which has been given retroactive effect
in the accompanying financial statements. All reference to shares and per
share amounts in the notes to financial statements have been adjusted to
reflect the reverse split.
(NOTE K) - Commitments and Contingencies:
----------------------------------------
[1] The Company has employment agreements which expire through
November 30, 1998 with two of its officers. The agreements provide for
minimum annual payments of $210,000 subject to upward adjustment at the
discretion of the Board of Directors.
[2] In October 1995, the Company entered into a consulting agreement
with one of the members of its Board of Directors for an unspecified
period. The consulting agreement provides for a $5,000 monthly consulting
fee. The term of the consulting agreement is subject to the approval of
the Board of Directors.
[3] USE International, L.L.C. ("USE International"):
-----------------------------------------------
In May 1995, the Company entered into a Joint Venture agreement
to form a limited liability company, USE International, L.L.C. ("USE
International"). USE International is owned 50% by the Company and 50% by
Indus, LLC ("Indus"). USE International is managed by Indus. In
connection with the agreement, the Company sold 2,500 shares of its common
stock, at market price, to Indus and issued options to purchase 16,250
shares of the Company's common stock with an exercise price of $8.00 per
share and expiring five years after date of issuance. At the time of
issuance, the options granted to Indus were deemed immaterial. The
agreement also provides for the issuance of options to purchase up to an
additional 25,000 shares of the Company's common stock at a price per share
of $8.00. These options will be granted to Indus upon the signing of an
initial transaction, as defined, by USE International.
The Company has agreed to pay Indus a consulting fee of $6,000
per month. The consulting arrangement has an initial term of one year and
expires in May 1996. The Company has also agreed to indemnify, defend and
hold Indus harmless from all claims, losses, causes of action, liabilities,
costs and expenses (including attorney's fees) which may arise in
connection with the business of USE International.
The Company accounts for the investment in USE International
under the equity method. USE International was inactive during the year
ended January 31, 1996 and the three-month period ended April 30, 1996.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE L) - Related Party Transactions:
-------------------------------------
The Company borrowed from officers and an affiliate of a director
(collectively, the "Related Parties") $325,000 under the Debentures and
$775,000 under the Notes. In connection with the Notes, an affiliate of a
director was granted warrants to purchase 78,000 shares of the Company's
common stock at $16.00 per share before October 31, 1999. Included in
deferred interest at January 31, 1996 and April 30, 1996 is $12,000 due to
the Related Parties. In addition, at January 31, 1996 and April 30, 1996,
$467,000 and $642,000, respectively, of accrued expenses and other current
liabilities is due to the Related Parties.
During the year ended January 31, 1996 and 1995 and the three months
ended April 30, 1996, the Company paid interest of $15,000, $22,000 and
$7,000, respectively, to the Related Parties. No interest payment was made
to the related parties during the three months ended April 30, 1995.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
General Partner
Far West Electric Energy Fund, L.P.
Salt Lake City, Utah
We have audited the balance sheet of Far West Electric Energy Fund,
L.P. as of December 31, 1995 and 1994, and the related statements of
income, partners' capital and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Far West
Electric Energy Fund, L.P. as of December 31, 1995 and 1994, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
Respectfully submitted,
/s/ Robison, Hill & Co.
----------------------------
Certified Public Accountants
Salt Lake City, Utah
February 29, 1996
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
BALANCE SHEETS
--------------
DECEMBER 31, 1995 AND 1994
--------------------------
1995 1994
---- ----
Assets
------
Utility Plant:
Plant in Service $15,999,000 $18,716,000
Equipment 588,000 335,000
Construction in Progress 118,000 118,000
Accumulated Depreciation (5,377,000) (6,010,000)
----------- -----------
Net Utility Plant 11,328,000 13,159,000
Restricted Cash 1,026,000 1,145,000
Other Assets 106,000 124,000
Current Assets:
Cash and Cash Equivalents 263,000 278,000
Receivables - Trade 399,000 437,000
Receivables - Other 6,000 6,000
Receivable - Related Party 238,000 159,000
Prepaid Expenses 4,000 12,000
----------- -----------
Total Current Assets 910,000 892,000
----------- -----------
Total Assets $13,370,000 $15,320,000
=========== ===========
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
BALANCE SHEETS
--------------
DECEMBER 31, 1995 AND 1994
--------------------------
(Continued)
-----------
1995 1996
---- ----
Partners' Capital and Liabilities
---------------------------------
Partners' Capital:
Limited Partners - 10,306 units $ 5,148,000 $ 4,868,000
General Partner - 1 Percent (8,000) (11,000)
----------- -----------
Total Partners' Capital 5,140,000 4,857,000
Other Liabilities - 150,000
Long-term Debt:
Notes Payable - Related Party 188,000 230,000
Notes Payable 537,000 -
----------- -----------
Partners' Capital and Long-Term
Liabilities 5,865,000 5,237,000
Current Liabilities:
Current Portion - Long-term Debt 4,563,000 7,140,000
Note Payable - Related Party 1,159,000 1,043,000
Payable-Related Party 671,000 573,000
Accrued Liabilities
Operations 402,000 495,000
Royalties 96,000 220,000
Interest 614,000 612,000
----------- -----------
Total Current Liabilities 7,505,000 10,083,000
----------- -----------
Total Partners' Capital
and Liabilities $13,370,000 $15,320,000
=========== ===========
See accompanying notes to the financial statements.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
STATEMENTS OF INCOME
--------------------
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---- ---- ----
Revenues:
Electric Power Revenues $ 2,529,000 $ 2,728,000 $ 3,162,000
Other Revenues 145,000 151,000 622,000
----------- ----------- -----------
Total Revenues 2,674,000 2,879,000 3,784,000
----------- ----------- -----------
Expenses:
Operations 1,755,000 1,779,000 2,163,000
Bad Debt Expense - - 31,000
General and Administrative:
Professional Services 55,000 54,000 72,000
General Partners - 98,000 123,000 223,000
Related Party ----------- ----------- -----------
Total General and 153,000 177,000 295,000
Administrative ----------- ----------- -----------
Total Expenses 1,908,000 1,956,000 2,489,000
----------- ----------- -----------
Income From Operations 766,000 923,000 1,295,000
Other Income (Expense):
Interest Income 73,000 52,000 38,000
Interest Expense (744,000) (902,000) (806,000)
Loss on Sale of Property (170,000) - -
----------- ----------- -----------
Net Other Expense (841,000) (850,000) (768,000)
----------- ----------- -----------
Net Income (Loss) Before
Extraordinary Item (75,000) 73,000 527,000
Extraordinary Item - Early 358,000 - 175,000
Extinguishment of Debt ----------- ----------- -----------
Net Income $ 283,000 $ 73,000 $ 702,000
=========== =========== ===========
Net Income Per Limited
Partnership Unit:
Income Before
Extraordinary Item $ (7.28)$ 7.08 $ 51.14
Extraordinary Item 34.74 - 16.98
----------- ----------- -----------
Net Income $ 27.46 $ 7.08 $ 68.12
=========== =========== ===========
See accompanying notes to the financial statements.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
STATEMENT OF PARTNERS' CAPITAL
------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
-----------------------------------------------------
General Partner
---------------
% Income
Allocation Amount
---------- ------
Balances at December 31, 1992 1 $ (18,573)
- 7,020
Net Income --- -----------
Balances at December 31, 1993 1 (11,553)
- 730
Net Income --- -----------
Balances at December 31, 1994 1 $ (10,823)
- 2,830
Net Income --- -----------
1 $ (7,993)
Balances at December 31, 1995 === ===========
Limited Partners
----------------
Number Total
of Units Amount Amount
-------- ------ ------
Balances at December 31, 1992 10,306 $ 4,100,573 $ 4,082,000
- 694,980 702,000
Net Income ------ ----------- -----------
Balances at December 31, 1993 10,306 4,795,553 4,784,000
- 72,270 73,000
Net Income ------ ----------- -----------
Balances at December 31, 1994 10,306 4,867,823 4,857,000
- 280,170 283,000
Net Income ------ ----------- -----------
10,306 $ 5,147,993 $ 5,140,000
Balances at December 31, 1995 ====== =========== ===========
See accompanying notes to the financial statements.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
STATEMENTS OF CASH FLOWS
------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---- ---- ----
Cash Flows From Operating
-------------------------
Activities:
----------
Net Income (Loss) $ 283,000 $ 73,000 $ 702,000
Adjustments to Net Income
(Loss):
Depreciation and Amortization 613,000 661,000 716,000
Loss on Sale of Property 170,000 - -
Extraordinary Item -
Early Extinguishment of Debt (358,000) - (175,000)
(Increase) Decrease in
Receivables (41,000) (124,000) (59,000)
(Increase) Decrease in Prepaid
Insurance (1,000) - (9,000)
(Increase) Decrease in Other
Assets 18,000 18,000 18,000
Accrued Income Restricted Cash (63,000) (43,000) (31,000)
Increase (Decrease) in Accrued
Liabilities 41,000 120,000 (234,000)
Increase (Decrease) in Amount 98,000 100,000 214,000
Due to General Partner --------- --------- ---------
Total Adjustments 477,000 732,000 440,000
--------- --------- ---------
Net Cash Provided by Operating 760,000 805,000 1,142,000
Activities --------- --------- ---------
Cash Flows From Investing
-------------------------
Activities:
----------
Cash Draws Restricted Cash 181,000 - 207,000
Transfers to Restricted Cash - - (205,000)
Capital Expenditures (253,000) (139,000) (222,000)
--------- --------- ---------
Net Cash Provided by (Used) in (72,000) (139,000) (220,000)
Investing Activities --------- --------- ---------
Cash Flows From Financing
-------------------------
Activities:
----------
Principal Payments on Long
-term Debt $(815,000) $(751,000) $(1,109,000)
Proceeds From the Issuance of 112,000 83,000 171,000
Debt --------- --------- -----------
Net Cash Provided by (Used) in (703,000) (668,000) (938,000)
Financing Activities --------- --------- -----------
Increase (Decrease) in Cash and
Cash Equivalents (15,000) (2,000) (16,000)
Cash and Cash Equivalents at 278,000 280,000 296,000
Beginning of Year --------- --------- -----------
Cash and Cash Equivalents at End $ 263,000 $ 278,000 $ 280,000
of Year ========= ========= ===========
Supplemental Disclosure of Cash
-------------------------------
Flow Information:
----------------
Cash Paid During the Year for $ 743,000 $ 727,000 $ 755,000
Interest ========= ========= ===========
Non-Cash Activities:
-------------------
The Partnership reduced a contract payable for the year ended December
31, 1993 by $13,000, and recognized income relating to option payments not
made.
An extraordinary gain of $175,000 for the year ended December 31,
1993, was recognized relating to the extinguishment and restructuring of
debt and accrued interest; see Note 4.
Notes payable and accrued interest were reduced and other income
recognized for the year ended December 31, 1993 in the amount of $424,000,
relating to offsets allowed under the performance guaranty on the Steamboat
Springs project; see Note 7.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
STATEMENT OF CASH FLOWS
-----------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
------------------------------------------------
(Continued)
-----------
The Partnership sold the Crystal Springs Project for $1,100,000 which
was paid directly to First Security Bank to pay down the note secured by
the Crystal Springs Project in accordance with the sales agreement dated
February 28, 1995. In addition, the note referred to above was
restructured as described in Note 13. A net loss on the sale of
$170,000 has been reported in net income for December 31, 1995 as
other income, and gain on early extinguishment of debt of $358,000 has
been reported as an extraordinary item for December 31, 1995.
See accompanying notes to the financial statements.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
The following significant accounting policies are followed by Far West
Electric Energy Fund, L.P. in preparing and presenting the financial
statements, and are to assist the users in understanding the financial
statements.
Organization
------------
Far West electric Energy Fund L.P., a Delaware limited partnership
(the "Partnership"), was originally organized in September 1984 under the
Uniform Limited Partnership Act of Utah as Far West Hydroelectric Fund,
Ltd. On December 20, 1988, the Partnership changed its name to Far West
Electric Energy Fund, L.P. and changed its domicile to Delaware.
The Partnership owns a geothermal power plant, (the "Steamboat Springs
Plant") located in Nevada, and until March 16, 1995, owned a hydroelectric
plant located in Idaho (the "Crystal Springs Plant") which was sold to
Crystal Springs Hydroelectric, L.P., a Washington limited partnership
pursuant to a Purchase and Sale Agreement dated February 28, 1995.
Utility Plant and Equipment
---------------------------
Utility plants and equipment are carried at cost or adjusted cost (see
Note 2). Fixed assets are depreciated over their estimated useful life
(utility plants - thirty years, equipment - five to ten years).
Cash Equivalents
----------------
For purposes of the statement of cash flows, the Partnership's policy
is that all investments with maturities of three months or less are
considered cash equivalents.
Income Taxes
------------
No provision for income taxes has been made since the Partnership
files partnership return under provisions for federal and state tax laws.
The assets and liabilities of the Partnership for tax purposes are lower
than the financial statements for 1995 by $8,066,000 and $552,000; and for
1994 by $11,154,000 and $2,208,000, respectively.
Income Per Limited Partnership Unit
-----------------------------------
The income per partnership unit on income before extraordinary item
and on net income is calculated on the weighted average units outstanding
during the year. The weighted average of units outstanding during 1995,
1994, and 1993 were 10,306.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------------
Reclassifications
-----------------
Certain amounts in 1994 and 1993 have been reclassified to conform
with financial statement presentations adopted in 1995.
NOTE 2 - UTILITY PLANT
----------------------
Plant in service consists of the following at December 31, 1995 and
1994:
Estimated
1995 1994 Useful Lives
---- ---- ------------
Steamboat Springs
Thermal Hydroelectric
Power Plant $15,599,000 $15,599,000 30 Years
Expansion Pipeline 400,000 400,000 5 to 7 Years
Crystal Springs
Hydroelectric Power
Plant - 4,738,000 30 Years
Valuation Allowance - (2,021,000)
----------- -----------
$15,999,000 $18,716,000
=========== ===========
The valuation allowance relates to the Crystal Springs Hydroelectric
Power Project. The valuation allowance is a result of the rights to a
purchase option being waived and a decline in the value of the project.
NOTE 3 - OTHER ASSETS
---------------------
Other assets consist of the following at December 31, 1995 and 1994:
1995 1994
-------- --------
Loan Origination Fees $183,000 $183,000
Organization Costs 65,000 65,000
Other Assets 35,000 35,000
(177,000) (159,000)
Accumulated Amortization -------- --------
$106,000 $124,000
Total Other Assets ======== ========
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 3 - OTHER ASSETS (Continued)
---------------------------------
The loan origination fees are being amortized on a straight-line basis
over the respective lives of the loans. Organization costs are amortized
over a five year period on a straight-line basis. Amortization was
$18,000, $18,000, $18,000 for the years ended December 31, 1995, 1994, and
1993, respectively.
NOTE 4 - LONG-TERM DEBT - NOTES PAYABLE
---------------------------------------
Long-term debt as of December 31, 1995 and 1994 consists of the
following:
1995 1994
---- ----
Note Payable to Westinghouse Credit
Corp. is in default as of 10/23/92 and
is immediately due and payable. Note is
secured by the Steamboat Springs Project
and all associated rights. Interest
rate is 11.5% $4,563,000 $5,340,000
Note Payable to a bank was due and
payable in full originally on
December 1, 1993, extended to
September 30, 1994 and has been modified
due to the sale of the Crystal Springs
Project. The principal amount owing
after the modification is $537,000.
Interest is due in semiannual
installments. With all remaining
principal and interest due 3/2/2000.
Interest rate is prime which was 8.75%
at year end (See Note 13 - Sale of 537,000 1,800,000
Crystal Springs Project). ---------- ----------
5,100,000 7,140,000
4,563,000 7,140,000
Less Current Installments Due ---------- ----------
$ 537,000 $ -
========== ==========
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 4 - LONG-TERM DEBT - NOTE PAYABLE (Continued)
--------------------------------------------------
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1995 are as follows:
Year Ending December 31,
------------------------
1996 $ 4,563,000
1997 -
1998 -
1999 -
2000 537,000
Thereafter -
-----------
$ 5,100,000
===========
A note payable to Ormat, Inc. was extinguished in the amount of
$175,000 in December 1993. The extinguishment was a result of negotiations
to settle litigation on the performance guaranty. The principal note
amount and related accrued interest are shown as an extraordinary item in
the statement of operations for the year ended December 31, 1993.
During December 1992, a note payable to a bank was restructured
resulting in a reduction of principal amount, accrued interest, and a
renegotiation of terms. Interest payments relating to the reduced note
were offset to accrued interest payable. The total amount offset against
accrued interest payable in 1994 was $26,000.
NOTE 5 - RESTRICTED CASH
------------------------
The Partnership is required to maintain an escrowed bank account as
security under the terms of the note payable to Westinghouse Credit Corp.
with the note payable balance as of December 31, 1995 of $4,563,000. The
reserve account was drawn down to $1,026,000 due to insufficient operating
funds needed for plant repairs of $188,000. The note is in default due to
the reserve account being drawn below required amounts. The reserve
includes the initial deposit of $1,000,000 and requires an additional
$70,000 annually for the first seven years, interest income is also
retained in the reserve account. Disbursements from the reserve account
for principal and interest payments on the note are allowed to the extent
that there are insufficient funds in the Partnership's operating accounts.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 6 - NOTE PAYABLE-RELATED PARTY
-----------------------------------
The Partnership had notes payable to related parties for the years
ended December 31, 1995, and 1994 as follows:
1995 1994
---- ----
Notes Payable to General Partner payable
on demand, unsecured. Interest rate is
13% $1,117,000 $1,005,000
Note Payable to 1-A Enterprises, a
partnership, due in quarterly
installments, including interest;
commencing April 16, 1990, remaining
principal due January 16, 2000; 230,000 268,000
unsecured. Interest rate is 11% ---------- ----------
1,347,000 1,273,000
1,159,000 1,043,000
Less Current Installments Due ---------- ----------
$ 188,000 $ 230,000
========== ==========
NOTE 7 - PURCHASE AND OPERATING AGREEMENTS
------------------------------------------
Steamboat Springs Thermal Hydroelectric Power Plant (Steamboat Springs)
-----------------------------------------------------------------------
Under the terms of the Steamboat Springs purchase agreement (the
Agreement), the Partnership is required to pay royalties to non-affiliated
parties aggregating 14.05 percent of annual gross revenues for the life of
the project plus an annual lump sum of $50,000 for the first ten years. As
of December 31, 1995 all royalty obligations were current. For the years
ended December 31, 1995, 1994, and 1993, royalty expense related to these
commitments is as follows:
1995 1994 1993
-------- -------- --------
Sierra Pacific Power Company (10%) $253,000 $257,000 $263,000
Benson Schwarzhoff & Helzel (3.888%) 98,000 99,000 102,000
Geothermal Development Associates
($50,000) 50,000 50,000 50,000
G. Martin Booth (.081%) 2,000 2,000 2,000
2,000 2,000 2,000
Richard W. Harris (.081%) -------- -------- --------
$405,000 $410,000 $419,000
Total ======== ======== ========
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 7 - PURCHASE AND OPERATING AGREEMENTS (Continued)
------------------------------------------------------
As part of the Agreement, the original developer of Steamboat Springs
(the Developer) guaranteed annual net operating revenues, as defined (Net
Operating Revenues) of $2,000,000 for a period of ten years following the
date of commissioning, March 31, 1987 (the Guarantee). In 1993, the debt
and related performance guarantee with the original developer was
extinguished. Pursuant to the Guarantee and included in other revenues in
the statements of income for the years ended December 31, 1993, and 1992
are $424,000, and $387,000, respectively. Pursuant to the contract and in
accordance with FIN-39, amounts due to the Partnership under the Guarantee
are offset annually against a note payable to the Developer, and the
Bonneville corporation which subsequently sold the project to the
Partnership. The note payable to the developer and Bonneville have been
fully offset as of December 31, 1993. The following Table summarizes these
transactions:
1993
----
Guaranteed Net Operating Revenues $2,000,000
Net Operating Revenues 1,288,000
----------
Offset Available 712,000
Gross Debt Subject to Offset 424,000
----------
Debt to be Offset in Future $ -
==========
The Partnership is also required to pay the Developer annual royalties
equal to 50 percent of the first $100,000 over the guaranteed Net Operating
Revenues and 75 percent of amounts in excess of the $100,000 each year for
the first ten years following the date of commissioning. For years 11
through 20 after commissioning, the royalty equals 30 percent of Net
Operating Revenues; principal debt service payments incurred to finance
construction or operations are not deducted in determining the revised net
operating revenues (Revised Net Operating Revenues). For years 21
inclusive and thereafter, the royalty is equal to 50 percent of Revised Net
Operating Revenues. As revenues have not exceeded the guaranteed net
operating revenues, no royalties have been earned and no royalties have
been paid pursuant with this commitment.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 8 - RELATED PARTY TRANSACTIONS
-----------------------------------
Under the terms of the Partnership agreement, the general partner (Far
West Capital, Inc.) is allowed various fees and reimbursements of expenses
incurred to manage the Partnership. For each of the years in the three-
year period ended December 31, 1995, the Partnership expensed the following
amounts as cost reimbursements to the general partner:
1995 1994 1993
---- ---- ----
General and Administrative
Expenses $ 98,000 $123,000 $223,000
In addition, during the year ended December 31, 1993, the Partnership
paid $3,300 to a Utah partnership for private air transportation, in the
ordinary course of business, in lieu of commercial airfare. The general
partners are partners of the Utah Partnership.
As a term of the amended and restated Partnership agreement, the
General Partner is entitled to 5 percent of the limited partnership units
(Units) as compensation. Limited Partnership units for each of the three-
year period ended December 31, 1995 are as follows:
1995 1994 1993
---- ---- ----
General Partner 530 530 530
Limited Partners 9,776 9,776 9,776
-------- -------- --------
Total 10,306 10,306 10,306
======== ======== ========
During 1988, the Partnership assigned its rights to build an expansion
unit to Steamboat Springs to a Nevada general partnership owned mostly by
Alan O. Melchior and Thomas A. Quinn, officers and owners of the General
Partner of the Partnership. As consideration for the rights, the Nevada
general partnership deeded the Partnership rights and title to piping and
valves installed from Steamboat Springs to the expansion unit and agreed to
pay the Partnership royalties equaling 10 percent of net operating income
from the expansion for the years ended December 31, 1988 through 1992, 15
percent for 1993 through 1998, 40 percent for 1999 through 2010, 45 percent
thereafter, and an annual pumping charge. Included in other revenues in
the statement of operations for the years ended December 31, 1995, 1994 and
1993, are $145,000, $144,000 and $135,000, respectively related to this
agreement. As of December 31, 1994 and 1993, two of the general partners
held a 75 percent ownership in the Nevada general partnership.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 8 - RELATED PARTY TRANSACTIONS (Continued)
-----------------------------------------------
During 1991, the Partnership assigned its 77% ownership in SB Geo,
Inc. a Utah Corporation, to Alan O. Melchior and Thomas A. Quinn, two of
the officers and owners of the General Partner of the Partnership. SB Geo,
Inc. operates the Partnership's Steamboat Springs Thermal Hydroelectric
Power Plant and a related expansion unit. At the time of the transfer, SB
Geo, Inc. had no assets and operated on a cost reimbursement basis. No
gain or loss was recognized as a result of the assignment.
NOTE 9 - MAJOR CUSTOMER
-----------------------
The Partnership has contracted with Sierra Pacific Power Company to
sell electric energy from Steamboat Springs for a term of 20 years. The
contract entitles the Partnership to a rate of 71.7 mills per kilowatt hour
for the first 10 years and a variable amount related to the short-term cost
of power to Sierra Pacific Power Company for the second 10 years. Sales to
Sierra Pacific Power Company account for 100 percent of electric power
sales. The Partnership is dependent upon this customer for the purchase of
all electricity generated from this power plant.
NOTE 10 - LITIGATION
--------------------
Ormat Arbitration
-----------------
The arbitrators during 1993 made their award regarding the lawsuit
against Ormat alleging breach of contract on the Steamboat Springs project
and Ormat's counter-suit regarding the cancellation of the operating
agreement. The Partnership was awarded $188,000 in damages including a
portion of previously restricted cash. Ormat was awarded $255,000 for past
fixed operating fees of which the majority had been held in an escrow
account.
Subsequent to the arbitrators award the Partnership and Ormat reached
an additional agreement which cancels the note payable to Ormat which was
previously offset by the performance guaranty.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 10 - LITIGATION (Continued)
--------------------------------
Bonneville Pacific Corporation Bankruptcy
-----------------------------------------
The Partnership has filed a claim in the Chapter 11 filing of
Bonneville Pacific Corporation. The claim relates to fraud claims and
other transactions on the Crystal Springs project.
This claim is a general unsecured claim; it is unliquidated and
contingent, meaning that the amount of the claim has yet to be fixed in the
bankruptcy forum. It is estimated that the claim is no more than
$100,000.00. There is no economy for the partnership in attempting to
resolve the amount of the claim at this juncture, without certainty that
Bonneville Pacific Corporation will succeed in confirming a plan of
reorganization, since general unsecured claims cannot receive payment
absent confirmation of a plan of reorganization. If and when a plan of
reorganization is confirmed, it is expected that, post-confirmation, there
will be a claims liquidation and resolution process, during which the claim
of the partnership will be fixed by the bankruptcy court. The Chapter 11
reorganization proceeding of the Bonneville Pacific Corporation has been
ongoing for some years. It is a large and complex proceeding. The success
of the reorganization effort will turn in major part upon complex
litigation which the trustee in the case, Roger Segal, has commenced
against various parties in interest. Counsel for Mr. Segal, Vernon
Hopkinson, estimates at the present time that this litigation may be
concluded and a plan of reorganization proposed no earlier than year-end,
1997. As noted above, payment on account of general unsecured claims
cannot occur unless and until a plan of reorganization is confirmed by the
bankruptcy court. Mr. Hopkinson estimates at the present time that the
size of the dividend to general unsecured creditors could be anywhere from
20 percent to payment in full, depending upon the outcome of the
aforementioned litigation.
Nevada Department of Transportation
-----------------------------------
The Department of Transportation of the State of Nevada ("NDOT")
commenced action on 12/10/93 in the Second Judicial District Court of the
State of nevada in and for the County of Washoe against the Partnership and
others to obtain, for highway purposes, ownership of approximately 2.79
acres of the property owned by Sierra Pacific Power Company ("SPPC") at the
extreme north of the land upon which the Steamboat Springs Plant is located
pursuant to the SPPC lease. The Court entered an Order for occupancy of
the condemned property on 12/29/93. The NDOT deposited the sum of $273,500
on 12/29/93; which remains on deposit as of 12/31/95. The Partnership is
defending the action insofar as is necessary to protect a stand-by
injection well located on the lease in the proximity of the land being
taken and a monitoring well in an adjacent area which is being taken. It
is presently negotiating a settlement which will leave the stand-by
injection well and the Partnership's rights in and use thereof intact and
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 10 - LITIGATION (Continued)
--------------------------------
available. The Partnership has constructed a new monitoring well and is
attempting to recover the cost thereof from the State. The Partnership has
an agreement in principle with the State relative to this reimbursement,
the cost of which is approximately $5,000. That sum will likely be
disbursed in May or June of 1996. The Partnership is also attempting to
obtain a portion of the $273,500 offered and deposited into Court by NDOT
on 12/29/93 as compensation for the taking. SPPC is claiming all of such
funds as the owner of the land. The Court has granted NDOT the right to
possess and occupy the property while the amount of compensation to be
finally awarded is being contested. WCC, the Partnership's principal
creditor, has claimed that under the financing agreements with respect to
the Steamboat Springs and 1-A Plants, all funds recovered from NDOT must be
applied to reduce the principal balance of the loans outstanding. The
funds will not likely be disbursed until the fourth quarter of 1996 or the
first quarter of 1997, unless the Partnership, SPPC, and WCC reach some
settlement before that time.
NOTE 11 - NOTE DEFAULTS
-----------------------
Due to insufficient funds being in restricted cash, the Partnership
received a notice of default as of 10/23/92 on a note to Westinghouse
Credit Corp. The balance as of December 31, 1995 and 1994 was $4,563,000
and $5,340,000, respectively. Under the terms of the note all principal
and interest is immediately due and payable. The note is secured by the
Steamboat Springs project and related revenues and other assets.
The Partnership was in default on a note payable to a bank as of
9/30/94. The balance as of December 31, 1994 and 1993 was $1,800,000. Due
to the sale of the Crystal Springs Project subsequent to December 31, 1994,
this note has been reduced to $537,000 (see Note 13) and is no longer in
default.
NOTE 12 - LIQUIDITY
-------------------
As shown in the accompanying financial statements for the year ended
December 31, 1995, current liabilities exceeded current assets by
$6,595,000. Of this amount $4,563,000 relates to the note defaults
described in Note 11.
NOTE 13 - SALE OF CRYSTAL SPRINGS PROJECT
-----------------------------------------
The Partnership signed an agreement dated February 28, 1995 to sell
the Crystal Springs project. The sale included all the assets and
liabilities
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 13 - SALE OF CRYSTAL SPRINGS PROJECT (Continued)
-----------------------------------------------------
associated with the Crystal Springs Project except the note payable to
First Security Bank which has been modified as follows:
Upon receipt of First Security (Lender) of a principal payment on
the loan in the amount of $1,100,000, the note was modified to
provide that the remaining principal balance owed shall be
$537,000 and interest and costs on the loan shall be deemed
current.
If the note is paid in full within two years after the payment of
$1,100,000, the Lender will discount the principal amount owing
by $100,000 (requiring a principal payment of only
$437,000), and if paid within three years, the Lender will discount
the amount of the principal due by $50,000 (requiring a principal
payment of only $487,000). There will be no discount if paid after
the third anniversary.
The modification has resulted in a gain on early extinguishment of
debt of $358,000.
The net loss on sale of the Crystal Springs Project of $170,000 has
been reported on the Statement of Income for the year ended December 31,
1995 as Other Income.
At February 28, 1995, no amount was due on the $50,000 line of credit
acquired in 1992 for use in repair of certain items of equipment for the
Crystal springs Plant for start up operations in 1993.
The following pro forma statement of operations give effect to the
above events as if they had occurred on January 1, 1995:
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 13 - SALE OF CRYSTAL SPRINGS PROJECT (Continued)
-----------------------------------------------------
PRO FORMA STATEMENT OF OPERATIONS
---------------------------------
As Reported Pro Forma
in Adjustments
Accompanying For Pro Forma
Financial Subsequent Statement of
Statements Events Operations
------------ ------------ ------------
REVENUES
Electric Power Sales $2,529,000 $ - $2,529,000
Other Revenues 145,000 - 145,000
---------- ---------- ----------
Total Revenues 2,674,000 - 2,674,000
---------- ---------- ----------
EXPENSES
Interest, Net 671,000 (16,000) (A) 655,000
Depreciation 613,000 - 613,000
Royalty 405,000 - 405,000
Professional Services 54,000 (4,000) (A) 50,000
Administrative Services -
General Partner 98,000 (38,000) (A) 60,000
Amortization 18,000 - 18,000
Insurance 47,000 - 47,000
Maintenance 583,000 (5,000) (A) 578,000
Taxes 31,000 - 31,000
Other 59,000 (1,000) (A) 58,000
---------- --------- ----------
Total Expenses 2,579,000 (64,000) 2,515,000
---------- ---------- ----------
Net Income (Loss) $ 95,000 $ 64,000 $ 159,000
---------- ---------- ----------
Net Income (Loss) Per
Limited Partnership Unit $ 9.22 $ 6.21 $ 15.43
========== =========== ==========
A - Operating expenses attributable to Crystal Springs Project.
B - Accrued interest and expenses from January 1, 1995 through date of
sale of Crystal Springs Project.
Nonrecurring Transactions
-------------------------
The same of the Crystal Springs Project has resulted in a loss of
$170,000 and a gain on early extinguishment of debt of $358,000. These
amounts are reported in the statement of Income for December 31, 1995.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 14 - SUBSEQUENT EVENTS
---------------------------
Steamboat Springs Project
-------------------------
The Fund has received a cash offer to sell substantially all of the
assets of the Fund to U.S. Envirosystems, Inc. for $1,250,000. The sale
would result in the termination of the Fund and distribution of the
proceeds to limited partners of approximately $33 per limited partnership
unit.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Partners
1-A Enterprises
Salt Lake City, Utah
We have audited the balance sheet of 1-A Enterprises as of December
31, 1995 and 1994, and the related statements of income, partners' capital
and cash flows for the years then ended. These financial statements are
the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of 1-A Enterprises
as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
Respectfully submitted,
/s/ Robison, Hill & Co.
----------------------------
Certified Public Accountants
Salt Lake City, Utah
March 5, 1996
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
BALANCE SHEET
-------------
December 31,
------------
1995 1994
---- ----
Assets
------
Utility Plant:
Plant $2,431,222 $2,431,222
Development Costs 450,000 450,000
Accumulated Depreciation (676,289) (580,248)
-------- --------
Net Utility Plant 2,204,933 2,300,974
Restricted Assets:
Cash 80,626 76,157
Certificate of Deposit 73,189 70,000
------ ------
Total Restricted Assets 153,815 146,157
Other Assets: 32,145 40,181
Current Assets:
Cash and Cash Equivalents 80,428 98,642
Receivables - Trade 98,539 98,600
Receivables - Other 7,139 6,358
Receivable - Related Party 229,810 267,705
Prepaid Expenses 1,679 1,348
------- -------
Total Current Assets 417,595 472,653
------- -------
Total Assets $2,808,488 $2,959,965
========== ==========
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
BALANCE SHEET
-------------
(Continued)
----------
December 31,
------------
1995 1994
---- ----
Partners' Capital and Liabilities
---------------------------------
Partners' Capital $ (293,083) $ (464,613)
Current Liabilities:
Note Payable - See Note 4 1,670,995 1,960,732
Note Payable - Related Party 728,970 728,970
Payable - Related Party 358,574 435,193
Accrued Liabilities:
Operations 3,120 5,767
Royalties 302,315 249,799
Interest 37,597 44,117
---------- ----------
Total Current Liabilities 3,101,571 3,424,578
---------- ----------
Total Partners' Capital and $2,808,488 $2,959,965
Liabilities ========== ==========
The accompanying notes are an integral part of these financial
statements.
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
STATEMENTS OF INCOME
--------------------
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1995 1994
---- ----
Revenues:
Electric Power Revenues $ 875,356 $ 798,722
---------- ----------
Expenses:
Operations 536,756 545,336
General and Administrative:
Professional Services - 1,481
Related party 14,500 14,500
---------- ----------
Total Expenses 551,256 561,317
---------- ----------
Income From Operations 324,100 237,405
---------- ----------
Other Income (Expense):
Interest Income 41,037 38,315
Interest Expense (202,477) (233,513)
---------- ----------
Net other Expense (161,440) (195,198)
---------- ----------
Net Income $ 162,660 $ 42,207
========== ==========
The accompanying notes are an integral part of these financial
statements.
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
STATEMENT OF PARTNERS' CAPITAL
------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, AND 1994
-----------------------------------------------
Balances at December 31, 1993 $ (510,835)
Contributions 4,015
Net Income 42,207
----------
Balances at December 31, 1994 (464,613)
Contributions 8,870
Net Income 162,660
----------
Balances at December 31, 1995 $ (293,083)
==========
The accompanying notes are an integral part of these financial
statements.
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
STATEMENTS OF CASH FLOWS
------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1995 1994
---- ----
Cash Flows From Operating Activities:
-------------------------------------
Net Income (Loss) $162,660 $0,42,207
-------- ---------
Adjustments to Net Income (Loss):
Depreciation and Amortization 104,078 104,078
(Increase) Decrease in
Receivables (721) (18,339)
(Increase) Decrease in
Prepaid Insurance (331) (678)
Accrued Interest Income
Restricted Assets (7,658) (2,859)
Increase (Decrease) in
Accrued Liabilities 43,349 48,764
Increase (Decrease) in (76,619) 147,519
Amount Due to Related Party -------- ---------
Total Adjustments 62,098 278,486
-------- ---------
Net Cash Provided by 244,758 320,693
Operating Activities -------- ---------
Cash Flows From Investing Activities:
-------------------------------------
Principle Payments From Note
Receivable Related Party 37,895 33,916
Investment in Certificate of - (70,000)
Deposit - Restricted -------- ---------
Net Cash Provided by (Used) 37,895 (36,084)
in Investing Activities -------- ---------
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
STATEMENTS OF CASH FLOWS
------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
------------------------------------------------
(Continued)
-----------
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1995 1994
---- ----
Cash flows from Financing Activities:
------------------------------------
Principal payments on
Long-term Debt $(289,737) $(259,310)
Proceeds from Partner
Contributions 8,870 4,015
--------- ---------
Net Cash Provided by (Used) (280,867) (255,295)
in Financing Activities ---------- ---------
Increase (Decrease) in Cash
and Cash Equivalents (18,214) 29,314
Cash and Cash Equivalents at 98,642 69,328
Beginning of Year --------- ---------
Cash and Cash Equivalents at $ 80,428 $ 98,642
Enc of Year ========= =========
Supplemental Disclosure of Cash
-------------------------------
Flow Information:
----------------
Cash Paid During the Year $ 208,997 $ 239,346
for Interest ========= =========
The accompanying notes are an integral part of these financial
statements.
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1995 AND 1994
--------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
The following significant accounting policies are followed by 1-A
Enterprises in preparing and presenting the financial statements, and are
to assist the users in understanding the financial statements.
Organization
------------
1-A Enterprises, a Nevada General partnership (the Partnership) was
organized in 1988 to acquire and operate electric generating plants.
Utility Plant and Development Costs
-----------------------------------
Utility plant and Development costs are carried at cost. Fixed assets
are depreciated over their estimated useful life (thirty years).
Cash Equivalents
----------------
For purposes of the statement of cash flows, the Partnership's policy
is that all investments with maturities of three months or less are
considered cash equivalents.
Income Taxes
------------
No provision for income taxes has been made since the Partnership
files partnership return under provisions for federal and state tax laws.
The assets of the Partnership for tax purposes are lower than the financial
statements for 1995 and 1994 by $2,204,933 and $2,300,974 respectively.
NOTE 2 - RECEIVABLE RELATED PARTY
---------------------------------
The Partnership had a note receivable from a related party for the
year ended December 31, 1995 and 1994 as follows:
1995 1994
---- ----
Note Receivable From Far West Electric
Energy Fund, L.P., a Delaware Limited
partnership, due in quarterly installments,
including interest; commencing April 16, 1990,
remaining principle due January 16, 2000;
unsecured. Interest rate is 11% $229,810 $267,705
======== ========
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1995
-----------------
(Continued)
-----------
NOTE 3 - OTHER ASSETS
---------------------
Other assets consist of the following at December 31, 1995 and 1994:
1995 1994
---------- ----------
Loan Origination Fees $ 80,363 $ 80,363
Accumulated Amortization (48,218) (40,182)
-------- --------
Total Other Assets $ 32,145 $ 40,181
========= ========
The loan origination fees are being amortized on a straight-line basis
over the life of the loan (ten years). Amortization was $8,036 and $8,036
for the years ended December 31, 1995 and 1994, respectively.
NOTE 4 - LONG-TERM DEBT
-----------------------
Long-term debt as of December 31, 1995 and 1994 consists of the
following:
1995 1994
---- ----
Note Payable to a corporation is
payable in quarterly installments,
including interest, beginning
January 20, 1990. Note is secured
by the Steamboat 1-A Project and all
associated rights. Interest rate is
11.25% $1,670,995 $1,960,732
Less Current Installments Due 1,670,995 1,960,732
---------- ----------
$ - $ -
========== ==========
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1995
-----------------
(Continued)
-----------
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1995 are as follows:
Year Ending December 31,
------------------------
1996 $1,670,995
1997 -
1998 -
1999 -
2000 -
Thereafter -
------------
$1,670,995
============
NOTE 5 - NOTE PAYABLE-RELATED PARTY
-----------------------------------
The Partnership had notes payable to related parties for the years
ended December 31, 1995 and 1994, as follows:
1995 1994
---- ----
Notes Payable to Far West Capital*
payable on demand, unsecured. No
interest accrued to date.
$728,970 $728,970
Less Current Installments Due 728,970 728,970
-------- --------
$ - $ -
======== ========
* Two of the general partners of the Company are majority owners of Far
West Capital, Inc.
NOTE 6 - PURCHASE AND OPERATING AGREEMENTS
-------------------------------------------
Under the terms of the amended purchase agreement (the Agreement), the
Partnership is required to pay royalties aggregating 29.05 percent of
annual gross revenues. For the years ended December 31, 1995, and 1994,
royalty expense related to these commitments is as follows:
(continued)
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1995
-----------------
(Continued)
-----------
1995 1994
--------- --------
Sierra Pacific Power Company (10%) $ 87,536 $ 79,872
Benson Schwarzhoff & Helzel 34,034 31,054
(3.888%)
Far West Electrical Energy Fund, 86,904 86,654
L.P.(15%)
G. Martin Booth (.081%) 709 647
Richard W. Harris (.081%) 709 647
--------- ----------
Total $209,892 $198,874
======== ========
NOTE 7 - RESTRICTED ASSETS
--------------------------
The Partnership is required to maintain an escrowed bank account as
security under the terms of the note payable to a corporation with the note
payable balance as of December 31, 1995 and 1994 of $1,670,995 and
$1,960,732 respectively. The reserve required an initial deposit of
$150,000 plus interest income to be maintained in the account. The reserve
was drawn down due to insufficient operating funds to meet obligations.
The balance in the reserve as of December 31, 1995 and 1994 is $80,626 and
$76,157 respectively. Disbursements from the reserve account for
obligations are allowed to the extent that there are insufficient funds in
the Partnership's operating accounts. Funds are to be deposited into the
reserve account as necessary to replenish any disbursements for obligations
as provided above. The note is in default due to the reserve account being
drawn down below required amounts.
The Company is required to pay a 10% royalty to Sierra Pacific Power
Company (SPPC). Under the agreement with SPPC, 4% is paid and 6% is
accrued during the first 6 years of operation. The date of initial
operation was 10/29/88. During the seventh and eighth years, the amount
paid increases to 6% and 8% while the amount accrued decreases to 4% and
2%, respectively. Beginning in years nine through thirty, the full 10% is
paid with no accrual. The accumulation of accrued royalties pursuant to
this agreement shall be paid in the eleventh year of operation plus
interest accrued monthly at an annual rate of 11.9%. The Partnership is
required to maintain an irrevocable letter of credit for the benefit of
SPPC in the amount of $70,000. The provisions of the letter of credit
provide that in the event of default by the Company, SPPC shall have the
right to draw upon the letter of credit to satisfy any amounts or portions
os such amounts owed to SPPC for the eleventh year payment amount and
interest accrued as of the date of default. The
(continued)
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1995
-----------------
(Continued)
-----------
$70,000 has been invested by the company in a certificate of deposit which
had a balance of $73,189 and $70,000 as of December 31, 1995 and 1994,
respectively.
NOTE 8 - RELATED PARTY TRANSACTIONS
-----------------------------------
Amounts have been accrued for various fees and reimbursements of
expenses incurred by an affiliated company to manage the Partnership. For
each of the years in the two-year period ended December 31, 1995, the
Partnership expensed the following amounts as cost reimbursements to the
affiliated company:
1995 1994
---- ----
General and Administrative
Expenses $ 14,500 $ 14,500
During 1988, Far West Electric Energy Fund, L.P. assigned their rights
to build an expansion unit to Steamboat Springs to 1-A Enterprises. As
consideration for the rights, 1-A Enterprises deeded Far West Electric
Energy Fund, L.P., rights and title to piping and valves installed from
Steamboat Springs to the expansion unit and agreed to pay Far West Electric
Energy Fund, L.P. royalties equaling 10 percent of net operating income
from the expansion for the years ended December 31, 1988 through 1992, 15
percent for 1993 through 1998, 40 percent for 1999 through 2010, 45 percent
thereafter, and an annual pumping charge. Included in Operations Expense
in the statement of operations for the years ended December 31, 1995 and
1994, are $145,096, and $144,000, respectively related to this agreement.
As of December 31, 1995 and 1994, two of the general partners of Far West
Electric Energy Fund, L.P. held a 74 percent (1995) and 75 percent (1994)
ownership in 1-A Enterprises.
The Partnership has entered into an Operating and Maintenance
Agreement with a related corporation to act as the operator of the
project. This agreement provides for operator to perform the duties of the
operator including operating and regular maintenance of the plant for a
monthly fee and additional fees for variable maintenance. The
Partnership paid $142,745 for the year ended December 31, 1995 and
$169,120 for the year ended December 31, 1994.
NOTE 9 - MAJOR CUSTOMER
-----------------------
The Partnership has contracted with Sierra Pacific Power Company to
sell electric energy from Steamboat Springs for a term of 20 years. The
contract entitles the Partnership to a rate of 71.7 mills per kilowatt hour
for the
(continued)
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1995
-----------------
(Continued)
-----------
first 10 years and a variable amount related to the short-term cost of
power to Sierra Pacific Power Company for the second 10 years. Sales to
Sierra Pacific Power Company account for 100 percent of electric power
sales. The Partnership is dependent upon this customer for the purchase of
all electricity generated from this power plant.
NOTE 10 - NOTE DEFAULTS
-----------------------
The Partnership is in default on a note payable to a corporation as of
October 1990 for reasons described in Note 4. The balance as of December
31, 1995 and 1994 is $1,670,995 and $1,960,732 respectively. Under the
terms of the note all principal and interest is immediately due and payable
upon request of the Lender. The note is secured by the 1-A project and
related revenued and other assets.
NOTE 11 - LIQUIDITY
-------------------
As shown in the accompanying financial statements for the year ended
December 31, 1995, current liabilities exceeded current assets by
$2,683,976. Of this amount $1,670,995 relates to the note defaults
described in Note 9.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Lehi Independent Power Associates, L.C.
We have audited the accompanying balance sheets of Lehi Independent
Power Associates, L.C. as of December 31, 1995 and 1994 and the related
statements of operations, changes in members equity and cash flows for the
year ended December 31, 1995 and the period January 24, 1994 (date of
inception) through December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We have conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Lehi
Independent Power Associates, L.C., as of December 31, 1995 and 1994, and
the results of its operations and its cash flows for year ended December
31, 1995 and the period January 24, 1994 (date of inception) through
December 31, 1994 in conformity with generally accepted accounting
principles.
March 19, 1996 /s/ TRAVELLER WINN & MOWER, P.C.
Salt Lake City, Utah
<PAGE>
Lehi Independent Power Associates, L.C.
Balance Sheets
December 31, 1995 and 1994
1995 1994
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 41,460 $ 2,113
Due from member - 3,335
Note receivable 115,750 -
Prepaid insurance 853 -
------- -------
Total current assets 158,063 5,448
Property, plant and equipment, 275,125 278,921
net ------- -------
TOTAL ASSETS $415,188 $ 284,369
======== =========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable $ 4,873 $ 951
Accrued expenses 4,373 -
Related party note payable - 3,440
------- --------
Total current liabilities 9,246 4,391
Members' equity:
Member contributions 292,662 292,662
Additional capital
contributions 42,104 28,149
Retained earnings (deficit) 71,176 (40,833)
------- --------
Total members' equity 405,942 279,978
------- --------
TOTAL LIABILITIES AND MEMBERS' $415,188 $284,369
EQUITY ======== ========
See accompanying notes to financial statements.
<PAGE>
Lehi Independent Power Associates, L.C.
Statements of Operations
For the year ended December 31, 1995 and the period
January 24, 1994 (date of inception) through December 31, 1994
1995 1994
---- ----
INCOME:
Gain on sale of fixed asset $236,194 $ --
EXPENSES:
General and administrative 49,195 27,092
Write-down of property, plant and 14,990 13,741
equipment -------- --------
Total expenses 64,185 40,833
-------- --------
Net income (loss) $172,009 $(40,833)
======== ========
See accompanying notes to financial statements.
<PAGE>
Lehi Independent Power Associates, L.C.
Statement of Changes in Members Equity
For the year ended December 31, 1995 and the period
January 24, 1994 (date of inception) through December 31, 1994
Additional Retained Total
Member Capital Earnings Members'
Contributions Contributions (deficit) Equity
------------ ------------- --------- --------
Balance January 24, 1995 $ - $ - $ - $ -
Members contributions 292,662 28,149 - 320,811
Net loss - - (40,833) (40,833)
-------- ------- -------- --------
Balance December 31, 292,662 28,149 (40,833) 279,978
1994
Members contributions - - 3,489 - 3,489
Suma, Corp.
Members contributions - - 3,489 - 3,489
Far West Capital,
Inc.
Members contributions - - 6,977 - 6,977
Lehi Envirosystems,
Inc.
Members distribution - - - (15,000) (15,000)
Suma Corp.
Members distribution - - - (15,000) (15,000)
Far West Capital,
Inc.
Members distribution - - - (30,000) (30,000)
Lehi Envirosystems,
Inc.
Net income - - 172,009 172,009
--------- --------- ------- -------
Balance December 31, $292,662 $42,104 $071,176 ($405,942)
1995 ========= ======== ======== =========
See accompanying notes to financial statements.
<PAGE>
Lehi Independent Power Associates, L.C.
Statements of Cash Flows
For the year ended December 31, 1995 and the period
January 24, 1994 (date of inception) through December 31, 1994
1995 1994
---- ----
Cash flows from operating activities:
Net income (loss) $172,009 $(40,833)
Adjustment to reconcile net income to
net cash provided by operating
activities:
Write-down of property, plant and
equipment 14,990 13,741
Gain on sale of equipment (236,194) -
Changes in assets and liabilities - -
Prepaid insurance (853) -
Accounts payable 3,922 951
Accrued expenses 4,373 --
-------- --------
Net cash (used) by operating
activities (41,753) (26,141)
Cash flows from investing activities:
Proceeds from sale of equipment 127,250 -
Cash flows from financing activities:
Net payment and proceeds from
collection of due from member 3,335 (3,335)
Net payment and proceeds of related
party note payable (3,440) 3,440
Additional capital contributions 13,955 28,149
Members distribution (60,000) -
-------- --------
Net cash provided (used) by financing
activities (46,150) 28,254
--------
Net increase in cash and cash
equivalents 39,347 2,113
Cash and cash equivalents at beginning 2,113 -
of period -------- --------
Cash and cash equivalents at end of $41,460 $ 2,113
period -------- --------
See accompanying notes to financial statements.
<PAGE>
Lehi Independent Power Associates, L.C.
Statements of Cash Flows
For the year ended December 31, 1995 and the period
January 24, 1994 (date of inception) through December 31, 1994
Supplemental cash flow information
Interest paid by the Company during 1995 was $415.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the period ended December 31, 1994, the members of the Company
contributed property and equipment with a cost of $292,662.
During the year ended December 31, 1995, the Company sold equipment for
$243,000. The Company received $127,250 in proceeds and a note receivable
for $115,750.
See accompanying notes to financial statements.
<PAGE>
Lehi Independent Power Associates, L.C.
Notes to Financial Statements
December 31, 1995 and 1994
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Lehi Independent Power Associates, L.C.(the Company) is a Utah based
company organized on January 24, 1994. The Company s principal
business is to purchase, develop, own, operate and/or sell all or a
portion of a power generation facility which produces electrical
energy located in Lehi, Utah. The members and their respective
ownership percentages are as follows: Lehi Envirosystems, Inc., 50 %;
Far West Capital, Inc., 25%; and Suma Corp., 25%. All revenues and
expenses are shared in the same proportion as each members ownership
percentage.
CASH AND CASH EQUIVALENTS
The Company considers all cash on deposit and short-term liquid
investments with original maturities of three months or less to be
cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of land, a power generation
plant and plant equipment and is recorded at cost. The plant is
currently not in operation. The plant and plant equipment are
depreciated on the straight-line method over useful lives of 29 and 6
years, respectively.
INCOME TAXES
No provision for federal income tax is made since the Company is
treated as a partnership for tax purposes and as such is not a taxable
entity under the federal income tax provisions. The individual
members are taxed on their proportionate share of members income or
loss.
2. DUE FROM MEMBER
At December 31, 1994, the Company had capital contributions receivable
from Lehi Envirosystems, Inc., for $3,335. This represents required
contributions to maintain the proportionate sharing of expenses as
stipulated in the operating agreement. This amount was received in
1995.
<PAGE>
Lehi Independent Power Associates, L.C.
Notes to Financial Statements
December 31, 1995 and 1994
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and consisted of the
following at December 31:
1995 1994
---- ----
Land $ 13,000 $ 13,000
Building 239,216 239,216
Plant equipment 30,446 40,446
-------- --------
282,662 292,662
Write-down of property,
plant and equipment (25,537) (13,741)
-------- --------
$257,125 $278,921
======== ========
During the periods in which the property, plant and equipment is not
in operation, management has reviewed the assets to determine their
realization. Based on this review, management has written-down the
property, plant and equipment for the year and period ended December
31, 1995 and 1994, $14,990 and $13,741, respectively.
4. RELATED PARTY TRANSACTIONS
The Company receives accounting services from a related company s
accounting department. The services provided are billed at $40 an
hour and average approximately $160 a month.
The related party note payable is due on demand and carries no
interest rate.
5. COMMITMENTS AND CONTINGENCIES
The Company is in communication with the Utah State Department of
Water Quality with respect to traces of petroleum products found in a
ground water discharge ditch which exits the plant property. Based on
those communications, the State is reviewing what, if any, additional
action may be required. Also, the United States Environmental
Protection Agency (EPA) has reviewed the data on the discharge and has
concluded that no violation of EPA Rules and Laws have occurred. In
Management s opinion, the potential impact to the financial statements
would not exceed $45,000.
See accompanying notes to financial statements.
<PAGE>
Lehi Independent Power Associates, L.C.
Notes to Financial Statements
December 31, 1995 and 1994
6. GOING CONCERN
The Company's primary asset consists of a power generation facility
that is currently idle. Consistent with its preference to operate the
facility, the Company has thus far declined to accept several offers
to liquidate the facility for amounts significantly in excess of the
facility s recorded net book value. The Company continues to pursue a
financially feasible power purchase contract which when executed would
result in the commencement of operations.
The members of the Company have committed to continue to fund
necessary costs associated with holding and maintaining the power
plant through December 31, 1996 in the event that the power plant does
not begin operations or is otherwise unable to generate revenues
sufficient to fund operating and holding costs.
See accompanying notes to financial statements.
<PAGE>
Plymouth Cogeneration Limited Partnership
Notes to Financial Statements
----------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
<PAGE>
Plymouth Cogeneration Limited Partnership
Balance Sheets
December 31, 1995 and 1994
----------------------------------------------------------------------
1995 1994
---- ----
ASSETS
Current assets:
Cash and cash $ 15,944 $ 8,233
equivalents
Accounts receivable 90,865 76,881
Prepaid expenses 18,087 14,198
Restricted cash 33,773 619,820
---------- ----------
Total current 158,669 719,132
assets ---------- ----------
Plant, at cost 5,888,172 5,882,464
Less: accumulated 295,411 -
depreciation ---------- ----------
5,592,761 5,882,464
---------- ----------
Debt service reserve 497,085 500,020
Deferred financing costs, 154,683 162,824
less accumulated
amortization
of $8,141 in 1995
Rent receivable 176,184 -
---------- ----------
Total assets $6,579,382 $7,264,440
---------- ----------
LIABILITIES AND PARTNERS'
CAPITAL
Current liabilities:
Note payable-general - $586,000
contractor (Note 2)$
Accounts payable and 262,013 286,917
accrued expenses
Deferred revenue 81,127 74,806
---------- ----------
Total current 343,140 947,723
liabilities ---------- ----------
Long-term debt, net of 4,987,181 4,980,717
discount (Note 3)
Partners' capital 1,249,061 1,336,000
---------- ----------
Total liabilities and $6,579,382 $7,264,440
partners' capital ---------- ----------
The accompanying notes are an integral part of these
financial statements.
<PAGE>
Plymouth Cogeneration Limited Partnership
Statement of Operations
For the Year Ended December 31, 1995
----------------------------------------------------------------------
1995
----
REVENUES
Facility lease $ 598,968
Management services 551,461
----------
Total revenues 1,150,429
----------
OPERATING EXPENSES
Operating and maintenance 426,948
Depreciation and amortization 303,552
General and administrative 149,830
----------
Total operating expenses 880,330
----------
Income before interest income and expense 270,099
----------
INTEREST INCOME AND EXPENSE
Interest expense (403,736)
Interest income 46,698
----------
(357,038)
----------
Net loss (86,939)
==========
The accompanying noted are an integral part of
these financial statements.
<PAGE>
Plymouth Cogeneration Limited Partnership
Statement of Changes in Partners' Capital
For the Year Ended December 31, 1995
----------------------------------------------------------------------
PARTNERS' CAPITAL, December 31, 1994 $1,336,000
Net loss (86,939)
----------
PARTNERS' CAPITAL, December 31, 1995 $1,249,061
----------
The accompanying notes are an integral part of these
financial statements.
<PAGE>
Plymouth Cogeneration Limited Partnership
Statement of Cash Flows
For the Year Ended December 31, 1995
----------------------------------------------------------------------
1995
----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (86,939)
----------
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization 303,552
Bond discount amortization 6,464
Changes in assets and liabilities:
Accounts receivable (13,984)
Prepaid expenses (3,889)
Transfer from restricted cash 47
Rent receivable (176,184)
Accounts payable and accrued expenses (24,904)
Deferred revenue 6,321
----------
Net cash provided by operating 10,484
activities ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for plant (5,708)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Transfer out of debt service reserve 2,935
Use of restricted cash 586,000
Payment of note payable (586,000)
----------
Net cash provided by financing 2,935
activities ----------
Net increase in cash and cash 7,711
equivalents
CASH AND CASH EQUIVALENTS, BEGINNING 8,233
----------
CASH AND CASH EQUIVALENTS, ENDING $ 15,944
==========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 421.305
==========
The accompanying notes are an integral part of these
financial statements.
<PAGE>
Plymouth Cogeneration Limited Partnership
Notes to Financial Statements
---------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
On June 25, 1992, IEC Plymouth, Inc. ("IEC" or "General
Partner"), a Connecticut Corporation, and Central Hudson
Cogeneration Incorporated, a New York Corporation ("Cencogen"), a
wholly-owned subsidiary of Central Hudson Gas & Electric
Corporation, a New York Corporation, formed a limited partnership
under the State of New Hampshire Statutes, Plymouth Cogeneration
Limited Partnership (the "Partnership"), to construct, own and
operate a 1.25 MW cogeneration facility (the "Facility") and
provide electricity and steam to Plymouth State College (the
"Site") in Plymouth, New Hampshire. On May 11, 1993, IEC and
Cencogen agreed to admit PSC Cogeneration Limited Partnership
("PSC" or "General Partner"), a Connecticut limited partnership
and IEC affiliate, replacing IEC. On November 1, 1994, PSC and
Cencogen agreed to admit Plymouth Envirosystems, Inc.
("Envirosystems" or "General Partner"), a Delaware corporation, a
wholly-owned subsidiary of U.S. Envirosystems, Inc., a Delaware
corporation. The Limited Partnership Agreement, as amended,
expires November 2024.
The Limited Partnership Agreement provides that profits, losses
and distributable cash for financial reporting and income tax
purposes are allocated in accordance with the ownership interests
of the partners. At December 31, 1995 and 1994, PSC's ownership
consisted of a 10% managing general partner and 17.5% limited
partner interest, Cencogen's ownership consisted of a 32.5%
limited partner interest and Envirosystems ownership consisted of
a 5% general partner and 35% limited partner interest.
On June 1, 1993, the Partnership entered into an Agreement of
Site Lease ("Site Lease") with the University System of New
Hampshire (the "University System"). The Site Lease provides
that the University System will lease to the Partnership a parcel
of land at the Site on which to construct the Facility. The Site
Lease expires upon expiration of the Management Services
Agreement (2015).
REVENUES
On June 1, 1993, the Partnership entered into an Agreement of
Facility Lease ("Facility Lease") with the University System.
The Facility Lease provides that the Partnership will lease the
Facility to the University System for the supply of thermal and
electric energy to the Site for a defined rental stream which
escalates over the life of the lease, or 20 years. Upon
expiration of the Facility Lease (2015), the Partnership must
convey title and all personal property at the Facility to the
University System, free and clear of encumbrances. The Facility
Lease includes an escape clause which provides for the University
System to terminate the agreement without penalty in the event
that the State of New Hampshire does not appropriate funds for
the payment of the Facility Lease.
<PAGE>
Plymouth Cogeneration Limited Partnership
Notes to Financial Statements
----------------------------------------------------------------------
On June 1, 1993, the Partnership entered into a Management
Services Agreement ("MSA") with the University System. The MSA
provides that the Partnership will operate and maintain the
Facility for the benefit of the University System during the term
of the MSA for a defined monthly management service fee, and a
1.1 cent per kwh operation and maintenance fee over the life of
the MSA (20 years). The MSA commenced on the in-service date of
the Facility and expires in the year 2015. The Facility was
deemed in-service January 1, 1995.
Under the terms of Facility Lease and MSA, the Partnership is
required to provide significant services through-out the life of
the agreements. As a result, the Facility Lease is being
accounted for as an operating lease. Lease revenues are
recognized in accordance with Financial Accounting Standards
Board Technical Bulletin No. 85-3, which requires that operating
lease revenues be recognized on the straight-line basis over the
life of the lease. Accordingly, while annual rent receipts
escalate each year, approximately 598,968 of facility lease
revenue will be recognized by the Partnership annually.
Management service fees and operation and maintenance fees are
recognized as earned over the life of the MSA.
Since Facility Lease revenues are being recognized on a straight-
line basis, the Partnership has recognized as a long-term asset,
Rent receivable, at December 31, 1995, which represents the
excess of revenues recognized over cash payments received.
At December 31, 1995 and 1994, the Partnership had deferred
revenues of $81,127 and $74,806 which represents management
service fees and lease revenues billed in advance.
RESULTS OF OPERATIONS AND MANAGEMENT PLANS
While the Partnership incurred a net loss in 1995, management
believes that its cash flows, including scheduled escalating rent
receipts under the Facility Lease, will be sufficient to meet
both its future operating expenses and debt service requirements,
including sinking fund installments.
PLANT
Plant represents cost of the Facility which is being leased to
the University System under the Facility Lease. The Partnership
placed the Facility in-service January 1, 1995. During 1994, the
University System's operating permits necessary to operate its
existing boilerhouse expired, at which time the Partnership
agreed to operate the Facility, while still under construction.
As of December 31, 1994, lease revenues of $210,636, management
service fees of $217,939, and operation and maintenance fees of
$40,945 were earned during the construction period; as a result
of Facility start-up prior to substantial completion and in-
service date. The above revenues earned during construction and
related operating and start-up expenses ($417,743) were netted
<PAGE>
Plymouth Cogeneration Limited Partnership
Notes to Financial Statements
----------------------------------------------------------------------
against Plant ($51,777). In accordance with the facility lease,
the Partnership is responsible for all maintenance and equipment
repair.
DEPRECIATION
Depreciation is provided on a straight-line basis. The useful
life of the plant is estimated to be twenty years.
INCOME TAXES
The Partnership is not subject to federal or state income taxes.
Each partner is required to report on its federal and, as
required, state income tax return its distributive share of the
Partnership's income, gains, losses, deductions and credits for
the taxable year of the Partnership ending within or with its
taxable year. Accordingly, there is no provision for income
taxes in the accompanying financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the balance sheet for cash and
cash equivalents, accounts receivable, restricted cash, debt
service reserve, accounts payable and accrued expenses
approximate their respective fair values because of the short
maturity of these items.
It was not practicable to estimate the fair value of the $5.11
million, 7.75% State of New Hampshire Electric Facility Revenue
Bonds without the Partnership incurring excessive costs. The
note is secured by a first mortgage in the Facility with a
maturity date of June 1, 2014.
STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, the Partnership
considers highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Restricted cash consists of cash held in trust for payment of
semi-annual long-term interest payments of the Partnership. Debt
service reserve consists of cash held in trust until maturity of
the Partnership's long-term debt.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
<PAGE>
Plymouth Cogeneration Limited partnership
Notes to Financial Statements
----------------------------------------------------------------------
2. NOTE PAYABLE GENERAL CONTRACTOR
During May 1994, the Partnership entered into an amendment to the
Turnkey Construction Contract ("Construction Contract") with the
general contractor of the Facility. The amendment provided for
an additional payment in the amount of $636,000 from the
Partnership to the general contractor for additional construction
costs. In connection with the amendment, the Partnership
executed a $636,000 promissory note for payment of these costs.
The note bears interest at Citibank's prime lending rate plus 2%.
Interest and principal were payable on maturity of the note in
November 1994. During November 1994, the Partnership funded an
escrow, the funds of which were available under the terms of the
escrow agreement to settle the Partnership's obligations to the
general contractor. At December 31, 1994, the balance due to the
general contractor on the note and the funds escrowed for payment
amounted to $586,000. Accrued interest on the note at December
31, 1994 amounted to $25,142. The escrowed funds were included
in restricted cash. During 1995, the Partnership settled all
obligations with the general contractor.
3. LONG-TERM DEBT
On June 30, 1993, the Partnership obtained $5,110,000 of
financing from the Business Finance Authority of the State of New
Hampshire to construct the Facility. The financing was obtained
through issuance of 7.75% State of New Hampshire Electric
Facility Revenue Bonds (the "Bonds"), a tax-exempt financing,
which matures on June 1, 2014. The Bonds were issued at a
discount of $129,283, which is being amortized over the life of
the bonds using the bonds outstanding method. This Leasehold
Mortgage and Trust Agreement (the "Agreement") contains certain
business covenants including, among other items, that the
Partnership provides timely financial and business information.
In connection with the financing, the Partnership paid $162,824
of financing related costs. These deferred financing costs will
be amortized on the bonds outstanding method over the life of the
bonds.
The Bondholder has a first mortgage security interest in the
Facility, pledge of the Partnership interests, and a collateral
assignment of all facility operating agreements. Interest is
payable semi-annually on June 1 and December 1. The Bonds are
subject to redemption from sinking fund installments, without
premium, plus accrued interest on June 1, 1997 and each June 1
thereafter at their principal amounts, through maturity of June
1, 2014. The Bonds are also subject to redemption at the option
of the Partnership on or after: June 1, 2003 at 102%; June 1,
2004 at 101%; and June 1, 2005 at 100%. Aggregate annual sinking
fund installments for the next five years and thereafter are as
follows:
<PAGE>
Plymouth Cogeneration Limited Partnership
Notes to Financial Statements
----------------------------------------------------------------------
1996 $ -
1997 70,000
1998 100,000
1999 125,000
2000 175,000
Thereafter 4,640,000
-----------
$5,110,000
===========
4. RELATED PARTY TRANSACTIONS
DEVELOPMENT EXPENSES
The managing general partner and affiliates were reimbursed for
development expenses during the development and construction phases.
In 1994, total reimbursements of $275,000 were incurred and
capitalized to Plant during the development and construction phases.
ADMINISTRATION SERVICE FEES
On January 13, 1994, the Partnership entered into and Administrative
Services Agreement with an affiliate of PSC. The agreement provides
that commencing on January 1, 1995, the Partnership will pay a fee in
the amount of $40,000, annually, adjusted for CPI, for administrative
services to be provided by the affiliate on behalf of the Partnership.
The Partnership incurred an administrative fee of $42,000 during 1995,
which is included in general and administrative expenses.
DEVELOPMENT COMMISSIONS
Development Commissions are payable to PSC and Cencogen commencing on
the in-service date of the Facility (January 1, 1995). Development
commissions are fixed annual amounts, payable quarterly which escalate
over the life of the agreement, or 20 years, and are subordinate to
the payment of debt service and general partners fees. The
Partnership incurred development commissions of $44,388 during 1995,
which are included in general and administrative expenses.
GENERAL PARTNER'S FEE
General Partner's Fee is payable to PSC commencing on the in-service
date of the Facility (January 1, 1995). The general partner's fee is
a fixed annual amount payable quarterly which escalates over the life
of the agreement, or 20 years, and is subordinate to the payment of
debt service. The Partnership incurred $14,796 during 1995, which is
included in general and administrative expenses.
<PAGE>
Plymouth Cogeneration Limited Partnership
Notes to Financial Statements
----------------------------------------------------------------------
OTHER
The Partnership incurred the following expenses with affiliates of the
General Partner for the years ended December 31, 1995 and 1994. The
1994 costs were capitalized into Plant during the development and
construction phases.
1995 1994
---- ----
Employee group health insurance $ - $37,703
and office related
Interest expense on advances 1,108
Amounts due to affiliates of the General Partner included in accounts
payable and accrued expenses of the Partnership at December 31, 1995 and
1994:
1995 1994
---- ----
Interest bearing advances at prime $28,520 $ -
Accrued interest on advances 1,108 -
The Partnership has elected for its employees to participate in a 401(k)
plan sponsored by an affiliate of the General Partner. The 401(k) plan
calls for employee only contributions.
<PAGE>
=================================== ===================================
NO DEALER, SALES REPRESENTATIVE
OR ANY OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR
ANY OF THE UNDERWRITERS. THIS U.S. ENERGY SYSTEMS, INC.
PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY, ANY SECURITIES
OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES OR
AN OFFER TO, OR A SOLICITATION OF,
ANY PERSON IN ANY JURISDICTION
WHERE SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED 1,625,000 SHARES OF
HEREIN IS CORRECT AS OF ANY TIME COMMON STOCK
SUBSEQUENT TO THE DATE HEREOF. AND
1,625,000 REDEEMABLE
----------------- COMMON STOCK
TABLE OF CONTENTS PURCHASE WARRANTS
PAGE
----
AVAILABLE INFORMATION . . . . . 2
PROSPECTUS SUMMARY . . . . . . 3
RISK FACTORS . . . . . . . . . 8
USE OF PROCEEDS . . . . . . . . 16 ----------
PRICE RANGE OF COMMON STOCK . . 18
DIVIDEND POLICY . . . . . . . . 18 PROSPECTUS
DILUTION . . . . . . . . . . . 19
CAPITALIZATION . . . . . . . . 20 ----------
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION . . . . 27
BUSINESS . . . . . . . . . . . 31
MANAGEMENT . . . . . . . . . . 40
CERTAIN TRANSACTIONS . . . . . 42
PRINCIPAL STOCKHOLDERS . . . . 44
DESCRIPTION OF SECURITIES . . . 46
SHARES ELIGIBLE FOR FUTURE SALE 50
UNDERWRITING . . . . . . . . . 51
LEGAL MATTERS . . . . . . . . . 53
EXPERTS . . . . . . . . . . . . 53
INDEX TO FINANCIAL STATEMENTS . F-1
GAINES, BERLAND INC.
=================================== ==================================
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED ___________, 1996
PROSPECTUS
U.S. ENERGY SYSTEMS, INC.
1,805,000 SHARES OF COMMON STOCK AND
500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Enviro Partners, L.P. ("Enviro"), Energy Management Corporation ("EMC")
and Anchor Capital Company LLC ("Anchor") (collectively referred to herein
as the "Selling Stockholders") hereby offer (the "Secondary Offering")
1,805,000 shares of Common Stock (the "Common Stock") and 500,000
Redeemable Common Stock Purchase Warrants (the "Warrants" and, together
with the Common Stock, the "Securities"). Concurrently with this Secondary
Offering, U.S Energy Systems, Inc., formerly U.S. Envirosystems, Inc. (the
"Company") offered (the "Primary Offering") 1,625,000 shares of Common
Stock and 1,625,000 Warrants. Each Warrant entitles the holder to purchase
one share of Common Stock for $4.00 during the four-year period commencing
one year from the date of this Prospectus. The Warrants are redeemable at
a price of $.01 per Warrant, at any time after the Warrants become
exercisable, upon not less than 30 business days prior written notice, if
the last sale price of the Common Stock has been at least 150% (initially
$6.00) of the exercise price of the Warrants for the 20 consecutive trading
days ending on the third day prior to the date on which the notice of
redemption is given. See "Description of Securities."
The Company's Common Stock is sporadically traded on the NASD OTC
Bulletin Board. Prior to this Secondary Offering, there has been no public
market for the Warrants nor has there been an established trading market
for the Common Stock. There can be no assurance that such a market will
develop for the Securities as a result of this Secondary Offering. The
Company has applied for inclusion of the Common Stock and the Warrants on
the Nasdaq SmallCap Market under the proposed symbols USEE and USEEW,
respectively.
-----------------------------------
THESE SECURITIES ARE SPECULATIVE IN NATURE, INVOLVE A HIGH
DEGREE OF RISK AND SUBSTANTIAL DILUTION AND SHOULD BE
CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS
OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS"
BEGINNING ON PAGE 8 AND"DILUTION" ON PAGE 17.
-----------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is _____________________, 1996.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company with the Commission
can be inspected without charge and copied at prescribed rates at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street N.W., Washington, D.C. 20549 and at the Commission's regional
offices located at Seven World Trade Center, Suite 1300, New York, New York
10048, and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661. The Company's Common Stock is quoted on the NASD OTC
Bulletin Board and certain of the Company's reports, proxy materials and
other information may be available for inspection at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on
Form SB-2 under the Securities Act of 1933, as amended ("Securities Act"),
with respect to the securities offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement,
certain parts of which have been omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the securities offered hereby, reference is made to the
Registration Statement, including the exhibits filed as part thereof and
otherwise incorporated therein. Copies of the Registration Statement and
the exhibits may be inspected, without charge, at the offices of the
Commission, or obtained at prescribed rates from the Public Reference
Section of the Commission at the address set forth above.
------------------
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. Each prospective investor is urged to read
this Prospectus in its entirety. At or prior to the consummation of the
Primary Offering, the Company will consummate the following transactions
(the "Closing Transactions"): (i) a private placement to two investors of
1,600,000 shares of the Company's 11% cumulative redeemable convertible
preferred stock (the "11% Preferred Stock") and 500,000 warrants ("Private
Warrants") having the same terms and conditions as the Warrants for an
aggregate consideration of $3,500,000 (the "Private Placement"), (ii) the
acquisition of a 50% interest in two geothermal plants known as Steamboat 1
and 1A for $4,982,000 (including $50,000 as a downpayment which was
previously paid by the Company) (the "Steamboat Acquisition"), (iii) the
conversion of $500,000 of convertible subordinated debentures (the
"Convertible Debentures") into 125,000 shares of Common Stock and 125,000
Private Warrants (the "Debenture Conversion") and (iv) the exchange of the
57,500 currently outstanding shares of the Company's Series One Preferred
Stock for 205,000 shares of Common Stock (the "Preferred Stock Exchange").
The consummation of the Primary Offering is a condition to the consummation
of the Closing Transactions and the consummation of the Closing
Transactions is a condition to the consummation of the Primary Offering.
Accordingly, if any of the Closing Transactions is not consummated, each of
the Primary Offering and this Secondary Offering will be terminated.
Except as otherwise indicated, all information in this Prospectus assumes
no exercise of the Warrants offered hereby or any of the Company's other
outstanding options and warrants to purchase Common Stock. All numbers and
amounts specified herein reflect a one for forty reverse stock split
effective May 6, 1996, unless otherwise indicated.
THE COMPANY
U.S. Energy Systems, Inc. is engaged in the cogeneration and independent
power plant ("IPP") industries as a project developer, owner and operator.
Cogeneration is the process of producing two or more energy forms
(typically electricity and heat) simultaneously from the same fuel source.
A cogeneration facility is a power plant which produces electricity and,
simultaneously, recovers waste heat to use in place of heat which would
otherwise be made from conventional sources such as furnaces or boilers. An
IPP is a power plant which is not owned and operated by a regulated public
electric utility company. Frequently, IPPs are cogeneration facilities.
Federal and state laws have been promulgated to promote competition in the
sale of electric energy and to encourage cogeneration and independent power
facilities.
The Company's strategy is to seek projects requiring power production or
cogeneration and to become an equity participant with the owners,
developers or other involved parties in return for the Company's expertise
in the structuring, design, management and operation of the projects.
Often, at the time of the Company's initial involvement, such projects will
have advanced beyond the conceptualization stage to a point where the
engineering, management and project coordination skills the Company offers
are required to proceed. Projects in which the Company is involved or is
negotiating to become involved include (a) acquiring and operating existing
IPPs and cogeneration facilities in the United States, (b) developing,
constructing, and operating new IPPs and cogeneration facilities in the
United States and in certain overseas markets, (c) designing and
constructing cogeneration and IPPs for third party owners, and (d)
developing, constructing and selling energy-efficient products using
cogeneration technology such as non-electric air conditioning.
As a major element of its strategy, the Company intends to focus on
projects such as shopping malls, healthcare centers, food processing
centers, hotels and other facilities where large quantities of electricity,
air conditioning and hot water are required on a continuous and
simultaneous basis. The Company has signed an agreement with the owners of
Bluebeard's Castle, a large resort and commercial complex in St. Thomas,
USVI, to build and operate a 3 megawatt Cogeneration plant and a 120,000
gallon per day water recovery system in the resort's property. The Company
and the resort owners will own the cogeneration plant and water system and
share revenues equally. The Company has received initial funding from the
resort owners and the first of six engine generators is being installed
during the month of August. The Company has also entered into a joint
development agreement with the Cowen Investment Group ("Cowen") to develop,
build and operate cogeneration plants at shopping malls. Toward this end,
the joint venture has been in discussions with two of the major mall owners
in the United States. Savings from the cogeneration system would be shared
equally by the mall owners and the joint development company (in which the
Company will have a 40% profit interest). Under the joint development
agreement, the Company will perform all project development functions other
than securing the financing. See "Business -- Current Operations and On-
Going Projects."
The Company has a history of losses substantially throughout its
existence and has not had revenues since emerging from bankruptcy in 1993.
To provide the Company with a source of revenues to enable it to expand its
business, concurrently with the Primary Offering, the Company will acquire,
for a total investment of $4,982,000 (including $50,000 as a downpayment
which was previously paid by the Company), a 50% interest in two geothermal
power plants, known as Steamboat 1 and 1A, in Steamboat Hills, Nevada (the
"Steamboat Facilities"), which it will operate under a co-management
agreement with its partner. Electricity is produced in geothermal plants
by extracting steam from the earth to drive turbines, thereby generating
the electricity. Geothermal power is considered a highly environmentally
sound method of producing electricity, but it can only be produced in areas
where specific geological formations exist. A substantial portion of the
net proceeds of the Primary Offering and the Private Placement will be used
for the Steamboat Acquisition. The Company regards the Steamboat
Acquisition as a key element toward achieving its objectives in the
independent power industry.
In January 1994, the Company purchased a 50% equity interest in a limited
liability company which owns a cogeneration facility in Lehi, Utah. The
Company expects the Lehi plant to be operational in the third quarter of
this fiscal year. However, the Company and its partners may decide to sell
a portion of the operating machinery and to purchase replacement equipment,
thereby increasing the plant's output capacity and efficiency. If such
sale and replacement is undertaken, the receipt of operational revenues
would be delayed until the second quarter of the next fiscal year. As
there are no contracts in effect at this time for the sale of power from
this plant, receipt of revenues will also be dependent upon the Company
entering into such contracts with customers.See "Business -- Current
Operations and On-Going Projects -- Lehi Cogeneration Project."
The Steamboat and Lehi projects enable the Company to participate in what
it believes is a growing market for independently produced electricity in
the western United States. Additionally, in 1994 the Company acquired a
50% interest in a partnership which owns and operates a cogeneration plant
which produces 2.5 megawatts of electricity and 25 million British Thermal
Units ("BTUs") for heating at Plymouth State College in Plymouth, New
Hampshire. The Plymouth facility provides 100% of the electrical and
heating requirements for the campus, which is part of the University of New
Hampshire system, under a twenty year contract.
The Company also intends to pursue projects which can utilize alternative
fuels or waste products, such as used motor oil and tires, which provide
environmental and ecological benefits and also provide potential for
earnings because of low fuel costs.
The Company was incorporated in the State of Delaware on May 6, 1981.
The executive offices of the Company are located at 515 North Flagler
Drive, Suite 202, West Palm Beach, Florida 33401. The telephone number is
(407) 820-9779.
CLOSING TRANSACTIONS
Concurrently with the closing of the Primary Offering, the Company will
consummate the Private Placement pursuant to which it will sell (i)
1,600,000 shares of the 11% Preferred Stock to Enviro Partners, L.P.
("Enviro") for $3,100,000 and (ii) 500,000 Private Warrants to Energy
Management Corporation ("EMC") for $400,000. The 11% Preferred Stock will
be convertible on a share-for-share basis into Common Stock, will vote on a
share-for-share basis with the Common Stock, will have a preferential
dividend of 11% (payable in additional shares of 11% Preferred Stock during
the first two years and thereafter in cash or in shares of 11% Preferred
Stock at the option of the Company) and a liquidation preference of
$3,100,000 plus accrued dividends. The 11% Preferred Stock is redeemable
at the option of the Company at any time after four years from issuance and
is mandatorily redeemable ten years after issuance, at a redemption price
equal to the liquidation preference. See "Description of Securities."
Also concurrently with the closing of the Primary Offering, the Company
will acquire a 50% interest in Steamboat Envirosystems, L.C. ("Steamboat
LLC"), which will purchase the Steamboat Facilities from Far West Electric
Energy Fund, L.P. (the current owner of Steamboat 1) and 1-A Enterprises
(the current owner of Steamboat 1-A). The Company will contribute a total
of $4,982,000 (including $50,000 as a downpayment which was previously paid
by the Company) to Steamboat LLC from the proceeds of the Primary Offering
and the Private Placement to enable Steamboat LLC to complete the
acquisition and retire a mortgage and certain royalty interests to which
the Steamboat Facilities are subject. See "Use of Proceeds -- Steamboat
Acquisition" and "Business -- Current Operation and On-Going Projects --
Steamboat Geothermal Power Plants."
The Debenture Conversion and the Preferred Stock Exchange will also occur
concurrently with the Closing of the Primary Offering. These transactions,
combined with the repayment of debt to be made with a portion of the
proceeds of the Primary Offering and the Private Placement, will result in
a substantial reduction of the Company's indebtedness. See "Use of
Proceeds" and Pro Forma Financial Statements.
THE OFFERING
Securities Offered in the Secondary Offering
1,805,000 shares of Common Stock and 500,000 Warrants. Each Warrant
entitles the holder to purchase one share of Common Stock for $4.00
during the four-year period commencing one year from the date of this
Prospectus. Each Warrant is redeemable at a price of $.01 per Warrant
at any time after the Warrants become exercisable, upon not less than
30 business days prior written notice, if the last sale price of the
Common Stock on Nasdaq has been at least 150% (initially $6.00) of the
then-exercise price of the Warrants for the 20 consecutive trading days
ending on the third day prior to the date on which the notice of
redemption is given. See "Description of Securities."
Common Stock outstanding
Prior to the Primary
Offering . . . . 439,650 shares
Common Stock to be outstanding
After the Primary
Offering . . . . . 2,394,650(1)(2)
Use of Proceeds . . . The Company will receive no proceeds in this
Secondary Offering.
Proposed Nasdaq SmallCap
--------------------------------
(1) Includes (i) 125,000 shares of Common Stock to be issued in the
Debenture Conversion and (ii) 205,000 shares of Common Stock to
be issued in the Preferred Stock Exchange.
(2) Does not include an aggregate of 4,594,975 shares of Common Stock
reserved and to be reserved for issuance following completion of the
Primary Offering including (i) 291,850 shares issuable on exercise of
currently outstanding options and warrants, (ii) 2,575,000 shares
issuable on exercise of the Warrants, the Representative's Purchase
Option in the Primary Offering and the Warrants issuable on exercise
of the Representative's Purchase Option in the Primary Offering and
the Private Warrants being issued in the Private Placement and the
Debenture Conversion, (iii) 1,600,000 shares issuable upon conversion
of 11% Preferred Stock to be issued to Enviro, and (iv) 128,125 shares
issuable upon conversion of Convertible Debentures which will remain
outstanding after the Primary Offering.
<PAGE>
Market Symbols..... Common Stock: USEE
Warrants: USEEW
RISK FACTORS
The securities offered hereby are speculative and involve a high
degree of risk and substantial dilution. Among the principal risks to be
considered are: (i) the Company has incurred and continues to incur
substantial losses, (ii) the Company's profitability will be dependent, to
a significant extent, on the continued successful operations of the
Steamboat Facilities, (iii) prior to the Primary Offering, the Company has
significant working capital and stockholders' equity deficits, and (iv) the
Company may require additional capital to undertake future projects. See
"Risk Factors" and "Dilution."
SUMMARY FINANCIAL DATA
(In thousands, except per share data)
The Summary Financial Information set forth below is derived from the
historical financial statements appearing elsewhere in this Prospectus and
should be read in conjunction with such financial statements, including the
notes thereto. The Pro Forma Statements of Operations data for the year
ended January 31, 1996 and the three months ended April 30, 1996 give
effect to the acquisition of a 50% interest in Steamboat LLC as if it had
occurred at the beginning of the periods. The Pro Forma Balance sheet data
as at April 30, 1996 give effect to the Primary Offering and to the Closing
Transactions as if such transactions had occurred on such date. See Pro
Forma Financial Statements, "Use of Proceeds" and historical financial
statements.
STATEMENT OF OPERATIONS DATA:
<TABLE>
YEAR ENDED YEAR ENDED
JANUARY 31, 1996 JANUARY 31, 1995
---------------- ----------------
HISTORICAL PRO FORMA HISTORICAL
USE USE/SB (1) USE
---------- ---------- ----------
<S> <C> <C> <C>
Income (loss) from
Joint Ventures . . $ (17) $ 1,863 $ (76)
Operating expenses . (853) (853) (1,006)
Interest expense (2) (604) (116) (319)
---- ---- ----
Income (loss) before
income taxes . . . (1,474) 894 (1,401)
Income taxes (3) . . (292)
----- ----- ------
Income (loss) before
extraordinary items (1,474) 602 (1,401)
Preferred dividends. . (21)(4a) (341)(4b)
----- ----- -------
Income (loss)
available for
common stockholders. . (1,495) 261 (1,401)
Net (loss) per share
of Common Stock . . (3.41) (3.38)
Pro forma net income
per share of 0.14
Common Stock (5) . ----
Shares used in
computing net
income per share of 438,773 1,813,851 415,022
Common Stock (5) . ------- --------- -------
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS DATA:
THREE MONTHS
THREE MONTHS ENDED ENDED
APRIL 30, 1996 APRIL 30, 1995
-------------------------------- --------------
HISTORICAL PRO FORMA HISTORICAL
USE USE/SB (1) USE
---------- ---------- --------------
<S> <C> <C> <C>
Income (loss) from
Joint Ventures . . $ (39) $ 510 $ (34)
Operating expenses . (221) (221) (202)
Interest expense (2) (170) (29) (99)
---- --- ---
Income (loss) before
income taxes . . . (430) 260 (335)
Income taxes (3) . . (53)
------ ---- ------
Income (loss) before
extraordinary items (430) 207 (335)
Preferred dividends (14)(4a) (85)(4b)
--- --- -------
Income (loss)
available for
common stockholders (444) 122 (335)
Net (loss) per share
of Common Stock . . (1.01) (0.77)
Pro forma net income
per share of 0.06
Common Stock (5) . ----
Shares used in
computing net
income per share of 439,622 2,013,936 436,167
Common Stock (5) . ------- --------- -------
</TABLE>
BALANCE SHEET DATA: APRIL 30,1996
---------------------------------
HISTORICAL PRO FORMA(6)
---------- ------------
Current assets......... $ 3 $ 1,420
Investment in joint
ventures............. 1,834 6,819
Total assets........... 1,998 8,239
Current liabilities.... 2,345 977
Long-term liabilities.. 2,812 1,342
11% Preferred Stock.... 3,100
Working capital........ (2,342) 433
Stockholders' equity
(deficit)............ $(3,159) $ 2,820
---------------------------
(1) Includes (a) adjusted operating results of the Steamboat
Facilities for the year ended December 31, 1995, and the three
months ended March 31, 1996, (b) elimination of deferred note
payable discount, elimination of interest payments on notes
payable and bridge loans to be repaid from the proceeds of
the Primary Offering, and (c) elimination of interest on
$500,000 principal amount of Convertible Debentures
converted into Common Stock and Private Warrants, with the
remainder paying interest at 9% per annum.
(2) Adjusted for reduction of debenture interest to 9%, and
removal of interest costs on bridge loans and notes payable
which will have been paid from the proceeds of the Primary
Offering. Also adjusts for the elimination of certain
unamortized deferred costs of these notes and loans.
(3) A pro forma provision for income taxes was calculated after
providing for a limit on the net operating loss deduction
assuming an ownership change had taken place at the
beginning of the fiscal year and the beginning of the three
month period ended April 30, 1996.
(4a) Provision for dividends on Series One Preferred Stock.
(4b) Provision for dividends on 11% Preferred Stock to be sold to
Enviro Partners, L.P. for $3,100,000. Dividends are payable
in 11% Preferred Stock.
(5) Pro forma net income per share is based on the weighted
average number of shares outstanding, the shares issued in
the Debenture Conversion and the Preferred Stock Exchange
and the dividend on the 11% Preferred Stock. Assumed
exercise of options and warrants and the conversion of the
11% Preferred Stock have not been reflected as they would
be anti-dilutive.
(6) Reflects the sale of Securities offered hereby, the Private
Placement, the Debenture Conversion, the Preferred Stock
Exchange and the anticipated use of proceeds for the
Steamboat Acquisition and the repayment of indebtedness,
including accrued interest to September 15, 1996, as
contemplated in "Use of Proceeds."
RISK FACTORS
Prospective purchasers of the securities offered hereby should carefully
consider the following factors, as well as the information contained
elsewhere in this Prospectus.
HISTORY OF LOSSES; WORKING CAPITAL AND STOCKHOLDERS' EQUITY DEFICITS;
AUDITORS' OPINION WITH EXPLANATORY PARAGRAPH
The Company has a history of losses substantially throughout its
existence and has not had revenues since emerging from bankruptcy in 1993.
To date, the Lehi power plant has not been operational. See "Current
Operations and On-Going Projects." The Company believes that there will be
profit and cash flow to the Company starting in the third quarter of this
fiscal year. Operations would be delayed until the second quarter of the
next fiscal year if the Company decides to sell some of its operating
machinery and to replace it by purchasing equipment that would ultimately
increase output capacity and efficiency. The Plymouth cogeneration plant
has not provided revenues or cash flow to the Company because of costs
related to equipment adjustments and operational reserves required by the
terms of the financing. However, revenues and cash flow are expected to
commence in the third quarter of the year.
For the years ended January 31, 1996 and 1995, the Company incurred net
losses of $1,391,000 and $1,316,000 respectively, and for the three months
ended April 30, 1996, the Company incurred a net loss of $430,000. At
April 30, 1996, as a result of these accumulated losses, the Company had a
working capital deficit of $2,342,000 and a stockholders' equity deficit of
$3,159,000. There can be no assurance that the Company will ever be able
to generate cash flows sufficient to meet its obligations and sustain
operations. The independent auditors' report for the fiscal year ended
January 31, 1996 states that these factors raise substantial doubt about
the Company's ability to continue as a going concern. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and the Company's Financial Statements.
LIMITED AVAILABLE CAPITAL; POSSIBLE NEED FOR ADDITIONAL FINANCING
While the Company believes that the proceeds from the Primary Offering
and the Private Placement, together with anticipated revenues, will be
sufficient to meet its anticipated cash requirements for the next twelve
months, there is no assurance in this regard. The Company's continued
existence will be dependent upon its ability to generate cash flows from
its operations sufficient to meet its obligations as they become due.
Unless the Company can generate cash flows from operations to fund its
working capital needs, the Company will be required to obtain additional
equity or debt financing to continue to operate its business. If the
Company should require additional capital, there can be no assurance that
such capital will be available to the Company, or if available, it would be
on terms acceptable to the Company. If additional funds are raised by
issuing equity securities, significant dilution to existing stockholders
may result. Any inability by the Company to obtain additional financing,
if required, will have a material adverse effect on the operations of the
Company, including the possible cessation of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Use of Proceeds."
PRIOR BANKRUPTCY
In late 1986, the Company, then called Cogenic Energy Systems, Inc., was
impaired by a $2,100,000 judgment resulting from a contractual dispute.
Although ultimately settled, the protracted court case caused delays in
planned expansion and sales and led to a serious cash shortage. In mid-
1989, the Company filed for protection under Chapter 11 of the Bankruptcy
Code and a Plan of Reorganization was confirmed by the bankruptcy court in
1993. The Plan required the payment of outstanding taxes. Of those taxes,
$110,000 was required to be paid upon the merger of Utility Systems
Florida, Inc. ("USF") into the Company (see "Business -- The Company"), but
has been deferred pursuant to a verbal agreement with the Internal Revenue
Service as long as the Company continues to meet its remaining pre-
bankruptcy tax obligations ($373,000 at July 31, 1996), which it is
amortizing on a monthly basis over a six year period. The Company does not
intend to pay this deferred $110,000 amount out of the proceeds of the
Primary Offering but to continue the deferral until either the Internal
Revenue Service requires payment or the Board of Directors deems cash flow
to be satisfactory.
EMERGING INDUSTRY; UNCERTAINTY OF MARKET ACCEPTANCE
Although the cogeneration and IPP industries have been in existence for a
number of years, they are still in their development stages. As is
typically the case in an emerging industry, demand and market acceptance
for their products and services are subject to a high level of uncertainty.
The Company has not yet commenced significant marketing activities and
currently has limited marketing experience and limited financial, personnel
and other resources to undertake extensive marketing activities.
PROJECT DEVELOPMENT RISKS
It is anticipated that certain types of projects, if undertaken, will
require the Company to raise additional capital and there can be no
assurance that such capital will be available on acceptable terms. The
Company's ability to develop new projects is also dependent on a number of
other factors outside its control, including obtaining power agreements,
governmental permits and approvals, fuel supply and transportation
agreements, electrical transmission agreements, site agreements and
construction contracts, and there can be no assurance that the Company will
be successful in doing so. Project development is subject to environmental,
engineering and construction risks. If additional financing is not
available on acceptable terms, the Company may have to cancel or defer new
projects. Further, projects which are successfully developed may still
face risks inherent in start-up businesses, such as lack of market
acceptance.
POTENTIAL REDUCTION IN REVENUE FROM STEAMBOAT GEOTHERMAL PROJECTS
The current power purchase agreements with Sierra Pacific Power Company
("Sierra") provide for price adjustments in December 1996 for Steamboat 1
and in December 1998 for Steamboat 1A. Under the contracts, Steamboat LLC
is required to sell power to Sierra for additional 10-year periods at the
then-prevailing short-term avoided costs for electricity for Sierra. If
the price adjustments were to be made now, the new prices based on the
contract formula would be substantially less than the existing contract
rates, although Management believes that revenues generated will still be
in excess of the costs of production. There is no assurance that future
prices at which the electricity generated by the Steamboat Facilities may
be sold will provide an attractive or economic return. The Company will
pay $1,000,000 into Steamboat LLC for the purpose of buying out certain
royalty interests and to fund certain capital improvements to the Steamboat
Facilities. While the Company and its partners believe that these
interests can be bought out, there are no agreements with the royalty
owners as yet. Should the Company not be able to come to an agreement with
any of them, the expected earnings of Steamboat LLC will be adversely
affected. See "Business -- Cogeneration and Independent Power Production"
and "Management's Discussion and Analysis of Financial Condition and Plan
of Operation -- Plan of Operation."
RELIANCE ON PRESIDENT
The Company will be highly dependent upon its executive officers and key
employees, particularly its President, Richard Nelson. The unexpected
loss of the services of Mr. Nelson could have a detrimental effect on the
Company. Although the Company plans to add additional full-time employees
after the Primary Offering, the Company presently has only three current
full-time employees and contracts with independent contractors for the
conduct of certain engineering, accounting, administrative and legal
functions.
GENERAL OPERATING RISKS
The operation of power generation facilities involves many risks,
including the breakdown or failure of power generation equipment,
transmission lines or other equipment or processes and performance below
expected levels of output or efficiency. Although the facilities in which
the Company is or will be involved contain certain redundancies and back-up
mechanisms, there can be no assurance that any such breakdown or failure
would not prevent the affected facility from performing under applicable
power agreements. The development and operation of geothermal energy
resources are subject to risks and uncertainties similar to those
experienced in the development of oil and gas resources. The successful
exploitation of a geothermal energy resource ultimately depends upon the
heat content of the extractable fluids, the geology of the reservoir, the
total amount of recoverable reserves, and operational factors relating to
the extraction of fluids, including operating expenses, energy price
levels, and capital expenditure requirements relating primarily to the
drilling of new wells. In connection with the development of a project,
the Company estimates the productivity of the geothermal resource and the
expected decline in such productivity. The productivity of a geothermal
resource may decline more than anticipated, resulting in insufficient
recoverable reserves being available for sustained generation of the
electrical power capacity desired. See "Business -- Current Operations and
On-Going Projects."
GOVERNMENT REGULATION
Under present federal law, the Company is not and will not be subject to
regulation as a holding company under the Public Utilities Holding Company
Act ("PUHCA") as long as each power plant in which it has an interest is a
qualifying facility ("QF") under the Public Utility Regulation Policy Act
of 1978 ("PURPA"). A QF that is a cogeneration facility must produce not
only electricity but also useful thermal energy for use in an industrial or
commercial process or heating or cooling applications in certain
proportions to the facility's total energy output and must meet certain
energy efficiency standards. Under the Public Utility Regulatory Policy
Act ("PURPA"), a regulated public electric utility company must purchase
electricity at its avoided cost from an IPP which has QF status. QF status
is granted to IPP's which use fossil fuel in a manner which allows for
recovery and use of a certain percentage of otherwise rejected heat thereby
achieving a higher degree of fuel efficiency. QF status is also granted to
IPP's which use renewable energy sources such as geothermal, hydro, solar,
wind, and waste products without regard to heat recovery. An IPP using
fossil fuel, which loses its ability to use recovered heat, could fall
below the efficiency standards and thereby lose its QF status. The
regulated public electric utility company, which may have been required to
purchase electricity from the IPP, could thereafter refuse to purchase such
electricity. IPP's which have QF status, and which are not fossil fuel
driven, cannot lose QF status. See "Business -- Government Regulation."
The construction and operation of power generation facilities require
numerous permits, approvals and certificates from appropriate federal,
state and local governmental agencies, as well as compliance with
environmental protection legislation and other regulations. While the
Company believes that the projects in which it is involved have the
requisite approvals for existing operations and are operated in accordance
with applicable laws, they remain subject to a varied and complex body of
laws and regulations that both public officials and private individuals may
seek to enforce. There can be no assurance that new or existing laws and
regulations which would have a materially adverse affect would not be
adopted or revised, nor can there be any assurance that the Company will be
able to obtain all necessary licenses, permits, approvals and certificates
for proposed projects or that completed facilities will comply with all
applicable permit conditions, statutes or regulations. In addition,
regulatory compliance for the construction of new facilities is a costly
and time consuming process, and intricate and changing environmental and
other regulatory requirements may necessitate substantial expenditures for
permitting and may create a significant risk of expensive delays or
significant loss of value in a project if the project is unable to function
as planned due to changing requirements or local opposition.
ENVIRONMENTAL RISKS
As is the case in all power projects, strict environmental regulations
established by federal, state and local authorities involving air and other
emissions must be met. While the Company takes every precaution to insure
that such regulations are met at all times, and projects are not entered
into which do not or cannot meet such regulations, there is no assurance
that such regulations can always be met. Should a condition occur in which
emissions standards at a specific project fall beneath allowable standards,
there could be costs involved in remediating such conditions. Additionally,
as with all industrial sites, there are standards for the safe handling of
fuels and chemicals which must be met. Again, the Company takes every
precaution to insure such standards are met. Exigencies may occur -- a fuel
spillage for example -- which would require remediation with attendant
costs.
Areas in which the Company is acquiring geothermal projects are subject
to frequent low-level seismic disturbances, and more significant seismic
disturbances are possible. While such power generation facilities are
built to withstand relatively significant levels of seismic disturbance,
and the Company believes it will be able to maintain adequate insurance
protection, there can be no assurance that earthquake, property damage or
business interruption insurance will be adequate to cover all potential
losses sustained in the event of serious seismic disturbances or that such
insurance will continue to be available on commercially reasonable terms.
UNCERTAINTY OF COMPETITIVE ENVIRONMENT
In addition to competition from electric utilities in the markets where
the projects are located, the Company also faces competition from
approximately 150 companies currently involved in the cogeneration and
independent power market. Most of these companies are larger and better
financed than the Company. Although the Company believes that it will be
entering segments of the marketplace where it will not face extensive
competition, there is no assurance that it will be able to do so, and it
will thereby be disadvantaged if it has to compete with the larger and
better financed companies. The entire industry also may face competition
from existing investor owned utility companies.
INSURANCE
Although the Company maintains insurance of various types to cover many
of the risks that apply to its operations, including $2,000,000 of general
liability insurance as well as separate insurance for each project, the
Company's planned insurance will not cover every potential risk associated
with its operations. The occurrence of a significant adverse event, the
risks of which are not fully covered by insurance, could have a material
adverse effect on the Company's financial condition and results of
operations. Moreover, no assurance can be given that the Company will be
able to maintain adequate insurance in the future at rates it considers
reasonable.
SUBSTANTIAL PORTION OF PROCEEDS TO PAY DEBTS; POTENTIAL CONFLICTS
OF INTEREST BETWEEN THE COMPANY AND CERTAIN OF ITS OFFICERS
A substantial amount of the net proceeds of the Primary Offering and the
Private Placement will be used to repay the Company's current indebtedness.
A portion of such repayment will benefit directly or indirectly several of
the Company's officers. In order to induce all holders of Convertible
Debentures to convert at least one-third of their Convertible Debentures,
the Company agreed to reduce the conversion rate from $16 per share to the
same price as that being offered to the public, $4.00 per share. There are
26 holders of Convertible Debentures of whom Theodore Rosen, Chairman, is
the only officer or director. Mr. Rosen, who holds $125,000 principal
amount of Convertible Debentures, will receive $26,200 in deferred
interest, accrued through September 15, 1996, and obtain the same favorable
conversion rate as that afforded to the other holders of Convertible
Debentures. Messrs. Richard Nelson, Rosen, and Ronald Moody, the Company's
President, Chairman of the Board and Director, respectively, will benefit
by the repayment to them of $30,376, $30,284 and $90,814 respectively,
(including accrued interest to September 15, 1996) for a loan made by them
to enable the Company to obtain its interest in the co-generation facility
at Plymouth State College in New Hampshire. Additionally, Messrs. Nelson
and Rosen have each deferred portions of their salaries and $219,250 and
$162,500, respectively, will be owed to them as of September 15, 1996.
Such amounts will not be paid from net proceeds of the Primary Offering,
but from cash flow, if and when, in the opinion of the Board of Directors,
cash flow is sufficient. Messrs. Nelson and Rosen will also benefit from
the release of their pledges of an aggregate of 97,250 shares of the
Company's Common Stock owned by them in connection with certain bridge
loans made to the Company by Anchor Capital Company, LLC ("Anchor") and
Solvation, Inc. ("Solvation"), which loans are being repaid with a portion
of the proceeds. See "Use of Proceeds" and "Certain Transactions."
CONCENTRATION OF VOTING POWER
Following the Primary Offering and the Private Placement, Enviro will own
1,600,000 shares of 11% Preferred Stock, which votes with and is
convertible into, on a share-for-share basis, the Common Stock.
Accordingly, Enviro will hold approximately 40.1% of the combined voting
power of the 11% Preferred Stock and Common Stock immediately after the
Primary Offering. The 11% Preferred Stock, as a class, will have the right
to designate two directors (the "Designated Directors") out of the five
members of the Board of Directors, and no action may be taken by the Board
of Directors without the approval of at least one of the Designated
Directors. Therefore, Enviro will have the ability to influence or control
most of the Company's actions. This concentration of voting power may also
have the effect of delaying or preventing any change of control of the
Company not approved by Enviro. If the 500,000 Private Warrants held by
EMC were exercised, the combined voting power of Enviro and EMC -- entities
that are indirectly owned by different members of the same family -- would
represent 46.7% of total voting power, assuming no other issuances of
Common Stock prior to such exercise.
LIMITED MARKET FOR THE COMMON STOCK; OFFERING PRICES DETERMINED BY
NEGOTIATION
Prior to the Primary Offering, there has been a limited trading market
for the Common Stock and no trading market for the Warrants. Although the
Common Stock has been sporadically traded on the OTC Bulletin Board, and
the Common Stock and Warrants will trade on the Nasdaq SmallCap Market upon
conclusion of the Primary Offering, there can be no assurance that an
active public trading market for the Common Stock or Warrants will develop
and continue after the Primary Offering. The initial offering prices of
the Securities in each of the Primary and Secondary Offerings have been
determined by negotiations between the Company and the Representative and
the Selling Stockholders, respectively, and may bear no relation to the
market prices of the Common Stock and Warrants after each of the Primary
and Secondary Offerings, respectively.
EFFECT OF WARRANTS, OPTIONS AND CONVERTIBLE SECURITIES OUTSTANDING AFTER
PRIMARY OFFERING
The Company has outstanding options and warrants which provide for the
purchase of an aggregate of 291,850 shares of Common Stock at prices
ranging from $4.00 to $10.00 per share. The Warrants, if exercised, would
result in the issuance of 1,625,000 shares of Common Stock. In the Primary
Offering, the Underwriters' over-allotment option, if fully exercised,
including the related Warrants, would result in the issuance of 487,500
shares of Common Stock. The Representative's Purchase Option, if fully
exercised, including the related Warrants, would result in the issuance of
325,000 shares of Common Stock. The 11% Preferred Stock to be issued will
be convertible into 1,600,000 shares of Common Stock. See "Description of
Securities -- 11% Preferred Stock." The Private Warrants to be issued, if
exercised, would result in the issuance of 625,000 shares of Common Stock.
See "Description of Securities -- Warrants." An additional 128,125 shares
of Common Stock are issuable upon conversion of remaining Convertible
Debentures. These issuances of Common Stock, totalling 5,082,475 shares,
would have a dilutive effect on the Company's stockholders by decreasing
their percentage ownership in the Company. Moreover, the holders of such
securities would be most likely to exercise or convert such securities at a
time when the Company could obtain capital by a new offering of securities
on terms more favorable than those provided by such securities.
Consequently, the terms on which the Company could obtain additional
capital may be adversely affected. See "Capitalization."
IMMEDIATE AND SUBSTANTIAL DILUTION
The Primary Offering involves an immediate dilution of approximately
$2.82 per share of Common Stock (approximately 71% of the offering price of
the Common Stock) between the offering price per share of the Common Stock
and the pro forma net tangible book value per share of the Common Stock
immediately after the completion of the Primary Offering and the Closing
Transactions. See "Dilution."
POSSIBLE RULE 144 SALES
Upon consummation of the Primary Offering, the Company will have
outstanding 2,394,650 shares of Common Stock. All of the 1,625,000 shares
sold in the Primary Offering (assuming no exercise of the Underwriters'
over-allotment option), will be freely transferable by persons other than
affiliates (as defined in regulations under the Securities Act) without
restriction or further registration under the Securities Act.
Of the 439,650 shares of Common Stock outstanding prior to the Primary
Offering 64,650 are "restricted securities" within the meaning of Rule 144
under the Securities Act and may not be sold in the absence of registration
under the Securities Act, unless an exemption from registration is
available, including the exemption provided by Rule 144. Under Rule 144 as
currently in effect, of such 64,650 shares, 35,000 shares are currently
eligible for sale, an additional 8,750 shares will be eligible for such
sale in or after August 1996, and the remaining 21,400 shares will be
eligible for such sale in or after June 1998, subject in each instance to
the volume limitations of the Rule. The 205,000 shares of Common Stock to
be issued in the Preferred Stock Exchange and the 125,000 shares of Common
Stock to be issued upon the Debenture Conversion will be restricted
securities but may be resold pursuant to the shelf registration thereof.
Anchor will not sell the 205,000 shares of Common Stock it will receive in
the Preferred Stock Exchange without the Representative's prior written
approval for a period of 9 months from the date of this Prospectus. The
foregoing does not give effect to any shares issuable on exercise of
outstanding options and warrants. The effect of the offer and sale of such
shares may be to depress the market price for the Company's Common Stock.
See "Shares Eligible for Future Sale -- Possible Rule 144 Sales."
POTENTIAL ADVERSE EFFECT OF WARRANT REDEMPTION
The Warrants may be called for redemption by the Company once they become
exercisable and the Representative has given its prior consent at a
redemption price of $.01 per Warrant upon not less than 30 business days'
prior written notice if the last sale price of the Common Stock has been at
least $6.00 (150% of the exercise price of the Warrants) on all 20 of the
last trading days ending on the third day prior to the date on which notice
is given. Notice of redemption of the Warrants could force the holders to
exercise the Warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so, to sell the Warrants at the current
market price when they may otherwise wish to hold the Warrants, or to
accept the redemption price, which would be substantially less than the
market value of the Warrants at the time of redemption. The Company is
required to maintain the effectiveness of a current registration statement
relating to the exercise of the Warrants and, accordingly, the Company will
be unable to redeem the Warrants unless there is a currently effective
prospectus and registration statement under the Securities Act covering the
issuance of underlying securities. Also, lack of qualification or
registration under applicable state securities laws may mean that the
Company would be unable to issue securities upon exercise of the Warrants
to holders in certain states, including at the time when the Warrants are
called for redemption. See "Description of Securities -- Warrants."
AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER
PROVISIONS
The Company's Certificate of Incorporation authorizes the issuance of
Preferred Stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without stockholder approval, to issue
Preferred Stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of
holders of the Company's Common Stock. In the event of issuance, the
Preferred Stock could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change in control of the Company,
which could have the effect of discouraging bids for the Company and,
thereby, preventing stockholders from receiving a premium for their shares
over the then-current market prices. See "Description of Securities."
The Delaware General Corporation Law includes provisions which are
intended to encourage persons considering unsolicited tender offers or
other unilateral takeover proposals to negotiate with the Company's
directors rather than pursue non-negotiated takeover attempts. These
existing takeover provisions may have a significant effect on the ability
of a stockholder to benefit from certain kinds of transactions that may be
opposed by the incumbent directors. See "Description of Securities --
Anti-Takeover Provisions."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS
The Company will be able to issue shares of its Common Stock upon
exercise of the Warrants only if there is then a current prospectus
relating to the issuance of such Common Stock and only if such Common Stock
is qualified for sale or exempt from qualification under applicable
securities laws of the jurisdictions in which the various holders of the
Warrants reside. The Company has undertaken to keep current a prospectus
which will permit the purchase and sale of the Common Stock underlying the
Warrants, but there can be no assurance that the Company will be able to do
so. Although the Company intends to seek to qualify for sale the shares of
Common Stock underlying the Warrants in those states in which the
securities are to be offered, no assurance can be given that such
qualification will be obtained. The Warrants may be deprived of any value
and the market for the Warrants may be limited if a current prospectus
covering the Common Stock issuable upon the exercise of the Warrants is not
kept effective or if such Common Stock is not qualified or exempt from
qualification in the jurisdictions in which the holders of the Warrants
then reside. See "Description of Securities -- Warrants."
QUALIFICATION REQUIREMENTS FOR NASDAQ SECURITIES; RISKS OF LOW-PRICED
SECURITIES
Application has been made for quotation of the Common Stock on the Nasdaq
SmallCap Market, which is administered by the National Association of
Securities Dealers, Inc. (the "NASD"). For the Company's securities to be
eligible for inclusion on Nasdaq, the Company must, among other things,
maintain at least $2,000,000 in total assets and have at least $1,000,000
of capital and surplus and the bid price of the Common Stock must be at
least$1.00 per share, provided, however, that, if the Company's stock falls
below such minimum bid price, it will remain eligible for continued
inclusion if the market value of the public float is at least $1,000,000
and the Company has at least $2,000,000 in capital and surplus. Although
the Company anticipates satisfying the listing criteria following the
consummation of the Primary Offering, there can be no assurance that it
will be able to continue to meet the required standards once it is listed.
If it should fail to meet one or more of such standards, its securities
would be subject to deletion from Nasdaq. If this should occur, trading,
if any, in the Common Stock and the Warrants would then continue to be
conducted in the over-the-counter market on the OTC Bulletin Board, an
NASD-sponsored inter-dealer quotation system, or in what are commonly
referred to as "pink sheets." As a result, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the market
value of, the Company's securities. In addition, if the Company's
securities cease to be quoted on Nasdaq and the Company fails to meet
certain other criteria, they would be subject to Commission rules that
impose additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors. For transactions covered by these rules, the broker-dealer must
make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to sale.
The broker-dealer also must provide the customer with current bid and offer
quotations for the securities, the compensation of the broker-dealer and
its salesperson in the transaction, and monthly account statements showing
the market value of each such security held in the customer's account. In
addition, prior to effecting a transaction in such a security the broker-
dealer must deliver a standardized risk disclosure document prepared by the
Commission that provides information about low-priced securities and the
nature and level of risks in the market for such securities. Consequently,
if the Company's securities were no longer quoted on Nasdaq, these rules
may affect the ability of broker-dealers to sell the Company's securities
and the ability of purchasers in each of the Primary and Secondary
Offerings to sell their securities in the secondary market.
LIMITATIONS ON REPRESENTATIVE'S MARKET MAKING ACTIVITIES
The Representative has the right to act as the Company's agent in
connection with any future solicitation of warrantholders to exercise their
Warrants. Unless granted an exemption by the Commission from Rule 10b-6
promulgated under the Exchange Act, the Representative will be prohibited,
during certain periods when the Warrants are exercisable, from engaging in
any market-making activities with regard to the Company's securities until
the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Representative
may have to receive a fee for soliciting the exercise of the Warrants. The
Warrants are not exercisable until one year after the date of this
Prospectus. As a result, the Representative may be unable to continue to
provide a market for the Company's securities during certain periods while
the Warrants are exercisable. Such limitations could impair the liquidity
and market prices of the Common Stock and Warrants.
DIVIDENDS UNLIKELY
The Company has never declared or paid dividends on its Common Stock and
currently does not intend to pay dividends in the foreseeable future. The
payment of dividends in the future will be at the discretion of the Board
of Directors and will be payable only after payment of dividends on the
Preferred Stock. See "Dividend Policy."
LIMITED LIABILITY OF DIRECTORS
The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be liable to the
corporation or its stockholders for expenses incurred in derivative or
third party actions arising from a breach of their fiduciary duty as
directors, except in certain circumstances. Accordingly, except in such
circumstances, the Company's directors will not be liable to the Company or
its stockholders for breach of such duty.
USE OF PROCEEDS
The Company will receive no proceeds in this Secondary Offering.
PRICE RANGE OF COMMON STOCK
The Common Stock has traded on the NASD OTC Bulletin Board under the
symbol USEN since the second quarter of the 1995 fiscal year. The following
table sets forth, for the periods indicated, the high and low closing bid
quotations for the Common Stock, as reported by the NASD OTC Bulletin
Board. The following quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
BID
-----------------
HIGH LOW
---- ---
FISCAL YEAR ENDED JANUARY 31, 1995:
Second Quarter . . . . . . . . . . $ 4.40 $3.60
Third Quarter . . . . . . . . . . $10.00 $8.40
Fourth Quarter . . . . . . . . . . $10.00 $10.00
FISCAL YEAR ENDED JANUARY 31, 1996:
First Quarter . . . . . . . . . . . $10.00 $10.00
Second Quarter . . . . . . . . . . $10.00 $10.00
Third Quarter . . . . . . . . . . . $ 8.40 $ 6.00
Fourth Quarter . . . . . . . . . . $ 4.00 $ 2.40
FISCAL YEAR ENDING JANUARY 31, 1997:
First Quarter . . . . . . . . . . $ 2.92 $ 2.48
Second Quarter . . . . . . . . . . $ 2.00 $ 1.50
As of August 2, 1996, there were 590 record holders of the Company's
Common Stock and approximately 907 beneficial holders of the Company's
Common Stock.
On August 2, 1996, the high bid price was $1.50 and low bid price was
$1.50.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The 1,600,000
shares of 11% Preferred Stock to be issued to Enviro have an aggregate
liquidation preference of $3,100,000 and will carry a preferential annual
cumulative dividend rate of 11% of the liquidation preference ($341,000 per
year). During the first two years after issuance, the 11% Preferred Stock
dividend will be payable in additional shares of 11% Preferred Stock
(valued at $1.9375 per share). Thereafter the 11% Preferred Stock dividend
will be payable in either shares of 11% Preferred Stock or cash, at the
option of the Company. No dividends may be paid on the Common Stock so
long as the Company is not current on payment of dividends on the 11%
Preferred Stock. See "Description of Securities -- 11% Preferred Stock."
DILUTION
The difference between the public offering price per share of Common
Stock included in the Primary Offering and the pro forma net tangible book
value per share of Common Stock after the Primary Offering and the Closing
Transactions is referred to herein as the dilution to investors in the
Primary Offering. Net tangible book value per share of Common Stock is
determined by dividing the net tangible book value (total assets less
intangible assets and less total liabilities and preferred stock equity) by
the number of outstanding shares of Common Stock.
As of April 30, 1996, the Company had a negative net tangible book value
of ($3,842,000) or ($8.74) per share of Common Stock. After giving effect
to the application of the net proceeds from the sale of the Securities
offered hereby and the Closing Transactions including payment of accrued
interest and additional bridge loan borrowing to September 15, 1996, the
net tangible book value at that date would be $2,820,000 or $1.18 per share
of Common Stock ($3,633,750 ($1.38 per share) if the Underwriters' over-
allotment option is exercised in the Primary Offering). This represents an
immediate increase in net tangible book value of $9.92 per share to
existing stockholders, and an immediate dilution of $2.82 (71%) per share
to new investors ($2.62 (66%) per share if the Underwriters' over-allotment
option is exercised in the Primary Offering).
The following table illustrates the dilution per share of Common Stock:
Public offering price per share of the Common
Stock included in the Offering . . . . . . . . . $4.00
Net tangible book value (deficit) per share
before the Primary Offering (1) . . . . . . . . ($8.74)
Increase to existing common stockholders in
net tangible book value due to the Primary
Offering and the Closing Transactions (2)(3) . . 9.92
----
Pro forma net tangible book value after the $1.18
Primary Offering . . . . . . . . . . . . . . . . ----
$2.82
Pro forma dilution to new investors . . . . . . ====
---------------------------------
(1) Based on 439,650 shares of Common stock issued and outstanding. Net
tangible book value is adjusted to provide for the $575,000
liquidation value of the Series One Preferred Stock.
(2) Gives effect to the Preferred Stock Exchange, the Debenture Conversion
and the issuance of 1,625,000 shares of Common Stock in the Primary
Offering.
(3) Net tangible book value is adjusted to provide for the $3,100,000
liquidation value of the 11% Preferred Stock.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
April 30, 1996 and as adjusted to reflect (i) the sale of the Securities in
the Primary Offering, (ii) the consummation by the Company of the Private
Placement, the Debenture Conversion and the Preferred Stock Exchange, and
(iii) the application of the net proceeds from the foregoing, including the
completion of the Steamboat Acquisition and the repayment of debt including
accrual of interest and additional bridge loan borrowing to September 15,
1996. See "Use of Proceeds." This table should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto and
the Pro Forma Financial Statements included in this Prospectus.
APRIL 30, 1996
--------------------------
PRO FORMA
HISTORICAL AS ADJUSTED
---------- -----------
Long-term debt, net of unamortized
discount of $30,000 . . . . . . $ 2,812,000 $ 1,342,000
Loans Payable . . . . . . . . . . 910,000
Pre-reorganization income taxes
payable, current. . . . . . . . . 182,000 182,000
------- -------
3,904,000 1,524,000
11% cumulative redeemable
convertible preferred stock,
to be issued and outstanding
1,600,000 shares. . . . . . . . 3,100,000
Stockholders' equity:
Preferred stock, $0.01 par value,
5,000,000 shares authorized;
issued and outstanding,
57,500 shares . . . . . . . 1,000
Common stock, $0.01 par value,
35,000,000 shares authorized;
issued and outstanding,
439,650 shares; to be issued and
outstanding 2,394,650
shares(1)(2) . . . . . . . . 4,000 23,000
Additional paid-in capital . . 112,000 6,311,000
(3,276,000) (3,514,000)(3)
Accumulated (deficit) . . . . . ---------- ----------
Total stockholders equity (3,159,000) 2,820,000
(deficit) . . . . . . . . . . . . ---------- ---------
$ 745,000 $ 7,444,000
Total capitalization . . . . . . ========== ==========
------------------------------
(1) Includes (i) 125,000 shares of Common Stock to be issued in the
Debenture Conversion and (ii) 205,000 shares of Common Stock to be
issued in the Preferred Stock Exchange.
(2) Does not include an aggregate of 4,594,975 shares of Common Stock
reserved and to be reserved for issuance following completion of the
Primary Offering including (i) 291,850 shares issuable on exercise of
currently outstanding options and warrants, (ii) 2,575,000 shares
issuable on exercise of the Warrants, the Representative's Purchase
Option and the Warrants issuable on exercise of the Representative's
Purchase Option and the Private Warrants being issued in the Private
Placement and the Debenture Conversion, (iii) 1,600,000 shares
issuable upon conversion of 11% Preferred Stock to be issued to
Enviro, and (iv) 128,125 shares issuable upon conversion of
Convertible Debentures which will remain outstanding after the
Offering.
(3) Change in accumulated (deficit) reflects the write off of unamortized
debt discount of $30,000 in connection with repayment of certain debt
and the accrual of interest to September 15, 1996.
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF APRIL 30, 1996
The following Pro Forma Condensed Balance Sheet gives effect to the
following transactions as if they had occurred on April 30, 1996: (a) sale
of 1,600,000 shares of Preferred Stock and 500,000 Private Warrants for an
aggregate of $3,500,000, (b) sale of 1,625,000 shares of Common Stock and
1,625,000 Warrants offered by this Prospectus for net proceeds of
$5,425,000, (c) acquisition of a 50% interest in two geothermal power
plants (the Steamboat Facilities) for an aggregate of $4,982,000 (including
$50,000 as a downpayment which was previously paid by the Company), (d)
repayment of notes payable and other liabilities in the aggregate amount of
$2,626,000 adjusting for accrual of interest and additional bridge loan
financing to September 15, 1996, (e) conversion of 57,500 shares of Series
One Preferred Stock into 205,000 shares of Common Stock, and (f) conversion
of $500,000 principal amount of the existing Convertible Debentures to
125,000 shares of Common Stock and 125,000 Private Warrants. The Pro Forma
Condensed Balance Sheet should be read in conjunction with Pro Forma
Statement of Operations and the historical financial statements of the
Company, Lehi Independent Power Associates, L.C. ("LIPA") and Plymouth
Cogeneration included in this Prospectus.
<TABLE>
PRO FORMA
ADJUSTMENTS
-------------
HISTORICAL DEBIT
---------- -----
A S S E T S
-----------
<S> <C> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . . $ 2,000 $ 3,500,000(a)
5,425,000(b)
50,000(d1)
Other current assets . . . . . . . . . . . 1,000
-----
Total current assets . . . . . . . 3,000
Investments in Joint Ventures - at equity:
Lehi Independent Power Associates, L.C. . . 1,150,000
Plymouth Cogeneration Limited Partnership . 684,000
Steamboat Envirosystems, L.C. . . . . . . . 53,000 4,932,000(c)
Deferred costs of registration . . . . . . . . 108,000
-------
TOTAL . . . . . . . . . . . . . . . $ 1,998,000
==========
LIABILITIES and STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
------------------------------------
Liabilities:
Loans payable . . . . . . . . . . . . . . . . $ 910,000 960,000(d2)
Pre-reorganization income taxes payable . . . 182,000
Other current liabilities (including due to
related parties of $642,000 and $402,000 1,253,000 666,000(d2)
Pro Forma). . . . . . . . . . . . . . . . . ---------
Total current liabilities . . . . . 2,345,000
Convertible subordinated secured debentures
(including due to related parties of
$325,000 and $218,000 Pro Forma). . . . . . 1,525,000 500,000(f)
Notes payable (including due to related
parties of $775,000) . . . . . . . . . . . 970,000 1,000,000(d2)
Other liabilities (including due to related 317,000
parties of $12,000) . . . . . . . . . . . . -------
Total liabilities . . . . . . . . . 5,157,000
---------
11% cumulative redeemable convertible
preferred stock, $.01 par value (issued and
outstanding, none; to be issued and
outstanding, 1,600,000 shares)
Stockholders' Equity (Capital Deficiency):
Preferred stock, $.01 par value (issued and
outstanding, 57,500 shares; to be issued and
outstanding, none) . . . . . . . . . . . . 1,000 1,000(e)
Common stock, $.01 par value (issued and
outstanding, 439,650 shares; to be issued
and outstanding, 2,394,650 shares) . . . . 4,000
Additional paid-in capital . . . . . . . . . 112,000 108,000(b)
1,000(e)
208,000(d1)
Accumulated deficit . . . . . . . . . . . . . (3,276,000) 30,000(g)
---------- ------
Total stockholders' equity (capital (3,159,000)
deficiency) . . . . . . . . . . . ----------
T O T A L . . . . . . . . . . . . . $ 1,998,000 $17,381,000
========== ==========
</TABLE>
<TABLE>
PRO FORMA
ADJUSTMENTS
---------------
PRO
CREDIT FORMA
------ -----
A S S E T S
-----------
<S> <C> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 4,932,000(c) $ 1,419,000
2,626,000(d2)
Other current assets . . . . . . . . . . . . . . . . 1,000
-----
Total current assets . . . . . . . . . . . 1,420,000
Investments in Joint Ventures - at equity:
Lehi Independent Power Associates, L.C. . . . . . . 1,150,000
Plymouth Cogeneration Limited Partnership . . . . . 684,000
Steamboat Envirosystems, L.C. . . . . . . . . . . . 4,985,000
Deferred costs of registration . . . . . . . . . . . . 108,000(b)
----------
TOTAL . . . . . . . . . . . . . . . . . . . $ 8,239,000
==========
LIABILITIES and STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
-------------------------------------
Liabilities:
Loans payable . . . . . . . . . . . . . . . . . . . . 50,000(d1)
Pre-reorganization income taxes payable . . . . . . . $ 182,000
Other current liabilities (including due to related
parties of $642,000 and $402,000 208,000(d1) 795,000
Pro Forma). . . . . . . . . . . . . . . . . . . . . -------
Total current liabilities . . . . . . . . . 977,000
Convertible subordinated secured debentures (including
due to related parties of $325,000 and $218,000
Pro Forma) . . . . . . . . . . . . . . . . . . . . 1,025,000
Notes payable (including due to related parties of
$775,000) . . . . . . . . . . . . . . . . . . . . . 30,000(g)
Other liabilities (including due to related parties of 317,000
$12,000) . . . . . . . . . . . . . . . . . . . . . -------
Total liabilities . . . . . . . . . . . . . 2,319,000
---------
11% cumulative redeemable convertible preferred stock,
$.01 par value (issued and outstanding, none; to
be issued and outstanding, 1,600,000 shares) 3,100,000(a) 3,100,000
Stockholders' Equity (Capital Deficiency):
Preferred stock, $.01 par value (issued and
outstanding, 57,500 shares; to be issued and
outstanding, none) . . . . . . . . . . . . . . . .
Common stock, $.01 par value (issued and outstanding,
439,650 shares; to be issued and outstanding,
2,394,650 shares) . . . . . . . . . . . . . . . . . 16,000(b) 23,000
2,000(e)
1,000(f)
Additional paid-in capital . . . . . . . . . . . . . 400,000(a) 6,311,000
5,409,000(b)
499,000(f)
Accumulated deficit . . . . . . . . . . . . . . . . .
(3,514,000)
-------- ---------
Total stockholders' equity (capital 2,820,000
deficiency) . . . . . . . . . . . . . . . ---------
T O T A L . . . . . . . . . . . . . . . . . $17,381,000 $ 8,239,000
========== ==========
</TABLE>
Notes to Pro Forma Condensed Consolidated Balance Sheet
------------------------------------
(a) To reflect sale of 1,600,000 shares of 11% Preferred Stock and
500,000 Private Warrants.
(b) To reflect sale of 1,625,000 shares of Common Stock and
1,625,000 Warrants for net proceeds of $5,425,000.
(c) To reflect purchase of a 50% interest in Steamboat LLC, which
is acquiring the Steamboat Facilities.
(d1) To reflect additional bridge loan
received after April 30, 1996 . . . . . . . . $50,000
And accrual of interest from May 1 to
September 15, 1996 . . . . . . . . . . . . . . $208,000
(d2) To reflect assumed repayment of debt:
Note payable . . . . . . . . . . . . . . . . . $1,000,000
Bridge loans . . . . . . . . . . . . . . . . . 960,000
Accrued interest . . . . . . . . . . . . . . . 666,000
----------
$2,626,000
==========
(e) To reflect conversion of existing Series One Preferred Stock
into 205,000 shares of Common Stock.
(f) To reflect conversion of $500,000 principal amount of the
existing Convertible Debentures to 125,000 shares of Common
Stock and 125,000 Private Warrants.
(g) To eliminate unamortized debt discount on debt repaid. This
charge will be treated as an extraordinary loss in the statement
of operations during the period this Offering is consummated.
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The following Pro Forma Condensed Consolidated Statement of Operations
combines the results of operations of the Company for the year ended
January 31, 1996 and the three months ended April 30, 1996 with the
Company's share of the pro forma results of operations of the Steamboat
Facilities for the year ended December 31, 1995 and the three months ended
March 31, 1996 as if the proposed Steamboat Acquisition has taken place at
the beginning of the periods in a transaction accounted for as a purchase.
The Pro Forma Condensed Consolidated Statement of Operations also gives
effect to the following: (a) sale of Common Stock and Warrants and sale of
Preferred Stock and Private Warrants to the extent necessary to fund the
acquisition of a 50% interest in the Steamboat Facilities and repay debt,
(b) conversion of 57,500 shares of Series One Preferred Stock into 205,000
shares of Common Stock, (c) restructure of existing Convertible Debentures
by converting $500,000 principal amount to 205,000 shares of Common Stock
and 125,000 Private Warrants and reducing the interest rate from 18% to 9%
on the remaining balance. This statement should be read in conjunction
with the Steamboat Envirosystems, L.C. Pro Forma Condensed Balance Sheet as
of March 31, 1996, the Steamboat Envirosystems Power Plants Pro Forma
Condensed Combined Statement of Operations and the historical financial
statements of the Company, LIPA and Plymouth Cogeneration, Far West
Electric Energy Fund, L.P. and 1-A Enterprises, included in this
Prospectus. LIPA, Plymouth, Far West Electric Energy Fund, L.P. and 1-A
Enterprises each have a fiscal year end of December 31 which differs to the
fiscal year end of the Company. No material adjustment is necessary to
reconcile the December 31 year end to the Company's January 31 year end.
The pro forma results of operations are not necessarily indicative of
future results of operations or what the results would have been if the
acquisition had taken place at the beginning of the periods.
<TABLE>
YEAR ENDED JANUARY 31, 1996
---------------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
DR./(CR.)
<S> <C> <C> <C>
Income (loss) from joint $ (17,000) $(1,880,000)(1) $1,863,000
venture . . . . . . . . ---------- ---------- ---------
Operating expenses . . . (853,000) (853,000)
(604,000) (488,000)(2) (116,000)
Interest expense (5) . . ---------- ------------ --------
Income (loss) before
income taxes . . . . . (1,474,000) 894,000
292,000 (3) 292,000
Income taxes . . . . . . ---------- ---------- ---------
Income (loss) before
extraordinary item . . (1,474,000) 602,000
Dividends on preferred 21,000 (4a) 341,000 (4b) 362,000
stock . . . . . . . . . ----------- --------- ---------
Income (loss) available
for common $(1,495,000) $ 240,000
stockholders (6) . . . ========== =========
$(3.41) $0.14
Net income per share (7) ----- -----
Shares used in computing
net income per 438,773 1,813,851
share (7) . . . . . . . ========== =========
</TABLE>
<TABLE>
THREE MONTHS ENDED APRIL 30, 1996
---------------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ---------
DR./(CR.)
<S> <C> <C> <C>
Income (loss) from joint $ (39,000) $(549,000)(1) $ 510,000
venture . . . . . . . . -------- -------- --------
Operating expenses . . . (221,000) (221,000)
(170,000) (141,000)(2) (29,000)
Interest expense (5) . . --------- -------- -------
Income (loss) before
income taxes . . . . . (430,000) 260,000
53,000(3) 53,000
Income taxes . . . . . . ---------- -------
Income (loss) before
extraordinary item . . (430,000) 207,000
Dividends on preferred 14,000 (4a) 85,000 (4b) 99,000
stock . . . . . . . . . ------ ------
Income (loss) available
for common $(444,000) $ 108,000
stockholders (6) . . . ======== ========
$(1.01) $0.06
Net income per share (7) ---- ----
Shares used in computing
net income per 439,622 2,013,936
share (7) . . . . . . . ======= =========
</TABLE>
-----------
(1) To reflect the Company's allocated pro forma income of Steamboat
LLC.
(2) To reflect the reduction in interest expenses as a result of
repayment of Notes Payable and Loans Payable, conversion of
$500,000 Convertible Subordinated Secured Debentures to 125,000
shares of Common Stock and 125,000 Private Warrants, and reduction
of interest rate from 18% to 9% on the remaining balance of the
Convertible Debentures. The reduction of the interest rate to 9%
will be accounted for prospectively.
(3) To reflect provision for federal and state taxes at 38%, after
providing for a limit on the net operating loss deduction assuming
an ownership change had taken place at the beginning of the fiscal
year and the beginning of the three month period ended April 30,
1996. A deferred tax benefit was not provided in the historical
financial statements since the likelihood of realization of such
benefit cannot be determined.
(4a) Provision for dividends on Series One Preferred Stock.
(4b) Provision for dividends on 11% Preferred Stock to be sold to Enviro
Partners for $3,100,000. Dividends are payable in 11% Preferred
Stock.
(5) The historical amounts during the year ended January 31, 1996 and
the three months ended April 30, 1996 include approximately
$146,000 and $35,000, respectively, of interest on debts owed to
related parties.
(6) The net income (loss) available to common stockholders during the
period the 57,500 shares of Series One Preferred Stock are
converted into 205,000 shares of Common Stock will be reduced by a
nonrecurring amount of approximately $791,000 representing the
excess of fair value of the Common Stock transferred to the holders
of the Preferred Stock over the carrying amount of the Preferred
Stock in the Company's balance sheet.
(7) Pro forma net income per share is based on the weighted average
number of shares outstanding, the shares issued in the Debenture
Conversion and the Preferred Stock Exchange, the dividend on the
11% Preferred Stock and shares issued in the Primary Offering to
obtain funds required for the acquisition of the Steamboat
Facilities and the retirement of debt (1,119,461 shares at
January 31, 1996 and 1,244,286 shares at April 30, 1996). Assumed
exercise of options, warrants and the conversion of the 11%
Preferred Stock have not been reflected as they would be anti-
dilutive.
STEAMBOAT ENVIROSYSTEMS, L.C.
PRO FORMA CONDENSED BALANCE SHEET
AS OF MARCH 31, 1996
The following Pro Forma Condensed Balance Sheet gives effect to the
acquisition of two geothermal plants (the "Steamboat Facilities") accounted
for as a purchase by the Company (50% ownership interest) and Far West
Capital (50% ownership interest) for an aggregate of $5,256,000 as if such
acquisition had taken place on March 31, 1996. The total is made up of
$4,982,000 contributed by the Company and $274,000 contributed by Far West
Capital, Inc. The Company's contribution will consist of (1) $1,575,000 to
be distributed to the limited partners and owners of the predecessor
entities (other than Far West Capital, Inc.) to obtain a 50% interest in
Steamboat Envirosystems, L.C., (2) $2,407,000 to be used to pay all
outstanding mortgages on the Steamboat Facilities and (3) $1,000,000 in
cash to be contributed to the Partnership to allow the purchase and
cancellation of certain royalty interests and to fund certain improvements
to the Steamboat Facilities. Far West Capital is contributing its limited
partnership interest in Steamboat 1, valued at $274,000 to Steamboat LLC.
Far West Capital has a 5.14% ownership interest in Steamboat 1 and is not
participating in the distributions of the purchase price paid by the
Company. The Pro Forma Condensed Balance Sheet should be read in
conjunction with Pro Forma Condensed Combined Operations of Steamboat
Envirosystems, L.C. and the historical financial statements of the Company,
Far West Electric Energy Fund, L.P. and 1-A Enterprises included in this
Prospectus.
PRO FORMA ADJUSTMENTS
---------------------
DEBIT CREDIT PRO FORMA
ASSETS ----- ------ ---------
Cash . . . . . . . . $4,982,000(a) 1,575,000(c)
1,000,000(d)
2,407,000(f)
Other Assets . . . . 3,000(a) 3,000
Property, Plant
and Equipment . . . 274,000(b) 5,256,000
1,575,000(c)
1,000,000(d)
2,407,000(e)
----------- ----------
Total $5,259,000
==========
LIABILITIES
Notes payable $2,407,000(f) 2,407,000(e)
MEMBER'S EQUITY
U.S. Energy Systems,
Inc. 4,985,000(a) $4,985,000
274,000(b) 274,000
Far West Capital, Inc. ---------- ----------- -------
$12,648,000 $12,648,000 $5,259,000
Total ========== ========== =========
----------------------------------
(a) To reflect cash contribution of U.S. Energy Systems, Inc.
including $50,000 deposit previously paid.
(b) To reflect contribution of Far West Capital Inc. of its 5.14%
limited partnership interest in Far West Electric Energy Fund,
L.P.
(c) To reflect distributions to limited partners of Far West
Electric Energy Fund, L.P. and owners of 1-A Enterprises.
(d) To reflect the purchase and cancellation of certain royalty
interests.
(e) To reflect assumption of the Mortgage.
(f) To reflect payment of the Mortgage.
STEAMBOAT FACILITIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
The following Pro Forma Condensed Combined Statement of Operations of
the Steamboat Facilities reflects the combined results of operations of the
Steamboat Facilities for the year ended December 31, 1995 and the three
months ended March 31, 1996, adjusted to eliminate those costs which will
no longer exist as a result of the purchase of interests by the Company and
Far West Capital. Steamboat LLC will acquire the Steamboat Facilities from
Far West Electric Energy Fund L.P. and 1-A Enterprises subject to a
mortgage in favor of an institutional lender and certain net revenue or
royalty interests in steam extraction rights. The $4,982,000 contributed
by the Company to Steamboat LLC will be applied as follows: (1) $1,575,000
cash purchase price (less $50,000 down payment previously paid by the
Company) will be used to obtain a 50% interest in Steamboat LLC, (2) a
mortgage on the Steamboat Facilities, which had a face value of $4,196,000
as at July 20, 1996 net of an escrowed reserve, will be acquired by the
Company for $2,407,000 and contributed to Steamboat LLC, and (3) $1,000,000
in cash will be contributed by the Company to Steamboat LLC to allow it to
purchase and cancel certain of the royalty interests and to fund certain
improvements to the Steamboat Facilities. This statement is not
necessarily indicative of what results of operations would have been had
the Company acquired its interest in the Steamboat Facilities at the
beginning of the periods or of what future results of operations may be.
This statement should be read in conjunction with the historical financial
statements of Far West Electric Energy Fund, L.P. (of which Steamboat 1 is
a part) and 1-A Enterprises (Steamboat 1-A) included in this Prospectus.
<TABLE>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------
HISTORICAL
---------------------------------------------------------
FAR WEST
ELECTRIC
ENERGY FUND, 1-A
L.P.(1) ENTERPRISES COMBINED
------------ ----------- --------
<S> <C> <C> <C>
Revenue:
Electric power . $2,529,000 $875,000 $3,404,000
Other . . . . . . 145,000 145,000
--------- --------- ---------
Total revenues 2,674,000 875,000 3,549,000
--------- --------- ---------
Expenses:
Operations:
Depreciation . 631,000 104,000 735,000
Royalty . . . 405,000 210,000 615,000
Other . . . . 824,000 237,000 1,061,000
Interest . . . . . 655,000 161,000 816,000
--------- --------- ---------
Total expenses 2,515,000 712,000 3,227,000
--------- --------- ---------
Net income . . $ 159,000 $163,000 $ 322,000
========= ========= =========
Resulting income to
U.S. Energy
Systems, Inc.:
Preferred 18% .
50% of balance
Total . . . .
</TABLE>
<TABLE>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1996 MARCH 31, 1996
--------------------------------- ----------------
HISTORICAL
----------------
FAR WEST
1 AND 1-A ELECTRIC
PRO FORMA ENERGY FUND,
ADJUSTMENTS ADJUSTED L.P.
----------- -------- ------------
<S> <C> <C> <C>
Revenue:
Electric power . . $3,404,000 $838,000
Other . . . . . . . 145,000 33,000
--------- ---------
Total revenues . 3,549,000 871,000
--------- ---------
Expenses:
Operations:
Depreciation . . $ (547,000)(2) 188,000 159,000
Royalty . . . . . (275,000)(3) 340,000 130,000
Other . . . . . . 1,061,000 216,000
Interest . . . . . . (816,000)(4) 180,000
--------- --------- ---------
Total expenses . (1,638,000) 1,589,000 685,000
--------- --------- ---------
Net income . . . $ 1,638,000 $1,960,000 $186,000
========= ========= =========
Resulting income to
U.S. Energy
Systems, Inc.:
Preferred 18% . . $1,800,000
50% of balance . 80,000
---------
Total . . . . . $1,880,000
=========
</TABLE>
<TABLE>
THREE MONTHS ENDED MARCH 31, 1996
----------------------------------------------------------------
HISTORICAL
--------------------------------
PRO FORMA
1-A 1 AND 1-A
ENTERPRISES COMBINED ADJUSTMENTS ADJUSTED
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Electric power . $194,000 $1,032,000 $1,032,000
Other . . . . . . 33,000 33,000
-------- --------- ---------
Total revenues 194,000 1,065,000 1,065,000
-------- --------- ---------
Expenses:
Operations:
Depreciation . 26,000 185,000 $(135,000)(2) 50,000
Royalty . . . . 49,000 179,000 (76,000)(3) 103,000
Other . . . . . 48,000 264,000 264,000
Interest . . . . . 37,000 217,000 (217,000)(4)
--------- --------- ---------
Total expenses . 160,000 845,000 (428,000) 417,000
--------- --------- --------- ---------
Net income . . . $ 34,000 $ 220,000 $ 428,000 $ 648,000
========= ========= ========= =========
Resulting income to
U.S. Energy
Systems, Inc.:
Preferred 18% . $ 450,000
50% of balance
99,000
---------
Total . . . . $ 549,000
=========
</TABLE>
-----------
(1) Does not include the operations of Crystal Springs Project or the
gain on sale of Crystal Springs Project. Crystal Springs Project was
sold by Far West Energy Fund, L.P. in February 1995 and will not be
part of the Steamboat Facilities.
(2) To record estimated reduction of depreciation for new basis in assets
acquired, assuming a 30-year depreciation period.
(3) To eliminate royalty expense of certain royalty agreements bought out
and contributed to Steamboat LLC. No agreements have yet been
reached for these buyouts.
(4) To eliminate interest expense due to elimination of debt.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION
Results of Operations
Year ended January 31, 1996 compared to year ended January 31, 1995
The Company had no revenues during the two fiscal years because (i) the
Lehi project acquired during that period was dormant, (ii) in the Plymouth
project, depreciation offset all earnings and (iii) efforts to arrange
financing were just beginning. In the fiscal year ended January 31, 1996,
the Company had a loss from operations of $1,474,000. This was reduced by
an extraordinary gain of $83,000 arising from the restructuring of a
liability, resulting in a net loss for the fiscal year of $1,391,000. In
the earlier fiscal year the loss from operations was $1,401,000 and the net
loss was $1,316,000.
The elements making up the losses in the two fiscal years were:
1996 1995
----- ------
Operating expenses $27,000 $109,000
Selling and 826,000 897,000
administrative expenses
Interest expense 604,000 319,000
Loss from Joint Ventures 17,000 76,000
---------- ----------
Totals $1,474,000 $1,401,000
Operating expenses of $27,000 and $109,000 in the fiscal years ended
January 31, 1996 and 1995 resulted from the adjudication of legal action on
a project which had been completed and reported in an earlier year. There
will be no further costs associated with this project.
Major items in the selling and administrative expenses were:
1996 1995
------ -----
Salaries and consulting fees $431,000 $407,000
Corporate expenses 70,000 85,000
Legal and professional costs 148,000 202,000
While there was no revenue during the two years, it was nevertheless
necessary to expend funds for salaries and consulting fees to evaluate new
proposals and structure joint ventures and new projects for planned growth.
The Company estimates that $75,000 of the salaries and consulting costs are
non-recurring or applicable to specific projects which will absorb future
costs.
Included in Corporate expenses in the fiscal year ended January 31, 1996
is a non-recurring cost of $25,000 for a previous planned public offering
that was never consummated.
Legal and professional costs were lower in the 1996 fiscal year due to
the fact that there were no start-up costs for the Company in this year.
Costs already incurred in connection with this Prospectus, approximately
$50,000 as of January 31, 1996, have been deferred.
Interest expense increased in the 1996 fiscal year due to the additional
borrowings in notes payable and bridge loans. The bulk of the increase is
accounted for as follows: The $1,000,000 in notes payable were in
existence only part of the 1995 fiscal year and the interest on them
accrued in that year totaled $28,000, whereas for the full 1996 fiscal year
the interest was $137,000. The bridge loans came into being in June, 1995,
so did not affect the 1995 fiscal year at all. The interest expense in
the 1996 fiscal year was $169,000.
Loss from joint ventures of $17,000 in the 1996 fiscal year and $76,000
in the 1995 fiscal year include $59,000 and $55,000 respectively for
amortization of purchase price over net equities in the net assets of LIPA
and Plymouth Cogeneration. For the period ended January 31, 1996, the
Company's allocated share of income or loss from joint ventures equalled
$86,000 gain from LIPA, and $44,000 loss from Plymouth. The Company's gain
from LIPA includes $118,000 gain from sale of unused plant equipment.
Three Months Ended April 30, 1996 Compared to 1995
The Company had no revenues for either of these periods. The losses
shown were made up of the following major elements:
1996 1995
---- -----
Selling and administrative expenses:
Salaries and consulting fees $121,000 $ 84,000
Legal and professional fees 51,000 33,000
Corporate expenses 6,000 32,000
All other 43,000 53,000
------ ------
Total selling and administrative $221,000 $202,000
expenses ======== ========
Interest expenses $170,000 $ 99,000
Consulting agreements which began during 1995 and were not in existence
during the 1995 quarter accounted for the increase in salaries and
consulting fees.
Legal and professional fees were higher in the current quarter due to
the additional costs related to the additional bridge loans, amortized over
the terms of the loans. Costs incurred in connection with the public and
private financing have been deferred. As of April 30, 1996, these amounted
to $108,000.
Interest expenses increased in the 1996 quarter due principally to the
additional borrowings in bridge loans, which came into being starting in
June 1995.
The three-month joint venture loss totaling $39,000 was similar to the
previous year's $34,000, and was composed of $20,000 from Lehi Independent
Power Associates, L.C., and $19,000 from Plymouth Cogeneration Limited
Partnership.
LIQUIDITY AND CAPITAL RESOURCES
The Company has no contractual commitment for capital expenditures at
this time. The Company has employment agreements with two of its officers
which expire five years from the date of this Prospectus. The agreements
provide for minimum annual payments totaling $210,000. Payments under
these agreements will not be made until the working capital of the Company
permits.
As a result of accumulated losses, the Company had a negative working
capital of $1,910,000, and a capital deficiency of $2,729,000 at
January 31, 1996, and $2,342,000 and $3,159,000, respectively, at April 30,
1996. The independent auditors' report for the fiscal year ended January
31, 1996 states that these factors raise substantial doubt about the
Company's ability to continue as a going concern. As a result of this
Offering, the Company's pro forma working capital at April 30, 1996 would
be a positive $443,000.
During the fiscal year ended January 31, 1996, net cash used in
operating activities was $641,000. Cash used in investing activities was
$29,000, with $53,000 having been used in connection with the Steamboat
Acquisition, offset in part by collections of a loan receivable from an
officer of the Company.
During the 1996 fiscal year, $34,000 was received from the sale of
Common Stock and $785,000 was received as proceeds from notes and loans
payable. Other adjustments brought the total cash flow provided by
financing activities to $664,000.
During the fiscal year ended January 31, 1995, net cash used in
operating activities was $874,000. Cash used in investing activities
totaled $694,000, of which $647,000 was for investment in and advances to
joint ventures. Cash provided by financing activities totaled $1,396,000
with $139,000 derived from sale of Common Stock and $1,375,000 from
borrowings.
During the quarter ended April 30, 1996, cash flow was carefully
conserved. Salaries were deferred and additional bridge loan borrowings
amounting to $125,000 were received. Fifty percent of interest payments to
holders of the Convertible Debentures continued to be deferred until paid
out of the proceeds of the Primary Offering, by agreement of the holders of
the Convertible Debentures.
PLAN OF OPERATION
The net proceeds of the Primary Offering will be approximately
$5,425,000 and the Private Placement of 11% Preferred Stock and Private
Warrants will provide $3,500,000 for a total net proceeds of $8,925,000.
Of this total, the Company's acquisition of 50% of Steamboat LLC will use
$4,932,000 (plus $50,000 that had already been paid as a deposit.) Other
liabilities required to be paid have been adjusted to include additional
bridge loan borrowings and interest accruals through September 15, 1996.
The bridge loans, including interest, total $1,081,000, secured notes
payable, including interest, total $1,209,000, and accrued interest on the
Convertible Debentures required to be paid as part of the restructuring of
these instruments, total $335,000. The funds remaining as working capital,
together with the income from the projects including the Steamboat
Facilities, will be sufficient to meet the requirements of the Company for
the next 12 months of operation without having to raise additional funds.
The steps taken to reduce the Company's interest costs include (i) the
capitalization of $500,000 of the Convertible Debentures and the reduction
of the interest rate on the balance after consummation of the Primary
Offering from 18% to 9%, (ii) the payment of the secured notes totaling
$1,000,000, and (iii) repayment of all bridge loans.
In addition, the Steamboat Acquisition should give the Company a
positive cash flow from all joint ventures in the current fiscal year.
This will not be impacted by payment of dividends since the existing
convertible preferred stock and the sale of additional convertible
preferred stock will not require cash payment of dividends. The shares
issued to Anchor for the initial bridge loan are being converted to 205,000
shares of common stock, and the dividends on the preferred stock issued to
Enviro Partners, L.P., will be paid in additional preferred stock during
the first two years after they are issued, and thereafter in cash or
preferred stock at the Company's option.
Negotiations for the sale of power from the Steamboat Facilities for the
period subsequent to the end of the current contracts (December 1996 for
Steamboat 1 and December 1998 for Steamboat 1-A) with Sierra are under way.
While there is no assurance that the present rate of revenues will
continue, management has confidence that cash flow from this project will
continue to provide an attractive return in future years. The basis for
this confidence is that the major expense of the projects is the existing
debt that the projects have carried. Upon acquisition of the projects by
the Company, this debt is retired, thus materially reducing carrying costs
for the projects and allowing the projects to sell electric output at
substantially reduced rates while maintaining a satisfactory cash flow.
Under the present power purchase agreements with Sierra, Steamboat LLC is
required to continue to sell power to Sierra, however, Sierra has indicated
that it would release Steamboat LLC from the power purchase agreements if
Steamboat LLC finds a market for the output of the Steamboat Facilities
outside of Sierra's service territory. Therefore, if rates offered by
Sierra are not satisfactory, the Company and its partners may decide to
terminate the existing contracts. The Company believes that under new
retail wheeling regulations it will be able to sell output of electricity
directly to retail customers or to sell to other electric utility grids at
more favorable prices. A second element is the reduction of present costs
due to the purchase and cancellation of certain royalty interests. While
no agreements are yet in place, the Company expects that such agreements
will be executed, which will increase cash flow in future years. Finally,
the Company will receive 100% of the profits up to $1,800,000.
In 1995, the Company and its partners concluded a sale of non-essential
engines and parts of the Lehi, Utah plant for a gain of approximately
$236,000, with 50% or $118,000 as the Company's share. The partnership is
using a portion of the funds from this contract to upgrade the remaining
two engines and place them in service. Currently there are no contracts
for the sale of the power output of the Lehi Plant. However, negotiations
for such contracts will begin as soon as the plant is in operational
status, and it is anticipated that cash flow will be generated during the
third quarter of the fiscal year. Alternatively, the Company may decide to
sell two of its engines and to replace them with a larger and more
efficient gas turbine. If such sale is made, the Company would benefit
through its 50% share of the revenue from the sale, however, operations
would be delayed until the second quarter of the next fiscal year. The
cost of the new engine is expected to be fully financed directly through
the manufacturer without additional investment by the Company.
The Plymouth, NH plant has been operating since January 1995. The
start-up costs of this plant resulted in only minor cash flow to the
Company until now, but the plant is operating at projected efficiencies and
current expectations are that regular cash flow will commence before the
end of the current fiscal year. In addition, switching the plant's fuel
supply to less expensive waste oil, as is presently being contemplated,
could add significantly to cash flow starting during the next fiscal year,
as the Partnership has an agreement with the university to share equally in
any fuel savings. There are also plans being studied to expand the size of
the project to serve other New Hampshire college system campuses through
wheeling, as described in "Business," which should take place during fiscal
year 1998.
The Company also expects revenues from other projects that will be under
way during the next twelve months but are not yet under contract. There
are five other projects, not including Steamboat, currently being
negotiated, at least four of which the Company believes will be secured and
from which revenues are expected to commence within the next twelve months.
These include two projects for two separate shopping malls in El Paso, TX,
a large resort and commercial center in St. Thomas, USVI, a residential and
commercial center at a kibbutz in Haifa, Israel, and a steel mill in
Raipur, India. With regard to the shopping malls and the St. Thomas
resort, the Company and its joint development partners in each case will
own and operate the cogeneration facilities. The Company has signed an
agreement with the owners of Bluebeard's Castle, a large resort and
commercial complex in St. Thomas, USVI, to build and operate a 3 megawatt
Cogeneration plant and a 120,000 gallon per day water recovery system in
the resort's property. The Company and the resort owners will own the
cogeneration plant and water system and share revenues equally. The
Company has received initial funding from the resort owners and the first
of six engine generators will be installed during the month of August.
While the Company will commence realizing revenues for its engineering and
equipment sales to the projects immediately upon the start of construction,
the main stream of revenue will be sale of energy to the host facilities
over the fifteen year terms of the contracts. In the case of the Israeli
kibbutz project, the Company would be selling the hardware and providing
engineering services for installation to the kibbutz, and the Company's
revenues will be derived from these sales. In the case of the Raipur steel
mill, the Company will provide consulting services to the steel mill for
the acquisition, shipping and installation of the hardware. The consulting
fee will be a percentage of total cost.
These other projects should not require capital outlays, as they will be
self-financed. The working capital remaining after the closing of the
Primary Offering, together with the regular income from Steamboat LLC, will
be adequate for operational needs during the next twelve months.
While the Company does not conduct research and development per se, it
will expend funds to investigate and develop new projects. It is
anticipated that a total of approximately $100,000 will be spent in such
endeavors, which will come from working capital as available. Although
each project which comes on stream has its own project staff which becomes
a cost of the specific project, the Company does plan to add at least three
more employees to headquarters staff to assist management. Expenses for
such staff increase, as well as expenses for outside consultants, have been
taken into account in planning for the Company's budget over the coming
year.
RESTRUCTURING OF DEBT
Concurrently with the consummation of the Primary Offering and the
other Closing Transactions, the Convertible Debentures, of which an
aggregate principal amount of $1,525,000 is outstanding, will be
restructured by converting $500,000 principal amount into 125,000 shares of
Common Stock and 125,000 Private Warrants and reducing the conversion rate
of the remainder to $8.00 per share from the present $16 per share, making
the remainder convertible into 128,125 shares of Common Stock. From and
after the consummation of the Primary Offering, the interest rate will be
9% instead of the present 18%.
ACCOUNTING STANDARDS
During the fiscal year ending January 31, 1997, the Company will be
required to adopt Statement of Financial Accounting Standard ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets," and
SFAS 123,"Accounting for Stock-Based Compensation," neither of which is
expected to have a material effect in the Company's financial statements.
IMPACT OF INFLATION
The Company's contracts include adjustments for changes in inflation
indices. The impact on Company earnings and cash flows would be minimal.
BUSINESS
THE COMPANY
The Company, formerly called Cogenic Energy Systems, Inc. and U.S.
Envirosystems, Inc., was incorporated under the laws of the State of
Delaware in 1981 in order to engage in the design, assembly, turn-key sale
and installation of factory built cogeneration systems powered by diesel
oil and/or natural gas. Richard H. Nelson, President of the Company, is one
of the two founders of the Company and acted as its Chief Executive Officer
until 1989. In late 1986, the Company was impaired by a $2,100,000
judgment resulting from a contractual dispute in California. Although
ultimately settled, the protracted court case caused serious delays in
planned expansion and in sales. Despite extensive restructuring, the
increasingly recessionary economic climate during that period led to a
serious cash shortage. By mid-1989, the Company filed for protection under
Chapter 11 of the Bankruptcy Code.
Utility Systems Florida, Inc. ("USF") was formed by Richard H. Nelson in
late 1991 with the objective of entering into the alternative energy
industry. USF proposed a Plan of Reorganization for the Company with the
intent of merging USF with the reorganized company. The Plan of
Reorganization was approved by the creditors and stockholders of the
Company, and the U.S. Bankruptcy Court, Southern District New York,
confirmed the Plan in March 1993. Pursuant to the Plan, USF was merged into
the Company and the Company was renamed U.S. Envirosystems, Inc.
On May 17, 1996, the Company changed its name from U.S. Envirosystems,
Inc. to U.S. Energy Systems, Inc.
BUSINESS OF THE COMPANY
Since its reorganization, the Company has been engaged in the
independent power plant ("IPP") industry as a project developer, owner and
operator. IPP's produce electricity for sale to either direct end users or
to regulated public electric utility companies. Regulated public electric
utility companies have historically produced electricity and have held the
exclusive distribution rights of the electricity thus produced to end users
in specific geographic territories. The exclusive right to the
distribution of electric power within a specific territory is a right
granted to the regulated public utility company by the various state public
utility commissions where such regulated public utility companies are
located. Because the exclusive franchise right is in effect a monopoly,
the rates charged for electric power and other services, as well as overall
operations, are regulated by the state public utility commissions. In
recent years, however, federal and state laws have been promulgated to
reduce and/or eliminate the regulated public electric utility industry's
monopoly over the production and sale of electric power in order to enhance
competition among electricity providers, hence, the emergence of IPP's. In
addition to conserving natural resources and reducing atmospheric pollution
by encouraging more efficient production of electric power, competition
should result in lower consumer costs for energy. "Independent power
plants" and "cogeneration plants" are frequently used interchangeably to
describe the power industry which is an alternative to the regulated power
industry. IPP's generally, but not always, produce power through a process
known as "cogeneration." Cogeneration is defined as the production of two
or more energy forms (typically electricity and heat), simultaneously, and
from the same fuel source. While producing electricity, otherwise wasted
heat is recovered from the exhaust and/or engine cooling water. This
recovered heat can be used to replace heat which would otherwise be made
from conventional furnaces and boilers. Other IPP's may not technically be
"cogenerators" but rather utilize renewable fuel sources such as
geothermal, wind, solar, hydro, and waste products such as waste oil, waste
wood and other bio-mass waste, or landfill gas. The favorable economics of
cogeneration or innovative and inexpensive renewable fuel sources allow
IPP's to compete with the longer established regulated power industry.
The Company's strategy is to seek projects requiring power production or
cogeneration and to become an equity participant with the owners,
developers or other involved parties in return for the Company's expertise
in the structuring, design, management and operation of the projects.
Often, at the time of the Company's initial involvement, such projects will
have advanced beyond the conceptualization stage to a point where the
engineering, management and project coordination skills the Company offers
are required to proceed. Although the Company has only been in existence
since 1993 and has only begun to develop projects, the president and key
consultants of the Company have been involved in the power generation
industry for over twenty years and alternative energy business for over
fifteen years and have built over 200 power projects in the United States
and abroad ranging in size from 100 kilowatts to 50 megawatts. Innovative
power projects developed by the principal executive include cogeneration
systems for ocean-going U.S. Coast Guard and Navy vessels.
In furtherance of its strategy, the Company is opportunistically
pursuing: (i) existing IPPs and cogeneration facilities which can be bought
at favorable prices; (ii) independent power and cogeneration projects not
yet built but for which another developer has successfully negotiated the
basic requirements for a plant including power purchase agreements,
environmental permits, etc., and (iii) special market opportunities for
cogeneration and energy savings projects (such as large shopping malls,
resorts, etc.) where such energy applications are not presently in common
use and where the Company can enter into joint development agreements with
the property owners to own and operate such facilities. With regard to the
latter, the Company possesses designs for, and will continue to seek out or
develop, special energy-efficient products such as natural gas powered air
conditioning with emphasis on the health care, food processing, shopping
mall and hotel markets where large quantities of electricity, air
conditioning and hot water are required on a continuous and simultaneous
basis.
The Company believes the greatest future potential for the Company in
the independent power plant/cogeneration market within the United States is
in facilities in the 3 to 50 megawatt size range. Additionally, the
Company believes that the largest potential for "inside-the-fence"
facilities (where all the energy forms produced are consumed at the power
plant location) falls into this size category. This range is advantageous
because, within this range, and depending on geographic location, these
plants usually fall below thresholds requiring prolonged environmental and
air quality permit procedure and may achieve more favorable pricing for its
electricity from either the utility grids or local customers. The reasons
for more favorable pricing are that plants of this size can be located in
specific areas of power capacity shortages. Regulated utility companies
purchasing such power to assist in meeting shortages are frequently willing
to pay more than "avoided cost" (i.e., their cost to produce an incremental
kilowatt), and local end users are frequently willing to pay full retail
prices which are more cost effective than interruptions of service due to
shortage induced brown-outs.
Also, the air quality permitting process for the size range contemplated
by the Company is generally faster, easier and more assured than in the
larger projects. In the smaller size range, so-called "inside-the-fence"
projects, nearly all of the electrical and thermal output can be utilized
by the host site. The thermal output of the cogeneration system replaces
conventional thermal output from the host's boilers and furnaces with
substantially less atmospheric emissions of nitrous oxide (NOX) and carbon
monoxide (CO) because of the emission control technology available to
cogeneration engines which is not available to boilers and furnaces. Since
the cogeneration system results in a net reduction in emissions for the
specific site, air quality permitting authorities will generally respond
quickly and favorably. In contrast, while the larger projects (over 50
megawatts) usually have no problems in placing the electrical output, there
is a problem in finding suitable thermal hosts who can use the vast
quantities of heat produced. Under such circumstances, even if all of the
host's thermal requirements are offset, there is still an increase in net
emissions in the area of the power plant. A prolonged and difficult
permitting process is the result.
The Company has begun to develop several projects in the 3 to 50
megawatt size range with emphasis on "inside the fence" applications.
Although natural gas has proven to be a superior and economical fuel choice
for many sites, the Company also intends to emphasize projects which can
utilize alternative and/or renewable fuels, since such projects not only
serve the interests of the public from an environmental and ecological
standpoint but also have the greatest potential for earnings when fuel
costs are lowest. In addition to potential within the United States, there
are substantial opportunities overseas for such projects, especially in
Latin America and Asia. The Company believes that dramatic energy
shortages, combined with national policies to privatize power production in
many developing countries, are creating an increasing potential for U.S.
companies in the independent power industry. In addition to international
agencies such as the World Bank and the Inter-American Development Bank,
there are a growing number of private institutional lenders who provide
project financing for such developments. The Company has commenced an
effort to create consortiums with both foreign companies and other U.S.
companies to pursue this market since the Company does not presently have
the financial resources or personnel to pursue such projects by itself.
For example, in Panama, the Company is working with a large Panamanian
financial group (the host country partner), and has commenced discussions
with a large foreign manufacturer of diesel engines and an American
shipyard with the purpose of creating a consortium to offer barge mounted
power plants in Panama and other Central American countries. (See also
"Other Potential Projects for the Company.") Similarly, there are numerous
opportunities in India which have been brought to the Company, and for
which the Company has held discussions with a large Indian industrial firm
(host country partner), with the international subsidiary of a major
electric utility company and with a large U.S. manufacturer of gas
turbines. In all cases, the Company would act as a consortium manager on
behalf of the host country partner.
COGENERATION AND INDEPENDENT POWER PRODUCTION
Cogeneration is the process of producing two or more energy forms
(typically electricity and heat) simultaneously from the same fuel source.
In order to encourage the conservation of natural resources such as fossil
fuels and to foster development of non-fossil fuel energy sources, the
federal government enacted PURPA, which mandated that all state public
utility commissions require public electric utility companies to cooperate
with privately owned cogeneration facilities, both by purchasing
electricity from such facilities at the utility company's "avoided cost"
(i.e., the utility company's incremental cost for generating such
electricity itself) and by providing standby power to such privately owned
facilities.
When electricity is produced, whether in a small cogeneration facility
or in a large central utility power plant, the energy efficiency of the
fuel used (the electrical output expressed in BTUs divided by the amount of
BTU input to the engines) does not exceed 35%. The remaining 65% of
available energy efficiency from the fuel is waste heat, either expelled
from the exhaust or removed from the engine's jacket water by radiators. By
recovering substantial portions of this otherwise wasted heat, and by
converting this heat into useful thermal purposes, the fuel efficiency of a
cogeneration facility can approach 75%. This converted waste heat replaces
heat that would otherwise have to be made using yet another fuel. Central
utility power plants have the ability to recover such heat, but the long
distances of such plants from customers who could utilize thermal energy
makes recovery and transport impractical.
In March 1995 the Federal Energy Regulatory Commission ("FERC") stated
that "retail wheeling" should be federally mandated and commenced
promulgating regulations to effect the process, setting the stage for a
total deregulation of the utility industry. Retail wheeling is the process
under which consumers of electricity may choose any electric producer, and
the local electric utility company must deliver (i.e., "wheel") the power
purchased elsewhere to that consumer through the utility company's
transmission lines. On April 25, 1996 FERC promulgated a regulation which
orders all electric utility companies to open their transmission lines to
independent power producers thus allowing wholesale purchase of power by
the utilities from distant independent producers. While the federal
regulation does not mandate that the transmission lines be opened for
direct sale of power by independent producers to retail end users, FERC is
expected to phase in such regulations in the future. Meanwhile, individual
state public utility commissions are free to promulgate regulations to
allow direct intra-state retail wheeling from independent producers to end-
users and several states have already commenced such procedures. See
"Business -- Government Regulation."
CURRENT OPERATIONS AND ON-GOING PROJECTS
Steamboat Geothermal Power Plants. The Company has signed an agreement
to form Steamboat LLC, a limited liability company which will acquire two
geothermal power plants, referred to as the Steamboat Facilities, in
Steamboat Hills, Nevada. Electricity is produced in these geothermal
plants through the use of heat in the form of hot water from the earth.
The electricity is produced through a "binary system" in which geothermal
hot water is circulated in one closed loop and, in another closed loop,
inert gas is compressed and heated. The compressed inert gas drives
turbines to generate the electricity. The geothermal water is reinjected
into the earth to be re-heated again through the earth's sub strata magma
formation. Because there are virtually no atmospheric emissions or
pollutants in the process, because the natural resource (water) is
constantly returned to the earth to avoid depletion of the underground
aquifer water table, and because the heat source is the earth's natural
magma layer, geothermal power is considered one of the most environmentally
sound methods of producing electricity. However, it can only be produced
in locations where specific geological formations exist.
Steamboat LLC will acquire the Steamboat Facilities from Far West
Electric Energy Fund L.P. ("FWEEF") and I-A Enterprises subject to a
mortgage (the "Mortgage") in favor of an institutional lender and certain
net revenue or royalty interests in steam extraction rights. Far West
Capital is the general partner and a limited partner in FWEEF. The Company
will obtain a 50% interest in Steamboat LLC by contributing to Steamboat
LLC the $1,575,000 cash purchase price (less $50,000 down payment
previously paid by the Company) for the Steamboat Facilities. Far West
Capital will own the other 50%. The Mortgage, on which the last quarterly
principal payment was made on July 20, 1996, will have a face value of
$4,196,000 at September 15, 1996 net of an escrowed reserve, and will be
acquired by the Company for $2,407,000 and contributed to Steamboat LLC.
While the Mortgage is in technical default, the holder of the Mortgage has
waived its rights and has negotiated with the Company the payment for the
Mortgage. An additional $1,000,000 in cash will be contributed by the
Company to Steamboat LLC to allow it to acquire certain of the royalty
interests (leaving outstanding only a royalty of 10% of power revenues of
the Steamboat Facilities) and to fund certain improvements to the Steamboat
Facilities. Negotiations with the royalty owners will begin during the
beginning of August, but agreements have not yet been reached. Far West
Capital has a 5.14% ownership interest in FWEEF and is contributing to
Steamboat LLC the debt owed to it by FWEEF. Far West Capital will not
receive any portion of the purchase price paid by the Company. Before
sharing net income from Steamboat LLC with Far West Capital, the Company
will have a priority income distribution from the project of $1,800,000 per
year, with income above this priority amount to be divided equally between
the Company and Far West Capital. The Company and Far West Capital will
co-manage the project. Far West Capital was established in 1983 and has
been a developer and operator of cogeneration and independent power
projects, principally hydroelectric and geothermal, in the western United
States and is the Company's current partner in LIPA. The two Steamboat
geothermal plants were built in 1986 and 1988, respectively, by Far West
Capital; A substantial portion of the net proceeds of the Primary Offering
and the Private Placement will be used for this acquisition, which will
generate immediate cash flow for the Company, thereby allowing it to pursue
and launch additional projects.
The Steamboat Facilities are currently managed by the professional
operations staff of SB Geo, Inc. The principals of Far West Capital own the
majority interest in SB Geo, Inc. After the Company has purchased its
equity interest in Steamboat LLC, SB Geo, Inc. will continue to manage the
day-to-day operations of the Steamboat Facilities and a joint management
committee, composed of representatives of the Company and Far West Capital,
will determine and resolve the significant management issues. Charges by SB
Geo, Inc. for services rendered will be negotiated at arms length, and may
not exceed charges for similar services which could be obtained from other
sources.
The two geothermal plants produce 15 megawatts of electric power which
is sold under two power purchase agreements to Sierra. The plants have
operated at 99% capacity since inception. The current power purchase
agreements have price adjustments in December 1996 for Steamboat 1 and in
December 1998 for Steamboat 1-A, which require Sierra to purchase and
Steamboat LLC to provide electricity at Sierra's then-prevailing short-term
avoided cost. The Company and its partners believe that the power purchase
agreements, with the price adjustments, will be at an acceptable price to
the Company. In addition, if Sierra were to consent to releasing the
Company from the existing power purchase agreements, the Company would be
free to sell the power elsewhere, as permitted under new retail wheeling
regulations proposed by FERC. Despite these retail wheeling regulations,
Sierra remains obligated to buy power from Steamboat LLC. However, Sierra
has indicated a willingness to release Steamboat LLC from the power
purchase agreements, provided that Steamboat LLC finds a market for the
output of the Steamboat Facilities outside of Sierra's territory.
There are currently five geothermal power projects operating in
Steamboat Hills, Nevada, totalling approximately 62 megawatts of output.
In addition to the 15 megawatt Steamboat 1 and 1-A projects which came on
line in 1986 and 1988, respectively, the 35 megawatt Steamboat 2 and 3
projects were developed and built by Far West Capital in 1992 and remain
owned by Far West Capital. In addition, Caithness Power, Inc. brought a 12
megawatt project on line in 1995. There is currently a total of
approximately 170 megawatts of geothermal power being produced in Nevada
with production from the Steamboat Hills area accounting for approximately
35%.
Plymouth State College, New Hampshire. In 1994 the Company, through its
subsidiary, Plymouth Envirosystems, Inc., acquired a 50% interest in
Plymouth Cogeneration which owns and operates a cogeneration plant which
produces 2.5 megawatts of electricity and 25 million BTUs for heat at
Plymouth State College, in Plymouth, New Hampshire. The facility provides
100% of the electrical and heating requirements for the campus, which is a
part of the University of New Hampshire system, under a twenty year
contract. The project, which cost $7 million to construct, is comprised of
a combination of diesel engine-generators, heat recovery and supplemental
boilers, and the complete civil works tying all campus buildings into a
single heating loop. The project was financed prior to the Company's
acquisition of a 50% interest through $5,500,000 in State of New Hampshire
tax exempt revenue bonds and $1,500,000 in equity. The Company paid a total
of $636,000 in cash and 11,400 shares of Common Stock for its 50% interest.
The Company's partners in Plymouth Cogeneration are Central Hudson
Cogeneration, Inc., a wholly owned subsidiary of Central Hudson Electric
Company of New York, and Independent Energy Finance Corporation of
Connecticut ("IEFC"). The project was completed in November 1994 and put
into full commercial service in January 1995. The plant is currently
operating at 98% capacity. IEC Plymouth, Inc. ("IEC Plymouth"),a wholly-
owned subsidiary of IEFC, runs the day-to-day operations of the plant and
the management decisions are resolved by a management committee which is
composed of representatives of the Company, IEFC and Central Hudson
Cogeneration, Inc.
The State of New Hampshire has initiated a study to determine the
feasibility of expanding the existing facility to 10 megawatts to wheel
electric power to two other state college campuses. Additionally, Plymouth
Cogeneration is bidding to sell 5 megawatts of expanded power to the local
electric cooperative. Under New Hampshire law, retail wheeling is
permitted to three customers from a single "inside-the-fence" cogeneration
plant. Also, plans are currently being developed by Plymouth Cogeneration
to install special fuel treatment equipment which will allow the existing
engines to burn less costly and more efficient fuels. Fuel cost savings
would be shared equally between the college and the partnership. There can
be no assurance that such fuel treatment equipment will be installed or
that such fuel cost savings will be realized.
Lehi Cogeneration Project. In January 1994, the Company, through its
subsidiary, Lehi Envirosystems, Inc., ("LEI") purchased a 50% equity
interest in LIPA, which owns a 17 megawatt cogeneration facility in Lehi,
Utah and the underlying real estate, hardware and permits to operate.
Although the facility has been dormant since 1990, work is underway to
commence operations at the facility and the Company believes it is capable
of future operations. The Company estimates that it will cost $30,000 to
commence operations. The successful operation of the plant also requires
the negotiation of an agreement with a utility company to purchase the
electrical output. LIPA has been negotiating with the municipal authority
and the town of Lehi. No agreements are yet in place and there can be no
assurance that the Company will be able to successfully negotiate any
contracts. The Company and its partners, who own the remaining 50% of
LIPA, share on a pro-rata basis the ownership, retrofitting costs, annual
expenses, and revenues associated with the project. The Company financed
its acquisition cost of $1,225,000 for this interest through the issuance
of Convertible Debentures. In addition to payment of interest, the Company
is obligated to pay the holders of the Convertible Debentures a pro rata
portion of 50% of LIPA's share of the net revenue (net of funds required
for the payment of interest) resulting from LIPA's energy sales. See
"Description of Securities -- Convertible Debentures." The Company's
partners in the Lehi project are Far West Capital and ReComp, Inc.
("ReComp"), a Utah company with interests in waste-to-energy projects. The
Lehi facility is managed by a management committee which is composed of
representatives of Far West Capital, ReComp and the Company.
Lehi originally had three engine generators totaling 17 megawatts. One
unit which would have required extensive and costly repairs was sold in
December 1995, resulting in a gain of approximately $236,000. The two
remaining units totaling 10 megawatts are currently being prepared to start
commissioning in order to allow them to be put in operation during the
third quarter. Concurrently with readying these engines for operational
status, the LIPA partnership has received an offer to purchase these
engines and is evaluating this option. If a satisfactory sales price is
obtained, LIPA would thereafter begin plans to acquire and install a 35
megawatt gas turbine, which would have substantially greater efficiency.
If the engines were sold, operations would be delayed from the third
quarter of the current fiscal year until the second quarter of the next
fiscal year. The proceeds from the sale of these engines would provide
sufficient operating capital for the partnership until the larger gas
turbine was operational. Financing for the gas turbine, if this option is
selected, would be provided by the engine manufacturer.
Shortly after the Company's interest in the project was purchased,
Micron Technologies, Inc. ("Micron") announced it intended to build a $1.5
billion manufacturing facility in the town of Lehi, on property one mile
from the Lehi Cogeneration Facility. The town announced that it would
supply power to Micron through its municipal power authority. The town
does not have a power generation capability, but acquires power through the
Utah Association of Municipal Power Systems ("UAMPS"). Over one year was
spent in discussions with Micron, the town of Lehi, and UAMPS as to the
feasibility of increasing the capacity from the facility to serve the 35
megawatt requirements of Micron. As a result of these discussions, the
Company and its partners decided to sell one seven megawatt engine which
was non-functional in order to make room in the plant for a larger and more
efficient engine. It was also decided during this period that it was
premature to put the plant in operation before its full intended
utilization was determined. During this prolonged period, however, it was
neither advisable nor practical, for business and political reasons, to
negotiate with other potential power purchasers. In April 1995, Micron
announced cutbacks and stopped all construction on the Lehi facility.
The Lehi cogeneration plant was originally built in 1987 at a cost in
excess of $20,000,000. The plant operated successfully as a small power
production facility under "qualifying facility" status granted by FERC from
date of commissioning until 1990, selling its electric output to Utah Power
and Light and its recovered heat to a large adjacent greenhouse operation.
In 1990 the original developer, which suffered financial problems not
associated with this project, filed for protection under the bankruptcy
laws. The Lehi plant, along with a number of other assets, were sold by the
bankruptcy court in April 1993. The Lehi plant was purchased by a Salt Lake
City group, Lehi Co-Gen Associates, L.C., with the intention of either
reselling the component equipment contained within the plant or re-
establishing the cogeneration operation in partnership with interested
parties. Extensive engineering and economic due diligence studies were
conducted on the project by Southern Electric International, a subsidiary
of the Southern Company, one of the largest electric utility companies in
the United States, in conjunction with the Company, resulting in a decision
to restore the plant to full operational status. The studies estimated that
the salvage value of the hardware and parts alone should be in excess of
$3,000,000. LIPA purchased the facility from Lehi Co-Gen Associates, L.C.
in early 1994 for approximately $292,000.
The Lehi plant uses dual fuel configuration reciprocating engines.
These engines can run on either diesel fuel or natural gas, or a
combination thereof. The plant can be operated on 5% diesel fuel and 95%
natural gas, for optimum environmental and economic efficiency. The plant
is totally self-contained, with state-of-the-art switchgear and
computerized electronic controls. Full environmental assessments have been
conducted which indicate that no environmental hazards are present or
likely to occur. One of the most important features of the plant is its
extant Air Quality Permit, allowing the plant to operate with emissions of
up to 300 tons of nitrous oxide ("NOX") annually. With expanded and
upgraded hardware, this permit will allow the plant to increase operational
output substantially.
Shopping Malls. The Company has entered into a joint development
agreement with Cowen to develop, build and operate cogeneration plants in
the United States. Cowen is a financier of real estate projects. Under the
joint development agreement, Cowen will provide the customers and the
cogeneration project financing. Cowen will retain 60% of the profit
interests in the projects and the Company will retain 40%. The Company's
responsibility is to provide the technical expertise, design, equipment
selection and installation services. The joint venture is negotiating with
a major real estate company which owns and operates approximately 200
shopping malls throughout the United States. Three of the malls have been
considered for initial test sites and engineering has begun for the first
site. The Company is carrying the cost of preliminary engineering which
will be reimbursed from the project if it is undertaken. The Company and
its joint development partner have also begun discussions with a second
major owner and operator of over 40 malls and has begun feasibility studies
to determine the best initial sites. The targeted shopping malls are all
enclosed structures with an average interior space of 500,000 square feet.
Such malls have substantial electric demand, with 18 hours of daily power
plant operation, seven days per week, and with almost year-round air
conditioning requirements without regard to geographic location. The
average cogeneration system configuration for such malls would consist of 4
megawatts in electric generation, with recovered heat utilized for
absorption air conditioning (in which the recovered heat causes inert gases
to expand and compress to produce chilled air, as opposed to conventional
compression powered by electric motors.) The systems would also require up
to 1000 tons of supplemental non-electric air conditioning. The
supplemental non-electric air conditioning, in most cases, would be
provided by engine driven chillers ("EDC"). An EDC produces chilled water
by utilizing conventional compressors, but powering the compressors with
natural gas fueled engines as opposed to electric motors. The EDC units
would be manufactured by sub-contractors from designs developed and owned
by the Company. While initial plans have been drawn and reviewed with the
mall owners, there can be no assurance that the joint effort with Cowen
will lead to any contracts being signed with mall owners or cogeneration
systems being installed.
Under the plan discussed with the mall owners, the joint development
company would engineer, build and operate the cogeneration facilities, with
financing arranged by the Company's joint development partner. The joint
development company and the mall owner would share energy savings for a
fifteen year period, after which time the cogeneration plant ownership
would revert to the mall owners. The proposed agreement calls for at least
ten such installations. The mall owner has indicated, however, that
installations of cogeneration systems would be contemplated at all malls
where certain basic economic criteria for cogeneration exists. The Company
and its joint development partners believe that approximately one-third of
the malls can meet the economic criteria of a minimum of twenty-five
percent annual energy savings. Since all of the malls are of similar
configuration and have similar energy patterns, there would be an economy
of scale: project design could be replicated at multiple locations with
only modest configuration changes. A contract for the first mall is
expected to be signed in the third fiscal quarter of 1996 with construction
commencing shortly thereafter, although there can be no assurance that this
will occur.
U.S. Virgin Islands. The Company has signed agreement with and is
currently in final contract preparation with Bluebeard Holding Company to
build a 3 megawatt cogeneration project for Bluebeard's Castle, a major
resort in St. Thomas, U.S. Virgin Islands. Utility services for the
Islands, like many other areas of the Caribbean, were severely impacted
during the 1995 hurricane season, and the Company believes that many public
and private buildings are presently considering "inside-the-fence"
cogeneration facilities in order to assure reliability of electric and hot
water services as well as to reduce present high costs of utility provided
services.
It is contemplated that the Company and the resort owner will form a
limited liability entity, with equal equity ownership, which will own and
operate the cogeneration facility, selling discounted power to the hotel
and adjacent commercial buildings. It is also contemplated that the
cogeneration facility will include a 120 thousand gallon per day reverse
osmosis water purification system to convert sea water to potable water.
Supplies of fresh water, which are always in short supply in the islands,
were even further reduced as a result of the storms. It is contemplated
that the resort's holding company will arrange twenty-percent equity for
the project, with the balance being financed through local banks. The
Company will provide design, equipment selection and installation services
for the project. The holding company is also in the planning stage for a
large, new resort, apartment and shopping complex on the eastern end of St.
Thomas for which a cogeneration facility is planned. It is contemplated
that the limited liability entity to be formed by the Company and Bluebeard
Holding Company will own and operate this future facility and will seek
additional resort facilities for cogeneration throughout the Virgin Islands
and other islands in the Caribbean. While final contracts are in
preparation, the project has already begun with the receipt of initial
funding from Bluebeard and the scheduled installation of the first of six
engine generators to be used in the project.
Waste Motor Oil Project. In November 1992, the Company was engaged to
design and build a three megawatt cogeneration plant in Virginia for a
private energy investment fund under a turn-key contract for $1,600,000.
The plant was built and put into commercial service in July 1993, eight
months after commencement of the project. The private energy fund had
signed a long term contract with Virginia Electric Power Company ("VEPCO")
to provide 3 megawatts of demand capacity to the VEPCO grid, and contracted
with the Company to provide an operational system both rapidly and cost
effectively. The Company created a distinct design utilizing rebuilt, very
low RPM internal combustion engines, which have the capability of utilizing
waste motor oil as fuel. The use of waste motor oil not only reduces the
fuel costs for the project, but also solves a local environmental problem
of disposing of over 800,000 gallons annually. The Company will employ the
techniques developed on this job in future projects. The Company has no
ongoing equity interest in this project.
OTHER POTENTIAL PROJECTS FOR THE COMPANY
ALTHOUGH PRELIMINARY EFFORTS HAVE BEEN UNDERTAKEN IN CONNECTION WITH THE
FOLLOWING PROJECTS, THERE IS NO ASSURANCE THAT ANY OF THEM WILL BE
DEVELOPED.
India. The Company, through USE International, LLC, has proposed a 52
megawatt combined cycle cogeneration project for a major steel mill in
Raipur, M.P., India. The project would utilize naphtha as a fuel source to
power a General Electric 40 megawatt gas turbine which will also provide
sufficient steam recovery to power a 12 megawatt steam turbine. The use of
recovered heat in the form of steam to power a second form of electric
production is known as a "combined cycle system." The steel mill intends to
purchase the system on a turnkey basis, and the Company would act as
project manager and coordinator being compensated on a percentage-of-cost
basis. The steel mill is presently awaiting funding from its financial
institutions in order to proceed. Inside-the-fence projects of this size
are growing in popularity in India because no central or local government
permissions are required and financing is easier since it is based entirely
on the credit-worthiness of the customer. USE International, LLC is 50%-
owned by the Company and the remaining 50% is owned by Indus, Inc. Ravi
Singh, a consultant to the Company, is the President and principal
shareholder of Indus, Inc.
Panama. The Company has formed a company, Panavisa Envirosystems, S.A.,
in order to qualify and bid on several potential power projects in Panama.
Panavisa, a wholly-owned subsidiary of the Company, is the corporate
vehicle which would be the joint venture partner with others when specific
projects are developed. The Company is working with a large Panamanian
financial group to form a consortium to design, build, and operate barge-
mounted power plants for Instituto de Recursos Hidraulicos y
Electrificacion, the Panamanian national electric company, which would
purchase electricity from the consortium under a negotiated long-term
contract. The Company's role would be to act as consortium manager.
Percentages of ownership among the various potential consortium partners
have not yet been negotiated. The barge-mounted power plant design would
utilize very low speed diesel engines capable of burning Orimulsion, an
emulsified tar recovered from reserves under the Orinoco River in
Venezuela. The Company would be working with Bitor USA, a wholly owned
subsidiary of Petrolanos Venezuela, which holds the patents on the
Orimulsion process. Specific opportunities for such power plants presently
exist in Panama as well as other Central American countries, which are
facing severe power shortages as a result of aging thermal power plants and
reductions in available hydroelectricity. Advantages of barge mounted
systems are quick delivery and total fabrication in the United States.
Israel. The Company submitted bids to a kibbutz to provide a three
megawatt cogeneration facility with 800 tons of absorption cooling using
Israeli technology for the absorbers. The Company was advised that it was
low bidder. The next procedure requires the kibbutz authority to authorize
a purchase contract and to arrange financing. If the contract is
ultimately awarded, as management believes it will be, the Company will do
final design work, acquire all hardware, have the system fabricated in the
United States by qualified sub-contractors, ship the entire system in four
containers to Israel, and send engineers to oversee installation by local
mechanical and electrical contractors. The Company is working in
association with Coolingtec Ltd., of Israel, which is the patent holder and
manufacturer of a new design absorption chilling unit, which is capable of
delivering substantially lower temperatures than other absorbers currently
on the market. Absorbtion chillers utilize recovered heat from the
cogeneration engines as their power source.
Native American Reservation. The Company is in discussions with an East
Coast Native American nation to assist it in developing an infrastructure
industry on its reservation involving independent power production. The
Company has recommended, and the Tribal Council has preliminarily approved,
a plan whereby the Company and the Native American nation would form a
joint development company to build, own and operate an independent power
plant of from 50 to 100 megawatts on the reservation. Output from the plant
would be sold to the grid and to neighboring municipalities.
U.S. Plastics Manufacturer. The Company has been asked to evaluate the
potential for an inside-the-fence cogeneration project of approximately 5
megawatts for a large U.S. manufacturer of plastic products in Illinois.
Recovered heat from the engine generators would be used in the plastics
extrusion operation. If the project proves economically feasible, the
Company would design and build the facility on a turn-key basis for the
plastics manufacturer.
Locating New Projects. The executives of the Company communicate
frequently with numerous individuals and companies in the industry. Most
of the projects in which the Company is now involved have come from these
contacts. The Company has established several informal and non-exclusive
relationships with other cogeneration developers and with non-regulated
subsidiaries of utility companies to pursue other business opportunities in
areas of interest to the Company. In certain special markets that the
Company seeks to develop, the Company identifies specific potential
customers and makes direct approaches to those customers.
COMPETITION
There are approximately 150 companies nationwide currently involved with
independent power plants. The Company currently occupies a relatively
minor position in the industry. The independent power industry is basically
divided into three areas: (1) very large power plants (over 50 megawatts);
(2) standard power plants (under 50 megawatts); and (3) "inside-the-fence"
plants, which can be of varying sizes, and so called because they are built
especially to serve the electrical and thermal needs of a specific building
or group of buildings rather than to sell the power to the utility grid and
are located literally "inside-the-fence" of the end user's property. The
very large plants are generally owned and operated by non-regulated
subsidiaries of public utility companies, which have been established by
the utility companies to participate in the IPP industry. Presently, there
are about thirty such companies operating. Because the staffing and
corporate philosophy of these companies emanates from the parent public
utilities, these operations are generally geared to the largest sized
plants. While some of these non-regulated utility subsidiaries have been
highly successful in the development of larger plants, they are limited by
federal law to 50% of project ownership. In many instances, they make ideal
partners for projects and the Company intends to work with many of these
companies when it locates specific projects fitting the non-regulated
subsidiaries' parameters.
In the category of standard sized independent power plants (under 50
megawatts), the vast majority of the developers so involved are either
subsidiaries of other non-utility industrial companies, small privately
owned partnerships, or energy funds established to invest in such projects.
"Inside-the-fence" plants are generally owned and operated by the end user,
although a number of such plants are built, owned and operated for the end
user by third parties.
EMPLOYEES
At present the Company has three full time employees and five contract
staff members. The Company retains outside contract staff as required for
engineering, fabrication, construction and maintenance services. Management
believes present staffing is adequate, although it expects that the number
of full time employees will expand over the next year as new projects come
on stream. Partnership projects such as Lehi, Plymouth, and the Steamboat
Facilities have their own professional staffs. These staffs report to a
Management Group in each of the individual partnerships, and a senior
Company officer is an active member of each of the Management Groups.
DESCRIPTION OF PROPERTY
The Lehi project is owned by LIPA, a Utah limited liability company. The
Company owns 50% of LIPA. The property includes two acres of land in Lehi,
Utah and all buildings, engine/generators, ancillary generating equipment,
heat recovery equipment, switchgear and controls, storage tanks, spare
parts, tools, and permits to operate a cogeneration facility with emissions
of up to 300 tons of NOX annually. All costs associated with LIPA and the
operation of the plants, and all income derived therefrom, is divided pro-
rata among the Company and the owners of the remaining 50% of LIPA. Other
than the Company's obligations to its debenture holders and bridge lenders,
there are no other encumbrances or debt associated with LIPA or the Lehi
cogeneration project. Management believes the plant is adequately covered
by insurance.
The Plymouth State College Cogeneration project is owned by Plymouth
Cogeneration, a Delaware partnership. The Company owns 50% of Plymouth
Cogeneration, which, in turn, owns all the plant and equipment associated
with the cogeneration project including the diesel engines, generators,
three auxiliary boilers, switchgear, controls and piping. The state
university system has two contracts with Plymouth Cogeneration: (1) a 20
year lease on the above equipment, and (2) a 20 year management contract.
Both contracts have escalation clauses. Management believes the equipment
is adequately covered by insurance.
The Company leases, on a year to year basis, 1,100 square feet of office
space in a commercial office building in West Palm Beach, Florida where its
executive offices are located. Contract employees work out of their own
offices. Management believes that the current space will remain adequate
through the current lease period, which expires in September 1997.
GOVERNMENT REGULATION
Under present federal law, the Company is not and will not be subject to
regulation as a holding company under PUHCA as long as each power plant in
which it has an interest is a QF under PURPA or are subject to another
exemption. In order to be a QF, a facility must be not more than 50% owned
by an electric utility or electric utility holding company. A QF that is a
cogeneration facility must produce not only electricity but also useful
thermal energy for use in an industrial or commercial process or heating or
cooling applications in certain proportions to the facility's total energy
output and must meet certain energy efficiency standards. Therefore, loss
of a thermal energy customer could jeopardize a cogeneration facility's QF
status. If one of the power plants in which the Company has an interest
were to lose its QF status and not receive another PUHCA exemption, the
project subsidiary or partnership in which the Company has an interest that
owns or leases that plant could become a public utility company, which
could subject the Company to various federal, state and local laws,
including rate regulation. In addition, loss of QF status could allow the
power purchaser to cease taking and paying for electricity or to seek
refunds of past amounts paid and thus could cause the loss of some or all
contract revenues or otherwise impair the value of a project and could
trigger defaults under provisions of the applicable project contracts and
financing agreements. There can be no assurance that if a power purchaser
ceased taking and paying for electricity or sought to obtain refunds of
past amounts paid the costs incurred in connection with the project could
be recovered through sales to other purchasers. A geothermal plant will be
a QF if it meets PURPA's ownership requirements and certain other
standards. Each of Steamboat 1 and Steamboat 1-A meet such ownership
requirements and standards and is therefore a QF. Also, IPP's which are
fossil fuel driven, and which do not sell electricity to a regulated public
electric utility, but rather sell electricity to private customers, do not
have the same risk if QF status is lost for any reason. A regulated public
electric company purchases electricity from an IPP with QF status only
because of that QF status. Other commercial customers of an IPP purchase
electricity for a variety of other reasons unrelated to QF status.
Additionally, under new rules proposed by FERC in order to achieve
deregulation of the power industry, requirements for attaining and
maintaining QF status are being relaxed and the requirement of QF status to
achieve certain benefits will ultimately be withdrawn completely as a
requirement. The ultimate effect will be to allow IPP's greater
flexibility in choosing location and a larger potential customer base.
Presently IPP's who sell to municipal power authorities or to a power pool
are considered "Exempted Wholesale Generators" and do not require QF
status.
The construction and operation of power generation facilities require
numerous permits, approvals and certificates from appropriate federal,
state and local governmental agencies, as well as compliance with
environmental protection legislation and other regulations. While the
Company believes that the projects in which it is involved have the
requisite approvals for existing operations and are operated in accordance
with applicable laws, they remain subject to a varied and complex body of
laws and regulations that both public officials and private individuals may
seek to enforce. There can be no assurance that new or existing laws and
regulations which would have a materially adverse affect would not be
adopted or revised, nor can there be any assurance that the Company will be
able to obtain all necessary licenses, permits, approvals and certificates
for proposed projects or that completed facilities will comply with all
applicable permit conditions, statutes or regulations. In addition,
regulatory compliance for the construction of new facilities is a costly
and time consuming process, and intricate and changing environmental and
other regulatory requirements may necessitate substantial expenditures for
permitting and may create a significant risk of expensive delays or
significant loss of value in a project if the project is unable to function
as planned due to changing requirements or local opposition.
LEGAL PROCEEDINGS
There are no legal proceedings currently pending or threatened against
the Company.
The owner of a farm adjacent to the LIPA facility in Lehi, Utah, has
sued LIPA for "nuisance, trespass, and negligence" alleging that in May
1995 diesel fuel from the power plant invaded the drainage ditch dividing
the two properties. The drainage ditch feeds a watering hole on the
farmer's property. The plaintiff's suit alleges that one bull died and
five calves were aborted as a result of petroleum toxosis from ingestion of
the fuel in the ditch and the watering hole. The suit, filed in Utah state
court on January 25, 1996, seeks damages "in excess of $20,000."
Depositions of both sides have been completed and discussions. Although
there was a spill of several hundred gallons of fuel on the LIPA property
in 1991, prior to ownership by either the Company or its partners, the 1991
spill was remediated. Prior to the Company's purchase of its interest in
the power plant in 1994, Phase I and Phase II Environmental Assessments
were conducted which did not identify any environmental problems. There is
no pathology evidence that the bull died of petroleum toxosis, or that the
calves were aborted as a result of petroleum toxosis in the mother cows.
No other cattle drinking from the same water hole appeared to be affected.
While neither the Company nor its partners believe the plaintiff has a
strong case, LIPA is exploring settlement options with the plaintiff which
would be less costly than the further extensive testing, expert analyses
and litigation.
MANAGEMENT
The directors and executive officers of the Company are presently as
follows:
Age Position(s)
--- -----------
Theodore Rosen 71 Chairman of the Board of Directors
Richard H. Nelson 56 President, Chief Executive Officer and
Director
Fred Knoll 40 Director
Ronald Moody 62 Director
Evan Evans 70 Director
Seymour J. Beder 69 Treasurer and Chief Financial Officer
At the conclusion of each of the Primary and Secondary Offerings, in
accordance with the terms of the Private Placement, Messrs. Knoll and Moody
will resign and two new directors, who will be designated by Enviro as the
holders of the 11% Preferred Stock (the "Designated Directors"), will be
elected by the remaining directors to fill the vacancies. Pursuant to the
terms of the 11% Preferred Stock, no action may be taken by the Board of
Directors without the approval of at least one of the Designated Directors.
Theodore Rosen. Mr. Rosen has been a Director of the Company and
Chairman of the Board of Directors since November 1993. Since June 1993,
Mr. Rosen has been Managing Director of Burnham Securities. He was Senior
Vice President of Oppenheimer & Co. from January 1991 to June 1993, and was
Vice President of Smith Barney & Co. from 1989 to 1991. Mr. Rosen also
currently serves as a director of Waterhouse Investors Cash Management Co.,
an investment management company engaged in management of money market
mutual funds. Mr. Rosen holds a BA degree from St. Lawrence University and
did graduate work at both Albany Law School and Columbia University School
of Business.
Richard H. Nelson. Mr. Nelson has been President, Chief Executive
Officer and Director of the Company since November 1993. Mr. Nelson has
been engaged in the power plant industry for more than twenty years and has
been involved with over 200 power projects throughout the world, 125 of
which have been cogeneration projects. In 1973, Mr. Nelson formed Sartex
Corp., which was merged into the Company, then called Cogenic Energy
Systems, Inc. ("Cogenic"), in 1981. Mr. Nelson served as president of
Cogenic until 1989. Cogenic filed for reorganization under Chapter 11 of
the Bankruptcy Code in 1989. From January 1989 until January 1991, Mr.
Nelson was president of Utility Systems Corp., a subsidiary of Cogenic
which was not party to the Chapter 11 filing. In January 1991 Mr. Nelson
formed USF where he served as president until November 1993. A Plan of
Reorganization was confirmed for Cogenic in March 1993, after which USF and
Cogenic merged, with Cogenic being the surviving corporation and changing
its name to U.S. Envirosystems, Inc. Mr. Nelson was Special Assistant to
the Director of the Peace Corps from 1961 to 1962; thereafter he served as
Military Aide to the Vice President of the United States from 1962 to 1963
and Assistant to the President of the United States from 1963 to 1967.
From 1967 to 1969, Mr. Nelson was Vice President of American International
Bank, and from 1969 to 1973 he was Vice President of Studebaker-Worthington
Corp. Mr. Nelson received his BA degree from Princeton University.
Ronald Moody. Mr. Moody has been a Director of the Company since January
1994. Mr. Moody entered the investment community in 1967 as a senior
partner of a Canadian investment house until 1976, and since that time has
been a private investor for his own account. After several years with the
Royal Bank of Canada, Mr. Moody joined the Montreal Trust Company in 1962
as a manager of pension fund and individual trust accounts. Mr. Moody
received his BA from the University of Western Ontario.
Fred Knoll. Mr. Knoll has been a Director of the Company since August
1994. During the last five years, Mr. Knoll has been chairman and CEO of
Knoll Capital Management, an investment and cash management firm, in New
York. Mr. Knoll is the Chairman of the Board of Thinking Tools and of
Lamar Signal Processing and a Director of Spradling Holdings, Raphael Glass
and the Columbus Fund. From 1989 until 1993, Mr. Knoll was Chairman of the
Board of Directors of C3/Telos Corporation, a computer systems company. Mr.
Knoll received his B.S. degree in Computer Sciences from M.I.T. and also a
B.S. degree in Management from the Sloan School at M.I.T. He received his
MBA from Columbia University.
Evan Evans. Mr. Evans has been a Director of the Company since August
1995. Since 1983 he has been chairman of Holvan Properties, Inc.
("Holvan"), a real estate developer, and was managing director of Easco
Marine, Ltd. from 1983 to 1988. Also, from 1985 to 1986 Mr. Evans was
general manager of Belgian Refining Corporation ("BRC"), pursuant to a
contract between BRC and Holvan. From 1981 to 1983 he was vice president
of Getty Trading and Transportation Company and president of its
subsidiary, Getty Trading International, Inc. From 1970 to 1981 Mr. Evans
was vice president and member of the board of directors of United Refining
Corp. He is currently on the board of directors of Holvan and BRC. Mr.
Evans received his BS degree in Mathematics from St. Lawrence University
and his BS in Civil Engineering from M.I.T.
Seymour J. Beder has been Secretary, Treasurer, Controller and Chief
Financial Officer of the Company since November 1993. From 1970 through
1980 he was Chief Financial Officer for Lynnwear Corporation, a textile
company, and from 1980 to September 1993, Mr. Beder was president of
Executive Timeshare, Inc., a provider of executive consulting talent. Mr.
Beder is a Certified Public Accountant, and a member of the New York State
Society of Certified Public Accountants and the American Institute of
Certified Public Accountants. Mr. Beder received his BA degree from City
College of New York.
In addition, the following persons, who are not officers or directors,
are affiliated with the operations of the Company as consultants:
Donald A. Warner. Mr. Warner has acted as director of development and a
consultant to the Company since 1993. For over 20 years, Mr. Warner has
been closely involved with the energy and environmental industries, and has
been consultant and attorney to numerous environmental and energy project
developments in both the public and private sector. The Company expects
Mr. Warner to work for the Company full-time after the completion of the
Primary Offering. Mr. Warner holds his BA degree from Rochester University
and his JD degree from Syracuse University. He also holds an LLM degree
from Washington University.
Patrick McGovern. Mr. McGovern has been a consultant to the Company
since 1993. From 1973 to 1981, Mr. McGovern was Engine Sales Manager for
Virginia Tractor Company (Caterpillar). From 1981 to 1984, he was Vice
President Engineering for the Company. From 1984 to present, he has been
president of Power Management Corp. Mr. McGovern holds both his BSEE and
MBA degrees from Louisiana State University.
Ravi Singh. Mr. Singh has been President of USE International, LLC, 50%
of which is owned by the Company, since 1995. Mr. Singh is president of
Indus LLC, a company he formed in 1994 to develop new investment
opportunities throughout southeast Asia and Oceania regions. From 1988
until 1994 he was a partner and Managing Director for International
Investment Banking at Cowen & Company. Prior to his time at Cowen &
Company, Mr. Singh had been affiliated with Coopers & Lybrand LLP with
advisory responsibilities for cross-border mergers and acquisitions,
notably in Japan. Mr. Singh was also affiliated with Komatsu Ltd. of Japan
where he was responsible for business development in India. Mr. Singh
received his BS in Engineering from the University of Delhi and his MBA
from Columbia University.
Nils A. Kindwall. Mr. Kindwall was Vice Chairman of Freeport McMoran,
Inc. from 1975 until his retirement in 1993. At Freeport McMoran, he was
principally responsible for developing and financing major natural resource
projects throughout the world. He has served on the National Advisory Board
of Chemical Bank, and is on the board of John Wiley & Sons, Inc. and Metall
Mining Corporation. Mr. Kindwall received his BA degree in Economics from
Princeton University and his MBA from Columbia University.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation includes provisions which
limit the liability of its Directors. As permitted by applicable
provisions of the Delaware General Corporation Law (the "Delaware Law"),
Directors will not be liable to the Company for monetary damages arising
from a breach of their fiduciary duty as Directors in certain
circumstances. This limitation does not affect liability for any breach of
a Director's duty to the Company or its stockholders (i) with respect to
approval by the Director of any transaction from which he or she derives an
improper personal benefit, (ii) with respect to acts or omissions involving
an absence of good faith, that the Director believes to be contrary to the
best interests of the Company or its stockholders, that involve intentional
misconduct or a knowing and culpable violation of law, that constitute an
unexpected pattern or inattention that amounts to an abdication of his or
her duty to the Company or its stockholders, or that show a reckless
disregard for duty to the Company or its stockholders in circumstances in
which he or she was, or should have been aware, in the ordinary course of
performing his or her duties, of a risk of a serious injury to the Company
or its stockholders, or (iii) based on transactions between the Company and
its Directors or another corporation with interrelated Directors or on
improper distributions, loans or guarantees under applicable sections of
Delaware Law. This limitation of Directors' liability also does not affect
the availability of equitable remedies, such as injunctive relief or
rescission.
The Company's Bylaws obligate the Company to indemnify its directors and
officers to the full extent permitted by Delaware Law, including
circumstances in which indemnification is otherwise discretionary under
Delaware Law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company, pursuant to the foregoing provisions or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
EXECUTIVE COMPENSATION
The following table shows the total compensation paid by the Company
during the fiscal years ended January 31, 1996, 1995 and 1994 to Mr.
Richard H. Nelson, the Company's President and Chief Executive Officer.
There were no other executives of the Company who received total
compensation in excess of $100,000 during any of such years.
<TABLE>
LONG TERM
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION
--------------------------- ----------- ------ ----- ------------
<S> <C> <C> <C> <C>
Richard H. Nelson, 1997 $37,500(1)
President and Chief (to April 30, 1996)
Executive Officer
1996 150,000(2) -- --
1995 $149,850 -- --
1994 $24,500 -- --
</TABLE>
(1) This entire amount has been deferred and will be paid by the
Company when working capital is adequate, which shall be
determined by the Board of Directors.
(2) Includes $125,500 at January 31, 1996, which has been deferred
and will be paid by the Company when working capital is adequate,
which shall be determined by the Board of Directors.
Compensation of Directors. Directors are not compensated for attendance
at meetings of the Board, although certain travel expenses relating to
attending meetings are reimbursed.
Employment Contracts. Mr. Nelson has an employment contract with the
Company to serve as its Chief Executive Officer for a term of five years
from the date of this Prospectus. Mr. Nelson's contract provides for an
annual salary of $150,000 plus normal benefits. Mr. Nelson has volunteered
to defer 50% of this salary until the Company's cash flow is, in the
opinion of the Board of Directors, sufficient. Under the terms of Mr.
Nelson's employment agreement, he may not disclose any confidential
information pertaining to the Company nor compete with the Company during
the term of his employment with the Company. Mr. Nelson works for the
Company full-time. As of September 15, 1996, the amount of deferred
compensation owed to Mr. Nelson will be $219,250.
Mr. Rosen has an employment contract with the Company to serve as its
Chairman of the Board for a term of five years from the date of this
Prospectus. Mr. Rosen's contract commenced December 1, 1993 and allows an
annual salary of $60,000 which is being deferred until the Company's cash
flow is, in the opinion of the Board of Directors, sufficient. Mr. Rosen
devotes a minimum of 40 hours per week to the Company. Under the terms of
Mr. Rosen's employment agreement, Mr. Rosen agrees that he will not
disclose any confidential information pertaining to the Company nor compete
with the Company during the term of his employment with the Company. As of
September 15, 1996, the amount of deferred compensation owed to Mr. Rosen
will be $162,500.
Stock Options. The Board of Directors has reserved 400,000 shares of the
Company's Common Stock for the issuance of non-qualified options to
existing and future directors, executives and employees of the Company.
CERTAIN TRANSACTIONS
The Plan of Reorganization of Cogenic Energy Systems, Inc. (the "Plan")
was originally filed and financed by Richard Nelson, who was then the sole
shareholder and sole director of USF. The Plan was confirmed by the
bankruptcy court in March 1993. Under the Plan, 100,000 shares of the
reorganized debtor were issued to Richard Nelson as the proponent and
financier of the Plan. An additional 125,000 shares (the "merger shares")
were issued to USF upon consummation of the Plan and upon the merger of
the reorganized debtor with USF. These merger shares were distributed
to individuals and companies who purchased shares of USF for purposes of
providing USF with the financing to acquire the Company and to allow the
Company to continue as the surviving corporation.
Messrs. Nelson, Theodore Rosen and Ronald Moody, President, Chairman of
the Board and Director, respectively, are participants in the Plymouth Loan
(having loaned $25,000, $25,000 and $75,000, respectively), which bears
interest at the rate of 2.5% per annum above the prime rate, and in which
the lenders, other than Messrs. Nelson and Rosen, received five-year
warrants to purchase 120 shares of the Company's Common Stock for each
$1,000 loaned, which warrants are exercisable at $5.00 per share. Messrs.
Nelson, Rosen, and Moody will benefit by the payment to them from the net
proceeds of the Primary Offering and the Private Placement of $30,376,
$30,284 and $90,814, respectively (including accrued interest to September
15, 1996) in connection with the repayment of the Plymouth Loan. Mr. Rosen
is also a holder of $125,000 in principal amount of the Company's
Convertible Debentures, which has accrued interest, adjusted to September
15, 1996, of $26,200 which will be repaid with the proceeds of the Primary
Offering. As part of the Debenture Conversion, the conversion rate of the
Convertible Debentures which remain outstanding after the Debenture
Conversion, including Mr. Rosen's Convertible Debentures, will be reduced
to $8.00 per share from the present $16.00 per share and the interest rate
will be reduced to 9% from the present 18%. See "Use of Proceeds" and
"Description of Securities -- Convertible Debentures."
In June 1995, the Company issued 57,500 shares of Series One Preferred
Stock to Anchor under the terms of the Anchor Loan by which Anchor loaned
the Company the sum of $600,000 bearing interest at the rate of 18% per
annum. The Anchor Loan is cross-collateralized (together with the
Solvation Loan described below) by a first lien on all of the assets of the
Company and 97,250 shares of Common Stock owned by Messrs. Nelson and
Rosen. The purpose of the Anchor Loan was to finance the costs and
expenses of the proposed public offering and provide other funding to the
Company for various costs and expenses. The maturity of the Anchor Loan
has been extended from March 11, 1996 to September 15, 1996. The Anchor
Loan is to be repaid at the date of closing of the Primary Offering or at
the date of closing of any public or private offering of debt or equity
securities in the gross amount of $5,000,000 or more and/or the sale of any
of the Company's assets or any part thereof. $600,000 of the proceeds of
the Primary Offering and the Private Placement will be used to repay the
Anchor Loan and $156,000 of accrued interest on such loan. The 57,500
shares of Series One Preferred Stock will be exchanged for 205,000 shares
of Common Stock in the Preferred Stock Exchange. See "Use of Proceeds --
Anchor Bridge Loan" and "Description of Securities -- Preferred Stock --
Series One Preferred Stock."
Private Placement. In December 1995, Solvation loaned the Company
$200,000, which carries an interest rate of 10% per annum and which is due
when the Primary Offering is closed, but no later than September 15, 1996.
A further $50,000 was loaned to the Company in May 1996 on the same terms
and conditions. The Solvation Loan is cross-collateralized with the Anchor
Loan by a first lien on all of the assets of the Company and 97,250 shares
of Common Stock owned by Messrs. Nelson and Rosen. See "Use of Proceeds --
Solvation Loan." Concurrently with the closing of the Primary Offering,
the Company will issue to Enviro for $3,100,000, 1,600,000 shares of 11%
Preferred Stock convertible into 1,600,000 shares of Common Stock of the
Company. See "Description of Securities -- Preferred Stock -- 11%
Preferred Stock." The Company will also issue 500,000 Private Warrants to
EMC for $400,000. See "Description of Securities -- Warrants -- Private
Warrants." EMC is a subsidiary of Solvation. Solvation and Enviro are
indirectly owned by different members of the same family. The terms for
the Private Placement were negotiated at arms-length.
In connection with the Anchor Loan, Richard Nelson and Theodore Rosen,
the Company's President and Chairman of the Board, respectively, pledged an
aggregate of 97,250 shares of the Company's Common Stock to Anchor. (The
pledge was later extended to secure the Solvation Loan.) These shares will
be released from such pledge upon repayment of the Anchor Loan and the
Solvation Loan. See "Use of Proceeds."
PRINCIPAL AND SELLING STOCKHOLDERS
The following table lists the number of shares of Common Stock owned as
of January 31, 1996 by (i) persons known to hold more than five percent of
the shares of outstanding Common Stock, (ii) each director of the Company,
(iii) any executive officers named in the Summary Compensation Table, (iv)
all officers and directors of the Company as a group. Each person named in
the table has sole investment power and sole voting power with respect to
the shares of the Common Stock set forth opposite his or its name, except
as otherwise indicated.
BENEFICIAL SHARES BENEFICIAL
OWNERSHIP PRIOR TO TO OWNERSHIP AFTER
OFFERING(1) BE SOLD OFFERING
------------------ -----------------
Richard Nelson 82,446 18.7% 0 82,446 3.4%
Theodore Rosen 88,333(2) 17.4% 0 100,833(2a) 4.1%
Ronald Moody 21,500(3) 4.8% 0 21,500(3) 0.9%
Fred Knoll 171,333(4) 28.6% 0 191,334(4a) 7.5%
Evan Evans 2,500(5) 0.6% 0 2,500(5) 0.1%
S. Marcus Finkle 63,833(6) 13.9% 0 68,833(6a) 2.9%
117 AABC
Aspen, CO
Guernroy, Ltd. 38,158(7) 8.6% 0 43,158(7a) 1.8%
c/o Royal Bank of
Canada
Channel Isles, UK
Enviro Partners, 1,600,000(8) 78.4% 1,600,000(8) 0 0%
L.P.
885 Third Avenue,
34th Floor
New York, NY 10022
Anchor Capital 205,000(9) 31.8% 205,000(9) 0 0%
Company, LLC
1140 Avenue of the
Americas
New York, NY 10036
All officers and 381,113(2) 55.2% 413,613(2) 15.6%
directors as a group (2a) (2a)
(6 persons) (3)(4) (3)(4)
(5) (4a)(5)
--------------------------
(1) The tabular information gives effect to the exercise of warrants or
options exercisable within 60 days of the date of this table owned in
each case by the person or group whose percentage ownership is set
forth opposite the respective percentage and is based on the
assumption that no other person or group exercises its option. The
address of each of the officers and directors is 515 North Flagler
Drive, Suite 202, West Palm Beach, Florida 33401.
(2) Includes 8,333 shares issuable upon conversion of Convertible
Debentures, and 60,250 shares issuable upon exercise of non-qualified
options at an exercise price of $8 per share which became exercisable
on December 1, 1995.
(2a) Includes 10,417 shares issuable upon conversion of Convertible
Debentures, and 60,250 shares issuable upon exercise of non-qualified
options at an exercise price of $8 per share which became exercisable
on December 1, 1995. Excludes 10,417 shares issuable upon exercise of
Private Warrants which are not exercisable until one year after the
closing of the Debenture Conversion. Also excludes 500,000 shares of
Common Stock underlying 500,000 Private Warrants held by EMC which are
subject to Mr. Rosen's right of first refusal for nine months from the
date of this Prospectus.
(3) Includes 9,000 shares issuable on exercise of warrants at an exercise
price of $5 per share which became exercisable on October 31, 1994.
(4) Includes (i) 67,500 shares issuable upon exercise of non-qualified
options at an exercise price of $8 per share which became exercisable
on December 1, 1995 and (ii) 91,333 shares owned by Europa
International Inc. ("Europa"), including 13,333 shares issuable to
Europa upon conversion of Convertible Debentures and 78,000 shares
issuable to Europa on exercise of warrants at an exercise price of $5
per share which became exercisable on October 31, 1994. Knoll Capital
Management has the sole voting power of the shares owned by Europa.
Mr. Knoll is the President and sole shareholder of Knoll Capital
Management.
(4a) Includes Europa holdings of 16,667 shares issuable upon conversion of
Convertible Debentures and 78,000 shares issuable on exercise of
warrants at an exercise price of $5 per share which became exercisable
on October 31, 1994. Knoll Capital Management has the sole voting
power of the shares owned by Europa. Mr. Knoll is the President and
sole shareholder of Knoll Capital Management. Excludes 16,667 shares
issuable upon exercise of Private Warrants which are not exercisable
until one year after the closing of the Debenture Conversion.
(5) Includes 1,250 shares issuable upon exercise of non-qualified options
at an exercise price of $4 per share which became exercisable on
January 25, 1995.
(6) Includes 3,333 shares issuable upon conversion of Convertible
Debentures and 18,000 shares issuable on exercise of warrants at an
exercise price of $5 per share which became exercisable on October 31,
1994.
(6a) Includes 4,167 shares issuable upon conversion of Convertible
Debentures and 18,000 shares issuable on exercise of warrants at an
exercise price of $5 per share which became exercisable on October
31, 1994. Excludes 4,167 shares issuable upon exercise of Private
Warrants which are not exercisable until one year after the Debenture
Conversion.
(7) Includes 3,333 shares issuable upon conversion of Convertible
Debentures.
(7a) Includes 4,167 shares issuable upon conversion of Convertible
Debentures. Excludes 4,167 shares issuable upon exercise of warrants
which are not exercisable until one year after the Debenture
Conversion.
(8) Represents shares issuable upon conversion of 11% Preferred Stock.
Excludes 500,000 shares issuable to EMC upon exercise of Private
Warrants which are not exercisable until one year after the Private
Placement. Enviro and EMC are indirectly owned by different members of
the same family.
(9) Represents shares issuable upon conversion of 57,500 shares of Series
One Preferred Stock.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 35,000,000 shares of
Common Stock, par value $.01 per share (the "Common Stock"), and 5,000,000
shares of Preferred Stock, par value $.01 per share. The following summary
of certain terms of the Common Stock and Preferred Stock does not purport
to be complete and is subject to, and qualified in its entirety by, the
provisions of the Company's Certificate of Incorporation and By-laws, which
are included as exhibits to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
The Company has 439,650 shares of Common Stock issued and outstanding.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Accordingly, holders of a majority of the shares
entitled to vote in any election of Directors may elect all of the
Directors standing for election. Subject to preferences that may be
applicable to any then outstanding Preferred Stock, the holders of the
Common Stock are entitled to receive such dividends, if any, as may be
declared by the Board of Directors from time to time out of legally
available funds. Upon liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets of the Company that are legally available for distribution, after
payment of all debts and other liabilities and subject to the prior rights
of holders of the Preferred Stock then outstanding. The holders of Common
Stock have no preemptive, subscription, redemption or conversion rights.
The rights, preferences and privileges of holders of Common Stock are
subject to the rights of the holders of shares of any series of Preferred
Stock that the Company will issue in the future.
WARRANTS
Each Warrant entitles the registered holder to purchase one share of
Common Stock at a price of $4.00 per share, subject to adjustments in
certain circumstances, during the period commencing one year and ending
five years from the date of this Prospectus.
The Warrants are redeemable by the Company, at the option of the
Company, with the prior consent of the Representative, at a price of $.01
per Warrant at any time after the Warrants become exercisable, upon not
less than 30 business days' written notice, provided that the last sales
price of the Common Stock equals or exceeds 150% (initially $6.00) of the
then-exercise price of the Warrants (the "Redemption Threshold") for the 20
consecutive trading days ending on the third day prior to the notice of
redemption to warrantholders. The warrantholders shall have the right to
exercise the Warrants until the close of business on the date fixed for
redemption. The Company is required to maintain the effectiveness of a
current registration statement relating to the exercise of the Warrants
and, accordingly, the Company will be unable to redeem the Warrants unless
there is a currently effective prospectus and registration statement under
the Securities Act covering the issuance of underlying securities. Also,
lack of qualification or registration under applicable state securities
laws may mean that the Company would be unable to issue securities upon
exercise of the Warrants to holders in certain states, including at the
time when the Warrants are called for redemption.
The Warrants will be issued in registered form under a Warrant Agreement
between the Company and American Stock Transfer & Trust Company as Warrant
Agent. Reference is made to such Warrant Agreement (which has been filed
as an exhibit to the Registration Statement of which this Prospectus is a
part) for a complete description of the terms and conditions applicable to
the Warrants (the description herein contained being qualified in its
entirety by reference to such Warrant Agreement).
The exercise price, number of shares of Common Stock issuable on
exercise of the Warrants and Redemption Threshold are subject to adjustment
in certain circumstances, including in the event of a stock dividend,
recapitalization, reorganization, merger or consolidation of the Company.
However, the Warrants are not subject to adjustment for issuances of Common
Stock at a price below their exercise price.
The Company has the right, in its sole discretion, to decrease the
exercise price of the Warrants for a period of not less than 30 days on not
less than 30 days' prior written notice to the warrantholders. In
addition, the Company has the right, in its sole discretion, to extend the
expiration date of the Warrants on five business days' prior written notice
to the warrantholders. The Company will comply with all applicable tender
offer rules, including Rule 13e-4, in the event the Company reduces the
exercise price for a limited period of time.
The Warrants may be exercised upon surrender of the Warrant Certificate
representing the Warrants on or prior to the expiration date at the offices
of the Warrant Agent, with the exercise form on the reverse side of the
Warrant Certificate completed and executed as indicated, accompanied by
full payment of the exercise price (by certified check, payable to the
Company) for the number of Warrants being exercised. The warrantholders do
not have the rights or privileges of holders of Common Stock.
No Warrants will be exercisable unless at the time of exercise the
Company has filed with the Commission a current prospectus covering the
shares of Common Stock issuable upon exercise of such Warrants and such
shares have been registered or qualified or are exempt under the securities
laws of the state of residence of the holder of such Warrants.
No fractional shares will be issued upon exercise of the Warrants. The
Company will pay to such warrantholder, in lieu of the issuance of any
fractional share which is otherwise issuable to such warrantholder, an
amount in cash based on the market value of the Common Stock on the last
trading day prior to the exercise date.
Private Warrants. On May 3, 1996 EMC entered into an agreement with the
Company whereby EMC agreed to purchase for $400,000, concurrently with
consummation of the Primary Offering, Private Warrants to purchase 500,000
shares of Common Stock of the Company. Terms of the agreement were
negotiated by the two parties. The Private Warrants are to have the same
terms and conditions as the Warrants. The Company has agreed to keep a
shelf registration statement in effect, covering the Private Warrants to be
received by EMC and the shares into which such Private Warrants are
convertible. EMC has given Theodore Rosen, the Company's Chairman of the
Board, a right of first refusal to purchase such Private Warrants if at any
time during the nine-month period following the date of this Prospectus EMC
decides to sell such Private Warrants. Mr. Rosen has agreed with the
Representative that he will exercise such right of first refusal in the
event EMC decides to sell the Private Warrants during such nine-month
period and that any Private Warrants purchased by Mr. Rosen will not be
sold by him until at least 13 months from the date of this Prospectus.
125,000 Private Warrants are also being issued in connection with the
Debenture Conversion. The terms of the Private Warrants were negotiated at
arms-length.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock,
par value $0.01 per share, in one or more series. The Board of Directors,
without further approval of the stockholders, is authorized to fix the
rights and terms relating to dividends, conversion, voting, redemption,
liquidation preferences, sinking funds and any other rights, preferences,
privileges and restrictions applicable to each such series of Preferred
Stock. The issuance of Preferred Stock, while providing flexibility in
connection with possible financing, acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of
the holders of Common Stock and, under certain circumstances, be used as a
means of discouraging, delaying or preventing a change in control of the
Company. Other than its agreement to issue the shares of the 11% Preferred
Stock and the Series One Preferred Stock, the Company has no shares of
Preferred Stock outstanding and has no plans to issue any shares.
Series One Preferred Stock. In June 1995, the Board of Directors
designated 100,000 of the Company's Preferred Stock as "Series One
Exchangeable and Convertible Preferred Stock." The Company issued 57,500
shares of such Series One Exchangeable and Convertible Preferred Stock (the
"Series One Preferred Stock") to Anchor under the terms of the Anchor Loan.
See "Certain Transactions." Under the terms of the Anchor Loan, upon the
consummation of this Offering and the other Closing Transactions, the
57,500 shares of Series One Preferred Stock will be exchanged for 205,000
shares of Common Stock. The holders are also entitled to receive
cumulative dividends equal to $1.00 per share and have a liquidation
preference of $10.00 per share plus any dividends accrued and unpaid. The
holders of Series One Preferred Stock have no voting rights except for
certain corporate actions. The Series One Preferred Stock is redeemable at
the option of the Company at a price of $10.00 per share, plus accrued and
unpaid dividends, under certain conditions, commencing January 1, 1999.
11% Preferred Stock. On May 3, 1996 Enviro entered into an agreement
with the Company whereby Enviro agreed to purchase for $3,100,000,
concurrently with consummation, 1,600,000 shares of 11% Preferred Stock,
which is convertible into 1,600,000 shares of Common Stock of the Company.
The 11% Preferred Stock has an aggregate liquidation preference of
$3,100,000 plus accrued dividends and will carry a preferential annual
cumulative dividend rate of 11% of the liquidation preference. During the
first two years after issuance, dividends on the 11% Preferred Stock will
be payable in additional shares of 11% Preferred Stock (valued at $1.8375
per share). Thereafter dividends on the 11% Preferred Stock will be
payable in either shares of 11% Preferred Stock or cash, at the option of
the Company. The Company has agreed to keep a shelf registration statement
in effect covering the shares into which the 11% Preferred Stock is
convertible. The 11% Preferred Stock will vote with the Common Stock on a
one vote per share basis on all matters other than the election of
directors.
The 11% Preferred Stock, as a class, will have the right to designate
two directors (the "Designated Directors") out of the five members of the
Board of Directors, and no action may be taken by the Board of Directors
without the approval of at least one of the Designated Directors.
The 11% Preferred Stock is redeemable at the option of the Company at
any time after four years from issuance, at a redemption price equal to the
liquidation preference and it is mandatorily redeemable ten years after
issuance.
The terms of the 11% Preferred Stock were negotiated at arms-length.
CONVERTIBLE DEBENTURES
Concurrently with the consummation of the Primary Offering and the
other Closing Transactions, the Convertible Debentures, of which an
aggregate principal amount of $1,525,000 is outstanding, will be
restructured by converting $500,000 principal amount into 125,000 shares of
Common Stock and 125,000 Private Warrants and reducing the conversion rate
of the remainder to $8.00 per share from the present $16 per share, making
the remainder convertible into 128,125 shares of Common Stock. From and
after the consummation of the Primary Offering, the interest rate will be
9% instead of the present 18%. The Convertible Debentures were issued in
June 1994 and mature on January 25, 2004. In addition to payment of
interest, the Company shall pay the holders of the Convertible Debentures a
pro rata portion of 50% of LIPA's share of the net revenue (net of funds
required for the payment of interest) resulting from LIPA's energy sales
(the "Supplemental Participation"). See "Business -- Current Operations and
On-Going Projects -- Lehi Cogeneration Project."
Pursuant to the terms and conditions of a pledge agreement between the
Company and Richard Nelson and Theodore Rosen, acting jointly as pledge
agent for all of the holders of the Convertible Debentures, payment of
principal and interest on the Convertible Debentures and, if applicable,
any Supplemental Participation due is secured by a security interest in all
of the issued and outstanding shares of common stock of LEI, all of which
issued and outstanding shares are owned by the Company. Until such time as
the Company's obligations for the payment of the principal and interest on
the Convertible Debentures and, if applicable, any Supplemental
Participation due are paid in full, the Company shall not cause LEI to
issue any additional shares of common stock unless the security interest
granted in LEI shall be extended to such additional shares.
The Convertible Debentures are subordinate and subject in right of
payment to the prior payment of all "Senior Indebtedness" of the Company.
"Senior Indebtedness" is the principal of, premium, if any, and interest
(including any interest accruing after the filing of a petition in
bankruptcy) on and other amounts due or in connection with any indebtedness
of the Company including without limitation, the liabilities as defined in
and arising under any loan or security agreement with a bank, insurance
company, or other financial institution or affiliate of any thereof whether
outstanding on the date of the Convertible Debentures, or any indebtedness
thereafter created, incurred, assumed or guaranteed by the Company, and, in
each case, all renewals, extensions, and refundings thereof, except
indebtedness which by the terms of the instrument creating or evidencing
such indebtedness created, incurred, assumed, or guaranteed after the date
of the Convertible Debentures is expressly made equal to or subordinate and
subject in right of payment to, the payment of principal of an interest on
the Convertible Debentures. Notwithstanding anything herein to the
contrary, Senior Indebtedness shall not include (i) indebtedness
representing the repurchase price of any preferred stock or other capital
stock of the Company or any dividend or distribution with respect thereto;
(ii) indebtedness of the Company owed directly to any employee, officer or
director thereof; and (iii) indebtedness which, by its terms, is
subordinate in right of payment to the indebtedness of the Company
evidenced by the Convertible Debentures.
To the extent the Company shall have funds legally available for such
payment, commencing January 25, 1998, the Company may redeem at its option
the Convertible Debentures, in whole or in part, at a redemption price
equal to 102% of the principal amount of each Convertible Debenture, plus
any unpaid and accrued interest of the Supplemental Participation. Upon
any such redemption, the Company must issue each holder whose Convertible
Debenture(s) have been redeemed a warrant to purchase a number of shares of
the Company's Common Stock equal to the number of shares into which the
principal amount being redeemed is then convertible. The exercise price of
these warrants would be the same as the conversion price at the time of
redemption (currently $8.00 per share).
ANTI-TAKEOVER PROVISIONS
The Company is governed by the provisions of Section 203 of the General
Corporation Law of Delaware, an anti-takeover law. In general, this
statute prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became
an interested stockholder, unless the business combination is approved in a
prescribed manner. A "business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder. An "interested stockholder"is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or
more of the Company's voting stock.
The Delaware Statute may discourage certain types of transactions
involving an actual or potential change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and warrant agent
for the Warrants is American Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Possible Rule 144 Sales. Upon completion of the Primary Offering by the
Company described in this Prospectus, the Company will have outstanding
2,394,650 shares of Common Stock. All of the 1,625,000 shares sold in the
Primary Offering (assuming no exercise of the Underwriters' over-allotment
option) will be freely transferable by persons other than affiliates (as
defined in regulations under the Securities Act) without restriction or
further registration under the Securities Act.
Of the 439,650 shares of Common Stock outstanding prior to the Primary
Offering, 64,650 shares of Common Stock outstanding are "restricted
securities" within the meaning of Rule 144 under the Securities Act and may
not be sold in the absence of registration under the Securities Act, unless
an exemption from registration is available, including the exemption
provided by Rule 144. Under Rule 144 as currently in effect, of such
64,650 shares, 35,000 shares are currently eligible for sale (none of which
are subject to the agreements described below restricting their sale), an
additional 8,750 shares will be eligible for such sale in or after August
1996, and the remaining 21,400 shares will be eligible for such sale in or
after June, 1998, subject in each instance to the volume limitations of the
Rule. The holders of record of _________ of these shares have agreed with
the Representative not to sell their shares until thirteen months from the
date of this Prospectus without the prior written approval of the
Representative. The 205,000 shares of Common Stock to be issued in the
Preferred Stock Exchange and the 125,000 shares of Common Stock to be
issued upon the Debenture Conversion will be restricted securities but may
be resold pursuant to the shelf registration thereof. Anchor has agreed
not to sell the 205,000 shares of Common Stock it will receive in the
Preferred Stock Exchange without the Representative's prior written
approval. The foregoing does not give effect to any shares issuable on
exercise of outstanding options and warrants. The effect of the offer and
sale of such shares may be to depress the market price for the Company's
Common Stock.
In general, under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated for purposes of Rule 144) who
beneficially owns Restricted Securities with respect to which at least two
years have elapsed since the later of the date the shares were acquired
from the Company or from an affiliate of the Company, is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock of the
Company, or (ii) the average weekly trading volume in Common Stock during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain manner-of-sale provisions and notice requirements, and
to the availability of current public information about the Company. A
person who is not an affiliate, has not been an affiliate within 90 days
prior to sale and who beneficially owns Restricted Securities with respect
to which at least three years have elapsed since the later of the date the
shares were acquired from the Company or from an affiliate of the Company,
is entitled to sell such shares under Rule 144(k) without regard to any of
the volume limitations or other requirements described above.
Registration Rights. This Registration Statement includes a shelf
registration (the "Shelf Registration") to enable Enviro to sell to the
public the 1,600,000 shares of Common Stock into which the shares of 11%
Preferred Stock are convertible. Enviro has agreed that it will not sell
such shares for a period of nine months from the closing of the Offering
without the Representative's consent. The Shelf Registration also covers
the 500,000 Private Warrants being acquired by EMC and the underlying
shares of Common Stock issuable on the conversion of the 11% Preferred
Stock and the exercise of such Private Warrants. These Private Warrants
are not subject to any agreement restricting resale. The Shelf
Registration also enables the holders of the 205,000 shares of Common Stock
to be issued in the Preferred Stock Exchange to sell their shares. The
125,000 shares of Common Stock to be issued in the Debenture Conversion and
the 11,400 shares of Common Stock previously issued in the acquisition of
Plymouth Cogeneration are not included in the Shelf Registration, however
they are available for sale in accordance with Rule 144 restrictions. The
Common Stock to be issued in the Preferred Stock Conversion is subject to a
nine month restriction on resale subject to earlier waiver of such
restriction by the Representative in its sole discretion.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for
the Company by the firm of Reid & Priest LLP, New York, New York.
EXPERTS
The financial statements of the Company as at January 31, 1996 and for
each of the years in the two-year period then ended, appearing in the
Prospectus, have been audited by Richard A. Eisner & Company, LLP,
independent auditors, to the extent and for the years indicated in their
report appearing elsewhere herein and in the Registration Statement. Such
financial statements have been included in reliance upon such report and
upon the authority of that firm as experts in accounting and auditing.
The financial statements of Lehi Independent Power Associates, L.C. as
of December 31, 1995 and 1994 for the year then ended and the period
January 24, 1994 (date of inception) through December 31, 1994, appearing
in this Prospectus, have been audited by Traveller Winn & Mower, PC,
independent auditors, to the extent and for the years indicated in their
report appearing elsewhere herein and in the Registration Statement. Such
financial statements have been included in reliance upon such report and
upon the authority of that firm as experts in accounting and auditing.
The financial statements of Far West Electric Energy Fund, L.P. as of
December 31, 1994 and 1995 and for the years then ended, appearing in this
Prospectus, have been audited by Robison, Hill & Co., PC, independent
auditors, to the extent and for the years indicated in their report
appearing elsewhere herein and in the Registration Statement. Such
financial statements have been included in reliance upon such report and
upon the authority of that firm as experts in accounting and auditing.
The financial statements of 1-A Enterprises as of December 31, 1994 and
1995 and for the two-year period then ended, appearing in this Prospectus,
have been audited by Robison, Hill & Co., PC, independent auditors, to the
extent and for the years indicated in their report appearing elsewhere
herein and in the Registration Statement. Such financial statements have
been included in reliance upon such report and upon the authority of that
firm as experts in accounting and auditing.
<PAGE>
U.S. ENVIROSYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
--------
U.S. ENERGY SYSTEMS, INC.
Report of Independent Auditor . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheet as at
January 31, 1996 and April 30, 1996
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Operations for
the Years Ended January 31, 1996 and
January 31, 1995 and for the Three Months
Ended April 30, 1996 (Unaudited) and
April 30, 1995 (Unaudited) . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Changes in
Capital Deficiency for the Years Ended
January 31, 1996 and January 31, 1995 and
For the Three Months Ended April 30, 1996
(Unaudited) and April 30, 1995 (Unaudited) . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for
the Years Ended January 31, 1996 and
January 31, 1995 and for the Three Months
Ended April 30, 1996 (Unaudited) and
APRIL 30, 1995 (Unaudited) . . . . . . . . . . . . . . . . . . F-7
Notes to Financial Statements . . . . . . . . . . . . . . . . . F-8
FAR WEST ELECTRIC ENERGY FUND, L.P.
Independent Auditors' Report . . . . . . . . . . . . . . . . . F-21
Balance Sheets, December 31, 1995 and 1994 . . . . . . . . . . F-22
Statements of Income, for the Years Ended
December 31, 1995, 1994, and 1993 . . . . . . . . . . . . . . F-24
Statements of Partners' Capital, for the
Years Ended December 31, 1995, 1994, and 1993 . . . . . . . . F-25
Statements of Cash Flows, for the Years ended
December 31, 1995, 1994, and 1993 . . . . . . . . . . . . . . F-26
Notes to Financial Statements . . . . . . . . . . . . . . . . . F-29
Schedule I, Condensed Financial Information of
Registrant (All Required Information Reported
in Financial Statements and Notes to the
Financial Statements)
Schedule II, Valuation of Qualifying Accounts
(All Required Information Reported in Note 2)
1-A ENTERPRISES
Independent Auditor's Report . . . . . . . . . . . . . . . . . F-42
Balance Sheet, December 31, 1995 and 1994 . . . . . . . . . . . F-43
Statements of Income, For the Years Ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . F-45
Statements of Partners' Capital, For the Years Ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . F-46
Statements of Cash Flows, For the Years Ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . F-47
Notes to Financial Statements
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . F-49
LEHI INDEPENDENT POWER ASSOCIATES, L.C.
Report of Independent Auditors . . . . . . . . . . . . . . . . F-55
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . F-56
Statements of Operations . . . . . . . . . . . . . . . . . . . F-57
Statement of Changes in Members' Equity . . . . . . . . . . . . F-58
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . F-59
Notes to Financial Statements . . . . . . . . . . . . . . . . . F-61
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
Report of Independent Auditors . . . . . . . . . . . . . . . . F-64
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . F-65
Statement of Operations . . . . . . . . . . . . . . . . . . . . F-66
Statement of Changes in Partners' Capital . . . . . . . . . . . F-67
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . F-68
Notes to Financial Statements . . . . . . . . . . . . . . . . . F-69
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
U.S. Energy Systems, Inc.
(formerly U.S. Envirosystems, Inc.)
We have audited the accompanying consolidated balance sheet of U.S.
Energy Systems, Inc. (formerly U.S. Envirosystems, Inc.) and subsidiaries
as at January 31, 1996 and the related consolidated statements of
operations, changes in capital deficiency and cash flows for each of the
years in the two-year period then ended. These statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the financial position of U.S.
Energy Systems, Inc. and subsidiaries at January 31, 1996, and the results
of its operations and its cash flows for each of the years in the two-year
period then ended in accordance with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note A to
the financial statements, the Company has incurred significant losses and
as at January 31, 1996, has a working capital deficiency of approximately
$1,910,000 and a capital deficiency of $2,729,000 which raise substantial
doubt about its ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note A. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Richard A. Eisner & Company, LLP
Richard A. Eisner & Company, LLP
New York, New York
March 1, 1996
With respect to Note J[4]
May 6, 1996
With respect to Note A (change of name to U.S. Energy Systems, Inc.)
May 17, 1996
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
CONSOLIDATED BALANCE SHEET
A S S E T S January 31, April 30,
----------- 1996 1996
(Note G) ----------- ---------
(Unaudited)
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . $ 2,000 $ 2,000
16,000 1,000
Other current assets . . . . . . . . . . . . ---------- ----------
Total current assets . . . . . . . . . . . . 18,000 3,000
Investments in Joint Ventures - at equity:
Lehi Independent Power Associates, L.C. (Note
C[1]) . . . . . . . . . . . . . . . . . . . 1,170,000 1,150,000
Plymouth Cogeneration Limited Partnership
(Note C[2]) . . . . . . . . . . . . . . . . 703,000 684,000
103,000 161,000
Other assets . . . . . . . . . . . . . . . . . ---------- ----------
$1,994,000 $1,998,000
TOTAL . . . . . . . . . . . . . . . . . . . ========== ==========
L I A B I L I T I E S
---------------------
Current liabilities:
Accrued expenses and other current
liabilities (including due to related
parties of $467,000 and $642,000,
respectively) (Notes D and L) . . . . . . . $ 990,000 $1,253,000
Pre-reorganization income taxes payable and
accrued interest - current (Note E) . . . . 172,000 182,000
766,000 910,000
Loans payable (Note G) . . . . . . . . . . . ---------- ----------
Total current liabilities . . . . . . . . . 1,928,000 2,345,000
Convertible subordinated secured debentures
(including due to related parties of $325,000)
(Notes H and L) . . . . . . . . . . . . . . . 1,525,000 1,525,000
Notes payable (including due to related parties
of $775,000) (Notes I and L) . . . . . . . . 965,000 970,000
Deferred interest (including due to related
parties of $12,000) (Notes H and L) . . . . . 114,000 114,000
Pre-reorganization income taxes payable and
accrued interest (Note E) . . . . . . . . . . 176,000 184,000
15,000 19,000
Advances from Joint Ventures (Note C[2]) . . . ---------- ----------
4,723,000 5,157,000
Total liabilities . . . . . . . . . . . . . ---------- ----------
Commitments and contingencies (Note K)
CAPITAL DEFICIENCY
-------------------
(Notes A and J)
Preferred stock, $.01 par value, authorized
5,000,000 shares; issued and outstanding
57,500 (liquidating preference $575,000) . . 1,000 1,000
Common stock, $.01 par value, authorized
35,000,000 shares; issued and outstanding
439,650 . . . . . . . . . . . . . . . . . . . 4,000 4,000
Additional paid-in capital . . . . . . . . . . 112,000 112,000
(2,846,000) (3,276,000)
Accumulated deficit . . . . . . . . . . . . . . ---------- ----------
(2,729,000) (3,159,000)
Total capital deficiency . . . . . . . . . . ---------- ----------
$1,994,000 $1,998,000
TOTAL . . . . . . . . . . . . . . . . . . . ========== ==========
The accompanying notes to financial statements
are an integral part hereof.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Three Months Ended
January 31, April 30,
----------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
Cost and expenses:
Operating expenses . $ 27,000 $ 109,000
Administrative
expenses . . . . . . 826,000 897,000 $ 221,000 $ 202,000
Interest expense . . 604,000 319,000 170,000 99,000
Loss from Joint
Ventures . . . . . . 17,000 76,000 39,000 34,000
----------- ---------- --------- ---------
Total cost and
expenses . . . . . 1,474,000 1,401,000 430,000 335,000
----------- --------- --------- ---------
(Loss) before
extraordinary item . .(1,474,000) (1,401,000) (430,000) (335,000)
Extraordinary gain from
restructuring of
liabilities . . . . . 83,000 85,000
----------- --------- --------- ---------
NET (LOSS) . . . . . .(1,391,000)$(1,316,000) (430,000) $(335,000)
=========== =========
Dividends on preferred (21,000) (14,000)
stock . . . . . . . . --------- ---------
(Loss) applicable to
common $(1,412,000) $(444,000)
stock . . . . . . . .========== =========
(Loss) per share before $ (3.41) $ (3.38) $ (1.01) $ (0.77)
extraordinary item . . ======== ======= ========= =========
Net (loss) per share . $ (3.22) $ (3.17) $ (1.01) $ (0.77)
======== ======= ========= =========
Weighted average shares 438,773 415,022 439,622 436,167
outstanding . . . . . ========= ======== ========= =========
The accompanying notes to financial statements
are an integral part hereof.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
(Notes A and J)
Preferred Stock Common Stock
--------------- ------------
Number Number
of of
Shares Amount Shares Amount
------ ------ ------ ------
Balance - January 31, 1994 391,250 $4,000
Sale of common stock . . . . . . 32,000
Compensation attributable
to options and warrants . . . .
Shares issued for interest
in Joint Ventures . . . . . . . 11,400
Value assigned to warrants
issued in connection with notes
payable
Net (loss) for the year
ended January 31, 1995 . . . . ------ ------ ------- ------
Balance - January 31, 1995 434,650 4,000
Sale of common stock . . . . . . 5,000
Value assigned to
preferred stock issued in
connection with loans payable . 57,500 $1,000
Value assigned to
additional warrants issued in
connection with notes payable .
Net (loss) for the year
ended January 31, 1996 . . . . ------ ------ ------- ------
Balance - January 31, 1996 . . . 57,500 1,000 439,650 4,000
Net (loss) for the three
months ended April 30, 1996 . . ------ ------ ------- ------
BALANCE - APRIL 30, 1996 57,500 $1,000 439,650 $4,000
(UNAUDITED) . . . . . . . . . . ====== ====== ======= ======
Common Stock
------------
Additional Accumulated
Paid-In Capital Deficit Total
--------------- -------- -----
Balance - January 31, 1994 $(306,000) $ (139,000) $ (441,000)
Sale of common stock . . . 139,000 139,000
Compensation attributable
to options and warrants . 48,000 48,000
Shares issued for interest
in Joint Ventures . . . . 114,000 114,000
Value assigned to warrants
issued in connection with
notes payable 46,000 46,000
Net (loss) for the year (1,316,000) (1,316,000)
ended January 31, 1995 . --------- ----------- -----------
Balance - January 31, 1995 41,000 (1,455,000) (1,410,000)
Sale of common stock . . . 34,000 34,000
Value assigned to
preferred stock issued in
connection with loans
payable . . . . . . . . . 28,000 29,000
Value assigned to
additional warrants issued
in connection with notes
payable . . . . . . . . . 9,000 9,000
Net (loss) for the year (1,391,000) (1,391,000)
ended January 31, 1996 . --------- ----------- -----------
Balance - January 31, 1996 112,000 (2,846,000) (2,729,000)
Net (loss) for the three (430,000) (430,000)
months ended April 30, 1996 --------- ----------- -----------
BALANCE - APRIL 30, 1996 $112,000 $(3,276,000)$(3,159,000)
(UNAUDITED) . . . . . . . ========= =========== ===========
The accompanying notes to financial statements
are an integral part hereof.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended January 31,
----------------------
1996 1995
---- ----
Cash flows from operating activities:
Net (loss) . . . . . . . . . . . . . . . . . $(1,391,000) $(1,316,000)
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
Amortization of debt discount . . . . . . . 42,000 3,000
Amortization of purchase price in excess of
equity in Joint Ventures . . . . . . . . . 59,000 55,000
Amortization of deferred financing costs . . 72,000
Value assigned to options and warrants . . . 48,000
Gain from restructuring of liabilities . . . (83,000) (85,000)
Equity in (income)/loss of Joint Ventures,
net of distributions . . . . . . . . . . . (13,000) 21,000
Loss from legal proceedings . . . . . . . . 102,000
Deferred interest . . . . . . . . . . . . . 114,000
Accrued interest on pre-reorganization
income taxes payable . . . . . . . . . . . 39,000
Changes in operating assets and liabilities:
(Increase) decrease in other assets . . . 2,000 (1,000)
Decrease in current assets . . . . . . . .
Increase in accounts payable and accrued 671,000 146,000
expenses . . . . . . . . . . . . . . . . ----------- -----------
(641,000) (874,000)
Net cash (used in) operating activities . ----------- -----------
Cash flows from investing activities:
Security deposit on proposed acquisition. . . (50,000)
Cost incurred in connection with the Proposed
Acquisitions . . . . . . . . . . . . . . . . (3,000)
Investment in Joint Ventures . . . . . . . . (636,000)
Advances to Joint Ventures . . . . . . . . . (9,000) (11,000)
Loans (to) from officers . . . . . . . . . . (47,000)
33,000
Collections of loans receivable - officer . . ----------- -----------
Net cash provided by (used in) investing (29,000) (694,000)
activities . . . . . . . . . . . . . . . . ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of convertible
subordinated debt . . . . . . . . . . . . . 400,000
Proceeds from issuance of common stock . . . 34,000 139,000
Proceeds from issuance of notes payable . . . 25,000 975,000
Proceeds from loans payable and preferred
stocks . . . . . . . . . . . . . . . . . . . 785,000
Payment of deferred financing costs . . . . . (102,000)
Payment of pre-reorganization payroll taxes
payable . . . . . . . . . . . . . . . . . . (34,000) (105,000)
Payment of pre-reorganization income taxes
payable . . . . . . . . . . . . . . . . . . (9,000) (13,000)
Advances from Joint Ventures . . . . . . . . 15,000
(50,000)
Deferred registration costs . . . . . . . . . ----------- -----------
664,000 1,396,000
Net cash provided by financing activities . ----------- -----------
NET (DECREASE) IN CASH . . . . . . . . . . . . (6,000) (172,000)
8,000 180,000
Cash - beginning of the period . . . . . . . . ----------- -----------
$ 2,000 $ 8,000
CASH - END OF THE PERIOD . . . . . . . . . . . =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid for interest . . . . . . . . . . . $ 93,000 $ 163,000
Supplemental schedule of noncash investing
activity:
Fair market value of common stock issued and
contributed to investment in Joint Ventures 114,000
Three Months Ended
April 30,
------------------
1996 1995
---- ----
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net (loss) . . . . . . . . . . . . . . . . . . $(430,000) $(335,000)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Amortization of debt discount . . . . . . . . 5,000 3,000
Amortization of purchase price in excess of
equity in Joint Ventures . . . . . . . . . . 14,000 14,000
Amortization of deferred financing costs . . . 19,000
Value assigned to options and warrants . . . .
Gain from restructuring of liabilities . . . .
Equity in (income)/loss of Joint Ventures, net
of distributions . . . . . . . . . . . . . . 25,000 20,000
Loss from legal proceedings . . . . . . . . .
Deferred interest . . . . . . . . . . . . . . 53,000
Accrued interest on pre-reorganization income
taxes payable . . . . . . . . . . . . . . . 4,000 2,000
Changes in operating assets and liabilities:
(Increase) decrease in other assets . . . .
Decrease in current assets . . . . . . . . . 15,000
Increase in accounts payable and accrued 280,000 151,000
expenses . . . . . . . . . . . . . . . . . --------- ---------
(68,000) (92,000)
Net cash (used in) operating activities . . --------- ---------
Cash flows from investing activities:
Security deposit on proposed acquisition. . . .
Cost incurred in connection with the Proposed
Acquisitions . . . . . . . . . . . . . . . . .
Investment in Joint Ventures . . . . . . . . .
Advances to Joint Ventures . . . . . . . . . .
Loans (to) from officers . . . . . . . . . . . 40,000
16,000
Collections of loans receivable - officer . . . ---------
Net cash provided by (used in) investing 56,000
activities . . . . . . . . . . . . . . . . . ---------
Cash flows from financing activities:
Proceeds from issuance of convertible
subordinated debt . . . . . . . . . . . . . . 25,000
Proceeds from issuance of common stock . . . . 9,000
Proceeds from issuance of notes payable . . . .
Proceeds from loans payable and preferred stocks 125,000
Payment of deferred financing costs . . . . . .
Payment of pre-reorganization payroll taxes
payable . . . . . . . . . . . . . . . . . . .
Payment of pre-reorganization income taxes
payable . . . . . . . . . . . . . . . . . . . (3,000) (8,000)
Advances from Joint Ventures . . . . . . . . . 4,000 3,000
(58,000)
Deferred registration costs . . . . . . . . . . --------- ---------
68,000 29,000
Net cash provided by financing activities . . --------- ---------
NET (DECREASE) IN CASH . . . . . . . . . . . . . - 0 - (7,000)
2,000 8,000
Cash - beginning of the period . . . . . . . . . --------- ---------
$ 2,000 $ 1,000
CASH - END OF THE PERIOD . . . . . . . . . . . . ========= =========
Supplemental disclosure of cash flow
information:
Cash paid for interest . . . . . . . . . . . . . $ 34,000 $ 15,000
Supplemental schedule of noncash
investing activity:
Fair market value of common stock
issued and contributed to
investment in Joint Ventures . . . . . . . .
The accompanying notes to financial statements
are an integral part hereof.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company:
----------------------
U.S. Energy Systems, Inc. ("USE") and subsidiaries (collectively, the
"Company") are the successors to Cogenic Energy Systems, Inc. ("Cogenic").
Cogenic emerged from Chapter 11 Bankruptcy Proceedings on March 22, 1993.
The Plan of Reorganization, as amended, provided that Cogenic merge with
Utilities Systems Florida, Inc. ("USF") and change the name of the
reorganized Cogenic to U.S. Envirosystems, Inc.
On May 17, 1996, the Company amended its Certificate of Incorporation
to change the name of the Company to U.S. Energy Systems, Inc.
The Company is in the business of owning, developing and operating
cogeneration and independent power plants through Joint Ventures.
The Company has incurred significant losses since its reorganization
in 1993 and, as at January 31, 1996 has a working capital deficiency of
approximately $1,910,000 and a capital deficiency of approximately
$2,729,000. These factors raise substantial doubt about its ability to
continue as a going concern. Management's plans for which it has letters
of intent or agreements include the following:
a) Obtain $3,500,000 through the sale of convertible preferred stock
and warrants.
b) Obtain net proceeds of approximately $5,425,000 through the sale
of 1,625,000 shares of common stock and warrants in a public
offering (the "Proposed Public Offering").
c) Convert the existing preferred stock into 205,000 shares of common
stock.
d) Convert $500,000 of the existing Debentures into 125,000 shares of
common stock and warrants.
e) Acquire 50% interest in two operating geothermal power plants
("Steamboat 1 and 1A") for an aggregate of $5,400,000 in cash
consideration (the "Proposed Acquisitions").
f) Repay notes payable and other liabilities of approximately
$2,139,000.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company: (continued)
----------------------
All of the above are dependent upon the successful completion of the
proposed public offering referred to in (b) above and to certain other
conditions including the completion of all of the above. There is no
assurance that the above plans can be accomplished. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
The financial information presented as of April 30, 1996 and for the
three-month periods ended April 30, 1996 and April 30, 1995 is unaudited,
but in the opinion of management contains all adjustments (consisting of
only normal recurring adjustments) necessary for a fair presentation of
such financial information. Results of operations for interim periods are
not necessarily indicative of those to be achieved for full fiscal years.
(NOTE B) - Significant Accounting Policies:
------------------------------------------
Significant accounting policies followed in the preparation of the
financial statements are as follows:
[1] Consolidation:
-------------
The consolidated financial statements of the Company include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in the
consolidated balance sheet.
[2] Investments in Joint Ventures:
-----------------------------
Investments in Joint Ventures are accounted for under the equity
method. LIPA and Plymouth each have a fiscal year end December 31 which
differs to the fiscal year end of the Company. No material adjustment is
necessary to reconcile the December 31 year end to the Company's January 31
year end.
[3] Net (loss) per share:
--------------------
Net (loss) per share is computed using the weighted average
number of common shares outstanding during the period and, when dilutive,
common stock equivalents.
[4] Recent pronouncements:
---------------------
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company will adopt the disclosure
requirements of SFAS 123 during the Company's fiscal year ending
January 31, 1997 but will continue to account for its stock option plans
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Significant Accounting Policies: (continued)
--------------------------------------------
under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" as permitted under FAS 123.
In addition, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS 121 is also effective for the Company's fiscal year ending
January 31, 1997. The Company believes adoption of SFAS No. 121 will not
have a material impact on its financial statements.
[5] Use of estimates:
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(NOTE C) - Investment in Joint Ventures:
---------------------------------------
[1] Lehi Independent Power Associates, L.C.:
---------------------------------------
In January 1994, Lehi Envirosystems, Inc. ("LEHI"), a subsidiary
of the Company, purchased a 50% equity interest in a limited liability
company called Lehi Independent Power Associates, L.C. ("LIPA"), which
wholly owns a cogeneration project (the "Project") located in Lehi, Utah.
The operating agreement of LIPA provides for, among other
matters, the allocation of the net profits and net losses to the owners in
proportion to their ownership interest. The agreement also provides for
additional contributions totalling $875,000 to be shared by the owners in
the event that any modification, as defined, is required to bring the
Project back to full operational condition. LIPA terminates in January
2024, unless sooner dissolved by certain conditions as set forth in the
operating agreement.
During the two-year period ended January 31, 1996 and the three-
month period ended April 30, 1996, the Project was not in operation.
In the Proposed Acquisitions, Far West Capital Inc., the other
50% owner of LIPA, will own 50% of Steamboats in the event the Proposed
Acquisitions are consummated.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE C) - Investment in Joint Ventures: (continued)
---------------------------------------
[2] Plymouth Cogeneration Limited Partnership ("PCLP"):
--------------------------------------------------
In November 1994, Plymouth Envirosystems, Inc. ("Plymouth"), a
subsidiary of the Company, acquired a 5% general partner interest and a 35%
limited partner interest in PCLP for cash contributions of $636,000.
The amended and restated agreement of limited partnership (the
"Agreement") provides for, among other matters, the allocation of net
profits and net losses in accordance with the respective ownership
interests of the partners. The terms, conditions and provisions of the
Agreement expire in November 2024 or until its termination or dissolution
in accordance with the provisions of the Agreement.
The partnership is engaged in the business of owning and
operating a cogeneration facility designed, developed, and constructed for
the production of electricity and steam (the "Plymouth Project"). The
management, supervision and control of, and the determination of all
matters relating to the ownership and operation of the Plymouth Project and
the operations of PCLP are delegated to PSC, the managing partner.
In December 1994, Plymouth acquired a 36.4% limited partner
ownership interest in PSC, the managing partner of PCLP, for a contribution
of 11,400 shares of the Company's common stock with a fair market value of
approximately $114,000. With this transaction, the Company's combined
ownership interest in PCLP is effectively 50%.
In November 1994, the Company entered into an agreement with IEC,
a general partner of PSC. The agreement provides for advances by IEC to
the Company equal to 50% of the development commissions, as defined,
received by IEC from PSC for a period of five years commencing in 1995.
During the fiscal year ended January 31, 1996, the Company received
advances from IEC of $15,000. The advances will be repaid by the Company
from the proceeds of capital distributions received from PSC. The Company
is required to repay the advances in five equal annual installments
commencing July 1, 2004.
[3] At acquisition, LEHI s equity in the net assets of LIPA was
approximately $146,000 and Plymouth s equity in the net assets of PCLP was
approximately $668,000. The excess of purchase price over the underlying
equities of LEHI and Plymouth have been allocated to the plants of LIPA and
PCLP, respectively, and is being amortized over the remaining life of such
assets. At January 31, 1996, the estimated remaining life of the plants is
as follows:
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE C) - Investment in Joint Ventures: (continued)
--------------------------------------
LIPA - Buildings - 28 years
Machinery and equipment - 6 years
Plymouth - plant - 19 years
[4] The following is summarized financial information of LIPA and
PCLP:
December 31, 1995
-----------------
LIPA PCLP
---- ----
Current Assets . . . . . . . . . . . . . . . . . $ 158,000 $ 158,000
Property, plant and equipment at cost (net) . . . 257,000 5,593,000
828,000
Other assets . . . . . . . . . . . . . . . . . . ---------- ----------
Total assets . . . . . . . . . . . . . . . . . 415,000 6,579,000
Current liabilities . . . . . . . . . . . . . . . (9,000) (343,000)
(4,987,000)
Long-term debt . . . . . . . . . . . . . . . . . ---------- ----------
$ 406,000 $1,249,000
Equity . . . . . . . . . . . . . . . . . . . . . ========== ==========
Equity in Joint Ventures . . . . . . . . . . . . $ 203,000 $ 625,000
Investments in Joint Ventures in excess of 967,000 78,000
equity . . . . . . . . . . . . . . . . . . . . ---------- ----------
$1,170,000 $ 703,000
Total investments in Joint Ventures . . . . . ========== ==========
March 31, 1996
--------------
LIPA PCLP
---- ----
Current Assets . . . . . . . . . . . . . . . $ 148,000 $ 260,000
Property, plant and equipment at cost (net) . 254,000 5,524,000
852,000
Other assets . . . . . . . . . . . . . . . . ---------- ----------
Total assets . . . . . . . . . . . . . . . 402,000 6,636,000
Current liabilities . . . . . . . . . . . . . (10,000) (432,000)
(4,989,000)
Long-term debt . . . . . . . . . . . . . . . ---------- ----------
$ 392,000 $1,215,000
Equity . . . . . . . . . . . . . . . . . . . ========== ==========
Equity in Joint Ventures . . . . . . . . . . $ 196,000 $ 608,000
Investments in Joint Ventures in excess of 954,000 76,000
equity . . . . . . . . . . . . . . . . . . ---------- ----------
$1,150,000 $ 684,000
Total investments in Joint Ventures . . . ========== ==========
Year Ended December 31,
-----------------------
LIPA PCLP
---- ----
1995 1994 1995
---- ---- ----
$1,150,000
Revenue . . . . . . . . . . . . . . . . ==========
$236,000
Gain on sale of fixed assets . . . . . ========
$172,000 $(41,000) $ (87,000)
Net income (loss) . . . . . . . . . . . ======== ======== ==========
Equity in net income (loss) . . . . . . $ 86,000 $(21,000) $ (44,000)
Amortization of purchase price over (55,000) (55,000) (4,000)
equity . . . . . . . . . . . . . . . -------- -------- ----------
$ 31,000 $(76,000) $ (48,000)
Net income (loss) from Joint Ventures . ======== ======== ==========
Three Months Ended March 31,
----------------------------
LIPA PCLP
---- ----
1996 1995 1996 1995
---- ---- ---- ----
$290,000 $301,000
Revenue . . . . . . . . . . . . . ======== ========
Gain on sale of fixed assets . .
$(14,000) $(10,000) $(35,000) $(29,000)
Net income (loss) . . . . . . . . ======== ======== ======== ========
Equity in net income (loss) . . . $(7,000) $(5,000) $(17,000) $(15,000)
Amortization of purchase price (13,000) (14,000) (2,000)
over equity . . . . . . . . . . -------- -------- -------- --------
Net income (loss) from Joint $(20,000) $(19,000) $(19,000) $(15,000)
Ventures . . . . . . . . . . . ======== ======== ======== ========
Plymouth Project commenced operations on January 1, 1995.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE D) - Accounts Payable and Accrued Expenses:
------------------------------------------------
Accrued expenses and other current liabilities are comprised of the
following:
January 31, April 30,
1996 1996
----------- ---------
Professional fees . . . . . . . . . $293,000 $ 376,000
Accrued interest . . . . . . . . . 417,000 499,000
Accrued payroll and related taxes . 238,000 336,000
Other . . . . . . . . . . . . . . . 42,000 42,000
-------- ----------
$990,000 $1,253,000
Total . . . . . . . . . . . . ======== ==========
(NOTE E) - Pre-Reorganization Income Taxes Payable:
--------------------------------------------------
Pursuant to the Plan of Reorganization of Cogenic, the pre-
reorganization income taxes payable were to be paid in full, plus interest
at the rate set by applicable statute, by making a payment of $110,000 upon
the merger with USF and by making equal monthly installments, commencing
one year after the merger, over a period not exceeding six years after the
date of assessment of such pre-reorganization income taxes payable. The
$110,000 payment has not been made since the effective date of the merger.
The remaining payments of pre-reorganization income taxes and accrued
interest are as follows:
January 31, April 30,
1996 1996
----------- ---------
1997 . . . . . . . . . . . $172,000 $183,000
1998 . . . . . . . . . . . 41,000 46,000
1999 . . . . . . . . . . . 43,000 44,000
2000 . . . . . . . . . . . 46,000 47,000
2001 . . . . . . . . . . . 46,000 46,000
-------- --------
Total . . . . . . . . $348,000 $366,000
======== ========
During the two-year period ended January 31, 1996, the Company reached
settlements with the tax authorities resulting in extraordinary gains from
restructuring of liabilities of $83,000 and $85,000 during the years ended
January 31, 1996 and January 31, 1995, respectively.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - Income Taxes:
-----------------------
The deferred tax asset is as follows:
January 31, April 30,
1996 1996
----------- ---------
Benefit of post-reorganization
operating loss carryforward . . . . $ 801,000 $ 920,000
Expenses for financial reporting, not
yet deductible for taxes . . . . . 132,000 52,000
(933,000) (972,000)
Valuation allowance. . . . . . . . . --------- ---------
$ - 0 - $ - 0 -
========= =========
The Company has fully reserved against the deferred tax asset since
the likelihood of realization cannot be determined.
During the years ended January 31, 1996 and 1995, and the three-month
period ended April 30, 1996, the difference between the statutory tax rate
of 34% and the Company's effective tax rate of 0% is due to an increase in
the valuation allowance of $410,000, $503,000 and $39,000, respectively.
During the three-month period ended April 30, 1995, the difference is due
to a decrease in the valuation allowance of $1,000.
Prior to the reorganization, Cogenic had available a net operating
loss carryforward, which expires through 2008, of approximately $19,000,000
for tax purposes and tax credit carryforwards of $216,000 expiring from
1997 to 2000. Utilization of the acquired net operating loss and tax
credit carryforwards may be subject to limitations as a result of the
reorganization, or in the event of other significant changes in ownership.
Accordingly, the Company has not recognized the deferred tax asset
attributable to the acquired net operating loss and tax credit
carryforwards.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Loans Payable (the "Loans"):
--------------------------------------
Loans payable consist of the following:
January 31, April 30,
1996 1996
----------- ---------
18% loan, payable on the earlier of
May 31, 1996 or closing of the
proposed public offering, net of debt
discount of $19,000 at January 31,
1996 (effective rate 39.68%) (a) . . . $616,000 $660,000
10% loan, payable on the earlier of
May 31, 1996 or closing of the
proposed public offering (b) . . . . . 100,000 200,000
18% unsecured loan payable upon closing
of the proposed public offering . . . . 50,000 50,000
-------- --------
$766,000 $910,000
======== ========
(a) Collateralized by first lien on all the assets of the Company and by
97,250 shares of the Company's common stock owned by officers.
(b) Collateralized by the Company's interest in LIPA and PCLP Joint
Ventures, subject to prior lien.
(NOTE H) - Convertible Subordinated Secured Debentures:
------------------------------------------------------
The Company's Convertible Subordinated Debentures (the "Debentures")
bear interest at 18% and are due on January 25, 2004. In addition to the
interest payments, the Debenture holders are entitled to 50% of the
Company's share of net profits (net of provision for the 18% interest on
the Debentures) of LIPA ("Supplemental Participation"). The Debentures are
collateralized by a security interest in the outstanding shares of Lehi and
are subject to subordination to senior indebtedness. Commencing
January 25, 1998, the Company has the option to redeem the Debentures at
102, plus unpaid and accrued interest and Supplemental Participation.
Commencing January 25, 1996, each Debenture may be converted at any time,
at the option of the Debenture holders, into the Company s common stock.
Subject to certain adjustments, each $1,000 principal amount of Debentures
is initially convertible into 62 shares of the Company's common stock.
Commencing January 25, 1997, the Company will have the right to convert all
the then outstanding Debentures into common stock at the then current
conversion number if the market price, as defined, of the common stock
equals or exceeds $40.00 for more than twenty (20) consecutive days prior
to the date fixed for conversion by the Company.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - Convertible Subordinated Secured Debentures: (continued)
------------------------------------------------------
In December 1994, the Company requested from its Debenture holders
that one-half of the 18% interest be deferred commencing with the
December 25, 1994 interest payment until the earlier to occur of completion
of new financing or commencement of cash flow from LIPA (see Note C[1]).
In the event of default, the Debenture holders have the right to demand
immediate payment of all or any portion of the outstanding principal amount
and any unpaid interest, if the default is not remedied within 120 days
after it has occurred. As of May 15, 1995, the Debenture holders have
agreed to the terms of the partial deferment. In connection with the 9%
deferment, the Company increased the number of shares that each Debenture
can be converted into from 62 shares for each $1,000 principal amount to 66
shares for each $1,000 principal amount.
At January 31, 1996 and April 30, 1996, the 9% interest deferred,
included in accrued expenses and other current liabilities, was $160,000
and $194,000, respectively.
(NOTE I) - Notes Payable:
------------------------
In connection with the acquisition of PCLP (see Note C[2]), the
Company borrowed $1,000,000 from a group comprised principally of officers,
directors and affiliates of the Company. The interest on the Secured
Promissory Notes (the "Notes") is the prime rate plus 2.5% (11% at
January 31, 1996) adjusted quarterly during the term of the Notes. The
interest on the Notes is payable quarterly but only to the extent that the
net after tax cash flow of Plymouth is sufficient to make such interest
payment. The Company has not paid interest on these Notes since the
inception of the Notes. At January 31, 1996 and April 30, 1996, the unpaid
interest on these Notes was $141,000 and $169,000, respectively, included
in accrued expenses and other current liabilities. The Notes are
collateralized by the shares of common stock of Plymouth. The Notes and
unpaid interest, are to be paid on the earlier of: (1) USE's receipt of
not less than $1,000,000 in net proceeds from the Company's next public
offering of equity securities, or (2) USE's receipt of an aggregate of not
less than $4,000,000 in net proceeds from a private debt financing of USE,
or (3) October 31, 1997.
In conjunction with the issuance of these Notes, the Company granted
to the investors warrants to purchase 95,000 shares of the Company's common
stock at $16.00 per share before October 31, 1999. The Company valued the
warrants issued at $46,000, which is being accounted for as debt discount.
In connection with the Company's Loans (Note G), the Company was required
to grant certain security interests in the Company's assets including its
ownership interest in Plymouth. In June 1995, in return for granting the
security interests, the Company granted the noteholders additional warrants
to purchase 19,000 shares of the Company's common stock (the "Additional
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Notes Payable: (continued)
------------------------
Warrants"). The Additional Warrants have the same terms as those warrants
initially granted to the noteholders. The Company valued the Additional
Warrants issued at $9,500, which is being accounted for as additional debt
discount. In March 1996, the Company reduced the exercise price of the
warrants including the additional warrants from $16.00 per share to $5.00
per share. The effective interest rates at January 31, 1996 and
January 31, 1995 are 13.60% and 10.72%, respectively.
(NOTE J) - Stockholders' Equity:
-------------------------------
[1] Preferred stock:
---------------
In June 1995, the Board of Directors designated 100,000 shares of
preferred stock as Series One Exchangeable and Convertible Preferred Stock
("Series One Preferred Stock"). The holders of Series One Preferred Stock
are entitled to (i) convert to common stock equal to $10.00 per share of
Series One Preferred Stock divided by the conversion price, as defined, and
subject to adjustments for changes in capital stock, (ii) no voting rights
except for certain corporate actions, (iii) receive cumulative dividends
equal to $1.00 per share, (iv) liquidation preference of $10.00 per share
plus any dividends accrued and unpaid.
The Series One Preferred Stock is redeemable at the option of the
Company at a price of $10.00 per share, plus accrued and unpaid dividends,
under certain conditions, commencing the earlier of: (i) 3 years after the
effective date of the Proposed Public Offering or (ii) January 1, 1999.
The Series One Preferred Stock rank senior to all other equity securities
of the Company including any other series or classes of preferred stock
with respect to dividend rights and rights upon liquidation, winding up and
dissolution.
In connection with the Company's Loans, the Company issued 57,500
shares of Series One Preferred Stock which are convertible into 205,000
shares of common stock. The Company estimated the fair value of these
shares of Series One Preferred Stock at approximately $29,000 and this
amount is treated as a loan discount which is being amortized over the life
of the loan.
In calculating the net income per share, the net income (loss)
available for common stockholders during the period the 57,500 shares of
Series One Preferred Stock are converted into 205,000 shares of common
stock will be reduced by a nonrecurring amount of approximately $791,000
which represents the excess of the fair value of the common stock
transferred to the holders of the preferred stock over the carrying amount
of the preferred stock.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - Stockholders' Equity: (continued)
-------------------------------
[2] Stock options:
-------------
Stock option activity is summarized as follows:
Shares Option Price Expiration Date
------ ------------ ---------------
(per share)
Granted - year ended $4.00 - April 1999 -
January 31, 1995 . 20,100 $10.00 January 2000
Granted - year ended 154,000 $4.00 - January 2000 -
January 31, 1996 . ------- $8.00 December 2000
Balance at
January 31, 1996 and
April 30, 1996
(174,100 exercisable
at option prices
$4.00 to $10.00) . 174,100
During the year ended January 31, 1995 the Company recorded a
compensation charge of $46,000 in connection with the issuance of certain
options in that year.
[3] Common stock reserved:
---------------------
The Company has reserved shares of common stock for issuance upon
conversion of the Debentures and exercise of warrants and options as
follows:
(i) Convertible subordinated secured
debentures (Note H). . . . . . . . . 100,000
(ii) Warrants issued in conjunction with
notes payable (Note I) . . . . . . . 114,000
(iii) Warrants issued in connection with
consulting services. Exercisable
at $16.00 per share, expires
October 31, 1999. In connection
therewith, the Company recorded a
noncash charge of $2,000, in 1995. . 3,750
(iv) Stock options outstanding
(Note J[2]). . . . . . . . . . . . . 174,100
(v) Series One Preferred Stock
(Note J[1]). . . . . . . . . . . . . 205,000
In connection with the proposed transactions referred to in
Note A, the Company anticipates issuing warrants to purchase approximately
2,125,000 shares of common stock.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - Stockholders' Equity: (continued)
-------------------------------
[4] Reorganization:
--------------
In February 1996, the shareholders approved a 1 for 40 reverse
stock split, effective May 6, 1996, which has been given retroactive effect
in the accompanying financial statements. All reference to shares and per
share amounts in the notes to financial statements have been adjusted to
reflect the reverse split.
(NOTE K) - Commitments and Contingencies:
----------------------------------------
[1] The Company has employment agreements which expire through
November 30, 1998 with two of its officers. The agreements provide for
minimum annual payments of $210,000 subject to upward adjustment at the
discretion of the Board of Directors.
[2] In October 1995, the Company entered into a consulting agreement
with one of the members of its Board of Directors for an unspecified
period. The consulting agreement provides for a $5,000 monthly consulting
fee. The term of the consulting agreement is subject to the approval of
the Board of Directors.
[3] USE International, L.L.C. ("USE International"):
-----------------------------------------------
In May 1995, the Company entered into a Joint Venture agreement
to form a limited liability company, USE International, L.L.C. ("USE
International"). USE International is owned 50% by the Company and 50% by
Indus, LLC ("Indus"). USE International is managed by Indus. In
connection with the agreement, the Company sold 2,500 shares of its common
stock, at market price, to Indus and issued options to purchase 16,250
shares of the Company's common stock with an exercise price of $8.00 per
share and expiring five years after date of issuance. At the time of
issuance, the options granted to Indus were deemed immaterial. The
agreement also provides for the issuance of options to purchase up to an
additional 25,000 shares of the Company's common stock at a price per share
of $8.00. These options will be granted to Indus upon the signing of an
initial transaction, as defined, by USE International.
The Company has agreed to pay Indus a consulting fee of $6,000
per month. The consulting arrangement has an initial term of one year and
expires in May 1996. The Company has also agreed to indemnify, defend and
hold Indus harmless from all claims, losses, causes of action, liabilities,
costs and expenses (including attorney's fees) which may arise in
connection with the business of USE International.
The Company accounts for the investment in USE International
under the equity method. USE International was inactive during the year
ended January 31, 1996 and the three-month period ended April 30, 1996.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(formerly U.S. Envirosystems, Inc.)
NOTES TO FINANCIAL STATEMENTS
(NOTE L) - Related Party Transactions:
-------------------------------------
The Company borrowed from officers and an affiliate of a director
(collectively, the "Related Parties") $325,000 under the Debentures and
$775,000 under the Notes. In connection with the Notes, an affiliate of a
director was granted warrants to purchase 78,000 shares of the Company's
common stock at $16.00 per share before October 31, 1999. Included in
deferred interest at January 31, 1996 and April 30, 1996 is $12,000 due to
the Related Parties. In addition, at January 31, 1996 and April 30, 1996,
$467,000 and $642,000, respectively, of accrued expenses and other current
liabilities is due to the Related Parties.
During the year ended January 31, 1996 and 1995 and the three months
ended April 30, 1996, the Company paid interest of $15,000, $22,000 and
$7,000, respectively, to the Related Parties. No interest payment was made
to the related parties during the three months ended April 30, 1995.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
General Partner
Far West Electric Energy Fund, L.P.
Salt Lake City, Utah
We have audited the balance sheet of Far West Electric Energy Fund,
L.P. as of December 31, 1995 and 1994, and the related statements of
income, partners' capital and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Far West
Electric Energy Fund, L.P. as of December 31, 1995 and 1994, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
Respectfully submitted,
/s/ Robison, Hill & Co.
----------------------------
Certified Public Accountants
Salt Lake City, Utah
February 29, 1996
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
BALANCE SHEETS
--------------
DECEMBER 31, 1995 AND 1994
--------------------------
1995 1994
---- ----
Assets
------
Utility Plant:
Plant in Service $15,999,000 $18,716,000
Equipment 588,000 335,000
Construction in Progress 118,000 118,000
Accumulated Depreciation (5,377,000) (6,010,000)
----------- -----------
Net Utility Plant 11,328,000 13,159,000
Restricted Cash 1,026,000 1,145,000
Other Assets 106,000 124,000
Current Assets:
Cash and Cash Equivalents 263,000 278,000
Receivables - Trade 399,000 437,000
Receivables - Other 6,000 6,000
Receivable - Related Party 238,000 159,000
Prepaid Expenses 4,000 12,000
----------- -----------
Total Current Assets 910,000 892,000
----------- -----------
Total Assets $13,370,000 $15,320,000
=========== ===========
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
BALANCE SHEETS
--------------
DECEMBER 31, 1995 AND 1994
--------------------------
(Continued)
-----------
1995 1996
---- ----
Partners' Capital and Liabilities
---------------------------------
Partners' Capital:
Limited Partners - 10,306 units $ 5,148,000 $ 4,868,000
General Partner - 1 Percent (8,000) (11,000)
----------- -----------
Total Partners' Capital 5,140,000 4,857,000
Other Liabilities - 150,000
Long-term Debt:
Notes Payable - Related Party 188,000 230,000
Notes Payable 537,000 -
----------- -----------
Partners' Capital and Long-Term
Liabilities 5,865,000 5,237,000
Current Liabilities:
Current Portion - Long-term Debt 4,563,000 7,140,000
Note Payable - Related Party 1,159,000 1,043,000
Payable-Related Party 671,000 573,000
Accrued Liabilities
Operations 402,000 495,000
Royalties 96,000 220,000
Interest 614,000 612,000
----------- -----------
Total Current Liabilities 7,505,000 10,083,000
----------- -----------
Total Partners' Capital
and Liabilities $13,370,000 $15,320,000
=========== ===========
See accompanying notes to the financial statements.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
STATEMENTS OF INCOME
--------------------
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---- ---- ----
Revenues:
Electric Power Revenues $ 2,529,000 $ 2,728,000 $ 3,162,000
Other Revenues 145,000 151,000 622,000
----------- ----------- -----------
Total Revenues 2,674,000 2,879,000 3,784,000
----------- ----------- -----------
Expenses:
Operations 1,755,000 1,779,000 2,163,000
Bad Debt Expense - - 31,000
General and Administrative:
Professional Services 55,000 54,000 72,000
General Partners - 98,000 123,000 223,000
Related Party ----------- ----------- -----------
Total General and 153,000 177,000 295,000
Administrative ----------- ----------- -----------
Total Expenses 1,908,000 1,956,000 2,489,000
----------- ----------- -----------
Income From Operations 766,000 923,000 1,295,000
Other Income (Expense):
Interest Income 73,000 52,000 38,000
Interest Expense (744,000) (902,000) (806,000)
Loss on Sale of Property (170,000) - -
----------- ----------- -----------
Net Other Expense (841,000) (850,000) (768,000)
----------- ----------- -----------
Net Income (Loss) Before
Extraordinary Item (75,000) 73,000 527,000
Extraordinary Item - Early 358,000 - 175,000
Extinguishment of Debt ----------- ----------- -----------
Net Income $ 283,000 $ 73,000 $ 702,000
=========== =========== ===========
Net Income Per Limited
Partnership Unit:
Income Before
Extraordinary Item $ (7.28)$ 7.08 $ 51.14
Extraordinary Item 34.74 - 16.98
----------- ----------- -----------
Net Income $ 27.46 $ 7.08 $ 68.12
=========== =========== ===========
See accompanying notes to the financial statements.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
STATEMENT OF PARTNERS' CAPITAL
------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
-----------------------------------------------------
General Partner
---------------
% Income
Allocation Amount
---------- ------
Balances at December 31, 1992 1 $ (18,573)
- 7,020
Net Income --- -----------
Balances at December 31, 1993 1 (11,553)
- 730
Net Income --- -----------
Balances at December 31, 1994 1 $ (10,823)
- 2,830
Net Income --- -----------
1 $ (7,993)
Balances at December 31, 1995 === ===========
Limited Partners
----------------
Number Total
of Units Amount Amount
-------- ------ ------
Balances at December 31, 1992 10,306 $ 4,100,573 $ 4,082,000
- 694,980 702,000
Net Income ------ ----------- -----------
Balances at December 31, 1993 10,306 4,795,553 4,784,000
- 72,270 73,000
Net Income ------ ----------- -----------
Balances at December 31, 1994 10,306 4,867,823 4,857,000
- 280,170 283,000
Net Income ------ ----------- -----------
10,306 $ 5,147,993 $ 5,140,000
Balances at December 31, 1995 ====== =========== ===========
See accompanying notes to the financial statements.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
STATEMENTS OF CASH FLOWS
------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---- ---- ----
Cash Flows From Operating
-------------------------
Activities:
----------
Net Income (Loss) $ 283,000 $ 73,000 $ 702,000
Adjustments to Net Income
(Loss):
Depreciation and Amortization 613,000 661,000 716,000
Loss on Sale of Property 170,000 - -
Extraordinary Item -
Early Extinguishment of Debt (358,000) - (175,000)
(Increase) Decrease in
Receivables (41,000) (124,000) (59,000)
(Increase) Decrease in Prepaid
Insurance (1,000) - (9,000)
(Increase) Decrease in Other
Assets 18,000 18,000 18,000
Accrued Income Restricted Cash (63,000) (43,000) (31,000)
Increase (Decrease) in Accrued
Liabilities 41,000 120,000 (234,000)
Increase (Decrease) in Amount 98,000 100,000 214,000
Due to General Partner --------- --------- ---------
Total Adjustments 477,000 732,000 440,000
--------- --------- ---------
Net Cash Provided by Operating 760,000 805,000 1,142,000
Activities --------- --------- ---------
Cash Flows From Investing
-------------------------
Activities:
----------
Cash Draws Restricted Cash 181,000 - 207,000
Transfers to Restricted Cash - - (205,000)
Capital Expenditures (253,000) (139,000) (222,000)
--------- --------- ---------
Net Cash Provided by (Used) in (72,000) (139,000) (220,000)
Investing Activities --------- --------- ---------
Cash Flows From Financing
-------------------------
Activities:
----------
Principal Payments on Long
-term Debt $(815,000) $(751,000) $(1,109,000)
Proceeds From the Issuance of 112,000 83,000 171,000
Debt --------- --------- -----------
Net Cash Provided by (Used) in (703,000) (668,000) (938,000)
Financing Activities --------- --------- -----------
Increase (Decrease) in Cash and
Cash Equivalents (15,000) (2,000) (16,000)
Cash and Cash Equivalents at 278,000 280,000 296,000
Beginning of Year --------- --------- -----------
Cash and Cash Equivalents at End $ 263,000 $ 278,000 $ 280,000
of Year ========= ========= ===========
Supplemental Disclosure of Cash
-------------------------------
Flow Information:
----------------
Cash Paid During the Year for $ 743,000 $ 727,000 $ 755,000
Interest ========= ========= ===========
Non-Cash Activities:
-------------------
The Partnership reduced a contract payable for the year ended December
31, 1993 by $13,000, and recognized income relating to option payments not
made.
An extraordinary gain of $175,000 for the year ended December 31,
1993, was recognized relating to the extinguishment and restructuring of
debt and accrued interest; see Note 4.
Notes payable and accrued interest were reduced and other income
recognized for the year ended December 31, 1993 in the amount of $424,000,
relating to offsets allowed under the performance guaranty on the Steamboat
Springs project; see Note 7.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
STATEMENT OF CASH FLOWS
-----------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
------------------------------------------------
(Continued)
-----------
The Partnership sold the Crystal Springs Project for $1,100,000 which
was paid directly to First Security Bank to pay down the note secured by
the Crystal Springs Project in accordance with the sales agreement dated
February 28, 1995. In addition, the note referred to above was
restructured as described in Note 13. A net loss on the sale of
$170,000 has been reported in net income for December 31, 1995 as
other income, and gain on early extinguishment of debt of $358,000 has
been reported as an extraordinary item for December 31, 1995.
See accompanying notes to the financial statements.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
The following significant accounting policies are followed by Far West
Electric Energy Fund, L.P. in preparing and presenting the financial
statements, and are to assist the users in understanding the financial
statements.
Organization
------------
Far West electric Energy Fund L.P., a Delaware limited partnership
(the "Partnership"), was originally organized in September 1984 under the
Uniform Limited Partnership Act of Utah as Far West Hydroelectric Fund,
Ltd. On December 20, 1988, the Partnership changed its name to Far West
Electric Energy Fund, L.P. and changed its domicile to Delaware.
The Partnership owns a geothermal power plant, (the "Steamboat Springs
Plant") located in Nevada, and until March 16, 1995, owned a hydroelectric
plant located in Idaho (the "Crystal Springs Plant") which was sold to
Crystal Springs Hydroelectric, L.P., a Washington limited partnership
pursuant to a Purchase and Sale Agreement dated February 28, 1995.
Utility Plant and Equipment
---------------------------
Utility plants and equipment are carried at cost or adjusted cost (see
Note 2). Fixed assets are depreciated over their estimated useful life
(utility plants - thirty years, equipment - five to ten years).
Cash Equivalents
----------------
For purposes of the statement of cash flows, the Partnership's policy
is that all investments with maturities of three months or less are
considered cash equivalents.
Income Taxes
------------
No provision for income taxes has been made since the Partnership
files partnership return under provisions for federal and state tax laws.
The assets and liabilities of the Partnership for tax purposes are lower
than the financial statements for 1995 by $8,066,000 and $552,000; and for
1994 by $11,154,000 and $2,208,000, respectively.
Income Per Limited Partnership Unit
-----------------------------------
The income per partnership unit on income before extraordinary item
and on net income is calculated on the weighted average units outstanding
during the year. The weighted average of units outstanding during 1995,
1994, and 1993 were 10,306.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------------
Reclassifications
-----------------
Certain amounts in 1994 and 1993 have been reclassified to conform
with financial statement presentations adopted in 1995.
NOTE 2 - UTILITY PLANT
----------------------
Plant in service consists of the following at December 31, 1995 and
1994:
Estimated
1995 1994 Useful Lives
---- ---- ------------
Steamboat Springs
Thermal Hydroelectric
Power Plant $15,599,000 $15,599,000 30 Years
Expansion Pipeline 400,000 400,000 5 to 7 Years
Crystal Springs
Hydroelectric Power
Plant - 4,738,000 30 Years
Valuation Allowance - (2,021,000)
----------- -----------
$15,999,000 $18,716,000
=========== ===========
The valuation allowance relates to the Crystal Springs Hydroelectric
Power Project. The valuation allowance is a result of the rights to a
purchase option being waived and a decline in the value of the project.
NOTE 3 - OTHER ASSETS
---------------------
Other assets consist of the following at December 31, 1995 and 1994:
1995 1994
-------- --------
Loan Origination Fees $183,000 $183,000
Organization Costs 65,000 65,000
Other Assets 35,000 35,000
(177,000) (159,000)
Accumulated Amortization -------- --------
$106,000 $124,000
Total Other Assets ======== ========
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 3 - OTHER ASSETS (Continued)
---------------------------------
The loan origination fees are being amortized on a straight-line basis
over the respective lives of the loans. Organization costs are amortized
over a five year period on a straight-line basis. Amortization was
$18,000, $18,000, $18,000 for the years ended December 31, 1995, 1994, and
1993, respectively.
NOTE 4 - LONG-TERM DEBT - NOTES PAYABLE
---------------------------------------
Long-term debt as of December 31, 1995 and 1994 consists of the
following:
1995 1994
---- ----
Note Payable to Westinghouse Credit
Corp. is in default as of 10/23/92 and
is immediately due and payable. Note is
secured by the Steamboat Springs Project
and all associated rights. Interest
rate is 11.5% $4,563,000 $5,340,000
Note Payable to a bank was due and
payable in full originally on
December 1, 1993, extended to
September 30, 1994 and has been modified
due to the sale of the Crystal Springs
Project. The principal amount owing
after the modification is $537,000.
Interest is due in semiannual
installments. With all remaining
principal and interest due 3/2/2000.
Interest rate is prime which was 8.75%
at year end (See Note 13 - Sale of 537,000 1,800,000
Crystal Springs Project). ---------- ----------
5,100,000 7,140,000
4,563,000 7,140,000
Less Current Installments Due ---------- ----------
$ 537,000 $ -
========== ==========
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 4 - LONG-TERM DEBT - NOTE PAYABLE (Continued)
--------------------------------------------------
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1995 are as follows:
Year Ending December 31,
------------------------
1996 $ 4,563,000
1997 -
1998 -
1999 -
2000 537,000
Thereafter -
-----------
$ 5,100,000
===========
A note payable to Ormat, Inc. was extinguished in the amount of
$175,000 in December 1993. The extinguishment was a result of negotiations
to settle litigation on the performance guaranty. The principal note
amount and related accrued interest are shown as an extraordinary item in
the statement of operations for the year ended December 31, 1993.
During December 1992, a note payable to a bank was restructured
resulting in a reduction of principal amount, accrued interest, and a
renegotiation of terms. Interest payments relating to the reduced note
were offset to accrued interest payable. The total amount offset against
accrued interest payable in 1994 was $26,000.
NOTE 5 - RESTRICTED CASH
------------------------
The Partnership is required to maintain an escrowed bank account as
security under the terms of the note payable to Westinghouse Credit Corp.
with the note payable balance as of December 31, 1995 of $4,563,000. The
reserve account was drawn down to $1,026,000 due to insufficient operating
funds needed for plant repairs of $188,000. The note is in default due to
the reserve account being drawn below required amounts. The reserve
includes the initial deposit of $1,000,000 and requires an additional
$70,000 annually for the first seven years, interest income is also
retained in the reserve account. Disbursements from the reserve account
for principal and interest payments on the note are allowed to the extent
that there are insufficient funds in the Partnership's operating accounts.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 6 - NOTE PAYABLE-RELATED PARTY
-----------------------------------
The Partnership had notes payable to related parties for the years
ended December 31, 1995, and 1994 as follows:
1995 1994
---- ----
Notes Payable to General Partner payable
on demand, unsecured. Interest rate is
13% $1,117,000 $1,005,000
Note Payable to 1-A Enterprises, a
partnership, due in quarterly
installments, including interest;
commencing April 16, 1990, remaining
principal due January 16, 2000; 230,000 268,000
unsecured. Interest rate is 11% ---------- ----------
1,347,000 1,273,000
1,159,000 1,043,000
Less Current Installments Due ---------- ----------
$ 188,000 $ 230,000
========== ==========
NOTE 7 - PURCHASE AND OPERATING AGREEMENTS
------------------------------------------
Steamboat Springs Thermal Hydroelectric Power Plant (Steamboat Springs)
-----------------------------------------------------------------------
Under the terms of the Steamboat Springs purchase agreement (the
Agreement), the Partnership is required to pay royalties to non-affiliated
parties aggregating 14.05 percent of annual gross revenues for the life of
the project plus an annual lump sum of $50,000 for the first ten years. As
of December 31, 1995 all royalty obligations were current. For the years
ended December 31, 1995, 1994, and 1993, royalty expense related to these
commitments is as follows:
1995 1994 1993
-------- -------- --------
Sierra Pacific Power Company (10%) $253,000 $257,000 $263,000
Benson Schwarzhoff & Helzel (3.888%) 98,000 99,000 102,000
Geothermal Development Associates
($50,000) 50,000 50,000 50,000
G. Martin Booth (.081%) 2,000 2,000 2,000
2,000 2,000 2,000
Richard W. Harris (.081%) -------- -------- --------
$405,000 $410,000 $419,000
Total ======== ======== ========
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 7 - PURCHASE AND OPERATING AGREEMENTS (Continued)
------------------------------------------------------
As part of the Agreement, the original developer of Steamboat Springs
(the Developer) guaranteed annual net operating revenues, as defined (Net
Operating Revenues) of $2,000,000 for a period of ten years following the
date of commissioning, March 31, 1987 (the Guarantee). In 1993, the debt
and related performance guarantee with the original developer was
extinguished. Pursuant to the Guarantee and included in other revenues in
the statements of income for the years ended December 31, 1993, and 1992
are $424,000, and $387,000, respectively. Pursuant to the contract and in
accordance with FIN-39, amounts due to the Partnership under the Guarantee
are offset annually against a note payable to the Developer, and the
Bonneville corporation which subsequently sold the project to the
Partnership. The note payable to the developer and Bonneville have been
fully offset as of December 31, 1993. The following Table summarizes these
transactions:
1993
----
Guaranteed Net Operating Revenues $2,000,000
Net Operating Revenues 1,288,000
----------
Offset Available 712,000
Gross Debt Subject to Offset 424,000
----------
Debt to be Offset in Future $ -
==========
The Partnership is also required to pay the Developer annual royalties
equal to 50 percent of the first $100,000 over the guaranteed Net Operating
Revenues and 75 percent of amounts in excess of the $100,000 each year for
the first ten years following the date of commissioning. For years 11
through 20 after commissioning, the royalty equals 30 percent of Net
Operating Revenues; principal debt service payments incurred to finance
construction or operations are not deducted in determining the revised net
operating revenues (Revised Net Operating Revenues). For years 21
inclusive and thereafter, the royalty is equal to 50 percent of Revised Net
Operating Revenues. As revenues have not exceeded the guaranteed net
operating revenues, no royalties have been earned and no royalties have
been paid pursuant with this commitment.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 8 - RELATED PARTY TRANSACTIONS
-----------------------------------
Under the terms of the Partnership agreement, the general partner (Far
West Capital, Inc.) is allowed various fees and reimbursements of expenses
incurred to manage the Partnership. For each of the years in the three-
year period ended December 31, 1995, the Partnership expensed the following
amounts as cost reimbursements to the general partner:
1995 1994 1993
---- ---- ----
General and Administrative
Expenses $ 98,000 $123,000 $223,000
In addition, during the year ended December 31, 1993, the Partnership
paid $3,300 to a Utah partnership for private air transportation, in the
ordinary course of business, in lieu of commercial airfare. The general
partners are partners of the Utah Partnership.
As a term of the amended and restated Partnership agreement, the
General Partner is entitled to 5 percent of the limited partnership units
(Units) as compensation. Limited Partnership units for each of the three-
year period ended December 31, 1995 are as follows:
1995 1994 1993
---- ---- ----
General Partner 530 530 530
Limited Partners 9,776 9,776 9,776
-------- -------- --------
Total 10,306 10,306 10,306
======== ======== ========
During 1988, the Partnership assigned its rights to build an expansion
unit to Steamboat Springs to a Nevada general partnership owned mostly by
Alan O. Melchior and Thomas A. Quinn, officers and owners of the General
Partner of the Partnership. As consideration for the rights, the Nevada
general partnership deeded the Partnership rights and title to piping and
valves installed from Steamboat Springs to the expansion unit and agreed to
pay the Partnership royalties equaling 10 percent of net operating income
from the expansion for the years ended December 31, 1988 through 1992, 15
percent for 1993 through 1998, 40 percent for 1999 through 2010, 45 percent
thereafter, and an annual pumping charge. Included in other revenues in
the statement of operations for the years ended December 31, 1995, 1994 and
1993, are $145,000, $144,000 and $135,000, respectively related to this
agreement. As of December 31, 1994 and 1993, two of the general partners
held a 75 percent ownership in the Nevada general partnership.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 8 - RELATED PARTY TRANSACTIONS (Continued)
-----------------------------------------------
During 1991, the Partnership assigned its 77% ownership in SB Geo,
Inc. a Utah Corporation, to Alan O. Melchior and Thomas A. Quinn, two of
the officers and owners of the General Partner of the Partnership. SB Geo,
Inc. operates the Partnership's Steamboat Springs Thermal Hydroelectric
Power Plant and a related expansion unit. At the time of the transfer, SB
Geo, Inc. had no assets and operated on a cost reimbursement basis. No
gain or loss was recognized as a result of the assignment.
NOTE 9 - MAJOR CUSTOMER
-----------------------
The Partnership has contracted with Sierra Pacific Power Company to
sell electric energy from Steamboat Springs for a term of 20 years. The
contract entitles the Partnership to a rate of 71.7 mills per kilowatt hour
for the first 10 years and a variable amount related to the short-term cost
of power to Sierra Pacific Power Company for the second 10 years. Sales to
Sierra Pacific Power Company account for 100 percent of electric power
sales. The Partnership is dependent upon this customer for the purchase of
all electricity generated from this power plant.
NOTE 10 - LITIGATION
--------------------
Ormat Arbitration
-----------------
The arbitrators during 1993 made their award regarding the lawsuit
against Ormat alleging breach of contract on the Steamboat Springs project
and Ormat's counter-suit regarding the cancellation of the operating
agreement. The Partnership was awarded $188,000 in damages including a
portion of previously restricted cash. Ormat was awarded $255,000 for past
fixed operating fees of which the majority had been held in an escrow
account.
Subsequent to the arbitrators award the Partnership and Ormat reached
an additional agreement which cancels the note payable to Ormat which was
previously offset by the performance guaranty.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 10 - LITIGATION (Continued)
--------------------------------
Bonneville Pacific Corporation Bankruptcy
-----------------------------------------
The Partnership has filed a claim in the Chapter 11 filing of
Bonneville Pacific Corporation. The claim relates to fraud claims and
other transactions on the Crystal Springs project.
This claim is a general unsecured claim; it is unliquidated and
contingent, meaning that the amount of the claim has yet to be fixed in the
bankruptcy forum. It is estimated that the claim is no more than
$100,000.00. There is no economy for the partnership in attempting to
resolve the amount of the claim at this juncture, without certainty that
Bonneville Pacific Corporation will succeed in confirming a plan of
reorganization, since general unsecured claims cannot receive payment
absent confirmation of a plan of reorganization. If and when a plan of
reorganization is confirmed, it is expected that, post-confirmation, there
will be a claims liquidation and resolution process, during which the claim
of the partnership will be fixed by the bankruptcy court. The Chapter 11
reorganization proceeding of the Bonneville Pacific Corporation has been
ongoing for some years. It is a large and complex proceeding. The success
of the reorganization effort will turn in major part upon complex
litigation which the trustee in the case, Roger Segal, has commenced
against various parties in interest. Counsel for Mr. Segal, Vernon
Hopkinson, estimates at the present time that this litigation may be
concluded and a plan of reorganization proposed no earlier than year-end,
1997. As noted above, payment on account of general unsecured claims
cannot occur unless and until a plan of reorganization is confirmed by the
bankruptcy court. Mr. Hopkinson estimates at the present time that the
size of the dividend to general unsecured creditors could be anywhere from
20 percent to payment in full, depending upon the outcome of the
aforementioned litigation.
Nevada Department of Transportation
-----------------------------------
The Department of Transportation of the State of Nevada ("NDOT")
commenced action on 12/10/93 in the Second Judicial District Court of the
State of nevada in and for the County of Washoe against the Partnership and
others to obtain, for highway purposes, ownership of approximately 2.79
acres of the property owned by Sierra Pacific Power Company ("SPPC") at the
extreme north of the land upon which the Steamboat Springs Plant is located
pursuant to the SPPC lease. The Court entered an Order for occupancy of
the condemned property on 12/29/93. The NDOT deposited the sum of $273,500
on 12/29/93; which remains on deposit as of 12/31/95. The Partnership is
defending the action insofar as is necessary to protect a stand-by
injection well located on the lease in the proximity of the land being
taken and a monitoring well in an adjacent area which is being taken. It
is presently negotiating a settlement which will leave the stand-by
injection well and the Partnership's rights in and use thereof intact and
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 10 - LITIGATION (Continued)
--------------------------------
available. The Partnership has constructed a new monitoring well and is
attempting to recover the cost thereof from the State. The Partnership has
an agreement in principle with the State relative to this reimbursement,
the cost of which is approximately $5,000. That sum will likely be
disbursed in May or June of 1996. The Partnership is also attempting to
obtain a portion of the $273,500 offered and deposited into Court by NDOT
on 12/29/93 as compensation for the taking. SPPC is claiming all of such
funds as the owner of the land. The Court has granted NDOT the right to
possess and occupy the property while the amount of compensation to be
finally awarded is being contested. WCC, the Partnership's principal
creditor, has claimed that under the financing agreements with respect to
the Steamboat Springs and 1-A Plants, all funds recovered from NDOT must be
applied to reduce the principal balance of the loans outstanding. The
funds will not likely be disbursed until the fourth quarter of 1996 or the
first quarter of 1997, unless the Partnership, SPPC, and WCC reach some
settlement before that time.
NOTE 11 - NOTE DEFAULTS
-----------------------
Due to insufficient funds being in restricted cash, the Partnership
received a notice of default as of 10/23/92 on a note to Westinghouse
Credit Corp. The balance as of December 31, 1995 and 1994 was $4,563,000
and $5,340,000, respectively. Under the terms of the note all principal
and interest is immediately due and payable. The note is secured by the
Steamboat Springs project and related revenues and other assets.
The Partnership was in default on a note payable to a bank as of
9/30/94. The balance as of December 31, 1994 and 1993 was $1,800,000. Due
to the sale of the Crystal Springs Project subsequent to December 31, 1994,
this note has been reduced to $537,000 (see Note 13) and is no longer in
default.
NOTE 12 - LIQUIDITY
-------------------
As shown in the accompanying financial statements for the year ended
December 31, 1995, current liabilities exceeded current assets by
$6,595,000. Of this amount $4,563,000 relates to the note defaults
described in Note 11.
NOTE 13 - SALE OF CRYSTAL SPRINGS PROJECT
-----------------------------------------
The Partnership signed an agreement dated February 28, 1995 to sell
the Crystal Springs project. The sale included all the assets and
liabilities
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 13 - SALE OF CRYSTAL SPRINGS PROJECT (Continued)
-----------------------------------------------------
associated with the Crystal Springs Project except the note payable to
First Security Bank which has been modified as follows:
Upon receipt of First Security (Lender) of a principal payment on
the loan in the amount of $1,100,000, the note was modified to
provide that the remaining principal balance owed shall be
$537,000 and interest and costs on the loan shall be deemed
current.
If the note is paid in full within two years after the payment of
$1,100,000, the Lender will discount the principal amount owing
by $100,000 (requiring a principal payment of only
$437,000), and if paid within three years, the Lender will discount
the amount of the principal due by $50,000 (requiring a principal
payment of only $487,000). There will be no discount if paid after
the third anniversary.
The modification has resulted in a gain on early extinguishment of
debt of $358,000.
The net loss on sale of the Crystal Springs Project of $170,000 has
been reported on the Statement of Income for the year ended December 31,
1995 as Other Income.
At February 28, 1995, no amount was due on the $50,000 line of credit
acquired in 1992 for use in repair of certain items of equipment for the
Crystal springs Plant for start up operations in 1993.
The following pro forma statement of operations give effect to the
above events as if they had occurred on January 1, 1995:
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 13 - SALE OF CRYSTAL SPRINGS PROJECT (Continued)
-----------------------------------------------------
PRO FORMA STATEMENT OF OPERATIONS
---------------------------------
As Reported Pro Forma
in Adjustments
Accompanying For Pro Forma
Financial Subsequent Statement of
Statements Events Operations
------------ ------------ ------------
REVENUES
Electric Power Sales $2,529,000 $ - $2,529,000
Other Revenues 145,000 - 145,000
---------- ---------- ----------
Total Revenues 2,674,000 - 2,674,000
---------- ---------- ----------
EXPENSES
Interest, Net 671,000 (16,000) (A) 655,000
Depreciation 613,000 - 613,000
Royalty 405,000 - 405,000
Professional Services 54,000 (4,000) (A) 50,000
Administrative Services -
General Partner 98,000 (38,000) (A) 60,000
Amortization 18,000 - 18,000
Insurance 47,000 - 47,000
Maintenance 583,000 (5,000) (A) 578,000
Taxes 31,000 - 31,000
Other 59,000 (1,000) (A) 58,000
---------- --------- ----------
Total Expenses 2,579,000 (64,000) 2,515,000
---------- ---------- ----------
Net Income (Loss) $ 95,000 $ 64,000 $ 159,000
---------- ---------- ----------
Net Income (Loss) Per
Limited Partnership Unit $ 9.22 $ 6.21 $ 15.43
========== =========== ==========
A - Operating expenses attributable to Crystal Springs Project.
B - Accrued interest and expenses from January 1, 1995 through date of
sale of Crystal Springs Project.
Nonrecurring Transactions
-------------------------
The same of the Crystal Springs Project has resulted in a loss of
$170,000 and a gain on early extinguishment of debt of $358,000. These
amounts are reported in the statement of Income for December 31, 1995.
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
-----------------------------------
A DELAWARE LIMITED PARTNERSHIP
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
NOTE 14 - SUBSEQUENT EVENTS
---------------------------
Steamboat Springs Project
-------------------------
The Fund has received a cash offer to sell substantially all of the
assets of the Fund to U.S. Envirosystems, Inc. for $1,250,000. The sale
would result in the termination of the Fund and distribution of the
proceeds to limited partners of approximately $33 per limited partnership
unit.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Partners
1-A Enterprises
Salt Lake City, Utah
We have audited the balance sheet of 1-A Enterprises as of December
31, 1995 and 1994, and the related statements of income, partners' capital
and cash flows for the years then ended. These financial statements are
the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of 1-A Enterprises
as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
Respectfully submitted,
/s/ Robison, Hill & Co.
----------------------------
Certified Public Accountants
Salt Lake City, Utah
March 5, 1996
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
BALANCE SHEET
-------------
December 31,
------------
1995 1994
---- ----
Assets
------
Utility Plant:
Plant $2,431,222 $2,431,222
Development Costs 450,000 450,000
Accumulated Depreciation (676,289) (580,248)
-------- --------
Net Utility Plant 2,204,933 2,300,974
Restricted Assets:
Cash 80,626 76,157
Certificate of Deposit 73,189 70,000
------ ------
Total Restricted Assets 153,815 146,157
Other Assets: 32,145 40,181
Current Assets:
Cash and Cash Equivalents 80,428 98,642
Receivables - Trade 98,539 98,600
Receivables - Other 7,139 6,358
Receivable - Related Party 229,810 267,705
Prepaid Expenses 1,679 1,348
------- -------
Total Current Assets 417,595 472,653
------- -------
Total Assets $2,808,488 $2,959,965
========== ==========
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
BALANCE SHEET
-------------
(Continued)
----------
December 31,
------------
1995 1994
---- ----
Partners' Capital and Liabilities
---------------------------------
Partners' Capital $ (293,083) $ (464,613)
Current Liabilities:
Note Payable - See Note 4 1,670,995 1,960,732
Note Payable - Related Party 728,970 728,970
Payable - Related Party 358,574 435,193
Accrued Liabilities:
Operations 3,120 5,767
Royalties 302,315 249,799
Interest 37,597 44,117
---------- ----------
Total Current Liabilities 3,101,571 3,424,578
---------- ----------
Total Partners' Capital and $2,808,488 $2,959,965
Liabilities ========== ==========
The accompanying notes are an integral part of these financial
statements.
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
STATEMENTS OF INCOME
--------------------
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1995 1994
---- ----
Revenues:
Electric Power Revenues $ 875,356 $ 798,722
---------- ----------
Expenses:
Operations 536,756 545,336
General and Administrative:
Professional Services - 1,481
Related party 14,500 14,500
---------- ----------
Total Expenses 551,256 561,317
---------- ----------
Income From Operations 324,100 237,405
---------- ----------
Other Income (Expense):
Interest Income 41,037 38,315
Interest Expense (202,477) (233,513)
---------- ----------
Net other Expense (161,440) (195,198)
---------- ----------
Net Income $ 162,660 $ 42,207
========== ==========
The accompanying notes are an integral part of these financial
statements.
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
STATEMENT OF PARTNERS' CAPITAL
------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, AND 1994
-----------------------------------------------
Balances at December 31, 1993 $ (510,835)
Contributions 4,015
Net Income 42,207
----------
Balances at December 31, 1994 (464,613)
Contributions 8,870
Net Income 162,660
----------
Balances at December 31, 1995 $ (293,083)
==========
The accompanying notes are an integral part of these financial
statements.
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
STATEMENTS OF CASH FLOWS
------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1995 1994
---- ----
Cash Flows From Operating Activities:
-------------------------------------
Net Income (Loss) $162,660 $0,42,207
-------- ---------
Adjustments to Net Income (Loss):
Depreciation and Amortization 104,078 104,078
(Increase) Decrease in
Receivables (721) (18,339)
(Increase) Decrease in
Prepaid Insurance (331) (678)
Accrued Interest Income
Restricted Assets (7,658) (2,859)
Increase (Decrease) in
Accrued Liabilities 43,349 48,764
Increase (Decrease) in (76,619) 147,519
Amount Due to Related Party -------- ---------
Total Adjustments 62,098 278,486
-------- ---------
Net Cash Provided by 244,758 320,693
Operating Activities -------- ---------
Cash Flows From Investing Activities:
-------------------------------------
Principle Payments From Note
Receivable Related Party 37,895 33,916
Investment in Certificate of - (70,000)
Deposit - Restricted -------- ---------
Net Cash Provided by (Used) 37,895 (36,084)
in Investing Activities -------- ---------
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
STATEMENTS OF CASH FLOWS
------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
------------------------------------------------
(Continued)
-----------
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1995 1994
---- ----
Cash flows from Financing Activities:
------------------------------------
Principal payments on
Long-term Debt $(289,737) $(259,310)
Proceeds from Partner
Contributions 8,870 4,015
--------- ---------
Net Cash Provided by (Used) (280,867) (255,295)
in Financing Activities ---------- ---------
Increase (Decrease) in Cash
and Cash Equivalents (18,214) 29,314
Cash and Cash Equivalents at 98,642 69,328
Beginning of Year --------- ---------
Cash and Cash Equivalents at $ 80,428 $ 98,642
Enc of Year ========= =========
Supplemental Disclosure of Cash
-------------------------------
Flow Information:
----------------
Cash Paid During the Year $ 208,997 $ 239,346
for Interest ========= =========
The accompanying notes are an integral part of these financial
statements.
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1995 AND 1994
--------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
The following significant accounting policies are followed by 1-A
Enterprises in preparing and presenting the financial statements, and are
to assist the users in understanding the financial statements.
Organization
------------
1-A Enterprises, a Nevada General partnership (the Partnership) was
organized in 1988 to acquire and operate electric generating plants.
Utility Plant and Development Costs
-----------------------------------
Utility plant and Development costs are carried at cost. Fixed assets
are depreciated over their estimated useful life (thirty years).
Cash Equivalents
----------------
For purposes of the statement of cash flows, the Partnership's policy
is that all investments with maturities of three months or less are
considered cash equivalents.
Income Taxes
------------
No provision for income taxes has been made since the Partnership
files partnership return under provisions for federal and state tax laws.
The assets of the Partnership for tax purposes are lower than the financial
statements for 1995 and 1994 by $2,204,933 and $2,300,974 respectively.
NOTE 2 - RECEIVABLE RELATED PARTY
---------------------------------
The Partnership had a note receivable from a related party for the
year ended December 31, 1995 and 1994 as follows:
1995 1994
---- ----
Note Receivable From Far West Electric
Energy Fund, L.P., a Delaware Limited
partnership, due in quarterly installments,
including interest; commencing April 16, 1990,
remaining principle due January 16, 2000;
unsecured. Interest rate is 11% $229,810 $267,705
======== ========
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1995
-----------------
(Continued)
-----------
NOTE 3 - OTHER ASSETS
---------------------
Other assets consist of the following at December 31, 1995 and 1994:
1995 1994
---------- ----------
Loan Origination Fees $ 80,363 $ 80,363
Accumulated Amortization (48,218) (40,182)
-------- --------
Total Other Assets $ 32,145 $ 40,181
========= ========
The loan origination fees are being amortized on a straight-line basis
over the life of the loan (ten years). Amortization was $8,036 and $8,036
for the years ended December 31, 1995 and 1994, respectively.
NOTE 4 - LONG-TERM DEBT
-----------------------
Long-term debt as of December 31, 1995 and 1994 consists of the
following:
1995 1994
---- ----
Note Payable to a corporation is
payable in quarterly installments,
including interest, beginning
January 20, 1990. Note is secured
by the Steamboat 1-A Project and all
associated rights. Interest rate is
11.25% $1,670,995 $1,960,732
Less Current Installments Due 1,670,995 1,960,732
---------- ----------
$ - $ -
========== ==========
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1995
-----------------
(Continued)
-----------
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1995 are as follows:
Year Ending December 31,
------------------------
1996 $1,670,995
1997 -
1998 -
1999 -
2000 -
Thereafter -
------------
$1,670,995
============
NOTE 5 - NOTE PAYABLE-RELATED PARTY
-----------------------------------
The Partnership had notes payable to related parties for the years
ended December 31, 1995 and 1994, as follows:
1995 1994
---- ----
Notes Payable to Far West Capital*
payable on demand, unsecured. No
interest accrued to date.
$728,970 $728,970
Less Current Installments Due 728,970 728,970
-------- --------
$ - $ -
======== ========
* Two of the general partners of the Company are majority owners of Far
West Capital, Inc.
NOTE 6 - PURCHASE AND OPERATING AGREEMENTS
-------------------------------------------
Under the terms of the amended purchase agreement (the Agreement), the
Partnership is required to pay royalties aggregating 29.05 percent of
annual gross revenues. For the years ended December 31, 1995, and 1994,
royalty expense related to these commitments is as follows:
(continued)
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1995
-----------------
(Continued)
-----------
1995 1994
--------- --------
Sierra Pacific Power Company (10%) $ 87,536 $ 79,872
Benson Schwarzhoff & Helzel 34,034 31,054
(3.888%)
Far West Electrical Energy Fund, 86,904 86,654
L.P.(15%)
G. Martin Booth (.081%) 709 647
Richard W. Harris (.081%) 709 647
--------- ----------
Total $209,892 $198,874
======== ========
NOTE 7 - RESTRICTED ASSETS
--------------------------
The Partnership is required to maintain an escrowed bank account as
security under the terms of the note payable to a corporation with the note
payable balance as of December 31, 1995 and 1994 of $1,670,995 and
$1,960,732 respectively. The reserve required an initial deposit of
$150,000 plus interest income to be maintained in the account. The reserve
was drawn down due to insufficient operating funds to meet obligations.
The balance in the reserve as of December 31, 1995 and 1994 is $80,626 and
$76,157 respectively. Disbursements from the reserve account for
obligations are allowed to the extent that there are insufficient funds in
the Partnership's operating accounts. Funds are to be deposited into the
reserve account as necessary to replenish any disbursements for obligations
as provided above. The note is in default due to the reserve account being
drawn down below required amounts.
The Company is required to pay a 10% royalty to Sierra Pacific Power
Company (SPPC). Under the agreement with SPPC, 4% is paid and 6% is
accrued during the first 6 years of operation. The date of initial
operation was 10/29/88. During the seventh and eighth years, the amount
paid increases to 6% and 8% while the amount accrued decreases to 4% and
2%, respectively. Beginning in years nine through thirty, the full 10% is
paid with no accrual. The accumulation of accrued royalties pursuant to
this agreement shall be paid in the eleventh year of operation plus
interest accrued monthly at an annual rate of 11.9%. The Partnership is
required to maintain an irrevocable letter of credit for the benefit of
SPPC in the amount of $70,000. The provisions of the letter of credit
provide that in the event of default by the Company, SPPC shall have the
right to draw upon the letter of credit to satisfy any amounts or portions
os such amounts owed to SPPC for the eleventh year payment amount and
interest accrued as of the date of default. The
(continued)
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1995
-----------------
(Continued)
-----------
$70,000 has been invested by the company in a certificate of deposit which
had a balance of $73,189 and $70,000 as of December 31, 1995 and 1994,
respectively.
NOTE 8 - RELATED PARTY TRANSACTIONS
-----------------------------------
Amounts have been accrued for various fees and reimbursements of
expenses incurred by an affiliated company to manage the Partnership. For
each of the years in the two-year period ended December 31, 1995, the
Partnership expensed the following amounts as cost reimbursements to the
affiliated company:
1995 1994
---- ----
General and Administrative
Expenses $ 14,500 $ 14,500
During 1988, Far West Electric Energy Fund, L.P. assigned their rights
to build an expansion unit to Steamboat Springs to 1-A Enterprises. As
consideration for the rights, 1-A Enterprises deeded Far West Electric
Energy Fund, L.P., rights and title to piping and valves installed from
Steamboat Springs to the expansion unit and agreed to pay Far West Electric
Energy Fund, L.P. royalties equaling 10 percent of net operating income
from the expansion for the years ended December 31, 1988 through 1992, 15
percent for 1993 through 1998, 40 percent for 1999 through 2010, 45 percent
thereafter, and an annual pumping charge. Included in Operations Expense
in the statement of operations for the years ended December 31, 1995 and
1994, are $145,096, and $144,000, respectively related to this agreement.
As of December 31, 1995 and 1994, two of the general partners of Far West
Electric Energy Fund, L.P. held a 74 percent (1995) and 75 percent (1994)
ownership in 1-A Enterprises.
The Partnership has entered into an Operating and Maintenance
Agreement with a related corporation to act as the operator of the project.
This agreement provides for operator to perform the duties of the operator
including operating and regular maintenance of the plant for a monthly fee
and additional fees for variable maintenance. The Partnership paid
$142,745 for the year ended December 31, 1995 and $169,120 for the year
ended December 31, 1994.
NOTE 9 - MAJOR CUSTOMER
-----------------------
The Partnership has contracted with Sierra Pacific Power Company to
sell electric energy from Steamboat Springs for a term of 20 years. The
contract entitles the Partnership to a rate of 71.7 mills per kilowatt hour
for the
(continued)
<PAGE>
1-A ENTERPRISES
---------------
A NEVADA GENERAL PARTNERSHIP
----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1995
-----------------
(Continued)
-----------
first 10 years and a variable amount related to the short-term cost of
power to Sierra Pacific Power Company for the second 10 years. Sales to
Sierra Pacific Power Company account for 100 percent of electric power
sales. The Partnership is dependent upon this customer for the purchase of
all electricity generated from this power plant.
NOTE 10 - NOTE DEFAULTS
-----------------------
The Partnership is in default on a note payable to a corporation as of
October 1990 for reasons described in Note 4. The balance as of December
31, 1995 and 1994 is $1,670,995 and $1,960,732 respectively. Under the
terms of the note all principal and interest is immediately due and payable
upon request of the Lender. The note is secured by the 1-A project and
related revenued and other assets.
NOTE 11 - LIQUIDITY
-------------------
As shown in the accompanying financial statements for the year ended
December 31, 1995, current liabilities exceeded current assets by
$2,683,976. Of this amount $1,670,995 relates to the note defaults
described in Note 9.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Lehi Independent Power Associates, L.C.
We have audited the accompanying balance sheets of Lehi Independent
Power Associates, L.C. as of December 31, 1995 and 1994 and the related
statements of operations, changes in members equity and cash flows for the
year ended December 31, 1995 and the period January 24, 1994 (date of
inception) through December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We have conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Lehi
Independent Power Associates, L.C., as of December 31, 1995 and 1994, and
the results of its operations and its cash flows for year ended December
31, 1995 and the period January 24, 1994 (date of inception) through
December 31, 1994 in conformity with generally accepted accounting
principles.
March 19, 1996 /s/ TRAVELLER WINN & MOWER, P.C.
Salt Lake City, Utah
<PAGE>
Lehi Independent Power Associates, L.C.
Balance Sheets
December 31, 1995 and 1994
1995 1994
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 41,460 $ 2,113
Due from member - 3,335
Note receivable 115,750 -
Prepaid insurance 853 -
------- -------
Total current assets 158,063 5,448
Property, plant and equipment, 275,125 278,921
net ------- -------
TOTAL ASSETS $415,188 $ 284,369
======== =========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable $ 4,873 $ 951
Accrued expenses 4,373 -
Related party note payable - 3,440
------- --------
Total current liabilities 9,246 4,391
Members' equity:
Member contributions 292,662 292,662
Additional capital
contributions 42,104 28,149
Retained earnings (deficit) 71,176 (40,833)
------- --------
Total members' equity 405,942 279,978
------- --------
TOTAL LIABILITIES AND MEMBERS' $415,188 $284,369
EQUITY ======== ========
See accompanying notes to financial statements.
<PAGE>
Lehi Independent Power Associates, L.C.
Statements of Operations
For the year ended December 31, 1995 and the period
January 24, 1994 (date of inception) through December 31, 1994
1995 1994
---- ----
INCOME:
Gain on sale of fixed asset $236,194 $ --
EXPENSES:
General and administrative 49,195 27,092
Write-down of property, plant and 14,990 13,741
equipment -------- --------
Total expenses 64,185 40,833
-------- --------
Net income (loss) $172,009 $(40,833)
======== ========
See accompanying notes to financial statements.
<PAGE>
Lehi Independent Power Associates, L.C.
Statement of Changes in Members Equity
For the year ended December 31, 1995 and the period
January 24, 1994 (date of inception) through December 31, 1994
Additional Retained Total
Member Capital Earnings Members'
Contributions Contributions (deficit) Equity
------------ ------------- --------- --------
Balance January 24, 1995 $ - $ - $ - $ -
Members contributions 292,662 28,149 - 320,811
Net loss - - (40,833) (40,833)
-------- ------- -------- --------
Balance December 31, 292,662 28,149 (40,833) 279,978
1994
Members contributions - - 3,489 - 3,489
Suma, Corp.
Members contributions - - 3,489 - 3,489
Far West Capital,
Inc.
Members contributions - - 6,977 - 6,977
Lehi Envirosystems,
Inc.
Members distribution - - - (15,000) (15,000)
Suma Corp.
Members distribution - - - (15,000) (15,000)
Far West Capital,
Inc.
Members distribution - - - (30,000) (30,000)
Lehi Envirosystems,
Inc.
Net income - - 172,009 172,009
--------- --------- ------- -------
Balance December 31, $292,662 $42,104 $071,176 ($405,942)
1995 ========= ======== ======== =========
See accompanying notes to financial statements.
<PAGE>
Lehi Independent Power Associates, L.C.
Statements of Cash Flows
For the year ended December 31, 1995 and the period
January 24, 1994 (date of inception) through December 31, 1994
1995 1994
---- ----
Cash flows from operating activities:
Net income (loss) $172,009 $(40,833)
Adjustment to reconcile net income to
net cash provided by operating
activities:
Write-down of property, plant and
equipment 14,990 13,741
Gain on sale of equipment (236,194) -
Changes in assets and liabilities - -
Prepaid insurance (853) -
Accounts payable 3,922 951
Accrued expenses 4,373 --
-------- --------
Net cash (used) by operating
activities (41,753) (26,141)
Cash flows from investing activities:
Proceeds from sale of equipment 127,250 -
Cash flows from financing activities:
Net payment and proceeds from
collection of due from member 3,335 (3,335)
Net payment and proceeds of related
party note payable (3,440) 3,440
Additional capital contributions 13,955 28,149
Members distribution (60,000) -
-------- --------
Net cash provided (used) by financing
activities (46,150) 28,254
--------
Net increase in cash and cash
equivalents 39,347 2,113
Cash and cash equivalents at beginning 2,113 -
of period -------- --------
Cash and cash equivalents at end of $41,460 $ 2,113
period -------- --------
See accompanying notes to financial statements.
<PAGE>
Lehi Independent Power Associates, L.C.
Statements of Cash Flows
For the year ended December 31, 1995 and the period
January 24, 1994 (date of inception) through December 31, 1994
Supplemental cash flow information
Interest paid by the Company during 1995 was $415.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the period ended December 31, 1994, the members of the Company
contributed property and equipment with a cost of $292,662.
During the year ended December 31, 1995, the Company sold equipment for
$243,000. The Company received $127,250 in proceeds and a note receivable
for $115,750.
See accompanying notes to financial statements.
<PAGE>
Lehi Independent Power Associates, L.C.
Notes to Financial Statements
December 31, 1995 and 1994
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Lehi Independent Power Associates, L.C.(the Company) is a Utah based
company organized on January 24, 1994. The Company s principal
business is to purchase, develop, own, operate and/or sell all or a
portion of a power generation facility which produces electrical
energy located in Lehi, Utah. The members and their respective
ownership percentages are as follows: Lehi Envirosystems, Inc., 50 %;
Far West Capital, Inc., 25%; and Suma Corp., 25%. All revenues and
expenses are shared in the same proportion as each members ownership
percentage.
CASH AND CASH EQUIVALENTS
The Company considers all cash on deposit and short-term liquid
investments with original maturities of three months or less to be
cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of land, a power generation
plant and plant equipment and is recorded at cost. The plant is
currently not in operation. The plant and plant equipment are
depreciated on the straight-line method over useful lives of 29 and 6
years, respectively.
INCOME TAXES
No provision for federal income tax is made since the Company is
treated as a partnership for tax purposes and as such is not a taxable
entity under the federal income tax provisions. The individual
members are taxed on their proportionate share of members income or
loss.
2. DUE FROM MEMBER
At December 31, 1994, the Company had capital contributions receivable
from Lehi Envirosystems, Inc., for $3,335. This represents required
contributions to maintain the proportionate sharing of expenses as
stipulated in the operating agreement. This amount was received in
1995.
<PAGE>
Lehi Independent Power Associates, L.C.
Notes to Financial Statements
December 31, 1995 and 1994
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and consisted of the
following at December 31:
1995 1994
---- ----
Land $ 13,000 $ 13,000
Building 239,216 239,216
Plant equipment 30,446 40,446
-------- --------
282,662 292,662
Write-down of property,
plant and equipment (25,537) (13,741)
-------- --------
$257,125 $278,921
======== ========
During the periods in which the property, plant and equipment is not
in operation, management has reviewed the assets to determine their
realization. Based on this review, management has written-down the
property, plant and equipment for the year and period ended December
31, 1995 and 1994, $14,990 and $13,741, respectively.
4. RELATED PARTY TRANSACTIONS
The Company receives accounting services from a related company s
accounting department. The services provided are billed at $40 an
hour and average approximately $160 a month.
The related party note payable is due on demand and carries no
interest rate.
5. COMMITMENTS AND CONTINGENCIES
The Company is in communication with the Utah State Department of
Water Quality with respect to traces of petroleum products found in a
ground water discharge ditch which exits the plant property. Based on
those communications, the State is reviewing what, if any, additional
action may be required. Also, the United States Environmental
Protection Agency (EPA) has reviewed the data on the discharge and has
concluded that no violation of EPA Rules and Laws have occurred. In
Management s opinion, the potential impact to the financial statements
would not exceed $45,000.
See accompanying notes to financial statements.
<PAGE>
Lehi Independent Power Associates, L.C.
Notes to Financial Statements
December 31, 1995 and 1994
6. GOING CONCERN
The Company's primary asset consists of a power generation facility
that is currently idle. Consistent with its preference to operate the
facility, the Company has thus far declined to accept several offers
to liquidate the facility for amounts significantly in excess of the
facility s recorded net book value. The Company continues to pursue a
financially feasible power purchase contract which when executed would
result in the commencement of operations.
The members of the Company have committed to continue to fund
necessary costs associated with holding and maintaining the power
plant through December 31, 1996 in the event that the power plant does
not begin operations or is otherwise unable to generate revenues
sufficient to fund operating and holding costs.
See accompanying notes to financial statements.
<PAGE>
Plymouth Cogeneration Limited Partnership
Notes to Financial Statements
----------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
<PAGE>
Plymouth Cogeneration Limited Partnership
Balance Sheets
December 31, 1995 and 1994
----------------------------------------------------------------------
1995 1994
---- ----
ASSETS
Current assets:
Cash and cash $ 15,944 $ 8,233
equivalents
Accounts receivable 90,865 76,881
Prepaid expenses 18,087 14,198
Restricted cash 33,773 619,820
---------- ----------
Total current 158,669 719,132
assets ---------- ----------
Plant, at cost 5,888,172 5,882,464
Less: accumulated 295,411 -
depreciation ---------- ----------
5,592,761 5,882,464
---------- ----------
Debt service reserve 497,085 500,020
Deferred financing costs, 154,683 162,824
less accumulated
amortization
of $8,141 in 1995
Rent receivable 176,184 -
---------- ----------
Total assets $6,579,382 $7,264,440
---------- ----------
LIABILITIES AND PARTNERS'
CAPITAL
Current liabilities:
Note payable-general - $586,000
contractor (Note 2)$
Accounts payable and 262,013 286,917
accrued expenses
Deferred revenue 81,127 74,806
---------- ----------
Total current 343,140 947,723
liabilities ---------- ----------
Long-term debt, net of 4,987,181 4,980,717
discount (Note 3)
Partners' capital 1,249,061 1,336,000
---------- ----------
Total liabilities and $6,579,382 $7,264,440
partners' capital ---------- ----------
The accompanying notes are an integral part of these
financial statements.
<PAGE>
Plymouth Cogeneration Limited Partnership
Statement of Operations
For the Year Ended December 31, 1995
----------------------------------------------------------------------
1995
----
REVENUES
Facility lease $ 598,968
Management services 551,461
----------
Total revenues 1,150,429
----------
OPERATING EXPENSES
Operating and maintenance 426,948
Depreciation and amortization 303,552
General and administrative 149,830
----------
Total operating expenses 880,330
----------
Income before interest income and expense 270,099
----------
INTEREST INCOME AND EXPENSE
Interest expense (403,736)
Interest income 46,698
----------
(357,038)
----------
Net loss (86,939)
==========
The accompanying noted are an integral part of
these financial statements.
<PAGE>
Plymouth Cogeneration Limited Partnership
Statement of Changes in Partners' Capital
For the Year Ended December 31, 1995
----------------------------------------------------------------------
PARTNERS' CAPITAL, December 31, 1994 $1,336,000
Net loss (86,939)
----------
PARTNERS' CAPITAL, December 31, 1995 $1,249,061
----------
The accompanying notes are an integral part of these
financial statements.
<PAGE>
Plymouth Cogeneration Limited Partnership
Statement of Cash Flows
For the Year Ended December 31, 1995
----------------------------------------------------------------------
1995
----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (86,939)
----------
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization 303,552
Bond discount amortization 6,464
Changes in assets and liabilities:
Accounts receivable (13,984)
Prepaid expenses (3,889)
Transfer from restricted cash 47
Rent receivable (176,184)
Accounts payable and accrued expenses (24,904)
Deferred revenue 6,321
----------
Net cash provided by operating 10,484
activities ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for plant (5,708)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Transfer out of debt service reserve 2,935
Use of restricted cash 586,000
Payment of note payable (586,000)
----------
Net cash provided by financing 2,935
activities ----------
Net increase in cash and cash 7,711
equivalents
CASH AND CASH EQUIVALENTS, BEGINNING 8,233
----------
CASH AND CASH EQUIVALENTS, ENDING $ 15,944
==========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 421.305
==========
The accompanying notes are an integral part of these
financial statements.
<PAGE>
Plymouth Cogeneration Limited Partnership
Notes to Financial Statements
---------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
On June 25, 1992, IEC Plymouth, Inc. ("IEC" or "General
Partner"), a Connecticut Corporation, and Central Hudson
Cogeneration Incorporated, a New York Corporation ("Cencogen"), a
wholly-owned subsidiary of Central Hudson Gas & Electric
Corporation, a New York Corporation, formed a limited partnership
under the State of New Hampshire Statutes, Plymouth Cogeneration
Limited Partnership (the "Partnership"), to construct, own and
operate a 1.25 MW cogeneration facility (the "Facility") and
provide electricity and steam to Plymouth State College (the
"Site") in Plymouth, New Hampshire. On May 11, 1993, IEC and
Cencogen agreed to admit PSC Cogeneration Limited Partnership
("PSC" or "General Partner"), a Connecticut limited partnership
and IEC affiliate, replacing IEC. On November 1, 1994, PSC and
Cencogen agreed to admit Plymouth Envirosystems, Inc.
("Envirosystems" or "General Partner"), a Delaware corporation, a
wholly-owned subsidiary of U.S. Envirosystems, Inc., a Delaware
corporation. The Limited Partnership Agreement, as amended,
expires November 2024.
The Limited Partnership Agreement provides that profits, losses
and distributable cash for financial reporting and income tax
purposes are allocated in accordance with the ownership interests
of the partners. At December 31, 1995 and 1994, PSC's ownership
consisted of a 10% managing general partner and 17.5% limited
partner interest, Cencogen's ownership consisted of a 32.5%
limited partner interest and Envirosystems ownership consisted of
a 5% general partner and 35% limited partner interest.
On June 1, 1993, the Partnership entered into an Agreement of
Site Lease ("Site Lease") with the University System of New
Hampshire (the "University System"). The Site Lease provides
that the University System will lease to the Partnership a parcel
of land at the Site on which to construct the Facility. The Site
Lease expires upon expiration of the Management Services
Agreement (2015).
REVENUES
On June 1, 1993, the Partnership entered into an Agreement of
Facility Lease ("Facility Lease") with the University System.
The Facility Lease provides that the Partnership will lease the
Facility to the University System for the supply of thermal and
electric energy to the Site for a defined rental stream which
escalates over the life of the lease, or 20 years. Upon
expiration of the Facility Lease (2015), the Partnership must
convey title and all personal property at the Facility to the
University System, free and clear of encumbrances. The Facility
Lease includes an escape clause which provides for the University
System to terminate the agreement without penalty in the event
that the State of New Hampshire does not appropriate funds for
the payment of the Facility Lease.
<PAGE>
Plymouth Cogeneration Limited Partnership
Notes to Financial Statements
----------------------------------------------------------------------
On June 1, 1993, the Partnership entered into a Management
Services Agreement ("MSA") with the University System. The MSA
provides that the Partnership will operate and maintain the
Facility for the benefit of the University System during the term
of the MSA for a defined monthly management service fee, and a
1.1 cent per kwh operation and maintenance fee over the life of
the MSA (20 years). The MSA commenced on the in-service date of
the Facility and expires in the year 2015. The Facility was
deemed in-service January 1, 1995.
Under the terms of Facility Lease and MSA, the Partnership is
required to provide significant services through-out the life of
the agreements. As a result, the Facility Lease is being
accounted for as an operating lease. Lease revenues are
recognized in accordance with Financial Accounting Standards
Board Technical Bulletin No. 85-3, which requires that operating
lease revenues be recognized on the straight-line basis over the
life of the lease. Accordingly, while annual rent receipts
escalate each year, approximately 598,968 of facility lease
revenue will be recognized by the Partnership annually.
Management service fees and operation and maintenance fees are
recognized as earned over the life of the MSA.
Since Facility Lease revenues are being recognized on a straight-
line basis, the Partnership has recognized as a long-term asset,
Rent receivable, at December 31, 1995, which represents the
excess of revenues recognized over cash payments received.
At December 31, 1995 and 1994, the Partnership had deferred
revenues of $81,127 and $74,806 which represents management
service fees and lease revenues billed in advance.
RESULTS OF OPERATIONS AND MANAGEMENT PLANS
While the Partnership incurred a net loss in 1995, management
believes that its cash flows, including scheduled escalating rent
receipts under the Facility Lease, will be sufficient to meet
both its future operating expenses and debt service requirements,
including sinking fund installments.
PLANT
Plant represents cost of the Facility which is being leased to
the University System under the Facility Lease. The Partnership
placed the Facility in-service January 1, 1995. During 1994, the
University System's operating permits necessary to operate its
existing boilerhouse expired, at which time the Partnership
agreed to operate the Facility, while still under construction.
As of December 31, 1994, lease revenues of $210,636, management
service fees of $217,939, and operation and maintenance fees of
$40,945 were earned during the construction period; as a result
of Facility start-up prior to substantial completion and in-
service date. The above revenues earned during construction and
related operating and start-up expenses ($417,743) were netted
<PAGE>
Plymouth Cogeneration Limited Partnership
Notes to Financial Statements
----------------------------------------------------------------------
against Plant ($51,777). In accordance with the facility lease,
the Partnership is responsible for all maintenance and equipment
repair.
DEPRECIATION
Depreciation is provided on a straight-line basis. The useful
life of the plant is estimated to be twenty years.
INCOME TAXES
The Partnership is not subject to federal or state income taxes.
Each partner is required to report on its federal and, as
required, state income tax return its distributive share of the
Partnership's income, gains, losses, deductions and credits for
the taxable year of the Partnership ending within or with its
taxable year. Accordingly, there is no provision for income
taxes in the accompanying financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the balance sheet for cash and
cash equivalents, accounts receivable, restricted cash, debt
service reserve, accounts payable and accrued expenses
approximate their respective fair values because of the short
maturity of these items.
It was not practicable to estimate the fair value of the $5.11
million, 7.75% State of New Hampshire Electric Facility Revenue
Bonds without the Partnership incurring excessive costs. The
note is secured by a first mortgage in the Facility with a
maturity date of June 1, 2014.
STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, the Partnership
considers highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Restricted cash consists of cash held in trust for payment of
semi-annual long-term interest payments of the Partnership. Debt
service reserve consists of cash held in trust until maturity of
the Partnership's long-term debt.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
<PAGE>
Plymouth Cogeneration Limited partnership
Notes to Financial Statements
----------------------------------------------------------------------
2. NOTE PAYABLE GENERAL CONTRACTOR
During May 1994, the Partnership entered into an amendment to the
Turnkey Construction Contract ("Construction Contract") with the
general contractor of the Facility. The amendment provided for
an additional payment in the amount of $636,000 from the
Partnership to the general contractor for additional construction
costs. In connection with the amendment, the Partnership
executed a $636,000 promissory note for payment of these costs.
The note bears interest at Citibank's prime lending rate plus 2%.
Interest and principal were payable on maturity of the note in
November 1994. During November 1994, the Partnership funded an
escrow, the funds of which were available under the terms of the
escrow agreement to settle the Partnership's obligations to the
general contractor. At December 31, 1994, the balance due to the
general contractor on the note and the funds escrowed for payment
amounted to $586,000. Accrued interest on the note at December
31, 1994 amounted to $25,142. The escrowed funds were included
in restricted cash. During 1995, the Partnership settled all
obligations with the general contractor.
3. LONG-TERM DEBT
On June 30, 1993, the Partnership obtained $5,110,000 of
financing from the Business Finance Authority of the State of New
Hampshire to construct the Facility. The financing was obtained
through issuance of 7.75% State of New Hampshire Electric
Facility Revenue Bonds (the "Bonds"), a tax-exempt financing,
which matures on June 1, 2014. The Bonds were issued at a
discount of $129,283, which is being amortized over the life of
the bonds using the bonds outstanding method. This Leasehold
Mortgage and Trust Agreement (the "Agreement") contains certain
business covenants including, among other items, that the
Partnership provides timely financial and business information.
In connection with the financing, the Partnership paid $162,824
of financing related costs. These deferred financing costs will
be amortized on the bonds outstanding method over the life of the
bonds.
The Bondholder has a first mortgage security interest in the
Facility, pledge of the Partnership interests, and a collateral
assignment of all facility operating agreements. Interest is
payable semi-annually on June 1 and December 1. The Bonds are
subject to redemption from sinking fund installments, without
premium, plus accrued interest on June 1, 1997 and each June 1
thereafter at their principal amounts, through maturity of June
1, 2014. The Bonds are also subject to redemption at the option
of the Partnership on or after: June 1, 2003 at 102%; June 1,
2004 at 101%; and June 1, 2005 at 100%. Aggregate annual sinking
fund installments for the next five years and thereafter are as
follows:
<PAGE>
Plymouth Cogeneration Limited Partnership
Notes to Financial Statements
----------------------------------------------------------------------
1996 $ -
1997 70,000
1998 100,000
1999 125,000
2000 175,000
Thereafter 4,640,000
-----------
$5,110,000
===========
4. RELATED PARTY TRANSACTIONS
DEVELOPMENT EXPENSES
The managing general partner and affiliates were reimbursed for
development expenses during the development and construction phases.
In 1994, total reimbursements of $275,000 were incurred and
capitalized to Plant during the development and construction phases.
ADMINISTRATION SERVICE FEES
On January 13, 1994, the Partnership entered into and Administrative
Services Agreement with an affiliate of PSC. The agreement provides
that commencing on January 1, 1995, the Partnership will pay a fee in
the amount of $40,000, annually, adjusted for CPI, for administrative
services to be provided by the affiliate on behalf of the Partnership.
The Partnership incurred an administrative fee of $42,000 during 1995,
which is included in general and administrative expenses.
DEVELOPMENT COMMISSIONS
Development Commissions are payable to PSC and Cencogen commencing on
the in-service date of the Facility (January 1, 1995). Development
commissions are fixed annual amounts, payable quarterly which escalate
over the life of the agreement, or 20 years, and are subordinate to
the payment of debt service and general partners fees. The
Partnership incurred development commissions of $44,388 during 1995,
which are included in general and administrative expenses.
GENERAL PARTNER'S FEE
General Partner's Fee is payable to PSC commencing on the in-service
date of the Facility (January 1, 1995). The general partner's fee is
a fixed annual amount payable quarterly which escalates over the life
of the agreement, or 20 years, and is subordinate to the payment of
debt service. The Partnership incurred $14,796 during 1995, which is
included in general and administrative expenses.
<PAGE>
Plymouth Cogeneration Limited Partnership
Notes to Financial Statements
----------------------------------------------------------------------
OTHER
The Partnership incurred the following expenses with affiliates of the
General Partner for the years ended December 31, 1995 and 1994. The
1994 costs were capitalized into Plant during the development and
construction phases.
1995 1994
---- ----
Employee group health insurance $ - $37,703
and office related
Interest expense on advances 1,108
Amounts due to affiliates of the General Partner included in accounts
payable and accrued expenses of the Partnership at December 31, 1995 and
1994:
1995 1994
---- ----
Interest bearing advances at prime $28,520 $ -
Accrued interest on advances 1,108 -
The Partnership has elected for its employees to participate in a 401(k)
plan sponsored by an affiliate of the General Partner. The 401(k) plan
calls for employee only contributions.
<PAGE>
=================================== ===================================
NO DEALER, SALES REPRESENTATIVE
OR ANY OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR
ANY OF THE UNDERWRITERS. THIS U.S. ENERGY SYSTEMS, INC.
PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY, ANY SECURITIES
OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES OR
AN OFFER TO, OR A SOLICITATION OF,
ANY PERSON IN ANY JURISDICTION
WHERE SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED 1,805,000 SHARES OF
HEREIN IS CORRECT AS OF ANY TIME COMMON STOCK
SUBSEQUENT TO THE DATE HEREOF. AND
500,000 REDEEMABLE
----------------- COMMON STOCK
TABLE OF CONTENTS PURCHASE WARRANTS
PAGE
----
AVAILABLE INFORMATION . . . . . 2
PROSPECTUS SUMMARY . . . . . . 3
RISK FACTORS . . . . . . . . . 8
USE OF PROCEEDS . . . . . . . . 16 ----------
PRICE RANGE OF COMMON STOCK . . 16
DIVIDEND POLICY . . . . . . . . 16 PROSPECTUS
DILUTION . . . . . . . . . . . 17
CAPITALIZATION . . . . . . . . 18 ----------
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION . . . . 26
BUSINESS . . . . . . . . . . . 30
MANAGEMENT . . . . . . . . . . 39
CERTAIN TRANSACTIONS . . . . . 42
PRINCIPAL AND
SELLING STOCKHOLDERS . . . . 43
DESCRIPTION OF SECURITIES . . . 45
SHARES ELIGIBLE FOR FUTURE SALE 49
LEGAL MATTERS . . . . . . . . . 50
EXPERTS . . . . . . . . . . . . 50
INDEX TO FINANCIAL STATEMENTS . F-1
=================================== ==================================
<PAGE>
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation exculpates directors from
personal liability to the fullest extent permitted by Section 102(b)(7) of
the Delaware General Corporation Law. This provision provides that a
corporation may eliminate or limit the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit.
The Company's By-Laws and Certificate of Incorporation provide that the
Registrant shall indemnify, to the fullest extent authorized by the
Delaware General Corporation Law, each person who is involved in any
litigation or other proceeding because he or she is or was a director or
officer of the Company against all expense, loss or liability in connection
therewith.
Section 145 of the Delaware General Corporation Law permits a
corporation to indemnify any director or officer of the corporation against
expenses (including attorneys' fees), judgements, fines and amounts paid in
settlements actually and reasonably incurred in connection with any action,
suit or proceeding brought by reason of the fact that such person is or was
a director or officer of the corporation, if such person acted in good
faith and in a manner that he or she reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, if he or she had no reason to believe his or
her conduct was unlawful. In a derivative action indemnification may be
made only for expenses actually and reasonably incurred by any director or
officer in connection with the defense or settlement of an action or suit,
if such person has acted in good faith and in a manner that he or she
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person
shall have been adjudged to be liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant is reasonably entitled to
indemnification for such expenses despite such adjudication of liability.
The right to indemnification includes the right to be paid expenses
incurred in defending any proceeding in advance of its final disposition
upon the delivery to the corporation of an undertaking, by or on behalf of
the director or officer, to repay all amounts so advanced if it is
ultimately determined that such director or officer is not entitled to
indemnification.
The Company has applied for directors' and officers' liability
insurance.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of this Offering in connection with the issuance
and distribution of the securities being registered, all of which are to be
paid by the Company, are as follows:
SEC Registration Fee . . . . . . . . $5,763
NASD Fee . . . . . . . . . . . . . . $2,172
Transfer Agent's Fees . . . . . . . $*
Printing and Engraving Fees . . . . $*
Legal Fees and Expenses . . . . . . $*
Blue Sky Fees and Expenses . . . . . $*
Accounting Fees and Expenses . . . . $*
Directors' and Officers'
Liability Insurance. . . . . . . . $*
Miscellaneous Expenses . . . . . . . $*
Total . . . . . . . . . . . . . $*
--------------
* To be filed by amendment
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following is a description of all unregistered sales of securities
by the Company within the past three years, including the name of the
purchaser, the date of purchase and the consideration paid. Each of the
securities were offered in private placements, exempt from registration
pursuant to Section 4(2) of the Securities Act.
1. In March 1994, the Company issued an aggregate of 18,250 shares of
Common Stock to the 8 individuals listed below in connection with a capital
raise. The total proceeds of the sale were $52,750.
Name of Purchaser Number of Shares Purchased Purchase Price
----------------- -------------------------- --------------
1. Ronald Moody 3,125 $ 1,250
2. Seneca Ltd. 2,500 10,000
3. Wm. A. Buik 2,500 10,000
4. Dana Pitt 2,500 10,000
5. Tracey Pitt 2,500 10,000
6. Lindsay Pitt 2,500 10,000
7. Theo Smith 125 500
8. Donald Warner 2,500 1,000
2. Between January and April 1994, the Company issued 18% Convertible
Debentures in the principal amount of $1,525,000 to 26 accredited
investors.
3, On May 4, 1994, the Company issued a total of 1,250 shares of
Common Stock to SDZ Venture Partners. The total proceeds of the sale were
$5,000.
4, On July 13, 1994, the Company issued 7,500 shares of Common Stock
to Fred Knoll. The total proceeds of the sale were $30,000.
5. In November 1994, the Company issued secured notes in the principal
amount of $100,000,000 with warrants attached to eight accredited
investors.
6. In November 1994, the Company issued a total of 11,400 shares of
Common Stock to Plymouth Cogeneration in partial payment of the $750,000
purchase price for an interest of the Plymouth project described in the
prospectus. The total proceeds of the sale were $114,000.
7. In 1995, the Company issued an aggregate of 10,000 shares of Common
Stock to the persons listed below. The total proceeds of the sale were
$72,000.
Number Amount
Name of of Date
of Shares Consideration of
Purchaser Purchased Paid Purchase
--------- --------- ------------- --------
Richard Barrett 1,250 $5,000 January 1995
Nils Kindwall 2,500 $22,000 January 1995
Evan Evans 1,250 $10,000 January 1995
Bruce Galloway 2,500 $10,000 February 1995
Indus, LLC 2,500 $25,000 July 1995
ITEM 27. EXHIBITS
INCORPORATED
BY REFERENCE EXHIBIT
EXHIBIT FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT
------- ----------- ----------- --------
1.1 Form of Underwriting Agreement X
3.1 Certificate of Incorporation of the Company B
filed with the Secretary of State of Delaware
3.2 By-Laws of the Company A 3(ii)
4.1 Specimen Stock Certificate X
4.2 Form of Warrant *
4.3 Form of Warrant Agreement X
4.4 Form of Representative's Purchase Option X
5.1 Opinion of Reid & Priest LLP *
10.1 Plan of Reorganization of Cogenic Energy A 2
Systems, Inc.
10.2 18% Convertible Subordinated Debenture due A 4
2004
10.3 Employment Agreement, dated as of November A 10(i)
11, 1993, between the Company and Richard
Nelson
10.3(a) Amendment to Employment Agreement between the *
Company and Richard Nelson, dated
______________
10.4 Employment Agreement, dated as of December A 10(ii)
11, 1993, between the Company and Theodore
Rosen
10.4(a) Amendment to Employment Agreement between the *
Company and Theodore Rosen dated ___________
10.5 Purchase Agreement, dated as of January 24, A 10(iii)
1994, between Lehi Co-Gen Associates, L.C.
and Lehi Envirosystems, Inc.
10.6 Operating Agreement among Far West Capital, B
Inc., Suma Corporation and Lehi
Envirosystems, Inc. dated January 24, 1994
10.7 Form of Purchase and Sale Agreement between B
Far West Capital, Inc., Far West Electric
Energy Fund, L.P., 1-A Enterprises, the
Company and Steamboat LLC
10.8 Form of Operation and Maintenance Agreement B
between Steamboat LLC and S.B. Geo, Inc.
10.9 Letter Agreement, dated as of November 8, B
1994, between the Company, PSC Cogeneration
Limited Partnership, Central Hudson
Cogeneration, Inc. and Independent Energy
Finance Corporation
10.10 Agreement among the Company, Plymouth B
Envirosystems, Inc., IEC Plymouth, Inc. and
Independent Energy Finance Corporation dated
November 16, 1994
10.11 Amended and Restated Agreement of Limited B
Partnership of Plymouth Cogeneration Limited
Partnership among PSC Cogeneration Limited
Partnership, Central Hudson Cogeneration,
Inc. and Plymouth Envirosystems, Inc. dated
November 1, 1994
10.12 Amended and Restated Agreement of Limited B
Partnership of PSC Cogeneration Limited
Partnership among IEC Plymouth, Inc.
Independent Energy Finance Corporation and
Plymouth Envirosystems, Inc. dated December
28, 1994
10.13 Purchase and Sale Agreement, dated as of B
December 31, 1995, between the Company, Far
West Capital, Inc., Far West Electric Energy
Fund, L.P., 1-A Enterprises and Steamboat
Envirosystems, LLC
10.14 Joint Development Memorandum of Intent dated B
September 20, 1994, between the Company and
Cowen Partnership
10.15 Agreement dated as of May 4, 1995 between the B
Company and Indus LLC
10.16 Security Agreement and Financing Statement B
among The Company, Lehi Envirosystems, Inc.,
Plymouth Envirosystems, Inc. and Anchor
Capital Company, LLC dated June 14, 1995
10.17 Stock Pledge Agreement among Richard H. B
Nelson, Theodore Rosen, Anchor Capital
Company, LLC and the Company dated June 14,
1995
10.18 Loan Agreement among the Company, Lehi B
Envirosystems, Inc., Plymouth Envirosystems
and Solvation, Inc. dated as of December 15,
1995
10.19 Pledge Agreement between the Company and B
Solvation, Inc. dated as of December 15, 1995
10.20 Lease dated September 1, 1995 between the B
Company and Gaedeke Holdings, Ltd.
10.21 Documents related to Private Placement B
10.22 Purchase Agreement between the Company and X
Westinghouse Electric Corporation dated as of
November 6, 1995 and amendments thereto
10.23 Letter of intent to the Company from X
Bluebeard's Castle, Inc. dated August 6,
1996.
10.24 Joint Venture Agreement among the Company and *
Bluebeard's Castle, Inc. and Bluebeard
Hilltop Villas dated as of _______________.
11.1 Earnings Per Share Calculations - Historical X
January 31, 1996
11.2 Earnings Per Share Calculations - Historical X
April 30, 1996
11.3 Pro Forma Earnings Per Share Calculation X
January 31, 1996
11.4 Pro Forma Earnings Per Share Calculation X
April 30, 1996
13.1 Annual Report of the Company on Form 10-KSB B
for the year ended January 31, 1995
QSB for the quarter ended October 31, 1995
13.3 Quarterly Report of the Company on Form 10- C
QSB for the quarter ended April 30, 1995
21.1 Subsidiaries of the Company B
23.1 Consent of Reid & Priest LLP (included in *
Exhibit 5.1)
23.2 Consent of Richard A. Eisner & Company, LLP X
23.3 Consent of Robison, Hill & Co., P.C. X
23.4 Consent of Robison, Hill & Co., P.C. X
23.5 Consent of Traveller Winn & Mower, PC X
23.6 Consent of Price Waterhouse LLP *
24.1 Power of Attorney X
(included on page II-7)
27 Financial Data Schedule
_____________
A Annual Report of the Company on Form 10-KSB for the year ended January
31, 1994 (File No. 0-10238).
B Registration Statement on Form SB-2 filed on May 3, 1996.
C Quarterly Report of the Company on Form 10-QSB for the quarter ended
April 30, 1996 (File No. 0-10238).
X Filed herewith.
* To be filed by Amendment.
ITEM 28. UNDERTAKINGS
Undertakings Required by Regulation S-B Item 512(a):
The Company will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 425(b) if, in the aggregate, the changes in the volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the Calculation of Registration Fee table in the
effective registration statement.
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a mew registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Undertakings Required by Regulation S-B Item 512(e):
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT
MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND HAS DULY CAUSED
THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF WEST PALM BEACH, AND STATE OF
FLORIDA, ON THE 12TH DAY OF AUGUST, 1996.
U.S. ENERGY SYSTEMS, INC.
BY: /s/ RICHARD NELSON
------------------------
Richard Nelson
President and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below under the heading "Signatures" constitutes and appoints
Richard Nelson and Theodore Rosen, or either of them his true and lawful
attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, each acting alone, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in
connection with the above premises, as fully for all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ THEODORE ROSEN Chairman of the August 12, 1996
----------------------------------- Board
(Theodore Rosen)
/s/ RICHARD NELSON President and August 12, 1996
----------------------------------- Chief Executive
(Richard Nelson) Officer (Principal
Executive Officer)
/s/ SEYMOUR J. BEDER Chief Accounting August 12, 1996
----------------------------------- Officer and
(Seymour J. Beder) Controller (Principal
Financial and
Accounting Officer)
/s/ RONALD MOODY Director August 12, 1996
-----------------------------------
(Ronald Moody)
Director August 12, 1996
-----------------------------------
(Fred Knoll)
/s/ EVAN EVANS Director August 12, 1996
-----------------------------------
(Evan Evans)
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
1.1 Form of Underwriting Agreement
4.1 Specimen Stock Certificate
4.3 Form of Warrant Agreement
4.4 Form of Representative's Purchase Option
10.22 Purchase Agreement between the Company and
Westinghouse Electric Corporation dated as of
November 6, 1995 and amendments thereto
10.23 Letter of intent to the Company from
Bluebeard's Castle, Inc. dated August 6,
1996.
11.1 Earnings Per Share Calculations - Historical
January 31, 1996
11.2 Earnings Per Share Calculations - Historical
April 30, 1996
11.3 Pro Forma Earnings Per Share Calculation
January 31, 1996
11.4 Pro Forma Earnings Per Share Calculation
April 30, 1996
23.2 Consent of Richard A. Eisner & Company, LLP
23.3 Consent of Robison, Hill & Co., P.C.
23.4 Consent of Robison, Hill & Co., P.C.
23.5 Consent of Traveller Winn & Mower, PC
24.1 Power of Attorney (included on page II-7)
27 Financial Data Schedule
EXHIBIT 1.1
DRAFT
062196
UNDERWRITING AGREEMENT
between
U.S. ENVIROSYSTEMS, INC.
and
GAINES, BERLAND INC.
Dated: __________, 1996
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
INDEX OF DEFINITIONS v
1. Purchase and Sale of Securities 1
1.1 Firm Units 1
1.1.1 Purchase of Firm Securities 1
1.1.2 Payment and Delivery 1
1.2 Over-allotment Option 2
1.2.1 Option Securities 2
1.2.2 Exercise of Over-allotment Option 2
1.2.3 Payment and Delivery 3
1.3 Representative's Purchase Option 3
1.3.1 Purchase Option 3
1.3.2 Payment and Delivery 3
2. Representations and Warranties of the Company 3
2.1 Filing of Registration Statement 3
2.1.1 Pursuant to the Act 3
2.1.2 Pursuant to the Exchange Act 4
2.2 No Stop Orders, Etc. 4
2.3 Disclosures in Registration Statement 4
2.3.1 Securities Act and 10b-5 Representation 4
2.3.2 Disclosure of Contracts 5
2.3.3 Prior Securities Transactions 5
2.4 Changes After Dates in Registration Statement 5
2.4.1 No Material Adverse Change 5
2.4.2 Recent Securities Transactions, Etc. 6
2.5 Independent Accountants 6
2.6 Financial Statements 6
2.7 Authorized Capital; Options; Etc. 6
2.8 Valid Issuance of Securities; Etc. 6
2.8.1 Outstanding Securities 6
2.8.2 Securities Sold Pursuant to this Agreement 7
2.9 Registration Rights of Third Parties 7
2.10 Validity and Binding Effect of Agreements 7
2.11 No Conflicts, Etc. 8
2.12 No Defaults; Violations 8
2.13 Corporate Power; Licenses; Consents 8
2.13.1 Conduct of Business 8
2.13.2 Transactions Contemplated Herein 9
2.14 Title to Property; Insurance 9
2.15 Litigation; Governmental Proceedings 9
2.16 Good Standing 10
2.17 Taxes 10
2.18 Employee Options. 10
2.19 Transactions Affecting Disclosure to NASD 10
2.19.1 Finder's Fees 10
2.19.2 Payments Within Twelve Months 11
2.19.3 Use of Proceeds 11
2.19.4 Insiders' NASD Affiliation 11
2.20 Foreign Corrupt Practices Act 11
2.21 Nasdaq Eligibility 11
2.22 Intangibles 11
2.23 Relations With Employees. 12
2.23.1 Employee Matters 12
2.23.2 Employee Benefit Plans 12
2.24 Officers' Certificate 13
2.25 Warrant Agreement 13
2.26 Lock-Up Agreements 13
2.27 Subsidiaries 13
2.28 Certain Definitions 13
2.29 Conditions to Obligations Under Other Agreements 14
3. Covenants of the Company 14
3.1 Amendments to Registration Statement 14
3.2 Federal Securities Laws 14
3.2.1 Compliance 14
3.2.2 Filing of Final Prospectus 14
3.2.3 Exchange Act Registration 14
3.3 Blue Sky Filing 14
3.4 Delivery to Underwriters of Prospectuses 15
3.5 Events Requiring Notice to the Representative 15
3.6 Review of Financial Statements 15
3.7 Unaudited Financials 15
3.8 Secondary Market Trading and Standard & Poor's 15
3.9 Nasdaq Maintenance 16
3.10 Warrant Solicitation and Warrant Solicitation Fees 16
3.11 Registration of Common Stock. 16
3.12 Reports to the Representative 16
3.12.1 Periodic Reports, Etc. 16
3.12.2 Transfer Sheets and Weekly Position Listings 17
3.12.3 Secondary Market Trading Memorandum. 17
3.13 Agreements between the Representative and the Company 17
3.13.1 [Intentionally Omitted.] 17
3.13.2 [Intentionally Omitted.] 17
3.13.3 Representative's Purchase Option 17
3.14 Disqualification of Form S-1 (or other appropriate form). 17
3.15 Payment of Expenses 17
3.15.1 General Expenses 18
3.15.2 Non-Accountable Expenses 18
3.16 Application of Net Proceeds 19
3.17 Delivery of Earnings Statements to Security Holders 19
3.18 Key Person Life Insurance. 19
3.19 Stabilization 19
3.20 Internal Controls 19
3.21 Accountants and Lawyers 19
3.22 Transfer Agent 20
3.23 Sale of Securities 20
3.24 Other Transactions. 20
4. Conditions of Underwriters' Obligations 20
4.1 Regulatory Matters 20
4.1.1 Effectiveness of Registration Statement 20
4.1.2 NASD Clearance 20
4.1.3 No Blue Sky Stop Orders 20
4.2 Company Counsel Matters 20
4.2.1 (a) Effective Date Opinion of Counsel 21
(b) Other Counsel's Opinion. 26
4.2.2 Closing Date and Option Closing Date Opinions of
Counsel 27
4.2.3 Reliance 27
4.2.4 Secondary Market Trading Memorandum 27
4.3 Cold Comfort Letters 27
4.4 Officers' Certificates 29
4.4.1 Officers' Certificate 29
4.4.2 Chief Financial Officer's Certificate 29
4.5 No Material Changes 30
4.6 Delivery of Agreements 30
4.7 Opinion of Counsel for the Underwriters 30
4.8 Other Transactions 31
5. Indemnification 31
5.1 Indemnification of the Underwriters 31
5.1.1 General 31
5.1.2 Procedure 31
5.2 Indemnification of the Company 32
5.3 Contribution 32
5.3.1 Contribution Rights 32
5.3.2 Contribution Procedure 33
6. Default by an Underwriter 33
6.1 Default Not Exceeding 10% of Firm Securities or Option
Securities. 33
6.2 Default Exceeding 10% of Firm Securities or Option
Securities. 34
6.3 Postponement of Closing Date. 34
7. Additional Covenants 34
7.1 Board Designee. 34
7.2 [Intentionally Omitted.] 35
7.3 Rule 144 Sales 35
7.4 Press Releases 35
7.5 Form S-8 or any Similar Form 35
7.6 Employment Agreements. 35
7.7 Compensation and Other Arrangements. 35
8. Representations and Agreements to Survive Delivery 35
9. Effective Date of This Agreement and Termination Thereof 36
9.1 Effective Date 36
9.2 Termination 36
9.3 Notice 36
9.4 Expenses 36
9.5 Indemnification 36
10. Miscellaneous 37
10.1 Notices 37
10.2 Headings 37
10.3 Amendment 37
10.4 Entire Agreement 37
10.5 Binding Effect 38
10.6 Governing Law; Jurisdiction 38
10.7 Execution in Counterparts 38
10.8 Waiver, Etc. 38
<PAGE>
INDEX OF DEFINITIONS
Term Section
---- -------
Acquisition Agreement 2.28
Acquisition Transactions 2.3.2
Act 2.1.1
AICPA 4.3(iii)
BSE 2.2.1
Closing Date 1.1.2
Code 2.23.2
Commission 2.1.1
Common Stock 1.1.1
Company Introductory Paragraph
Conversion Agreement 2.28
Effective Date 1.1.1
ERISA 2.23.2
ERISA Plans 2.23.2
Exchange Act 2.1.2
Far West 2.6
Filing Date 2.19.2
Firm Securities 1.1.1
Insiders 2.26
Intangibles 2.22
Lehi 2.3.2
NASD 2.19.1
1-A 2.6
Option Closing Date 1.2.2
Option Securities 1.2.1
Other Counsel 4.2.1(b)
Over-allotment Option 1.2.1
Plymouth 2.3.2
Preferred Stock Exchange Agreement 2.28
Preliminary Prospectus 2.1.1
Private Placement Agreement 2.28
Pro Forma Financial Statements 4.3(iv)
Proposed Financing 7.8
Prospectus 2.1.1
Public Securities 1.2.1
Registration Statement 2.1.1
Regulations 2.1.1
Representative Introductory Paragraph
Representative's Purchase Option 1.3.1
Representative's Securities 1.3.1
Representative's Shares 1.3.1
Representative's Warrants 1.3.1
Secondary Market Trading Memorandum 3.12.3
Securities . 1.3.1
Steamboat Facilities 2.28
Steamboat L.L.C. 2.3.2
Subsidiary(ies) 2.27
Transfer Agent 3.22
Unaudited Financials 3.7
Underwriter Introductory Paragraph
Underwriters Introductory Paragraph
Warrants 1.1.1
Warrant Agreement 2.25
<PAGE>
U.S. ENVIROSYSTEMS, INC.
1,625,000 SHARES OF COMMON STOCK
1,625,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
UNDERWRITING AGREEMENT
----------------------
New York, New York
__________, 1996
Gaines, Berland Inc.
950 Third Avenue
27th Floor
New York, New York 10022
Dear Sirs:
The undersigned, U.S. ENVIROSYSTEMS, INC., a Delaware corporation
("Company"), hereby confirms its agreement with Gaines, Berland Inc. (being
referred to herein variously as "you" or the "Representative"), and the
other underwriters named on Schedule 1 hereto (the Representative and the
other underwriters being collectively referred to as the "Underwriters" or
individually as "Underwriter"), as follows:
1. PURCHASE AND SALE OF SECURITIES.
1.1 FIRM UNITS.
1.1.1 PURCHASE OF FIRM SECURITIES. On the basis of the
representations and warranties herein contained, but subject to the terms
and conditions herein set forth, the Company agrees to issue and sell to
the several Underwriters, 1,625,000 shares of the Company's Common Stock,
par value $0.01 ("Common Stock"), and 1,625,000 Redeemable Common Stock
Purchase Warrants ("Warrants"), and the Underwriters, severally and not
jointly, agree to purchase from the Company, the numbers of shares of
Common Stock and Warrants set forth opposite their respective names on
Schedule 1 hereto for purchase prices of $____ per share of Common Stock
and $____ per Warrant (net of commissions in each instance). Such shares
of Common Stock and Warrants are hereinafter referred to as the "Firm
Securities." Each Warrant entitles its holder to purchase one share of
Common Stock at an initial exercise price of $____ per share commencing on
the first anniversary of the effective date of the Registration Statement
(as hereinafter defined) ("Effective Date") and ending on the fifth
anniversary of the Effective Date.
1.1.2 PAYMENT AND DELIVERY. Delivery and payment for the
Firm Securities shall be made at 10:00 A.M., New York time, on or before
the third business day following the date the Firm Securities commence
trading or at such other time as the Representative shall determine, at the
offices of the Representative or at such other place as shall be agreed
upon by the Representative and the Company. The hour and date of delivery
and payment for the Firm Securities are called the "Closing Date." Payment
for the Firm Securities shall be made on the Closing Date, at the
Representative's election, by wire transfer of funds or by certified or
bank cashier's check(s) in New York Clearing House funds, in accordance
with the instructions of the Company upon delivery to you of certificates
(in form and substance satisfactory to the Representative) representing the
Common Stock and Warrants comprising the Firm Securities for the respective
accounts of the Underwriters. The Firm Securities shall be registered in
such name or names and in such authorized denominations as the
Representative may request in writing at least two full business days prior
to the Closing Date. The Company will permit the Representative to examine
and package the Firm Securities for delivery at least one full business day
prior to the Closing Date. The Company shall not be obligated to sell or
deliver the Firm Securities except upon tender of payment by the
Underwriters for all the Firm Securities.
1.2 OVER-ALLOTMENT OPTION.
1.2.1 OPTION SECURITIES. For the purposes of covering any
over-allotments in connection with the distribution and sale of the Firm
Securities, the Underwriters are hereby granted an option to purchase up to
an additional 243,750 shares of Common Stock and/or 243,750 Warrants from
the Company ("Over-allotment Option"). Such additional securities are
hereinafter referred to as the "Option Securities." The Firm Securities
and the Option Securities, together with the shares of Common Stock
issuable upon exercise of the Warrants, are hereinafter referred to
collectively as the "Public Securities." The purchase price to be paid for
the Option Securities will be the same price per Option Security as the
price per Firm Security set forth in Section 1.1.1 hereof.
1.2.2 EXERCISE OF OVER-ALLOTMENT OPTION. The Over-allotment
Option granted pursuant to Section 1.2.1 hereof may be exercised by the
Representative on behalf of the Underwriters as to all or any part of the
Option Securities at any time, from time to time, within forty-five days
after the Effective Date. The Underwriters will not be under any
obligation to purchase any Option Securities prior to the exercise of the
Over-allotment Option. The Over-allotment Option granted hereby may be
exercised by the giving of oral notice to the Company from the
Representative, which must be confirmed by a letter or telecopy setting
forth the number of Option Securities to be purchased, the date and time
for delivery of and payment for the Option Securities and stating that the
Option Securities referred to therein are to be used for the purpose of
covering over-allotments in connection with the distribution and sale of
the Firm Securities. If such notice is given at least two full business
days prior to the Closing Date, the date set forth therein for such
delivery and payment will be the Closing Date. If such notice is given
thereafter, the date set forth therein for such delivery and payment will
not be earlier than five full business days after the date of the notice.
If such delivery and payment for the Option Securities does not occur on
the Closing Date, the date and time of the closing for such Option
Securities will be as set forth in the notice (hereinafter the "Option
Closing Date"). Upon exercise of the Over-allotment Option, the Company
will become obligated to convey to the Underwriters, and, subject to the
terms and conditions set forth herein, the Underwriters will become
obligated to purchase, the number of Option Securities specified in such
notice.
1.2.3 PAYMENT AND DELIVERY. Payment for the Option
Securities will be at the Representative's election by wire-transfer or by
certified or bank cashier's check(s) in New York Clearing House funds,
payable to the order of the Company at the offices of the Representative or
at such other place as shall be agreed upon by the Representative and the
Company upon delivery to you of certificates representing such securities
for the respective accounts of the Underwriters. The certificates
representing the Option Securities to be delivered will be in such
denominations and registered in such names as the Representative requests
not less than two full business days prior to the Closing Date or the
Option Closing Date, as the case may be, and will be made available to the
Representative for inspection, checking and packaging at the aforesaid
office of the Company's transfer agent or correspondent not less than one
full business day prior to such Closing Date.
1.3 REPRESENTATIVE'S PURCHASE OPTION.
1.3.1 PURCHASE OPTION. The Company hereby agrees to issue
and sell to the Representative (and/or its designees) on the Closing Date,
for an aggregate purchase price of $100, an option ("Representative's
Purchase Option") for the purchase of an aggregate of 162,500 shares of
Common Stock ("Representative's Shares") at an initial exercise price of
$5.55 per share and/or 162,500 Warrants ("Representative's Warrants") at an
initial exercise price of $0.13875 per Warrant. The Representative's
Shares and the Representative's Warrants are identical to the securities
comprising the Firm Securities. The Representative's Purchase Option, the
Representative's Shares, the Representative's Warrants and the shares of
Common Stock issuable upon exercise of the Representative's Warrants are
hereinafter referred to collectively as the "Representative's Securities."
The Public Securities and the Representative's Securities are hereinafter
referred to collectively as the "Securities".
1.3.2 PAYMENT AND DELIVERY. Delivery and payment for the
Representative's Purchase Option shall be made on the Closing Date. The
Company shall deliver to the Representative, upon payment therefor,
certificates for the Representative's Purchase Option in the name or names
and in such authorized denominations as the Representative may request.
The Representative's Purchase Option shall be exercisable for a period of
four years commencing one year from the Effective Date.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to the Representative as follows:
2.1 FILING OF REGISTRATION STATEMENT.
2.1.1 PURSUANT TO THE ACT. The Company has filed with the
Securities and Exchange Commission ("Commission") a registration statement
and an amendment or amendments thereto, on Form SB-2 (Registration No. 333-
4612), including any related preliminary prospectus ("Preliminary
Prospectus"), for the registration of the Securities under the Securities
Act of 1933, as amended ("Act"), which registration statement and amendment
or amendments have been prepared by the Company in conformity with the
requirements of the Act and the rules and regulations ("Regulations") of
the Commission under the Act. Except as the context may otherwise require,
such registration statement, as amended, on file with the Commission at the
time the registration statement becomes effective (including the
prospectus, financial statements, schedules, exhibits and all other
documents filed as a part thereof or incorporated therein and all
information deemed to be a part thereof as of such time pursuant to
paragraph (b) of Rule 430A of the Regulations) is hereinafter called the
"Registration Statement," and the form of the final prospectus dated the
Effective Date (or, if applicable, the form of final prospectus filed with
the Commission pursuant to Rule 424 of the Regulations) is hereinafter
called the "Prospectus." The Registration Statement has been declared
effective by the Commission on the date hereof.
2.1.2 PURSUANT TO THE EXCHANGE ACT. The Company has filed
with the Commission a registration statement on Form 8-A providing for the
registration under the Securities Exchange Act of 1934, as amended
("Exchange Act"), of the Warrants included in the Securities. Such
registration has been declared effective by the Commission on the date
hereof. The Common Stock is registered under the Exchange Act under
registration statement on Form 8-A, declared effective on ________________.
2.2 NO STOP ORDERS, ETC. Neither the Commission nor, to the best of
the Company's knowledge, any state regulatory authority has issued any
order preventing or suspending the use of any Preliminary Prospectus or has
instituted or, to the best of the Company's knowledge, threatened to
institute any proceedings with respect to such an order.
2.3 DISCLOSURES IN REGISTRATION STATEMENT.
2.3.1 SECURITIES ACT AND 10B-5 REPRESENTATION. At the time
the Registration Statement becomes or became effective and at all times
subsequent thereto up to the Closing Date and the Option Closing Date, if
any, the Registration Statement and the Prospectus contained and will
contain with respect to the Company and the Steamboat Facilities (as
defined in Section 2.28) all material statements which are required to be
stated therein in accordance with the Act and the Regulations, and
conformed and will in all material respects conform to the requirements of
the Act and the Regulations; neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, on such dates,
contained or will contain any untrue statement of a material fact or
omitted or will omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. When any
Preliminary Prospectus was first filed with the Commission (whether filed
as part of the Registration Statement for the registration of the
Securities or any amendment thereto or pursuant to Rule 424(a) of the
Regulations) and when any amendment thereof or supplement thereto was first
filed with the Commission, such Preliminary Prospectus and any amendments
thereof and supplements thereto complied or will comply in all material
respects with the applicable provisions of the Act and the Regulations and
did not and will not contain an untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading. The representation and warranty made
in this Section 2.3.1 does not apply to statements made or statements
omitted in reliance upon and in conformity with written information
furnished to the Company with respect to the Underwriters by the
Representative expressly for use in the Registration Statement or
Prospectus or any amendment thereof or supplement thereto.
2.3.2 DISCLOSURE OF CONTRACTS. The description in the
Registration Statement and the Prospectus of contracts and other documents
is accurate and presents fairly the information required to be disclosed
and there are no contracts or other documents required to be described in
the Registration Statement or the Prospectus or to be filed with the
Commission as exhibits to the Registration Statement which have not been so
described or filed. Each contract or other instrument (however
characterized or described) to which the Company, Lehi Independent Power
Associates, L.C. ("Lehi") or Plymouth Cogeneration Limited Partnership
("Plymouth") is a party or by which the property or business of the Company
or the Steamboat Facilities is or may be bound or affected and (i) which is
referred to in the Prospectus, or (ii) is material to the business of Lehi,
Plymouth or the Company as it will exist after the acquisition by the
Company of a 50% interest in Steamboat Envirosystems, L.L.C., a ___________
limited liability company ("Steamboat L.L.C."), and the acquisition by
Steamboat L.L.C. of the Steamboat Facilities (collectively, the
"Acquisition Transactions") has been duly and validly executed, is in full
force and effect in all material respects and is enforceable against the
parties thereto in accordance with its terms, except as such enforceability
may be limited by bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally and that the remedy of specific
performance and injunctive relief and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought. None of such contracts or
instruments has been assigned by the Company, Lehi, Plymouth or Steamboat
L.L.C., and none of the Company, Lehi, Plymouth or Steamboat L.L.C. or, to
the best of the Company's knowledge, any other party is in default
thereunder and, to the best of the Company's knowledge, no event has
occurred which, with the lapse of time or the giving of notice, or both,
would constitute a default thereunder. None of the material provisions of
such contracts or instruments violates or will result in a violation of any
existing applicable law, rule, regulation, judgment, order or decree of any
governmental agency or court having jurisdiction over the Company, Lehi or
Plymouth or Steamboat L.L.C. or any of their respective assets or
businesses, including, without limitation, those relating to environmental
laws and regulations.
2.3.3 PRIOR SECURITIES TRANSACTIONS. No securities of the
Company have been sold by the Company within the three years prior to the
date hereof, except as disclosed in the Registration Statement.
2.4 CHANGES AFTER DATES IN REGISTRATION STATEMENT.
2.4.1 NO MATERIAL ADVERSE CHANGE. Since the respective dates
as of which information is given in the Registration Statement and the
Prospectus, except as otherwise specifically stated therein, (i) there has
been no material adverse change in the condition, financial or otherwise,
or in the results of operations, business or business prospects of the
Company, Lehi, Plymouth and Steamboat L.L.C., as they will exist after the
Acquisition Transactions, including, but not limited to, a material loss or
interference with its business from fire, storm, explosion, flood or other
casualty, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, whether or not arising in
the ordinary course of business, and (ii) there have been no transactions
entered into by the Company, Lehi, Plymouth or Steamboat L.L.C., other than
those in the ordinary course of business, which are material with respect
to the condition, financial or otherwise, or to the results of operations,
business or business prospects of the Company, Lehi, Plymouth and Steamboat
L.L.C. as they will exist after the Acquisition Transactions.
2.4.2 RECENT SECURITIES TRANSACTIONS, ETC. Subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, and, except as may otherwise be indicated or
contemplated herein or therein, the Company has not (i) issued any
securities or incurred any liability or obligation, direct or contingent,
for borrowed money; or (ii) declared or paid any dividend or made any other
distribution on or in respect to its capital stock.
2.5 INDEPENDENT ACCOUNTANTS. Richard A. Eisner & Company, LLP,
Traveller Winn & Mower, PC, and Robison, Hill & Co., P.C., whose reports
are filed with the Commission as part of the Registration Statement, are or
were independent accountants as required by the Act and the Regulations as
of the dates of their respective reports.
2.6 FINANCIAL STATEMENTS. The financial statements, including the
notes thereto and supporting schedules included in the Registration
Statement and Prospectus, fairly present the financial position and the
results of operations of the Company, Lehi, Plymouth, Far West Capital
Electric Energy Fund, L.P. ("Far West") and 1-A Enterprises ("1-A") at the
dates and for the periods to which they apply; and such financial
statements have been prepared in conformity with generally accepted
accounting principles, consistently applied throughout the periods
involved; and the supporting schedules included in the Registration
Statement present fairly the information required to be stated therein.
The pro forma consolidated financial information set forth in the
Registration Statement reflects all significant assumptions and adjustments
relating to the business and operations of the Company, Lehi, Plymouth and
Steamboat L.L.C. in connection with the Acquisition Transactions and the
operations of the Steamboat Facilities as described in the Registration
Statement.
2.7 AUTHORIZED CAPITAL; OPTIONS; ETC. The Company had at the date or
dates indicated in the Prospectus duly authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the
Prospectus. Based on the assumptions and adjustments stated in the
Registration Statement and the Prospectus, the Company will have on the
Closing Date the adjusted stock capitalization set forth therein. Except
as set forth in the Registration Statement and the Prospectus, on the
Effective Date and on the Closing Date there will be no options, warrants,
or other rights to purchase or otherwise acquire any authorized but
unissued shares of Common Stock of the Company, including any obligations
to issue any shares pursuant to anti-dilution provisions, or any security
convertible into shares of Common Stock of the Company, or any contracts or
commitments to issue or sell shares of Common Stock or any such options,
warrants, rights or convertible securities.
2.8 VALID ISSUANCE OF SECURITIES; ETC.
2.8.1 OUTSTANDING SECURITIES. All issued and outstanding
securities of the Company have been duly authorized and validly issued and
are fully paid and non-assessable; the holders thereof have no rights of
rescission with respect thereto and are not subject to personal liability
by reason of being such holders; and none of such securities were issued in
violation of the preemptive rights of any holders of any security of the
Company or similar contractual rights granted by the Company. The
outstanding options and warrants to purchase shares of Common Stock
constitute the valid and binding obligations of the Company, enforceable in
accordance with their terms, except (i) as such enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (ii) as enforceability of any indemnification
provision may be limited under federal and state securities laws, and (iii)
that the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to the equitable defenses and to the
discretion of the court before which any proceeding therefor may be
brought. The authorized Common Stock and outstanding options and warrants
to purchase shares of Common Stock conform to all statements relating
thereto contained in the Registration Statement and the Prospectus. The
offers and sales by the Company of the outstanding Common Stock, options
and warrants to purchase shares of Common Stock were at all relevant times
either registered under the Act and registered or qualified under the
applicable state securities or Blue Sky Laws or exempt from such
registration or qualification requirements and the holders thereof have no
rights of rescission with respect thereto.
2.8.2 SECURITIES SOLD PURSUANT TO THIS AGREEMENT. The
Securities have been duly authorized and, when issued and paid for, will be
validly issued, fully paid and non-assessable; the holders thereof are not
and will not be subject to personal liability by reason of being such
holders; the Securities are not and will not be subject to the preemptive
rights of any holders of any security of the Company or similar contractual
rights granted by the Company; and all corporate action required to be
taken for the authorization, issuance and sale of the Securities has been
duly and validly taken. When issued, the Representative's Purchase Option,
the Representative's Warrants and the Warrants will constitute valid and
binding obligations of the Company to issue and sell, upon exercise thereof
and payment therefor, the number and type of securities of the Company
called for thereby and the Representative's Purchase Option, the
Representative's Warrants and the Warrants will be enforceable against the
Company in accordance with their respective terms, except (i) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (ii) as enforceability
of any indemnification provision may be limited under federal and state
securities laws, and (iii) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
2.9 REGISTRATION RIGHTS OF THIRD PARTIES. Except as set forth in the
Prospectus, no holders of any securities of the Company or of any options,
warrants or other rights of the Company exercisable for or convertible or
exchangeable into securities of the Company have the right to require the
Company to register any such securities under the Act or to include any
such securities in a registration statement to be filed by the Company.
2.10 VALIDITY AND BINDING EFFECT OF AGREEMENTS. To the extent that
each thereof is a party thereto, this Agreement, the Warrant Agreement, the
Representative's Purchase Option, the Acquisition Agreement, the Private
Placement Agreement, the Conversion Agreement and the Preferred Stock
Exchange Agreement (as each such agreement is hereinafter defined) have
been duly and validly authorized by the Company or Steamboat L.L.C., as the
case may be, and constitute, or when executed and delivered will
constitute, the valid and binding agreements of the Company or Steamboat
L.L.C., enforceable against the Company and Steamboat L.L.C. in accordance
with their respective terms, except (i) as such enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (ii) as enforceability of any indemnification
provision may be limited under federal and state securities laws, and (iii)
that the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to the equitable defenses and to the
discretion of the court before which any proceeding therefor may be
brought.
2.11 NO CONFLICTS, ETC. To the extent that each thereof is a party
thereto, the execution, delivery, and performance by the Company and
Steamboat L.L.C. of this Agreement, the Warrant Agreement, the Acquisition
Agreement, the Private Placement Agreement, the Conversion Agreement and
the Preferred Stock Exchange Agreement, the consummation by the Company and
Steamboat L.L.C. of the transactions herein and therein contemplated and
the compliance by the Company and Steamboat L.L.C. with the terms hereof
and thereof do not and will not, with or without the giving of notice or
the lapse of time or both, (i) result in a breach of, or conflict with any
of the terms and provisions of, or constitute a default under, or result in
the creation, modification, termination or imposition of any lien, charge
or encumbrance upon any property or assets of the Company or Steamboat
L.L.C. pursuant to the terms of, any indenture, mortgage, deed of trust,
note, loan or credit agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any other agreement or
instrument to which the Company or Steamboat L.L.C. is a party or by which
the Company or Steamboat L.L.C. may be bound or to which any of the
property or assets of the Company or Steamboat L.L.C. is subject; (ii)
result in any violation of the provisions of the Certificate of
Incorporation or the By-Laws of the Company or Steamboat L.L.C.; (iii)
violate any existing applicable law, rule, regulation, judgment, order or
decree of any governmental agency or court, domestic or foreign, having
jurisdiction over the Company or Steamboat L.L.C. or any of their
properties or business; or (iv) have a material adverse effect on any
permit, license, certificate, registration, approval, consent, license or
franchise concerning the Company or Steamboat L.L.C.
2.12 NO DEFAULTS; VIOLATIONS. Except as described in the Prospectus,
no default exists in the due performance and observance of any term,
covenant or condition of any material license, contract, indenture,
mortgage, deed of trust, note, loan or credit agreement, or any other
agreement or instrument evidencing an obligation for borrowed money, or any
other material agreement or instrument to which the Company, Lehi, Plymouth
or Steamboat L.L.C. is a party or by which any of them may be bound or to
which any of their properties or assets is subject. None of the Company,
Lehi, Plymouth or Steamboat L.L.C. is in violation of any term or provision
of its Certificate of Incorporation or By-Laws or Certificate of Formation
or Operating Agreement or other similar document or instrument, as the case
may be, or in violation of any material franchise, license, permit,
applicable law, rule, regulation, judgment or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over any of them
or any of their properties or business.
2.13 CORPORATE POWER; LICENSES; CONSENTS.
2.13.1 CONDUCT OF BUSINESS. Each of the Company, Lehi,
Plymouth and Steamboat L.L.C. has all requisite corporate or limited
liability company power and authority, and has all necessary material
authorizations, approvals, orders, licenses, certificates and permits of
and from all governmental regulatory officials and bodies, to own or lease
its properties and conduct its business as described in the Prospectus, and
each of the Company, Lehi, Plymouth and Steamboat L.L.C. is and has been
doing business in compliance with all such material authorizations,
approvals, orders, licenses, certificates and permits and all federal,
state and local rules and regulations. The disclosures in the Registration
Statement concerning the effects of federal, state and local regulation on
the business of each of the Company, Lehi, Plymouth and Steamboat L.L.C. as
currently contemplated are correct in all material respects and do not omit
to state a material fact.
2.13.2 TRANSACTIONS CONTEMPLATED HEREIN. The Company has all
corporate power and authority to enter into this Agreement and to carry out
the provisions and conditions hereof, and all consents, authorizations,
approvals and orders required in connection therewith have been obtained.
No consent, authorization or order of, and no filing with, any court,
government agency or other body is required for the valid issuance, sale
and delivery, of the Securities pursuant to this Agreement, the Warrant
Agreement and the Representative's Purchase Option, and as contemplated by
the Prospectus, except with respect to applicable federal and state
securities laws. Each of the Company and Steamboat L.L.C. has all
corporate power and authority to enter into those of the Acquisition
Agreement, the Private Placement Agreement, the Conversion Agreement and
the Preferred Stock Exchange Agreement to which it is a party and to carry
out the provisions and conditions thereof and all consents, authorizations,
approvals and orders required in connection therewith have been obtained.
2.14 TITLE TO PROPERTY; INSURANCE. Each of the Company, Steamboat
L.L.C., Lehi and Plymouth has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property
(tangible and intangible) owned or leased by it, free and clear of all
liens, encumbrances, claims, security interests, defects and restrictions
of any material nature whatsoever, other than those referred to in the
Prospectus and liens for taxes not yet due and payable or arising by law.
The properties in which each of the Company, Steamboat L.L.C., Lehi and
Plymouth has an interest are adequately insured against loss or damage by
fire or other casualty. The Company, Steamboat L.L.C., Lehi and Plymouth
each maintains, in adequate amounts, such other insurance as is usually
maintained by companies engaged in the same or similar business.
2.15 LITIGATION; GOVERNMENTAL PROCEEDINGS. Except as set forth in the
Prospectus, there is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding pending or, to the
best of the Company's knowledge, threatened against, or involving the
properties or business of, the Company, Steamboat L.L.C., Lehi or Plymouth
which might materially and adversely affect the financial position,
prospects, value or the operation or the properties or the business of the
Company, Steamboat L.L.C., Lehi or Plymouth, or which questions the
validity of the capital stock or membership interests of the Company,
Steamboat L.L.C., Lehi or Plymouth or this Agreement or the Acquisition
Agreement or any action taken or to be taken by the Company or Steamboat
L.L.C. pursuant to, or in connection with, this Agreement or the
Acquisition Agreement. There are no outstanding orders, judgments or
decrees of any court, governmental agency or other tribunal, domestic or
foreign, naming the Company, Steamboat L.L.C., Lehi or Plymouth and
enjoining the Company, Steamboat L.L.C., Lehi or Plymouth from taking, or
requiring the Company, Steamboat L.L.C., Lehi or Plymouth to take, any
action, or to which the Company, Steamboat L.L.C., Lehi or Plymouth or
their respective properties or business is bound or subject.
2.16 GOOD STANDING.
(a) The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws of the
state of its incorporation and is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which ownership
or leasing of any properties or the character of its operations requires
such qualification or licensing, except where the failure to qualify would
not have a material adverse effect on it or its properties or business.
(b) Each of Steamboat L.L.C., Lehi and Plymouth has been
duly organized and is validly existing as a limited liability company or
limited partnership and is in good standing under the laws of the state of
its formation and is duly qualified and licensed and in good standing as a
foreign limited liability company or limited partnership in each
jurisdiction in which ownership or leasing of any properties or the
character of its operations requires such qualification or licensing,
except where the failure to qualify would not have a material adverse
effect on it or its properties or business.
2.17 TAXES. Each of the Company, Steamboat L.L.C., Lehi and Plymouth
has filed all returns (as hereinafter defined) required to be filed with
taxing authorities prior to the date hereof or has duly obtained extensions
of time for the filing thereof. Each of the Company, Steamboat L.L.C.,
Lehi and Plymouth has paid all taxes (as hereinafter defined) shown as due
on such returns that were filed and has paid all taxes imposed on or
assessed against it. The provisions for taxes payable, if any, shown on
the financial statements filed with or as part of the Registration
Statement are sufficient for all accrued and unpaid taxes, whether or not
disputed, and for all periods to and including the dates of such
consolidated financial statements. Except as disclosed in writing to the
Representative, (i) no issues have been raised (and are currently pending)
by any taxing authority in connection with any of the returns or taxes
asserted as due from the Company or Steamboat L.L.C., Lehi or Plymouth, and
(ii) no waivers of statutes of limitation with respect to the returns or
collection of taxes have been given by or requested from the Company,
Steamboat L.L.C., Lehi and Plymouth. The term "taxes" mean all federal,
state, local, foreign, and other net income, gross income, gross receipts,
sales, use, ad valorem, transfer, franchise, profits, license, lease,
service, service use, withholding, payroll, employment, excise, severance,
stamp, occupation, premium, property, windfall profits, customs, duties or
other taxes, fees, assessments, or charges of any kind whatever, together
with any interest and any penalties, additions to tax, or additional
amounts with respect thereto. The term "returns" means all returns,
declarations, reports, statements, and other documents required to be filed
in respect to taxes.
2.18 EMPLOYEE OPTIONS. No shares of Common Stock are eligible for
sale pursuant to Rule 701 promulgated under the Act in the 12 month period
following the Effective Date.
2.19 TRANSACTIONS AFFECTING DISCLOSURE TO NASD.
2.19.1 FINDER'S FEES. Except as described in the Prospectus,
there are no claims, payments, issuances, arrangements or understandings
for services in the nature of a finder's, consulting or origination fee
with respect to the introduction of the Company to the Representative or
the sale of the Securities hereunder or any other arrangements, agreements,
understandings, payments or issuance with respect to the Company that may
affect the Representative's compensation, as determined by the National
Association of Securities Dealers, Inc. ("NASD").
2.19.2 PAYMENTS WITHIN TWELVE MONTHS. The Company has not
made any direct or indirect payments (in cash, securities or otherwise) to
(i) any person, as a finder's fee, investing fee or otherwise, in
consideration of such person raising capital for the Company or introducing
to the Company persons who provided capital to the Company, (ii) to any
NASD member, (iii) to any person or entity that has any direct or indirect
affiliation or association with any NASD member within the twelve month
period prior to the date on which the Registration Statement was filed with
the Commission ("Filing Date") or thereafter, other than payments to (iv)
the Representative, (v) Theodore Rosen, Chairman of the Board of the
Company, and (vi) Wharton Capital Corp. in the amount of $12,500.
2.19.3 USE OF PROCEEDS. None of the net proceeds of the
offering will be paid by the Company to any NASD member or any affiliate or
associate of any NASD member, except as specifically authorized herein.
2.19.4 INSIDERS' NASD AFFILIATION. Other than Theodore Rosen
(a) no officer, director or five percent or greater stockholder of the
Company has any direct or indirect affiliation or association with any NASD
member, and (b) no beneficial owner of the Company's unregistered
securities issued within the 12 month period prior to the Filing Date or
thereafter has any direct or indirect affiliation or association with any
NASD member. The Company will advise the Representative and the NASD if
any other five percent or greater stockholder becomes, directly or
indirectly, an affiliate or associated person of an NASD member
participating in the distribution.
2.20 FOREIGN CORRUPT PRACTICES ACT. Neither the Company nor any of
its officers, directors, employees or agents or any other person acting on
its behalf has, directly or indirectly, given or agreed to give any money,
gift or similar benefit (other than legal price concessions to customers in
the ordinary course of business) to any customer, supplier, employee or
agent of a customer or supplier, or official or employee of any
governmental agency or instrumentality of any government (domestic or
foreign) or any political party or candidate for office (domestic or
foreign) or any political party or candidate for office (domestic or
foreign) or other person who was, is, or may be in a position to help or
hinder the business of the Company (or assist it in connection with any
actual or proposed transaction) which (i) might subject the Company to any
damage or penalty in any civil, criminal or governmental litigation or
proceeding, (ii) if not given in the past, might have had a materially
adverse effect on the assets, business or operations of the Company as
reflected in any of the financial statements contained in the Prospectus or
(iii) if not continued in the future, might adversely affect the assets,
business, operations or prospects of the Company. The internal accounting
controls and procedures of the Company are sufficient to cause the Company
to comply with the Foreign Corrupt Practices Act of 1977, as amended.
2.21 NASDAQ ELIGIBILITY. As of the Effective Date, the Securities
have been approved for quotation upon notice of issuance on the Nasdaq
SmallCap Market.
2.22 INTANGIBLES. Each of the Company, Steamboat L.L.C., Lehi and
Plymouth owns or possesses the requisite licenses or rights to use all
trademarks, service marks, service names, trade names, patents and patent
applications, copyrights and other rights (collectively, "Intangibles")
described as being licensed to or owned by it in the Registration
Statement. The Intangibles which have been registered in the United States
Patent and Trademark Office have been fully maintained and are in full
force and effect. There is no claim or action by any person pertaining to,
or proceeding pending or threatened and none of the Company, Steamboat
L.L.C., Lehi or Plymouth has received any notice of conflict with the
asserted rights of others which challenges the exclusive right of such
company with respect to any Intangibles used in the conduct of its business
except as described in the Prospectus. The Intangibles and the current
products, services and processes of each of the Company, Steamboat L.L.C.,
Lehi and Plymouth do not infringe on any Intangibles held by any third
party. To the best of the Company's knowledge, no others have infringed
upon the Intangibles of the Company, Steamboat L.L.C., Lehi or Plymouth.
2.23 RELATIONS WITH EMPLOYEES.
2.23.1 EMPLOYEE MATTERS. Each of the Company, Steamboat
L.L.C., Lehi and Plymouth has generally enjoyed a satisfactory employer-
employee relationship with its employees and is in compliance in all
material respects with all federal, state and local laws and regulations
respecting the employment of its employees and employment practices, terms
and conditions of employment and wages and hours relating thereto. To the
best of the Company's knowledge, there are no pending investigations
involving the Company, Steamboat L.L.C., Lehi or Plymouth by the U.S.
Department of Labor or any other governmental agency, responsible for the
enforcement of such federal, state and local laws and regulations. There
is no unfair labor practice charge or complaint against the Company,
Steamboat L.L.C., Lehi or Plymouth pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or
stoppage pending or threatened against or involving the Company, Steamboat
L.L.C., Lehi or Plymouth or any predecessor entity, and none has ever
occurred. No question concerning representation exists respecting the
employees of the Company, Steamboat L.L.C., Lehi or Plymouth and no
collective bargaining agreement or modification thereof is currently being
negotiated by the Company, Steamboat L.L.C., Lehi or Plymouth. No
grievance or arbitration proceeding is pending under any expired or
existing collective bargaining agreements of the Company, Steamboat L.L.C.,
Lehi or Plymouth, if any.
2.23.2 EMPLOYEE BENEFIT PLANS. Other than as set forth in the
Registration Statement, neither the Company, Steamboat L.L.C., Lehi or
Plymouth maintains, sponsors nor contributes to, nor is it required to
contribute to, any program or arrangement that is an "employee pension
benefit plan," an "employee welfare benefit plan," or a, "multi-employer
plan" as such terms are defined in Sections 3(2), 3(1) and 3(37),
respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). The Company and Steamboat L.L.C.,
Plymouth and Lehi do not maintain or contribute to, and have at no time
maintained or contributed to, a defined benefit plan, as defined in Section
3(35) of ERISA. If the Company, Steamboat L.L.C., Lehi and Plymouth does
maintain or contribute to a defined benefit plan, any termination of the
plan on the date hereof would not give rise to liability under Title IV of
ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or
Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"),
which could subject the Company, Steamboat L.L.C., Lehi or Plymouth to any
tax penalty for prohibited transactions and which has not adequately been
corrected. Each ERISA Plan is in compliance with all material reporting,
disclosure and other requirements of the Code and ERISA as they relate to
any such ERISA Plan. Determination letters have been received from the
Internal Revenue Service with respect to each ERISA Plan which is intended
to comply with Code Section 401(a), stating that such ERISA Plan and the
attendant trust are qualified thereunder. None of the Company, Steamboat
L.L.C., Lehi and Plymouth has ever completely or partially withdrawn from a
"multi-employer plan."
2.24 OFFICERS' CERTIFICATE. Any certificate signed by any duly
authorized officer of the Company or Steamboat L.L.C., Lehi or Plymouth and
delivered to you or to your counsel shall be deemed a representation and
warranty by the Company to the Representative as to the matters covered
thereby.
2.25 WARRANT AGREEMENT. The Company has entered into a warrant
agreement with respect to the Warrants and the Representative's Warrants
substantially in the form filed as an exhibit to the Registration Statement
("Warrant Agreement") with American Stock Transfer & Trust Company, in form
and substance satisfactory to the Representative, providing for among other
things (i) no redemption of the Warrants without the consent of the
Representative and (ii) the payment of a warrant solicitation fee as
contemplated by Section 3.10 hereof.
2.26 LOCK-UP AGREEMENTS. The Company has caused to be duly executed
legally binding and enforceable agreements pursuant to which all of the
officers and directors of the Company (including their family members and
affiliates) and the persons listed on Schedule 2 (collectively, "Insiders")
agree not to sell any shares of Common Stock owned by them (either pursuant
to Rule 144 of the Regulations or otherwise) for a period of thirteen
months following the Effective Date other than as set forth therein except
with the consent of the Representative and, if applicable, a state
securities commission.
2.27 SUBSIDIARIES. The representations and warranties made by the
Company in this Agreement shall, in the event that the Company has one or
more subsidiaries (a "subsidiary(ies)"), also apply and be true with
respect to each subsidiary as if each representation and warranty contained
herein made specific reference to the subsidiary each time the term
"Company" was used.
2.28 CERTAIN DEFINITIONS. As used herein:
(i) the term "Acquisition Agreement" means that certain [to
follow];
(ii) the term "Conversion Agreement" means the [to follow];
(iii) the term "Preferred Stock Exchange Agreement"
means the [to follow];
(iv) the term "Private Placement Agreement" means the [to
follow]; and
(v) the term "Steamboat Facilities" means the [to follow].
2.29 CONDITIONS TO OBLIGATIONS UNDER OTHER AGREEMENTS. As of the
Effective Date, the obligations of the Company and Steamboat L.L.C. which
are conditions to the consummation of the transactions contemplated by the
Acquisition Agreement, the Private Placement Agreement, the Conversion
Agreement, and the Preferred Stock Exchange Agreement have been fulfilled
by the Company other than the closing of the offering contemplated by the
Registration Statement and those conditions which cannot be satisfied until
the closing of such offering.
3. COVENANTS OF THE COMPANY. The Company covenants and agrees as
follows:
3.1 AMENDMENTS TO REGISTRATION STATEMENT. The Company will deliver
to the Representative, prior to filing, any amendment or supplement to the
Registration Statement or Prospectus proposed to be filed after the
Effective Date and not file any such amendment or supplement to which the
Representative shall reasonably object.
3.2 FEDERAL SECURITIES LAWS.
3.2.1 COMPLIANCE. During the time when a Prospectus is
required to be delivered under the Act, the Company will use all reasonable
efforts to comply with all requirements imposed upon it by the Act, the
Regulations and the Exchange Act and by the regulations under the Exchange
Act, as from time to time in force, so far as necessary to permit the
continuance of sales of or dealings in the Public Securities in accordance
with the provisions hereof and the Prospectus. If at any time when a
Prospectus relating to the Securities is required to be delivered under the
Act, any event shall have occurred as a result of which, in the opinion of
counsel for the Company or counsel for the Underwriters, the Prospectus, as
then amended or supplemented, includes an untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, or if it is necessary at any
time to amend the Prospectus to comply with the Act, the Company will
notify the Representative promptly and prepare and file with the
Commission, subject to Section 3.1 hereof, an appropriate amendment or
supplement in accordance with Section 10 of the Act.
3.2.2 FILING OF FINAL PROSPECTUS. The Company will file the
Prospectus (in form and substance satisfactory to the Representative) with
the Commission pursuant to the requirements of Rule 424 of the Regulations.
3.2.3 EXCHANGE ACT REGISTRATION. For a period of five years
from the Effective Date, the Company will use its best efforts to maintain
the registration of the Common Stock and the Warrants under the provisions
of Section 12 of the Exchange Act.
3.3 BLUE SKY FILING. The Company will endeavor in good faith, in
cooperation with the Representative, at or prior to the time the
Registration Statement becomes effective to qualify the Public Securities
for offering and sale under the securities laws of such jurisdictions as
the Representative may reasonably designate, provided that no such
qualification shall be required in any jurisdiction where, as a result
thereof, the Company would be subject to service of general process or to
taxation as a foreign corporation doing business in such jurisdiction. In
each jurisdiction where such qualification shall be effected, the Company
will, unless the Representative agrees that such action is not at the time
necessary or advisable, use all reasonable efforts to file and make such
statements or reports at such times as are or may be required by the laws
of such jurisdiction.
3.4 DELIVERY TO UNDERWRITERS OF PROSPECTUSES. The Company will
deliver to the several Underwriters, without charge, from time to time
during the period when the Prospectus is required to be delivered under the
Act or the Exchange Act such number of copies of each Preliminary
Prospectus and the Prospectus as such Underwriters may reasonably request
and, as soon as the Registration Statement or any amendment or supplement
thereto becomes effective, deliver to you two original executed
Registration Statements, including exhibits, and all post-effective
amendments thereto and copies of all exhibits filed therewith or
incorporated therein by reference and all original executed consents of
certified experts.
3.5 EVENTS REQUIRING NOTICE TO THE REPRESENTATIVE. The Company will
notify the Representative immediately and confirm the notice in writing
(i) of the effectiveness of the Registration Statement and any amendment
thereto, (ii) of the issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceeding for that purpose, (iii)
of the issuance by any state securities commission of any proceedings for
the suspension of the qualification of the Public Securities for offering
or sale in any jurisdiction or of the initiation, or the threatening, of
any proceeding for that purpose, (iv) of the mailing and delivery to the
Commission for filing of any amendment or supplement to the Registration
Statement or Prospectus, (v) of the receipt of any comments or request for
any additional information from the Commission, and (vi) of the happening
of any event during the period described in Section 3.4 hereof which, in
the judgment of the Company, makes any statement of a material fact made in
the Registration Statement or the Prospectus untrue or which requires the
making of any changes in the Registration Statement or the Prospectus in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading. If the Commission or any state
securities commission shall enter a stop order or suspend such
qualification at any time, the Company will make every reasonable effort to
obtain promptly the lifting of such order.
3.6 REVIEW OF FINANCIAL STATEMENTS. For a period of five years from
the Effective Date, the Company, at its expense, shall cause its regularly
engaged independent accountants to read (but not audit) the Company's
financial statements for each of the first three fiscal quarters prior to
the announcement of quarterly financial information, the filing of the
Company's Form 10-Q quarterly reports and the mailing of quarterly
financial information to stockholders.
3.7 UNAUDITED FINANCIALS. The Company will furnish to the
Representative as early as practicable subsequent to the date hereof, but
at least three full business days prior to the Closing Date, a copy of the
latest available unaudited interim financial statements ("Unaudited
Financials") of the Company (which shall be as of a month-end date no more
than thirty days prior to the Effective Date) which have been read by the
Company's independent accountants, as stated in their letter to be
furnished pursuant to Section 4.3 hereof.
3.8 SECONDARY MARKET TRADING AND STANDARD & POOR'S. The Company will
take all necessary and appropriate actions to achieve accelerated
publication in Standard and Poor's Corporation Records Corporate
Descriptions (within thirty (30) days after the Effective Date) and to
maintain such publication with updated quarterly information for a period
of five years from the Effective Date, including the payment of any
necessary fees and expenses. The Company shall take such action as may be
reasonably requested by the Representative to obtain a secondary market
trading exemption in such states as may be requested by the Representative,
including the payment of any necessary fees and expenses and the filing of
a Form (e.g., 25101(b)) for secondary market trading in the State of
California on the Effective Date or as soon thereafter as is permissible.
3.9 NASDAQ MAINTENANCE. For a period of five years from the date
hereof, the Company will use its best efforts to maintain the quotation of
the Common Stock and Warrants by Nasdaq SmallCap Market and, if the Company
satisfies the inclusion standards of the Nasdaq National Market System, to
apply for and maintain quotations by the Nasdaq National Market System of
such securities during such period.
3.10 WARRANT SOLICITATION AND WARRANT SOLICITATION FEES. The Company
hereby engages the Representative, on a non-exclusive basis, as its agent
for the solicitation of the exercise of the Warrants. The Company, at its
cost, will (i) assist the Representative with respect to such solicitation,
if requested by the Representative and will (ii) provide the
Representative, and direct the Company's transfer and warrant agent to
provide to the Representative, lists of the record and, to the extent
known, beneficial owners of the Company's Warrants. Commencing one year
from the Effective Date, the Company will pay the Representative a
commission of five percent of the Warrant exercise price for each Warrant
exercised, payable on the date of such exercise, on the terms provided for
in the Warrant Agreement, if allowed under the rules and regulations of the
NASD and only if the Representative has provided bona fide services to the
Company in connection with the exercise of Warrants and has received
written confirmation from the holder that the Representative has solicited
such exercise. In addition to soliciting, either orally or in writing, the
exercise of Warrants, such services may also include disseminating
information, either orally or in writing, to Warrantholders about the
Company or the market for the Company's securities, and assisting in the
processing of the exercise of the Warrants. The Representative may engage
sub-agents who are members of the NASD in its solicitation efforts. The
Company will disclose the arrangement to pay such solicitation fees to the
Representative in any prospectus used by the Company in connection with the
registration of the shares of Common Stock underlying the Warrants.
3.11 REGISTRATION OF COMMON STOCK. The Company agrees that prior to
the date that the Warrants become exercisable, it shall file with the
Commission a post-effective amendment to the Registration Statement, if
possible, or a new registration statement, for the registration, under the
Act, of the Common Stock issuable upon exercise of the Warrants. In either
case, the Company shall cause the same to become effective at or prior to
the date that the Warrants become exercisable, and to maintain the
effectiveness of such registration statement and keep current a prospectus
thereunder until the expiration of the Warrants in accordance with the
provisions of the Warrant Agreement.
3.12 REPORTS TO THE REPRESENTATIVE.
3.12.1 PERIODIC REPORTS, ETC. For a period of five years from
the Effective Date, the Company will promptly furnish to the
Representative, and to each other Underwriter who may so request, copies of
such financial statements and other periodic and special reports as the
Company from time to time files with any governmental authority or
furnishes generally to holders of any class of its securities, and promptly
furnish to the Representative (i) a copy of each periodic report the
Company shall be required to file with the Commission, (ii) a copy of every
press release and every news item and article with respect to the Company
or its affairs which was released by the Company, (iii) copies of each Form
SR, (iv) a copy of each Form 8-K or Schedules 13D, 13G, 14D-1 or 13E-4
received or prepared by the Company, (v) a copy of monthly statements
setting forth such information regarding the Company's results of
operations and financial position (including balance sheet, profit and loss
statements and data regarding operations) as is regularly prepared by
management of the Company, and (vi) such additional documents and
information with respect to the Company and the affairs of any future
subsidiaries of the Company as the Representative may from time to time
reasonably request.
3.12.2 TRANSFER SHEETS AND WEEKLY POSITION LISTINGS. For a
period of five years from the Closing Date, the Company will furnish to the
Representative at the Company's sole expense such transfer sheets and
position listings of the Company's securities as the Representative may
request, including the daily, weekly and monthly consolidated transfer
sheets of the transfer agent of the Company and the weekly security
position listings of the Depository Trust Company.
3.12.3 SECONDARY MARKET TRADING MEMORANDUM. Until such time
as the Public Securities are listed or quoted, as the case may be, on the
New York Stock Exchange, the American Stock Exchange or Nasdaq National
Market, the Company shall cause the Representative's legal counsel to
deliver to the Representative at the times set forth below a written
memorandum detailing those states in which Public Securities may be traded
in non-issuer transactions under the Blue Sky laws of the fifty states
("Secondary Market Trading Memorandum"). The Secondary Market Trading
Memorandum shall be delivered to the Representative on the Effective Date
and on the first day of every calendar quarter thereafter. The Company
shall pay to Representative's legal counsel a one-time fee of $5,000 for
such services at the Closing.
3.13 AGREEMENTS BETWEEN THE REPRESENTATIVE AND THE COMPANY.
3.13.1 [INTENTIONALLY OMITTED.]
3.13.2 [INTENTIONALLY OMITTED.]
3.13.3 REPRESENTATIVE'S PURCHASE OPTION. On the Closing Date,
the Company will execute and deliver to the Representative the
Representative's Purchase Option substantially in the form filed as an
exhibit to the Registration Statement.
3.14 DISQUALIFICATION OF FORM S-1 (OR OTHER APPROPRIATE FORM). For a
period equal to seven years from the date hereof, the Company will not take
any action or actions which may prevent or disqualify the Company's use of
Form S-1 (or other appropriate form) for the registration of the Warrants
and the Representative's Warrants and the securities issuable upon exercise
of those securities under the Act.
3.15 PAYMENT OF EXPENSES.
3.15.1 GENERAL EXPENSES. The Company hereby agrees to pay on
the Closing Date and, to the extent not paid on the Closing Date, on the
option Closing Date, if any, all expenses incident to the performance of
the obligations of the Company under this Agreement, including but not
limited to (i) the preparation, printing, filing, delivery and mailing
(including the payment of postage with respect to such mailing) of the
Registration Statement, the Prospectus and the Preliminary Prospectuses and
the printing and mailing of this Agreement and related documents, including
the cost of all copies thereof and any amendments thereof or supplements
thereto supplied to the Underwriters in quantities as may be required by
the Underwriters, (ii) the printing, engraving, issuance and delivery of
the shares of Common Stock and the Warrants and the Representative's
Purchase Option, including any transfer or other taxes payable thereon,
(iii) the qualification of the Public Securities under state or foreign
securities or Blue Sky laws, including the filing fees under such Blue Sky
laws, the costs of printing and mailing the "Preliminary Blue Sky
Memorandum," and all amendments and supplements thereto, fees up to an
aggregate of $35,000 and disbursements of Underwriters' counsel and a one
time fee of $5,000 payable to the Underwriters' counsel for the preparation
of the Secondary Market Trading Memorandum, (iv) filing fees, costs and
expenses (including disbursements of Underwriters' counsel) incurred in
registering the offering with the NASD, (v) costs of placing "tombstone"
advertisements in The Wall Street Journal, (vi) fees and disbursements of
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the transfer and warrant agent, (vii) the preparation, binding and delivery
of transaction "bibles" and transaction lucite cubes or similar
commemorative items in a form, style and quantity as requested by the
Representative, (viii) any listing of the Public Securities on Nasdaq
SmallCap or National Market, as the case may be, and any securities
exchange, and any listing in Standard & Poor's, (ix) the Company's expenses
associated with "due diligence" meetings arranged by the Underwriter, and
(x) all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided for in
this Section 3.15.1. Since an important part of the public offering
process is for the Company to appropriately and accurately describe both
the background of the principals of the Company and the Company's
competitive position in its industry, the Company has engaged and will pay
for an investigative search firm of the Representative's choice to conduct
an investigation of principals of the Company mutually selected by the
Representative and the Company. If the Company's representative have not
submitted to a bindery acceptable to the Representative all of the closing
and other documents material to the transactions contemplated hereby within
30 days of the Effective Date, the Company shall pay the fees and costs of
the Representative's agents to prepare the transactional bibles and have
them bound. The Representative may deduct from the net proceeds of the
offering payable to the Company on the Closing Date, or the Option Closing
Date, if any, the expenses set forth herein to be paid by the Company to
the Representative and/or to third parties.
3.15.2 NON-ACCOUNTABLE EXPENSES. The Company further agrees
that, in addition to the expenses payable pursuant to Section 3.15.1, it
will pay to the Representative a non-accountable expense allowance equal to
three percent (3%) of the gross proceeds received by the Company from the
sale of the Public Securities, of which $50,000 has been paid to date, and
the Company will pay the balance on the Closing Date and any additional
monies owed attributable to the Option Securities or otherwise on the
Option Closing Date by certified or bank cashier's check or, at the
election of the Representative, by deduction from the proceeds of the
offering contemplated herein. If the offering contemplated by this
Agreement is not consummated for any reason whatsoever then the following
provisions shall apply: The Company's liability for payment to the
Representative of the non-accountable expense allowance shall be equal to
the sum of the Representative's actual out-of-pocket expenses (including,
but not limited to, counsel fees, "road-show" and due diligence expenses).
The Representative shall retain such part of the non-accountable expense
allowance previously paid as shall equal such actual out-of-pocket
expenses. If the amount previously paid is insufficient to cover such
actual out-of-pocket expenses, the Company shall remain liable for and
promptly pay any other actual out-of-pocket expenses. If the amount
previously paid exceeds the amount of the actual out-of-pocket expenses,
the Representative shall promptly remit to the Company any such excess.
Upon request, the Representative shall furnish the Company with copies of
receipts or other evidence of payment of its actual out-of-pocket expenses.
3.16 APPLICATION OF NET PROCEEDS. The Company will apply the net
proceeds from the offering received by it in a manner consistent with the
application described under the caption "Use Of Proceeds" in the
Prospectus. The Company hereby agrees that, without the express prior
consent of the Representative, except as so described, the Company will not
apply any net proceeds from the offering to pay (i) any debt for borrowed
funds or (ii) any debt or obligation owed to any Insider.
3.17 DELIVERY OF EARNINGS STATEMENTS TO SECURITY HOLDERS. The Company
will make generally available to its security holders as soon as
practicable, but not later than the first day of the fifteenth full
calendar month following the Effective Date, an earnings statement (which
need not be certified by independent accountants unless required by the Act
or the Regulations, but which shall satisfy the provisions of Rule 158(a)
under Section 11(a) of the Act) covering a period of at least twelve
consecutive months beginning after the Effective Date.
3.18 KEY PERSON LIFE INSURANCE. The Company will maintain, for a
period of not less than one year from the Effective Date, key person life
insurance in an amount no less than $__________ on the life of Richard A.
Nelson and pay the annual premiums therefor and name the Company as the
sole beneficiary thereof.
3.19 STABILIZATION. Neither the Company, nor, to its knowledge, any
of its employees, directors or stockholders has taken or will take,
directly or indirectly, any action designed to or which has constituted or
which might reasonably be expected to cause or result in, under the
Exchange Act, or otherwise, stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Public
Securities.
3.20 INTERNAL CONTROLS. The Company maintains and will continue to
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance
with management's general or specific authorization, (ii) transactions are
recorded as necessary in order to permit preparation of financial
statements in accordance with generally accepted accounting principles and
to maintain accountability for assets, (iii) access to assets is permitted
only in accordance with management's general or specific authorization, and
(iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with respect
to any differences.
3.21 ACCOUNTANTS AND LAWYERS. For a period of five years from the
Effective Date, the Company shall retain independent accountants and
securities lawyers acceptable to the Representative. Richard A. Eisner &
Co., LLP, and Reid & Priest, LLP, are acceptable to the Representative.
3.22 TRANSFER AGENT. For a period of five years from the Effective
Date, the Company shall retain a transfer agent for the Common Stock and
Warrants acceptable to the Representative. American Stock Transfer & Trust
Company is acceptable to the Representative.
3.23 SALE OF SECURITIES. Except in accordance with the agreements
referred to in Section 2.26, the Company agrees not to permit or cause a
private or public sale or private or public offering of any of its
securities (in any manner, including pursuant to Rule 144 under the Act)
owned nominally or beneficially by the Insiders for a period of thirteen
months following the Effective Date without obtaining the prior written
consent of the Representative.
3.24 OTHER TRANSACTIONS. The Company will take such action as is
necessary to consummate the Acquisition Transactions and the transactions
contemplated by the Private Placement Agreement, the Conversion Agreement
and the Preferred Stock Exchange Agreement concurrently with the
consummation of the transactions contemplated by this Agreement.
4. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Securities, as provided
herein, shall be subject to the continuing accuracy of the representations
and warranties of the Company as of the date hereof and as of each of the
Closing Date and the Option Closing Date, if any, to the accuracy of the
statements of officers of the Company made pursuant to the provisions
hereof and to the performance by the Company of its obligations hereunder
and to the following conditions:
4.1 REGULATORY MATTERS.
4.1.1 EFFECTIVENESS OF REGISTRATION STATEMENT. The
Registration Statement has been declared effective on the date of this
Agreement and, at each of the Closing Date and the Option Closing Date, no
stop order suspending the effectiveness of the Registration Statement shall
have been issued and no proceedings for the purpose shall have been
instituted or shall be pending or contemplated by the Commission and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of Graubard Mollen &
Miller, counsel to the Underwriters.
4.1.2 NASD CLEARANCE. By the Effective Date, the
Representative shall have received clearance from the NASD as to the amount
of compensation allowable or payable to the Underwriters as described in
the Registration Statement.
4.1.3 NO BLUE SKY STOP ORDERS. No order suspending the sale
of the Securities in any jurisdiction designated by the Representative
pursuant to Section 3.3 hereof shall have been issued on either on the
Closing Date or the Option Closing Date, and no proceedings for that
purpose shall have been instituted or shall be contemplated.
4.2 COMPANY COUNSEL MATTERS.
4.2.1 (a) EFFECTIVE DATE OPINION OF COUNSEL. On the
Effective Date, the Representative shall have received the favorable
opinion of Reid & Priest, LLP, counsel to the Company, dated the Effective
Date, addressed to the Representative and in form and substance
satisfactory to Graubard Mollen & Miller, counsel to the Underwriters, to
the following effect, except that such opinion need not address any matters
relating to Steamboat L.L.C. other than in the following clause (i):
(i) (A) The Company has been duly organized and is
validly existing as a corporation and is in good standing under the laws of
its state of incorporation and is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which its
ownership or leasing of any properties or the character of its operations
requires such qualification or licensing, except where the failure to
qualify would not have a material adverse effect on it or its properties or
business.
(B) Each of Steamboat L.L.C. and Lehi has been
duly organized and is validly existing as a limited liability company and
is in good standing under the laws of its state of organization and is duly
qualified and licensed and in good standing as a foreign limited liability
company in each jurisdiction in which its ownership or leasing or any
properties or the character of its operations requires such qualification
or licensing, except where the failure to qualify would not have a material
adverse effect on it or its properties or business.
(C) Plymouth has been duly organized and is
validly existing as a limited partnership and is in good standing under the
laws of its state of organization and is duly qualified and licensed and in
good standing as a foreign limited partnership in each jurisdiction in
which its ownership or leasing or any properties or the character of its
operations requires such qualification or licensing, except where the
failure to qualify would not have a material adverse effect on it or its
properties or business.
(D) The Company, through its subsidiaries, is the
record and beneficial owner of 50% of the equity interests of Lehi,
Plymouth and Steamboat L.L.C.
(ii) Each of the Company, Lehi, Plymouth and Steamboat
L.L.C. has all requisite power and authority, and has all necessary
authorizations, approvals, orders, licenses, certificates and permits of
and from all governmental or regulatory officials and bodies to own or
lease its properties and conduct its business as described in the
Prospectus. Except to the extent that the lack of such authorizations,
approvals, orders, licenses, certificates and permits would not have a
materially adverse effect on the Company or Steamboat L.L.C. or their
respective activities, such counsel has no actual knowledge that any of the
Company, Lehi, Plymouth or Steamboat L.L.C. is conducting its activities
without material compliance with such approvals, orders, licenses,
certificates and permits. Each of the Company and Steamboat L.L.C. has all
power and authority to enter into those of this Agreement, the Warrant
Agreement, the Acquisition Agreement, the Private Placement Agreement, the
Conversion Agreement, the Preferred Stock Exchange Agreement and the
Representative's Purchase Option to which it is a party and to carry out
the provisions and conditions hereof and thereof, and all consents,
authorizations, approvals and orders required in connection therewith have
been obtained. No consents, approvals, authorizations or orders of, and no
filing with any court or governmental agency or body (other than such as
may be required under the Act and applicable Blue Sky laws) are required as
to the Company, Lehi, Plymouth and Steamboat L.L.C. for the valid
authorization, issuance, sale and delivery of the Securities, and the
consummation of the transactions and agreements contemplated by this
Agreement, the Warrant Agreement, the Acquisition Agreement, the Private
Placement Agreement, the Conversion Agreement, the Preferred Stock Exchange
Agreement and the Representative's Purchase Option and as contemplated by
the Prospectus or, if so required, all such authorizations, approvals,
consents, orders, registrations, licenses and permits have been duly
obtained and are in full force and effect and have been disclosed to the
Representative.
(iii) All issued and outstanding securities of the
Company have been duly authorized and validly issued and are fully paid and
non-assessable; the holders thereof have no rights of rescission with
respect thereto and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation of
the preemptive rights of any holders of any security of the Company or, to
the best of such counsel's knowledge, similar contractual rights granted by
the Company. The outstanding options and warrants to purchase shares of
Common Stock constitute the valid and binding obligations of the Company,
enforceable in accordance with their terms, except (a) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (b) as enforceability
of any indemnification provision may be limited under the federal and state
securities laws, and (c) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the
equitable defenses and to the direction of the court before which any
proceeding therefor may be brought. The offers and sales by the Company of
the outstanding Common Stock and options and warrants to purchase shares of
Common Stock were at all relevant times either registered under the Act and
the applicable state securities or Blue Sky Laws or exempt from such
registration requirements. The authorized and outstanding capital stock of
the Company is as set forth under the caption "Capitalization" in the
Prospectus.
(iv) The Securities have been duly authorized and, when
issued and paid for, will be validly issued, fully paid and non-assessable;
the holders thereof are not and will not be subject to personal liability
by reason of being such holders. The Securities are not and will not be
subject to the preemptive rights of any holders of any security of the
Company or, to the best of such counsel's knowledge after due inquiry,
similar contractual rights granted by the Company. All corporate action
required to be taken for the authorization, issuance and sale of the
Securities has been duly and validly taken. When issued, the Warrants, the
Representative's Purchase Option and the Representative's Warrants will
constitute valid and binding obligations of the Company to issue and sell,
upon exercise thereof and payment therefor, the number and type of
securities of the Company called for thereby and such Warrants,
Representative's Purchase Option and Representative's Warrants, when
issued, will be enforceable against the Company in accordance with their
respective terms, except (a) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (b) as enforceability of any indemnification provision
may be limited under the federal and state securities laws, and (c) that
the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to the equitable defenses and to the
discretion of the court before which any proceeding therefor may be
brought. The certificates representing the Securities are in due and
proper form.
(v) To the best of such counsel's knowledge, after due
inquiry, except as set forth in the Prospectus, no holders of any
securities of the Company or of any options, warrants or securities of the
Company exercisable for or convertible or exchangeable into securities of
the Company have the right to require the Company to register any such
securities of the Company under the Act or to include any such securities
in a registration statement to be filed by the Company.
(vi) To the best of such counsel's knowledge, after due
inquiry, the Units, the shares of Common Stock and the Warrants are
eligible for quotation on the Nasdaq SmallCap Market.
(vii) This Agreement, the Warrant Agreement, the
Acquisition Agreement, the Private Placement Agreement, the Conversion
Agreement, the Preferred Stock Exchange Agreement and the Representative's
Purchase Option have each been duly and validly authorized by the Company
and Steamboat L.L.C. to the extent it is a party thereto and, when executed
and delivered by the Company and Steamboat L.L.C., to the extent it is a
party thereto, will constitute valid and binding obligations of the Company
and Steamboat L.L.C., as the case may be, enforceable against the Company
and Steamboat L.L.C., to the extent it is a party thereto, in accordance
with their respective terms, except (a) as such enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (b) as enforceability of any indemnification
provisions may be limited under the federal and state securities laws, and
(c) that the remedy of specific performance and injunctive and other forms
of equitable relief may be subject to the equitable defenses and to the
discretion of the court before which any proceeding therefor may be
brought.
(viii) The execution, delivery and performance by
the Company and Steamboat L.L.C., to the extent it is a party thereto, of
this Agreement, the Warrant Agreement, the Acquisition Agreement, the
Conversion Agreement, the Private Placement Agreement, the Preferred Stock
Exchange Agreement and the Representative's Purchase Option, the issuance
and sale of the Securities by the Company, the consummation of the
transactions contemplated hereby and thereby and the compliance by the
Company and Steamboat L.L.C., to the extent any is a party thereto, with
the terms and provisions hereof and thereof, do not and will not, with or
without the giving of notice or the lapse of time, or both, (a) conflict
with, or result in a breach of, any of the terms or provisions of, or
constitute a default under, or result in the creation or modification of
any lien, security interest, charge or encumbrance upon any of the
respective properties or assets of the Company or Steamboat L.L.C. pursuant
to the terms of, any material mortgage, deed of trust, note, indenture,
written loan, contract or other material agreement or instrument of which
such counsel has knowledge and, to the best of such counsel's knowledge, to
which the Company or Steamboat is a party or by which the Company or
Steamboat or any of their respective properties or assets may be bound, (b)
result in any violation of the provisions of the respective Certificates of
Incorporation, By-Laws, Certificate of Formation or Operating Agreement of
the Company or Steamboat L.L.C., (c) violate any statute or any judgment,
order or decree of which such counsel has knowledge, rule or regulation
applicable to the Company or Steamboat L.L.C. of any court, domestic or
foreign, or of any federal, state or other regulatory authority or other
governmental body having jurisdiction over the Company or Steamboat L.L.C.,
their respective properties or assets, or (d) have a material adverse
effect on any permit, certification, registration, approval, consent,
license or franchise of the Company or Steamboat L.L.C.
(ix) The Registration Statement, each Preliminary
Prospectus and the Prospectus and any post-effective amendments or
supplements thereto (other than the financial statements included therein,
as to which no opinion need be rendered) comply as to form in all material
respects with the requirements of the Act and Regulations. The Securities
and all other securities issued or issuable by the Company conform in all
respects to the description thereof contained in the Registration Statement
and the Prospectus. The information in the Prospectus under "Business,"
"Management," "Certain Transactions," "Principal Stockholders,"
"Description of Securities" and "Shares Eligible for Future Sale" have been
reviewed by such counsel, and insofar as it contains descriptions of law,
descriptions of statutes, rules or regulations or legal conclusions such
information is correct in all material respects. No statute or regulation
or legal or governmental proceeding required to be described in the
Prospectus is not described as required, nor are any contracts or documents
of which such counsel has knowledge of a character required to be described
in the Registration Statement or the Prospectus or to be filed as exhibits
to the Registration Statement not so described or filed as required.
(x) Counsel has participated in conferences with
officers and other representatives of the Company, representatives of the
independent accountants for the Company and representatives of the
Representative at which the contents of the Registration Statement, the
Prospectus and related matters were discussed and although such counsel is
not passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement and Prospectus (except as otherwise set forth in counsel's
opinion), no facts have come to the attention of such counsel which lead
them to believe that neither the Registration Statement or the Prospectus
nor any amendment or supplement thereto, as of the date of such opinion,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading (it being understood that such counsel need express no
opinion with respect to the financial statements and schedules and other
financial and statistical data included in the Registration Statement or
Prospectus).
(xi) The Registration Statement is effective under the
Act, and, to the best of such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act or applicable state securities laws.
(xii) Except as described in the Prospectus, and to
the best of such counsel's knowledge, the Company, Lehi, Plymouth and
Steamboat L.L.C. each has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property
(tangible and intangible) stated in the Prospectus to be owned or leased by
it, free and clear of all liens, encumbrances, claims, security interests,
defects and restrictions of any material nature whatsoever, other than
those referred to in the Prospectus and liens for taxes not yet due and
payable.
(xiii) Except as described in the Prospectus, to the
best of such counsel's knowledge, no material default exists in the due
performance and observance of any term, covenant or condition of any
material license, contract, indenture, mortgage, deed of trust, note, loan
or credit agreement, or any other material agreement or instrument
evidencing an obligation for borrowed money, or any other material
agreement or instrument to which the Company, Lehi, Plymouth or Steamboat
L.L.C. is a party or by which the Company, Lehi, Plymouth or Steamboat
L.L.C. may be bound or to which any of the respective properties or assets
of the Company, Lehi, Plymouth or Steamboat L.L.C. is subject. None of the
Company, Lehi, Plymouth or Steamboat L.L.C. is in material violation of any
term or provision of its Certificate of Incorporation, By-Laws, Certificate
of Formation, Operating Agreement or other similar document or of any
franchise, license, permit, applicable law, rule, regulation, judgment or
decree of any governmental agency or court, domestic or foreign, having
jurisdiction over it or any of its properties or business, except as
described in the Prospectus.
(xiv) To the best of such counsel's knowledge,
after due inquiry, the Company, Lehi, Plymouth and Steamboat L.L.C. each
owns or possesses, free and clear of all liens or encumbrances and rights
thereto or therein by third parties, other than as described in the
Prospectus, the requisite licenses or other rights to use all patents,
licenses, Intangibles and other rights necessary to conduct its business
(including, without limitation, any such licenses or rights described in
the Prospectus as being licensed to or owned or possessed by the Company,
Lehi, Plymouth or Steamboat L.L.C. and there is no claim or action by any
person pertaining to, or proceeding, pending or, to the best of such
counsel's knowledge after due inquiry threatened, which challenges the
exclusive rights of the Company, Lehi, Plymouth or Steamboat L.L.C. with
respect to any Intangibles used in the conduct of its business (including
without limitation any such licenses or rights described in the Prospectus
as being owned or possessed by the Company, Lehi, Plymouth or Steamboat
L.L.C.).
(xv) To the best of such counsel's knowledge, after due
inquiry, except as described in the Prospectus and except for subsidiaries
whose operations are included in their respective consolidated financial
statements included in the Prospectus, none of the Company, Lehi, Plymouth
or Steamboat L.L.C. owns an interest in any corporation, partnership, joint
venture, trust or other business entity.
(xvi) To the best of such counsel's knowledge,
after due inquiry, except as set forth in the Prospectus, there is no
action, suit or proceeding before or by any court of governmental agency or
body, domestic or foreign, now pending, or threatened against the Company,
Lehi, Plymouth or Steamboat L.L.C. which might result in any material and
adverse change in the condition (financial or otherwise), business or
prospects of the Company, Lehi, Plymouth or Steamboat L.L.C., or might
materially and adversely affect the properties or assets thereof.
(xvii) To the best of such counsel's knowledge,
after due inquiry, neither the Company nor its officers, employees, agents
or other persons acting on their behalf has, directly or indirectly, given
or agreed to give any money, gift or similar benefit (other than legal
price concessions to customers in the ordinary course of business) to any
customer or supplier, any employee or agent of a customer or supplier, any
officials or employee of any governmental agency or body (domestic or
foreign), any political party or candidate for office (domestic or foreign)
or any other person who was, is or may be in a position to help or hinder
the business of the Company (or assist it in connection with any actual or
proposed transaction) which (a) might subject the Company to any damage or
penalty in any civil, criminal or governmental litigation or proceeding,
(b) if not given in the past, might have had a materially adverse effect on
the assets, business or operations of the Company as reflected in the
financial statements contained in the Registration Statement or (c) if not
continued in the future, might adversely affect the assets, business,
operations or prospects of the Company. The Company's internal accounting
controls and procedures are sufficient to cause the Company to comply with
the Foreign Corrupt Practices Act of 1977, as amended.
(xviii) To the best of such counsel's knowledge,
after due inquiry, except as described in the Prospectus, there are no
claims, payments, issuances, arrangements or understandings for services in
the nature of a finder's or origination fee with respect to the sale of the
Securities hereunder or financial consulting arrangements or any other
arrangements, agreements, understandings, payments or issuances that may
affect the Representative's compensation, as determined by the NASD.
(b) OTHER COUNSEL'S OPINION. On the Effective Date, the
Representative shall have received the opinion of ______________________
__________________________________________ ("Other Counsel") in form and
substance satisfactory to Graubard Mollen & Miller, counsel to the
Underwriters, relating to litigation, title to properties, permits and
licenses and environmental and regulatory matters. Such opinion shall
include, among other things, statements to the effect that:
(i) Other Counsel is not aware of any federal, state
or local statute, rule or regulation relating to electricity production,
operation, marketing or transportation matters or environmental matters
which it considers to be material to the operations of the Company, Lehi,
Plymouth and Steamboat L.L.C. in the states in which they operate other
than those set forth in the Prospectus (collectively, the "Applicable Laws
and Regulations").
(ii) To the best of Other Counsel's knowledge, after
due inquiry, it is not aware of any state of facts which would lead it to
believe that any of the Company, Lehi, Plymouth and Steamboat L.L.C. is not
in substantial compliance with the Applicable Laws and Regulations. By
"substantial compliance," Other Counsel means that, based on its experience
as attorneys, it believes that any compliance exceptions of which it has
knowledge are not of a level of significance, individually or collectively,
to the various regulatory authorities which enforce the Applicable Laws and
Regulations which would result in any of the Company, Lehi, Plymouth and
Steamboat L.L.C. losing its ability to operate any of its properties (or to
receive the benefits from those properties operated by others in which it
has an interest) or in a fine or penalty that would significantly affect
the financial condition of the Company.
(iii) Other Counsel has examined and passed upon
statements concerning the Applicable Laws and Regulations in the following
sections of the Prospectus: the sections in "Risk Factors" entitled
"Governmental Regulation" and "Environmental Risks" and the section in
"Business" entitled "Government Regulation." Such sections, insofar as
they refer to the Applicable Laws and Regulations, are accurate and
complete and do not contain any untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements
contained therein, in light of the circumstances in which they were made,
not misleading.
(iv) The Company, Lehi, Plymouth and Steamboat L.L.C.
each presently has all necessary environmental and other permits, licenses,
approvals and other governmental authorizations to conduct their respective
businesses and operate their respective facilities in the manner now
conducted and as stated in the Prospectus to be contemplated to be
conducted and operated.
(c) Unless the context clearly indicates otherwise, the
term "Company" as used in this Section 4.2.1 shall include each subsidiary
of the Company. The opinion of counsel for the Company and Other Counsel
and any opinion relied upon by such counsel shall include a statement to
the effect that it may be relied upon by counsel for the Representative in
its opinion delivered to the Representative.
4.2.2 CLOSING DATE AND OPTION CLOSING DATE OPINIONS OF
COUNSEL. On each of the Closing Date and the Option Closing Date, if any,
the Representative shall have received the favorable opinions of Company
Counsel and Other Counsel, dated the Closing Date or the Option Closing
Date, as the case may be, addressed to the Representative and in the forms
and substance satisfactory to Graubard Mollen & Miller, counsel to the
Underwriters, confirming as of the Closing Date and, if applicable, the
Option Closing Date, the statements made by such counsel in their opinions
delivered on the Effective Date and, in the case of the opinion of Company
Counsel, referring to Steamboat L.L.C. as set forth in Section 4.2.1.
4.2.3 RELIANCE. In rendering such opinions, such counsel may
rely (i) as to matters involving the application of laws other than the
laws of the jurisdictions in which they are admitted, to the extent such
counsel deems proper and to the extent specified in such opinion, if at
all, upon an opinion or opinions (in form and substance reasonably
satisfactory to the Underwriters' counsel) of other counsel reasonably
acceptable to the Underwriters' counsel, familiar with the applicable laws,
and (ii) as to matters of fact, to the extent they deem proper, on
certificates or other written statements of officers of departments of
various jurisdiction having custody of documents respecting the corporate
existence or good standing of the Company, Lehi, Plymouth and Steamboat
L.L.C., provided that copies of any such statements or certificates shall
be delivered to the Underwriters' counsel if requested. Each such opinion
of counsel shall include a statement to the effect that it may be relied
upon by counsel for the Underwriters in its opinion delivered to the
Representative.
4.2.4 SECONDARY MARKET TRADING MEMORANDUM. On the Effective
Date, the Representative shall have received the Secondary Market Trading
Memorandum.
4.3 COLD COMFORT LETTERS. At the time this Agreement is executed and
at each of the Closing Date and the Option Closing Date, if any, you shall
have received a letter, addressed to the Representative and in form and
substance satisfactory in all respects (including the non-material nature
of the changes or decreases, if any, referred to in clause (iii) below) to
you and to Graubard Mollen & Miller, counsel for the Underwriters, from
Richard A. Eisner & Company LLP, dated, respectively, as of the date of
this Agreement and as of the Closing Date and the Option Closing Date, if
any:
(i) confirming that they are independent accountants with
respect to the Company within the meaning of the Act and the applicable
Regulations;
(ii) stating that in their opinion the financial statements
of the Company included in the Registration Statement and Prospectus comply
as to form in all material respects with the applicable accounting
requirements of the Act and the published Regulations thereunder;
(iii) stating that, based on the performance procedures
specified by the American Institute of Certified Public Accountants
("AICPA") for a review of the latest available unaudited interim financial
statements of the Company, Lehi and Plymouth (as described in SAS No. 71
Interim Financial Information), with an indication of the date of the
latest available unaudited interim financial statements, a reading of the
latest available minutes of the stockholders and board of directors and the
various committees of the board of directors, consultations with officers
and other employees of the Company, Lehi and Plymouth responsible for
financial and accounting matters and other specified procedures and
inquiries, nothing has come to their attention which would lead them to
believe that (a) the unaudited financial statements of the Company, Lehi
and Plymouth included in the Registration Statement do not comply as to
form in all material respects with the applicable accounting requirements
of the Act and the Regulations or any material modification should be made
to the unaudited interim financial statements included in the Registration
Statement for them to be in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the
audited financial statements of the Company, Lehi and Plymouth included in
the Registration Statement, (b) at a date not later than five days prior to
the Effective Date, Closing Date or Option Closing Date, as the case may
be, there was any change in the capital stock or long-term debt of the
Company, or any decrease in the stockholders' equity of the Company as
compared with amounts shown in the ____________, 1996 balance sheet
included in the Registration Statement, other than as set forth in or
contemplated by the Registration Statement, or, if there was any decrease,
setting forth the amount of such decrease, and (c) during the period from
_________, 1996, to a specified date not later than five days prior to the
Effective Date, Closing Date or Option Closing Date, as the case may be,
there was any decrease in revenues, or increase in net loss or net loss per
share of Common Stock, in each case as compared with the corresponding
period in the preceding year and as compared with the corresponding period
in the preceding quarter, other than as set forth in or contemplated by the
Registration Statement, or, if there was any such decrease, setting forth
the amount of such decrease;
(iv) stating that, based on the performance of procedures
specified by the AICPA for a review of unaudited pro forma financial
statements of the Company and Steamboat Envirosystems Power Plants and
inquiries of the officers and other employees of the Company responsible
for financial and accounting matters and other specified procedures and
inquiries, nothing has come to their attention which would lead them to
believe that (a) the unaudited pro forma condensed consolidated balance
sheet at ____________, 1996 and the unaudited pro forma condensed
consolidated statement of operations for the [period] ended ______________,
1996 of the Company and the unaudited pro forma condensed combined
statement of operations for the [period] ended ______________, 1996 of
Steamboat Envirosystems Power Plants included in the Registration Statement
(collectively, the "Pro Forma Financial Statements") do not comply as to
form in all material respects with applicable requirements of the Act, the
Regulations and applicable accounting requirements, (b) that the pro forma
adjustments have not been properly applied to the historical amounts in the
compilation of the Pro Forma Financial Statements, or (c) that the
assumptions used in the preparation of the Pro Forma Financial Statements
are not appropriate;
(v) setting forth, at a date not later than five days prior
to the Effective Date, the amount of liabilities of the Company, Lehi and
Plymouth (including a break-down of commercial paper and notes payable to
banks);
(vi) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and earnings,
statements and other financial information pertaining to the Company, Lehi
and Plymouth set forth in the Prospectus, in each case to the extent that
such amounts, numbers, percentages, statements and information may be
derived from the general accounting records and work sheets of the Company,
with the results obtained from the application of specified readings,
inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement;
(vii) stating that they have not during the immediately
preceding five year period brought to the attention of the Company's
management any reportable condition related to internal structure, design
or operation as defined in the Statement on Auditing Standards No. 60 -
"Communication of Internal Control Structure Related Matters Noted in an
Audit," in the Company's internal controls; and
(viii) statements as to such other matters incident to
the transaction contemplated hereby as you may reasonably request.
4.4 OFFICERS' CERTIFICATES.
4.4.1 OFFICERS' CERTIFICATE. At each of the Closing Date and
the Option Closing Date, if any, the Representative shall have received a
certificate of the Company signed by the President and the Chief Financial
Officer of the Company, dated the Closing Date or the Option Closing Date,
as the case may be, respectively, to the effect that the Company has
performed all covenants and complied with all conditions required by this
Agreement to be performed or complied with by the Company prior to and as
of the Closing Date, or the Option Closing Date, as the case may be, and
that the conditions set forth in Section 4.5 hereof have been satisfied as
of such date and that, as of Closing Date and the Option Closing Date, as
the case may be, the representations and warranties of the Company set
forth in Section 2 hereof are true and correct. In addition, the
Representative will have received such other and further certificates of
officers of the Company as the Representative may reasonably request.
4.4.2 CHIEF FINANCIAL OFFICER'S CERTIFICATE. At each of the
Closing Date and the Option Closing Date, if any, the Representative shall
have received a certificate of the Company signed by the Chief Financial
Officer of the Company, dated the Closing Date or the Option Date, as the
case may be, respectively, certifying (i) that the Certificate of
Incorporation and By-Laws, as amended, of the Company are true and
complete, have not been modified and are in full force and effect, (ii)
that the resolutions relating to the public offering contemplated by this
Agreement are in full force and effect and have not been modified, (iii)
all correspondence between the Company or its counsel and the Commission,
(iv) all correspondence between the Company or its counsel and the NASD
concerning inclusion of the Securities on Nasdaq, and (v) as to the
incumbency of the officers of the Company. The documents referred to in
such certificate shall be attached to such certificate.
4.5 NO MATERIAL CHANGES. Prior to and on each of the Closing Date
and the Option Closing Date, if any, (i) there shall have been no material
adverse change or development involving a prospective material change in
the condition or prospects or the business activities, financial or
otherwise, of the Company, Lehi, Plymouth and Steamboat L.L.C., taken
together, from the latest dates as of which such condition is set forth in
the Registration Statement and Prospectus, (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the
Company, Lehi, Plymouth or Steamboat L.L.C. from the latest date as of
which the financial condition of the Company, Lehi, Plymouth and Steamboat
L.L.C. is set forth in the Registration Statement and Prospectus which is
materially adverse to the Company, Lehi, Plymouth and Steamboat L.L.C.,
(iii) the Company, Lehi, Plymouth and Steamboat L.L.C. shall not be in
default under any provision of any instrument relating to any outstanding
indebtedness which default would have a material adverse effect on it, (iv)
no material amount of the assets of the Company, Lehi, Plymouth and
Steamboat L.L.C. shall have been pledged or mortgaged, except as set forth
in the Registration Statement and Prospectus, (v) no action suit or
proceeding, at law or in equity, shall have been pending or threatened
against the Company, Lehi, Plymouth or Steamboat L.L.C. or affecting any of
its property or business before or by any court or governmental commission,
board or other administrative agency wherein an unfavorable decision,
ruling or finding may materially adversely affect the business, operations,
prospects or financial condition or income of the Company, Lehi, Plymouth
and Steamboat L.L.C., except as set forth in the Registration Statement and
Prospectus, (vi) no stop order shall have been issued under the Act and no
proceedings therefor shall have been initiated or threatened by the
Commission, and (vii) the Registration Statement and the Prospectus and any
amendments or supplements thereto contain all material statements which are
required to be stated therein in accordance with the Act and the
Regulations and conform in all material respects to the requirements of the
Act and the Regulations, and neither the Registration Statement nor the
Prospectus nor any amendment or supplement thereto contains any untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading. As used
in this Section 4.5, the term "Company" shall mean the Company and its
subsidiaries, taken as a whole.
4.6 DELIVERY OF AGREEMENTS. At the Closing, the Company shall have
delivered to the Representative executed copies of the Representative's
Purchase Option.
4.7 OPINION OF COUNSEL FOR THE UNDERWRITERS. All proceedings taken
in connection with the authorization, issuance or sale of the Securities as
herein contemplated shall be reasonably satisfactory in form and substance
to you and to Graubard Mollen & Miller, counsel to the Underwriters, and
you shall have received from such counsel a favorable opinion, dated the
Closing Date and the Option Closing Date, if any, with respect to such of
these proceedings as you may reasonably require. On or prior to the
Effective Date, the Closing Date and the Option Closing Date, as the case
may be, counsel for the Underwriters shall have been furnished such
documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
this Section 4.7, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions herein
contained.
4.8 OTHER TRANSACTIONS. The Acquisition Transactions shall have been
effected on the Closing Date and all conditions required to consummate the
transactions contemplated by the Acquisition Agreement, the Private
Placement Agreement, the Conversion Agreement and the Preferred Stock
Exchange Agreement shall have been fulfilled concurrently with the
consummation of the transactions contemplated by this Agreement.
5. INDEMNIFICATION.
5.1 INDEMNIFICATION OF THE UNDERWRITERS.
5.1.1 GENERAL. Subject to the conditions set forth below,
the Company agrees to indemnify and hold harmless each of the Underwriters,
their respective directors, officers, agents and employees and each person,
if any, who controls an Underwriter ("controlling person") within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act,
against any and all loss, liability, claim, damage and expense whatsoever
(including but not limited to any and all legal or other expenses
reasonably incurred in investigating, preparing or defending against any
litigation or claims whatsoever, commenced or threatened, whether arising
out of any action between any of the Underwriters and the Company or
between any of the Underwriters and any third-party or otherwise) to which
they or any of them may become subject under the Act, the Exchange Act or
any other statute or at common law or otherwise or under the laws of
foreign countries, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in (i) any
Preliminary Prospectus, the Registration Statement or the Prospectus (as
from time to time each may be amended and supplemented); (ii) in any post-
effective amendment or amendments or any new registration statement and
prospectus in which is included securities of the Company issued or
issuable upon exercise of the Representative's Purchase Option; or (iii)
any application or other document or written communication (in this Section
5 collectively called "application") executed by the Company or based upon
written information furnished by the Company in any jurisdiction in order
to qualify the Securities under the securities laws thereof or filed with
the Commission, any state securities commission or agency, Nasdaq or any
securities exchange; or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, unless such statement or omission was made in
reliance upon and in strict conformity with written information furnished
to the Company with respect to any Underwriter by or on behalf of such
Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or Prospectus, or any amendment or supplement
thereof, or in any application, as the case may be. The Company agrees
promptly to notify the Representative of the commencement of any litigation
or proceedings against the Company or any of its officers, directors or
controlling persons in connection with the issue and sale of the Securities
or in connection with the Registration Statement or Prospectus.
5.1.2 PROCEDURE. If any action is brought against an
Underwriter or controlling person in respect of which indemnity may be
sought against the Company pursuant to Section 5.1.1, such Underwriter
shall promptly notify the Company in writing of the institution of such
action and the Company shall assume the defense of such action, including
the employment and fees of counsel (subject to the approval of the
Underwriter) and payment of actual expenses. Such Underwriter or
controlling person shall have the right to employ its or their own counsel
in any such case, but the fees and expenses of such counsel shall be at the
expense of such Underwriter or such controlling person unless (i) the
employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action, or (ii) the Company
shall not have employed counsel to have charge of the defense of such
action, or (iii) such indemnified party or parties shall have reasonably
concluded that there may be defenses available to it or them which are
different from or additional to those available to the Company (in which
case the Company shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which
events the fees and expenses of not more than one additional firm of
attorneys selected by the Underwriter or Underwriters and/or controlling
person shall be borne by the Company. Notwithstanding anything to the
contrary contained herein, if an Underwriter or controlling person shall
assume the defense of such action as provided above, the Company shall have
the right to approve the terms of any settlement of such action which
approval shall not be unreasonably withheld.
5.2 INDEMNIFICATION OF THE COMPANY. Each of the Underwriters,
severally and not jointly, agrees to indemnify and hold harmless the
Company against any and all loss, liability, claim, damage and expense
described in the foregoing indemnity from the Company to the several
Underwriters, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions directly relating to
the transactions effected by the Underwriters in connection with this
offering made in any Preliminary Prospectus, the Registration Statement or
Prospectus or any amendment or supplement thereto or in any application in
reliance upon, and in strict conformity with, written information furnished
to the Company with respect to an Underwriter by or on behalf of such
Underwriter expressly for use in such Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment or supplement thereto
or in any such application. In case any action shall be brought against
the Company or any other person so indemnified based on any Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment or
supplement thereto or any application, and in respect of which indemnity
may be sought against any Underwriter, such Underwriter shall have the
rights and duties given to the Company, and the Company and each other
person so indemnified shall have the rights and duties given to the several
Underwriters by the provisions of Section 5.1.2.
5.3 CONTRIBUTION.
5.3.1 CONTRIBUTION RIGHTS. In order to provide for just and
equitable contribution under the Act in any case in which (i) any person
entitled to indemnification under this Section 5 makes claim for
indemnification pursuant hereto but it is judicially determined (by the
entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of
appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 5 provides for indemnification
in such case, or (ii) contribution under the Act, the Exchange Act or
otherwise may be required on the part of any such person in circumstances
for which indemnification is provided under this Section 5, then, and in
each such case, the Company and the Underwriters shall contribute to the
aggregate losses, liabilities, claims, damages and expenses of the nature
contemplated by said indemnity agreement incurred by the Company and the
Underwriters, as incurred, in such proportions that the Underwriters are
responsible for that portion represented by the percentage that the
underwriting discount appearing on the cover page of the Prospectus bears
to the initial offering price appearing thereon and the Company is
responsible for the balance; provided, that, no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. Notwithstanding the provisions of
this Section 5.3, no Underwriter shall be required to contribute any amount
in excess of the amount by which the total price at which the Public
Securities underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay in respect of such losses, liabilities,
claims, damages and expenses. For purposes of this Section, each director,
officer and employee of an Underwriter, and each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act shall
have the same rights to contribution as such Underwriter and each director
of the Company, each officer of the Company who signed the Registration
Statement, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act shall have the same rights to contribution
as the Company.
5.3.2 CONTRIBUTION PROCEDURE. Within fifteen days after
receipt by any party to this Agreement (or its representative) of notice of
the commencement of any action, suit or proceeding, such party will, if a
claim for contribution in respect thereof is to be made against another
party ("contributing party"), notify the contributing party of the
commencement thereof, but the omission to so notify the contributing party
will not relieve it from any liability which it may have to any other party
other than for contribution hereunder. In case any such action, suit or
proceeding is brought against any party, and such party notifies a
contributing party or its representative of the commencement thereof within
the aforesaid fifteen days, the contributing party will be entitled to
participate therein with the notifying party and any other contributing
party similarly notified. Any such contributing party shall not be liable
to any party seeking contribution on account of any settlement of any
claim, action or proceeding which was effected by such party seeking
contribution on account of any settlement of any claim, action or
proceeding effected by such party seeking contribution without the written
consent of such contributing party. The contribution provisions contained
in this Section are intended to supersede, to the extent permitted by law,
any right to contribution under the Act, the Exchange Act or otherwise
available.
6. DEFAULT BY AN UNDERWRITER.
6.1 DEFAULT NOT EXCEEDING 10% OF FIRM SECURITIES OR OPTION
SECURITIES. If any Underwriter or Underwriters shall default in its or
their obligations to purchase the Firm Securities or the Option Securities,
if exercised, hereunder, and if the number of the Firm Securities or the
Option Securities with respect to which such default relates does not
exceed in the aggregate 10% of the number of Firm Securities or Option
Securities which all Underwriters have agreed to purchase hereunder, then
such Firm Securities or Option Securities to which the default relates
shall be purchased by the non-defaulting Underwriters in proportion to
their respective commitments hereunder.
6.2 DEFAULT EXCEEDING 10% OF FIRM SECURITIES OR OPTION SECURITIES.
In the event that such default relates to more than 10% of the Firm
Securities or Option Securities, you may in your discretion arrange for
yourself or for another party or parties to purchase such Firm Securities
or Option Securities to which such default relates on the terms contained
herein. If within one business day after such default relating to more
than 10% of the Firm Securities or Option Securities you do not arrange for
the purchase of such Firm Securities or Option Securities, then the Company
shall be entitled to a further period of one business day within which to
procure another party or parties satisfactory to you to purchase said Firm
Securities or Option Securities on such terms. In the event that neither
you nor the Company arrange for the purchase of the Firm Securities or
Option Securities to which a default relates as provided in this Section 6,
this Agreement may be terminated by you or the Company (but only with
respect to the obligations relating to the Option Securities if such
default occurs after the Closing Date) without liability on the part of the
Company (except as provided in Section 3.15 and Section 5.1 hereof) or the
several Underwriters but nothing herein shall relieve a defaulting
Underwriter of its liability, if any, to the other several Underwriters and
to the Company for damages occasioned by its default hereunder.
6.3 POSTPONEMENT OF CLOSING DATE. In the event that the Firm
Securities or Option Securities to which the default relates are to be
purchased by the non-defaulting Underwriters, or are to be purchased by
another party or parties as aforesaid, you or the Company shall have the
right to postpone the Closing Date or the Option Closing Date for a
reasonable period, but not in any event exceeding five business days, in
order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment to the
Registration Statement or the Prospectus which in the opinion of counsel
for the Underwriters may thereby be made necessary. The term "Underwriter"
as used in this Agreement shall include any party substituted under this
Section 6 with like effect as if it had originally been a party to this
Agreement with respect to such Securities.
7. ADDITIONAL COVENANTS.
7.1 BOARD DESIGNEE. For a period of not less than five years from
the Effective Date, the Company will recommend and use its best efforts to
elect a designee of the Representative, at the option of the
Representative, either as a member of or a non-voting advisor to the Board
of Directors of the Company. Such designee, if elected or appointed, shall
attend meetings of the Board and receive no more or less compensation than
is paid to other non-management directors of the Company and shall be
entitled to receive reimbursement for all reasonable costs incurred in
attending such meetings, including, but not limited to, food, lodging and
transportation. To the extent permitted by law, the Company will agree to
indemnify the Representative and its designee for the actions of such
designee as a director of the Company. In the event the Company maintains
a liability insurance policy affording coverage for the acts of its
officers and directors, it will, if possible, include each of the
Representative and its designee as an insured under such policy. If the
Representative does not exercise its option to designate a member of the
Company's Board of Directors, the Representative shall nevertheless have
the right to send a representative (who need not be the same individual
from meeting to meeting) to observe each meeting of the Board of Directors.
The Company agrees to give the Representative written notice of each such
meeting and to provide the Representative with an agenda and minutes of the
meeting no later than it gives such notice and provides such items to the
other directors.
7.2 [INTENTIONALLY OMITTED.]
7.3 RULE 144 SALES. During the five year period following the
Effective Date, the Representative shall have the right to purchase for the
Representative's account or to sell for the account of the Company's
officers, directors and Principal Stockholders any securities sold pursuant
to Rule 144 under the Act. Each of the officers, directors and Principal
Stockholders ("144 Sellers") will agree to consult with the Representative
with regard to any such sales and will offer the Representative the
exclusive opportunity to purchase or sell such securities on terms at least
as favorable to the 144 Sellers as they can secure elsewhere. If the
Representative fails to accept in writing any such proposal for sale by the
144 Sellers within three business days after receipt of a notice containing
such proposal, then the Representative shall have no claim or right with
respect to any such sales contained in any such notice. If, thereafter,
such proposal is modified in any material respect, the 144 Sellers shall
adopt the same procedure as with respect to the original proposal.
7.4 PRESS RELEASES. Except as required by law, the Company will not
issue a press release or engage in any other publicity until 25 days after
the Effective Date without the Representative's prior written consent.
7.5 FORM S-8 OR ANY SIMILAR FORM. The Company shall not file a
Registration Statement on Form S-8 (or any similar or successor form) for
the registration of shares of Common Stock underlying stock options for a
period of one year from the Effective Date without the Representative's
prior written consent.
7.6 EMPLOYMENT AGREEMENTS. On or before the Closing Date, Theodore
Rosen and Richard H. Nelson shall have entered into employment agreements
having terms of five years from the Effective Date and containing such
other terms and conditions as shall have been approved by the
Representative.
7.7 COMPENSATION AND OTHER ARRANGEMENTS. The Company hereby agrees
that, for a period of three years from the Effective Date, all the
compensation and other arrangements between the Company and its officers,
directors and affiliates shall be approved by a Compensation Committee of
the Company's Board of Directors, a majority of the members of which shall
have no affiliation or other relationship with the Company other than as
directors.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations,
warranties and agreements at the Closing Dates and such representations,
warranties and agreements of the Underwriters and Company, including the
indemnity agreements contained in Section 5 hereof, shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of the Underwriters, the Company or any controlling person, and
shall survive termination of this Agreement or the issuance and delivery of
the Securities to the several Underwriters until the earlier of the
expiration of any applicable statute of limitations and the seventh
anniversary of the later of the Closing Date or the Option Closing Date, if
any, at which time the representations, warranties and agreements shall
terminate and be of no further force and effect.
9. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.
9.1 EFFECTIVE DATE. This Agreement shall become effective on the
Effective Date at the time that the Registration Statement is declared
effective.
9.2 TERMINATION. You shall have the right to terminate this
Agreement at any time prior to any Closing Date, (i) if any domestic or
international event or act or occurrence has materially disrupted, or in
your opinion will in the immediate future materially disrupt, general
securities markets in the United States; or (ii) if trading on the New York
Stock Exchange, the American Stock Exchange, The Boston Stock Exchange or
in the over-the-counter market shall have been suspended, or minimum or
maximum prices for trading shall have been fixed, or maximum ranges for
prices for securities shall have been fixed, or maximum ranges for prices
for securities shall have been required on the over-the-counter market by
the NASD or by order of the Commission or any other government authority
having jurisdiction, or (iii) if the United States shall have become
involved in a war or major hostilities, or (iv) if a banking moratorium has
been declared by a New York State or federal authority, or (v) if a
moratorium on foreign exchange trading has been declared which materially
adversely impacts the United States securities market, or (vi) if the
Company shall have sustained a material loss by fire, flood, accident,
hurricane, earthquake, theft, sabotage or other calamity or malicious act
which, whether or not such loss shall have been insured, will, in your
opinion, make it inadvisable to proceed with the delivery of the
Securities, or (vii) if Richard H. Nelson or Theodore Rosen shall no longer
serve the Company in his present capacities, or (viii) if any of the
Acquisition Agreement, the Private Placement Agreement, the Conversion
Agreement or the Preferred Stock Exchange Agreement is terminated, or (ix)
if the Company has breached any of its representations, warranties or
obligations hereunder, or (x) if the Representative shall have become aware
after the date hereof of such a material adverse change in the condition
(financial or otherwise), business, or prospects of the Company, Lehi,
Plymouth and Steamboat L.L.C., or such adverse material change in general
market conditions as in the Representative's judgment would make it
impracticable to proceed with the offering, sale and/or delivery of the
Securities or to enforce contracts made by the Representative for the sale
of the Securities.
9.3 NOTICE. If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 9, the
Company shall be notified on the same day as such election is made by you
by telephone or telecopy, confirmed by letter.
9.4 EXPENSES. In the event that this Agreement shall not be carried
out for any reason whatsoever, within the time specified herein or any
extensions thereof pursuant to the terms herein, the obligations of the
Company to pay the expenses related to the transactions contemplated herein
shall be governed by Section 3.15 hereof.
9.5 INDEMNIFICATION. Notwithstanding any contrary provision
contained in this Agreement, any election hereunder or any termination of
this Agreement, and whether or not this Agreement is otherwise carried out,
the provisions of Section 5 shall not be in any way affected by such
election or termination or failure to carry out the terms of this Agreement
or any part hereof.
10. MISCELLANEOUS.
10.1 NOTICES. All communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be mailed,
delivered or telecopied and confirmed
If to the Representative:
Gaines, Berland Inc.
950 Third Avenue 27th Floor
New York, New York 10022
Attention: Alan Gaines
Copy to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Attention: David Alan Miller, Esq.
If to the Company:
U.S. Envirosystems, Inc.
515 North Flagler Drive
Suite 202
West Palm Beach, Florida 33401
Attention: President
Copy to:
Reid & Priest, LLP
40 West 57th Street
New York, New York 10019
Attention: Gregory Katz, Esq.
10.2 HEADINGS. The headings contained herein are for the sole purpose
of convenience of reference, and shall not in any way limit or affect the
meaning or interpretation of any of the terms or provisions of this
Agreement.
10.3 AMENDMENT. This Agreement may only be amended by a written
instrument executed by each of the parties hereto.
10.4 ENTIRE AGREEMENT. This Agreement (together with the other
agreements and documents being delivered pursuant to or in connection with
this Agreement) constitutes the entire agreement of the parties hereto with
respect to the subject matter hereof, and supersedes all prior agreements
and understandings of the parties, oral and written, with respect to the
subject matter hereof.
10.5 BINDING EFFECT. This Agreement shall inure solely to the benefit
of and shall be binding upon the Representative, the Underwriters, the
Company and the controlling persons, directors and officers referred to in
Section 5 hereof, and their respective successors, legal representatives
and assigns, and no other person shall have or be construed to have any
legal or equitable right, remedy or claim under or in respect of or by
virtue of this Agreement or any provisions herein contained.
10.6 GOVERNING LAW; JURISDICTION. This Agreement shall be governed by
and construed and enforced in accordance with the law of the State of New
York, without giving effect to conflicts of law. The Company hereby agrees
that any action, proceeding or claim against it arising out of, relating in
any way to this Agreement shall be brought and enforced in the courts of
the State of New York or the United States District Court for the Southern
District of New York, and irrevocably submits to such jurisdiction, which
jurisdiction shall be exclusive. The Company hereby waives any objection
to such exclusive jurisdiction and that such courts represent an
inconvenient forum. Any such process or summons to be served upon the
Company may be served by transmitting a copy thereof by registered or
certified mail, return receipt requested, postage prepaid, addressed to it
at the address set forth in Section 10.1 hereof. Such mailing shall be
deemed personal service and shall be legal and binding upon the Company in
any action, proceeding or claim. The Company and the Representative agree
that the prevailing party(ies) in any such action shall be entitled to
recover from the other party(ies) all of its reasonable attorneys' fees and
expenses relating to such action or proceeding and/or incurred in
connection with the preparation therefor.
10.7 EXECUTION IN COUNTERPARTS. This Agreement may be executed in one
or more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but all of
which taken together shall constitute one and the same agreement, and shall
become effective when one or more counterparts has been signed by each of
the parties hereto and delivered to each of the other parties hereto.
10.8 WAIVER, ETC. The failure of any of the parties hereto to at any
time enforce any of the provisions of this Agreement shall not be deemed or
construed to be a waiver of any such provision, nor to in any way effect
the validity of this Agreement or any provision hereof or the right of any
of the parties hereto to thereafter enforce each and every provision of
this Agreement. No waiver of any breach, non-compliance or non-fulfillment
of any of the provisions of this Agreement shall be effective unless set
forth in a written instrument executed by the party or parties against whom
or which enforcement of such waiver is sought; and no waiver of any such
breach, non-compliance or non-fulfillment shall be construed or deemed to
be a waiver of any other or subsequent breach, non-compliance or non-
fulfillment.
If the foregoing correctly sets forth the understanding between
the Representative, for itself and as Representative of the Underwriters
listed in Schedule 1 hereto, and the Company, please so indicate in the
space provided below for that purpose, whereupon this letter shall
constitute a binding agreement between us.
Very truly yours,
U.S. ENVIROSYSTEMS, INC.
By:_______________________________
Name: Richard H. Nelson
Title: President
Accepted as of the date first
above written.
New York, New York
GAINES, BERLAND INC.
(for itself and as Representative
of the Underwriters listed on
Schedule 1 hereto)
By: ____________________________
Name: Joseph Berland
Title: Chairman
<PAGE>
SCHEDULE 1
U.S. ENVIROSYSTEMS, INC.
1,625,000 SHARES OF COMMON STOCK AND
1,625,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Number of Shares of Common Number of Warrants
Underwriter Stock to be Purchased to be Purchased
----------- -------------------------- -------------------
Gaines, Berland Inc.
----------- -----------
1,625,000 1,625,000
<PAGE>
SCHEDULE 2
Name Number of Shares
---- ----------------
EXHIBIT 4.1
U.S. ENVIROSYSTEMS, INC.
Incorporated Under the Laws of the State of Delaware
COMMON STOCK
CUSIP 90328X 20 2
THIS IS TO CERTIFY that
is the owner of
full-paid and non assessable shares of Common Stock of the par
value of One Cent ($.01) each of
U.S. ENVIROSYSTEMS, INC.
transferable on the books of the Corporation by the holder hereof
in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed.
This Certificate is not valid until countersigned by the
Transfer Agent.
WITNESS the facsimile seal of the Corporation and the
signatures of its duly authorized officers.
Dated:
U.S. ENVIROSYSTEMS, INC.
DELAWARE
1981
SEAL
/s/ Theodore Rosen /s/ Richard H. Nelson
Chairman President
EXHIBIT 4.3
DRAFT
062096
WARRANT AGREEMENT
AGREEMENT made as of __________, 1996, between U.S. ENVIROSYSTEMS,
INC., a Delaware corporation with offices at 515 North Flagler Drive, Suite
202, West Palm Beach, Florida 33401 ("Company"), and AMERICAN STOCK
TRANSFER & TRUST COMPANY, a New York corporation with offices at 40 Wall
Street, New York, New York 10005 ("Warrant Agent").
WHEREAS, the Company is engaged in a public offering of its
securities ("Public Offering") and, in connection therewith, has determined
to issue and deliver up to (i) 1,625,000 Redeemable Common Stock Purchase
Warrants ("Public Warrants") to the public investors (and an additional
243,750 Public Warrants subject to an over-allotment option) evidencing the
right of the holder thereof to purchase one share of the Company's common
stock, $0.01 per value ("Common Stock"), for $4.00 and (ii) 162,500
Redeemable Common Stock Purchase Warrants to Gaines, Berland Inc.,
Representative of the underwriters ("Representative"), or its designees
("Representative's Warrants" and, together with the Public Warrants, the
"Warrants"), each of which Representative's Warrants is identical to the
Public Warrants; and
WHEREAS, the Company has filed with the Securities and Exchange
Commission a Registration Statement (No. 333-4612) on Form SB-2
("Registration Statement") for the registration under the Securities Act of
1933, as amended ("Act"), of, among other securities, the Warrants and the
Common Stock issuable upon exercise of the Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of
the Company, and the Warrant Agent is willing to so act, in connection with
the issuance, registration, transfer, exchange, redemption and exercise of
the Warrants; and
WHEREAS, the Company desires to provide for the form and
provisions of the Warrants, the terms upon which they shall be issued and
exercised, and the respective rights, limitation of rights, and immunities
of the Company, the Warrant Agent, and the holders of the Warrants; and
WHEREAS, all acts and things have been done and performed which
are necessary to make the Warrants, when executed on behalf of the Company
and countersigned by or on behalf of the Warrant Agent, as provided herein,
the valid, binding and legal obligations of the Company, and to authorize
the execution and delivery of this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto agree as follows:
1. Appointment of Warrant Agent.
-----------------------------
The Company hereby appoints the Warrant Agent to act as agent for the
Company for the Warrants, and the Warrant Agent hereby accepts such
appointment and agrees to perform the same in accordance with the terms and
conditions set forth in this Agreement.
2. Warrants.
---------
2.1. Form of Warrant. Each Warrant certificate shall be
----------------
issued in registered form only, shall be in substantially the form of
Exhibit A hereto, and shall be signed by, or bear the facsimile signature
of, the President and Secretary or Assistant Secretary of the Company and
shall bear a facsimile of the Company's seal. In the event the person
whose facsimile signature has been placed upon any Warrant certificate
shall have ceased to serve in the capacity in which such person signed the
Warrant certificate before such Warrant certificate is issued, it may be
issued with the same effect as if he had not ceased to be such at the date
of issuance.
2.2. Effect of Countersignature. Unless and until
---------------------------
countersigned by the Warrant Agent pursuant to this Agreement, a Warrant
certificate shall be invalid and of no effect and may not be exercised by
the holder thereof.
2.3. Registration.
-------------
2.3.1. Warrant Register. The Warrant Agent shall
-----------------
maintain books ("Warrant Register") for the registration of original
issuance and the registration of transfer of the Warrants. Upon the
initial issuance of the Warrants, the Warrant Agent shall issue and
register the Warrants in the names of the respective holders thereof in
such denominations and otherwise in accordance with instructions delivered
to the Warrant Agent by the Company.
2.3.2. Registered Holder. Prior to due presentment
------------------
for registration of transfer of any Warrant certificate, the Company and
the Warrant Agent may deem and treat the person in whose name such Warrant
certificate shall be registered upon the Warrant Register ("registered
holder"), as the absolute owner of such Warrant and of each Warrant
represented thereby (notwithstanding any notation of ownership or other
writing on the Warrant certificate made by anyone other than the Company or
the Warrant Agent), for the purpose of any exercise thereof, and for all
other purposes, and neither the Company nor the Warrant Agent shall be
affected by any notice to the contrary.
3. Terms and Exercise of Warrants.
-------------------------------
3.1. Warrant Price. Each Warrant certificate shall, when
--------------
countersigned by the Warrant Agent, entitle the registered holder thereof,
subject to the provisions of such Warrant certificate and of this Warrant
Agreement, to purchase from the Company the number of shares of Common
Stock stated therein, at the price of $4.00 per whole share, subject to the
adjustments provided in Section 4 hereof. The term "Warrant Price" as used
in this Warrant Agreement refers to the price per share at which Common
Stock may be purchased at the time a Warrant is exercised.
3.2. Duration of Warrants. Subject to Section 3.3.6 hereof,
---------------------
a Warrant may be exercised only during the period ("Exercise Period")
commencing on __________, 1997 and terminating on the earlier of
__________, 2001 or the date fixed for redemption of the Warrant as
provided in Section 6 of this Agreement ("Expiration Date"). Each Warrant
not exercised on or before 5:00 p.m., New York time, on its Expiration Date
shall become void, and all rights thereunder and all rights in respect
thereof under this Agreement shall cease at the close of business on its
Expiration Date. The Company in its sole discretion may extend from time
to time the duration of the Warrants by delaying the Expiration Date.
3.3. Exercise of Warrants.
---------------------
3.3.1. Payment. Subject to the provisions of the
--------
Warrant and this Agreement, a Warrant, when countersigned by the Warrant
Agent, may be exercised by the registered holder thereof by surrendering
the certificate representing such Warrant, at the office of the Warrant
Agent, or at the office of its successor as Warrant Agent, in the Borough
of Manhattan, City and State of New York, with the subscription form, as
set forth on the Warrant certificate and in substantially the form of
Exhibit A hereto, duly executed, and by paying in full, in lawful money of
the United States, in cash, certified check or bank draft payable to the
order of the Company, the Warrant Price for each full share of Common Stock
as to which the Warrant is exercised and any and all applicable taxes due
in connection with the exercise of the Warrant, the exchange of the Warrant
for the Common Stock, and the issuance of the Common Stock.
3.3.2. Issuance of Certificates. As soon as
-------------------------
practicable after the exercise of any Warrant and the clearance of the
funds in payment of the Warrant Price, the Company shall issue to or upon
the written order of the registered holder of such Warrant a certificate or
certificates for the number of full shares of Common Stock to which he is
entitled, registered in such name or names as may be directed by him, and
if such Warrant shall not have been exercised in full, a new countersigned
Warrant certificate for the number of shares as to which such Warrant shall
not have been exercised. Notwithstanding the foregoing, the Company shall
not be obligated to deliver any securities pursuant to the exercise of a
Warrant unless a registration statement meeting the requirements of the Act
and the regulations promulgated thereunder with respect to the securities
is effective. Warrants may not be exercised by, or securities issued to,
any registered holder in any state in which such exercise would be
unlawful.
3.3.3. Valid Issuance. All shares of Common Stock
---------------
issued upon the proper exercise of a Warrant in conformity with this
Agreement shall be validly issued, fully paid and non-assessable.
3.3.4. Date of Issuance. Each person in whose name
-----------------
any such certificate for shares of Common Stock is issued shall for all
purposes be deemed to have become the holder of record of such shares on
the date on which the Warrant certificate was surrendered and payment of
the Warrant Price was made, irrespective of the date of delivery of such
certificate, except that, if the date of such surrender and payment is a
date when the stock transfer books of the Company are closed, such person
shall be deemed to have become the holder of such shares at the close of
business on the next succeeding date on which the stock transfer books are
open.
3.3.5. Warrant Solicitation and Warrant Solicitation
---------------------------------------------
Fee.
----
(i) The Company has engaged the Representative, on
a non-exclusive basis, as its agent for the solicitation of the exercise of
the Warrants. The Company will provide, at its cost, such reasonable
assistance with respect to such solicitation as the Representative may
request, including directing the Warrant Agent to deliver to the
Representative lists of the record and, to the extent known, beneficial
owners of the Company's Warrants. Accordingly, the Company hereby
instructs the Warrant Agent to cooperate with the Representative in every
reasonable respect in connection with the Representative's solicitation
activities, including, but not limited to, providing to the Representative
a list of record and beneficial holders of the Warrants and circulating a
prospectus or offering circular disclosing the compensation arrangements
referenced in Section 3.3.5(ii) herein to holders of the Warrants at the
time of exercise of the Warrants. In addition to the conditions set forth
in Section 3.3.5(ii) herein, the Representative shall only accept payment
of the warrant solicitation fee provided in Section 3.3.5(ii) if it has
provided bona fide services to the Company in connection with the exercise
of the Warrants. In addition to soliciting, either orally or in writing,
the exercise of Warrants by a Warrantholder, such services may also include
disseminating information, either orally or in writing, to Warrantholders
about the Company or the market for the Company's securities, or assisting
in the processing of the exercise of Warrants.
(ii) In each instance in which a Warrant is
exercised, the Warrant Agent shall promptly give written notice of such
exercise to the Company and the Representative ("Warrant Agent's Exercise
Notice"). If, upon the exercise of any Warrant more than one year from the
Effective Date, (i) the market price of the Company's Common Stock is
greater than the Warrant Price, (ii) disclosure of compensation
arrangements was made both at the time of the original offering and at the
time of exercise (by delivery of the Prospectus or as otherwise required by
applicable law, rule or regulation), (iii) the exercise of the Warrant was
solicited by the Representative, (iv) the Warrant was not held in a
discretionary account, and (v) the solicitation of the exercise of the
Warrant was not in violation of Rule 10b-6 (as such rule or any successor
rule may be in effect as of such time of exercise) promulgated under the
Securities Exchange Act of 1934, then the Warrant Agent, upon receipt of a
certified or official bank check from the Company to the order of the
Representative in an amount equal to the Representative's fee of five
percent (5%) of the Warrant Price, shall deliver such check to the
Representative simultaneously with the distribution of proceeds to the
Company received upon exercise of the Warrant(s) so exercised, provided
that the Representative delivers to the Warrant Agent, within ten (10)
business days from the date on which the Representative has received the
Warrant Agent's Exercise Notice, a certificate that the conditions set
forth in the preceding clauses (ii), (iii), (iv) and (v) have been
satisfied. The Representative and the Company may at any time during
business hours, examine the records of the Warrant Agent, including its
ledger of original Warrant certificates returned to the Warrant Agent upon
exercise of Warrants.
(iii) The provisions of this Section 3.3.5 may
not be modified, amended or deleted without the prior written consent of
the Representative.
3.3.6. Representative's Warrants. The Representative's
--------------------------
Warrants shall have the same terms as the Public Warrants. No solicitation
fee shall be payable with respect to the exercise of the Representative's
Warrants.
4. Adjustments.
------------
4.1. Stock Dividends - Split-Ups. If after the date hereof,
----------------------------
and subject to the provisions of Section 4.5, the number of outstanding
shares of Common Stock is increased by a stock dividend payable in shares
of Common Stock or by a split-up of shares of Common Stock or other similar
event, then, on the effective date of such stock dividend, split-up or
similar event, the number of shares issuable on exercise of each Warrant
shall be increased in proportion to such increase in outstanding shares and
the then applicable Warrant Price shall be correspondingly decreased.
4.2. Aggregation of Shares. If after the date hereof, and
----------------------
subject to the provisions of Section 4.5, the number of outstanding shares
of Common Stock is decreased by a consolidation, combination or
reclassification of shares of Common Stock or other similar event, then, on
the effective date of such consolidation, combination, reclassification or
similar event, the number of shares issuable on exercise of each Warrant
shall be decreased in proportion to such decrease in outstanding shares and
the then applicable Warrant Price shall be correspondingly increased.
4.3. Replacement of Securities Upon Reorganization, etc.
---------------------------------------------------
If after the date hereof any capital reorganization or reclassification of
the Common Stock of the Company, or consolidation or merger of the Company
with or into another corporation, or the sale of all or substantially all
of its assets to another corporation or other similar event (collectively
referred to as a "Transaction") shall be effected, then, as a condition of
such Transaction, lawful and fair provision shall be made whereby the
Warrant holders shall thereafter have the right to purchase and receive,
upon the basis and upon the terms and conditions specified in the Warrants
and in lieu of the shares of Common Stock of the Company immediately
theretofore purchasable and receivable upon the exercise of the rights
represented thereby, such shares of stock, securities, or assets as may be
issued or payable with respect to or in exchange for the number of
outstanding shares of such Common Stock equal to the number of shares of
such stock immediately theretofore purchasable and receivable upon the
exercise of the rights represented by the Warrants, had such Transaction
not taken place and in such event appropriate provision shall be made with
respect to the rights and interests of the Warrant holders to the end that
the provisions hereof (including, without limitation, provisions for
adjustments of the Warrant Price and of the number of shares purchasable
upon the exercise of the Warrants) shall thereafter be applicable, as
nearly as may be, to any share of stock, securities, or assets thereafter
deliverable upon the exercise hereof. The Company shall not effect any
such Transaction unless prior to the consummation thereof the successor
corporation (if other than the Company) resulting from such Transaction, or
the corporation purchasing such assets, shall assume by written instrument
executed and delivered to the Warrant Agent the obligation to deliver to
the Warrant holders such shares of stock, securities, or assets which, in
accordance with the foregoing provisions, such holders may be entitled to
purchase.
4.4. Notices of Changes in Warrant. Upon every adjustment of
------------------------------
the Warrant Price or the number of shares issuable on exercise of a
Warrant, the Company shall (i) give written notice thereof to the Warrant
Agent, which notice shall state the Warrant Price resulting from such
adjustment and the increase or decrease, if any, in the number of shares
purchasable at such price upon the exercise of a Warrant, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based and (ii) cause a notice to be given to each registered
holder of the Warrants in the same manner as provided in Section 6.2
hereof. Upon the occurrence of any event specified in Sections 4.1, 4.2,
or 4.3, then, in any such event, the Company shall give written notice to
the Warrant Agent in the manner set forth above of the record date for such
dividend, distribution, or subscription rights, or the effective date of
any Transaction, dissolution, liquidation, winding up or issuance. Such
notice shall also specify the date as of which the holders of Common Stock
of record shall participate in such dividend, distribution, or subscription
rights, or shall be entitled to exchange their Common Stock for stock,
securities, or other assets deliverable upon such Transaction, dissolution,
liquidation, winding up or issuance. Failure to give such notice, or any
defect therein, shall not affect the legality or validity of such event.
4.5. No Adjustment in Certain Circumstances. No adjustment of
---------------------------------------
the Warrant Price shall be made if the amount of such adjustment shall be
less than two (2) cents per share, but in such case any adjustment that
otherwise would be required then to be made shall be carried forward and
shall be made at the time of and together with the next subsequent
adjustment, which, together with any adjustment so carried forward, shall
amount to two (2) cents or more per share.
4.6. No Fractional Shares. Notwithstanding any provision
---------------------
contained in this Warrant Agreement to the contrary, the Company shall not
issue fractional shares upon exercise of Warrants. If, by reason of any
adjustment made pursuant to this Section 4, the holder of any Warrant would
be entitled, upon the exercise of such Warrant, to receive a fractional
interest in a share, the number of shares of Common Stock to be received
shall be rounded off to the nearest whole number.
4.7. Form of Warrant. The form of Warrant need not be changed
----------------
because of any adjustment pursuant to this Section 4, and Warrants issued
after such adjustment may state the same Warrant Price and the same number
of shares as is stated in the Warrants initially issued pursuant to this
Agreement. However, the Company may at any time in its sole discretion
make any change in the form of Warrant that the Company may deem
appropriate and that does not affect the substance thereof, and any Warrant
thereafter issued or countersigned, whether in exchange or substitution for
an outstanding Warrant or otherwise, may be in the form as so changed.
5. Transfer and Exchange of Warrants.
----------------------------------
5.1. Registration of Transfer. The Warrant Agent shall
-------------------------
register the transfer, from time to time, of any outstanding Warrant upon
the Warrant Register, upon surrender of such Warrant for transfer, properly
endorsed with signatures properly guaranteed and accompanied by appropriate
instructions for transfer. Upon any such transfer, a new Warrant
representing an equal aggregate number of Warrants shall be issued and the
old Warrant shall be canceled by the Warrant Agent. Warrants so canceled
shall be delivered by the Warrant Agent to the Company from time to time
upon request.
5.2. Procedure for Surrender of Warrants. Warrants may be
------------------------------------
surrendered to the Warrant Agent, together with a written request for
exchange, and thereupon the Warrant Agent shall issue in exchange therefor
one or more new Warrants as requested by the registered holder of the
Warrants so surrendered, representing an equal aggregate number of
Warrants; provided, however, that in the event that a Warrant surrendered
for transfer bears a restrictive legend, the Warrant Agent shall not cancel
such Warrant and issue a new Warrant in exchange therefor until the Warrant
Agent has received an opinion of counsel for the Company stating that such
transfer may be made and indicating whether the new Warrant must also bear
a restrictive legend.
5.3. Fractional Warrants. The Warrant Agent shall not be
--------------------
required to effect any registration of transfer or exchange which will
result in the issuance of a Warrant certificate for a fraction of a
Warrant. The number of Warrants to be delivered shall be rounded off to
the nearest whole number.
5.4. Service Charges. No service charge shall be made for any
----------------
exchange or registration of transfer of Warrants.
5.5. Warrant Execution and Countersignature. The Warrant
Agent
---------------------------------------
is hereby authorized to countersign and to deliver, in accordance with the
terms of this Agreement, the Warrants required to be issued pursuant to the
provisions of this Section 5, and the Company, whenever required by the
Warrant Agent, will supply the Warrant Agent with Warrants duly executed on
behalf of the Company for such purpose.
6. Redemption.
-----------
6.1. Redemption. The Warrants may be redeemed, at the option
-----------
of the Company, as a whole and not in part, at any time after they become
exercisable, at the office of the Warrant Agent, upon the notice referred
to in Section 6.2, at the price of $.01 per Warrant ("Redemption Price"),
provided that (a) the last sale price of the Common Stock has been at least
one hundred fifty percent (150%) of the then effective exercise price of
the Warrants on each of the twenty (20) consecutive trading days ending on
the third trading day prior to the date on which notice of redemption is
given, the satisfaction of which condition shall be certified by the
Company, (b) it is prior to the Expiration Date and (c) the Company has
obtained the prior written consent of the Representative. The provisions
of this Section 6.1 may not be modified, amended or deleted without the
prior written consent of the Representative.
6.2. Date Fixed for, and Notice of, Redemption. In the event
------------------------------------------
the Company shall elect to redeem all of the Warrants, the Company shall
fix a date for the redemption. Notice of redemption shall be mailed by
first class mail, postage prepaid, by the Company or the Company's agent at
its direction not less than fifteen (15) business days prior to the date
fixed for redemption to the registered holders of the Warrants to be
redeemed at their last addresses as they shall appear on the registration
books. Any notice mailed in the manner herein provided shall be
conclusively presumed to have been duly given whether or not the registered
holder received such notice.
6.3. Exercise After Notice of Redemption. The Warrants may be
------------------------------------
exercised in accordance with Section 3 of this Agreement at any time after
notice of redemption shall have been given by the Company pursuant to
Section 6.2 hereof and prior to the close of business on the date fixed for
redemption. After the redemption date, the record holder of the Warrants
shall have no further rights except to receive, upon surrender of the
Warrants, the Redemption Price.
7. Other Provisions Relating to Rights of Holders of Warrants.
-----------------------------------------------------------
7.1. No Rights as Stockholder. A Warrant does not entitle the
-------------------------
registered holder thereof to any of the rights of a stockholder of the
Company, including, without limitation, the right to receive dividends, or
other distributions, exercise any preemptive rights to vote or to consent
or to receive notice as a stockholder in respect of the meetings of
stockholders or the election of directors of the Company or any other
matter.
7.2. Lost, Stolen, Mutilated, or Destroyed Warrants. If any
-----------------------------------------------
Warrant certificate is lost, stolen, mutilated, or destroyed, the Company
and the Warrant Agent may on such terms as to indemnity or otherwise as
they may in their discretion impose (which shall, in the case of a
mutilated Warrant certificate, include the surrender thereof), issue a new
Warrant certificate of like denomination, tenor, and date as the Warrant
certificate so lost, stolen, mutilated, or destroyed. Any such new Warrant
certificate shall constitute a substitute contractual obligation of the
Company, whether or not the allegedly lost, stolen, mutilated, or destroyed
Warrant certificate shall be at any time enforceable by anyone.
7.3. Reservation of Common Stock. The Company shall at all
----------------------------
times reserve and keep available a number of its authorized but unissued
shares of Common Stock that will be sufficient to permit the exercise in
full of all outstanding Warrants issued pursuant to this Agreement.
7.4. Registration of Common Stock. The Company agrees that
-----------------------------
prior to the commencement of the Exercise Period it shall file with the
Securities and Exchange Commission a post-effective amendment to the
Registration Statement or a new registration statement for the registration
under the Act of the Common Stock issuable upon exercise of the Warrants.
In either case, the Company shall cause the same to become effective at or
prior to the commencement of the Exercise Period and maintain the
effectiveness of such registration statement and keep current a prospectus
thereunder until the expiration of the Warrants in accordance with the
provisions of this Agreement. The Company shall use its best efforts to
cause the Common Stock and the Warrants to be listed on an Exchange, NMS
and/or Nasdaq until the Expiration Date. The provisions of this Section
7.4 may not be modified, amended or deleted without the prior written
consent of the Representative.
8. Concerning the Warrant Agent and Other Matters.
-----------------------------------------------
8.1. Payment of Taxes. The Company will from time to time
-----------------
promptly pay all taxes and charges that may be imposed upon the Company or
the Warrant Agent in respect of the issuance or delivery of shares of
Common Stock upon the exercise of Warrants, but the Company shall not be
obligated to pay any transfer taxes in respect of the Warrants or such
shares.
8.2. Resignation, Consolidation, or Merger of Warrant Agent.
-------------------------------------------------------
8.2.1. Appointment of Successor Warrant Agent. The
---------------------------------------
Warrant Agent, or any successor to it hereafter appointed, may resign its
duties and be discharged from all further duties and liabilities (other
than those incurred prior to such resignation or discharge) hereunder after
giving sixty (60) days' notice in writing to the Company. If the office of
the Warrant Agent becomes vacant by resignation or incapacity to act or
otherwise, the Company shall appoint in writing a successor Warrant Agent
in place of the Warrant Agent. If the Company shall fail to make such
appointment within a period of 30 days after it has been notified in
writing of such resignation or incapacity by the Warrant Agent or by the
holder of a Warrant (who shall, with such notice, submit his Warrant for
inspection by the Company), then the holder of any Warrant may apply to the
Supreme Court of the State of New York for the County of New York for the
appointment of a successor Warrant Agent. Any successor Warrant Agent,
whether appointed by the Company or by such court, shall be a corporation
organized, existing and in good standing under the laws of the state in
which it was incorporated and authorized to exercise corporate trust
powers, and, if not incorporated in the State of New York, shall be
authorized to do business in the State of New York as a foreign
corporation, and shall be authorized to serve as Warrant Agent for the
Warrants under the Securities Exchange Act of 1934, as amended. After
appointment, any successor Warrant Agent shall be vested with all the
authority, powers, rights, immunities, duties, and obligations of its
predecessor Warrant Agent with like effect as if originally named as
Warrant Agent hereunder, without any further act or deed; but if for any
reason it becomes necessary or appropriate, the predecessor Warrant Agent
shall execute and deliver, at the expense of the Company, an instrument
transferring to such successor Warrant Agent all the authority, powers, and
rights of such predecessor Warrant Agent hereunder; and upon request of any
successor Warrant Agent the Company shall make, execute, acknowledge, and
deliver any and all instruments in writing for more fully and effectually
vesting in and confirming to such successor Warrant Agent all such
authority, powers, rights, immunities, duties, and obligations.
8.2.2. Notice of Successor Warrant Agent. In the event
----------------------------------
a successor Warrant Agent shall be appointed, the Company shall give notice
thereof to the predecessor Warrant Agent, the Representative and the
transfer agent for the Common Stock not later than the effective date of
any such appointment.
8.2.3. Merger or Consolidation of Warrant Agent. Any
-----------------------------------------
corporation into which the Warrant Agent may be merged or with which it may
be consolidated or any corporation resulting from any merger or
consolidation to which the Warrant Agent shall be a party, if it shall be
eligible to serve as Warrant Agent under Section 8.2.1, shall be the
successor Warrant Agent under this Agreement without any further act.
8.3. Fees and Expenses of Warrant Agent.
-----------------------------------
8.3.1. Remuneration. The Company agrees to pay the
-------------
Warrant Agent reasonable remuneration for its services hereunder and will
reimburse the Warrant Agent upon demand for all reasonable expenditures
that the Warrant Agent may reasonably incur in the execution of its duties
hereunder.
8.3.2. Further Assurances. The Company agrees to
-------------------
perform, execute, acknowledge, and deliver or cause to be performed,
executed, acknowledged, and delivered all such further and other acts,
instruments, and assurances as may reasonably be required by the Warrant
Agent for the carrying out or performing of the provisions of this
Agreement.
8.4. Liability of Warrant Agent.
---------------------------
8.4.1. Reliance on Company Statement. Whenever in the
------------------------------
performance of its duties under this Warrant Agreement, the Warrant Agent
shall deem it necessary or desirable that any fact or matter be proved or
established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a statement signed by the President of the Company and
delivered to the Warrant Agent. The Warrant Agent may rely upon such
statement for any action taken or suffered in good faith by it pursuant to
the provisions of this Agreement.
8.4.2. Indemnity. The Warrant Agent shall be liable
----------
hereunder only for its own negligence, willful misconduct or bad faith.
The Company agrees to indemnify the Warrant Agent and save it harmless
against any and all liabilities, including judgments, costs and reasonable
counsel fees, for anything done or omitted by the Warrant Agent in the
execution of this Agreement except as a result of the Warrant Agent's
negligence, willful misconduct, or bad faith.
8.4.3. Exclusions. The Warrant Agent shall have no
-----------
responsibility with respect to the validity of this Agreement or with
respect to the validity or execution of any Warrant (except its
countersignature thereof); nor shall it be responsible for any breach by
the Company of any covenant or condition contained in this Agreement or in
any Warrant; nor shall it be responsible to make any adjustments required
under the provisions of Section 4 hereof or responsible for the manner,
method, or amount of any such adjustment or the ascertaining of the
existence of facts that would require any such adjustment; nor shall it by
any act hereunder be deemed to make any representation or warranty as to
the authorization or reservation of any shares of Common Stock to be issued
pursuant to this Agreement or any Warrant or as to whether any shares of
Common Stock will when issued be valid and fully paid and nonassessable.
8.5. Acceptance of Agency. The Warrant Agent hereby accepts
---------------------
the agency established by this Agreement and agrees to perform the same
upon the terms and conditions herein set forth and among other things,
shall account promptly to the Company with respect to Warrants exercised
and concurrently account for, and pay to the Company, all moneys received
by the Warrant Agent for the purchase of shares of the Company's Common
Stock through the exercise of Warrants.
9. Miscellaneous Provisions.
-------------------------
9.1. Successors. All the covenants and provisions of this
-----------
Agreement by or for the benefit of the Company or the Warrant Agent shall
bind and inure to the benefit of their respective successors and assigns.
9.2. Notices. Any notice, statement or demand authorized by
--------
this Warrant Agreement to be given or made by the Warrant Agent or by the
holder of any Warrant to or by the Company shall be sufficiently given or
made if sent by certified mail, or private courier service, postage
prepaid, addressed (until another address is filed in writing by the
Company with the Warrant Agent), as follows:
U.S. Envirosystems, Inc.
515 North Flagler Drive
Suite 202
West Palm Beach, Florida 33401
Attention: President
with a copy to:
Reid & Priest, L.L.P.
40 West 57th Street
New York, New York 10019
Attention: Gregory Katz, Esq.
Any notice, statement or demand authorized by this Agreement to be given or
made by the holder of any Warrant or by the Company to or on the Warrant
Agent shall be sufficiently given or made if sent by certified mail or
private courier service, postage prepaid, addressed (until another address
is filed in writing by the Warrant Agent with the Company), as follows:
American Stock Transfer & Trust Company
6201 15th Avenue - Third Floor
Brooklyn, New York 11219
Attention: Mr. Joseph Wolf
9.3. Applicable law; Jurisdiction. The validity,
-----------------------------
interpretation, and performance of this Agreement and of the Warrants shall
be governed in all respects by the law of the State of New York, without
giving effect to principles of conflicts of law. The Company hereby agrees
that any action, proceeding or claim against it arising out of or relating
in any way to this Agreement shall be brought and enforced in the courts of
the State of New York or the United States District Court for the Southern
District of New York, and irrevocably submits to such jurisdiction, which
jurisdiction shall be exclusive. The Company hereby waives any objection
to such exclusive jurisdiction and that such courts represent an
inconvenient forum. Any such process or summons to be served upon the
Company may be served by transmitting a copy thereof by registered or
certified mail, return receipt requested, postage prepaid, addressed to it
at the address set forth in Section 9.2 hereof. Such mailing shall be
deemed personal service and shall be legal and binding upon the Company in
any action, proceeding or claim.
9.4. Persons Having Rights Under This Agreement. Nothing in
-------------------------------------------
this Agreement expressed and nothing that may be implied from any of the
provisions hereof is intended, or shall be construed, to confer upon, or
give to, any person or corporation other than the parties hereto and the
registered holders of the Warrants and, for the purposes of Sections 3.3.5,
6.1 and 7.4 hereof, the Representative, any right, remedy, or claim under
or by reason of this Warrant Agreement or of any covenant, condition,
stipulation, promise, or agreement hereof. The Representative shall be
deemed to be a third-party beneficiary of this Agreement with respect to
such Sections. All covenants, conditions, stipulations, promises, and
agreements contained in this Warrant Agreement shall be for the sole and
exclusive benefit of the parties hereto (and the Representative to the
extent set forth above) and their successors and assigns and of the
registered holders of the Warrants.
9.5. Examination of the Warrant Agreement. A copy of this
-------------------------------------
Agreement shall be available at all reasonable times at the office of the
Warrant Agent for inspection by the registered holder of any Warrant. The
Warrant Agent may require any such holder to submit his or her Warrant for
inspection by it.
9.6. Modification of Agreement. The Company and the Warrant
--------------------------
Agent may from time to time supplement or amend this Agreement without the
approval of the holders of the Warrants in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective
or inconsistent with any other provisions herein, or to make or amend any
other provisions in regard to matters or questions arising hereunder which
the Company may deem necessary or desirable and which shall not adversely
affect the interests of the holders of the Warrants.
9.7. Counterparts. This Agreement may be executed in any
-------------
number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together
constitute but one and the same instrument.
9.8. Effect of Headings. The Section headings herein are for
-------------------
convenience only and are not part of this Warrant Agreement and shall not
affect the interpretation thereof.
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto under their respective corporate seals as of the day and
year first above written.
Attest: U.S. ENVIROSYSTEMS, INC.
______________________________ By:________________________________
Name: Richard H. Nelson
Title: Title: President
Attest: AMERICAN STOCK TRANSFER &
TRUST COMPANY
______________________________ By:____________________________
Name: Name:
Title: Title:
EXHIBIT 4.4
DRAFT
062096
THE SECURITIES EVIDENCED BY THIS INSTRUMENT MAY NOT BE SOLD OR
OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND APPLICABLE SECURITIES LAWS OF
ANY STATE OR JURISDICTION, OR AN OPINION OF COUNSEL SATISFACTORY
TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THE REGISTERED HOLDER OF THIS PURCHASE OPTION, BY ITS ACCEPTANCE
HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS
PURCHASE OPTION EXCEPT AS HEREIN PROVIDED.
NOT EXERCISABLE PRIOR TO -------------, 1997. VOID AFTER 5:00
P.M. EASTERN TIME, ----------, 2001.
UNIT PURCHASE OPTION
FOR THE PURCHASE OF
162,500 SHARES OF COMMON STOCK
AND
162,500 COMMON STOCK PURCHASE WARRANTS
OF
U.S. ENVIROSYSTEMS, INC.
(A DELAWARE CORPORATION)
1. Purchase Option.
---------------
THIS CERTIFIES THAT, in consideration of $100 duly paid
by or on behalf of Gaines, Berland Inc. ("Holder"), as registered
owner of this Purchase Option, to U.S. Envirosystems, Inc.
("Company"), Holder is entitled, at any time or from time to time
at or after ----------, 1997 ("Commencement Date"), and at or
before 5:00 p.m., Eastern Time, ------- --, 2001 ("Expiration
Date"), but not thereafter, to subscribe for, purchase and
receive, in whole or in part, up to 162,500 shares of Common
Stock of the Company, $.01 par value ("Common Stock"), and/or
162,500 Common Stock Purchase Warrants ("Warrants") each to
purchase one share of Common Stock during the period commencing
one year and expiring five years from the effective date
("Effective Date") of the registration statement on Form SB-2
(File No. 333-4612) ("Registration Statement") pursuant to which
the Company has registered shares of Common Stock and warrants to
purchase Common Stock. Each Warrant is the same as the warrants
that have been registered for sale to the public ("Public War-
rants") pursuant to the Registration Statement. The shares of
Common Stock and Warrants are sometimes collectively referred to
herein as the "Securities." The Holder may purchase, upon
exercise of the Purchase Option, either shares of Common Stock or
Warrants or both. If the Expiration Date is a day on which
banking institutions are authorized by law to close, then this
Purchase Option may be exercised on the next succeeding day which
is not such a day in accordance with the terms herein. During
the period ending on the Expiration Date, the Company agrees not
to take any action that would terminate the Purchase Option.
This Purchase Option is initially exercisable at [$5.55] per
share of Common Stock and [$0.13875] per Warrant purchased;
provided, however, that, upon the occurrence of any of the events
specified in Section 6 hereof, the rights granted by this
Purchase Option, including the exercise prices and the number of
shares of Common Stock and Warrants to be received upon such
exercise, shall be adjusted as therein specified. The term
"Exercise Price" shall mean the initial exercise price or an
adjusted exercise price, depending on the context, of a share of
Common Stock or a Warrant.
2. Exercise.
--------
2.1 Exercise Form.
-------------
In order to exercise this Purchase Option, the exercise form
attached hereto must be duly executed and completed and delivered
to the Company, together with this Purchase Option and payment of
the Exercise Price in cash or by certified check or official bank
check for the Securities being purchased. If the subscription
rights represented hereby shall not be exercised at or before
5:00 p.m., Eastern time, on the Expiration Date, this Purchase
Option shall become and be void without further force or effect,
and all rights represented hereby shall cease and expire.
2.2 Legend.
------
Each certificate for the Securities purchased under this
Purchase Option shall bear a legend as follows unless such
Securities have been registered under the Securities Act of 1933,
as amended:
"The securities represented by this certificate have
not been registered under the Securities Act of 1933,
as amended ("Act"), or applicable state law. The
securities may not be offered for sale, sold or
otherwise transferred except pursuant to an effective
registration statement under the Act, or pursuant to an
exemption from registration under the Act and
applicable state law."
2.3 Cashless Exercise.
------------------
2.3.1 Determination of Amount.
------------------------
In lieu of the payment of the Exercise Price in the
manner required by Section 2.1, the Holder shall have the right
(but not the obligation) to pay the Exercise Price for the
Securities being purchased with this Purchase Option upon
exercise by the surrender to the Company of any exercisable but
unexercised portion of this Purchase Option having a "Stock
Value" or "Warrant Value" (as defined below), as the case may be,
at the close of trading on the last trading day immediately
preceding the exercise of this Purchase Option, equal to the
Exercise Price multiplied by the number of Securities being
purchased upon exercise ("Cashless Exercise Right").
(1) Common Stock.
-------------
Upon exercise of the Cashless Exercise Right
with respect to the Common Stock, the Company shall deliver to
the Holder (without payment by the Holder of any of the Exercise
Price) that number of shares of Common Stock equal to the
quotient obtained by dividing (x) the "Stock Value" (as defined
below) of the portion of the Purchase Option being converted at
the time the Cashless Exercise Right is exercised by (y) the
Exercise Price; provided however, that the aggregate number of
shares of Common Stock which may be issued upon exercise of the
Purchase Option, including upon cashless exercise, may not exceed
that number of shares set forth on the first page of this
Purchase Option, except as may be adjusted pursuant to Section 6
hereof. The "Stock Value" of the portion of the Purchase Option
being converted shall equal the remainder derived from
subtracting (a) the Exercise Price multiplied by the number of
shares of Common Stock underlying the portion of the Purchase
Option being converted from (b) the market price of the Common
Stock (Stock Market Price) multiplied by the number of shares of
Common Stock underlying the portion of the Purchase Option being
converted. As used herein, the term "Stock Market Price" at any
date shall be deemed to be the last reported sale price of the
Common Stock on such date, or, in case no such reported sale
takes place on such day, the average of the last reported sale
prices for the immediately preceding three trading days, in
either case as officially reported by the principal securities
exchange on which the Common Stock is listed or admitted to
trading, or, if the Common Stock is not listed or admitted to
trading on any national securities exchange or if any such
exchange on which the Common Stock is listed is not its principal
trading market, the last reported sale price as furnished by the
NASD through the Nasdaq National Market or SmallCap Market, or,
if applicable, the OTC Bulletin Board, or if the Common Stock is
not listed or admitted to trading on any of the foregoing
markets, or similar organization, as determined in good faith by
resolution of the Board of Directors of the Company, based on the
best information available to it.
(2) Warrants.
---------
Upon exercise of the Cashless Exercise Right
with respect to the Warrants, the Company shall deliver to the
Holder (without payment by the Holder of any of the Exercise
Price) that number of Warrants equal to the quotient obtained by
dividing (x) the "Warrant Value" (as defined below) of the
portion of the Purchase Option being converted at the time the
Cashless Exercise Right is exercised by (y) the Exercise Price;
provided however, that the aggregate number of Warrants which may
be issued upon exercise of the Purchase Option, including upon
cashless exercise, may not exceed that number of Warrants set
forth on the cover page of this Purchase Option, except as may be
adjusted pursuant to Section 6 hereof. The "Warrant Value" of
the portion of the Purchase Option being converted shall equal
the remainder derived from subtracting (a) the Exercise Price
multiplied by the number of Warrants underlying the portion of
the Purchase Option being converted from (b) the market price of
the Warrants (Warrant Market Price) multiplied by the number of
Warrants underlying the portion of the Purchase Option being
converted. As used herein, the term "Warrant Market Price" at
any date shall be deemed to be the last reported sale price of
the Warrants on such date, or, in case no such reported sale
takes place on such day, the average of the last reported sale
prices for the immediately preceding three trading days, in
either case as officially reported by the principal securities
exchange on which the Warrants are listed or admitted to trading,
or, if the Warrants are not listed or admitted to trading on any
national securities exchange or if any such exchange on which the
Warrants are listed is not its principal trading market, the last
reported sale price as furnished by the NASD through the Nasdaq
National Market or SmallCap Market, or, if applicable, the OTC
Bulletin Board, or if the Warrants are not listed or admitted to
trading on any of the foregoing markets, or similar organization,
as determined in good faith by resolution of the Board of
Directors of the Company, based on the best information available
to it.
2.3.2 Mechanics of Cashless Exercise.
-------------------------------
The Cashless Exercise Right may be exercised by the
Holder on any business day on or after the Commencement Date and
not later than the Expiration Date by delivering the Purchase
Option with a duly executed exercise form attached hereto with
the cashless exercise section completed to the Company,
exercising the Cashless Exercise Right and specifying the total
number of shares of Common Stock or Warrants the Holder will
purchase pursuant to such Cashless Exercise Right.
3. Transfer.
---------
3.1 General Restrictions.
---------------------
Subject to Section 3.2, the registered Holder of this
Purchase Option, by its acceptance hereof, agrees that it will
not sell, transfer or assign or hypothecate this Purchase Option
prior to the Commencement Date to anyone other than (i) an
officer or partner of such Holder, (ii) an officer of Gaines,
Berland Inc. ("Underwriter") or an officer or partner of any
Selected Dealer or member of the underwriting syndicate in
connection with the Company's public offering with respect to
which this Purchase Option has been issued, or (iii) any Selected
Dealer or member of the underwriting syndicate. On and after the
Commencement Date, transfers to others may be made in accordance
with the terms of this Purchase Option subject to compliance with
or exemptions from applicable securities laws. In order to make
any permitted assignment, subject to Section 3.2 hereof, the
Holder must deliver to the Company the assignment form attached
hereto duly executed and completed, together with the Purchase
Option and payment of all transfer taxes, if any, payable in
connection therewith. Unless the Company can show that the
transfer may not be effected in accordance with applicable
securities laws, the Company shall immediately transfer this
Purchase Option on the books of the Company and shall execute and
deliver a new Purchase Option or Purchase Options of like tenor
to the appropriate assignee(s) expressly evidencing the right to
purchase the aggregate number of shares of Common Stock and
Warrants purchasable hereunder or such portion of such number as
shall be contemplated by any such assignment.
3.2 Restrictions Imposed by the Act.
--------------------------------
This Purchase Option and the Securities underlying this
Purchase Option shall not be transferred unless and until (i) the
Company has received the opinion of counsel for the Holder that
this Purchase Option or the Securities, as the case may be, may
be transferred pursuant to an exemption from registration under
the Act and applicable state law, the availability of which is
established to the reasonable satisfaction of the Company (the
Company hereby agreeing that the opinion of Graubard Mollen &
Miller shall be deemed satisfactory evidence of the availability
of an exemption), or (ii) a registration statement relating to
such Purchase Option or Securities, as the case may be, has been
filed by the Company and declared effective by the Securities and
Exchange Commission and compliance with applicable state law.
4. New Purchase Options to be Issued.
----------------------------------
4.1 Partial Exercise or Transfer.
-----------------------------
Subject to the restrictions in Section 3 hereof, this
Purchase Option may be exercised or assigned in whole or in part.
In the event of the exercise or assignment hereof in part only,
upon surrender of this Purchase Option for cancellation, together
with the duly executed exercise or assignment form and funds
sufficient to pay the Exercise Price, the Company shall cause to
be delivered to the Holder without charge a new Purchase Option
of like tenor to this Purchase Option in the name of the Holder
evidencing the right of the Holder to purchase the aggregate
number of shares of Common Stock and Warrants purchasable
hereunder as to which this Purchase Option has not been exercised
or assigned.
4.2
Lost Certificate.
------------------
Upon receipt by the Company of evidence satisfactory to it
of the loss, theft, destruction or mutilation of this Purchase
Option and of reasonably satisfactory indemnification, the
Company shall execute and deliver a new Purchase Option of like
tenor and date. Any such new Purchase Option executed and
delivered as a result of such loss, theft, mutilation or
destruction shall constitute a substitute contractual obligation
on the part of the Company.
5. Registration Rights.
--------------------
5.1 Demand Registration.
---------------------
5.1.1 Grant of Right.
--------------
The Company, upon written demand ("Initial Demand
Notice") of the Holder(s) of at least 51% of the Purchase Options
and/or the underlying shares of Common Stock and Warrants
("Majority Holders"), agrees to register, on one occasion, all or
any portion of the Purchase Options requested by the Majority
Holders in the Initial Demand Notice and all of the Securities
underlying the Purchase Options, including the Common Stock, the
Warrants and the Common Stock underlying the Warrants
(collectively the "Registrable Securities"). On such occasion,
the Company will file a Registration Statement covering the
Registrable Securities within sixty days after receipt of the
Initial Demand Notice unless such Initial Demand Notice shall be
received within sixty days after the end of a fiscal year, in
which event such Registration Statement shall be filed within 120
days after the end of the fiscal year, and use its best efforts
to have such registration statement declared effective promptly
thereafter. Should this registration or the effectiveness
thereof be delayed by the Company, the exercisability of the
Purchase Options shall be extended for a period of time equal to
the delay in registering the Registrable Securities; provided,
however, that such extension date shall not extend beyond five
years from the Effective Date. Moreover, if the Company fails to
comply with the provisions of this Section 5.1.1, the Company
shall, in addition to any other equitable or other relief avail-
able to the Holder(s), be liable for any and all damages
(including consequential, special and incidental damages)
sustained by the Holder(s). The demand for registration may be
made at any time during a period of five years commencing on the
Effective Date. The Company covenants and agrees to give written
notice of its receipt of any Initial Demand Notice by any
Holder(s) to all other registered Holders of the Purchase Options
and/or the Registrable Securities within ten days from the date
of the receipt of any such Initial Demand Notice.
5.1.2 Terms.
------
The Company shall bear all fees and expenses attendant
to registering the Registrable Securities, but the Holders shall
pay any and all underwriting commissions and the expenses of any
legal counsel selected by the Holders to represent them in
connection with the sale of the Registrable Securities. The
Company agrees to use its best efforts to cause the filing
required herein to become effective promptly and to qualify or
register the Registrable Securities in such states as are
reasonably requested by the Holder(s); provided, however, that in
no event shall the Company be required to register the
Registrable Securities in a state in which such registration
would cause (i) the Company to be obligated to register or
license to do business in such state, or (ii) the principal
stockholders of the Company to be obligated to escrow their
shares of capital stock of the Company. The Company shall cause
any registration statement filed pursuant to the demand rights
granted under Section 5.1.1 to remain effective for a period of
at least nine consecutive months from the date that the Holders
of the Registrable Securities covered by such registration
statement are first given the opportunity to sell all of such
securities.
5.2 "Piggy-Back" Registration
--------------------------
5.2.1 Grant of Right.
---------------
In addition to the demand right of registration, the
Holders of the Purchase Options shall have the right, for a
period of seven years commencing on the Effective Date, to
include the Registrable Securities as part of any other
registration of securities filed by the Company (other than in
connection with a transaction contemplated by Rule 145(a)
promulgated under the Act or pursuant to Form S-8).
5.2.2 Terms.
------
The Company shall bear all fees and expenses attendant
to registering the Registrable Securities, but the Holders shall
pay any and all underwriting commissions and the expenses of any
legal counsel selected by the Holders to represent them in
connection with the sale of the Registrable Securities. In the
event of such a proposed registration, the Company shall furnish
the then Holders of outstanding Registrable Securities with not
less than thirty days written notice prior to the proposed date
of filing of such registration statement. Such notice to the
Holders shall continue to be given for each registration
statement filed by the Company until such time as all of the
Registrable Securities have been sold by the Holder. The holders
of the Registrable Securities shall exercise the "piggy-back"
rights provided for herein by giving written notice, within
thirty days of the receipt of the Company's notice of its
intention to file a registration statement. The Company shall
cause any registration statement filed pursuant to the above
"piggyback" rights to remain effective for at least nine months
from the date that the Holders of the Registrable Securities are
first given the opportunity to sell all of such securities.
5.3 General Terms.
---------------
5.3.1 Indemnification.
----------------
The Company shall indemnify the Holder(s) of the
Securities to be sold pursuant to any registration statement
hereunder and each person, if any, who controls such Holders
within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended ("Exchange Act"),
against all loss, claim, damage, expense or liability (including
all reasonable attorneys' fees and other expenses reasonably
incurred in investigating, preparing or defending against any
claim whatsoever) to which any of them may become subject under
the Act, the Exchange Act or otherwise, arising from such
registration statement but only to the same extent and with the
same effect as the provisions pursuant to which the Company has
agreed to indemnify the Underwriter contained in Section 5 of the
Underwriting Agreement between the Underwriter and the Company,
dated the Effective Date. The Holder(s) of the Securities to be
sold pursuant to such registration statement, and their
successors and assigns, shall severally, and not jointly,
indemnify the Company, against all loss, claim, damage, expense
or liability (including all reasonable attorneys' fees and other
expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such Holders, or
their successors or assigns, in writing, for specific inclusion
in such registration statement to the same extent and with the
same effect as the provisions contained in Section 5 of the
Underwriting Agreement pursuant to which the Underwriter has
agreed to indemnify the Company.
5.3.2 Exercise of Warrants.
---------------------
Nothing contained in this Purchase Option shall be
construed as requiring the Holder(s) to exercise their Purchase
Options or Warrants prior to or after the initial filing of any
registration statement or the effectiveness thereof.
5.3.3 Exclusivity.
------------
The Company shall not permit the inclusion of any
securities other than the Registrable Securities to be included
in any registration statement filed pursuant to Section 5.1
hereof without the prior written consent of the Majority Holders
of the Securities.
5.3.4 Documents Delivered to Holders.
-------------------------------
The Company shall furnish to each Holder participating
in an offering contemplated by Section 5.1 hereof and to each
underwriter of any such offering, if any, a signed counterpart,
addressed to such Holder or underwriter, of (i) an opinion of
counsel to the Company, dated the effective date of such
registration statement (and, if such registration includes an
underwritten public offering, an opinion dated the date of the
closing under any underwriting agreement related thereto), and
(ii) a "cold comfort" letter dated the effective date of such
registration statement (and, if such registration includes an
underwritten public offering, a letter dated the date of the
closing under the underwriting agreement) signed by the
independent public accountants who have issued a report on the
Company's financial statements included in such registration
statement, in each case covering substantially the same matters
with respect to such registration statement (and the prospectus
included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial
statements, as are customarily covered in opinions of issuer's
counsel and in accountants' letters delivered to underwriters in
underwritten public offerings of securities. The Company shall
also deliver promptly to each Holder participating in the
offering requesting the correspondence and memoranda described
below and to the managing underwriter copies of all
correspondence between the Commission and the Company, its
counsel or auditors and all memoranda relating to discussions
with the Commission or its staff with respect to the registration
statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the registration state-
ment as it deems reasonably necessary to comply with applicable
securities laws or rules of the National Association of Securi-
ties Dealers, Inc. ("NASD"). Such investigation shall include
access to books, records and properties and opportunities to
discuss the business of the Company with its officers and inde-
pendent auditors, all to such reasonable extent and at such
reasonable times and as often as any such Holder shall reasonably
request.
5.3.5 Underwriting Agreement.
-----------------------
The Company shall enter into an underwriting
agreement with the managing underwriter(s) selected by any
Holders whose Registrable Securities are being registered
pursuant to Section 5.1. Such agreement shall be reasonably
satisfactory in form and substance to the Company, each Holder
and such managing underwriters, and shall contain such
representations, warranties and covenants by the Company and such
other terms as are customarily contained in agreements of that
type. The Holders shall be parties to any underwriting agreement
relating to an underwritten sale of their Securities and may, at
their option, require that any or all the representations,
warranties and covenants of the Company to or for the benefit of
such underwriters shall also be made to and for the benefit of
such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company
or the underwriters except as they may relate to such Holders,
their shares and their intended methods of distribution.
5.3.6 Documents to be Delivered by Holder(s);
-----------------------------------------
Cooperation.
------------
Each of the Holder(s) participating in any of the
foregoing offerings shall furnish to the Company a completed and
executed questionnaire provided by the Company requesting
information customarily sought of selling securityholders and
shall otherwise cooperate with the Company's reasonable requests.
6. Adjustments.
------------
6.1 Adjustments to Exercise Price and Number of
---------------------------------------------
Securities.
------------
The Exercise Price and the number of shares of Common Stock
and Warrants issuable on exercise of the Purchase Option shall be
subject to adjustment from time to time as hereinafter set forth:
6.1.1 Stock Dividends - Split-Ups.
---------------------------
If after the date hereof, and subject to the provisions
of Section 6.3 below, the number of outstanding shares of Common
Stock is increased by a stock dividend payable in shares of
Common Stock or by a split-up of shares of Common Stock or other
similar event, then, on the effective date of such stock dividend
or split-up, the number of shares of Common Stock issuable on
exercise of the Purchase Option and the Warrants underlying the
Purchase Option shall be increased in proportion to such increase
in outstanding shares.
6.1.2 Aggregation of Shares.
----------------------
If after the date hereof, and subject to the provisions
of Section 6.3, the number of outstanding shares of Common Stock
is decreased by a consolidation, combination or reclassification
of shares of Common Stock or other similar event, then, upon the
effective date of such consolidation, combination or
reclassification, the number of shares of Common Stock issuable
on exercise of the Purchase Option and Warrants underlying the
Purchase Option shall be decreased in proportion to such decrease
in outstanding shares.
6.1.3 Adjustments in Exercise Price.
------------------------------
Whenever the number of shares of Common Stock
purchasable upon the exercise of this Purchase Option is
adjusted, as provided in this Section 6.1, the Exercise Price
shall be adjusted (to the nearest cent) by multiplying such
Exercise Price immediately prior to such adjustment by a fraction
(x) the numerator of which shall be the number of shares of
Common Stock purchasable upon the exercise of this Purchase
Option immediately prior to such adjustment, and (y) the
denominator of which shall be the number of shares of Common
Stock so purchasable immediately thereafter. If it is determined
that such Exercise Price and number of shares of Common Stock
must be adjusted, then the Exercise Price of the Purchase Option
with respect to the underlying Warrants and the number of
Warrants purchasable hereunder shall also be adjusted on an
equivalent basis.
6.1.4 Replacement of Securities Upon
-------------------------------
Reorganization, etc.
---------------------
If after the date hereof any capital reorganization or
reclassification of the Common Stock of the Company, or
consolidation or merger of the Company with another corporation,
or the sale of all or substantially all of its assets to another
corporation or other similar event shall be effected, then, as a
condition of such reorganization, reclassification,
consolidation, merger, or sale, lawful and fair provision shall
be made whereby the Holders shall thereafter have the right to
purchase and receive, upon the basis and upon the terms and
conditions specified in the Purchase Option and in lieu of the
securities of the Company immediately theretofore purchasable and
receivable upon the exercise of the rights represented thereby,
such shares of stock, securities, or assets as may be issued or
payable with respect to or in exchange for the number of
securities equal to the number of securities immediately
theretofore purchasable and receivable upon the exercise of the
rights represented by the Purchase Option, had such
reorganization, reclassification, consolidation, merger, or sale
not taken place and in such event appropriate provision shall be
made with respect to the rights and interests of the Holders to
the end that the provisions hereof (including, without
limitation, provisions for adjustments of the Exercise Price and
of the number of securities purchasable upon the exercise of the
Purchase Option) shall thereafter be applicable, as nearly as may
be in relation to any share of stock, securities, or assets
thereafter deliverable upon the exercise hereof. The Company
shall not effect any such consolidation, merger, or sale unless
prior to the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or
merger, or the corporation purchasing such assets, shall assume
by written instrument executed and delivered to the Holders
evidencing its obligation to deliver such shares of stock,
securities, or assets as, in accordance with the foregoing
provisions, such Holders may be entitled to purchase.
6.1.5 Changes in Form of Purchase Option.
-------------------------------------
This form of Purchase Option need not be changed
because of any change pursuant to this Section, and Purchase
Options issued after such change may state the same Exercise
Price and the same number of shares of Common Stock and Warrants
as are stated in the Purchase Options initially issued pursuant
to this Agreement. The acceptance by any Holder of the issuance
of new Purchase Options reflecting a required or permissive
change shall not be deemed to waive any rights to a prior
adjustment or the computation thereof.
6.1.6 Changes in Underlying Warrants.
-------------------------------
The Company agrees that the Warrants are governed by
the terms of the Company s Warrant Agreement, dated -------------
, 1996, including the anti-dilution provisions contained therein.
6.2 Elimination of Fractional Interests.
------------------------------------
The Company shall not be required to issue certificates
representing fractions of shares of Common Stock or Warrants upon
the exercise or transfer of the Purchase Option, nor shall it be
required to issue scrip or pay cash in lieu of any fractional
interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up or down
to the nearest whole number of Warrants, shares of Common Stock
or other securities, properties or rights.
7. Reservation and Listing.
------------------------
The Company shall at all times reserve and keep available out of
its authorized shares of Common Stock, solely for the purpose of
issuance upon exercise of the Purchase Options or the Warrants,
such number of shares of Common Stock or other securities,
properties or rights as shall be issuable upon the exercise
thereof. The Company covenants and agrees that, upon exercise of
the Purchase Options and payment of the Exercise Price therefor,
all shares of Common Stock and other securities issuable upon
such exercise shall be duly and validly issued, fully paid and
non-assessable and not subject to preemptive rights of any
stockholder. The Company further covenants and agrees that upon
exercise of the Warrants underlying this Purchase Option and
payment of the Warrant exercise price therefor, all shares of
Common Stock and other securities issuable upon such exercises
shall be duly and validly issued, fully paid and non-assessable
and not subject to preemptive rights of any stockholder. As long
as the Purchase Options shall be outstanding, the Company shall
use its best efforts to cause all (i) shares of Common Stock
issuable upon exercise of the Purchase Options and the Warrants
and (ii) Warrants issuable upon exercise of the Purchase Options
to be listed (subject to official notice of issuance) on all
securities exchanges (or, if applicable on Nasdaq) on which the
Common Stock or the Public Warrants issued to the public in
connection herewith are then listed and/or quoted.
8. Certain Notice Requirements.
----------------------------
8.1 Holder's Right to Receive Notice.
---------------------------------
Nothing herein shall be construed as conferring upon the
Holders the right to vote or consent or to receive notice as a
stockholder for the election of directors or any other matter, or
as having any rights whatsoever as a stockholder of the Company.
If, however, at any time prior to the expiration of the Purchase
Options and their exercise, any of the events described in
Section 8.2 shall occur, then, in one or more of said events, the
Company shall give written notice of such event at least fifteen
days prior to the date fixed as a record date or the date of
closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, conversion
or exchange of securities or subscription rights, or entitled to
vote on such proposed dissolution, liquidation, winding up or
sale. Such notice shall specify such record date or the date of
the closing of the transfer books, as the case may be.
8.2 Events Requiring Notice.
------------------------
The Company shall be required to give the notice described
in this Section 8 upon one or more of the following events: (i)
if the Company shall take a record of the holders of its shares
of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a
cash dividend or distribution payable otherwise than out of
retained earnings, as indicated by the accounting treatment of
such dividend or distribution on the books of the Company, or
(ii) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital
stock of the Company, or any option, right or warrant to
subscribe therefor, or (iii) a dissolution, liquidation or
winding up of the Company (other than in connection with a
consolidation or merger) or a sale of all or substantially all of
its property, assets and business shall be proposed.
8.3 Notice of Change in Exercise Price.
-----------------------------------
The Company shall, promptly after an event requiring a
change in the Exercise Price pursuant to Section 6.1 hereof, send
notice to the Holders of such event and change ("Price Notice").
The Price Notice shall describe the event causing the change and
the method of calculating same and shall be certified as being
true and accurate by the Company's President and Chief Financial
Officer.
8.4 Transmittal of Notices.
-----------------------
All notices, requests, consents and other communications
under this Purchase Option shall be in writing and shall be
deemed to have been duly made on the date of delivery if
delivered personally or sent by overnight courier, with
acknowledgment of receipt to the party to which notice is given,
or on the fifth day after mailing if mailed to the party to whom
notice is to be given, by registered or certified mail, return
receipt requested, postage prepaid and properly addressed as
follows: (i) if to the registered Holder of the Purchase Option,
to the address of such Holder as shown on the books of the
Company, or (ii) if to the Company, to its principal executive
office.
9. Miscellaneous.
--------------
9.1 Amendments.
-----------
The Company and the Underwriter may from time to time
supplement or amend this Purchase Option without the approval of
any of the Holders in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective
or inconsistent with any other provisions herein, or to make any
other provisions in regard to matters or questions arising
hereunder which the Company and the Underwriter may deem
necessary or desirable and which the Company and the Underwriter
deem shall not adversely affect the interest of the Holders. All
other modifications or amendments shall require the written con-
sent of the party against whom enforcement of the modification or
amendment is sought.
9.2 Headings.
---------
The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or
affect the meaning or interpretation of any of the terms or
provisions of this Purchase Option.
9.3 Entire Agreement.
----------------
This Purchase Option (together with the other agreements and
documents being delivered pursuant to or in connection with this
Purchase Option) constitutes the entire agreement of the parties
hereto with respect to the subject matter hereof, and supersedes
all prior agreements and understandings of the parties, oral and
written, with respect to the subject matter hereof.
9.4 Binding Effect.
--------------
This Purchase Option shall inure solely to the benefit of
and shall be binding upon, the Holder and the Company and their
respective successors, legal representatives and assigns, and no
other person shall have or be construed to have any legal or
equitable right, remedy or claim under or in respect of or by
virtue of this Purchase Option or any provisions herein
contained.
9.5 Governing Law; Submission to Jurisdiction.
------------------------------------------
This Purchase Option shall be governed by and construed and
enforced in accordance with the law of the State of New York,
without giving effect to principles of conflicts of law. The
Company hereby agrees that any action, proceeding or claim
against it arising out of, or relating in any way to this
Purchase Option shall be brought and enforced in the courts of
the State of New York or of the United States of America for the
Southern District of New York, and irrevocably submits to such
jurisdiction, which jurisdiction shall be exclusive. The Company
hereby waives any objection to such exclusive jurisdiction and
that such courts represent an inconvenient forum. Any process or
summons to be served upon the Company may be served by
transmitting a copy thereof by registered or certified mail,
return receipt requested, postage prepaid, addressed to it at the
address set forth in Section 8.4 hereof. Such mailing shall be
deemed personal service and shall be legal and binding upon the
Company in any action, proceeding or claim. The Company agrees
that the prevailing party(ies) in any such action shall be
entitled to recover from the other party(ies) all of its
reasonable attorneys' fees and expenses relating to such action
or proceeding and/or incurred in connection with the preparation
therefor.
9.6 Waiver, Etc.
------------
The failure of the Company or the Holder to at any time
enforce any of the provisions of this Purchase Option shall not
be deemed or construed to be a waiver of any such provision, nor
to in any way affect the validity of this Purchase Option or any
provision hereof or the right of the Company or any Holder to
thereafter enforce each and every provision of this Purchase
Option. No waiver of any breach, non-compliance or
non-fulfillment of any of the provisions of this Purchase Option
shall be effective unless set forth in a written instrument
executed by the party or parties against whom or which
enforcement of such waiver is sought; and no waiver of any such
breach, non-compliance or non-fulfillment shall be construed or
deemed to be a waiver of any other or subsequent breach,
non-compliance or non-fulfillment.
9.7 Execution in Counterparts.
-------------------------
This Purchase Option may be executed in one or more
counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original,
but all of which taken together shall constitute one and the same
agreement, and shall become effective when one or more
counterparts has been signed by each of the parties hereto and
delivered to each of the other parties hereto.
IN WITNESS WHEREOF, the Company has caused this Pur-
chase Option to be signed by its duly authorized officer as of
the ---- day of ---------, 1996.
U.S. ENVIROSYSTEMS, INC.
By:------------------------- Name: Richard H. Nelson
Title: President
<PAGE>
FORM TO BE USED TO EXERCISE PURCHASE OPTION:
U.S. ENVIROSYSTEMS, INC.
515 North Flagler Drive
Suite 202
West Palm Beach, Florida 33401
Date:-----------------
The undersigned hereby elects irrevocably to exercise
the within Purchase Option and to purchase ---- shares of Common
Stock and/or ----- Warrants of U.S. Envirosystems, Inc. and
hereby makes payment of $------------ (at the rate of $---------
per share of Common Stock and -------------- per Warrant) in
payment of the Exercise Price pursuant thereto. Please issue the
Common Stock and Warrants as to which this Purchase Option is
exercised in accordance with the instructions given below.
or
--
The undersigned hereby elects irrevocably to exercise
the within Purchase Option and to purchase --------- shares of
Common Stock and/or ------- Warrants of U.S. Envirosystems, Inc.
by surrender of the unexercised portion of the within Purchase
Option (with a "Stock Value" and/or "Warrant Value" of $---------
- and $--------, respectively, based on a "Stock Market Price"
and/or "Warrant Market Price" of $----------- and $-------,
respectively). Please issue the Common Stock and Warrants in
accordance with the instructions given below.
------------------------------- Signature
------------------------------ Signature Guaranteed
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION
IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATSOEVER AND MUST BE GUARANTEED BY A BANK, OTHER THAN A
SAVINGS BANK, OR BY A TRUST COMPANY OR BY A FIRM HAVING
MEMBERSHIP ON A REGISTERED NATIONAL SECURITIES EXCHANGE.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name---------------------------------------------------
(Print in Block Letters)
Address------------------------------------------------
<PAGE>
FORM TO BE USED TO ASSIGN PURCHASE OPTION:
ASSIGNMENT
(To be executed by the registered Holder to effect a
transfer of the within Purchase Option):
FOR VALUE RECEIVED,------------------------------------
--------
does hereby sell, assign and transfer unto-----------------------
-------------------
the right to purchase ----------------------- shares of Common
Stock and/or ------ Warrants of U.S. Envirosystems, Inc.
("Company") evidenced by the within Purchase Option and does
hereby authorize the Company to transfer such right on the books
of the Company.
Dated:-------------------
---------------------------Signature
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION
IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATSOEVER.
EXHIBIT 10.22
PURCHASE AGREEMENT
PURCHASE AGREEMENT, dated as of November 6, 1995 (this
"Purchase Agreement"), between WESTINGHOUSE ELECTRIC CORPORATION,
a Pennsylvania corporation, successor in interest by merger to
Westinghouse Credit Corporation ("Seller"), and U.S.
ENVIROSYSTEMS, INC., a Delaware corporation ("Purchaser").
W I T N E S S E T H
WHEREAS, prior to the date hereof, Seller has entered into
the Loan Transaction (such terms, and other capitalized terms
used herein without definition, being defined as provided in
Section 1.1); and
WHEREAS, Seller desires to sell to Purchaser, and Purchaser
desires to purchase from Seller, all of Seller's right, title and
interest in and to the Loan Transaction on the terms and
conditions, and subject to the limitations and exclusions, set
forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound
hereby, agree as follows.
ARTICLE I
DEFINITIONS
SECTION 1.1. DEFINED TERMS.
(a) For purposes of this Purchase Agreement,
capitalized terms used herein shall, unless otherwise expressly
provided for or defined herein, have the respective meanings set
forth below.
APPLICABLE LAW shall mean all applicable laws of any
Governmental Authority, including, without limitation, federal,
state and foreign securities laws, tax laws, tariff and trade
laws, ordinances, judgments, decrees, injunctions, writs and
orders or like actions of any Governmental Authority and rules,
regulations, orders, interpretations, licenses, and permits of
any federal, regional, state, county, municipal or other
Governmental Authority.
ASSIGNMENT AND ASSUMPTION AGREEMENT shall mean an
Assignment and Assumption Agreement, dated the Closing Date, in
substantially the form of Exhibit A hereto.
BORROWER shall mean any Person identified as such in
any of the Transaction Documents.
DEFAULT shall mean any event under any Loan Transaction
Document relating to the failure of the Borrower to pay principal
or interest.
GOVERNMENTAL AUTHORITY shall mean any nation or
government (including any state or other political subdivision of
either thereof) and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining
to government.
LIEN shall mean any mortgage, pledge, security
interest, encumbrance, lien, easement, servitude or charge of any
kind.
LOAN TRANSACTION shall mean the loan transactions
identified in Schedule 1 hereto.
PERSON shall mean any individual, corporation,
partnership, joint venture, business association, joint-stock
company, trust or unincorporated organization or any government
or political subdivision thereof or any governmental agency.
TRANSACTION DOCUMENTS shall mean, with respect to the
Loan Transaction all of the agreements, instruments,
certificates, financing statements and other documents of any
nature executed in connection therewith, including any
amendments, modifications or supplements thereof from time to
time.
TRANSFER DOCUMENTS shall mean this Purchase Agreement,
the Assignment and Assumption Agreement, and each instrument
delivered pursuant to the last sentence of Section 3.3(e).
(b) All references in this Purchase Agreement to
sections, paragraphs, clauses, schedules, appendices and exhibits
are to sections, paragraphs, clauses, schedules, appendices and
exhibits in and to this Purchase Agreement unless otherwise
indicated.
ARTICLE II
SALE AND PURCHASE; OTHER AGREEMENTS
SECTION 2.1. SALE AND PURCHASE; TERMINATION.
(a) Subject to the terms and conditions set forth
herein, Seller agrees to sell, transfer and assign to Purchaser,
and Purchaser agrees to purchase and accept from Seller, the Loan
Transaction on November 15, 1995, or on such other date but in no
event later than January 15, 1996, as may be agreed upon by the
parties (the "Closing Date"). Time is of the essence as to such
Closing Date.
(b) This Purchase Agreement may be terminated, and the
transactions contemplated hereby abandoned by either Purchaser or
Seller if the Loan Transaction Transfer shall not have occurred
on or before January 15, 1996.
SECTION 2.2. PURCHASE PRICE; PAYMENT; INTEREST.
(a) The purchase price payable by Purchaser to Seller
for the Loan Transaction on the Closing Date shall be Four
Million Six Hundred Thousand Dollars ($4,600,000.00) plus
Interest, as defined in paragraph (c) (collectively the "Purchase
Price"). The Purchase Price shall be payable by Seller in lawful
currency of the United States of America in the manner
contemplated by paragraph (b) of this Section 2.2. In addition
to the Purchase Price, it is agreed that the payment due October
20, 1995 under the terms of the Loan Transaction shall be
retained by Seller resulting in a remaining principal balance in
the amount of Six Million Two Hundred Thirty Three Thousand Three
Hundred Fifty Nine Dollars ($6,233,359.00) under the terms of the
Transaction Documents.
(b) Payment of the Purchase Price on the Closing Date
shall be made to Citibank N.A., 399 Park Avenue, New York, NY,
ABA Routing Number 021000089, Account Number 3848-7299, for
credit to Farwest, by wire transfer of immediately available
funds, or in such other manner or to such other account as Seller
may direct.
(c) Interest. As part of the Purchase Price, Purchaser
--------
herein agrees to pay to Seller at closing, additional
consideration in an amount equal to the amount of interest
calculated at a rate equal to and pursuant to the terms of the
Transaction Documents prorated for the period October 20, 1995
through the Closing Date, inclusive ("Interest").
SECTION 2.3. TAXES. Seller shall be responsible for
payment of any taxes, assessments and similar charges imposed by
the federal or any state government or any political subdivision
of either thereof upon the sale, assignment or transfer of the
Loan Transaction as contemplated hereby to the extent that such
taxes are not the obligation of the Borrower under the
Transaction Documents; provided, that Purchaser shall cooperate
--------
with seller with respect to avoidance of any such taxes, including
delivery by Purchase of appropriate exemption certificates,
where applicable.
ARTICLE III
CLOSING; CONDITIONS TO CLOSING
SECTION 3.1. CLOSING. The closing in respect of the
purchase and sale of the Loan Transaction shall take place at the
offices of --------------------- (or at such other location as
the parties hereto may agree) commencing at -------------,
Pittsburgh time, on the Closing Date.
SECTION 3.2. Seller's Conditions to Closing. The
obligations of Seller to assign, transfer and convey the Loan
Transaction on the Closing Date as provided herein is subject to
the compliance (to the reasonable satisfaction of Seller) on or
before the Closing Date with, or the waiver by Seller on or
before the Closing Date of, the following conditions precedent:
(a) Consents Under Other Obligations; Governmental
----------------------------------------------
Authority, Notices and Approvals. All approvals, consents or
--------------------------------
required licenses of, or notices to, any Governmental Authority
or any trustee or holder of any indebtedness or obligation of
Seller, which are required in connection with the transactions
contemplated by this Purchase Agreement or the Assignment and
Assumption Agreement, shall, to the reasonable satisfaction of
Seller, have been duly obtained, given or accomplished.
Purchaser shall obtain, at its expense, any such approvals,
consents or licenses.
(b) Litigation. No action, proceeding or investigation
----------
shall have been instituted or threatened before any Governmental
Authority, nor shall any order, writ, judgment or decree have
been issued or proposed to be issued by any Governmental
Authority as of the Closing Date, which in any case questions the
validity or legality of this Purchase Agreement, the transactions
contemplated hereby or by the Transaction Documents, or the
ability of either party hereto to consummate any of such
transactions.
(c) Assignment and Assumption Agreement. The Assignment
------------------------------------
and Assumption Agreement shall have been duly authorized,
executed and delivered by Purchaser.
(d) Purchaser Price. Purchaser shall have paid the
---------------
amount due as contemplated by Section 2.2(b).
(e) Proceedings Satisfactory. All proceedings taken in
------------------------
connection with the transactions contemplated hereby and all
documents and papers relating thereto shall be reasonably
satisfactory to Seller and Seller's Counsel, and Seller and such
Counsel shall have received copies of such documents and papers
as Seller or such Counsel may reasonably request in connection
therewith, all in form and substance satisfactory to Seller and
such Counsel.
(f) Opinion. Seller shall have received the opinion of
-------
Purchaser's Special Counsel in the form attached hereto as
Exhibit B.
(g) Reserve Accounts. As of the Closing Date the amount
----------------
of the reserve accounts under the terms of the Transaction
Documents shall not be less than One Million One Hundred Thousand
Dollars ($1,100,000.00).
(h) Interest in Collateral/Security. Purchaser shall
-------------------------------
take all reasonable and necessary steps, including without
limitation, obtaining all required or necessary approvals and
consents in connection with Purchaser's acquisition, as
contemplated hereunder, of Seller's interest as described in the
Transaction Documents, and Purchaser shall also take all
reasonable and necessary steps to obtain and secure its interest
in the underlying security and collateral as contemplated by the
terms of this Agreement.
SECTION 3.3. PURCHASER'S CONDITIONS TO CLOSING. The
obligation of Purchaser to acquire the Loan Transaction and to
pay the Purchase Price on the Closing Date as provided herein is
subject to the compliance (to the reasonable satisfaction of
Purchaser) on or before the Closing Date with, or the waiver by
Purchaser on or before the Closing Date of, the following
conditions precedent:
(a) Consents Under Other Obligations; Governmental
----------------------------------------------
Authority, Notices and Approvals. All approvals, consents or
--------------------------------
required licenses of, or notices to, any Governmental Authority
or any trustee or holder of any indebtedness or obligation of
Seller, which are required in connection with the transactions
contemplated by this Purchase Agreement or the Assignment and
Assumption Agreement, shall, to the reasonable satisfaction of
Purchaser, have been duly obtained, given or accomplished.
Purchaser shall obtain, at its expense, any such approvals,
consents or licenses.
(b) Litigation. No action, proceeding or investigation
----------
shall have been instituted or threatened before any Governmental
Authority, nor shall any order, writ, judgment or decree have
been issued or proposed to be issued by any Governmental
Authority as of the time of the Closing Date, which in any case
questions the validity or legality of this Purchase Agreement,
the transactions contemplated hereby or by the Transaction
Documents, or the ability of either party hereto to consummate
any of such transactions.
(c) Assignment and Assumption Agreement. The Assignment
-----------------------------------
and Assumption Agreement shall have been duly authorized,
executed and delivered by Seller.
(d) Loan Transaction Transfer. Seller shall have given,
-------------------------
or obtained a waiver with respect to, any notice to the Borrower
required under the Transaction Documents and the Borrower shall
have agreed to pay all amounts due under the Transaction
Documents to Purchaser from and after the Closing Date.
(e) Transaction Documents; Transfer Documents. On the
-----------------------------------------
Closing Date, Seller shall deliver to Purchaser the originals of
all Transaction Documents which are in the possession of Seller,
or true and complete copies of such Transaction Documents if such
originals are not in Seller's possession; provided, however, Seller
-------- -------
shall be required to deliver originals of all such Transaction
Documents which are instruments or chattel paper under the
Uniform Commercial Code, including without limitation all forms
of notes. Seller shall also execute and deliver to Purchaser
such documents and instruments in form and substance reasonably
satisfactory to Purchaser as shall be necessary or shall be
reasonably requested by Purchaser to evidence the sale,
assignment, transfer and delivery of the Loan Transaction to
Purchaser on the public record including, without limitation,
documents and instruments to evidence the assignment of any
security interest and financing statement arising out of the
Transaction Documents.
(f) Proceedings Satisfactory. All proceedings taken in
------------------------
connection with the transactions contemplated hereby and all
documents and papers relating thereto shall be reasonably
satisfactory to Purchaser and Purchaser's Special Counsel, and
Purchaser and such Special Counsel shall have received copies of
such documents and papers as Purchaser or such Special Counsel
may reasonably request in connection therewith, all in form and
substance satisfactory to Purchaser and such Special Counsel.
(g) Certain Filings. On or before the Closing Date, all
---------------
filings or recordings necessary in order to establish and perfect
the right, title and interest to be conveyed to Purchaser under
the Transfer Documents with respect to the Loan Transaction shall
have been duly made or accomplished.
(h) Opinions. Purchaser shall have received the opinion
--------
of Seller's Special Counsel in the attached hereto as Exhibit C.
(i) Reserve Accounts. As of the Closing Date the amount
----------------
of the reserve accounts under the terms of the Transaction
Documents shall not be less than One Million One Hundred Thousand
Dollars ($1,100,000.00).
(j) Interest in Collateral/Security. Purchaser shall
-------------------------------
take all reasonable and necessary steps, including without
limitation, obtaining all required or necessary approvals and
consents in connection with Purchaser's acquisition, as
contemplated hereunder, of Seller's interest as described in the
Transaction Documents, and Purchaser shall also take all
reasonable and necessary steps to obtain and secure its interest
in the underlying security and collateral as contemplated by the
terms of this Agreement.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND AGREEMENTS
SECTION 4.1. REPRESENTATIONS, WARRANTIES AND
AGREEMENTS OF SELLER. Seller represents and warrants to, and
agrees with, Purchaser as follows:
(a) Organization, Corporate Authority, Etc. Seller is
--------------------------------------
a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Pennsylvania, and is duly
qualified to own its properties and carry on its business in each
jurisdiction where the failure to be so qualified would have a
material adverse effect on Seller's business. Seller has all
requisite corporate power and authority to enter into and perform
its obligations under the Transfer Documents.
(b) Authorization, Etc. This purchase Agreement has
------------------
been, and on or prior to the Closing Date the other applicable
Transfer Documents to which Seller is a party will have been,
duly authorized executed and delivered by Seller. This Purchase
Agreement does, and the other Transfer Documents when executed
and delivered will, assuming due authorization, execution, and
delivery hereof and thereof by Purchaser, constitute the legal,
valid and binding obligations of Seller enforceable against
Seller in accordance with their respective terms, except as
enforcement of the terms hereof and thereof may be limited by
applicable bankruptcy, insolvency, reorganization, liquidation,
moratorium or similar laws affecting enforcement of creditors'
rights generally, as well as the award by courts of relief in
lieu of specific performance of contractual provisions.
(c) No Violation. None of the execution, delivery or
------------
performance by Seller of this Purchase Agreement or any other
Transfer Document, or the consummation by Seller of any of the
transactions contemplated hereby or thereby, will contravene any
Applicable Law binding on Seller or any of its property, or any
provision of the charter or bylaws of Seller, or will result in a
breach of, or constitute a default under, or contravene any
provision of, any agreement or instrument to which Seller is a
party or by which Seller or any of its property is bound (which
breach, default or contravention would have a material adverse
effect on such execution, delivery or performance).
(d) Prior Transfers. Seller is the sole legal and
---------------
beneficial owner of the Loan Transaction. There are no Liens on,
or with respect to, the Loan Transaction, other than those
created pursuant to, or permitted by, the Transaction Documents
and the interests therein to be transferred to Purchaser as
contemplated hereby.
(e) No Defaults. No Default exists under the Loan
-----------
Transaction.
(f) Transaction Documents. Seller has delivered to
---------------------
Purchaser a true and correct copy of each of the Transaction
Documents, and all amendments, modifications and supplements
thereto. The documents individually listed on Schedule 2
represent a complete and accurate list of all the material
Transaction Documents and there are no documents omitted which
would have a material adverse effect on the individual
Transaction Documents so listed. The Transaction Documents, as
so amended, modified and supplemented to the date hereof, are in
full force and effect and there has been no prepayment of any
amount due under the Transaction Documents.
(g) Title; Transfer Documents. Seller is the sole legal
-------------------------
and beneficial owner of the Loan Transaction under the terms of
the Transaction Documents. Pursuant to the Transfer Documents,
Seller will convey to Purchaser good and marketable title to the
Loan Transaction, free and clear of all Liens created by or
arising through Seller or any affiliate of Seller, other than
those Liens or other rights, priorities or interests of other
parties created pursuant to, or permitted by, the Transaction
Documents. Under and pursuant to any of the Transaction
Documents intended as or which operate as security for
obligations owing to Seller, there has been granted to and
created in favor of Seller, and upon the transfer of Loan
Transaction (and any required filing or recording) there will be
created in favor of Purchaser, the security interest purported to
be created thereby in the collateral with respect thereto, and
such security interests have been perfected and are prior to the
rights of all third parties therein and thereto except as those
created pursuant to or permitted by the Transaction Documents.
(h) No Material Litigation. There are no pending or, to
----------------------
the best of Seller's knowledge, threatened investigations, suits
or proceedings against Seller or affecting Seller or its
properties, which would materially adversely affect the
consummation of the transactions contemplated by, or the
performance by Seller of its obligations under, this Purchase
Agreement or any other Transfer Document to which it is a party.
(i) No InconsistentActions. From and afterthe Closing
-----------------------
Date, neither Seller nor any affiliate of Seller will take any
action that would be inconsistent with the status of Purchaser as
the sole owner of the Loan Transaction for federal, state and
local tax purposes, except for the period of Seller's ownership
prior to the Closing Date.
(j) Securities Laws. Neither Seller nor anyone
---------------
authorized to act on its behalf has directly or indirectly
offered any beneficial interest or security (as defined in
Section 2(1) of the Securities Act of 1933, as amended) relating
to an interest in the Loan Transaction for sale to, or solicited
any offer to acquire any such interest or security from, or has
sold any such interest or security to, any Person in violation of
the registration provisions of the Securities Act and Seller will
not directly or indirectly make any such offer, solicitation or
sale in violation of such provisions of such Securities Act;
Provided, that the foregoing shall not be deemed to impose on
Seller any responsibility with respect to any such offer, sale or
solicitation by Purchaser.
SECTION 4.2. REPRESENTATIONS, WARRANTIES AND
AGREEMENTS OF PURCHASER. Purchaser represents and warrants to,
and agrees with, Seller as follows:
(a) Organization, Corporate Authority, Etc. Purchaser
--------------------------------------
is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and is duly
qualified to own its properties and carry on its business in each
jurisdiction where the failure to be so qualified would have a
material adverse effect on Purchaser's business. The purchase
and sale of property similar to the Loan Transaction is within
the ordinary course of business conducted by Purchaser and
Purchaser has all requisite corporate power and authority to
enter into and perform its obligations under this Purchase
Agreement and the other Transfer Documents to which it is a
party.
(b) Authorization, Etc. This Purchase Agreement has
------------------
been, and on or prior to the Closing Date the other Transfer
Documents to which Purchaser is a party will have been, duly
authorized, executed and delivered by Purchaser. This Purchase
Agreement does, and the other Transfer Documents to which it is a
party when executed and delivered will, assuming the due
authorization, execution, and delivery hereof and thereof by
Seller, constitute the legal, valid and binding obligations of
Purchaser, enforceable against it in accordance with their
respective terms, except as enforcement of the terms hereof and
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, liquidation, moratorium or similar laws affecting
enforcement of creditors' rights generally, as well as the award
by courts of relief in lieu of specific performance of
contractual provisions.
(c) No Violation. None of the execution, delivery or
------------
performance by Purchaser of this Purchase Agreement or the other
Transfer Documents to which it is a party, or the consummation of
any of the transactions contemplated hereby or thereby, will
contravene any Applicable Law binding on Purchaser or any of its
property, or any provision of the articles of incorporation or
bylaws of Purchaser, or will result in a breach of, or constitute
a default under, or contravene any provision of, any agreement or
instrument to which Purchaser is a party or by which Purchaser or
any of its property is bound (which breach, default, or
contravention would have a material adverse effect on such
execution, delivery or performance).
(d) No Defaults. Purchaser is not in default under any
-----------
mortgage, deed of trust, indenture, or other instrument or
agreement to which it is a party or by which it or any of its
properties or assets may be bound, which default or defaults, as
the case may be, would have, in the aggregate, a material adverse
effect on Purchaser, or on any of the transactions contemplated
by, or on Purchaser's ability to perform its obligations under,
this Purchase Agreement or any other Transfer Document to which
it is a party.
(e) No Material Litigation. There are no pending or, to
----------------------
the best of Purchaser's knowledge, threatened investigations,
suits or proceedings against Purchaser or affecting Purchaser or
its properties, which are reasonably likely to materially
adversely affect the consummation of the transactions
contemplated by, or the performance by Purchaser of its
obligations under, this Purchase Agreement or any other Transfer
Document to which it is a party.
(f) ERISA. Purchaser is not intending to purchase and
-----
will not purchase the Loan Transaction with the assets of an
employee benefit plan (or its related trust) as defined in
Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended from time to time, or with the assets of any
plan (or its related trust) as defined in Section 4975(e)(1) of
the Code.
(g) Securities Laws. Neither Purchaser nor anyone
---------------
authorized to act on its behalf has directly or indirectly
offered any beneficial interest or security (as defined in
Section 2(1) of the Securities Act of 1933, as amended) relating
to an interest in the Loan Transaction for sale to, or solicited
any offer to acquire any such interest or security from, or has
sold any such interest or security to, any Person in violation of
the registration provisions of the Securities Act and Purchaser
will not directly or indirectly make any such offer, solicitation
or sale in violation of such provisions of such Securities Act;
provided, that the foregoing shall not be deemed to impose
--------
on Purchaser any responsibility with respect to any such
offer, sale or solicitation by Seller.
ARTICLE V
RESERVED RIGHTS, INDEMNIFICATION; FILINGS
SECTION 5.1. RESERVED RIGHTS. Purchaser and Seller
recognize and agree that Seller will continue to be entitled to
all benefits accrued and all rights vested pursuant to any and
all Transaction Documents in respect of the period prior to the
Closing Date, including, without limitation, all rights to
indemnification by the Borrower and all amounts due from any
predecessor to the current Borrower, provided, however, that such
-------- -------
reserved rights shall not include any interest payable after the
Closing Date under the terms of any Transaction Document
notwithstanding that some portion of such interest may relate to
a period prior to the Closing Date. Purchaser agrees that, in
all matters relating to any such reserved rights, it shall act
in a manner consistent with, and not in derogation of, any
rights of Seller as predecessor "lender" under such Transaction
Documents. Without limiting the generality of the foregoing,
Seller and Purchaser agree to take all action reasonably necessary
to facilitate the realization by each of them of their respective
rights under each Transaction Document.
SECTION 5.2. INDEMNIFICATION. (a) Notwithstanding
the assumption by Purchaser of all of the obligations of Seller
under the Transaction Documents to which Seller is a party,
Seller and Purchaser agree that, as between themselves, Purchaser
shall have no liability or obligation as a result of, and Seller
shall indemnify and hold Purchaser harmless (on an after-tax
basis) against, and shall pay and reimburse Purchaser for any
loss, cost or other expense it incurs arising out of (1) the
breach of any representation or warranty of Seller set forth in
this Purchase Agreement or in any agreement, certificate,
schedule, or other instrument delivered to Purchaser pursuant
hereto; (2) the breach of any of the covenants of Seller
contained in or arising out of this Purchase Agreement or the
transactions contemplated hereby; (3) any failure by Seller to
comply with the terms of the Transaction Documents to which it is
a party prior to the Closing Date; or (4) any liabilities or
obligations of Seller under the Transaction Documents required to
be satisfied or performed by Seller prior to the Closing Date.
(b) Seller shall have no liability or obligation as a
result of, and Purchaser shall indemnify and hold Seller harmless
(on an after-tax basis) against, and shall pay and reimburse
Seller for any loss, cost or other expense it incurs arising out
of (1) the breach of any representation or warranty of Purchaser
set forth in this Purchase Agreement or in any agreement,
certificate, schedule, or other instrument delivered to Seller
pursuant hereto; (2) the breach of any of the covenants of
Purchaser contained in or arising out of this Purchase Agreement
or the transactions contemplated hereby; (3) any failure by
Purchaser to comply with the terms of the Transaction Documents
assumed by Purchaser pursuant to the Transfer Documents on or
after the Closing Date; or (4) any liabilities or obligations of
Purchaser under the Transaction Documents required to be
satisfied or performed by Purchaser on or after the Closing Date.
SECTION 5.3. COOPERATION; FILINGS. Each of the
parties hereto agrees to promptly take, or cause to be taken, all
action and to do, or cause to be done, all things reasonably
necessary, proper or advisable under Applicable Law or otherwise,
to consummate the transactions contemplated by this Purchase
Agreement and each other Transfer Document.
ARTICLE VI
MISCELLANEOUS
SECTION 6.1. TRANSACTION COSTS. Each party hereto
agrees to pay the fees and expenses of its own counsel and/or
special counsel in connection with the transaction contemplated
hereby. Purchaser shall pay and shall indemnify Seller for all
fees and expenses relating to UCC filings, licenses, filing and
transfer fees, assessments or taxes and expenses arising from the
transfer hereunder or relating to recordations and filings with
Governmental Authority and all fees and expenses of special
counsel employed by Purchaser.
SECTION 6.2. BROKERS, FINDERS, ETC. Each party
represents to the other that it has dealt with no broker or
finder in connection with the transactions contemplated hereby,
and no broker or Person acting on such a party's behalf is
entitled to any brokerage fee, financial advisory fee, commission
or finder's fee in connection with such transactions. Seller and
Purchaser each agree to indemnify and hold harmless the other
from and against any and all loss, liability, damage, cost, claim
or expense (including without limitation attorneys' fees)
incurred by reason of any such commission, brokerage fee,
financial advisory fee or finder's fee alleged to be payable
because of any act, omission or statement of the indemnifying
party.
SECTION 6.3. ANNOUNCEMENTS. Purchaser and Seller will
consult with each other regarding press releases or other public
announcements related to this Purchase Agreement, any other
Transfer Document, and the transactions contemplated hereby or
thereby, and neither Purchaser or Seller shall issue any such
press release or announcement without the prior written consent
of the other, except as otherwise required by Applicable Law.
SECTION 6.4. COUNTERPARTS; EFFECTIVE DATE. This
Purchase Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall
together constitute but one and the same instrument. This
Purchase Agreement shall become effective as of the later of the
dates set forth below under the signatures of the officers of the
parties hereto on the execution page hereof.
SECTION 6.5. AMENDMENTS, ETC.; ENTIRE PURCHASE
AGREEMENT. This Purchase Agreement and the other Transfer
Documents contain the entire agreement of the parties with
respect to the subject matter hereof and thereof, and supersede
all prior agreements and understandings between the parties,
whether written or oral. Neither this Purchase Agreement, nor
the other Transfer Documents, nor any of the terms hereof or
thereof may be terminated, amended, supplemented, waived or
modified orally, but only by an instrument which purports to
terminate, amend, supplement, waive or modify this Purchase
Agreement or the other Transfer Documents, or any of the terms
hereof or thereof, signed by the party against which the
enforcement of the termination, amendment, supplement, waiver or
modification is sought. The schedules, exhibits and appendices
attached to this Purchase Agreement constitute a part of this
Purchase Agreement and are incorporated herein by reference as is
set forth in full in the main body of this Purchase Agreement.
SECTION 6.6. SUCCESSORS AND ASSIGNS. This Purchase
Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors and assigns. Neither party
hereto shall assign its rights hereunder without the consent of
the other party unless required to do so by Applicable Law.
SECTION 6.7. GOVERNING LAW. This agreement, including
all matters of construction, validity and performance, shall in
all respects be governed by, and construed in accordance with,
the law of the Commonwealth of Pennsylvania applicable to
contracts made in such state and to be performed entirely within
such state, without giving effect to principles relating to
conflicts of law.
SECTION 6.8. NOTICES. All notices, offers,
acceptances, approvals, waivers, requests, demands and other
communications hereunder or under any instrument, certificate or
other instrument delivered in connection with the transactions
described herein shall be in writing, shall be addressed as
provided below and shall be considered as properly given (a) if
delivered in person, (b) if sent by overnight delivery service,
(c) if mailed by first class United States mail, postage prepaid,
registered or certified with return receipt requested, (d) if
send by prepaid telegram or by telex and confirmed, or (e) if
sent by any electronic data transmission facility and confirmed.
Notice so given shall be effective upon receipt; provided, that
--------
if any notice is tendered to any addressee and the delivery
thereof is refused by such addressee, such notice shall be
effective upon such tender. For the purposes of notice, the
address of the parties shall be as set forth below; provided,
--------
that any party shall have the right to change its address for
notice hereunder to any other location by the giving of prior
notice to the other party in the manner set forth hereinabove.
The initial addresses of the parties hereto are as follows:
Seller: WESTINGHOUSE ELECTRIC CORPORATION
11 Stanwix Street
Gateway Six
Pittsburgh, PA 15222
Attention: Financial Services Business Unit,
Manager of Administration
Fax: 412/642-3821
Purchaser: U.S. ENVIROSYSTEMS, INC.
515 North Flageler Drive
Suite 202
West Palm Beach, FL 33401
Fax:
SECTION 6.9. SEVERABILITY OF PROVISIONS. Any
provision of this Purchase Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions
hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
SECTION 6.10. HEADINGS. The headings used herein are
for convenience of reference only and shall not define or limit
any of the terms or provisions hereof.
SECTION 6.11. SURVIVAL. The representations,
warranties and covenants of the parties contained in this
Purchase Agreement, the other Transfer Documents, or in any
instrument, certificate or other document delivered in connection
herewith or therewith, shall survive execution and delivery
hereof and of the other Transfer Documents.
SECTION 6.12. FURTHER ASSURANCES. Seller and
Purchaser shall do and perform such further acts and execute and
deliver such further instruments as may be required by law or
reasonably requested by either party to carry out and effectuate
the purposes of this Purchase Agreement and any other Transfer
Documents and to more effectively put Purchaser in possession and
control of all or any part of the Loan Transaction.
SECTION 6.13. NON-RECOURSE. Purchaser acknowledges
that it has independently made its own appraisal of the
creditworthiness of the Borrower and the value of any collateral
pledged under the Transaction Documents and that Seller's
obligations with respect to the Loan Transaction shall be
nonrecourse and Seller's liability shall be limited to the
express representations, warranties and covenants set forth
herein and in the other Transfer Documents.
IN WITNESS WHEREOF, the parties hereto have caused this
Purchase Agreement to be duly executed and delivered by their
respective officers thereunto duly authorized as of the day and
year set forth below under the signatures of their respective
officers.
SELLER: WESTINGHOUSE ELECTRIC CORPORATION
By:------------------------------
Name:----------------------------
Title:---------------------------
Date:----------------------------
PURCHASER: U.S. ENVIROSYSTEMS, INC.
By:------------------------------
Name:----------------------------
Title:---------------------------
Date:----------------------------
<PAGE>
Schedule 1
THE LOAN TRANSACTION
FAR WEST ($8M)
--------------
Far West Electric Energy Fund, L.P., a Delaware limited
partnership, as borrower ("Far West"), and Westinghouse Electric
Corporation, successor by merger to Westinghouse Credit
Corporation, as lender ("WEC"), entered into a Term Loan
Agreement dated as of December 28, 1989 (the "Loan Agreement"),
under which Far West borrowed from WEC the sum of $8 million
("Loan") in order to refinance previously obtained permanent
financing for a 5.0 MW (net) geothermal electric generation
facility located in Washoe County, Nevada (the "Project"). The
Loan was evidenced by a certain Promissory Note dated January 16,
1990 (the "Note"), executed pursuant to the Loan Agreement.
Repayment of the Loan and the Note, and performance of Far
West's obligations under the Loan Agreement, was secured, in
part, by an assignment of Far West's right, title and interest in
and to certain agreements (the "Assigned Agreements"), granted to
WEC pursuant to that certain Collateral Assignment dated as of
December 28, 1989 ("Far West Assignment"). The Note is also
secured by a Deed of Trust executed in favor of WEC covering a
leasehold interest in certain real property situated in Washoe
County, Nevada and a Security Agreement under which Far West
granted security interests to WEC.
The outstanding principal balance of the Loan on the Closing
Date is $4,562,363.69.
Schedule 1
THE LOAN TRANSACTION
1-A ENTERPRISES ($3M)
---------------------
1-A Enterprises, a Nevada general partnership, as borrower
("1-A Enterprises"), and Westinghouse Electric Corporation,
successor by merger to Westinghouse Credit Corporation, as lender
("WEC"), entered into Term Loan Agreement dated as of December
28, 1989 (the "Loan Agreement"), under which 1-A Enterprises
borrowed from WEC the sum of $3 million ("Loan") in order to
refinance previously obtained permanent financing for a 1.8 MW
(net) geothermal electric generation facility located in Washoe
County, Nevada (the "Project"). The Loan was evidenced by a
certain Promissory Note dated January 16, 1990 (the "Note"),
executed pursuant to the Loan Agreement.
Repayment of the Loan and the Note, and performance of 1-A
Enterprises' obligations under the Loan Agreement, was secured by
an assignment of 1-A Enterprises' right, title and interest in
and to certain agreements (the "Assigned Agreements"), granted to
WEC pursuant to that certain Collateral Assignment dated as of
December 28, 1989 ("1-A Assignment"). The Note is also secured
by a Deed of Trust executed in favor of WEC covering a
sub-leasehold interest in certain real property situated in
Washoe County, Nevada and a Security Agreement under which 1-A
Enterprises granted security interests to WEC.
The outstanding principal balance of the Loan on the Closing
Date is $1,670,995.22.
<PAGE>
Schedule 2
MATERIAL TRANSACTION DOCUMENTS
FAR WEST
--------
1. Term Loan Agreement dated December 28, 1989 between
Westinghouse Electric Corporation successor by merger to
Westinghouse Credit Corporation ("Lender") and Far West
Electric Energy Fund, L.P., a Delaware limited partnership
("Borrower").
2. Promissory Note dated January 16, 1990, in the principal
amount of $8,000,000.00, payable by Far West Electric Energy
Fund, L.P. as Borrower to Westinghouse Credit Corporation.
3. Leasehold Trust Deed and Security Agreement
4. Security Agreement
5. Collateral Assignment dated December 28, 1989 between Far
West Electric Energy Fund, L.P., a DE limited partnership,
Assignor, and WCC, Assignee, relating to the Term Loan
Agreement dated December 28, 1989.
6. Escrow Agreement
1-A ENTERPRISES
---------------
1. Term Loan Agreement dated December 28, 1989 between
Westinghouse Electric Corporation successor by merger to
Westinghouse Credit Corporation ("Lender") and 1-A
Enterprises, a Nevada general partnership ("Borrower").
2. Promissory Note dated January 16, 1990, in the principal
amount of $3,000,000.00, payable by 1-A Enterprises as
Borrower to Westinghouse Credit Corporation.
3. Leasehold Trust Deed and Security Agreement
4. Security Agreement
5. Collateral Assignment dated December 28, 1989 between 1-A
Enterprises, Nevada general partnership, Assignor, and WCC,
Assignee, relating to the Term Loan Agreement dated December
28, 1989.
6. Escrow Agreement
<PAGE>
EXHIBIT A
ASSIGNMENT AND ASSUMPTION AGREEMENT
-----------------------------------
ASSIGNMENT AND ASSUMPTION AGREEMENT, dated as of the
later of the dates set forth below the signatures hereto, (this
"Agreement"), between WESTINGHOUSE ELECTRIC CORPORATION,
successor in interest by merger to Westinghouse Credit
Corporation, a Pennsylvania corporation ("Seller"), and U.S.
ENVIROSYSTEMS, INC., a ------------ corporation ("Purchaser").
SECTION 1. DEFINITIONS. For purposes of this
Agreement, the following specific terms shall have the respective
meanings set forth below.
BORROWER shall mean any person identified as such in
any of the Transaction Documents.
LIEN shall mean any mortgage, pledge, security
interest, encumbrance, lien, easement, servitude or charge of any
kind.
LOAN TRANSACTION shall mean the loan transaction
identified in Schedule 1 hereto.
TRANSACTION DOCUMENTS shall mean all of the agreements,
instruments, certificates, financing statements and other
documents of any nature executed in connection with the Loan
Transaction, including any amendments, modification or
supplements thereof from time to time.
SECTION 2. SALE AND ASSIGNMENT. Seller, for good and
valuable consideration to it, receipt of which is hereby
acknowledged, does hereby assign, transfer, sell and convey unto
Purchaser all of Seller's right, title and interest in and to the
Loan Transaction, subject to no liens other than Liens created
pursuant to or permitted by the Transaction Documents, to have
and hold the said Loan Transaction unto Purchaser to and for its
use forever, provided, however, that Seller retains and does not
-------- -------
assign to Purchaser hereby, all benefits accrued and all rights
vested pursuant to the Transaction Documents in respect of the period
prior to the date hereof, including, without limitation, all
rights to indemnification by the Borrower and all amounts due
from any predecessor to the current Borrower.
SECTION 3. ASSUMPTION. (a) Purchaser hereby assumes
all of the duties and obligations of Seller under the Transaction
Documents arising or accruing on or after the date hereof, and
agrees that it shall be bound by all the terms of, and shall
undertake all the obligations of the Seller contained in, the
Transaction Documents, whether arising on or subsequent to the
date hereof.
(b) Purchaser and Seller hereby covenant and agree to
execute and to deliver to the other parties to the Transaction
Documents from time to time such other documents, instruments and
agreements as they reasonably may request in order to further
evidence the assignment, assumption and substitution effected
hereby or otherwise to carry out the purposes and intent of this
Agreement.
SECTION 4. NOVATION. Upon the effectiveness hereof in
accordance with Section 7, Seller shall be released and
discharged from each obligation, liability or duty pursuant to
the Transaction Documents arising or accruing on or after the
date of effectiveness hereof and Purchaser shall be substituted
in lieu of Seller as a party to each of the Transaction Documents
to which Seller is a party.
SECTION 5. SUCCESSORS AND ASSIGNS. This Agreement
shall be binding upon and inure to the benefit of the parties
hereto and their successors and assigns and shall inure to the
benefit of the other parties to the Transaction Documents.
SECTION 6. GOVERNING LAW. This agreement, including
all matters of construction, validity and performance, shall in
all respects be governed by, and construed in accordance with,
the law of the Commonwealth of Pennsylvania applicable to
contracts made in such state and to be performed entirely within
such state, without giving effect to principles relating to
conflicts of law.
SECTION 7. COUNTERPARTS; EFFECTIVE DATE. This
Agreement may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall
be an original, but all such counterparts shall together
constitute but one and the same instrument. This Agreement shall
become effective as of the later of the dates set forth below
under the signatures of the officers of the parties hereto on the
execution page hereof.
IN WITNESS WHEREOF, the parties hereto have each caused
this Agreement to be duly executed and delivered by their
respective officers thereunto duly authorized as of the date and
year set forth below under the signatures of their respective
officers.
SELLER: WESTINGHOUSE ELECTRIC CORPORATION
By:------------------------------
Name:----------------------------
TITLE:---------------------------
DATE:----------------------------
PURCHASER: U.S. ENVIROSYSTEMS, INC.
By:------------------------------
Name:----------------------------
TITLE:---------------------------
DATE:----------------------------
<PAGE>
EXHIBIT B
-----------------, 1995
To Each Party Listed on
the Attached Schedule:
WESTINGHOUSE ELECTRIC CORPORATION
ENVIROSYSTEMS, INC.
Purchase and Sale of
A Loan Transaction
Dear Sirs:
We have acted as special counsel for ENVIROSYSTEMS,
INC., a ----------------------- corporation ("Purchaser"), in
connection with the execution and delivery by Purchaser of (i)
the Purchase Agreement, dated as of ---------------, 1995
(the "Purchaser Agreement"), between WESTINGHOUSE ELECTRIC
CORPORATION ("Seller") and Purchaser, (ii) the Assignment and
Assumption Agreement, dated the date hereof, between Seller and
Purchaser ("Assignment Agreement"). Capitalized terms used
herein, and not otherwise defined herein, shall have the
respective meanings assigned to such terms in the Purchase
Agreement.
In connection with this opinion, we have examined the
originals or certified, conformed or reproduction copies, of all
records, agreements, instruments and documents as we deemed
relevant and necessary as the basis for the opinions hereinafter
expressed. As to factual matters not independently established
by us, we have relied upon certificates of officers of Purchaser
and of public officials.
In such examination we have assumed the genuineness of
all signatures on the documents which we have examined other than
the signatures of persons acting on behalf of Purchaser with
respect to the Transfer Documents, the authenticity of all
documents submitted to us as originals, and the conformity with
the originals (and the authenticity of such originals) of all
documents submitted to us as copies. We have also assumed that
each of the Transfer Documents has been duly authorized, executed
and delivered by the parties thereto, other than Purchaser, and
constitute the legal, valid and binding obligations of the
parties thereto, other than Purchaser.
Based upon and subject to the foregoing and the further
exceptions, limitations and qualifications set forth below, we
are of the opinion that:
1. Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of the
Commonwealth of ---------------, and has the corporate
power and authority to enter into and perform its
obligations under each Transfer Document.
2. The Purchase Agreement and the Assignment Agreement
have each been duly authorized by all necessary
corporate action on the part of the Purchaser and do
not require the consent or approval of any stockholder
of Purchaser (except for any consent or approval as has
been duly obtained, given or accomplished).
3. Each of the Purchase Agreement and the Assignment
Agreement constitutes a legal, valid and binding
agreement of Purchaser, enforceable against Purchaser
in accordance with its respective terms.
4. Neither the execution, delivery or performance by
Purchaser of the Purchase Agreement and Assignment
Agreement nor the consummation by Purchaser of the
transactions contemplated thereby:
(a) Conflicts with, or results in the breach of, any
provision of Purchaser's Articles of Incorporation
or Bylaws;
(b) Contravenes any statute or regulation of the
United States or the Commonwealth of Pennsylvania
applicable to Purchaser; or
(c) Requires any governmental action by any
Governmental Authority with respect to Purchaser
under federal law or the law of the Commonwealth
of Pennsylvania, except such governmental actions
as are contemplated by the Transfer Documents or
such as have been duly obtained, given or
accomplished.
The opinion set forth in Paragraph 3 above is subject
to the qualification that enforceability of the Purchaser
Agreement and the Assignment Agreement in accordance with their
respective terms, may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and
general principles of equity (regardless of whether such
enforceability is considered in a proceeding at law or at
equity). In rendering the opinions above, we express no opinion
with respect to any of the Transaction Documents.
This opinion is being delivered pursuant to Section
3.2(f) of the Purchase Agreement for the sole benefit of the
Persons listed on the Schedule attached hereto in connection with
the transactions contemplated by the Transfer Documents, and no
other Person shall be entitled to rely on this opinion without
the express written consent of the undersigned. This opinion is
limited to the matters stated herein, and no opinion is implied
or may be inferred beyond the matters expressly stated herein.
Very truly yours,
Schedule
--------
U.S. EnviroSystems, Inc.
515 North Flageler Drive
Suite 202
West Palm Beach, FL 33401
Westinghouse Electric Corporation
11 Stanwix Street
Gateway Six
Pittsburgh, PA 15222
<PAGE>
EXHIBIT C
To Each Party Listed on
the Attached Schedule
WESTINGHOUSE ELECTRIC CORPORATION
U.S. ENVIROSYSTEMS, INC.
Purchase and Sale of
A Loan Transaction
Dear Sirs:
We have acted as Special Counsel to Westinghouse
Electric Corporation ("Seller") in connection with the execution
and deliver by Seller of (i) a Purchase Agreement, dated as of --
-------------, 1995, (the "Purchase Agreement"), between Seller
and EnviroSystems, Inc. ("Purchaser"), (ii) the Assignment and
Assumption Agreement, dated the date hereof (the "Assignment
Agreement"), between Seller and Purchaser. Capitalized terms
used herein, and not otherwise defined herein, shall have the
respective meanings assigned to such terms in the Purchase
Agreement.
We have examined originals or copies, certified or
otherwise identified to our satisfaction, of the following: the
Purchase Agreement and the Assignment Agreement, the other
Transfer Documents, the Transaction Documents and such other
documents, corporate records, agreements and other instruments,
certificates, opinions, correspondence with public officials and
certificates of other officers as we have deemed necessary or
appropriate for the purposes of rendering this opinion. In such
examination we have assumed the genuineness of all signatures on
the documents which we have examined, other than the signatures
of persons acting on behalf of Seller, the authenticity of all
documents submitted to us as originals, and the conformity with
the originals (and the authenticity of such originals) of all
documents submitted to us as copies.
Based on and in reliance upon the foregoing, and
subject to the qualifications set forth below, we are of the
opinion that:
1. Seller has been duly incorporated and is validly
existing and is in good standing under the laws of
Pennsylvania and has the corporate power and authority
to enter into and to perform its obligations under the
Transfer Documents.
2. Assuming the Purchase Agreement and Assignment
Agreement, have been duly authorized, executed and
delivered by the parties thereto, other than Seller,
and constitute the legal, valid and binding obligations
of the parties thereto, other than Seller, each of the
Purchase Agreement and the Assignment Agreement has
been duly authorized, executed and delivered by Seller
and constitutes the legal, valid and binding obligation
of Seller, enforceable against Seller in accordance
with its terms.
3. The execution, delivery and performance by Seller of
the Purchase Agreement and the Assignment Agreement are
not in violation of the Certificates of Incorporation
or Bylaws of Seller, or of any material indenture,
mortgage, credit agreement, note or bond purchase
agreement to which Seller is a party and which would
have a material adverse effect on Seller, and do not
contravene any federal, or Pennsylvania statute or
regulation.
4. Neither the execution, delivery or performance by
Seller of the Purchase Agreement, the Assignment
Agreement, nor the consummation by Seller of any of the
transactions contemplated thereby constitutes a
material breach or violation by Seller of the
Transaction Documents (not otherwise consented to, or
waived by, the appropriate Person thereunder) or
contravenes any federal, or Pennsylvania law applicable
to Seller on or before the Closing Date, except such as
are contemplated by the Transfer Documents or such as
have been duly obtained, given or accomplished.
The opinion set forth in paragraph 2 above is subject
to the qualification that the enforceability of the Purchase
Agreement, the Assignment Agreement, and the FAA Assignment may
be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of
creditors' rights generally and general principles of equity
(regardless of whether such enforceability is considered in a
proceeding at law or at equity).
We are qualified to practice law in the Commonwealth of
Pennsylvania and we express no opinion herein concerning any laws
other than the laws of the Commonwealth of Pennsylvania, and the
laws of the United States.
This opinion is being delivered pursuant to Section
3.3(i) of the Purchase Agreement for the sole benefit of the
Persons listed on the Schedule attached hereto, and no other
Person shall be entitled to rely on this opinion without the
express written consent of the undersigned. This opinion is
limited to the matters stated herein, and no opinion is implied
or may be inferred beyond the matters expressly stated herein.
Very truly yours,
<PAGE>
Schedule
--------
Westinghouse Electric Corporation
11 Stanwix Street
Gateway Six
Pittsburgh, PA 15222
U.S. EnviroSystems, Inc.
515 North Flageler Drive
Suite 202
West Palm Beach, FL 33401
<PAGE>
AMENDMENT TO LEASE AGREEMENT
----------------------------
This Amendment to Purchase Agreement made and entered into
as of the 15th day of January, 1996, by and between WESTINGHOUSE
ELECTRIC CORPORATION, a Pennsylvania corporation, hereinafter
referred to as "Seller" and U.S. ENVIRONMENTAL SYSTEMS, a
Delaware corporation, hereinafter referred to as "Purchaser".
WITNESSETH:
WHEREAS, Seller and Purchaser entered into a Purchase
Agreement, dated November 6, 1995, relating to the Sale by Seller
of a certain Loan Transaction, said Purchase Agreement being
hereinafter referred to as "Purchase Agreement".
WHEREAS, the parties desire to amend said Purchase Agreement
in accordance with the provisions hereinafter set forth; and
NOW, THEREFORE, intending to be legally bound hereby, it is
agreed between the parties as follows:
1. Paragraph 2.1(a) of Purchase Agreement shall be deleted
and in lieu thereof the following provisions shall be
substituted:
SECTION 2.1. Sale and Purchase; Termination.
(a) Subject to the terms and conditions set forth herein,
Seller agrees to sell, transfer and assign to Purchaser, and
Purchase agrees to purchase and accept from Seller, the Loan
Transaction on November 15, 1995, or on such other date but in no
event later than March 15, 1996, as may be agreed upon by the
parties (the "Closing Date"). Time is of the essence as to such
Closing Date.
2. Paragraph 2.2(a) and 2.2(e) shall be deleted and in
lieu thereof the following provisions shall be substituted:
(a) The purchase price payable by Purchaser to Seller for
the Loan Transaction on the Closing Date shall be Four Million
Three Hundred Six Thousand One Hundred Twenty-Two and 64/100
Dollars ($4,306,122.64) plus Interest, as defined in paragraph
(c) (collectively the "Purchase Price"). The Purchase Price
shall be payable by Seller in lawful currency of the United
States of America in the manner contemplated by paragraph (b) of
this Section 2.2. In addition to the Purchase Price, it is
agreed that the payment due January 20, 1996 under the terms of
the Loan Transaction shall be retained by Seller resulting in a
remaining principal balance in the amount of Five Million Nine
Hundred Thirty-Nine Thousand Four Hundred Eighty-One and 58/100
Dollars ($5,939,481.58) under the terms of the Transaction
Documents.
(b) Interest. As part of the Purchase Price, Purchaser
herein agrees to pay to Seller at closing, additional
consideration in an amount equal to the amount of interest
calculated at a rate equal to and pursuant to the terms of the
Transaction Documents prorated for the period January 20, 1996
through the Closing Date, inclusive ("Interest").
3. Schedule 1 The Loan Transaction Far West ($8M) is
hereby amended by deleting $4,562,363.69 from the last sentence
on the Schedule and substituting $4,346,084.17. Schedule 1 1-A
Enterprises ($3M) is hereby amended by deleting $1,670,995.22
from the last sentence on the Schedule and substituting
$1,593,397.41.
4. In all other respects the Purchase Agreement shall
remain in full force and effect.
WITNESS the hands and seals of the parties the day and year
first above written.
SELLER: WESTINGHOUSE ELECTRIC CORPORATION
By:------------------------------
Name:----------------------------
Title:---------------------------
Date:----------------------------
PURCHASER: U.S. ENVIROSYSTEMS, INC.
By:------------------------------
Name:----------------------------
Title:---------------------------
Date:----------------------------
<PAGE>
SECOND AMENDMENT TO PURCHASE AGREEMENT
--------------------------------------
This Second Amendment to Purchase Agreement made and entered
into as of the 16th day of March, 1996, by and between
WESTINGHOUSE ELECTRIC CORPORATION, a Pennsylvania corporation,
hereinafter referred to as "Seller" and U.S. ENVIRONMENTAL
SYSTEMS, a Delaware corporation, hereinafter referred to as
"Purchaser".
WITNESSETH:
WHEREAS, Seller and Purchaser entered into a Purchase
Agreement, dated November 6, 1995, as amended pursuant to
Amendment dated as of January 15, 1996, relating to the Sale by
Seller of a certain Loan Transaction, said Purchase Agreement
being hereinafter referred to as "Purchase Agreement".
WHEREAS, the parties desire to amend said Purchase Agreement
in accordance with the provisions hereinafter set forth; and
NOW, THEREFORE, intending to be legally bound hereby, it is
agreed between the parties as follows:
1. Paragraph 2.1(a) of Purchase Agreement shall be deleted
and in lieu thereof the following provisions shall be
substituted:
SECTION 2.1. Sale and Purchase; Termination.
(a) Subject to the terms and conditions set forth herein,
Seller agrees to sell, transfer and assign to Purchaser, and
Purchase agrees to purchase and accept from Seller, the Loan
Transaction on November 15, 1995, or on such other date but in no
event later than May 15, 1996, as may be agreed upon by the
parties (the "Closing Date"). Time is of the essence as to such
Closing Date.
2. Paragraph 2.2(a) and 2.2(e) shall be deleted and in
lieu thereof the following provisions shall be substituted:
(a) The purchase price payable by Purchaser to Seller
for the Loan Transaction on the Closing Date shall be Three
Million Nine Hundred Seventy-three Thousand Six Hundred
Thirty-seven and 01/100 Dollars ($3,973,637.01) plus Interest, as
defined in paragraph (c) (collectively the "Purchase Price").
The Purchase Price shall be payable by Seller in lawful currency
of the United States of America in the manner contemplated by
paragraph (b) of this Section 2.2. In addition to the Purchase
Price, it is agreed that the payment due April 20, 1996 under the
terms of the Loan Transaction shall be retained by Seller
resulting in a remaining principal balance in the amount of Five
Million Six Hundred Six Thousand Nine Hundred Ninety-five and
96/100 Dollars ($5,606,995.96) under the terms of the Transaction
Documents.
(b) Interest. As part of the Purchase Price, Purchaser
herein agrees to pay to Seller at closing, additional
consideration in an amount equal to the amount of interest
calculated at a rate equal to and pursuant to the terms of the
Transaction Documents prorated for the period April 20, 1996
through the Closing Date, inclusive ("Interest").
3. Schedule 1 The Loan Transaction Far West ($8M) is
hereby amended by deleting $4,346,084.17 from the last sentence
on the schedule and substituting $4,093,378.79. Schedule 1 1-A
Enterprises ($3M) is hereby amended by deleting $1,593,397.41
from the last sentence on the Schedule and substituting
$1,513,617.16.
4. In all other respects the Purchase Agreement shall
remain in full force and effect.
WITNESS the hands and seals of the parties the day and year
first above written.
SELLER: WESTINGHOUSE ELECTRIC CORPORATION
By:------------------------------
Name:----------------------------
Title:---------------------------
Date:----------------------------
PURCHASER: U.S. ENVIROSYSTEMS, INC.
By:------------------------------
Name:----------------------------
Title:---------------------------
Date:----------------------------
<PAGE>
THIRD AMENDMENT TO PURCHASE AGREEMENT
-------------------------------------
This Third Amendment to Purchase Agreement made and entered
into as of the 15th day of May, 1996, by and between WESTINGHOUSE
ELECTRIC CORPORATION, a Pennsylvania corporation, hereinafter
referred to as "Seller" and U.S. ENVIRONMENTAL SYSTEMS, a
Delaware corporation, hereinafter referred to as "Purchaser".
WITNESSETH:
WHEREAS, Seller and Purchaser entered into a Purchase
Agreement, dated November 6, 1995, as amended pursuant to
Amendment dated as of January 15, 1996, relating to the Sale by
Seller of a certain Loan Transaction, said Purchase Agreement
being hereinafter referred to as "Purchase Agreement".
WHEREAS, the parties desire to amend said Purchase Agreement
in accordance with the provisions hereinafter set forth; and
NOW, THEREFORE, intending to be legally bound hereby, it is
agreed between the parties as follows:
1. Paragraph 2.1(a) of Purchase Agreement shall be deleted
and in lieu thereof the following provisions shall be
substituted:
SECTION 2.1. Sale and Purchase; Termination.
(a) Subject to the terms and conditions set forth herein,
Seller agrees to sell, transfer and assign to Purchaser, and
Purchaser agrees to purchase and accept from Seller, the Loan
Transaction on November 15, 1995, or on such other date but in no
event later than June 15, 1996, as may be agreed upon by the
parties (the "Closing Date"). Time is of the essence as to such
Closing Date.
2. Paragraph 2.2(a) and 2.2(e) shall be deleted and in
lieu thereof the following provisions shall be substituted:
(a) The purchase price payable by Purchaser to Seller for
the Loan Transaction on the Closing Date shall be Three Million
Nine Hundred Seventy-three Thousand Six Hundred Thirty-seven and
01/100 Dollars ($3,973,637.01) plus Interest, as defined in
paragraph (c) (collectively the "Purchase Price"). The Purchase
Price shall be payable by Seller in lawful currency of the United
States of America in the manner contemplated by paragraph (b) of
this Section 2.2. In addition to the Purchase Price, it is
agreed that the payment due April 20, 1996 under the terms of the
Loan Transaction shall be retained by Seller resulting in a
remaining principal balance in the amount of Five Million Six
Hundred Six Thousand Nine Hundred Ninety-five and 96/100 Dollars
($5,606,995.96) under the terms of the Transaction Documents.
(b) Interest. As part of the Purchase Price, Purchaser
herein agrees to pay to Seller at closing, additional
consideration in an amount equal to the amount of interest
calculated at a rate equal to and pursuant to the terms of the
Transaction Documents prorated for the period April 20, 1996
through the Closing Date, inclusive ("Interest").
3. Schedule 1 The Loan Transaction Far West ($8M) is
hereby amended by deleting $4,346,084.17 from the last sentence
on the schedule and substituting $4,093,378.79. Schedule 1 1-A
Enterprises ($3M) is hereby amended by deleting $1,593,397.41
from the last sentence on the Schedule and substituting
$1,513,617.16.
4. In all other respects the Purchase Agreement shall
remain in full force and effect.
WITNESS the hands and seals of the parties the day and year
first above written.
SELLER: WESTINGHOUSE ELECTRIC CORPORATION
By:------------------------------
Name:----------------------------
Title:---------------------------
Date:----------------------------
PURCHASER: U.S. ENVIROSYSTEMS, INC.
By:------------------------------
Name:----------------------------
Title:---------------------------
Date:----------------------------
<PAGE>
FOURTH AMENDMENT TO PURCHASE AGREEMENT
--------------------------------------
This Fourth Amendment to Purchase Agreement made and entered
into as of the 15th day of June, 1996, by and between
WESTINGHOUSE ELECTRIC CORPORATION, a Pennsylvania corporation,
hereinafter referred to as "Seller" and U.S. ENVIRONMENTAL
SYSTEMS, a Delaware corporation, hereinafter referred to as
"Purchaser".
WITNESSETH:
WHEREAS, Seller and Purchaser entered into a Purchase
Agreement, dated November 6, 1995, as amended, relating to the
Sale by Seller of a certain Loan Transaction, said Purchase
Agreement being hereinafter referred to as "Purchase Agreement".
WHEREAS, the parties desire to amend said Purchase Agreement
in accordance with the provisions hereinafter set forth; and
NOW, THEREFORE, intending to be legally bound hereby, it is
agreed between the parties as follows:
1. Paragraph 2.1(a) of Purchase Agreement shall be deleted
and in lieu thereof the following provisions shall be
substituted:
SECTION 2.1. Sale and Purchase; Termination.
(a) Subject to the terms and conditions set forth herein,
Seller agrees to sell, transfer and assign to Purchaser, and
Purchase agrees to purchase and accept from Seller, the Loan
Transaction on November 15, 1995, or on such other date but in no
event later than August 15, 1996, as may be agreed upon by the
parties (the "Closing Date"). Time is of the essence as to such
Closing Date.
2. Paragraph 2.2(a) and 2.2(e) shall be deleted and in
lieu thereof the following provisions shall be substituted:
(a) The purchase price payable by Purchaser to Seller for
the Loan Transaction on the Closing Date shall be Three Million
Six Hundred Sixty-Two Thousand Seven Hundred Eighty-Seven and
22/100 Dollars ($3,662,787.22) plus Interest, as defined in
paragraph (c) (collectively the "Purchase Price"). The Purchase
Price shall be payable by Seller in lawful currency of the United
States of America in the manner contemplated by paragraph (b) of
this Section 2.2. In addition to the Purchase Price, it is
agreed that the payment due July 20, 1996 under the terms of the
Loan Transaction shall be retained by Seller resulting in a
remaining principal balance in the amount of Five Million Two
Hundred Ninety-Six Thousand One Hundred Forty-Six and 17/100
Dollars ($5,296,146.17) under the terms of the Transaction
Documents.
(b) Interest. As part of the Purchase Price, Purchaser
herein agrees to pay to Seller at closing, additional
consideration in an amount equal to the amount of interest
calculated at a rate equal to and pursuant to the terms of the
Transaction Documents prorated for the period July 20, 1996
through the Closing Date, inclusive ("Interest").
3. Schedule 1 The Loan Transaction Far West ($8M) is
hereby amended by deleting $4,093,378.79 from the last sentence
on the schedule and substituting $3,864,553.07. Schedule 1 1-A
Enterprises ($3M) is hereby amended by deleting $1,513,617.16
from the last sentence on the Schedule and substituting
$1,431,593.10.
4. In all other respects the Purchase Agreement shall
remain in full force and effect.
WITNESS the hands and seals of the parties the day and year
first above written.
SELLER: WESTINGHOUSE ELECTRIC CORPORATION
By:------------------------------
Name:----------------------------
Title:---------------------------
Date:----------------------------
PURCHASER: U.S. ENVIROSYSTEMS, INC.
By:------------------------------
Name:----------------------------
Title:---------------------------
Date:----------------------------
EXHIBIT 10.23
[LETTERHEAD OF BLUEBEARD'S CASTLE]
August 6, 1996
U.S. Energy Systems, Inc.
515 N. Flagler Drive
Suite 202
West Palm Beach, FL 33401
Gentlemen:
This letter will serve as our understanding that U.S. Energy
Systems, Inc., Bluebeard's Castle, Inc., and Bluebeard's Hilltop
Villas Condominium Associations et al have agreed to undertake a
joint venture to build and operate a power plant and water
treatment facility at Bluebeard's Castle in St. Thomas, USVI,
which will sell electric energy and potable water to end users in
and contiguous to Bluebeard's Castle.
The final Joint Development Agreement will be in form and
substance as that attached herewith. While it is understood that
U.S. Energy Systems, Inc. and Bluebeard's Castle, Inc., have
concurred with the Joint Development Agreement, and while no
impediments to concurrence are expected by Bluebeard's Hilltop
Villas Condominium Associations, et al (individual members have
already been notified by letter and have actually commenced
funding), official execution by the Associations can only take
place at the next association board meeting now being scheduled.
With the shipment by you of the initial engine-generator, funding
for which has been arranged, the project has, de factor, begun.
Very truly yours,
BLUEBEARD'S CASTLE, INC.
By: /s/ John H. Cavanaugh
President
AGREED:
U.S. ENERGY SYSTEMS, INC.
By: /s/ Richard H. Nelson President
------------------------
Exhibit 11.1
U.S. Energy Systems, Inc. and Subsidiaries
(Formerly U.S. Envirosystems, Inc.)
Earnings Per Share Calculations Historical
January 31, 1996
Number Number Weighted
of Shares of Days Average
Out- Out- Number
Date standing standing of Shares
---- -------- -------- ---------
Shares outstanding at
February 1, 1995 . . . . . . . 434,650 365 434,650
Add: issuance of Common Stock
Indus, LLC . . . . . . . . . . . 5/4/95 2,500 272 1,863
Bruce Galloway . . . . . . . . . 3/7/95 2,500 330 2,260
------ ---------
439,650 438,773
=========
(Loss) before extraordinary
item . . . . . . . . . . . . . (1,474,000)
Dividends on Preferred Stock . . (21,000)
(Loss) available to common
stockholders . . . . . . . . . (1,495,000)
(Loss) per share before
extraordinary item . . . . . . (3.41)
---------
Net (loss) . . . . . . . . . . . (1,391,000)
Dividends on Preferred Stock . . (21,000)
---------
(Loss) available to common
stockholders . . . . . . . . . 1,412,000)
Net (loss) per share . . . . . . (3.22)
=========
Exhibit 11.2
U.S. Energy Systems, Inc. and Subsidiaries
(Formerly U.S. Envirosystems, Inc.)
Earnings Per Share Calculations Historical
April 30, 1996
Number Number Weighted
of Shares of Days Average
Out- Out- Number
Date standing standing of Shares
---- -------- -------- ---------
Shares outstanding at
February 1, 1995 . . . . . . . 434,650 90 434,650
Add: issuance of Common Stock
Indus, LLC . . . . . . . . . . . 5/4/95 2,500 90 2,500
Bruce Galloway . . . . . . . . . 3/7/95 2,500 89 2,472
------ ---------
439,650 439,622
=========
Net (loss) . . . . . . . . . . . (430,0000)
Dividends on Preferred Stock . . (14,000)
---------
(Loss) available to common
stockholders . . . . . . . . . (444,000)
Net (loss) per share . . . . . . (1.01)
=========
Exhibit 11.3
U.S. Energy Systems, Inc. and Subsidiaries
Pro Forma Earnings Per share Calculation
January 31, 1996
Number of shares issued
and outstanding . . . . . . . 439,650
Anchor preferred stock
converted to common . . . . . 129,740
Conversion of debentures
($500,000 principal) . . . . . 125,000
New issue per prospectus,
limited to use of proceeds
Total use of proceeds . . . . . 3,739,000
Net proceeds per share
= $5,425,000/1,625,000 . . . . 3.34 1,119,461
----------
Total common shares
outstanding . . . . . . . . . 1,813,851
==========
Options and warrants
outstanding to purchase
equivalent shares . . . . . . 1,927,705
20% limitation on
assumed repurchase
(20% x 1,813,851) . . . . . . 362,770
Average exercise
price per share . . . . $4.78
Average market price
per share . . . . . . . $7.60
Application of
assumed proceeds . . . . . . . $9,212,854
==========
Toward repurchase of common shares
at applicable market price
(362,770 @ $7.60) . . . . . . 2,757,053
Toward reduction of debt . . . . 1,025,000
114,000 1,139,000
---------
Balance invested in
government securities . . . . 5,316,801
----------
$9,212,854
----------
Adjustment of net income:
Actual net income after
tax provision . . . . . . . . 602,000
Interest reduction due to
debt payment (9% on
$1,025,000 less
40% tax effect) . . . . . . . 55,350
Interest on government
securities (at 6% on
$5,316,801 less
34% tax effect) . . . . . . . 210,545
----------
Adjusted net income . . . . . . . 867,895
----------
Provision for preferred
dividend . . . . . . . . . . . (341,000)
----------
Net available for
common stockholders . . . . . 526,895
==========
Adjustment of shares outstanding:
Actual outstanding . . . . . . . 1,813,851
Net additional shares issuable
(1,813,851 - 362,770
repurchased) . . . . . . . . . 1,451,081
---------
Adjusted shares outstanding
(primary) . . . . . . . . . . 3,264,931
=========
Conversion of enviro
preferred stock . . . . . . . 1,600,000
---------
Fully diluted shares
outstanding . . . . . . . . . 4,864,931
=========
Earnings per share
Before adjustment
($602,000-$341,000)/1,813,851) $0.14
After adjustment
[($505,895)/3,264,931)
(anti-dilutive) . . . . . . . . . $0.16
Fully diluted (after
conversion of Enviro Preferred)
($867,895/4,864,931)
(anti-dilutive) . . . . . . . . . $0.18
Exhibit 11.4
U.S. Energy Systems, Inc. and Subsidiaries
Pro Forma Earnings Per share Calculation
April 30, 1996
Number of shares issued and outstanding . 439,650
Anchor preferred stock converted to 205,000
common . . . . . . . . . . . . . . . . .
Conversion of debentures ($500,000 125,000
principal) . . . . . . . . . . . . . . .
New issue per prospectus, limited to use
of proceeds
Total use of proceeds . . . . . . . . . . 4,154,000
Net proceeds per share = 3.34 1,244,286
$5,425,000/1,625,000 . . . . . . . . . . ---------
Total common shares outstanding . . . . . 2,013,936
=========
Options and warrants outstanding to 2,051,600
purchase equivalent shares . . . . . . .
20% limitation on assumed repurchase (20% 402,787
x 2,013,936) . . . . . . . . . . . . . .
Average exercise price per share . $4.99
Average market price per share . . $2.70
Application of assumed proceeds . . . . . $10,232,900
===========
Toward repurchase of common shares at 1,087,525
applicable market price (402,787 @ $2.70)
Toward reduction of debt . . . . . . . 1,025,000
114,000 1,139,000
---------
Balance invested in government securities 8,006,375
----------
10,232,900
Adjustment of net income:
Actual net income after tax provision . . 207,000
Interest reduction due to debt payment
(9% on $1,025,000 less 40% tax effect) . 13,838
Interest on government securities (at 6%
on $8,004,434 less 34% tax effect) . . . 79,263
----------
Adjusted net income . . . . . . . . . . . 300,101
----------
Provision for preferred dividend . . . . (85,000)
----------
Net available for common stockholders . . 215,101
==========
Adjustment of shares outstanding:
Actual outstanding . . . . . . . . . . . 2,013,936
Net additional shares issuable (2,013,936
- 402,787 repurchased . . . . . . . . . . 1,648,813
---------
Adjusted shares outstanding (primary) . . 3,662,749
=========
Conversion of enviro preferred stock . . 1,600,000
---------
Fully diluted shares outstanding . . . . 5,262,749
=========
Earnings per share:
Before adjustment ($207,000 $0.06
-$85,000)/2,013,936) . . . . . . . . . .
After adjustment [($201,101)/3,662,749) $0.06
(anti-dilutive) . . . . . . . . . . . . .
Fully diluted (after conversion of enviro $0.06
prefered) ($300,101/5,262,749) (anti-
dilutive) . . . . . . . . . . . . . . . .
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in the Prospectus constituting
a part of this Registration Statement of our report dated March
1, 1996 (May 6, 1996 as to Note J(4) and May 17, 1996 as to Note
A) relating to the consolidated financial statements of U.S.
Energy Systems, Inc. and subsidiaries, which is contained in that
Prospectus. We also consent to the reference to us under the
caption "Experts" in the Prospectus.
/s/Richard A. Eisner & Company LLP
Richard A. Eisner & Company, LLP
New York, New York
August 12, 1996
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in this Registration Statement
on Amendment No. 1 to Form SB-2 of our report dated February 29,
1996 on our audit of the financial statements of Far West
Electric Energy Fund, L.P. We also consent to the reference to
our firm under the caption "Experts".
/s/ Robison, Hill & Co.
Certified Public Accountants
Salt Lake City, Utah
August 9, 1996
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in this Registration Statement
on Amendment No. 1 to Form SB-2 of our report dated March 5, 1996
on our audit of the financial statements of 1-A Enterprises. We
also consent to the reference to our firm under the caption
"Experts".
/s/ Robison, Hill & Co.
Certified Public Accountants
Salt Lake City, Utah
August 9, 1996
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption
"Experts" and to the use of our reports dated March 19, 1996, in
the Registration Statement (Form SB-2) and related Prospectus of
U.S. Envirosystems, Inc. for the registration of 1,625,000 shares
of Common Stock and 1,625,000 Redeemable Common Stock Purchase
Warrants.
/s/ Traveller Winn & Mower, PC
Certified Public Accountants
Salt Lake City, Utah
August 9, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
OF OPERATIONS, BALANCE SHEETS, STATEMENTS OF STOCKHOLDERS' EQUITY AND STATEMENTS
OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> APR-30-1996
<CASH> 2,000
<SECURITIES> 0
<RECEIVABLES> 1,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,998,000
<CURRENT-LIABILITIES> 2,345,000
<BONDS> 1,525,000
0
1,000
<COMMON> 4,000
<OTHER-SE> (3,164,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,998,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 430,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 170,000
<INCOME-PRETAX> (430,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (430,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (430,000)
<EPS-PRIMARY> (1.01)
<EPS-DILUTED> (1.01)
</TABLE>
