<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1996
REGISTRATION NO. 333-04612
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
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)
RICHARD H. NELSON
PRESIDENT
515 NORTH FLAGLER DRIVE, U.S. ENERGY SYSTEMS, INC.
SUITE 202 515 NORTH FLAGLER DRIVE, SUITE 202
WEST PALM BEACH, FL 33401 WEST PALM BEACH, FL 33401
(561) 820-9779 (561) 820-9779
(ADDRESS AND TELEPHONE NUMBER OF (NAME, ADDRESS AND TELEPHONE
PRINCIPAL NUMBER OF AGENT FOR SERVICE)
EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)
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
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE FEE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01.......... 2,443,750(2) $4.00 $9,775,000 $2,962
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Redeemable Common Stock Purchase War-
rants................................ 2,443,750(3)(8) $ .10 $ 244,375 $ 74
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Common Stock, par value $.01.......... 2,443,750(4)(8) $4.00 $9,775,000 $2,962
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Common Stock, par value $.01.......... 212,500(5)(8) $6.60 $1,402,500 $ 425
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Redeemable Common Stock Purchase War-
rants................................ 212,500(6)(8) $.165 $ 35,063 $ 11
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Common Stock, par value $.01.......... 212,500(7)(8) $5.00 $1,062,500 $ 322
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Common Stock, par value $.01.......... 1,805,000(9) $4.00 $7,220,000 $2,188
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Redeemable Common Stock Purchase War-
rants................................ 500,000(10)(8) $ .10 $ 50,000 $ 15
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Common Stock, par value $.01.......... 500,000(11)(8) $4.00 $2,000,000 $ 606
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TOTAL................................. $9,565
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- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457.
(2) Includes 318,750 shares which the Underwriters have the option to
purchase to cover over-allotments, if any.
(3) Includes 318,750 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 Warrants registered in a concurrent secondary offering.
(11) 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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 15, 1996
PROSPECTUS
U.S. ENERGY SYSTEMS, INC.
2,125,000 SHARES OF COMMON STOCK AND
2,125,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
U.S. Energy Systems, Inc. (the "Company") hereby offers (the "Offering")
2,125,000 shares of Common Stock (the "Common Stock") and 2,125,000 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 9 AND "DILUTION" ON PAGE 20.
-----------
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.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share................................. $4.00 $.40 $3.60
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Per Warrant............................... $.10 $.01 $.09
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Total(3).................................. $8,712,500 $871,250 $7,841,250
</TABLE>
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(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 212,500
shares of Common Stock at $6.60 per share and/or 212,500 Warrants at $.165
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 $261,375 ($300,581 if
the Underwriters' over-allotment option is exercised in full), estimated at
$789,250.
(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
318,750 shares of Common Stock and/or an additional 318,750 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 $10,019,375, $1,001,938 and $9,017,437, respectively.
See "Underwriting."
The Securities are 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
<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.
2
<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 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 95% interest in
two geothermal plants known as Steamboat 1 and 1A for $4,898,000 (including
$50,000 as a downpayment which was previously paid by the Company) (the
"Steamboat Acquisition"), (iii) the acquisition of an 81.5% interest in NRG
Company LLC ("NRG") for $265,000, to enable NRG to make a loan of $250,000 to
Reno Energy LLC ("Reno Energy"), developer of a district heating project to be
fueled by geothermal sources, to secure for NRG an option to obtain a 50%
interest in Reno Energy. (iv) 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 (v)
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 a letter of intent with the owners of Bluebeard's Castle, a large resort
and commercial complex in St. Thomas, United States Virgin Islands ("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. Under the letter of intent the
Company, the resort manager and the resort owners would own the cogeneration
plant and water system and share revenues. The Company has received initial
funding from the resort owners and the first of six engine generators is being
installed during
3
<PAGE>
September 1996. 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.
Under the joint development agreement, savings from the cogeneration systems
would be shared equally by the mall owners and the joint development company
(in which the Company would 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, except for the distribution of $20,000 from the Plymouth State College
project (described below) in August 1996, has not received any cash
distributions from its investments 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 $4,898,000 (including $50,000 as a downpayment which was
previously paid by the Company), a 95% interest in two geothermal power plants,
known as Steamboat 1 and 1A, in Steamboat Hills, Nevada (the "Steamboat
Facilities"). Electricity is produced in geothermal plants by extracting heat
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 plant 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 fourth quarter of this fiscal
year, provided that it obtains the necessary air quality permits. 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 waste products
or other alternative fuels, such as used motor oil and tires, which provide
environmental and ecological benefits and also provide potential for earnings
because of low fuel costs. In this regard, the Company will invest $265,000 for
81.5% of NRG. NRG will have an option to acquire 50% of Reno Energy, which
plans to develop a pipeline to distribute and sell excess heat available from
the geothermal resources in Steamboat Hills, Nevada (the "Reno Project").
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. Its telephone number is (561) 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
4
<PAGE>
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 at a redemption price equal
to the liquidation preference. The terms and conditions of the Private Warrants
are identical to those of the Warrants, and entitle the holder to purchase one
share of Common Stock for $4.00, subject to adjustments in certain
circumstances, during the period commencing one year and ending five years from
the date of this Prospectus. Both the Warrants and the Private Warrants are
redeemable by the Company, at a price of $.01 per warrant, at any time after
they 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 terms for the Private Placement were initially negotiated prior to
December 1995. The investors in the Private Placement agreed to invest $3.5
million in return for a specific percentage of the Company, subject to the
Company being able to raise at least another $6 million through either another
private placement or a public offering. The specific percentage would be
reduced proportionally to the size of the additional financing over $6 million.
A specific sales price was not set, but only a percentage of ownership. The
price attributed to the shares to be issued to the Private Placement investors
has been determined by the ultimate capitalization after a public offering,
accounting for the number of common shares for which the preferred shares could
be converted to attain the specific ownership percentage, and then dividing the
numerical shares by the dollar amount invested. The effective price per share
of Common Stock paid by Enviro is $1.94. The specific advantages for the
Company of this arrangement would be that there would be no discounts or costs
(other than the investors' legal fees) attached to the amount to be invested in
the Private Placement. In addition, the Private Placement investors would
contribute substantial financial and management skills which the Company would
need as it achieved growth objectives. Based on the terms of the agreement and
the Offering, following the Offering and the Private Placement, Enviro will
hold approximately 35.6% of the voting power of the Company, and, if the
Private Warrants held by EMC are exercised after the one-year non-
exercisability period, the Private Placement investors together would hold
approximately 42.0% of the voting power of the Company. See "Risk Factors--
Concentration of Voting Power."
Also concurrently with the closing of the Offering, the Company will acquire
a 95% 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). Far West Capital, Inc., a Utah corporation ("Far West
Capital"), will own the remaining 5% of Steamboat LLC. The Company will
contribute a total of $4,898,000 (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, to retire a mortgage and, to provide capital for the potential
acquisition of certain of the royalty interests to which the Steamboat
Facilities are subject and improvements to the plants. 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. 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.
Pursuant to the Debenture Conversion, an aggregate principal amount of $500,000
of Convertible Debentures will be converted into 125,000 shares of Common Stock
and 125,000 Private Warrants. The holders who have agreed to the conversion
will participate on a pro rata basis. The information in this Prospectus
assumes that all holders of the Convertible Debentures have agreed to
participate in the Debenture Conversion. Three of the 26 holders of Convertible
Debentures, representing $150,000 in principal amount, have not agreed to the
interest rate reduction from 18% to 9% per annum. Accordingly, the Company's
annual interest expense will be $13,500 greater than the Pro Forma amounts
shown in this Prospectus. See "Use of Proceeds" and Pro Forma Financial
Statements.
5
<PAGE>
THE OFFERING
Securities offered..........
2,125,000 shares of Common Stock and 2,125,000
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................... 2,894,650 shares(1)(2)
Use of proceeds.............
The net proceeds to be received from the sale of
the Securities offered hereby are estimated to be
approximately $7,052,000 (approximately
$8,116,000 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) $4,848,000
for the Steamboat Acquisition, (ii) $265,000 for
the investment in NRG, (iii) $2,689,000 to repay
indebtedness (including $50,000 which was
borrowed to make a downpayment on the Steamboat
Acquisition) and (iv) 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."
- --------
(1) Includes (i) 439,650 shares of Common Stock outstanding prior to the
Offering, (ii) 2,125,000 shares of Common Stock being issued pursuant to
the Offering, (iii) 125,000 shares of Common Stock to be issued in the
Debenture Conversion and (iv) 205,000 shares of Common Stock to be issued
in the Preferred Stock Exchange.
(2) Does not include an aggregate of 5,194,975 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) 3,175,000 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.
6
<PAGE>
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 six months ended July 31, 1996 give effect to the
Closing Transactions including the acquisition of a 95% interest in Steamboat
LLC and the 81.5% interest in NRG as if they had occurred at the beginning of
the periods. The Pro Forma Balance sheet data as at July 31, 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.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
YEAR ENDED JANUARY 31, SIX MONTHS ENDED JULY 31,
JANUARY 31, 1996 1995 JULY 31, 1996 1995
----------------------------- ----------- ------------------------ ----------
HISTORICAL PRO FORMA HISTORICAL HISTORICAL PRO FORMA HISTORICAL
USE USE/SB (1) USE USE USE/SB (1) USE
---------- --------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ -- $ 3,404 $ -- $ -- $ 1,919 $ --
------- --------- ------- ------- --------- -------
Operating and
administrative expenses:
Depreciation............ -- 172 -- -- 86 --
Royalty................. -- 528 -- -- 372 --
Other................... 853 1,856 1,006 408 927 421
Interest (2).............. 604 94 319 328 35 223
Loss from Joint Ventures.. 17 17 76 92 92 62
------- --------- ------- ------- --------- -------
Income (loss) before in-
come taxes............... (1,474) 737 (1,401) (828) 407 (706)
Income taxes (3).......... -- 244 -- -- 135 --
------- --------- ------- ------- --------- -------
Income (loss) before ex-
traordinary items........ (1,474) 493 (1,401) (828) 272 (706)
Preferred dividends....... 21(4a) 341(4b) -- 29(4a) 171(4b) --
------- --------- ------- ------- --------- -------
Income (loss) available
for common stockholders*. $(1,495) $ 152 $(1,401) $ (857) $ 101 $ (706)
======= ========= ======= ======= ========= =======
(Loss) per share of Common
Stock*................... $ (3.41) $ (3.38) $ (1.95) $ (1.61)
======= ======= ======= =======
(Loss) per share of Common
Stock--Supplemental (5)*. $ (1.27) $ (0.65)
======= =======
Pro forma net income per
share of Common Stock
(6)*.................... $ 0.08 $ 0.04
========= =========
Shares used in computing
net income per share of
Common Stock (6)......... 438,773 1,838,694 415,022 439,650 2,065,433 438,296
======= ========= ======= ======= ========= =======
BALANCE SHEET DATA:
<CAPTION>
JULY 31, 1996
-----------------------------
HISTORICAL PRO FORMA (7)
---------- ---------------
<S> <C> <C>
Current assets............ $ 21 $2,799
Investment in joint ven-
tures.................... 1,834 1,781
Loan receivable........... -- 300(8)
Property, plant and equip-
ment..................... -- 5,172
Total assets.............. 2,076 10,052
Current liabilities....... 2,815 1,264
Long-term liabilities..... 2,818 1,343
Minority interest in sub-
sidiaries................ -- 334
Working capital........... (2,794) 1,535
Stockholders' equity (def-
icit).................... (3,557) 7,111
</TABLE>
7
<PAGE>
- --------
* Before extraordinary item.
(1) Includes (a) adjusted operating results of the Steamboat Facilities for the
year ended December 31, 1995, and the six months ended June 30, 1996; (no
provision for the minority interest is made until the annual net income of
the Steamboat Facilities exceeds $1,800,000), (b) NRG income of 9% interest
on a $300,000 loan to Reno Energy less the 18.5% minority interest in NRG,
(c) 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 (d) elimination of interest on $500,000 principal
amount of Convertible Debentures converted into Common Stock and Private
Warrants, with substantially all the remainder paying interest at 9% per
annum.
(2) Adjusted for reduction of Convertible Debenture interest to 9%, and
elimination of interest costs on $500,000 principal amount of Convertible
Debentures converted into Common Stock and Private Warrants and 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. Three of the 26 holders of Convertible
Debentures, representing $150,000 in principal amount, have not agreed to
the interest rate reduction from 18% to 9% per annum. Accordingly, the
Company's annual interest expense will be $13,500 greater than the Pro
Forma amounts shown in this Prospectus. Also includes NRG income of 9%
interest on $300,000 loan to Reno Energy less the 18.5% minority interest
in NRG.
(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 1996 fiscal year and the beginning of
the six month period ended July 31, 1996.
(4a) Provision for dividends on Series One Preferred Stock eliminated as a
result of the Preferred Stock Conversion.
(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) Supplemental loss per share is based on the weighted average number of
shares outstanding and 537,651 (at January 31, 1996) and 586,826 (at July
31, 1996) of the shares to be issued in the Offering for the repayment of
debt.
(6) 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, the investment in NRG and the retirement of
debt (1,145,181 shares at January 31, 1996 and 1,295,783 shares at July 31,
1996). Assumed exercise of options and warrants and the conversion of the
11% Preferred Stock have not been reflected as they would be anti-dilutive.
(7) 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, the NRG investment and the
repayment of indebtedness, including accrued interest to October 15, 1996,
as contemplated in "Use of Proceeds."
(8) The NRG loan to Reno Energy includes $50,000 from funds invested by the
minority interests and $250,000 from the funds to be invested by the
Company.
8
<PAGE>
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.
NO SIGNIFICANT REVENUES; HISTORY OF LOSSES/UNCERTAIN PROFITABILITY; WORKING
CAPITAL, CASH FLOW AND STOCKHOLDERS' EQUITY DEFICITS; AUDITORS' OPINION WITH
EXPLANATORY PARAGRAPH
The Company has a history of losses substantially throughout its existence
and, except for the distribution of $20,000 from the Plymouth State College
project in August 1996, has not received any cash distributions from its
investments since its reorganization in 1993. To date, the Lehi power plant
has not been operational. See "Current Operations and On-Going Projects."
Although the Company believes that there may be profit and cash flow from the
Lehi power plant starting in the fourth quarter of this fiscal year, there can
be no assurances that this will occur. Operations at the plant may be delayed
until the second quarter of the next fiscal year if the Company decides to
sell certain operating machinery and replace it by purchasing equipment that
would ultimately increase output capacity and efficiency. The Plymouth
cogeneration plant historically had not provided revenues or cash flow to the
Company because of costs related to equipment adjustments and operational
reserves required by the terms of its financing, and there can be no assurance
that any cash flow will be available in the foreseeable future. The Company
received a distribution of $20,000 in August 1996.
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 six months ended
July 31, 1996, the Company incurred a net loss of $828,000. At July 31, 1996,
as a result of these and earlier accumulated losses, the Company had a working
capital deficit of $2,794,000 and a stockholders' equity deficit of
$3,557,000. 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 cash flow from operations, 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; DEFERRED TAXES
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),
9
<PAGE>
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
began developing new projects after USF merged with the reorganized Cogenic
Energy Systems, Inc. in November 1993, but has not yet commenced significant
marketing activities and currently has limited marketing experience as well as
limited financial, personnel and other resources to undertake extensive
marketing activities.
PROJECT DEVELOPMENT AND ACQUISITION 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, including the Reno Project, 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. In particular, the Reno Project is still in the
planning and development stage and there are no contracts with any end users
nor any governmental approvals. 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, decline 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 exceed the
cost of production, or that Steamboat LLC will generate adequate cash flow
from operations to meet its investing and financing requirements. Although the
prices are variable and fluctuate, if, as expected, a substantial reduction in
power prices for Steamboat 1 takes place in December 1996, the result would
mean a decrease in the amount of net earnings of Steamboat LLC which the
Company will receive, which, depending on the extent of the price reductions,
could result in the Company reflecting a net loss. However, Management
believes that more satisfactory earnings can potentially be obtained for the
energy generated in the Steamboat Facilities through negotiations with Sierra,
and/or as a result of efforts by the Company to develop other options for
sales of both electricity and heat from the facilities. No assurance can be
given that such efforts will be successful.
The Company will pay $1,000,000 into Steamboat LLC to provide capital for
the potential acquisition of certain royalty interests and to fund certain
improvements to the Steamboat Facilities which are expected to result in
higher electricity output. While negotiations with certain royalty owners have
already begun, and the Company and its partners believe that these interests
can be bought out, no agreements have yet been concluded and no potential
savings from royalty reductions are reflected in the pro forma financial
statements presented herein. Additional royalty agreements, applying only to
Steamboat 1, call for payment of a total of 30% of the net revenue of
Steamboat 1 after certain deductions, starting March 1, 1997. The resulting
effect on the net income of Steamboat LLC and on the Company's after-tax
income will depend on the other elements of power sales revenues outlined
above. Assuming the reduction in income from power sales discussed above, and
the buyout of no royalty interests, the cost of these net revenue royalties
could be in the range of $50,000 to $100,000 annually. The Company expects the
Steamboat Facilities to generate sufficient revenues to make any royalty
10
<PAGE>
payments required. Negotiations with these interests have also already begun,
but no assurance can be given that the negotiations will produce successful
results. See "U.S. Energy Systems, Inc. and Subsidiaries Pro Forma Condensed
Consolidated Statements of Operations," "Steamboat Facilities Pro Forma
Condensed Combined Statement of Operations," "Management's Discussion and
Analysis of Financial Condition and Plan of Operation--Plan of Operation" and
"Business--Current Operations and On-Going Projects."
RELIANCE ON PRESIDENT
The Company will be 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 Utility Holding Company Act
of 1935 ("PUHCA") as long as each power plant in which it has an interest is a
qualifying facility ("QF") under the Public Utility Regulatory Policies 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 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, are not subject to
efficiency standards regarding 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
it is in substantial compliance with all applicable rules and regulations and
that the projects in which it is involved have the requisite approvals for
existing operations and are operated in accordance with applicable laws, the
operations of the Company and its projects remain subject to a varied and
complex body of laws and regulations that both
11
<PAGE>
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 below 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. Virtually all 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 and may be adversely affected by the prices charged by such
companies for conventional energy sources, which, in turn, are affected by
inflation and availability of fossil fuel.
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
12
<PAGE>
the Company's officers, directors and stockholders. 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, all of whom have been
afforded the opportunity to obtain the same more favorable conversion rate.
The Chairman of the Board, a director, and two principal stockholders of the
Company are holders of an aggregate amount of $425,000 of the Company's
Convertible Debentures. Accrued interest on such indebtedness, adjusted to
October 15, 1996, which will be repaid from the proceeds of the Offering,
amounts to $107,100. As part of the Debenture Conversion the conversion rate
of the Convertible Debentures held by those holders consenting to participate,
which remain outstanding after the Debenture Conversion, 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%. Three of the 26 holders of Convertible
Debentures, representing $150,000 in principal amount, have not agreed to the
interest rate reduction from 18% to 9% per annum. Accordingly, the Company's
annual interest expense will be $13,500 greater than the Pro Forma amounts
shown in this Prospectus. See "Use of Proceeds" and "Description of
Securities--Convertible Debentures." The President, the Chairman, two
directors and two principal stockholders will also benefit by the payment to
them of an aggregate of $1,119,900 (including accrued interest to October 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 $231,750 and $167,500, respectively, will be owed to them as of
October 15, 1996. The deferred salaries 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 35.6% 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
42.0% of total voting power, assuming no other issuances of Common Stock prior
to such exercise.
DISPARITY BETWEEN PUBLIC OFFERING PRICE PER SHARE AND THE EFFECTIVE PRIVATE
OFFERING PRICE PER SHARE OF COMMON STOCK
Although the Common Stock offered to the public is at a price of $4.00 per
share, the effective price per share paid by Enviro, upon conversion of the
11% Preferred Stock, is $1.94.
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. The Common Stock has been
sporadically traded on the OTC Bulletin Board. Although the Company has made
an application so that the Common Stock and Warrants will trade on the Nasdaq
SmallCap Market upon conclusion of the Offering, there can be no assurance
that the Securities will be listed on Nasdaq or that an active public trading
market for the Common Stock or Warrants will develop and continue after the
Offering. The Company's application for listing on the Nasdaq SmallCap Market
was denied on October 1, 1996. A hearing has been scheduled for October 17,
1996. 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."
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<PAGE>
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 2,125,000 shares of Common Stock. The Underwriters' over-
allotment option, if fully exercised, including the related Warrants, would
result in the issuance of 637,500 shares of Common Stock. The Representative's
Purchase Option, if fully exercised, including the related Warrants, would
result in the issuance of 425,000 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 5,832,475 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 $2.61 per
share of Common Stock, (approximately 65% 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
Common Stock into which the shares of 11% Preferred Stock are convertible.
Enviro has agreed that it will not sell such shares in the public market for a
period of twelve months from the closing of the Secondary Offering. 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
2,894,650 shares of Common Stock. All of the 2,125,000 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
14
<PAGE>
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, 43,250 shares are currently
eligible for sale, and the remaining 21,400 shares will be eligible for such
sale in or after November 1996, 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. Although
registered pursuant to the Shelf Registration, 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
15
<PAGE>
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 and Warrants on
the Nasdaq SmallCap Market, which is administered by the National Association
of Securities Dealers, Inc. (the "NASD"). The Company's application for
listing on the Nasdaq SmallCap Market was denied on October 1, 1996. A hearing
has been scheduled for October 17, 1996. 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."
16
<PAGE>
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 $7,052,000 (approximately $8,116,000
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:
<TABLE>
<S> <C> <C> <C>
Steamboat Acquisition:
For purchase of Steamboat Facilities.......... $ 1,575,000
Less deposit already paid..................... (50,000)
-----------
1,525,000
Mortgage purchase and contribution............ 2,323,000
Additional contribution for purchase of
royalty interests and capital expenditures to
fund improvements to Steamboat Facilities.... 1,000,000
-----------
Total Steamboat Acquisition..................... 4,848,000 45.94%
Reno Project Investment......................... 265,000 2.51%
Repayment of debt, with interest to October 15,
1996:
Plymouth loan................................. $1,218,000
Anchor bridge loan............................ 775,000
Solvation bridge loan......................... 267,000
Other bridge loan............................. 63,000
Accrued interest on debentures................ 366,000
----------
Total repayment of debt......................... 2,689,000 25.48%
-----------
Total proceeds used............................. 7,802,000
Balance to working capital...................... 2,750,000 26.06%
----------- -----
Total proceeds as above......................... $10,552,000 100.0%
=========== =====
</TABLE>
If the Company determines to exercise the Reno Option, it will use the funds
designated for use as working capital, if such funds are available at that
time.
The foregoing represents Management's best estimate of its allocation of the
net proceeds of the Offering based upon the current state of its business
operations, its current business plan and the current economic and industry
conditions. Future events, including changes in the Company's planned business
operations, may result in changes in the allocation of funds. 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 an institutional
lender and certain net revenue or royalty interests in
17
<PAGE>
steam extraction rights. The Company will obtain a 95% 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 October 15,
1996 net of an escrowed reserve, and will be acquired by the Company for
$2,323,000 and contributed to Steamboat LLC. An additional $1,000,000 in cash
will be contributed by the Company to Steamboat LLC to provide potential
capital for the acquisition of certain of the royalty interests (leaving
outstanding a royalty to Sierra of 10% of power revenues of the Steamboat
Facilities and such other royalty interests as the Company is unsuccessful in
purchasing) and for funding certain improvements to the Steamboat Facilities.
The Company will receive the first $1,800,000 of Steamboat LLC annual net
income. For net income above $1,800,000, Far West Capital will receive: (i)
55% for the first five years and (ii) 5% thereafter, with the balance going to
the Company. See "Business--Current Operations and On-Going Projects."
REPAYMENT OF DEBT
An aggregate of $2,689,000 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 October 15, 1996):
Plymouth Loan. $1,218,000 will be used to repay a secured loan of $1,000,000
(plus accrued interest of $218,000) 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. $775,000 will be used to repay a loan of $660,000 (plus
accrued interest of $115,000) made to the Company in June 1995 by Anchor to
provide funds for the expenses of this Offering 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 October 25, 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. $267,000 will be used to repay a loan of $250,000
(plus $17,000 accrued interest) made to the Company commencing 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 October 25, 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. $63,000 will be used to repay a loan of $50,000 (plus
accrued interest of $13,000) made to the Company in May 1995 by a non-
affiliated individual to provide funds for a down payment on the Steamboat
Facilities acquisition. This loan bears interest at the rate of 18% per annum
and is repayable upon the consummation of this Offering.
18
<PAGE>
Accrued Interest on Debentures. $366,000 will be used to pay interest on the
Company's Convertible Debentures including $107,600 to certain directors and
principal stockholders. 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.
Pursuant to the Debenture Conversion, an aggregate principal amount of
$500,000 of Convertible Debentures will be converted into 125,000 shares of
Common Stock and 125,000 Private Warrants. The holders who have agreed to the
Conversion will participate on a pro rata basis. Three of the 26 holders of
Convertible Debentures, representing $150,000 in principal amount, have not
agreed to the interest rate reduction from 18% to 9% per annum. Accordingly,
the Company's annual interest expense will be $13,500 greater than the Pro
Forma amounts shown in this Prospectus. 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 symbols
USEN (until July 1996) and USEE 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.
<TABLE>
<CAPTION>
BID
-------------
HIGH LOW
------ ------
<S> <C> <C>
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
Third Quarter (to Sept. 30, 1996)......................... $ 3.19 $ 2.25
</TABLE>
As of September 30, 1996, there were 583 record holders of the Company's
Common Stock and approximately 900 beneficial holders of the Company's Common
Stock.
On September 30, 1996, the high bid price was $3.375 and low bid price was
$3.00.
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."
19
<PAGE>
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
minority interest) by the number of outstanding shares of Common Stock.
As of July 31, 1996, the Company had a negative net tangible book value of
($4,353,000) or ($9.90) 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 October 15, 1996, the pro forma net
tangible book value at that date would be $4,019,000 or $1.39 per share of
Common Stock ($5,083,000 ($1.58 per share) if the Underwriters' over-allotment
option is exercised). This represents an immediate increase in net tangible
book value of $11.29 per share to existing stockholders, and an immediate
dilution of $2.61 (65%) per share to new investors ($2.42 (61%) per share if
the Underwriters' over-allotment option is exercised).
The following table illustrates the dilution per share of Common Stock:
<TABLE>
<S> <C> <C>
Public offering price per share of the Common Stock included
in the Offering.............................................. $4.00
Negative net tangible book value per share before the Offering
(1).......................................................... $(9.90)
======
Increase to existing common stockholders in net tangible book
value due to the Offering and the Closing Transactions
(2)(3)....................................................... 11.29
======
Pro forma net tangible book value after the Offering.......... $1.39
=====
Pro forma dilution to new investors........................... $2.61
=====
</TABLE>
- --------
(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 2,125,000 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.
20
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
at July 31, 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 October 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.
<TABLE>
<CAPTION>
JULY 31, 1996
------------------------
PRO FORMA
HISTORICAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Long-term debt, net of unamortized discount of
$30,000............................................. $ 2,818,000 $ 1,343,000
Loans payable........................................ 960,000
Pre-reorganization income taxes payable, current..... 192,000 192,000
----------- -----------
3,970,000 1,535,000
----------- -----------
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized; issued and outstanding, 57,500 shares;
to be issued and outstanding, none................ 1,000
11% Cumulative redeemable convertible preferred
stock, $.01 par value;
issued and outstanding, none; to be issued and
outstanding, 1,600,000 shares; liquidation value
$3,100,000........................................ -- 16,000
Common stock, $0.01 par value, 35,000,000 shares
authorized; issued and outstanding, 439,650
shares; to be issued and outstanding, 2,894,650
shares(1)(2)...................................... 4,000 28,000
Additional paid-in capital......................... 112,000 10,904,000
Accumulated (deficit) (3).......................... (3,674,000) (3,837,000)
----------- -----------
Total stockholders' equity (deficit)................. (3,557,000) 7,111,000
----------- -----------
Total capitalization................................. $ 413,000 $ 8,646,000
=========== ===========
</TABLE>
- --------
(1) Includes (i) 439,650 Shares of Common Stock outstanding prior to the
Offering, (ii) 2,125,000 shares of Common Stock being issued pursuant to
the Offering, (iii) 125,000 shares of Common Stock to be issued in the
Debenture Conversion and (iv) 205,000 shares of Common Stock to be issued
in the Preferred Stock Exchange.
(2) Does not include an aggregate of 5,194,975 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) 3,175,000 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 $25,000 in connection with repayment of certain debt and the
accrual of interest to October 15, 1996.
21
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JULY 31, 1996
The following Pro Forma Condensed Balance Sheet gives effect to the
following transactions as if they had occurred on July 31, 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 2,125,000 shares of Common Stock and
2,125,000 Warrants offered by this Prospectus for net proceeds of $7,052,000,
(c) acquisition of a 95% interest in two geothermal power plants (the
Steamboat Facilities) for an aggregate of $4,898,000 (including $50,000 as a
downpayment which was previously paid by the Company), (d) acquisition of an
81.5% interest in NRG for $265,000, (e) repayment of notes payable and other
liabilities in the aggregate amount of $2,681,000 adjusting for accrual of
interest and additional bridge loan financing to October 15, 1996, (f)
conversion of 57,500 shares of Series One Preferred Stock into 205,000 shares
of Common Stock, and (g) 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>
STEAMBOAT PRO FORMA ADJUSTMENTS
USE 1 AND 1A ---------------------------
HISTORICAL PRO FORMA CONSOLIDATED DEBIT CREDIT PRO FORMA
----------- ---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
A S S E T S
Current assets:
Cash.................... $ 1,000 $ 1,000 $ 3,500,000(a) $ 4,848,000(c) $ 2,776,000
7,052,000(b) 2,689,000(d2)
25,000(j) 265,000(i)
Inventory............... 19,000 19,000 19,000
Other current assets.... 1,000 $ 3,000 4,000 4,000
----------- ---------- ---------- ----------- ----------- -----------
Total current assets... 21,000 3,000 24,000 10,577,000 7,802,000 2,799,000
Investments in Joint
Ventures--at equity:
Lehi Independent Power 1,112,000 1,112,000 1,112,000
Associates, LC........
Plymouth Cogeneration 669,000 669,000 669,000
Limited Partnership...
Steamboat 53,000 53,000 4,848,000(c) 4,901,000(h) --
Envirosystems.........
NRG Company LLC........ 265,000(i) 265,000(j) --
Loan receivable, Reno 300,000(j) 300,000
Energy.................
Property, Plant and 5,172,000 5,172,000 5,172,000
Equipment..............
Deferred costs of regis- 221,000 221,000 221,000(b) --
tration................
----------- ---------- ---------- ----------- ----------- -----------
TOTAL.................. $ 2,076,000 $5,175,000 $7,251,000 $15,990,000 $13,189,000 $10,052,000
=========== ========== ========== ----------- ----------- ===========
L I A B I L I T I E S
Loans payable........... $ 960,000 $ 960,000 $ 960,000(d2) $ --
Pre-reorganization in- 192,000 192,000 192,000
come taxes payable.....
Other current liabili- 1,663,000 1,663,000 729,000(d2) 138,000(d1) 1,072,000
ties ..................
----------- ---------- ---------- ----------- ----------- -----------
Total current liabili- 2,815,000 2,815,000 1,689,000 138,000 1,264,000
ties..................
Convertible subordinated 1,525,000 1,525,000 500,000(f) 1,025,000
secured debentures ....
Notes payable .......... 975,000 975,000 1,000,000(d2) 25,000(g) --
Other liabilities ...... 318,000 318,000 318,000
----------- ---------- ---------- ----------- ----------- -----------
Total Liabilities...... 5,633,000 5,633,000 3,189,000 163,000 2,607,000
----------- ---------- ----------- ----------- -----------
Minority interests in
subsidiaries:
Steamboat Envirosystems 274,000(h) 274,000
LLC...................
NRG Company LLC........ 60,000(j) 60,000
----------- -----------
Total Minority Inter- 334,000 334,000
ests..................
----------- -----------
S T O C K H O L D E R S'
E Q U I T Y
(C A P I T A L
D E F I C I E N C Y):
Preferred stock, ($.01 1,000 1,000 1,000(e) --
par value issued and
outstanding, 57,500
shares; to be issued
and outstanding, none).
11% Cumulative redeem-
able convertible pre-
ferred stock, ($.01 par
value, issued and out-
standing, none; to be
issued and outstanding,
1,600,000 shares; liq-
uidation value
$3,100,000)............ 16,000(a) 16,000
Common stock ($.01 par
value, issued and out-
standing, 439,650
shares; to be issued
and outstanding,
2,894,650 shares)...... 4,000 4,000 21,000(b) 28,000
2,000(e)
1,000(f)
Additional paid-in capi- 112,000 112,000 221,000(b) 3,484,000(a) 10,904,000
tal.................... 1,000(e) 7,031,000(b)
499,000(f)
Accumulated deficit..... (3,674,000) (3,674,000) 25,000(g) (3,837,000)
138,000(d1)
Members' equity:
U.S. Energy Systems, 4,901,000 4,901,000 4,901,000(h) --
Inc. .................
Far West Capital, Inc.. 274,000 274,000 274,000(h) --
----------- ---------- ---------- ----------- ----------- -----------
Total stockholders' (3,557,000) 5,175,000 1,618,000 5,561,000 11,054,000 7,111,000
equity (capital
deficiency)...........
----------- ---------- ---------- ----------- ----------- -----------
TOTAL.................. $ 2,076,000 $5,175,000 $7,251,000 $24,740,000 $24,740,000 $10,052,000
=========== ========== ========== =========== =========== ===========
</TABLE>
22
<PAGE>
Notes to Pro Forma Condensed Consolidated Balance Sheet
- --------
(a) To reflect sale of 1,600,000 shares of 11% Preferred Stock for $3,100,000
and 500,000 Private Warrants for $400,000.
(b) To reflect sale of 2,125,000 shares of Common Stock and 2,125,000 Warrants
for net proceeds of $7,052,000.
(c) To reflect purchase of a 95% interest in Steamboat LLC, which is acquiring
the Steamboat Facilities.
<TABLE>
<S> <C>
(d1)To reflect accrual of interest from August 1 to October 15,
1996............................................................... $138,000
(d2)To reflect assumed repayment of debt:
Note payable.................................................... $1,000,000
Bridge loans.................................................... 960,000
Accrued interest................................................ 729,000
----------
$2,689,000
==========
</TABLE>
(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. No value has been assigned to these 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.
(h) To eliminate Steamboat LLC investment account and set up minority
interest.
(i) To reflect purchase of an 81.5% interest in NRG Company, LLC for $265,000.
(j) To reflect consolidation of accounts of NRG. The only assets of NRG are a
loan receivable of $300,000 from Reno Energy and cash of $25,000. The
majority interest was paid in during September, 1996. See "Business--
Current Operations and On-going Projects--Nevada District Heating
Project."
23
<PAGE>
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
consolidates the results of operations of the Company for the year ended
January 31, 1996 and the six months ended July 31, 1996 with the pro forma
results of operations of the Steamboat Facilities for the year ended
December 31, 1995 and the six months ending June 30, 1996 as if the proposed
Steamboat Acquisition had 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 95% 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
125,000 shares of Common Stock and 125,000 Private Warrants and reducing the
interest rate from 18% to 9% on the remaining balance and (d) the investment
in NRG as if the investment was made at the beginning of the periods. This
statement should be read in conjunction with the Steamboat Envirosystems, L.C.
Pro Forma Condensed Balance Sheet as of June 30, 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>
<CAPTION>
YEAR ENDED JANUARY 31, 1996
--------------------------------------------------------------------
ADJUSTED
USE 1 AND 1a PRO FORMA PRO FORMA
HISTORICAL PRO FORMA (1) CONSOLIDATED ADJUSTMENTS CONSOLIDATED
----------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Electric power... $ -- $3,404,000 $3,404,000 $ -- $3,404,000
----------- ---------- ---------- --------- ----------
Total revenue.... -- 3,404,000 3,404,000 -- 3,404,000
----------- ---------- ---------- --------- ----------
Expenses:
Depreciation.... -- 172,000 172,000 172,000
Royalty......... -- 528,000 528,000 528,000
Administrative
and other....... 853,000 1,003,000 1,856,000 1,856,000
Interest
expense(5a)/income
(5b) ............ 604,000 -- 604,000 (488,000)(2) 94,000
(22,000)(5b)
Loss from Joint
Ventures......... 17,000 17,000 17,000
----------- ---------- ---------- --------- ----------
Total expenses.. 1,474,000 1,703,000 3,177,000 2,667,000
----------- ---------- ---------- --------- ----------
Income (loss) be-
fore income tax-
es............... (1,474,000) 1,701,000 227,000 737,000
Income taxes..... -- -- (244,000)(3) 244,000
----------- ---------- ---------- --------- ----------
Net income
(loss)........... (1,474,000) 1,701,000 227,000 493,000
Dividends on pre-
ferred stock..... 21,000 21,000 21,000 (4a) 341,000
(341,000)(4b)
----------- ---------- ---------- --------- ----------
Net income (loss)
available for
common stockhold-
ers (6).......... $(1,495,000) $1,701,000 $ 206,000 $ 152,000
----------- ---------- ---------- --------- ----------
Net income per
common share (7). $ (3.41) $ 0.08
----------- ----------
Shares used in
computing net in-
come per common
share (7)........ 438,773 1,838,694
=========== ==========
<CAPTION>
SIX MONTHS ENDED JULY 31, 1996
-------------------------------------------------------------------
ADJUSTED
USE 1 AND 1a PRO FORMA PRO FORMA
HISTORICAL PRO FORMA (1) CONSOLIDATED ADJUSTMENTS CONSOLIDATED
----------- ------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Electric power... $ -- $1,919,000 $1,919,000 $ -- $1,919,000
----------- ------------- ------------ --------------- ------------
Total revenue.... -- 1,919,000 1,919,000 -- 1,919,000
----------- ------------- ------------ --------------- ------------
Expenses:
Depreciation.... -- 86,000 86,000 86,000
Royalty......... -- 372,000 372,000 372,000
Administrative
and other....... 408,000 519,000 927,000 927,000
Interest
expense(5a)/income
(5b) ............ 328,000 -- 328,000 (282,000)(2) 35,000
(11,000)(5b)
Loss from Joint
Ventures......... 92,000 92,000 92,000
----------- ------------- ------------ --------------- ------------
Total expenses.. 828,000 977,000 1,805,000 1,512,000
----------- ------------- ------------ --------------- ------------
Income (loss) be-
fore income tax-
es............... (828,000) 942,000 114,000 407,000
Income taxes..... -- -- 135,000 (3) 135,000
----------- ------------- ------------ --------------- ------------
Net income
(loss)........... (828,000) 942,000 114,000 272,000
Dividends on pre-
ferred stock..... 29,000 29,000 (29,000)(4a) 171,000
171,000 (4b)
----------- ------------- ------------ --------------- ------------
Net income (loss)
available for
common stockhold-
ers (6).......... $(857,000) $ 942,000 $ 85,000 $ 101,000
----------- ------------- ------------ --------------- ------------
Net income per
common share (7). $ (1.95) $ 0.04
----------- ------------
Shares used in
computing net in-
come per common
share (7)........ 439,650 2,065,433
=========== ============
</TABLE>
24
<PAGE>
- --------
(1) Reflects the Pro Forma earnings of the Steamboat Facilities as shown on
the Pro Forma Condensed Combined Statement of Operations of Steamboat
Facilities. The Company is entitled to an annual preferred return of the
first $1,800,000 of the net income of Steamboat LLC. No provision for the
interest of Far West Capital in the net income of Steamboat Facilities is
made until the annual net income of the Steamboat Facilities exceeds
$1,800,000.
(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% of
the remaining balance of the Convertible Debentures. The reduction of the
interest rate to 9% will be accounted for prospectively. Three of the 26
holders of Convertible Debentures, representing $150,000 in principal
amount, have not agreed to the interest rate reduction from 18% to 9% per
annum. Accordingly, the Company's annual interest expense will be $13,500
greater than the Pro Forma amounts shown in this Prospectus.
(3) To reflect provision for federal and state taxes at 38%, while 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 six month period ended July 31, 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 eliminated as a
result of the Preferred Stock Conversion.
(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.
(5a) The historical amounts during the year ended January 31, 1996 and the six
months ended July 31, 1996 include approximately $185,000 and $93,000,
respectively, of interest on debts owed to related parties.
(5b) To reflect NRG income of 9% interest on $300,000 loan to Reno Energy,
$27,000 per annum, less the 18.5% minority interest in NRG.
(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, the investment in NRG and the retirement of
debt (1,145,181 shares at January 31, 1996 and 1,295,783 shares at July
31, 1996). Assumed exercise of options, warrants and the conversion of the
11% Preferred Stock have not been reflected as they would be anti-
dilutive.
25
<PAGE>
STEAMBOAT ENVIROSYSTEMS, L.C.
PRO FORMA CONDENSED BALANCE SHEET
AS OF JUNE 30, 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 (95% ownership interest) and Far West Capital
(5% ownership interest) for an aggregate of $5,256,000 as if such acquisition
had taken place on June 30, 1996. The total is made up of $4,898,000
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 95% interest in Steamboat Envirosystems, L.C.,
(2) $2,323,000 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 potential 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 the 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.
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------
DEBIT CREDIT PRO FORMA
----------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Cash................................. $ 4,898,000(a) $1,575,000(c)
1,000,000(d)
2,323,000(f)
Other Assets......................... 3,000(a) $ 3,000
Property, Plant and Equipment........ 274,000(b)
1,575,000(c)
1,000,000(d)
2,323,000(e) 5,172,000
----------- ---------- ----------
Total.............................. $10,073,000 $4,898,000 $5,175,000
=========== ========== ==========
LIABILITIES
Notes payable........................ $ 2,323,000(f) $2,323,000(e)
MEMBERS' EQUITY
U.S. Energy Systems, Inc............. 4,901,000(a) $4,901,000
Far West Capital, Inc................ 274,000(b) 274,000
----------- ---------- ----------
Total.............................. $ 2,323,000 $7,498,000 $5,175,000
=========== ========== ==========
</TABLE>
- --------
(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 investment to purchase and cancel certain royalty interests
and to fund certain improvements to the Steamboat Facilities.
(e) To reflect assumption of the Mortgage.
(f) To reflect payment of the Mortgage.
26
<PAGE>
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 six months
ended June 30, 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 $4,848,000 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 95% 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 October 15, 1996 net of an
escrowed reserve, and will be acquired by the Company for $2,323,000 and
contributed to Steamboat LLC, and (3) $1,000,000 in cash will be contributed
by the Company to Steamboat LLC to allow the potential purchase and
cancellation of 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>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------
HISTORICAL
---------------------------------
FAR WEST
ELECTRIC
ENERGY 1 AND 1-A
FUND, 1-A PRO FORMA
L.P.(1) ENTERPRISES COMBINED ADJUSTMENTS ADJUSTED
---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Electric power.... $2,529,000 $875,000 $3,404,000 $ $3,404,000
Other............. 145,000 145,000 (87,000) (3a,b)
(58,000) (4)
---------- -------- ---------- ----------- ----------
Total revenues.. 2,674,000 875,000 3,549,000 (145,000) 3,404,000
---------- -------- ---------- ----------- ----------
Expenses:
Operations:
Depreciation..... 631,000 104,000 735,000 (563,000)(2) 172,000
Royalty.......... 405,000 210,000 615,000 (87,000)(3a,b) 528,000
Other............ 824,000 237,000 1,061,000 (58,000)(4) 1,003,000
Interest........... 655,000 161,000 816,000 (816,000)(5)
---------- -------- ---------- ----------- ----------
Total expenses.... 2,515,000 712,000 3,227,000 $(1,524,000) 1,703,000
---------- -------- ---------- ----------- ----------
Net income(6)..... $ 159,000 $163,000 $ 322,000 $1,701,000
========== ======== ========== ==========
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
-------------------------------------------------------------
HISTORICAL
---------------------------------
FAR WEST
ELECTRIC
ENERGY PRO FORMA
FUND, A 1 AND 1-A
L.P. ENTERPRISES COMBINED ADJUSTMENTS ADJUSTED
---------- ----------- ---------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Electric power.... $1,509,000 $410,000 $1,919,000 $ $1,919,000
Other............. 68,000 68,000 (43,000)(3)
(25,000)(4)
---------- ----------- ---------- ---------------- ----------
Total revenues.. 1,577,000 410,000 1,987,000 (68,000) 1,919,000
---------- ----------- ---------- ---------------- ----------
Expenses:
Operations:
Depreciation..... 329,000 52,000 381,000 (295,000)(2) 86,000
Royalty.......... 237,000 92,000 329,000 43,000(3a,b) 372,000
Other............ 439,000 105,000 544,000 (25,000)(4) 519,000
Interest........... 330,000 71,000 401,000 (401,000)(5)
---------- ----------- ---------- ---------------- ----------
Total expenses.... 1,335,000 320,000 1,655,000 $(678,000) 977,000
---------- ----------- ---------- ---------------- ----------
Net income(6)..... $ 242,000 $ 90,000 $ 332,000 $ 942,000
========== =========== ========== ==========
</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 Electric Energy Fund, L.P. in February, 1995.
(2) To record estimated reduction of depreciation for new basis of assets
acquired, based on $5,172,000 total cost, assuming a 30-year depreciation
period, from date of acquisition.
(3)(a) To eliminate certain royalties paid by 1-A Enterprises to Far West
Electric Energy Fund, L.P., which amount to $87,000 in the year ended
December 31, 1995 and $43,000 in the six months ended June 30, 1996.
(b) Does not include additional savings to be made if negotiations with
certain royalty owners, already under way, are successful.
(4) To eliminate intercompany charges paid by 1-A Enterprises to Far West
Electric Energy Fund, L.P.
(5) To eliminate interest expense due to elimination of debt.
(6) No provision for the interest of Far West Capital in the net income is
required until the annual net income for the Steamboat Facilities exceeds
$1,800,000.
27
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND 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:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Operating expenses.................................... $ 27,000 $ 109,000
Selling and administrative expenses................... 826,000 897,000
Interest expense...................................... 604,000 319,000
Loss from Joint Ventures.............................. 17,000 76,000
---------- ----------
Totals.............................................. $1,474,000 $1,401,000
========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Salaries and consulting fees.............................. $431,000 $407,000
Corporate expenses........................................ 70,000 85,000
Legal and professional costs.............................. 148,000 202,000
</TABLE>
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 previously 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. The interest expense in the 1996 fiscal year was
$169,000.
Losses 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
28
<PAGE>
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 Cogeneration. The
Company's gain from LIPA includes $118,000 gain from sale of unused plant
equipment.
Six months Ended July 31, 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:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
(Loss) from joint ventures................................... $ 92,000 $ 62,000
======== ========
Operating expenses........................................... -- $ 26,000
======== ========
Selling and administrative expenses:
Salaries and consulting fees............................... $239,000 $190,000
Legal and professional fees................................ 77,000 63,000
Corporate expenses......................................... 15,000 48,000
All other.................................................. 77,000 94,000
-------- --------
Total selling and administrative expenses.................... $408,000 $395,000
======== ========
Interest expenses............................................ $328,000 $223,000
======== ========
The six-month joint venture losses break down as follows:
Lehi Independent Power Associates, L.C. ("Lehi")............. $ 58,000 $ 40,000
Plymouth Cogeneration Limited Partnership ("Plymouth")....... 34,000 22,000
-------- --------
Total (loss) from joint ventures............................. $ 92,000 $ 62,000
======== ========
</TABLE>
Operating expenses in the 1995 period resulted from the adjudication of
legal action on a project which had been completed and reported on earlier.
There will be no further costs associated with this project.
Consulting agreements which began during 1995 and were not in existence
during the 1995 period accounted for the increase in salaries and consulting
fees. The Company has entered into a consulting agreement with Indus Inc. for
assistance in developing both projects and joint development agreements in
Asia, with specific emphasis on India. To date, Indus Inc. has been
instrumental in bringing in the potential project for the Rajinder Steel Mill
in Raijpur, India and for developing the potential for a consortium with
Raunaq Industries in New Delhi, India. The Company has also entered into a
consulting agreement with Knoll Capital Management relating to specific work
being done for the Company to develop projects in Israel and the Middle East.
Knoll Capital Management was instrumental in arranging the kibbutz project in
Israel which the Company is currently pursuing. See "Certain Transactions."
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 July 31, 1996, these amounted to $221,000.
The corporate expenses in 1995 included a non-recurring cost of $25,000 for
a previously planned public offering that was never consummated. Interest
expense increased in the 1996 period due to higher levels of borrowing,
including bridge loans which began in June, 1995.
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.
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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 $2,794,000 and $3,557,000, respectively, at July 31, 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 July 31, 1996 would be a positive $124,000.
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 six months ended July 31, 1996, cash flow was carefully
conserved. Salaries were deferred and additional bridge loan borrowings
amounting to $175,000 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 $7,052,000 and the
Private Placement of 11% Preferred Stock and Private Warrants will provide
$3,500,000 for a total net proceeds of $10,552,000. Of this total, the
Company's acquisition of 95% of Steamboat LLC will use $4,848,000 (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 October 15, 1996. The bridge loans, including
interest, total $1,105,000, secured notes payable, including interest, total
$1,218,000, and accrued interest on the Convertible Debentures required to be
paid as part of the restructuring of these instruments, total $366,000. It is
Management's belief that 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 except on a project finance
basis for new projects.
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 secured notes in the principal amount of $1,000,000
and interest thereon, and (iii) repayment of all bridge loans. Three of the 26
holders of Convertible Debentures, representing $150,000 in principal amount,
have not agreed to the interest rate reduction from 18% to 9% per annum.
Accordingly, the Company's annual interest expense will be $13,500 greater
than the Pro Forma amounts shown in this Prospectus.
In addition, the Steamboat Acquisition is expected to 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 11% 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.
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. However,
Sierra has indicated that it would be willing to negotiate a
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mutual release of the contract. 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 exceed the cost of production, or that
Steamboat LLC will generate adequate cash flow from operations to meet its
investing and financing requirements. Although the prices are variable and
fluctuate, if, as expected, a substantial reduction in power prices for
Steamboat 1 takes place in December 1996, the result would mean a decrease in
the Company's share of the net earnings of Steamboat LLC, which, depending on
the extent of the price reduction, could result in the Company reflecting a
net loss. If rates offered by Sierra are not satisfactory, the Company and its
partners may seek to negotiate termination of the existing contracts. The
Company believes that under new regulations it will be able to sell the output
of electricity to other electric utility purchasers at more favorable prices.
The Company will contribute $1,000,000 to Steamboat LLC for the purpose of
buying out certain royalty interests and to fund certain improvements to the
Steamboat Facilities which are expected to result in higher electricity
output. While negotiations with certain royalty owners have already begun, and
the Company and its partners believe that these interests can be bought out,
no agreements have yet been concluded and potential savings from royalty
reductions are not reflected in the pro forma financial statements presented
herein. Additional royalty agreements, applying only to Steamboat 1, call for
payment of a total of 30% of the net revenue of Steamboat 1 after certain
deductions, starting March 1, 1997. The resulting effect on the net income of
Steamboat LLC and on the Company's after tax income will depend on the other
elements of power sales revenues outlined above. Assuming the reduction in
income from power sales illustrated above, and the buyout of no royalty
interests, the cost of these net revenue royalties could be in the range of
$50,000 to $100,000 annually. Negotiations with these interests have also
already begun, and Management believes they will be successfully purchased
although no assurance can be given. See "U.S. Energy Systems, Inc. and
Subsidiaries Pro Forma Condensed Consolidated Statements of Operations,"
"Steamboat Facilities Pro Forma Condensed Combined Statement of Operations,"
and "Business--Current Operations and On-Going Projects."
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 sale 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 fourth quarter of the
fiscal year, provided that it obtains the necessary air quality permits.
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.
Under Title V of the Clean Air Act, the Lehi Plant must obtain an operating
permit from the Utah Division of Air Quality before it can commence
operations. The Title V program did not take effect in Utah until July 10,
1995. Therefore, a Title V permit was not a requirement during past operations
of the facility, but it will be a requirement for future operations. A permit
modification would also be necessary if new engines are installed or if
capacity is increased.
The Plymouth, NH plant has been operating since January 1995 and
historically 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, the plant has begun to provide cash flow
to the Company. The Company received its first distribution amounting to
$20,000 in August 1996. In addition, switching the plant's fuel supply to less
expensive waste oil, as is presently being contemplated, could add 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
would take place during fiscal year 1998.
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<PAGE>
The Company also expects revenues from other projects, currently being
negotiated, that will be under way during the next twelve months but are not
yet under contract. There are five such projects, not including Steamboat, at
least four of which the Company believes will be secured and from which
revenues are anticipated 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 in the long term 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 a letter of intent 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, the resort manager and the resort owners will own the cogeneration
plant and water system and share revenues based on capital investment in the
project. The resort owners have committed to pay approximately $41,000 for the
installation of the first of six engine generators during September 1996, all
of which has been received. While the Company anticipates realizing additional
revenues for its engineering and equipment sales to the project immediately
upon the start of construction, and anticipates that the main stream of revenue
will be the sale of energy to the host facilities over the fifteen year term of
the contract, there can be no assurance that this will occur. 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 over the next twelve months on
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%. Three of the
26 holders of Convertible Debentures, representing $150,000 in principal
amount, have not agreed to the interest rate reduction from 9% to 18% per
annum. Accordingly, the Company's annual interest expense will be $13,500
greater than the Pro Forma amounts in this Prospectus.
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 of inflation on Company earnings and cash flows is expected to be
minimal.
32
<PAGE>
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 Mr. 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. Mr. Nelson resumed the positions of President and Chief
Executive Officer of the Company when it emerged from bankruptcy. 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 utilizing a process known as
"cogeneration." Cogeneration is defined as the production of two or more
energy forms (typically electricity and heat) simultaneously 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
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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 begun to develop new projects since USF merged with the reorganized
Cogenic Energy Systems, Inc. in November 1993, the president and key
consultants of the Company have been involved in the power generation industry
for over twenty years and the alternative energy business for over fifteen
years and have been involved in the building of 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) IPP 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 is 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. The basis for granting air quality permits varies from location to
location, but permits are always required before commencement of operations.
In applying for such permits, the facility developers present a computer model
of emissions of carbon monoxide and nitrous oxides which would be expected to
issue from the facility over a one year period. This model is based on the
fuel used, the anticipated annual hours of operation, the engine
manufacturer's specifications for emissions, and the reduction of such
emissions from application of catalytic converters or other devices. The
emissions are then expressed in weight, e.g., "100 tons per year." The local
air quality authority will then determine if this is acceptable for the area.
The local air quality authority may or may not require continuous emissions
monitoring to insure that the level of emissions granted in the permit are not
exceeded.
If the facility is recovering waste heat and utilizing that heat to displace
heat which would otherwise be made from burning fuels in conventional furnaces
or boilers, and if the emissions from the facility are actually less than the
emissions which would be forthcoming from the conventional furnaces or boilers
so displaced, there is said to be a "net reduction" in emissions for the area,
and the permitting authorities will normally act promptly and favorably to
grant the permit. If the facility is not using recovered waste heat to
displace other heat source emissions, e.g., a large, stand-alone generating
plant with no cogeneration, there would be a "net increase" in emissions in
that geographic area. Under such circumstances, the permitting process could
be prolonged and made difficult by public hearings, public interventions, and
the considerably more careful determinations which the local air quality
authority must make in order to decide whether or not such net increase in
emissions can be allowed.
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<PAGE>
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 frequently 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 because of the low fuel costs. 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 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, the Company has entered into a memorandum of understanding with
Raunaq Industries in India to pursue the creation of a consortium to build one
or more large coal fired power plants. In Panama, while no definitive
consortium agreement has been signed, the Company and its Panamanian partners
have created a Panamanian corporation (Panavisa), which has applied to the
Panamanian government for pre-qualification to bid on several projects.
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 April 1996 the Federal Energy Regulatory Commission ("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, many
states are expected to phase in such regulations in the future. See
"Business--Government Regulation."
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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 95% 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 remaining 5%. 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 October 15, 1996 net of an
escrowed reserve, and will be acquired by the Company for $2,323,000 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 provide capital for the
potential acquisition of certain of the royalty interests and for funding
certain improvements to the Steamboat Facilities. While negotiations with
certain royalty owners have already begun, and the Company and its partners
believe that these interests can be bought out, no agreements have yet been
concluded and no potential savings from royalty reductions are reflected in
the pro forma financial statements presented herein. Additional royalty
agreements, applying only to Steamboat 1, call for payment of a total of 30%
of the net revenue of Steamboat 1 after certain deductions, starting March 1,
1997. The resulting effect on the net income of Steamboat LLC and on the
Company's after tax income will depend on the other elements of power sales
revenues outlined above. Assuming the reduction in income from power sales
illustrated above, and the buyout of no royalty interests, the cost of these
net revenue royalties could be in the range of $50,000 to $100,000 annually.
Negotiations with these interests have also already begun, and Management
believes they will be successfully purchased, although no assurance can be
given. See "U.S. Energy Systems, Inc. and Subsidiaries Pro Forma Condensed
Consolidated Statements of Operations," "Steamboat Facilities Pro Forma
Condensed Combined Statement of Operations" and "Management's Discussion and
Analysis of Financial Condition and Plan of Operation--Plan of Operation."
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. The Company
will receive the first $1,800,000 of Steamboat LLC annual net income. For net
income above $1,800,000, Far West Capital will receive: (i) 55% for the first
five years and (ii) 5% thereafter, with the Company to receive the balance.
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, none of which is the subject of a
binding or definite agreement.
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
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Steamboat Facilities. 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 8 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. 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 exceed the
cost of production, or that Steamboat LLC will generate adequate cash flow
from operations to meet its investing and financing requirements. Although the
prices are variable and fluctuate, if, as expected, a substantial reduction in
power prices for Steamboat 1 takes place in December 1996, the result would
mean a decrease in the Company's share of the net earnings of Steamboat LLC,
which, depending on the extent of the price reduction, could result in the
Company reflecting a net after tax loss. However, Management believes that a
more satisfactory price is likely to be obtained for the electricity generated
in the Steamboat Facilities through negotiations with Sierra or otherwise,
although no assurance can be given that such efforts will be successful. 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 to
other utilities. While under the power purchase agreements, Sierra has an
obligation to buy the electricity generated and the plants have an obligation
to sell the same to Sierra, negotiations relating to the price adjustments may
result in a mutual cancellation of the agreement if such is favorable to both
sides. Sierra has indicated it would be willing to negotiate a mutual
cancellation.
There are currently five geothermal power projects operating in Steamboat
Hills, Nevada, totalling approximately 62 megawatts of output. In addition to
the 8 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 $5.9 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
$5,110,000 in State of New Hampshire tax exempt revenue bonds and $700,000 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 Gas & Electric
Corporation 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. 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 wheel electric power to two
other state college campuses. Also, plans are currently being developed by
Plymouth Cogeneration to install special fuel treatment equipment which will
allow the existing engines to
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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"
and "Certain Transactions." The Company's partners in the Lehi project are Far
West Capital and Suma Corporation ("Suma"), 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, Suma 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 fourth 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, commencement of
operations would be delayed from the fourth 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.
Under Title V of the Clean Air Act, the Lehi Plant must obtain an operating
permit from the Utah Division of Air Quality before it can commence
operations. The Title V program did not take effect in Utah until July 10,
1995. Therefore, a Title V permit was not a requirement during past operations
of the facility, but it will be a requirement for future operations. A permit
modification would also be necessary if new engines are installed or if
capacity is increased. Because all existing facilities were required to submit
operating permit applications in 1995, the Division of Air Quality has had a
significant backlog.
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. Management had been negotiating with
Micron to provide direct sale of 35 megawatts from the Lehi facility. During
these prolonged negotiations, and up until Micron's decision in April 1995 to
suspend construction of their new plant, Management was constrained by local
political
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sensitivity from seeking sale of electricity from the Lehi facility to other
potential purchasers. Management believes, however, that the substantial
population and industrial growth being experienced in the area is creating a
large, future market for power. Management further believes that it should plan
to increase the Lehi facility's size to 35 megawatts using high efficiency gas
turbines since a market is rapidly developing. Even in the absence of Micron,
35 megawatts is the size under discussion because the plant's air quality
permit allows for 249.9 tons of emissions annually, which fits the profile of a
35 megawatt combined cycle gas turbine.
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 249.9 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 the Cowen Investment Group 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 Cowen 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.
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Under the plan discussed with the mall owners, the joint development company
would engineer, build and operate the cogeneration facilities, with financing
arranged by Cowen. 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. A proposed agreement with one
of the mall owners calls for at least ten such installations. The mall owners
have indicated, however, that installations of cogeneration systems would be
contemplated at all malls where certain basic economic criteria for
cogeneration exists. The Company and Cowen 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 a letter of intent 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, the resort manager and the resort owner
will form a limited liability entity, which will own and operate the
cogeneration facility, selling discounted power to the hotel and adjacent
commercial buildings. The profits and cash shall be distributed pro rata on the
basis of the capital contributions of the parties to the contract. The Company
will be credited for its capital contributions as a result of the services it
will provide to the joint venture. 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.
Nevada District Heating Project. Concurrently with the closing of the
Offering, the Company will be acquiring an 81.5% interest in NRG Company LLC
("NRG") for $265,000. NRG was recently formed and funded at $70,000 by several
investors in the Company, including Messrs. Rosen and Nelson (see "Certain
Transactions--Reno Project"). From these funds NRG made a loan of $50,000 to
Reno Energy LLC ("Reno Energy"). $250,000 from the Company's capital
contribution to NRG will be loaned to Reno Energy to bring
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the total loan to $300,000. The purpose will be to fund pre-development
expenses associated with the proposed development of a geothermal district
heating project. The loan is to be repaid over three years with interest at 9%
per annum, or with the proceeds from any financing transaction.
There is a large industrial park being developed in Reno on a 1200 acre area
in close proximity to the district heating plant. The first phase of the park
is already sold out, and the entire park is expected to be developed within
the next four to seven years. An examination of the current property owners of
the park indicates that the park will house mostly commercial buildings with
some industrial facilities. Also, a 200-bed hospital and 300-room hotel are
planned to be built in the park, with many more prospective tenants.
Therefore, the industrial park will create a huge demand for space heating and
cooling as well as process heating. It is expected that the total buildings,
adding up to 30,000,000 square feet of floor space, will be connected to the
geothermal grid to meet their heating and cooling needs. Additionally, there
is a high school located nearby and a college campus is planned in addition to
other development in the area. Each of these is likely to be a major consumer
of geothermal energy.
Reno Energy plans to construct and operate a plant which will use
geothermally heated fresh water for space heating and cooling and for process
heating in the industrial park and the other nearby development. To meet the
requirements of these commercial and industrial facilities, a pipeline with
supply and return lines would be built that would loop through the industrial
park. A binary hot water system with fresh water circulating through the loop
will be used to avoid any concerns associated with the direct use of
geothermal brine such as scale build-up in the pipes, corrosion on pipes and
equipment, and possible pollution of the ground in case of a spill. Fresh
water will be heated in heat exchangers at the site where geothermal brine is
extracted and reinjected; only fresh water will be circulated in the loop. The
heat thus provided will be sold at a discount from the cost of producing an
equivalent amount of heat from conventional natural gas furnaces.
Under the terms of the agreements between NRG and Reno Energy, NRG will have
an option to acquire a 50% interest in Reno Energy (subject to certain
preferential distribution interests of the founders of Reno Energy) (the "Reno
Option"). The Reno Option, which would be paid for out of working capital,
will be exercisable for $1 million until December 1, 1996 but extendable, upon
payment of $100,000, until March 1, 1997 at an exercise price of $1,200,000.
If the Company determines to exercise the Reno Option, it will use funds
designated for use as working capital, if such funds are available at that
time. It is estimated that approximately $35,000,000 is required for
construction, procurement and other costs associated with the commencement of
operations at Reno Energy. Such amount is expected to be financed through
industrial revenue bonds and/or vendor financing, in addition to other types
of tax-exempt debt financing. Efforts begun on the Reno Project include
retention of an international engineering firm to provide preliminary
engineering and design services to support Reno Energy's application to the
Nevada Public Service Commission for authorization, as well as retention of a
financial consultant to assist in securing debt financing for the Reno
Project.
Under the terms of the agreements governing NRG, the Company, which will own
81.5% of NRG, will have decision making authority on all matters. If the Reno
Option is exercised, each of the investors in NRG will be given an opportunity
to fund its pro rata share of the option price in order to maintain its
interest in NRG.
The project is still in the planning and development stage. As yet there are
no contracts with any end users, nor are there approvals from local and state
authorities. The Company will have to satisfy itself as to these and other
factors before NRG's option would be exercised.
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 its 50% owned subsidiary, 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
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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. The remaining 50% of USE International,
LLC is owned by Indus, LLC. Ravi Singh, a consultant to the Company, is the
President and principal of Indus, LLC.
Panama. The Company has formed a company, Panavisa Envirosystems, S.A.
("Panavisa"), 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. While there is no definitive agreement in place, the
Company is working with a Panamanian financial group to form a consortium to
design, build, and operate barge-mounted power plants for Institucion de
Recursos Hidraulicos y Electrificacion, the Panamanian national electric
company, which would purchase electricity from the consortium under a
negotiated long-term contract. If such project is ultimately undertaken, it is
likely that the Panamanian financial group involved in such project would
become a partner in Panavisa. 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. Absorption 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 President and consultants of the Company
communicate frequently with numerous individuals and companies in the industry.
Most of the projects in which the Company is now involved
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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 plant 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. Many of the very large
plants are owned and operated by subsidiaries of public utility companies and
large industrial companies which have established these subsidiaries to
participate in the IPP industry. Approximately 18 of the 25 largest independent
power companies are subsidiaries of public utilities or large industrial
companies. The operations of most of these companies are geared to the largest
sized power plants because of the need to place significant investment to
achieve returns large enough to have an impact on a large public utility's or
industrial company's balance sheet. Some of these companies have been highly
successful in the development of larger plants; but under federal law, utility
subsidiaries may not own more than 50% of QF projects. However, subsidiaries of
large industrial companies and other non-utility companies have no similar
restrictions. Additionally, under federal law enacted in 1992, a new category
of independent power producer was created known as exempt wholesale generators
("EWG"). EWG's have no ownership limitations nor do they have similar
requirements to QF's with regard to useful thermal output or fuel efficiency
and operating efficiency criteria. To receive qualification as an EWG, the
owner of an IPP need only demonstrate that the entire output of the facility is
sold exclusively in the wholesale market. EWG's are prohibited from making
retail sales and therefore cannot be developed for inside-the-fence projects.
In many instances, subsidiaries of public utilities and large industrial
companies make ideal partners for projects and the Company intends to work with
such companies when it locates a specific project fitting their investment
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 will retain 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 249.9
tons of NOX annually. All costs associated with LIPA and the operation of the
plants, and all income derived therefrom, are divided pro-rata among the
Company
43
<PAGE>
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 is 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. QF status exempts the owner of an IPP from regulation
under various federal laws including PUHCA and the regulation of the rates for
sale from the IPP as well as certain state laws. However, QF status does not
exempt in IPP from state utility law regulation in those states where the sale
of electricity directly to an industrial or commercial customer is regulated as
a retail sale. Most states currently do not regulate the sale of electricity
from a QF to an inside-the-fence customer.
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. With the exception of an air
operating permit for the Lehi facility, the Company believes that it is in
substantial compliance with all applicable rules and regulations and that the
projects in which it is involved have the requisite approvals for existing
operations and are operated in accordance with applicable laws. However, the
operations of the Company and its projects 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
44
<PAGE>
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.
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.
45
<PAGE>
MANAGEMENT
The directors and executive officers of the Company are presently as
follows:
<TABLE>
<CAPTION>
AGE POSITION(S)
--- -----------
<S> <C> <C>
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.................. 71 Director
Seymour J. Beder............ 69 Treasurer and Chief Financial Officer
</TABLE>
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 holder 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
46
<PAGE>
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.
47
<PAGE>
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 six
months ended July 31, 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>
<CAPTION>
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS LONG TERM COMPENSATION
- --------------------------- ------------------ -------- ----- ----------------------
<S> <C> <C> <C> <C>
Richard H. Nelson, 1997
President and Chief (to July 31, 1996) $ 75,000(1) -- --
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.
- --------
For a period of three years from the date of this Prospectus, all
compensation and other arrangements between the Company and its officers,
directors and affiliates is to be approved by a Compensation Committee of the
Board of Directors, a majority of whom are to have no affiliation or other
relationship with the Company other than as 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.
48
<PAGE>
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 compete with the Company during the term of his employment with the
Company or for two years thereafter, or, at any time, disclose any
confidential information pertaining to the Company. Mr. Nelson works for the
Company full-time. As of October 15, 1996, the amount of deferred compensation
owed to Mr. Nelson will be $231,750.
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, he may not compete with the Company during the term of
his employment with the Company or for two years thereafter, or, at any time,
disclose any confidential information pertaining to the Company. As of October
15, 1996, the amount of deferred compensation owed to Mr. Rosen will be
$167,500.
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, the President, Theodore Rosen, the Chairman, Ronald Moody, a
director, Fred Knoll, a director, and S. Marcus Finkle, a principal
stockholder of the Company, are participants in the Plymouth Loan (having
loaned $25,000, $25,000, $75,000, $650,000 and $150,000 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, Moody, Knoll and Finkle will benefit by the payment to them from the
net proceeds of the Offering and the Private Placement of $30,600, $30,500,
$91,000, $792,500 and $183,000, respectively (including accrued interest to
October 15, 1996) in connection with the repayment of the Plymouth Loan. Mr.
Rosen, Mr. Knoll and Mr. Finkle and Guernroy Ltd. a principal Stockholder, are
also holders of the Company's Convertible Debentures in the amounts of
$125,000, $200,000, $50,000 and $50,000 respectively. Accrued interest,
adjusted to October 15, 1996, which will be repaid from the proceeds of the
Offering, amount to $29,400, $54,000, $12,500 and $11,800 respectively. As
part of the Debenture Conversion, the conversion rate of the Convertible
Debentures, which remain outstanding after the Debenture Conversion, will be
reduced to $8.00 per share from the present $16.00 per share and the interest
rate thereon will be reduced to 9% from the present 18%. 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. Three of the 26 holders of Convertible Debentures,
representing $150,000 in principal amount, have not agreed to the interest
rate reduction from 18% to 9% per annum. Accordingly, the Company's annual
interest expense will be $13,500 greater than the Pro Forma amounts shown in
this Prospectus. See "Use of Proceeds" and "Description of Securities--
Convertible Debentures."
49
<PAGE>
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 October 25, 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.
$775,000 of the proceeds of the Offering and the Private Placement will be
used to repay the Anchor Loan and $115,000 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."
The Company and its partners, who each own 50% of LIPA, share on a pro-rata
basis the ownership, retrofitting costs, annual expenses, and revenues
associated with the Lehi Cogeneration 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 "Business--
Current Operations and On-Going Projects."
The Company has also entered into a consulting agreement with Knoll Capital
Management relating to specific work being done for the Company to develop
projects in Israel and the Middle East. The contract is for a term of one
year, expiring in October 1996, and provides for a consulting fee of $5,000
per month. Fred Knoll, a director and principal stockholder of the Company is
the Chairman and Chief Executive Officer of Knoll Capital Management. Knoll
Capital Management was instrumental in arranging the kibbutz project in Israel
which the Company is currently pursuing and continues to be instrumental in
assisting the Company in negotiations in other parts of the world, including
Panama. See "Management's Discussion and Analysis of Financial Condition and
Plan of Operations--Results of Operations."
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 October 25, 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."
Reno Project. In order to participate in the Reno Project and eliminate any
potential conflict of interest, the Company will be acquiring the interests of
Messrs. Rosen and Nelson in NRG. Of the $265,000 to be paid by the Company for
its 81.5% interest in NRG, $10,000 will be used to purchase those interests,
for which Messrs. Rosen and Nelson had paid that amount. See "Business--
Current Operations and On-Going Projects--Nevada District Heating Project."
Messrs. Moody and Knoll, directors of the Company until their resignation upon
the consummation of this Offering, will each continue to own $10,000 (3.08%)
interests in NRG.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table lists the number of shares of Common Stock owned as of
August 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>
<CAPTION>
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 2.9%
Theodore Rosen.......... 88,333(2) 17.4% 100,833(2a) 3.4%
Ronald Moody............ 21,500(3) 4.8% 21,500(3) 0.7%
Fred Knoll.............. 171,333(4) 28.6% 191,334(4a) 6.3%
Evan Evans.............. 2,500(5) 0.6% 2,500(5) 0.1%
S. Marcus Finkle........ 63,833(6) 13.9% 68,833(6a) 2.4%
117 AABC
Aspen, CO
Guernroy, Ltd........... 38,158(7) 8.6% 43,158(7a) 1.5%
c/o Royal Bank of Can-
ada
Channel Isles, UK
Enviro Partners, L.P.... 0 0.0% 1,600,000(8) 35.6%
885 Third Avenue, 34th
Floor
New York, NY 10022
Anchor Capital Company, 205,000(9) 31.8% 205,000(9) 7.0%
LLC....................
1140 Avenue of the
Americas
New York, NY 10036
All officers and direc-
tors as a group (6 per-
sons).................. 381,113(2) 55.2% 413,613(2)(2a) 13.1%
(3)(4) (3)(4)
(5) (4a)(5)
</TABLE>
- --------
(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
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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.
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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 "Preferred Stock").
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.
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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 "Series One Preferred Stock"). The Company
issued 57,500 shares of 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
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<PAGE>
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 the consummation of this Offering, 1,600,000 shares of 11% Preferred
Stock, which may be converted into 1,600,000 shares of Common Stock of the
Company. Such conversion may take place at any time, and from time to time.
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. Enviro has
agreed that it will not sell in the public market the shares received upon
conversion, for a period of twelve months from the closing of the Offering.
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 after
four years at a price per share equal to (x) 100% of the liquidation
preference of such share plus (y) an amount per share equal to all accrued and
unpaid dividends thereon, whether or not declared or payable.
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, at a
price of $4.00 per share, $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%. Three of the 26 holders of Convertible Debentures, representing
$150,000 in principal amount, have not agreed to the conversion. If such
individuals do not agree to the conversion, the Company's annual interest
expense will increase by $13,500. These changes were negotiated with the
holders of the Convertible Debentures. 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
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<PAGE>
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.
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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, 43,250 shares are
currently eligible for sale (none of which are subject to the agreements
described below restricting their sale), and the remaining 21,400 shares will
be eligible for such sale in or after November 1996, subject in each instance
to the volume limitations of the Rule. The holders of record of 130,946 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. Although registered pursuant to the Shelf Registration, 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 in
the public market for a period of twelve months from the closing of the
Offering. 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. However, 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 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.
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UNDERWRITING
The Underwriters named 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 2,125,000
shares of Common Stock and 2,125,000 Warrants. The number of shares of Common
Stock and Warrants which each Underwriter has agreed to purchase is set forth
opposite its name:
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF
UNDERWRITER OF COMMON STOCK WARRANTS
----------- ---------------- ---------
<S> <C> <C>
Gaines, Berland Inc..................................
--------- ---------
Total.............................................. 2,125,000 2,125,000
========= =========
</TABLE>
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 dealers 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 318,750 additional shares
of Common Stock and/or an additional 318,750 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 212,500 shares of Common Stock and/or an aggregate of 212,500
Warrants (the "Representative's Purchase Option"). The Representative's
Purchase Option is exercisable at a price of $6.60 per share of Common Stock
and $.165 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, except
that the exercise price of the Warrants issuable upon the exercise of the
Representative's Purchase Option is $5.00. 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
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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 130,946 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. Anchor has
agreed not to sell the 205,000 shares of Common Stock to be acquired by it in
the Preferred Stock Exchange without the consent of the Representative for a
period of 9 months following the date of this Prospectus, although such shares
are registered pursuant to the Shelf Registration. Similarly, Enviro has
agreed not to sell in the public market any of the 11% Preferred Stock or any
of the 1,600,000 shares of Common Stock into which such Preferred Stock may be
converted for a period of twelve months following the date of the consummation
of the Offering, although such shares are also registered pursuant to the
Shelf Registration. In addition, during the five years following the date of
the consummation of the Offering, 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.
59
<PAGE>
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 given 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.
The financial statements of Plymouth Cogeneration Limited Partnership as of
December 31, 1994 and 1995 and for the year ended December 31, 1995, appearing
in this Prospectus, have been so included in the reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
60
<PAGE>
U.S. ENVIROSYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
U.S. ENERGY SYSTEMS, INC.
Report of Independent Auditor............................................. F-2
Consolidated Balance Sheet as at January 31, 1996 and July 31, 1996 (Unau-
dited)................................................................... F-3
Consolidated Statements of Operations for the years ended January 31, 1996
and January 31, 1995
and for the Six Months ended July 31, 1996 and July 31, 1995 (Unaudited). F-4
Consolidated Statements of Changes in Capital Deficiency for the years
ended January 31, 1996
and January 31, 1995 and for the Six Months ended July 31, 1996 and July
31, 1995 (Unaudited)..................................................... F-5
Consolidated Statements of Cash Flows for the years ended January 31, 1996
and January 31, 1995
and for the Six Months ended July 31, 1996 and July 31, 1995 (Unaudited). F-6
Notes to Financial Statements............................................. F-7
FAR WEST ELECTRIC ENERGY FUND, L.P.
Independent Auditor's Report.............................................. F-16
Balance Sheets, December 31, 1995 and 1994 and June 30, 1996.............. F-17
Statements of Income, for the years ended December 31, 1995, 1994, and
1993
and the Six Months ended June 30, 1996................................... F-18
Statements of Partners' Capital, for the years ended December 31, 1995,
and 1994, and 1993
and the Six Months ended June 30, 1996................................... F-19
Statements of Cash Flows, for the years ended December 31, 1995, 1994 and
1993
and the Six Months ended June 30, 1996................................... F-20
Notes to Financial Statements............................................. F-21
1-A ENTERPRISES
Independent Auditor's Report.............................................. F-29
Balance Sheet, December 31, 1995 and 1994 and June 30, 1996............... F-30
Statements of Income, for the years ended December 31, 1995 and 1994...... F-31
Statements of Partners' Capital, for the years ended December 31, 1995 and
1994
and the Six Months ended June 30, 1996................................... F-32
Statements of Cash Flows, for the years ended December 31, 1995 and 1994
and the Six Months ended June 30, 1996................................... F-33
Notes to Financial Statements December 31, 1995 and 1994 and the Six
Months ended June 30, 1996............................................... F-34
LEHI INDEPENDENT POWER ASSOCIATES, L.C.
Report of Independent Auditors............................................ F-38
Balance Sheets, December 31, 1995 and 1994 and June 30, 1996.............. F-39
Statements of Operations for the year ended December 31, 1995, the Period
ended December 31, 1994 and the Six Months ended June 30, 1996........... F-40
Statement of Changes in Members' Equity for the year ended December 31,
1995,
the Period ended December 31, 1994 and the Six Months ended June 30,
1996..................................................................... F-41
Statements of Cash Flows for the year ended December 31, 1995, the Period
ended December 31, 1994 and the Six Months ended June 30, 1996........... F-42
Notes to Financial Statements............................................. F-43
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
Report of Independent Accountants......................................... F-45
Balance Sheets, December 31, 1995 and 1994 and June 30, 1996.............. F-46
Statement of Operations for the year ended December 31, 1995
and the Six Months ended June 30, 1996................................... F-47
Statement of Changes in Partners' Capital for the year ended December 31,
1995
and the Six Months ended June 30, 1996................................... F-48
Statement of Cash Flows for the year ended December 31, 1995
and the Six Months ended June 30, 1996................................... F-49
Notes to Financial Statements............................................. F-50
</TABLE>
F-1
<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.
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
F-2
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
ASSETS 1996 1996
(NOTE G) ----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash.................................................. $ 2,000 $ 1,000
Other current assets.................................. 16,000 20,000
---------- ----------
Total current assets................................. 18,000 21,000
Investments in Joint Ventures--at equity:
Lehi Independent Power Associates, L.C. (Note C[1])... 1,170,000 1,112,000
Plymouth Cogeneration Limited Partnership (Note C[2]). 703,000 669,000
Other assets........................................... 103,000 274,000
---------- ----------
TOTAL................................................ $1,994,000 $2,076,000
========== ==========
LIABILITIES
Current liabilities:
Accrued expenses and other current liabilities (in-
cluding due to related parties of $467,000 and
$707,000, respectively) (Notes D and L).............. $ 990,000 $1,663,000
Pre-reorganization income taxes payable and accrued
interest--
current (Note E)..................................... 172,000 192,000
Loans payable (Note G)................................ 766,000 960,000
---------- ----------
Total current liabilities............................ 1,928,000 2,815,000
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)............................. 965,000 975,000
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 in-
terest (Note E)....................................... 176,000 180,000
Advances from Joint Ventures (Note C[2])............... 15,000 24,000
---------- ----------
Total liabilities.................................... 4,723,000 5,633,000
---------- ----------
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
Accumulated deficit.................................... (2,846,000) (3,674,000)
---------- ----------
Total capital deficiency............................. (2,729,000) (3,557,000)
---------- ----------
TOTAL................................................ $1,994,000 $2,076,000
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JULY 31,
------------------------ -----------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cost and expenses:
Operating expenses.......... $ 27,000 $ 109,000 $ $ 26,000
Administrative expenses..... 826,000 897,000 408,000 395,000
Interest expense............ 604,000 319,000 328,000 223,000
Loss from Joint Ventures.... 17,000 76,000 92,000 62,000
----------- ----------- --------- ---------
Total cost and expenses.... 1,474,000 1,401,000 828,000 706,000
----------- ----------- --------- ---------
(Loss) before extraordinary
item....................... (1,474,000) (1,401,000) (828,000) (706,000)
Extraordinary gain from re-
structuring of liabilities.. 83,000 85,000 83,000
----------- ----------- --------- ---------
Net (Loss)................... (1,391,000) $(1,316,000) (828,000) $(623,000)
=========== =========
Dividends on preferred stock. (21,000) (29,000)
----------- ---------
(Loss) applicable to common
stock....................... $(1,412,000) $(857,000)
=========== =========
(Loss) per share before ex-
traordinary item............ $ (3.41) $ (3.38) $ (1.95) $ (1.61)
=========== =========== ========= =========
Net (loss) per share......... $ (3.22) $ (3.17) $ (1.95) $ (1.42)
=========== =========== ========= =========
Weighted average shares out-
standing.................... 438,773 415,022 439,650 438,296
=========== =========== ========= =========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-4
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
(NOTES A AND J)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- -------------------------
NUMBER NUMBER ADDITIONAL
OF OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------- ------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--January 31,
1994................... 391,250 $4,000 $(306,000) $ (139,000) $ (441,000)
Sale of common stock.... 32,000 139,000 139,000
Compensation
attributable to options
and warrants........... 48,000 48,000
Shares issued for inter-
est in Joint Ventures.. 11,400 114,000 114,000
Value assigned to
warrants issued in
connection with notes
payable................ 46,000 46,000
Net (loss) for the year
ended
January 31, 1995....... (1,316,000) (1,316,000)
------- ------- ------- ------ --------- ----------- -----------
Balance--January 31,
1995................... 434,650 4,000 41,000 (1,455,000) (1,410,000)
Sale of common stock.... 5,000 34,000 34,000
Value assigned to
preferred stock issued
in connection with
loans payable.......... 57,500 $ 1,000 28,000 29,000
Value assigned to
additional warrants
issued in connection
with notes payable..... 9,000 9,000
Net (loss) for the year
ended
January 31, 1996....... (1,391,000) (1,391,000)
------- ------- ------- ------ --------- ----------- -----------
Balance--January 31,
1996................... 57,500 1,000 439,650 4,000 112,000 (2,846,000) (2,729,000)
Net (loss) for the six
months ended
July 31, 1996.......... (828,000) (828,000)
------- ------- ------- ------ --------- ----------- -----------
Balance--July 31, 1996
(Unaudited)............ 57,500 $ 1,000 439,650 $4,000 $ 112,000 $(3,674,000) $(3,557,000)
======= ======= ======= ====== ========= =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JULY 31,
------------------------ -----------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating ac-
tivities:
Net (loss).................. $(1,391,000) $(1,316,000) $(828,000) $(623,000)
Adjustments to reconcile net
(loss) to net cash (used
in) operating activities:
Amortization of debt dis-
count...................... 42,000 3,000 10,000 7,000
Amortization of purchase
price in excess of equity
in Joint Ventures.......... 59,000 55,000 26,000 28,000
Amortization of deferred fi-
nancing and registration
costs...................... 72,000 39,000 14,000
Value assigned to options
and warrants............... 48,000
Gain from restructuring of
liabilities................ (83,000) (85,000) (83,000)
Equity in (income)/loss of
Joint Ventures, net of dis-
tributions................. (13,000) 21,000 66,000 34,000
Loss from legal proceedings. 102,000
Deferred interest........... 114,000 61,000
Accrued interest on pre-re-
organization income taxes
payable.................... 39,000 24,000
Changes in operating assets
and liabilities:
(Increase) decrease in
other assets.............. 2,000 (1,000) (19,000) (11,000)
Increase in accounts pay-
able and accrued expenses. 671,000 146,000 673,000 134,000
----------- ----------- --------- ---------
Net cash (used in) operat-
ing activities............ (641,000) (874,000) (9,000) (439,000)
----------- ----------- --------- ---------
Cash flows from investing ac-
tivities:
Security deposit on proposed
acquisition................ (50,000)
Cost incurred in connection
with the Proposed Acquisi-
tions...................... (3,000)
Investment in Joint Ven-
tures...................... (636,000)
Advances to Joint Ventures.. (9,000) (11,000)
Loans (to) from officers.... (47,000)
Collections of loans receiv-
able--officer.............. 33,000 59,000
----------- ----------- --------- ---------
Net cash provided by (used
in) investing activities.. (29,000) (694,000) 59,000
----------- ----------- --------- ---------
Cash flows from financing ac-
tivities:
Proceeds from issuance of
convertible subordinated
debt....................... 400,000 25,000
Proceeds from issuance of
common stock............... 34,000 139,000 63,000
Proceeds from issuance of
notes payable.............. 25,000 975,000
Proceeds from loans payable
and preferred stocks....... 785,000 175,000 570,000
Payment of deferred financ-
ing costs.................. (102,000) (85,000)
Payment of pre-reorganiza-
tion payroll taxes payable. (34,000) (105,000) (109,000)
Payment of pre-reorganiza-
tion income taxes payable.. (9,000) (13,000) (11,000)
Advances from Joint Ven-
tures...................... 15,000 9,000 3,000
Deferred registration costs. (50,000) (176,000)
----------- ----------- --------- ---------
Net cash provided by fi-
nancing activities........ 664,000 1,396,000 8,000 456,000
----------- ----------- --------- ---------
NET INCREASE (DECREASE) IN
CASH........................ (6,000) (172,000) (1,000) 76,000
Cash--beginning of the peri-
od.......................... 8,000 180,000 2,000 8,000
----------- ----------- --------- ---------
CASH--END OF THE PERIOD...... $ 2,000 $ 8,000 $ 1,000 $ 84,000
=========== =========== ========= =========
Supplemental disclosure of
cash flow information:
Cash paid for interest...... $ 93,000 $ 163,000 $ 154,000 $ 60,000
Supplemental schedule of
noncash investing activity:
Fair market value of common
stock issued and contrib-
uted to investment in Joint
Ventures................... $ 114,000
Supplemental schedule of
noncash financing activity:
Valuation of preferred stock
in connection with bridge
loan....................... $ 29,000
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-6
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
(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 an 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.
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 July 31, 1996 and for the six-
month periods ended July 31, 1996 and July 31, 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.
F-7
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
[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 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 six-month period
ended July 31, 1996, the Project was not in operation.
In the Proposed Acquisitions, Far West Capital Inc., the other 50% owner of
LIPA, will own an interest in Steamboats in the event the Proposed
Acquisitions are consummated.
F-8
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
[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:
<TABLE>
<S> <C>
LIPA--Buildings.......................... 28 years
Machinery and equipment............... 6 years
Plymouth--Plant.......................... 19 years
</TABLE>
F-9
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
[4]The following is summarized financial information of LIPA and PCLP:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
---------------------- ----------------------
LIPA PCLP LIPA PCLP
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Current Assets................. $ 158,000 $ 158,000 $ 122,000 $ 188,000
Property, plant and equipment
at cost (net)................. 257,000 5,593,000 251,000 5,450,000
Other assets................... 828,000 876,000
---------- ---------- ---------- ----------
Total assets................. 415,000 6,579,000 373,000 6,514,000
Current liabilities............ (9,000) (343,000) (35,000) (339,000)
Long-term debt................. (4,987,000) (4,990,000)
---------- ---------- ---------- ----------
Equity......................... $ 406,000 $1,249,000 $ 338,000 $1,185,000
========== ========== ========== ==========
Equity in Joint Ventures....... $ 203,000 $ 625,000 $ 169,000 $ 593,000
Investments in Joint Ventures
in excess of equity........... 967,000 78,000 943,000 76,000
---------- ---------- ---------- ----------
Total investments in Joint
Ventures.................... $1,170,000 $ 703,000 $1,112,000 $ 669,000
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------ --------------------------------------
LIPA PCLP LIPA PCLP
------------------ ---------- ------------------ ------------------
1995 1994 1995 1996 1995 1996 1995
-------- -------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $1,150,000 $596,000 $570,000
========== ======== ========
Gain on sale of fixed
assets................. $236,000
========
Net income (loss)....... $172,000 $(41,000) $ (87,000) $(68,000) $(24,000) $(64,000) $(44,000)
======== ======== ========== ======== ======== ======== ========
Equity in net income
(loss)................. $ 86,000 $(21,000) $ (44,000) $(34,000) $(12,000) $(32,000) $(22,000)
Amortization of purchase
price over equity...... (55,000) (55,000) (4,000) (24,000) (28,000) (2,000)
-------- -------- ---------- -------- -------- -------- --------
Net income (loss) from
Joint Ventures......... $ 31,000 $(76,000) $ (48,000) $(58,000) $(40,000) $(34,000) $(22,000)
======== ======== ========== ======== ======== ======== ========
</TABLE>
Plymouth Project commenced operations on January 1, 1995.
(NOTE D)--ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accrued expenses and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1996 1996
----------- ----------
<S> <C> <C>
Professional fees.................................... $293,000 $ 501,000
Accrued interest..................................... 417,000 591,000
Accrued payroll and related taxes.................... 238,000 411,000
Other................................................ 42,000 160,000
-------- ----------
Total.............................................. $990,000 $1,663,000
======== ==========
</TABLE>
F-10
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
(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:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1996 1996
----------- --------
<S> <C> <C>
1997.................................................... $172,000 $192,000
1998.................................................... 41,000 46,000
1999.................................................... 43,000 44,000
2000.................................................... 46,000 47,000
2001.................................................... 46,000 43,000
-------- --------
Total................................................. $348,000 $372,000
======== ========
</TABLE>
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.
(NOTE F)--INCOME TAXES:
The deferred tax asset is as follows:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1996 1996
----------- ----------
<S> <C> <C>
Benefit of post-reorganization operating loss
carryforward....................................... $801,000 $1,022,000
Expenses for financial reporting, not yet deductible
for taxes.......................................... 132,000 110,000
Valuation allowance................................. (933,000) (1,132,000)
-------- ----------
$-- 0 -- $ -- 0 --
======== ==========
</TABLE>
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 six-month period
ended July 31, 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 $199,000, respectively.
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.
F-11
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
(NOTE G)--LOANS PAYABLE (THE "LOANS"):
Loans payable consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1996 1996
----------- --------
<S> <C> <C>
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).......................... 100,000 250,000
18% unsecured loan payable upon closing of the proposed
public offering....................................... 50,000 50,000
-------- --------
$766,000 $960,000
======== ========
</TABLE>
(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.
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 July 31, 1996, the 9% interest deferred, included in
accrued expenses and other current liabilities, was $160,000 and $229,000,
respectively.
F-12
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
(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 and 10.75%
at July 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 July 31, 1996, the unpaid interest on these
Notes was $141,000 and $209,000, 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, based on an independent
appraisal, 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 Warrants"). The Additional Warrants have the same terms as
those warrants initially granted to the noteholders. The Company, based on the
appraisal referred to above, valued the Additional Warrants issued at $9,500,
which is being accounted for as additional debt discount. In March 1996, as a
result of continuing negotiations between the parties that commenced when the
additional warrants were issued, the Company reduced the exercise price of the
warrants, including the additional warrants, from $16.00 per share to $5.00
per share. At that time, the market price of the Common Stock was $2.50 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.
F-13
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
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.
[2]Stock options:
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE EXPIRATION DATE
------- -------------- ---------------
(PER SHARE)
<S> <C> <C> <C>
Granted--year ended January 31, 1995. 20,100 $4.00 - $10.00 April 1999 -
January 2000
Granted--year ended January 31, 1996. 154,000 $4.00 - $ 8.00 January 2000 -
------- December 2000
Balance at January 31, 1996 and July
31, 1996
(174,100 exercisable at option
prices $4.00 to $10.00)............. 174,100
</TABLE>
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.
[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.
F-14
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
[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. 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 six-month period ended July 31, 1996.
(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 July 31, 1996 is $12,000 due to the Related
Parties. In addition, at January 31, 1996 and July 31, 1996, $467,000 and
$707,000, 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 six months ended
July 31, 1996 and 1995, the Company paid interest of $15,000, $22,000, $13,000
and $17,000, respectively, to the Related Parties.
F-15
<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
F-16
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
JUNE 30,
1995 1994 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Utility Plant:
Plant in Service....................... $15,999,000 $18,716,000 $15,999,000
Equipment.............................. 588,000 335,000 616,000
Construction in Progress............... 118,000 118,000 118,000
Accumulated Depreciation............... (5,377,000) (6,010,000) (5,697,000)
----------- ----------- -----------
Net Utility Plant..................... 11,328,000 13,159,000 11,036,000
Restricted Cash......................... 1,026,000 1,145,000 1,054,000
Other Assets............................ 106,000 124,000 97,000
Current Assets:
Cash and Cash Equivalents.............. 263,000 278,000 245,000
Receivables--Trade..................... 399,000 437,000 317,000
Receivables--Other..................... 6,000 6,000 0
Receivable--Related Party.............. 238,000 159,000 0
Prepaid Expenses....................... 4,000 12,000 27,000
----------- ----------- -----------
Total Current Assets.................. 910,000 892,000 589,000
----------- ----------- -----------
Total Assets.......................... $13,370,000 $15,320,000 $12,776,000
=========== =========== ===========
PARTNERS' CAPITAL AND LIABILITIES
Partners' Capital:
Limited Partners--10,306 units......... $ 5,148,000 $ 4,868,000 $ 5,388,000
General Partner--1 Percent............. (8,000) (11,000) (6,000)
----------- ----------- -----------
Total Partners' Capital............... 5,140,000 4,857,000 $ 5,382,000
Other Liabilities....................... -- 150,000
Long-term Debt:
Notes Payable--Related Party........... 188,000 230,000 163,000
Notes Payable.......................... 537,000 -- 537,000
----------- ----------- -----------
Partners' Capital and Long-Term Liabili-
ties................................... 5,865,000 5,237,000 6,082,000
Current Liabilities:
Current Portion--Long-term Debt........ 4,563,000 7,140,000 4,139,000
Note Payable--Related Party............ 1,159,000 1,043,000 1,201,000
Payable-Related Party.................. 671,000 573,000 275,000
Accrued Liabilities
Operations............................. 402,000 495,000 317,000
Royalties.............................. 96,000 220,000 84,000
Interest............................... 614,000 612,000 678,000
----------- ----------- -----------
Total Current Liabilities............. 7,505,000 10,083,000 6,694,000
----------- ----------- -----------
Total Partners' Capital and Liabili-
ties................................. $13,370,000 $15,320,000 $12,776,000
=========== =========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-17
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ------------------------
1995 1994 1993 1996 1995
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Electric Power Reve-
nues.................. $2,529,000 $2,728,000 $3,162,000 $1,509,000 $1,300,000
Other Revenues......... 145,000 151,000 622,000 68,000 66,000
---------- ---------- ---------- ---------- ----------
Total Revenues....... 2,674,000 2,879,000 3,784,000 1,577,000 1,366,000
---------- ---------- ---------- ---------- ----------
Expenses:
Operations............. 1,755,000 1,779,000 2,163,000 881,000 838,000
Bad Debt Expense....... -- -- 31,000 -- --
General and Administra-
tive:
Professional Services. 55,000 54,000 72,000 70,000 41,000
General Partners--Re-
lated Party.......... 98,000 123,000 223,000 54,000 82,000
---------- ---------- ---------- ---------- ----------
Total General and Ad-
ministrative........ 153,000 177,000 295,000 124,000 123,000
---------- ---------- ---------- ---------- ----------
Total Expenses....... 1,908,000 1,956,000 2,489,000 1,005,000 961,000
---------- ---------- ---------- ---------- ----------
Income From Opera-
tions............... 766,000 923,000 1,295,000 572,000 405,000
Other Income (Expense):
Interest Income........ 73,000 52,000 38,000 26,000 32,000
Interest Expense....... (744,000) (902,000) (806,000) (356,000) (781,000)
Loss on Sale of Proper-
ty.................... (170,000) -- -- -- (170,000)
---------- ---------- ---------- ---------- ----------
Net Other Expense.... (841,000) (850,000) (768,000) (330,000) (919,000)
---------- ---------- ---------- ---------- ----------
Net Income (Loss)
Before Extraordinary
Item............... (75,000) 73,000 527,000 242,000 (514,000)
Extraordinary Item--
Early Extinguishment
of Debt................ 358,000 -- 175,000 -- 358,000
---------- ---------- ---------- ---------- ----------
Net Income........... $ 283,000 $ 73,000 $ 702,000 $ 242,000 $ (156,000)
========== ========== ========== ========== ==========
Net Income Per Lim-
ited Partnership
Unit:
Income Before Ex-
traordinary Item... $ (7.28) $ 7.08 $ 51.14 $ 23.48 $ (49.87)
Extraordinary Item.. 34.74 -- 16.98 -- 34.74
---------- ---------- ---------- ---------- ----------
Net Income........... $ 27.46 $ 7.08 $ 68.12 $ 23.48 $ (15.14)
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-18
<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
AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
GENERAL PARTNER LIMITED PARTNERS
------------------- -------------------
% INCOME NUMBER TOTAL
ALLOCATION AMOUNT OF UNITS AMOUNT AMOUNT
---------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances at December 31,
1992................... 1 $(18,573) 10,306 $4,100,573 $4,082,000
Net Income.............. -- 7,020 -- 694,980 702,000
--- -------- ------ ---------- ----------
Balances at December 31,
1993................... 1 (11,553) 10,306 4,795,553 4,784,000
Net Income.............. -- 730 -- 72,270 73,000
--- -------- ------ ---------- ----------
Balances at December 31,
1994................... 1 $(10,823) 10,306 4,867,823 4,857,000
Net Income.............. -- 2,830 -- 280,170 283,000
--- -------- ------ ---------- ----------
Balances at December 31,
1995................... 1 $ (7,993) 10,306 $5,147,993 $5,140,000
Net Income (Unaudited).. -- 2,420 -- 239,580 242,000
--- -------- ------ ---------- ----------
Balances at June 30,
1996 (Unaudited)....... 1 $ (5,573) 10,306 $5,387,573 $5,382,000
=== ======== ====== ========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-19
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------ -----------------------------
1995 1994 1993 1996 1995
-------- -------- ---------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net Income (Loss)...... $283,000 $ 73,000 $ 702,000 $ 242,000 $ (156,000)
Adjustments to Net In-
come (Loss):
Depreciation and Amor-
tization.............. 613,000 661,000 716,000 329,000 313,000
Loss on Sale of Proper-
ty.................... 170,000 -- -- -- 170,000
Extraordinary Item--
Early Extinguishment
of Debt............... (358,000) -- (175,000) -- (358,000)
(Increase) Decrease in
Receivables........... (41,000) (124,000) (59,000) 87,000 95,000
(Increase) Decrease in
Prepaid Insurance..... (1,000) -- (9,000) (23,000) (16,000)
(Increase) Decrease in
Other Assets.......... 18,000 18,000 18,000 (28,000) 11,000
Accrued Income Re-
stricted Cash......... (63,000) (43,000) (31,000) -- (34,000)
Increase (Decrease) in
Accrued Liabilities... 41,000 120,000 (234,000) (33,000) 144,000
Increase (Decrease) in
Amount Due to
General Partner....... 98,000 100,000 214,000 (140,000) 216,000
-------- -------- ---------- ------------ -------------
Total Adjustments..... 477,000 732,000 440,000 192,000 541,000
-------- -------- ---------- ------------ -------------
Net Cash Provided by
Operating Activities.. 760,000 805,000 1,142,000 434,000 385,000
-------- -------- ---------- ------------ -------------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Cash Draws Restricted
Cash.................. 181,000 -- 207,000 -- 102,000
Transfers to Restricted
Cash.................. -- -- (205,000) -- --
Capital Expenditures... (253,000) (139,000) (222,000) (28,000) (174,000)
Disposal of Plant and
Equipment............. -- -- -- -- --
-------- -------- ---------- ------------ -------------
Net Cash Provided by
(Used) in Investing
Activities............. (72,000) (139,000) (220,000) (28,000) (72,000)
-------- -------- ---------- ------------ -------------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Principal Payments on
Long-Term Debt........ (815,000) (751,000) (1,109,000) (424,000) (345,000)
Proceeds From the Issu-
ance of Debt.......... 112,000 83,000 171,000 -- --
-------- -------- ---------- ------------ -------------
Net Cash Provided by
(Used) in Financing
Activities............ (703,000) (668,000) (938,000) (424,000) (345,000)
-------- -------- ---------- ------------ -------------
Increase (Decrease) in
Cash and Cash
Equivalents............ (15,000) (2,000) (16,000) (18,000) (32,000)
Cash and Cash Equiva-
lents at Beginning of
Period................. 278,000 280,000 296,000 263,000 278,000
-------- -------- ---------- ------------ -------------
Cash and Cash Equiva-
lents at End of Period. $263,000 $278,000 $ 280,000 $ 245,000 $ 246,000
======== ======== ========== ============ =============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash Paid During the
Period for Interest... $743,000 $727,000 $ 755,000 $ 79,000 $ 188,000
======== ======== ========== ============ =============
</TABLE>
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.
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.
F-20
<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.
RECLASSIFICATIONS
Certain amounts in 1994 and 1993 have been reclassified to conform with
financial statement presentations adopted in 1995.
UNAUDITED INTERIM PERIODS
The financial information presented as of June 30, 1996 and for the six-
month periods ended June 30, 1996 and 1995 is unaudited, but in the opinion of
Management contains all adjustments (consisting only of normal recurring
adjustments) necessary for a fair representation of such financial
information. Results of operations for interim periods are not necessarily
indicative of those to be achieved for full fiscal years.
F-21
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--UTILITY PLANT
Plant in service consists of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
ESTIMATED
1995 1994 USEFUL LIVES
----------- ----------- ------------
<S> <C> <C> <C>
Steamboat Springs Thermal Hydroelec-
tric 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
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Loan Origination Fees.................................... $183,000 $183,000
Organization Costs....................................... 65,000 65,000
Other Assets............................................. 35,000 35,000
Accumulated Amortization................................. (177,000) (159,000)
-------- --------
Total Other Assets..................................... $106,000 $124,000
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
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 Crystal Springs Project)...... 537,000 1,800,000
---------- ----------
5,100,000 7,140,000
Less Current Installments Due........................ 4,563,000 7,140,000
---------- ----------
$ 537,000 $ --
========== ==========
</TABLE>
F-22
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER
31,
-----------
<S> <C>
1996......................................................... $ 4,563,000
1997......................................................... --
1998......................................................... --
1999......................................................... --
2000......................................................... 537,000
Thereafter................................................... --
-----------
$ 5,100,000
===========
</TABLE>
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.
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:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
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; unsecured. Interest rate is 11%.... 230,000 268,000
---------- ----------
1,347,000 1,273,000
Less Current Installments Due......................... 1,159,000 1,043,000
---------- ----------
$ 188,000 $ 230,000
========== ==========
</TABLE>
F-23
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
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
Richard W. Harris (.081%)......................... 2,000 2,000 2,000
-------- -------- --------
Total............................................ $405,000 $410,000 $419,000
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1993
----------
<S> <C>
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.................................. $ --
==========
</TABLE>
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.
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
F-24
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
period ended December 31, 1995, the Partnership expensed the following amounts
as cost reimbursements to the general partner:
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
General and Administrative Expenses............... $98,000 $123,000 $223,000
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
General Partner......................................... 530 530 530
Limited Partners........................................ 9,776 9,776 9,776
------ ------ ------
Total................................................. 10,306 10,306 10,306
====== ====== ======
</TABLE>
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.
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.
F-25
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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 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
F-26
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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
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.
F-27
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following pro forma statement of operations give effect to the above
events as if they had occurred on January 1, 1995:
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PRO FORMA
AS REPORTED IN ADJUSTMENTS PRO FORMA
ACCOMPANYING FOR STATEMENT
FINANCIAL SUBSEQUENT OF
STATEMENTS EVENTS OPERATIONS
-------------- ----------- ----------
<S> <C> <C> <C>
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 Part-
nership Unit....................... $ 9.22 $ 6.21 $ 15.43
========== ======= ==========
</TABLE>
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.
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.
F-28
<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
F-29
<PAGE>
1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
JUNE 30,
1995 1994 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Utility Plant:
Plant..................................... $2,431,222 $2,431,222 $2,431,222
Development Costs......................... 450,000 450,000 450,000
Accumulated Depreciation.................. (676,289) (580,248) (724,310)
---------- ---------- ----------
Net Utility Plant....................... 2,204,933 2,300,974 2,156,912
Restricted Assets:
Cash...................................... 80,626 76,157 82,781
Certificate of Deposit.................... 73,189 70,000 76,159
---------- ---------- ----------
Total Restricted Assets................. 153,815 146,157 158,940
Other Assets:.............................. 32,145 40,181 28,127
Current Assets:
Cash and Cash Equivalents................. 80,428 98,642 79,190
Receivables--Trade........................ 98,539 98,600 130,620
Receivables--Other........................ 7,139 6,358 4,904
Receivable--Related Party................. 229,810 267,705 209,226
Prepaid Expenses.......................... 1,679 1,348 6,661
---------- ---------- ----------
Total Current Assets.................... 417,595 472,653 430,601
---------- ---------- ----------
Total Assets............................ $2,808,488 $2,959,965 $2,774,580
========== ========== ==========
PARTNERS' CAPITAL AND LIABILITIES
Partners' Capital.......................... $ (293,083) $ (464,613) $ 22,105
Current Liabilities:
Note Payable--See Note 4.................. 1,670,995 1,960,732 1,513,617
Note Payable--Related Party............... 728,970 728,970 503,970
Payable--Related Party.................... 358,574 435,193 381,153
Accrued Liabilities:
Operations............................... 3,120 5,767 7,348
Royalties................................ 302,315 249,799 313,277
Interest................................. 37,597 44,117 33,110
---------- ---------- ----------
Total Current Liabilities............... 3,101,571 3,424,578 2,752,475
---------- ---------- ----------
Total Partners' Capital and Liabilities. $2,808,488 $2,959,965 $2,774,580
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS,
DECEMBER 31, ENDED JUNE 30,
------------------ -----------------------
1995 1994 1996 1995
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Electric Power Revenues............ $875,356 $798,722 $410,427 $404,800
-------- -------- -------- --------
EXPENSES:
Operations......................... 536,756 545,336 249,908 252,875
General and Administrative:
Professional Services............. -- 1,481 -- --
Related party..................... 14,500 14,500 -- --
-------- -------- -------- --------
Total Expenses................... 551,256 561,317 249,908 252,875
-------- -------- -------- --------
Income From Operations........... 324,100 237,405 160,519 151,925
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest Income.................... 41,037 38,315 17,047 7,017
Interest Expense................... (202,477) (233,513) (87,554) (94,469)
-------- -------- -------- --------
Net other Expense................. (161,440) (195,198) (70,507) (87,452)
-------- -------- -------- --------
Net Income........................ $162,660 $ 42,207 $ 90,012 $ 64,473
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1995, AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<S> <C>
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)
Contributions (Unaudited)........................................... 225,176
Net Income (Unaudited).............................................. 90,012
---------
Balances at June 30, 1996 (Unaudited)............................... $ 22,105
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------ -----------------------
1995 1994 1996 1995
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net Income (Loss).................. $162,660 $ 42,207 $ 90,012 $ 64,473
-------- -------- -------- --------
Adjustments to Net Income (Loss):
Depreciation and Amortization..... 104,078 104,078 52,039 52,039
(Increase) Decrease in Receiv-
ables............................ (721) (18,339) (29,846) (17,586)
(Increase) Decrease in Prepaid In-
surance.......................... (331) (678) (4,982) (5,368)
Accrued Interest Income Restricted
Assets........................... (7,658) (2,859) (5,125) (2,193)
Increase (Decrease) in Accrued Li-
abilities........................ 43,349 48,764 10,703 (1,658)
Increase (Decrease) in Amount Due
to Related Party................. (76,619) 147,519 (202,421) 10,997
-------- -------- -------- --------
Total Adjustments................ 62,098 278,486 (179,632) 36,231
-------- -------- -------- --------
Net Cash Provided by Operating Ac-
tivities......................... 224,758 320,693 (89,620) 100,704
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVI-
TIES:
Principle Payments From Note Re-
ceivable Related Party........... 37,895 33,916 20,584 18,422
Investment in Certificate of De-
posit--Restricted................ -- (70,000) -- --
-------- -------- -------- --------
Net Cash Provided by (Used) in In-
vesting Activities............... 37,895 (36,084) 20,584 18,422
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Principal payments on Long-term
Debt.............................. (289,737) (259,310) (157,378) (140,851)
Proceeds from Partner Contribu-
tions............................. 8,870 4,015 225,176 4,191
-------- -------- -------- --------
Net Cash Provided by (Used) in Fi-
nancing Activities................ (280,867) (255,295) 67,798 (136,660)
-------- -------- -------- --------
Increase (Decrease) in Cash and
Cash Equivalents.................. (18,214) 29,314 (1,238) (17,534)
Cash and Cash Equivalents at Begin-
ning of Year...................... 98,642 69,328 80,428 98,642
-------- -------- -------- --------
Cash and Cash Equivalents at End of
Year.............................. $ 80,428 $ 98,642 $ 79,190 $ 81,108
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash Paid During the Year for In-
terest............................ $208,997 $239,346 $ 92,041 $ 64,469
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-33
<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.
UNAUDITED INTERIM PERIODS
The financial information presented as of June 30, 1996 and for the six-
month periods ended June 30, 1996 and 1995 is unaudited, but in the opinion of
Management contains all adjustments (consisting only of normal recurring
adjustments) necessary for a fair representation of such financial
information. Results of operations for interim periods are not necessarily
indicative of those to be achieved for full fiscal years.
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:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
NOTE 3--OTHER ASSETS
Other assets consist of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Loan Origination Fees.................................... $ 80,363 $ 80,363
Accumulated Amortization................................. (48,218) (40,182)
-------- --------
Total Other Assets....................................... $ 32,145 $ 40,181
======== ========
</TABLE>
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.
F-34
<PAGE>
1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 4--LONG-TERM DEBT
Long-term debt as of December 31, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Note Payable to a corporation is payable in quar-
terly 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
---------- ----------
$ -- $ --
========== ==========
</TABLE>
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996........................................................ $1,670,995
1997........................................................ --
1998........................................................ --
1999........................................................ --
2000........................................................ --
Thereafter.................................................. --
----------
$1,670,995
==========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
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
-------- --------
$ -- $ --
======== ========
</TABLE>
*Two of the general partners of the Company are majority owners of Far West
Capital, Inc.
F-35
<PAGE>
1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
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:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Sierra Pacific Power Company (10%)........................ $ 87,536 $ 79,872
Benson Schwarzhoff & Helzel (3.888%)...................... 34,034 31,054
Far West Electrical Energy Fund, L.P.(15%)................ 86,904 86,654
G. Martin Booth (.081%)................................... 709 647
Richard W. Harris (.081%)................................. 709 647
-------- --------
Total.................................................... $209,892 $198,874
======== ========
</TABLE>
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 notepayable
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 $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:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
General and Administrative Expenses......................... $14,500 $14,500
</TABLE>
F-36
<PAGE>
1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
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 EnergyFund,
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
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.
F-37
<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
F-38
<PAGE>
LEHI INDEPENDENT POWER ASSOCIATES, L.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
JUNE 30,
1995 1994 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 41,460 $ 2,113 $ 7,305
Due from member................................. -- 3,335 --
Note receivable................................. 115,750 -- 113,750
Prepaid insurance............................... 853 -- 1,117
-------- -------- --------
Total current assets........................... 158,063 5,448 122,172
Property, plant and equipment, net............... 257,125 278,921 250,464
-------- -------- --------
Total assets................................... $415,188 $284,369 $372,636
======== ======== ========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable................................ $ 4,873 $ 951 $ 34,329
Accrued expenses................................ 4,373 -- 373
Related party note payable...................... -- 3,440 --
-------- -------- --------
Total current liabilities...................... 9,246 4,391 34,702
Members' equity:
Member contributions............................ 292,662 292,662 292,662
Additional capital contributions................ 42,104 28,149 42,105
Retained earnings (deficit)..................... 71,176 (40,833) 3,167
-------- -------- --------
Total members' equity.......................... 405,942 279,978 337,934
-------- -------- --------
Total liabilities and members' equity............ $415,188 $284,369 $372,636
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE>
LEHI INDEPENDENT POWER ASSOCIATES, L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE JANUARY 24 FOR THE SIX MONTHS
YEAR ENDED THROUGH ENDED JUNE 30
DECEMBER 31, DECEMBER 31, -----------------------
1995 1994 1996 1995
------------ -------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INCOME:
Gain on sale of fixed
asset................. $236,194 $ -- $ -- $ --
EXPENSES:
General and administra-
tive.................. 49,195 27,092 61,347 16,925
Write-down of property,
plant and equipment... 14,990 13,741 6,661 7,495
-------- -------- -------- --------
Total expenses........ 64,185 40,833 68,008 24,420
-------- -------- -------- --------
Net income (loss)....... $172,009 $(40,833) $(68,008) $(24,420)
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-40
<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
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
MEMBER CAPITAL EARNINGS MEMBERS'
CONTRIBUTIONS CONTRIBUTIONS (DEFICIT) EQUITY
------------- ------------- --------- --------
<S> <C> <C> <C> <C>
Balance January 24, 1995....... $ -- $ -- $ -- $ --
Members contributions.......... 292,662 28,149 -- 320,811
Net loss....................... -- -- (40,833) (40,833)
-------- ------- ------- --------
Balance December 31, 1994...... 292,662 28,149 (40,833) 279,978
Members contributions--Suma,
Corp.......................... -- 3,489 -- 3,489
Members contributions--Far West
Capital, Inc.................. -- 3,489 -- 3,489
Members contributions--Lehi
Envirosystems, Inc............ -- 6,977 -- 6,977
Members distribution--Suma
Corp.......................... -- -- (15,000) (15,000)
Members distribution--Far West
Capital, Inc.................. -- -- (15,000) (15,000)
Members distribution--Lehi
Envirosystems, Inc............ -- -- (30,000) (30,000)
Net income..................... -- -- 172,009 172,009
-------- ------- ------- --------
Balance December 31, 1995...... 292,662 42,104 71,176 405,942
-------- -------
Net (Loss) (Unaudited)......... (68,008) (68,008)
------- --------
Balance June 30, 1996 (Unau-
dited)........................ $292,662 $42,104 $ 3,168 $337,934
======== ======= ======= ========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
LEHI INDEPENDENT POWER ASSOCIATES, L.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD FOR THE SIX MONTHS
ENDED ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------------
1995 1994 1996 1995
------------ -------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)......... $172,009 $(40,833) $(68,008) $(24,240)
Adjustment to reconcile
net income to net cash
provided by operating
activities:
Write-down of property,
plant and equipment...... 14,990 13,741 6,661 7,495
Gain on sale of equipment. (236,194) -- -- --
Changes in assets and lia-
bilities................. -- -- -- --
Prepaid insurance......... (853) -- (264) 1,036
Note Receivable........... -- -- 2,000 --
Accounts payable.......... 3,922 951 29,456 9,943
Accrued expenses.......... 4,373 -- (4,000) --
-------- -------- -------- --------
Net cash (used) by operat-
ing activities........... (41,753) (26,141) (34,155) (8,018)
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) -- 1,245
Net payment and proceeds
of related party note
payable................. (3,440) 3,440 -- (3,440)
Additional capital con-
tributions.............. 13,955 28,149 -- 10,705
Members' distribution.... (60,000) -- -- --
-------- -------- -------- --------
Net cash provided (used)
by financing activities.. (46,150) 28,254 -- 8,510
-------- -------- -------- --------
Net increase in cash and
cash equivalents......... 39,347 2,113 (34,155) 492
Cash and cash equivalents
at beginning of period... 2,113 -- 41,460 2,113
-------- -------- -------- --------
Cash and cash equivalents
at end of period......... $ 41,460 $ 2,113 $ 7,305 $ 2,605
======== ======== ======== ========
</TABLE>
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.
F-42
<PAGE>
LEHI INDEPENDENT POWER ASSOCIATES, L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 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.
NOTE 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.
NOTE 3--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and consisted of the
following at December 31:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
F-43
<PAGE>
LEHI INDEPENDENT POWER ASSOCIATES, L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
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.
NOTE 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.
NOTE 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.
NOTE 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.
F-44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Plymouth Cogeneration Limited Partnership
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in partners' capital and cash flows present fairly, in
all material respects, the financial position of Plymouth Cogeneration Limited
Partnership at December 31, 1995 and 1994, and the results of their operations
and their cash flows for the year ended December 31, 1995, in conformity with
generally accepted accounting principles. 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 audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
February 27, 1996
Hartford, Connecticut
F-45
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
JUNE 30,
1995 1994 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 15,944 $ 8,233 $ 65,481
Accounts receivable......................... 90,865 76,881 89,394
Prepaid expenses............................ 18,087 14,198 47
Restricted cash............................. 33,773 619,820 33,707
---------- ---------- ----------
Total current assets....................... 158,669 719,132 188,629
---------- ---------- ----------
Plant, at cost............................... 5,888,172 5,882,464 5,893,333
Less: accumulated depreciation............... 295,411 -- 443,289
---------- ---------- ----------
5,592,761 5,882,464 5,450,044
---------- ---------- ----------
Debt service reserve......................... 497,085 500,020 496,717
Deferred financing costs, less accumulated
amortization of
$8,141 in 1995.............................. 154,683 162,824 150,613
Rent receivable.............................. 176,184 -- 228,468
---------- ---------- ----------
Total assets............................... $6,579,382 $7,264,440 $6,514,471
========== ========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Note payable--general contractor (Note 2)... $ -- $ 586,000 $ --
Accounts payable and accrued expenses....... 262,013 286,917 257,600
Deferred revenue............................ 81,127 74,806 81,127
---------- ---------- ----------
Total current liabilities.................. 343,140 947,723 338,727
---------- ---------- ----------
Long-term debt, net of discount (Note 3)..... 4,987,181 4,980,717 4,990,413
---------- ---------- ----------
Partners capital:
General partners............................ 180,599 193,639 171,039
Limited partners............................ 1,068,462 1,142,361 1,014,292
---------- ---------- ----------
Total partners' capital.................... 1,249,061 1,336,000 1,185,331
---------- ---------- ----------
Total liabilities and partners' capital.... $6,579,382 $7,264,440 $6,514,471
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED
ENDED JUNE 30,
DECEMBER 31, -----------------------
1995 1996 1995
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUES
Facility lease............................ $ 598,968 $ 299,484 $ 299,484
Management services....................... 551,461 278,642 270,979
---------- --------- ---------
Total revenues.......................... 1,150,429 578,126 570,463
---------- --------- ---------
OPERATING EXPENSES
Operating and maintenance................. 426,948 222,310 212,298
Depreciation and amortization............. 303,552 151,948 152,575
General and administrative................ 149,830 85,111 75,045
---------- --------- ---------
Total operating expenses................ 880,330 459,369 439,918
---------- --------- ---------
Income before interest income and ex-
pense.................................. 270,099 118,757 130,545
---------- --------- ---------
INTEREST INCOME AND EXPENSE
Interest expense.......................... (403,736) (201,919) (201,110)
Interest income........................... 46,698 19,432 26,893
---------- --------- ---------
(357,038) (182,487) (174,217)
---------- --------- ---------
Net loss................................ $ (86,939) $ (63,730) $ (43,672)
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
PARTNERS' CAPITAL PARTNERS' CAPITAL PARTNERS' CAPITAL
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 NET LOSS 1995 NET LOSS 1996
----------------- -------- ----------------- ----------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
General Partners........ $ 193,639 $(13,040) $ 180,599 $ (9,560) $ 171,039
Limited Partners........ 1,142,361 (73,899) 1,068,462 (54,170) 1,014,292
---------- -------- ---------- -------- ----------
$1,336,000 $(86,939) $1,249,061 $(63,730) $1,185,331
========== ======== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR SIX MONTHS
ENDED ENDED JUNE 30,
DECEMBER 31, ----------------------
1995 1996 1995
------------ ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................. $(86,939) $(63,730) $ (43,672)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization........... 303,552 151,948 152,575
Bond discount amortization.............. 6,464 3,232 3,232
Changes in assets and liabilities:
Accounts receivable..................... (13,984) 1,471 (6,909)
Prepaid expenses........................ (3,889) 18,040 1,458
Transfer from restricted cash........... 47 66 --
Rent receivable......................... (176,184) (52,284) (88,092)
Accounts payable and accrued expenses... (24,904) (4,413) (19,983)
Deferred revenue........................ 6,321 -- --
-------- -------- ---------
Net cash provided (used) by operating
activities............................ 10,484 54,330 (1,391)
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for plant................... (5,708) (5,161) --
Use of restricted cash................... 586,000 -- 226,241
-------- -------- ---------
Net cash provided (used) by investing ac-
tivities................................ 580,292 (5,161) 226,241
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment out of debt service reserve...... 2,935 368 10
Payment of note payable.................. (586,000) -- (230,959)
-------- -------- ---------
Net cash (used) provided by financing
activities............................ (583,065) 368 (230,949)
-------- -------- ---------
Net increase (decrease) in cash and
cash equivalents...................... 7,711 49,537 (6,099)
Cash and cash equivalents, beginning...... 8,233 15,944 8,233
-------- -------- ---------
Cash and cash equivalents, ending......... $ 15,944 $ 65,481 $ 2,134
======== ======== =========
SUPPLEMENTAL DISCLOSURES
Interest paid............................ $421,305 $198,012 $ 198,013
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 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.
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
F-50
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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.
F-51
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information presented as of June 30, 1996 and for the six
month periods ended June 30, 1996 and June 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 operation for interim periods are not necessarily
indicative of those to be achieved for full fiscal years.
NOTE 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.
NOTE 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.
F-52
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<S> <C>
1996.......................... $ --
1997.......................... 70,000
1998.......................... 100,000
1999.......................... 125,000
2000.......................... 175,000
Thereafter.................... 4,640,000
----------
$5,110,000
==========
</TABLE>
NOTE 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.
F-53
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
1995 1994
------ -------
<S> <C> <C>
Employee group health insurance and office related........... $ -- $37,703
Interest expense on advances................................. 1,108
</TABLE>
Amounts due to affiliates of the General Partner included in accounts
payable and accrued expenses of the Partnership at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
------- ----
<S> <C> <C>
Interest bearing advances at prime.............................. $28,520 $--
Accrued interest on advances.................................... 1,108 --
</TABLE>
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.
F-54
<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 AU-
THORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURI-
TIES 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 SO-
LICITATION 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 HEREIN IS CORRECT AS OF ANY TIME SUB-
SEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 2
PROSPECTUS SUMMARY........................................................ 3
RISK FACTORS.............................................................. 9
USE OF PROCEEDS........................................................... 17
PRICE RANGE OF COMMON STOCK............................................... 19
DIVIDEND POLICY .......................................................... 19
DILUTION ................................................................. 20
CAPITALIZATION ........................................................... 21
PRO FORMA FINANCIAL INFORMATION........................................... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION ............................................................... 28
BUSINESS ................................................................. 33
MANAGEMENT ............................................................... 46
CERTAIN TRANSACTIONS ..................................................... 49
PRINCIPAL STOCKHOLDERS ................................................... 51
DESCRIPTION OF SECURITIES ................................................ 53
SHARES ELIGIBLE FOR FUTURE SALE .......................................... 57
UNDERWRITING ............................................................. 58
LEGAL MATTERS ............................................................ 60
EXPERTS .................................................................. 60
FINANCIAL STATEMENTS...................................................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. ENERGY SYSTEMS, INC.
2,125,000 SHARES OF COMMON STOCK
AND
2,125,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
---------------
PROSPECTUS
---------------
GAINES, BERLAND INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 15, 1996
PROSPECTUS
U.S. ENERGY SYSTEMS, INC.
1,805,000 SHARES OF COMMON STOCK AND
500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
-----------
This Prospectus relates to the offering ("Secondary Offering") by (a) Enviro
Partners, L.P. ("Enviro") of 1,600,000 shares of Common Stock of U.S. Energy
Systems, Inc. (the "Company"), (b) Anchor Capital Company LLC ("Anchor") of
205,000 shares of Common Stock of the Company, and (c) Energy Management
Corporation ("EMC") of 500,000 Redeemable Common Stock Purchase Warrants of the
Company (the "Warrants"), such shares of Common Stock and Warrants
(collectively, the "Securities") to be sold from time to time by Enviro, Anchor
and EMC (collectively the "Selling Securityholders") following completion of
the Primary Offering (as defined below). Each Warrant entitles the holder to
purchase one share of Common Stock for $4.00 during the four-year period
beginning one year from the date of this Prospectus. The Warrants are
redeemable at a price of $.01 per Warrant, at any time after they 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 dates
ending on the third day prior to the date on which the notice of redemption is
given. See "Description of Securities." Concurrently with this Secondary
Offering, the Company is offering for sale to the public, by means of a
separate prospectus, 2,125,000 shares of Common Stock and 2,125,000 Warrants
(the "Primary Offering").
Enviro has agreed that it will not sell in the public market its 1,600,000
shares of Common Stock for a period of twelve months and Anchor has agreed that
it will not sell its 205,000 shares of Common Stock without the consent of
Gaines, Berland Inc. (the "Representative") for a period of nine months from
the date of consummation of the Primary Offering. EMC has given Theodore Rosen,
the Chairman of the Board of the Company, a right of first refusal to purchase
its Warrants if at any time during the nine month period following the date of
this Prospectus EMC decides to sell such Warrants. Mr. Rosen has agreed with
the Representative that he will exercise such right of first refusal in the
event EMC decides to sell its Warrants during such nine-month period and that
he will not sell any Warrants so purchased by him until at least 13 months from
the date of this Prospectus.
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 10.
-----------
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
<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.
----------------
2
<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 95% interest in
two geothermal plants known as Steamboat 1 and 1A for $4,898,000 (including
$50,000 as a downpayment which was previously paid by the Company) (the
"Steamboat Acquisition"), (iii) the acquisition of an 81.5% interest in NRG
Company LLC ("NRG") for $265,000, to enable NRG to make a loan of $250,000 to
Reno Energy LLC ("Reno Energy"), developer of a district heating project to be
fueled by geothermal sources, to secure for NRG an option to obtain a 50%
interest in Reno Energy, (iv) 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 (v)
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 each of the Primary Offering
and this Secondary 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.
Although this Prospectus is written as though the Secondary Offering is
concurrent with the Primary Offering, the Secondary Offering will not commence
until the Primary Offering has been consummated. 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
3
<PAGE>
conditioning and hot water are required on a continuous and simultaneous basis.
The Company has signed a letter of intent with the owners of Bluebeard's
Castle, a large resort and commercial complex in St. Thomas, United States
Virgin Islands ("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.
Under the letter of intent the Company, the resort manager and the resort
owners would own the cogeneration plant and water system and share revenues.
The Company has received initial funding from the resort owners and the first
of six engine generators is being installed during September 1996. 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. Under the joint development
agreement, savings from the cogeneration systems would be shared equally by the
mall owners and the joint development company (in which the Company would 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, except for the distribution of $20,000 from the Plymouth State College
project (described below) in August 1996, has not received any cash
distributions from its investments 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 $4,898,000 (including $50,000 as a downpayment which was
previously paid by the Company), a 95% interest in two geothermal power plants,
known as Steamboat 1 and 1A, in Steamboat Hills, Nevada (the "Steamboat
Facilities"). Electricity is produced in geothermal plants by extracting heat
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 plant 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 fourth quarter of this fiscal
year, provided that it obtains the necessary air quality permits. 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 waste products
or other alternative fuels, such as used motor oil and tires, which provide
environmental and ecological benefits and also provide potential for earnings
because of low fuel costs. In this regard, the Company will invest $265,000 for
81.5% of NRG. NRG will have an option to acquire 50% of Reno Energy, which
plans to develop a pipeline to distribute and sell excess heat available from
the geothermal resources in Steamboat Hills, Nevada (the "Reno Project").
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. Its telephone number is (561) 820-9779.
4
<PAGE>
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 at a redemption price equal to the liquidation
preference. The terms and conditions of the Private Warrants are identical to
those of the Warrants, and entitle the holder to purchase one share of Common
Stock for $4.00, subject to adjustments in certain circumstances, during the
period commencing one year and ending five years from the date of this
Prospectus. Both the Warrants and the Private Warrants are redeemable by the
Company, at a price of $.01 per warrant, at any time after they 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 terms for the Private Placement were initially negotiated prior to
December 1995. The investors in the Private Placement agreed to invest $3.5
million in return for a specific percentage of the Company, subject to the
Company being able to raise at least another $6 million through either another
private placement or a public offering. The specific percentage would be
reduced proportionally to the size of the additional financing over $6 million.
A specific sales price was not set, but only a percentage of ownership. The
price attributed to the shares to be issued to the Private Placement investors
has been determined by the ultimate capitalization after a public offering,
accounting for the number of common shares for which the preferred shares could
be converted to attain the specific ownership percentage, and then dividing the
numerical shares by the dollar amount invested. The effective price per share
of Common Stock paid by Enviro is $1.94. The specific advantages for the
Company of this arrangement would be that there would be no discounts or costs
(other than the investors' legal fees) attached to the amount to be invested in
the Private Placement. In addition, the Private Placement investors would
contribute substantial financial and management skills which the Company would
need as it achieved growth objectives. Based on the terms of the agreement and
the Primary Offering, following the Primary Offering and the Private Placement,
Enviro will hold approximately 35.6% of the voting power of the Company, and,
if the Private Warrants held by EMC are exercised after the one-year non-
exercisability period, the Private Placement investors together would hold
approximately 42.0% of the voting power of the Company. See "Risk Factors--
Concentration of Voting Power."
Also concurrently with the closing of the Primary Offering, the Company will
acquire a 95% 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). Far West Capital, Inc., a Utah corporation ("Far West
Capital"), will own the remaining 5% of Steamboat LLC. The Company will
contribute a total of $4,898,000 (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, to retire a mortgage and to provide capital for the potential
acquisition of certain of the royalty interests to which the Steamboat
Facilities are subject and improvements to the plants. See "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. 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
5
<PAGE>
consummation of an underwritten offering of the Company's securities.
Thereafter, the interest rate on the outstanding Convertible Debentures will be
9% per annum. Pursuant to the Debenture Conversion, an aggregate principal
amount of $500,000 of Convertible Debentures will be converted into 125,000
shares of Common Stock and 125,000 Private Warrants. The holders who have
agreed to the conversion will participate on a pro rata basis. The information
in this Prospectus assumes that all holders of the Convertible Debentures have
agreed to participate in the Debenture Conversion. Three of the 26 holders of
Convertible Debentures, representing $150,000 in principal amount, have not
agreed to the interest rate reduction from 18% to 9% per annum. Accordingly,
the Company's annual interest expense will be $13,500 greater than the Pro
Forma amounts shown in this Prospectus. See "Description of Securities--
Convertible Debentures," "Certain Transaction" and Pro Forma Financial
Statements.
6
<PAGE>
THE OFFERING
Securities offered..........
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 439,650 shares
Offering...................
Common Stock to be
outstanding after the
Primary Offering........... 2,894,650 shares(1)(2)
Use of proceeds............. The Company will receive no proceeds from the
sale of the Securities offered hereby.
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 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."
- --------
(1) Includes (i) 439,650 shares of Common Stock outstanding prior to the
Primary Offering, (ii) 2,125,000 shares of Common Stock being issued
pursuant to the Primary Offering, (iii) 125,000 shares of Common Stock to
be issued in the Debenture Conversion and (iv) 205,000 shares of Common
Stock to be issued in the Preferred Stock Exchange.
(2) Does not include an aggregate of 5,194,975 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) 3,175,000 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 Primary Offering.
7
<PAGE>
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 six months ended July 31, 1996 give effect to the
Closing Transactions including the acquisition of a 95% interest in Steamboat
LLC and the 81.5% interest in NRG as if they had occurred at the beginning of
the periods. The Pro Forma Balance sheet data as at July 31, 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, and historical
financial statements.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
YEAR ENDED JANUARY 31, SIX MONTHS ENDED JULY 31,
JANUARY 31, 1996 1995 JULY 31, 1996 1995
----------------------------- ----------- ------------------------ ----------
HISTORICAL PRO FORMA HISTORICAL HISTORICAL PRO FORMA HISTORICAL
USE USE/SB (1) USE USE USE/SB (1) USE
---------- --------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ -- $ 3,404 $ -- $ -- $ 1,919 $ --
------- --------- ------- ------- --------- -------
Operating and
administrative expenses:
Depreciation............ -- 172 -- -- 86 --
Royalty................. -- 528 -- -- 372 --
Other................... 853 1,856 1,006 408 927 421
Interest (2).............. 604 94 319 328 35 223
Loss from Joint Ventures.. 17 17 76 92 92 62
------- --------- ------- ------- --------- -------
Income (loss) before in-
come taxes............... (1,474) 737 (1,401) (828) 407 (706)
Income taxes (3).......... -- 244 -- -- 135 --
------- --------- ------- ------- --------- -------
Income (loss) before ex-
traordinary items........ (1,474) 493 (1,401) (828) 272 (706)
Preferred dividends....... 21(4a) 341(4b) -- 29(4a) 171(4b) --
------- --------- ------- ------- --------- -------
Income (loss) available
for common stockholders*. $(1,495) $ 152 $(1,401) $ (857) $ 101 $ (706)
======= ========= ======= ======= ========= =======
(Loss) per share of Common
Stock*................... $ (3.41) $ (3.38) $ (1.95) $ (1.61)
======= ======= ======= =======
(Loss) per share of Common
Stock--Supplemental (5)*. $ (1.27) $ (0.65)
======= =======
Pro forma net income per
share of Common Stock
(6)*.................... $ 0.08 $ 0.04
========= =========
Shares used in computing
net income per share of
Common Stock (6)......... 438,773 1,838,694 415,022 439,650 2,065,433 438,296
======= ========= ======= ======= ========= =======
BALANCE SHEET DATA:
<CAPTION>
JULY 31, 1996
-----------------------------
HISTORICAL PRO FORMA (7)
---------- ---------------
<S> <C> <C>
Current assets............ $ 21 $2,799
Investment in joint ven-
tures.................... 1,834 1,781
Loan receivable........... -- 300(8)
Property, plant and equip-
ment..................... -- 5,172
Total assets.............. 2,076 10,052
Current liabilities....... 2,815 1,264
Long-term liabilities..... 2,818 1,343
Minority interest in sub-
sidiaries................ -- 334
Working capital........... (2,794) 1,535
Stockholders' equity (def-
icit).................... (3,557) 7,111
</TABLE>
8
<PAGE>
- --------
* Before extraordinary item.
(1) Includes (a) adjusted operating results of the Steamboat Facilities for the
year ended December 31, 1995, and the six months ended June 30, 1996; (no
provision for the minority interest is made until the annual net income of
the Steamboat Facilities exceeds $1,800,000), (b) NRG income of 9% interest
on a $300,000 loan to Reno Energy less the 18.5% minority interest in NRG,
(c) 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 (d) elimination of interest on $500,000 principal
amount of Convertible Debentures converted into Common Stock and Private
Warrants, with substantially all the remainder paying interest at 9% per
annum.
(2) Adjusted for reduction of Convertible Debenture interest to 9%, and
elimination of interest costs on $500,000 principal amount of Convertible
Debentures converted into Common Stock and Private Warrants and 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. Three of the 26 holders of
Convertible Debentures, representing $150,000 in principal amount, have not
agreed to the interest rate reduction from 18% to 9% per annum.
Accordingly, the Company's annual interest expense will be $13,500 greater
than the Pro Forma amounts shown in this Prospectus. Also includes NRG
income of 9% interest on $300,000 loan to Reno Energy less the 18.5%
minority interest in NRG.
(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 1996 fiscal year and the beginning of
the six month period ended July 31, 1996.
(4a) Provision for dividends on Series One Preferred Stock eliminated as a
result of the Preferred Stock Conversion.
(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) Supplemental loss per share is based on the weighted average number of
shares outstanding and 537,651 (at January 31, 1996) and 586,826 (at July
31, 1996) of the shares to be issued in the Primary Offering for the
repayment of debt.
(6) 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, the investment in NRG and the
retirement of debt (1,145,181 shares at January 31, 1996 and 1,295,783
shares at July 31, 1996). Assumed exercise of options and warrants and the
conversion of the 11% Preferred Stock have not been reflected as they would
be anti-dilutive.
(7) 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, the NRG investment and the
repayment of indebtedness, including accrued interest to October 15, 1996.
(8) The NRG loan to Reno Energy includes $50,000 from funds invested by the
minority interests and $250,000 from the funds to be invested by the
Company.
9
<PAGE>
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.
NO SIGNIFICANT REVENUES; HISTORY OF LOSSES/UNCERTAIN PROFITABILITY; WORKING
CAPITAL, CASH FLOW AND SECURITYHOLDERS' EQUITY DEFICITS; AUDITORS' OPINION
WITH EXPLANATORY PARAGRAPH
The Company has a history of losses substantially throughout its existence
and, except for the distribution of $20,000 from the Plymouth State College
project in August 1996, has not received any cash distributions from its
investments since its reorganization in 1993. To date, the Lehi power plant
has not been operational. See "Current Operations and On-Going Projects."
Although the Company believes that there may be profit and cash flow from the
Lehi power plant starting in the fourth quarter of this fiscal year, there can
be no assurances that this will occur. Operations at the plant may be delayed
until the second quarter of the next fiscal year if the Company decides to
sell certain operating machinery and replace it by purchasing equipment that
would ultimately increase output capacity and efficiency. The Plymouth
cogeneration plant historically had not provided revenues or cash flow to the
Company because of costs related to equipment adjustments and operational
reserves required by the terms of its financing, and there can be no assurance
that any cash flow will be available in the foreseeable future. The Company
received a distribution of $20,000 in August 1996.
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 six months ended
July 31, 1996, the Company incurred a net loss of $828,000. At July 31, 1996,
as a result of these and earlier accumulated losses, the Company had a working
capital deficit of $2,794,000 and a stockholders' equity deficit of
$3,557,000. 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 cash flow from operations,
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."
PRIOR BANKRUPTCY; DEFERRED TAXES
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),
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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
began developing new projects after USF merged with the reorganized Cogenic
Energy Systems, Inc. in November 1993, but has not yet commenced significant
marketing activities and currently has limited marketing experience as well as
limited financial, personnel and other resources to undertake extensive
marketing activities.
PROJECT DEVELOPMENT AND ACQUISITION 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, including the Reno Project, 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. In particular, the Reno Project is still in the
planning and development stage and there are no contracts with any end users
nor any governmental approvals. 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, decline 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 exceed the
cost of production, or that Steamboat LLC will generate adequate cash flow
from operations to meet its investing and financing requirements. Although the
prices are variable and fluctuate, if, as expected, a substantial reduction in
power prices for Steamboat 1 takes place in December 1996, the result would
mean a decrease in the amount of net earnings of Steamboat LLC which the
Company will receive, which, depending on the extent of the price reductions,
could result in the Company reflecting a net loss. However, Management
believes that more satisfactory earnings can potentially be obtained for the
energy generated in the Steamboat Facilities through negotiations with Sierra
and/or as a result of efforts by the Company to develop other options for
sales of both electricity and heat from the facility. No assurance can be
given that such efforts will be successful.
The Company will pay $1,000,000 into Steamboat LLC to provide capital for
the potential acquisition of certain royalty interests and to fund certain
improvements to the Steamboat Facilities which are expected to result in
higher electricity output. While negotiations with certain royalty owners have
already begun, and the Company and its partners believe that these interests
can be bought out, no agreements have yet been concluded and no potential
savings from royalty reductions are reflected in the pro forma financial
statements presented herein. Additional royalty agreements, applying only to
Steamboat 1, call for payment of a total of 30% of the net revenue of
Steamboat 1 after certain deductions, starting March 1, 1997. The resulting
effect on the net income of Steamboat LLC and on the Company's after-tax
income will depend on the other elements of power sales revenues outlined
above. Assuming the reduction in income from power sales discussed above, and
the buyout of no royalty interests, the cost of these net revenue royalties
could be in the range of $50,000 to $100,000 annually. The Company expects the
Steamboat Facilities to generate sufficient revenues to make any royalty
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payments required. Negotiations with these interests have also already begun,
but no assurance can be given that the negotiations will produce successful
results. See "U.S. Energy Systems, Inc. and Subsidiaries Pro Forma Condensed
Consolidated Statements of Operations," "Steamboat Facilities Pro Forma
Condensed Combined Statement of Operations," "Management's Discussion and
Analysis of Financial Condition and Plan of Operation--Plan of Operation" and
"Business--Current Operations and On-Going Projects."
RELIANCE ON PRESIDENT
The Company will be 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 Utility Holding Company Act
of 1935 ("PUHCA") as long as each power plant in which it has an interest is a
qualifying facility ("QF") under the Public Utility Regulatory Policies 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 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, are not subject to
efficiency standards regarding 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
it is in substantial compliance with all applicable rules and regulations and
that the projects in which it is involved have the requisite approvals for
existing operations and are operated in accordance with applicable laws, the
operations of the Company and its projects remain subject to a varied and
complex body of laws and regulations that both
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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 below 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. Virtually all 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 and may be adversely affected by the prices charged by such
companies for conventional energy sources, which, in turn, are affected by
inflation and availability of fossil fuel.
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, directors and stockholders. In order to induce all holders
of Convertible Debentures
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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, all of whom have been afforded the opportunity to
obtain the same more favorable conversion rate. The Chairman of the Board, a
director, and two principal stockholders of the Company are holders of an
aggregate amount of $425,000 of the Company's Convertible Debentures. Accrued
interest on such indebtedness, adjusted to October 15, 1996, which will be
repaid from the proceeds of the Primary Offering, amounts to $107,100. As part
of the Debenture Conversion the conversion rate of the Convertible Debentures
held by those holders consenting to participate, which remain outstanding
after the Debenture Conversion, 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%. Three of the 26 holders of Convertible Debentures, representing
$150,000 in principal amount, have not agreed to the interest rate reduction
from 18% to 9% per annum. Accordingly, the Company's annual interest expense
will be $13,500 greater than the Pro Forma amounts shown in this Prospectus.
See "Closing Transactions" and "Description of Securities--Convertible
Debentures." The President, the Chairman, two directors and two principal
stockholders will also benefit by the payment to them of an aggregate of
$1,119,900 (including accrued interest to October 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 $231,750
and $167,500, respectively, will be owed to them as of October 15, 1996. The
deferred salaries 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 "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 35.6% 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 42.0% of total voting power, assuming no
other issuances of Common Stock prior to such exercise.
DISPARITY BETWEEN PUBLIC OFFERING PRICE PER SHARE AND THE EFFECTIVE PRIVATE
OFFERING PRICE PER SHARE OF COMMON STOCK
Although the Common Stock offered to the public is at a price of $4.00 per
share, the effective price per share paid by Enviro, upon conversion of the
11% Preferred Stock, is $1.94.
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. The Common Stock has
been sporadically traded on the OTC Bulletin Board. Although the Company has
made an application so that the Common Stock and Warrants will trade on the
Nasdaq SmallCap Market upon conclusion of the Primary Offering, there can be
no assurance that the Securities will be listed on Nasdaq or that an active
public trading market for the Common Stock or Warrants will develop and
continue after the Primary Offering. The Company's application for listing on
the Nasdaq SmallCap Market was
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denied on October 1, 1996. A hearing has been scheduled for October 17, 1996.
The initial offering prices of the Securities in the Primary Offering were
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 Primary Offering.
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 2,125,000 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 637,500 shares of Common Stock. The
Representative's Purchase Option, if fully exercised, including the related
Warrants, would result in the issuance of 425,000 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
5,832,475 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 $2.61
per share of Common Stock, (approximately 65% 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.
POSSIBLE RULE 144 SALES
Upon consummation of the Primary Offering, the Company will have outstanding
2,894,650 shares of Common Stock. All of the 2,125,000 shares sold in the
Primary Offering (assuming no exercise of the Underwriters' over-allotment
option in the Primary Offering), 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, ^ 43,250 shares are currently eligible for sale,
and the remaining 21,400 shares will be eligible for such sale in or after
November 1996, 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. Although registered pursuant to the
^Shelf Registration, 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
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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 and Warrants on
the Nasdaq SmallCap Market, which is administered by the National Association
of Securities Dealers, Inc. (the "NASD"). The Company's application for
listing on the Nasdaq SmallCap Market was denied on October 1, 1996. A hearing
has been scheduled for October 17, 1996. 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
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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 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.
17
<PAGE>
USE OF PROCEEDS
The Company will receive no proceeds from the sale of Securities offered
hereby.
PRICE RANGE OF COMMON STOCK
The Common Stock has traded on the NASD OTC Bulletin Board under the symbols
USEN (until July 1996) and USEE 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.
<TABLE>
<CAPTION>
BID
-------------
HIGH LOW
------ ------
<S> <C> <C>
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
Third Quarter (to Sept. 30, 1996)......................... $ 3.19 $ 2.25
</TABLE>
As of September 30, 1996, there were 583 record holders of the Company's
Common Stock and approximately 900 beneficial holders of the Company's Common
Stock.
On September 30, 1996, the high bid price was $3.375 and low bid price was
$3.00.
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."
18
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
at July 31, 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 October 15, 1996.
See "Closing Transactions" and "Certain Transactions." 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.
<TABLE>
<CAPTION>
JULY 31, 1996
------------------------
PRO FORMA
HISTORICAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Long-term debt, net of unamortized discount of
$30,000............................................. $ 2,818,000 $ 1,343,000
Loans payable........................................ 960,000
Pre-reorganization income taxes payable, current..... 192,000 192,000
----------- -----------
3,970,000 1,535,000
----------- -----------
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized; issued and outstanding, 57,500 shares;
to be issued and outstanding, none................ 1,000
11% Cumulative redeemable convertible preferred
stock, $.01 par value;
issued and outstanding, none; to be issued and
outstanding, 1,600,000 shares; liquidation value
$3,100,000........................................ -- 16,000
Common stock, $0.01 par value, 35,000,000 shares
authorized; issued and outstanding, 439,650
shares; to be issued and outstanding, 2,894,650
shares(1)(2)...................................... 4,000 28,000
Additional paid-in capital......................... 112,000 10,904,000
Accumulated (deficit) (3).......................... (3,674,000) (3,837,000)
----------- -----------
Total stockholders' equity (deficit)................. (3,557,000) 7,111,000
----------- -----------
Total capitalization................................. $ 413,000 $ 8,646,000
=========== ===========
</TABLE>
- --------
(1) Includes (i) 439,650 Shares of Common Stock outstanding prior to the
Primary Offering, (ii) 2,125,000 shares of Common Stock being issued
pursuant to the Primary Offering, (iii) 125,000 shares of Common Stock to
be issued in the Debenture Conversion and (iv) 205,000 shares of Common
Stock to be issued in the Preferred Stock Exchange.
(2) Does not include an aggregate of 5,194,975 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) 3,175,000 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 Primary Offering.
(3) Change in accumulated (deficit) reflects the write off of unamortized debt
discount of $25,000 in connection with repayment of certain debt and the
accrual of interest to October 15, 1996.
19
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JULY 31, 1996
The following Pro Forma Condensed Balance Sheet gives effect to the
following transactions as if they had occurred on July 31, 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 2,125,000 shares of Common Stock and
2,125,000 Warrants offered by this Prospectus for net proceeds of $7,052,000,
(c) acquisition of a 95% interest in two geothermal power plants (the
Steamboat Facilities) for an aggregate of $4,898,000 (including $50,000 as a
downpayment which was previously paid by the Company), (d) acquisition of an
81.5% interest in NRG for $265,000 (e) repayment of notes payable and other
liabilities in the aggregate amount of $2,681,000 adjusting for accrual of
interest and additional bridge loan financing to October 15, 1996, (f)
conversion of 57,500 shares of Series One Preferred Stock into 205,000 shares
of Common Stock, and (g) 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>
STEAMBOAT PRO FORMA ADJUSTMENTS
USE 1 AND 1A ---------------------------
HISTORICAL PRO FORMA CONSOLIDATED DEBIT CREDIT PRO FORMA
----------- ---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
A S S E T S
Current assets:
Cash.................... $ 1,000 $ 1,000 $ 3,500,000(a) $ 4,848,000(c) $ 2,776,000
7,052,000(b) 2,689,000(d2)
25,000(j) 265,000(i)
Inventory............... 19,000 19,000 19,000
Other current assets.... 1,000 $ 3,000 4,000 4,000
----------- ---------- ---------- ----------- ----------- -----------
Total current assets... 21,000 3,000 24,000 10,577,000 7,802,000 2,799,000
Investments in Joint
Ventures--at equity:
Lehi Independent Power 1,112,000 1,112,000 1,112,000
Associates, LC........
Plymouth Cogeneration 669,000 669,000 669,000
Limited Partnership...
Steamboat 53,000 53,000 4,848,000(c) 4,901,000(h) --
Envirosystems.........
NRG Company LLC........ 265,000(i) 265,000(j) --
Loan receivable, Reno 300,000(j) 300,000
Energy.................
Property, Plant and 5,172,000 5,172,000 5,172,000
Equipment..............
Deferred costs of regis- 221,000 221,000 221,000(b) --
tration................
----------- ---------- ---------- ----------- ----------- -----------
TOTAL.................. $ 2,076,000 $5,175,000 $7,251,000 $15,990,000 $13,189,000 $10,052,000
=========== ========== ========== ----------- ----------- ===========
L I A B I L I T I E S
Loans payable........... $ 960,000 $ 960,000 $ 960,000(d2) $ --
Pre-reorganization in- 192,000 192,000 192,000
come taxes payable.....
Other current liabili- 1,663,000 1,663,000 729,000(d2) 138,000(d1) 1,072,000
ties ..................
----------- ---------- ---------- ----------- ----------- -----------
Total current liabili- 2,815,000 2,815,000 1,689,000 138,000 1,264,000
ties..................
Convertible subordinated 1,525,000 1,525,000 500,000(f) 1,025,000
secured debentures ....
Notes payable .......... 975,000 975,000 1,000,000(d2) 25,000(g) --
Other liabilities ...... 318,000 318,000 318,000
----------- ---------- ---------- ----------- ----------- -----------
Total Liabilities...... 5,633,000 5,633,000 3,189,000 163,000 2,607,000
----------- ---------- ----------- ----------- -----------
Minority interests in
subsidiaries:
Steamboat Envirosystems 274,000(h) 274,000
LLC...................
NRG Company LLC........ 60,000(j) 60,000
----------- -----------
Total Minority Inter- 334,000 334,000
ests..................
----------- -----------
S T O C K H O L D E R S'
E Q U I T Y
(C A P I T A L
D E F I C I E N C Y):
Preferred stock, ($.01 1,000 1,000 1,000(e) --
par value issued and
outstanding, 57,500
shares; to be issued
and outstanding, none).
11% Cumulative redeem-
able convertible pre-
ferred stock, ($.01 par
value, issued and out-
standing, none; to be
issued and outstanding,
1,600,000 shares; liq-
uidation value
$3,100,000)............ 16,000(a) 16,000
Common stock ($.01 par
value, issued and out-
standing, 439,650
shares; to be issued
and outstanding,
2,894,650 shares)...... 4,000 4,000 21,000(b) 28,000
2,000(e)
1,000(f)
Additional paid-in capi- 112,000 112,000 221,000(b) 3,484,000(a) 10,904,000
tal.................... 1,000(e) 7,031,000(b)
499,000(f)
Accumulated deficit..... (3,674,000) (3,674,000) 25,000(g) (3,837,000)
138,000(d1)
Members' equity:
U.S. Energy Systems, 4,901,000 4,901,000 4,901,000(h) --
Inc. .................
Far West Capital, Inc.. 274,000 274,000 274,000(h) --
----------- ---------- ---------- ----------- ----------- -----------
Total stockholders' (3,557,000) 5,175,000 1,618,000 5,561,000 11,054,000 7,111,000
equity (capital
deficiency)...........
----------- ---------- ---------- ----------- ----------- -----------
TOTAL.................. $ 2,076,000 $5,175,000 $7,251,000 $24,740,000 $24,740,000 $10,052,000
=========== ========== ========== =========== =========== ===========
</TABLE>
20
<PAGE>
Notes to Pro Forma Condensed Consolidated Balance Sheet
- --------
(a) To reflect sale of 1,600,000 shares of 11% Preferred Stock for $3,100,000
and 500,000 Private Warrants for $400,000.
(b) To reflect sale of 2,125,000 shares of Common Stock and 2,125,000 Warrants
for net proceeds of $7,052,000.
(c) To reflect purchase of a 95% interest in Steamboat LLC, which is acquiring
the Steamboat Facilities.
<TABLE>
<S> <C>
(d1)To reflect accrual of interest from August 1 to October 15,
1996............................................................... $138,000
(d2)To reflect assumed repayment of debt:
Note payable.................................................... $1,000,000
Bridge loans.................................................... 960,000
Accrued interest................................................ 729,000
----------
$2,689,000
==========
</TABLE>
(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. No value has been assigned to these 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.
(h) To eliminate Steamboat LLC investment account and set up minority
interest.
(i) To reflect purchase of an 81.5% interest in NRG Company, LLC for $265,000.
(j) To reflect consolidation of accounts of NRG. The only assets of NRG are a
loan receivable of $300,000 from Reno Energy and cash of $25,000. The
majority interest was paid in during September, 1996. See "Business--
Current Operations and On-going Projects--Nevada District Heating
Project."
21
<PAGE>
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
consolidates the results of operations of the Company for the year ended
January 31, 1996 and the six months ended July 31, 1996 with the pro forma
results of operations of the Steamboat Facilities for the year ended
December 31, 1995 and the six months ending June 30, 1996 as if the proposed
Steamboat Acquisition had 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 95% 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
125,000 shares of Common Stock and 125,000 Private Warrants and reducing the
interest rate from 18% to 9% on the remaining balance and (d) the investment
in NRG as if the investment was made at the beginning of the periods. This
statement should be read in conjunction with the Steamboat Envirosystems, L.C.
Pro Forma Condensed Balance Sheet as of June 30, 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>
<CAPTION>
YEAR ENDED JANUARY 31, 1996
--------------------------------------------------------------------
ADJUSTED
USE 1 AND 1A PRO FORMA PRO FORMA
HISTORICAL PRO FORMA (1) CONSOLIDATED ADJUSTMENTS CONSOLIDATED
----------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Electric power... $ -- $3,404,000 $3,404,000 $ -- $3,404,000
----------- ---------- ---------- --------- ----------
Total revenue.... -- 3,404,000 3,404,000 -- 3,404,000
----------- ---------- ---------- --------- ----------
Expenses:
Depreciation.... -- 172,000 172,000 172,000
Royalty......... -- 528,000 528,000 528,000
Administrative
and other....... 853,000 1,003,000 1,856,000 1,856,000
Interest
expense(5a)/income
(5b) ............ 604,000 -- 604,000 (488,000)(2) 94,000
(22,000)(5b)
Loss from Joint
Ventures......... 17,000 17,000 17,000
----------- ---------- ---------- --------- ----------
Total expenses.. 1,474,000 1,703,000 3,177,000 2,667,000
----------- ---------- ---------- --------- ----------
Income (loss) be-
fore income tax-
es............... (1,474,000) 1,701,000 227,000 737,000
Income taxes..... -- -- (244,000)(3) 244,000
----------- ---------- ---------- --------- ----------
Net income
(loss)........... (1,474,000) 1,701,000 227,000 493,000
Dividends on pre-
ferred stock..... 21,000 21,000 21,000 (4a) 341,000
(341,000)(4b)
----------- ---------- ---------- --------- ----------
Net income (loss)
available for
common stockhold-
ers (6).......... $(1,495,000) $1,701,000 $ 206,000 $ 152,000
----------- ---------- ---------- --------- ----------
Net income per
common share (7). $ (3.41) $ 0.08
----------- ----------
Shares used in
computing net in-
come per common
share (7)........ 438,773 1,838,694
=========== ==========
<CAPTION>
SIX MONTHS ENDED JULY 31, 1996
-------------------------------------------------------------------
ADJUSTED
USE 1 AND 1A PRO FORMA PRO FORMA
HISTORICAL PRO FORMA (1) CONSOLIDATED ADJUSTMENTS CONSOLIDATED
----------- ------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Electric power... $ -- $1,919,000 $1,919,000 $ -- $1,919,000
----------- ------------- ------------ --------------- ------------
Total revenue.... -- 1,919,000 1,919,000 -- 1,919,000
----------- ------------- ------------ --------------- ------------
Expenses:
Depreciation.... -- 86,000 86,000 86,000
Royalty......... -- 372,000 372,000 372,000
Administrative
and other....... 408,000 519,000 927,000 927,000
Interest
expense(5a)/income
(5b) ............ 328,000 -- 328,000 (282,000)(2) 35,000
(11,000)(5b)
Loss from Joint
Ventures......... 92,000 92,000 92,000
----------- ------------- ------------ --------------- ------------
Total expenses.. 828,000 977,000 1,805,000 1,512,000
----------- ------------- ------------ --------------- ------------
Income (loss) be-
fore income tax-
es............... (828,000) 942,000 114,000 407,000
Income taxes..... -- -- 135,000 (3) 135,000
----------- ------------- ------------ --------------- ------------
Net income
(loss)........... (828,000) 942,000 114,000 272,000
Dividends on pre-
ferred stock..... 29,000 29,000 (29,000)(4a) 171,000
171,000 (4b)
----------- ------------- ------------ --------------- ------------
Net income (loss)
available for
common stockhold-
ers (6).......... $(857,000) $ 942,000 $ 85,000 $ 101,000
----------- ------------- ------------ --------------- ------------
Net income per
common share (7). $ (1.95) $ 0.04
----------- ------------
Shares used in
computing net in-
come per common
share (7)........ 439,650 2,065,433
=========== ============
</TABLE>
22
<PAGE>
- --------
(1) Reflects the Pro Forma earnings of the Steamboat Facilities as shown on
the Pro Forma Condensed Combined Statement of Operations of Steamboat
Facilities. The Company is entitled to an annual preferred return of the
first $1,800,000 of the net income of Steamboat LLC. No provision for the
interest of Far West Capital in the net income of Steamboat Facilities is
made until the annual net income of the Steamboat Facilities exceeds
$1,800,000.
(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% of
the remaining balance of the Convertible Debentures. The reduction of the
interest rate to 9% will be accounted for prospectively. Three of the 26
holders of Convertible Debentures, representing $150,000 in principal
amount, have not agreed to the interest rate reduction from 18% to 9% per
annum. Accordingly, the Company's annual interest expense will be $13,500
greater than the Pro Forma amounts shown in this Prospectus.
(3) To reflect provision for federal and state taxes at 38%, while 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 six month period ended July 31, 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 eliminated as a
result of the Preferred Stock Conversion.
(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.
(5a) The historical amounts during the year ended January 31, 1996 and the six
months ended July 31, 1996 include approximately $185,000 and $93,000,
respectively, of interest on debts owed to related parties.
(5b) To reflect NRG income of 9% interest on $300,000 loan to Reno Energy,
$27,000 per annum, less the 18.5% minority interest in NRG.
(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, the investment in NRG and the
retirement of debt (1,145,181 shares at January 31, 1996 and 1,295,783
shares at July 31, 1996). Assumed exercise of options, warrants and the
conversion of the 11% Preferred Stock have not been reflected as they
would be anti-dilutive.
23
<PAGE>
STEAMBOAT ENVIROSYSTEMS, L.C.
PRO FORMA CONDENSED BALANCE SHEET
AS OF JUNE 30, 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 (95% ownership interest) and Far West Capital
(5% ownership interest) for an aggregate of $5,256,000 as if such acquisition
had taken place on June 30, 1996. The total is made up of $4,898,000
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 95% interest in Steamboat Envirosystems, L.C.,
(2) $2,323,000 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 potential 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 the 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.
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------
DEBIT CREDIT PRO FORMA
----------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Cash................................. $ 4,898,000(a) $1,575,000(c)
1,000,000(d)
2,323,000(f)
Other Assets......................... 3,000(a) $ 3,000
Property, Plant and Equipment........ 274,000(b)
1,575,000(c)
1,000,000(d)
2,323,000(e) 5,172,000
----------- ---------- ----------
Total.............................. $10,073,000 $4,898,000 $5,175,000
=========== ========== ==========
LIABILITIES
Notes payable........................ $ 2,323,000(f) $2,323,000(e)
MEMBERS' EQUITY
U.S. Energy Systems, Inc............. 4,901,000(a) $4,901,000
Far West Capital, Inc................ 274,000(b) 274,000
----------- ---------- ----------
Total.............................. $ 2,323,000 $7,498,000 $5,175,000
=========== ========== ==========
</TABLE>
- --------
(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 investment to purchase and cancel certain royalty interests
and to fund certain improvements to the Steamboat Facilities.
(e) To reflect assumption of the mortgage to acquire the Steamboat Facilities
from Far West Electric Energy Fund, L.P. and 1-A Enterprises (the
"Mortgage").
(f) To reflect payment of the Mortgage.
24
<PAGE>
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 six months
ended June 30, 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 $4,848,000 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 95% 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 October 15, 1996 net of an
escrowed reserve, and will be acquired by the Company for $2,323,000 and
contributed to Steamboat LLC, and (3) $1,000,000 in cash will be contributed
by the Company to Steamboat LLC to allow the potential purchase and
cancellation of 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>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------
HISTORICAL
---------------------------------
FAR WEST
ELECTRIC
ENERGY 1 AND 1-A
FUND, 1-A PRO FORMA
L.P.(1) ENTERPRISES COMBINED ADJUSTMENTS ADJUSTED
---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Electric power.... $2,529,000 $875,000 $3,404,000 $ $3,404,000
Other............. 145,000 145,000 (87,000) (3a,b)
(58,000) (4)
---------- -------- ---------- ----------- ----------
Total revenues.. 2,674,000 875,000 3,549,000 (145,000) 3,404,000
---------- -------- ---------- ----------- ----------
Expenses:
Operations:
Depreciation..... 631,000 104,000 735,000 (563,000)(2) 172,000
Royalty.......... 405,000 210,000 615,000 (87,000)(3a,b) 528,000
Other............ 824,000 237,000 1,061,000 (58,000)(4) 1,003,000
Interest........... 655,000 161,000 816,000 (816,000)(5)
---------- -------- ---------- ----------- ----------
Total expenses.... 2,515,000 712,000 3,227,000 $(1,524,000) 1,703,000
---------- -------- ---------- ----------- ----------
Net income........ $ 159,000 $163,000 $ 322,000 $1,701,000
========== ======== ========== ==========
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
--------------------------------------------------------------
HISTORICAL
---------------------------------
FAR WEST
ELECTRIC
ENERGY PRO FORMA
FUND, A 1 AND 1-A
L.P. ENTERPRISES COMBINED ADJUSTMENTS ADJUSTED
---------- ----------- ---------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Electric power.... $1,509,000 $410,000 $1,919,000 $ $1,919,000
Other............. 68,000 68,000 (43,000)(3)
(25,000)(4)
---------- ----------- ---------- ----------------- ----------
Total revenues.. 1,577,000 410,000 1,987,000 (68,000) 1,919,000
---------- ----------- ---------- ----------------- ----------
Expenses:
Operations:
Depreciation..... 329,000 52,000 381,000 (295,000)(2) 86,000
Royalty.......... 237,000 92,000 329,000 43,000 (3a,b) 372,000
Other............ 439,000 105,000 544,000 (25,000)(4) 519,000
Interest........... 330,000 71,000 401,000 (401,000)(5)
---------- ----------- ---------- ----------------- ----------
Total expenses.... 1,335,000 320,000 1,655,000 $(678,000) 977,000
---------- ----------- ---------- ----------------- ----------
Net income........ $ 242,000 $ 90,000 $ 332,000 $ 942,000
========== =========== ========== ==========
</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 Electric Energy Fund, L.P. in February, 1995.
(2) To record estimated reduction of depreciation for new basis of assets
acquired, based on $5,172,000 total cost, assuming a 30-year depreciation
period, from date of acquisition.
(3)(a) To eliminate certain royalties paid by 1-A Enterprises to Far West
Electric Energy Fund, L.P., which amount to $87,000 in the year ended
December 31, 1995 and $43,000 in the six months ended June 30, 1996.
(b) Does not include additional savings to be made if negotiations with
certain royalty owners, already under way, are successful.
(4) To eliminate intercompany charges paid by 1-A Enterprises to Far West
Electric Energy Fund, L.P.
(5) To eliminate interest expense due to elimination of debt.
(6) No provision for the interest of Far West Capital in the net income is
required until the annual net income for the Steamboat Facilities exceeds
$1,800,000.
25
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND 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:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Operating expenses.................................... $ 27,000 $ 109,000
Selling and administrative expenses................... 826,000 897,000
Interest expense...................................... 604,000 319,000
Loss from Joint Ventures.............................. 17,000 76,000
---------- ----------
Totals.............................................. $1,474,000 $1,401,000
========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Salaries and consulting fees.............................. $431,000 $407,000
Corporate expenses........................................ 70,000 85,000
Legal and professional costs.............................. 148,000 202,000
</TABLE>
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 previously 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. The interest expense in the 1996 fiscal year was
$169,000.
Losses 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
26
<PAGE>
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 Cogeneration. The
Company's gain from LIPA includes $118,000 gain from sale of unused plant
equipment.
Six months Ended July 31, 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:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
(Loss) from joint ventures................................... $ 92,000 $ 62,000
======== ========
Operating expenses........................................... -- $ 26,000
======== ========
Selling and administrative expenses:
Salaries and consulting fees............................... $239,000 $190,000
Legal and professional fees................................ 77,000 63,000
Corporate expenses......................................... 15,000 48,000
All other.................................................. 77,000 94,000
-------- --------
Total selling and administrative expenses.................... $408,000 $395,000
======== ========
Interest expenses............................................ $328,000 $223,000
======== ========
The six-month joint venture losses break down as follows:
Lehi Independent Power Associates, L.C. ("Lehi")............. $ 58,000 $ 40,000
Plymouth Cogeneration Limited Partnership ("Plymouth")....... 34,000 22,000
-------- --------
Total (loss) from joint ventures............................. $ 92,000 $ 62,000
======== ========
</TABLE>
Operating expenses in the 1995 period resulted from the adjudication of
legal action on a project which had been completed and reported on earlier.
There will be no further costs associated with this project.
Consulting agreements which began during 1995 and were not in existence
during the 1995 period accounted for the increase in salaries and consulting
fees. The Company has entered into a consulting agreement with Indus Inc. for
assistance in developing both projects and joint development agreements in
Asia, with specific emphasis on India. To date, Indus Inc. has been
instrumental in bringing in the potential project for the Rajinder Steel Mill
in Raijpur, India and for developing the potential for a consortium with
Raunaq Industries in New Delhi, India. The Company has also entered into a
consulting agreement with Knoll Capital Management relating to specific work
being done for the Company to develop projects in Israel and the Middle East.
Knoll Capital Management was instrumental in arranging the kibbutz project in
Israel which the Company is currently pursuing. See "Certain Transactions."
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 July 31, 1996, these amounted to $221,000.
The corporate expenses in 1995 included a non-recurring cost of $25,000 for
a previously planned public offering that was never consummated. Interest
expense increased in the 1996 period due to higher levels of borrowing,
including bridge loans which began in June, 1995.
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.
27
<PAGE>
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 $2,794,000 and $3,557,000, respectively, at July 31, 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 the Primary Offering, the
Company's pro forma working capital at July 31, 1996 would be a positive
$124,000.
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 six months ended July 31, 1996, cash flow was carefully
conserved. Salaries were deferred and additional bridge loan borrowings
amounting to $175,000 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 $7,052,000
and the Private Placement of 11% Preferred Stock and Private Warrants will
provide $3,500,000 for a total net proceeds of $10,552,000. Of this total, the
Company's acquisition of 95% of Steamboat LLC will use $4,848,000 (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 October 15, 1996. The bridge loans, including
interest, total $1,105,000, secured notes payable, including interest, total
$1,218,000, and accrued interest on the Convertible Debentures required to be
paid as part of the restructuring of these instruments, total $366,000. It is
Management's belief that 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 except on a project finance
basis for new projects.
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 secured notes in the principal amount of
$1,000,000 and interest thereon, and (iii) repayment of all bridge loans.
Three of the 26 holders of Convertible Debentures, representing $150,000 in
principal amount, have not agreed to the interest rate reduction from 18% to
9% per annum. Accordingly, the Company's annual interest expense will be
$13,500 greater than the Pro Forma amounts shown in this Prospectus.
In addition, the Steamboat Acquisition is expected to 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 11% 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.
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. However,
Sierra has indicated that it would be willing to negotiate a
28
<PAGE>
mutual release of the contract. 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 exceed the cost of production, or that
Steamboat LLC will generate adequate cash flow from operations to meet its
investing and financing requirements. Although the prices are variable and
fluctuate, if, as expected, a substantial reduction in power prices for
Steamboat 1 takes place in December 1996, the result would mean a decrease in
the Company's share of the net earnings of Steamboat LLC, which, depending on
the extent of the price reduction, could result in the Company reflecting a
net loss. If rates offered by Sierra are not satisfactory, the Company and its
partners may seek to negotiate termination of the existing contracts. The
Company believes that under new regulations it will be able to sell the output
of electricity to other electric utility purchasers at more favorable prices.
The Company will contribute $1,000,000 to Steamboat LLC for the purpose of
buying out certain royalty interests and to fund certain improvements to the
Steamboat Facilities which are expected to result in higher electricity
output. While negotiations with certain royalty owners have already begun, and
the Company and its partners believe that these interests can be bought out,
no agreements have yet been concluded and potential savings from royalty
reductions are not reflected in the pro forma financial statements presented
herein. Additional royalty agreements, applying only to Steamboat 1, call for
payment of a total of 30% of the net revenue of Steamboat 1 after certain
deductions, starting March 1, 1997. The resulting effect on the net income of
Steamboat LLC and on the Company's after tax income will depend on the other
elements of power sales revenues outlined above. Assuming the reduction in
income from power sales illustrated above, and the buyout of no royalty
interests, the cost of these net revenue royalties could be in the range of
$50,000 to $100,000 annually. Negotiations with these interests have also
already begun, and Management believes they will be successfully purchased
although no assurance can be given. See "U.S. Energy Systems, Inc. and
Subsidiaries Pro Forma Condensed Consolidated Statements of Operations,"
"Steamboat Facilities Pro Forma Condensed Combined Statement of Operations,"
and "Business--Current Operations and On-Going Projects."
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 sale 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 fourth quarter of the
fiscal year, provided that it obtains the necessary air quality permits.
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.
Under Title V of the Clean Air Act, the Lehi Plant must obtain an operating
permit from the Utah Division of Air Quality before it can commence
operations. The Title V program did not take effect in Utah until July 10,
1995. Therefore, a Title V permit was not a requirement during past operations
of the facility, but it will be a requirement for future operations. A permit
modification would also be necessary if new engines are installed or if
capacity is increased.
The Plymouth, NH plant has been operating since January 1995 and
historically 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, the plant has begun to provide cash flow
to the Company. The Company received its first distribution amounting to
$20,000 in August 1996. In addition, switching the plant's fuel supply to less
expensive waste oil, as is presently being contemplated, could add 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
would take place during fiscal year 1998.
29
<PAGE>
The Company also expects revenues from other projects, currently being
negotiated, that will be under way during the next twelve months but are not
yet under contract. There are five such projects, not including Steamboat, at
least four of which the Company believes will be secured and from which
revenues are anticipated 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 in the long term 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 a letter of intent 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, the resort manager and the resort owners will own the cogeneration
plant and water system and share revenues based on capital investment in the
project. The resort owners have committed to pay approximately $41,000 for the
installation of the first of six engine generators during September 1996, all
of which has been received. While the Company anticipates realizing additional
revenues for its engineering and equipment sales to the project immediately
upon the start of construction, and anticipates that the main stream of revenue
will be the sale of energy to the host facilities over the fifteen year term of
the contract, there can be no assurance that this will occur. 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 over the next twelve months on
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 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%. Three of the
26 holders of Convertible Debentures, representing $150,000 in principal
amount, have not agreed to the interest rate reduction from 9% to 18% per
annum. Accordingly, the Company's annual interest expense will be $13,500
greater than the Pro Forma amounts in this Prospectus.
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 of inflation on Company earnings and cash flows is expected to be
minimal.
30
<PAGE>
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 Mr. 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. Mr. Nelson resumed the positions of President and Chief
Executive Officer of the Company when it emerged from bankruptcy. 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 utilizing a process known as
"cogeneration." Cogeneration is defined as the production of two or more
energy forms (typically electricity and heat) simultaneously 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
31
<PAGE>
engineering, management and project coordination skills the Company offers are
required to proceed. Although the Company has only begun to develop new
projects since USF merged with the reorganized Cogenic Energy Systems, Inc. in
November 1993, the president and key consultants of the Company have been
involved in the power generation industry for over twenty years and the
alternative energy business for over fifteen years and have been involved in
the building of 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) IPP 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 is 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. The basis for granting air quality permits varies from location to
location, but permits are always required before commencement of operations.
In applying for such permits, the facility developers present a computer model
of emissions of carbon monoxide and nitrous oxides which would be expected to
issue from the facility over a one year period. This model is based on the
fuel used, the anticipated annual hours of operation, the engine
manufacturer's specifications for emissions, and the reduction of such
emissions from application of catalytic converters or other devices. The
emissions are then expressed in weight, e.g., "100 tons per year." The local
air quality authority will then determine if this is acceptable for the area.
The local air quality authority may or may not require continuous emissions
monitoring to insure that the level of emissions granted in the permit are not
exceeded.
If the facility is recovering waste heat and utilizing that heat to displace
heat which would otherwise be made from burning fuels in conventional furnaces
or boilers, and if the emissions from the facility are actually less than the
emissions which would be forthcoming from the conventional furnaces or boilers
so displaced, there is said to be a "net reduction" in emissions for the area,
and the permitting authorities will normally act promptly and favorably to
grant the permit. If the facility is not using recovered waste heat to
displace other heat source emissions, e.g., a large, stand-alone generating
plant with no cogeneration, there would be a "net increase" in emissions in
that geographic area. Under such circumstances, the permitting process could
be prolonged and made difficult by public hearings, public interventions, and
the considerably more careful determinations which the local air quality
authority must make in order to decide whether or not such net increase in
emissions can be allowed.
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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 frequently 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 because of the low fuel costs. 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 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, the Company has entered into a memorandum of understanding with
Raunaq Industries in India to pursue the creation of a consortium to build one
or more large coal fired power plants. In Panama, while no definitive
consortium agreement has been signed, the Company and its Panamanian partners
have created a Panamanian corporation (Panavisa), which has applied to the
Panamanian government for pre-qualification to bid on several projects.
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 April 1996 the Federal Energy Regulatory Commission ("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, many
states are expected to phase in such regulations in the future. See
"Business--Government Regulation."
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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 95% 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 remaining 5%. 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 October 15, 1996 net of an
escrowed reserve, and will be acquired by the Company for $2,323,000 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 provide capital for the
potential acquisition of certain of the royalty interests and for funding
certain improvements to the Steamboat Facilities. While negotiations with
certain royalty owners have already begun, and the Company and its partners
believe that these interests can be bought out, no agreements have yet been
concluded and no potential savings from royalty reductions are reflected in
the pro forma financial statements presented herein. Additional royalty
agreements, applying only to Steamboat 1, call for payment of a total of 30%
of the net revenue of Steamboat 1 after certain deductions, starting March 1,
1997. The resulting effect on the net income of Steamboat LLC and on the
Company's after tax income will depend on the other elements of power sales
revenues outlined above. Assuming the reduction in income from power sales
illustrated above, and the buyout of no royalty interests, the cost of these
net revenue royalties could be in the range of $50,000 to $100,000 annually.
Negotiations with these interests have also already begun, and Management
believes they will be successfully purchased, although no assurance can be
given. See "U.S. Energy Systems, Inc. and Subsidiaries Pro Forma Condensed
Consolidated Statements of Operations," "Steamboat Facilities Pro Forma
Condensed Combined Statement of Operations" and "Management's Discussion and
Analysis of Financial Condition and Plan of Operation--Plan of Operation."
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. The Company
will receive the first $1,800,000 of Steamboat LLC annual net income. For net
income above $1,800,000, Far West Capital will receive: (i) 55% for the first
five years and (ii) 5% thereafter, with the Company to receive the balance.
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, none of which is the
subject of a binding or definite agreement.
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
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equity interest in Steamboat LLC, SB Geo, Inc. will continue to manage the
day-to-day operations of the Steamboat Facilities. 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 8 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. 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 exceed the
cost of production, or that Steamboat LLC will generate adequate cash flow
from operations to meet its investing and financing requirements. Although the
prices are variable and fluctuate, if, as expected, a substantial reduction in
power prices for Steamboat 1 takes place in December 1996, the result would
mean a decrease in the Company's share of the net earnings of Steamboat LLC,
which, depending on the extent of the price reduction, could result in the
Company reflecting a net after tax loss. However, Management believes that a
more satisfactory price is likely to be obtained for the electricity generated
in the Steamboat Facilities through negotiations with Sierra or otherwise,
although no assurance can be given that such efforts will be successful. 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 to
other utilities. While under the power purchase agreements, Sierra has an
obligation to buy the electricity generated and the plants have an obligation
to sell the same to Sierra, negotiations relating to the price adjustments may
result in a mutual cancellation of the agreement if such is favorable to both
sides. Sierra has indicated it would be willing to negotiate a mutual
cancellation.
There are currently five geothermal power projects operating in Steamboat
Hills, Nevada, totalling approximately 62 megawatts of output. In addition to
the 8 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 $5.9 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
$5,110,000 in State of New Hampshire tax exempt revenue bonds and $700,000 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 Gas & Electric
Corporation 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. 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.
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The State of New Hampshire has initiated a study to determine the feasibility
of expanding the existing facility to wheel electric power to two other state
college campuses. 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" and "Certain Transactions."
The Company's partners in the Lehi project are Far West Capital and Suma
Corporation ("Suma"), 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, Suma 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 fourth 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, commencement of
operations would be delayed from the fourth 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.
Under Title V of the Clean Air Act, the Lehi Plant must obtain an operating
permit from the Utah Division of Air Quality before it can commence operations.
The Title V program did not take effect in Utah until July 10, 1995. Therefore,
a Title V permit was not a requirement during past operations of the facility,
but it will be a requirement for future operations. A permit modification would
also be necessary if new engines are installed or if capacity is increased.
Because all existing facilities were required to submit operating permit
applications in 1995, the Division of Air Quality has had a significant
backlog.
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
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before its full intended utilization was determined. Management had been
negotiating with Micron to provide direct sale of 35 megawatts from the Lehi
facility. During these prolonged negotiations, and up until Micron's decision
in April 1995 to suspend construction of their new plant, Management was
constrained by local political sensitivity from seeking sale of electricity
from the Lehi facility to other potential purchasers. Management believes,
however, that the substantial population and industrial growth being
experienced in the area is creating a large, future market for power.
Management further believes that it should plan to increase the Lehi facility's
size to 35 megawatts using high efficiency gas turbines since a market is
rapidly developing. Even in the absence of Micron, 35 megawatts is the size
under discussion because the plant's air quality permit allows for 249.9 tons
of emissions annually, which fits the profile of a 35 megawatt combined cycle
gas turbine.
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 249.9 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 the Cowen Investment Group 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 Cowen 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
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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 Cowen. 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. A proposed agreement with one
of the mall owners calls for at least ten such installations. The mall owners
have indicated, however, that installations of cogeneration systems would be
contemplated at all malls where certain basic economic criteria for
cogeneration exists. The Company and Cowen 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 a letter of intent 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, the resort manager and the resort owner
will form a limited liability entity, which will own and operate the
cogeneration facility, selling discounted power to the hotel and adjacent
commercial buildings. The profits and cash shall be distributed pro rata on the
basis of the capital contributions of the parties to the contract. The Company
will be credited for its capital contributions as a result of the services it
will provide to the joint venture. 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.
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Nevada District Heating Project. Concurrently with the closing of the
Primary Offering, the Company will be acquiring an 81.5% interest in NRG
Company LLC ("NRG") for $265,000. NRG was recently formed and funded at
$70,000 by several investors in the Company, including Messrs. Rosen and
Nelson (see "Certain Transactions--Reno Project"). From these funds NRG made a
loan of $50,000 to Reno Energy LLC ("Reno Energy"). $250,000 from the
Company's capital contribution to NRG will be loaned to Reno Energy to bring
the total loan to $300,000. The purpose will be to fund pre-development
expenses associated with the proposed development of a geothermal district
heating project. The loan is to be repaid over three years with interest at 9%
per annum, or with the proceeds from any financing transaction.
There is a large industrial park being developed in Reno on a 1200 acre area
in close proximity to the district heating plant. The first phase of the park
is already sold out, and the entire park is expected to be developed within
the next four to seven years. An examination of the current property owners of
the park indicates that the park will house mostly commercial buildings with
some industrial facilities. Also, a 200-bed hospital and 300-room hotel are
planned to be built in the park, with many more prospective tenants.
Therefore, the industrial park will create a huge demand for space heating and
cooling as well as process heating. It is expected that the total buildings,
adding up to 30,000,000 square feet of floor space, will be connected to the
geothermal grid to meet their heating and cooling needs. Additionally, there
is a high school located nearby and a college campus is planned in addition to
other development in the area. Each of these is likely to be a major consumer
of geothermal energy.
Reno Energy plans to construct and operate a plant which will use
geothermally heated fresh water for space heating and cooling and for process
heating in the industrial park and the other nearby development. To meet the
requirements of these commercial and industrial facilities, a pipeline with
supply and return lines would be built that would loop through the industrial
park. A binary hot water system with fresh water circulating through the loop
will be used to avoid any concerns associated with the direct use of
geothermal brine such as scale build-up in the pipes, corrosion on pipes and
equipment, and possible pollution of the ground in case of a spill. Fresh
water will be heated in heat exchangers at the site where geothermal brine is
extracted and reinjected; only fresh water will be circulated in the loop. The
heat thus provided will be sold at a discount from the cost of producing an
equivalent amount of heat from conventional natural gas furnaces.
Under the terms of the agreements between NRG and Reno Energy, NRG will have
an option to acquire a 50% interest in Reno Energy (subject to certain
preferential distribution interests of the founders of Reno Energy) (the "Reno
Option"). The Reno Option, which would be paid for out of working capital,
will be exercisable for $1 million until December 1, 1996 but extendable, upon
payment of $100,000, until March 1, 1997 at an exercise price of $1,200,000.
If the Company determines to exercise the Reno Option, it will use the funds
designated for use as working capital, if such funds are available at that
time. It is estimated that approximately $35,000,000 is required for
construction, procurement and other costs associated with the commencement of
operations at Reno Energy. Such amount is expected to be financed through
industrial revenue bonds and/or vendor financing, in addition to other types
of tax-exempt debt financing. Efforts begun on the Reno Project include
retention of an international engineering firm to provide preliminary
engineering and design services to support Reno Energy's application to the
Nevada Public Service Commission for authorization, as well as retention of a
financial consultant to assist in securing debt financing for the Reno
Project.
Under the terms of the agreements governing NRG, the Company, which will own
81.5% of NRG, will have decision making authority on all matters. If the Reno
Option is exercised, each of the investors in NRG will be given an opportunity
to fund its pro rata share of the option price in order to maintain its
interest in NRG.
The project is still in the planning and development stage. As yet there are
no contracts with any end users, nor are there approvals from local and state
authorities. The Company will have to satisfy itself as to these and other
factors before NRG's option would be exercised.
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<PAGE>
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 its 50% owned subsidiary, 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. The remaining 50% of USE International, LLC is
owned by Indus, LLC. Ravi Singh, a consultant to the Company, is the President
and principal shareholder of Indus, LLC.
Panama. The Company has formed a company, Panavisa Envirosystems, S.A.
("Panavisa"), 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. While there is no definitive agreement in place, the
Company is working with a Panamanian financial group to form a consortium to
design, build, and operate barge-mounted power plants for Institucion de
Recursos Hidraulicos y Electrificacion, the Panamanian national electric
company, which would purchase electricity from the consortium under a
negotiated long-term contract. If such project is ultimately undertaken, it is
likely that the Panamanian financial group involved in such project would
become a partner in Panavisa. 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. Absorption 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.
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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 President and consultants 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 plant 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. Many of the very large
plants are owned and operated by subsidiaries of public utility companies and
large industrial companies which have established these subsidiaries to
participate in the IPP industry. Approximately 18 of the 25 largest independent
power companies are subsidiaries of public utilities or large industrial
companies. The operations of most of these companies are geared to the largest
sized power plants because of the need to place significant investment to
achieve returns large enough to have an impact on a large public utility's or
industrial company's balance sheet. Some of these companies have been highly
successful in the development of larger plants; but under federal law, utility
subsidiaries may not own more than 50% of QF projects. However, subsidiaries of
large industrial companies and other non-utility companies have no similar
restrictions. Additionally, under federal law enacted in 1992, a new category
of independent power producer was created known as exempt wholesale generators
("EWG"). EWG's have no ownership limitations nor do they have similar
requirements to QF's with regard to useful thermal output or fuel efficiency
and operating efficiency criteria. To receive qualification as an EWG, the
owner of an IPP need only demonstrate that the entire output of the facility is
sold exclusively in the wholesale market. EWG's are prohibited from making
retail sales and therefore cannot be developed for inside-the-fence projects.
In many instances, subsidiaries of public utilities and large industrial
companies make ideal partners for projects and the Company intends to work with
such companies when it locates a specific project fitting their investment
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 will retain 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.
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<PAGE>
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 249.9
tons of NOX annually. All costs associated with LIPA and the operation of the
plants, and all income derived therefrom, are 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 is 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. QF status exempts the owner of an IPP from regulation
under various federal laws including PUHCA and the regulation of the rates for
sale from the IPP as well as certain state laws. However, QF status does not
exempt an IPP from state utility law regulation in those states where the sale
of electricity directly to an industrial or commercial customer is regulated as
a retail sale. Most states currently do not regulate the sale of electricity
from a QF to an inside-the-fence customer.
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. With the exception of an air
operating permit for the Lehi facility, the Company believes that it is in
substantial compliance with all applicable rules and regulations and that the
projects in which it is involved have the requisite approvals for existing
operations and are operated
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in accordance with applicable laws. However, the operations of the Company and
its projects 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.
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.
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MANAGEMENT
The directors and executive officers of the Company are presently as
follows:
<TABLE>
<CAPTION>
AGE POSITION(S)
--- -----------
<S> <C> <C>
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.................. 71 Director
Seymour J. Beder............ 69 Treasurer and Chief Financial Officer
</TABLE>
At the conclusion of the Primary 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 holder 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
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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
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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 six
months ended July 31, 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>
<CAPTION>
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS LONG TERM COMPENSATION
- --------------------------- ------------------ -------- ----- ----------------------
<S> <C> <C> <C> <C>
Richard H. Nelson, 1997
President and Chief (to July 31, 1996) $ 75,000(1)
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.
- --------
For a period of three years from the date of this Prospectus, all
compensation and other arrangements between the Company and its officers,
directors and affiliates is to be approved by a Compensation Committee of the
Board of Directors, a majority of whom are to have no affiliation or other
relationship with the Company other than as 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 compete with the Company during the term of his employment with the
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<PAGE>
Company or for two years thereafter, or, at any time, disclose any
confidential information pertaining to the Company. Mr. Nelson works for the
Company full-time. As of October 15, 1996, the amount of deferred compensation
owed to Mr. Nelson will be $231,750.
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, he may not compete with the Company during the term of
his employment with the Company or for two years thereafter, or, at any time,
disclose any confidential information pertaining to the Company. As of October
15, 1996, the amount of deferred compensation owed to Mr. Rosen will be
$167,500.
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, the President, Theodore Rosen, the Chairman, Ronald Moody, a
director, Fred Knoll, a director, and S. Marcus Finkle, a principal
stockholder of the Company, are participants in the Plymouth Loan (having
loaned $25,000, $25,000, $75,000, $650,000 and $150,000 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, Moody, Knoll and Finkle will benefit by the payment to them from the
net proceeds of the Primary Offering and the Private Placement of $30,600,
$30,500, $91,000, $792,500 and $183,000, respectively (including accrued
interest to October 15, 1996) in connection with the repayment of the Plymouth
Loan. Mr. Rosen, Mr. Knoll and Mr. Finkle and Guernroy Ltd. a principal
Stockholder, are also holders of the Company's Convertible Debentures in the
amounts of $125,000, $200,000, $50,000 and $50,000 respectively. Accrued
interest, adjusted to October 15, 1996, which will be repaid from the proceeds
of the Primary Offering, amount to $29,400, $54,000, $12,500 and $11,800
respectively. As part of the Debenture Conversion, the conversion rate of the
Convertible Debentures, which remain outstanding after the Debenture
Conversion, will be reduced to $8.00 per share from the present $16.00 per
share and the interest rate thereon will be reduced to 9% from the present
18%. 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. Three of the 26 holders of Convertible
Debentures, representing $150,000 in principal amount, have not agreed to the
interest rate reduction from 18% to 9% per annum. Accordingly, the Company's
annual interest expense will be $13,500 greater than the Pro Forma amounts
shown in this Prospectus. See "Closing Transactions," 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
47
<PAGE>
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 October 25, 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. $775,000 of the proceeds of the Primary Offering
and the Private Placement will be used to repay the Anchor Loan and $115,000
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 "Description of Securities--Preferred Stock--Series One
Preferred Stock."
The Company and its partners, who each own 50% of LIPA, share on a pro-rata
basis the ownership, retrofitting costs, annual expenses, and revenues
associated with the Lehi Cogeneration 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 "Business--
Current Operations and On-Going Projects."
The Company has also entered into a consulting agreement with Knoll Capital
Management relating to specific work being done for the Company to develop
projects in Israel and the Middle East. The contract is for a term of one
year, expiring in October 1996, and provides for a consulting fee of $5,000
per month. Fred Knoll, a director and principal stockholder of the Company is
the Chairman and Chief Executive Officer of Knoll Capital Management. Knoll
Capital Management was instrumental in arranging the kibbutz project in Israel
which the Company is currently pursuing and continues to be instrumental in
assisting the Company in negotiations in other parts of the world, including
Panama. See "Management's Discussion and Analysis of Financial Condition and
Plan of Operations--Results of Operations."
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 October 25, 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. 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.
Reno Project. In order to participate in the Reno Project and eliminate any
potential conflict of interest, the Company will be acquiring the interests of
Messrs. Rosen and Nelson in NRG. Of the $265,000 to be paid by the Company for
its 81.5% interest in NRG, $10,000 will be used to purchase those interests,
for which Messrs. Rosen and Nelson had paid that amount. See "Business--
Current Operations and On-Going Projects--Nevada District Heating Project."
Messrs. Moody and Knoll, directors of the Company until their resignation upon
the consummation of the Primary Offering, will each continue to own $10,000
(3.08%) interests in NRG.
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<PAGE>
PRINCIPAL AND SELLING SECURITYHOLDERS
The following table lists the number of shares of Common Stock owned as of
August 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. The following table also
includes relevant information regarding the securityholders for whose account
securities are being offered pursuant to this Prospectus. 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>
<CAPTION>
BENEFICIAL OWNERSHIP SHARES TO WARRANTS BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1) BE SOLD TO BE SOLD AFTER OFFERING(1)
-------------------- --------- ---------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard Nelson.......... 82,446 18.7% 0 82,446 2.9%
Theodore Rosen.......... 88,333(2) 17.4% 0 100,833(2a) 3.4%
Ronald Moody............ 21,500(3) 4.8% 0 21,500(3) 0.7%
Fred Knoll.............. 171,333(3) 28.6% 0 191,334(a) 6.3%
Evan Evans.............. 2,500 0.6% 0 2,500 0.1%
S. Marcus Finkle........ 63,833 13.9% 0 68,833(a) 2.4%
117 AABC
Aspen, CO
Guernroy, Ltd........... 38,158 8.6% 0 43,158(a) 1.5%
c/o Royal Bank of
Canada
Channel Isles, UK
Enviro Partners, L.P.... 1,600,000 78.4% 1,600,000(8) 0 0%
885 Third Avenue, 34th
Floor
New York, NY 10022
Anchor Capital Company, 205,000 31.8% 205,000(9) 0 0%
LLC....................
1140 Avenue of the
Americas
New York, NY 10036
Energy Management 0 0% 0 500,000(10) 0 0%
Corporation............
885 Third Avenue, 34th
Floor
New York, NY 10022
All officers and 381,113(2)(2a) 55.2% 413,613(2)(2a) 13.1%
directors..............
as a group (6 persons) (3)(4) (3)
(4)
</TABLE>
- --------
(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.
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<PAGE>
(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 an 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.
(10) Represents warrants issued to EMC which are not exercisable until one
year after the Private Placement and which do not represent beneficial
ownership of the Common Stock as of the date of this table. EMC currently
owns all of the Private Warrants, which will represent 18.2% of the
warrants outstanding. EMC has had no affiliation with the Company for the
past three years.
50
<PAGE>
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 "Preferred Stock").
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.
51
<PAGE>
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 "Series One Preferred Stock"). The Company
issued 57,500 shares of 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 the Primary Offering and the other
Closing Transactions, the 57,500 shares of Series One Preferred Stock will be
52
<PAGE>
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 the consummation of the Primary Offering, 1,600,000 shares of 11%
Preferred Stock, which may be converted into 1,600,000 shares of Common Stock
of the Company. Such conversion may take place at any time, and from time to
time. 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. Enviro
has agreed that it will not sell in the public market the shares received upon
conversion, for a period of twelve months from the closing of the Primary
Offering. 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 after
four years at a price per share equal to (x) 100% of the liquidation
preference of such share plus (y) an amount per share equal to all accrued and
unpaid dividends thereon, whether or not declared or payable.
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, at a price of $4.00 per share, $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%. Three of the 26 holders of Convertible
Debentures, representing $150,000 in principal amount, have not agreed to the
conversion. If such individuals do not agree to the conversion, the Company's
annual interest expense will increase by $13,500. These changes were
negotiated with the holders of the Convertible Debentures. 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.
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<PAGE>
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.
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<PAGE>
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 in the Primary Offering) 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, 43,250
shares are currently eligible for sale (none of which are subject to the
agreements described below restricting their sale), and the remaining 21,400
shares will be eligible for such sale in or after November 1996, subject in
each instance to the volume limitations of the Rule. The holders of record of
130,946 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. Although registered pursuant to the Shelf Registration, 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.
55
<PAGE>
PLAN OF DISTRIBUTION
The Securities are being registered to permit public secondary trading of
the 1,805,000 shares of Common Stock and the 500,000 Redeemable Common Stock
Purchase Warrants by the holders thereof from time to time after the date of
this Prospectus. The Company has agreed, among other things, to bear all
expenses other than underwriting discounts and selling commissions and fees in
connection with the registration and sale of the Securities covered by this
Prospectus.
The Company will not receive any of the proceeds from this Secondary
Offering by the Selling Securityholders. The Company has been advised by the
Selling Securityholders that the Selling Securityholders may sell all or a
portion of the Securities beneficially owned by them and offered hereby from
time to time on the Nasdaq SmallCap Market, the NASD OTC Bulletin Board or any
exchange on which the Securities may trade on terms to be determined at the
times of such sales. The Selling Securityholders may also make private sales
of the Securities directly or through a broker or brokers. Alternatively, any
of the Selling Securityholders may from time to time offer any of the
Securities beneficially owned by them through underwriters, dealers or agents,
who may receive compensation in the form of underwriting discounts,
commissions or concessions from the Selling Securityholders and from the
purchasers of the Securities for whom they may act as agent. Any sales
pursuant to this Prospectus by holders of any of the Securities offered hereby
will require the delivery of a current Prospectus to the purchaser.
The Securities may be sold from time to time in one or more transactions at
fixed offering prices, which may be changed, or at varying prices determined
at the time of sale or at negotiated prices. Such prices will be determined by
the holders of such Securities or by agreement between such holders and
underwriters or dealers who may receive fees or commissions in connection
therewith. The aggregate proceeds to the Selling Securityholders from the sale
of the Securities offered hereby will be the purchase price of such Securities
less discounts and commissions, if any. No underwriting arrangements exist as
of the date of this Prospectus for sales by any Selling Securityholders. Upon
being advised of any underwriting arrangements, the Company will supplement
this Prospectus to disclose such arrangements.
The Company may suspend the use of this Prospectus at any time under certain
circumstances relating to pending corporate developments, public filings with
the Commission and similar events.
In order to comply with the securities laws of certain states, if
applicable, the Securities will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Securities may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
The Selling Securityholders and any broker-dealers, agents or underwriters
that participate with the Selling Securityholders in the distribution of the
Securities may be deemed to be "underwriters" within the meaning of the
Securities Act, in which event any commissions received by such broker-
dealers, agents or underwriters and any profit on the resale of the Securities
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
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.
56
<PAGE>
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 given 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.
The financial statements of Plymouth Cogeneration Limited Partnership as of
December 31, 1994 and 1995 and for the year ended December 31, 1995, appearing
in this Prospectus, have been so included in the reliance on the report on
Price Waterhouse LLP, independent accountants given on the authority of said
firm as experts in auditing and accounting.
57
<PAGE>
U.S. ENVIROSYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
U.S. ENERGY SYSTEMS, INC.
Report of Independent Auditor............................................. F-2
Consolidated Balance Sheet as at January 31, 1996 and July 31, 1996 (Unau-
dited)................................................................... F-3
Consolidated Statements of Operations for the years ended January 31, 1996
and January 31, 1995
and for the Six Months ended July 31, 1996 and July 31, 1995 (Unaudited). F-4
Consolidated Statements of Changes in Capital Deficiency for the years
ended January 31, 1996
and January 31, 1995 and for the Six Months ended July 31, 1996 and July
31, 1995 (Unaudited)..................................................... F-5
Consolidated Statements of Cash Flows for the years ended January 31, 1996
and January 31, 1995
and for the Six Months ended July 31, 1996 and July 31, 1995 (Unaudited). F-6
Notes to Financial Statements............................................. F-7
FAR WEST ELECTRIC ENERGY FUND, L.P.
Independent Auditor's Report.............................................. F-16
Balance Sheets, December 31, 1995 and 1994 and June 30, 1996.............. F-17
Statements of Income, for the years ended December 31, 1995, 1994, and
1993
and the Six Months ended June 30, 1996................................... F-18
Statements of Partners' Capital, for the years ended December 31, 1995,
and 1994, and 1993
and the Six Months ended June 30, 1996................................... F-19
Statements of Cash Flows, for the years ended December 31, 1995, 1994 and
1993
and the Six Months ended June 30, 1996................................... F-20
Notes to Financial Statements............................................. F-21
1-A ENTERPRISES
Independent Auditor's Report.............................................. F-29
Balance Sheet, December 31, 1995 and 1994 and June 30, 1996............... F-30
Statements of Income, for the years ended December 31, 1995 and 1994...... F-31
Statements of Partners' Capital, for the years ended December 31, 1995 and
1994
and the Six Months ended June 30, 1996................................... F-32
Statements of Cash Flows, for the years ended December 31, 1995 and 1994
and the Six Months ended June 30, 1996................................... F-33
Notes to Financial Statements December 31, 1995 and 1994 and the Six
Months ended June 30, 1996............................................... F-34
LEHI INDEPENDENT POWER ASSOCIATES, L.C.
Report of Independent Auditors............................................ F-38
Balance Sheets, December 31, 1995 and 1994 and June 30, 1996.............. F-39
Statements of Operations for the year ended December 31, 1995, the Period
ended December 31, 1994 and the Six Months ended June 30, 1996........... F-40
Statement of Changes in Members' Equity for the year ended December 31,
1995,
the Period ended December 31, 1994 and the Six Months ended June 30,
1996..................................................................... F-41
Statements of Cash Flows for the year ended December 31, 1995, the Period
ended December 31, 1994 and the Six Months ended June 30, 1996........... F-42
Notes to Financial Statements............................................. F-43
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
Report of Independent Accountants......................................... F-45
Balance Sheets, December 31, 1995 and 1994 and June 30, 1996.............. F-46
Statement of Operations for the year ended December 31, 1995
and the Six Months ended June 30, 1996................................... F-47
Statement of Changes in Partners' Capital for the year ended December 31,
1995
and the Six Months ended June 30, 1996................................... F-48
Statement of Cash Flows for the year ended December 31, 1995
and the Six Months ended June 30, 1996................................... F-49
Notes to Financial Statements............................................. F-50
</TABLE>
F-1
<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.
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
F-2
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
ASSETS 1996 1996
(NOTE G) ----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash.................................................. $ 2,000 $ 1,000
Other current assets.................................. 16,000 20,000
---------- ----------
Total current assets................................. 18,000 21,000
Investments in Joint Ventures--at equity:
Lehi Independent Power Associates, L.C. (Note C[1])... 1,170,000 1,112,000
Plymouth Cogeneration Limited Partnership (Note C[2]). 703,000 669,000
Other assets........................................... 103,000 274,000
---------- ----------
TOTAL................................................ $1,994,000 $2,076,000
========== ==========
LIABILITIES
Current liabilities:
Accrued expenses and other current liabilities (in-
cluding due to related parties of $467,000 and
$707,000, respectively) (Notes D and L).............. $ 990,000 $1,663,000
Pre-reorganization income taxes payable and accrued
interest--
current (Note E)..................................... 172,000 192,000
Loans payable (Note G)................................ 766,000 960,000
---------- ----------
Total current liabilities............................ 1,928,000 2,815,000
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)............................. 965,000 975,000
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 in-
terest (Note E)....................................... 176,000 180,000
Advances from Joint Ventures (Note C[2])............... 15,000 24,000
---------- ----------
Total liabilities.................................... 4,723,000 5,633,000
---------- ----------
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
Accumulated deficit.................................... (2,846,000) (3,674,000)
---------- ----------
Total capital deficiency............................. (2,729,000) (3,557,000)
---------- ----------
TOTAL................................................ $1,994,000 $2,076,000
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JULY 31,
------------------------ -----------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cost and expenses:
Operating expenses.......... $ 27,000 $ 109,000 $ $ 26,000
Administrative expenses..... 826,000 897,000 408,000 395,000
Interest expense............ 604,000 319,000 328,000 223,000
Loss from Joint Ventures.... 17,000 76,000 92,000 62,000
----------- ----------- --------- ---------
Total cost and expenses.... 1,474,000 1,401,000 828,000 706,000
----------- ----------- --------- ---------
(Loss) before extraordinary
item....................... (1,474,000) (1,401,000) (828,000) (706,000)
Extraordinary gain from re-
structuring of liabilities.. 83,000 85,000 83,000
----------- ----------- --------- ---------
Net (Loss)................... (1,391,000) $(1,316,000) (828,000) $(623,000)
=========== =========
Dividends on preferred stock. (21,000) (29,000)
----------- ---------
(Loss) applicable to common
stock....................... $(1,412,000) $(857,000)
=========== =========
(Loss) per share before ex-
traordinary item............ $ (3.41) $ (3.38) $ (1.95) $ (1.61)
=========== =========== ========= =========
Net (loss) per share......... $ (3.22) $ (3.17) $ (1.95) $ (1.42)
=========== =========== ========= =========
Weighted average shares out-
standing.................... 438,773 415,022 439,650 438,296
=========== =========== ========= =========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-4
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
(NOTES A AND J)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- -------------------------
NUMBER NUMBER ADDITIONAL
OF OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------- ------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--January 31,
1994................... 391,250 $4,000 $(306,000) $ (139,000) $ (441,000)
Sale of common stock.... 32,000 139,000 139,000
Compensation
attributable to options
and warrants........... 48,000 48,000
Shares issued for inter-
est in Joint Ventures.. 11,400 114,000 114,000
Value assigned to
warrants issued in
connection with notes
payable................ 46,000 46,000
Net (loss) for the year
ended
January 31, 1995....... (1,316,000) (1,316,000)
------- ------- ------- ------ --------- ----------- -----------
Balance--January 31,
1995................... 434,650 4,000 41,000 (1,455,000) (1,410,000)
Sale of common stock.... 5,000 34,000 34,000
Value assigned to
preferred stock issued
in connection with
loans payable.......... 57,500 $ 1,000 28,000 29,000
Value assigned to
additional warrants
issued in connection
with notes payable..... 9,000 9,000
Net (loss) for the year
ended
January 31, 1996....... (1,391,000) (1,391,000)
------- ------- ------- ------ --------- ----------- -----------
Balance--January 31,
1996................... 57,500 1,000 439,650 4,000 112,000 (2,846,000) (2,729,000)
Net (loss) for the six
months ended
July 31, 1996.......... (828,000) (828,000)
------- ------- ------- ------ --------- ----------- -----------
Balance--July 31, 1996
(Unaudited)............ 57,500 $ 1,000 439,650 $4,000 $ 112,000 $(3,674,000) $(3,557,000)
======= ======= ======= ====== ========= =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JULY 31,
------------------------ -----------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating ac-
tivities:
Net (loss).................. $(1,391,000) $(1,316,000) $(828,000) $(623,000)
Adjustments to reconcile net
(loss) to net cash (used
in) operating activities:
Amortization of debt dis-
count...................... 42,000 3,000 10,000 7,000
Amortization of purchase
price in excess of equity
in Joint Ventures.......... 59,000 55,000 26,000 28,000
Amortization of deferred fi-
nancing and registration
costs...................... 72,000 39,000 14,000
Value assigned to options
and warrants............... 48,000
Gain from restructuring of
liabilities................ (83,000) (85,000) (83,000)
Equity in (income)/loss of
Joint Ventures, net of dis-
tributions................. (13,000) 21,000 66,000 34,000
Loss from legal proceedings. 102,000
Deferred interest........... 114,000 61,000
Accrued interest on pre-re-
organization income taxes
payable.................... 39,000 24,000
Changes in operating assets
and liabilities:
(Increase) decrease in
other assets.............. 2,000 (1,000) (19,000) (11,000)
Increase in accounts pay-
able and accrued expenses. 671,000 146,000 673,000 134,000
----------- ----------- --------- ---------
Net cash (used in) operat-
ing activities............ (641,000) (874,000) (9,000) (439,000)
----------- ----------- --------- ---------
Cash flows from investing ac-
tivities:
Security deposit on proposed
acquisition................ (50,000)
Cost incurred in connection
with the Proposed Acquisi-
tions...................... (3,000)
Investment in Joint Ven-
tures...................... (636,000)
Advances to Joint Ventures.. (9,000) (11,000)
Loans (to) from officers.... (47,000)
Collections of loans receiv-
able--officer.............. 33,000 59,000
----------- ----------- --------- ---------
Net cash provided by (used
in) investing activities.. (29,000) (694,000) 59,000
----------- ----------- --------- ---------
Cash flows from financing ac-
tivities:
Proceeds from issuance of
convertible subordinated
debt....................... 400,000 25,000
Proceeds from issuance of
common stock............... 34,000 139,000 63,000
Proceeds from issuance of
notes payable.............. 25,000 975,000
Proceeds from loans payable
and preferred stocks....... 785,000 175,000 570,000
Payment of deferred financ-
ing costs.................. (102,000) (85,000)
Payment of pre-reorganiza-
tion payroll taxes payable. (34,000) (105,000) (109,000)
Payment of pre-reorganiza-
tion income taxes payable.. (9,000) (13,000) (11,000)
Advances from Joint Ven-
tures...................... 15,000 9,000 3,000
Deferred registration costs. (50,000) (176,000)
----------- ----------- --------- ---------
Net cash provided by fi-
nancing activities........ 664,000 1,396,000 8,000 456,000
----------- ----------- --------- ---------
NET INCREASE (DECREASE) IN
CASH........................ (6,000) (172,000) (1,000) 76,000
Cash--beginning of the peri-
od.......................... 8,000 180,000 2,000 8,000
----------- ----------- --------- ---------
CASH--END OF THE PERIOD...... $ 2,000 $ 8,000 $ 1,000 $ 84,000
=========== =========== ========= =========
Supplemental disclosure of
cash flow information:
Cash paid for interest...... $ 93,000 $ 163,000 $ 154,000 $ 60,000
Supplemental schedule of
noncash investing activity:
Fair market value of common
stock issued and contrib-
uted to investment in Joint
Ventures................... $ 114,000
Supplemental schedule of
noncash financing activity:
Valuation of preferred stock
in connection with bridge
loan....................... $ 29,000
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-6
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
(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 an 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.
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 July 31, 1996 and for the six-
month periods ended July 31, 1996 and July 31, 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.
F-7
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
[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 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 six-month period
ended July 31, 1996, the Project was not in operation.
In the Proposed Acquisitions, Far West Capital Inc., the other 50% owner of
LIPA, will own an interest in Steamboats in the event the Proposed
Acquisitions are consummated.
F-8
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
[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:
<TABLE>
<S> <C>
LIPA--Buildings.......................... 28 years
Machinery and equipment............... 6 years
Plymouth--Plant.......................... 19 years
</TABLE>
F-9
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
[4]The following is summarized financial information of LIPA and PCLP:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
---------------------- ----------------------
LIPA PCLP LIPA PCLP
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Current Assets................. $ 158,000 $ 158,000 $ 122,000 $ 188,000
Property, plant and equipment
at cost (net)................. 257,000 5,593,000 251,000 5,450,000
Other assets................... 828,000 876,000
---------- ---------- ---------- ----------
Total assets................. 415,000 6,579,000 373,000 6,514,000
Current liabilities............ (9,000) (343,000) (35,000) (339,000)
Long-term debt................. (4,987,000) (4,990,000)
---------- ---------- ---------- ----------
Equity......................... $ 406,000 $1,249,000 $ 338,000 $1,185,000
========== ========== ========== ==========
Equity in Joint Ventures....... $ 203,000 $ 625,000 $ 169,000 $ 593,000
Investments in Joint Ventures
in excess of equity........... 967,000 78,000 943,000 76,000
---------- ---------- ---------- ----------
Total investments in Joint
Ventures.................... $1,170,000 $ 703,000 $1,112,000 $ 669,000
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------ --------------------------------------
LIPA PCLP LIPA PCLP
------------------ ---------- ------------------ ------------------
1995 1994 1995 1996 1995 1996 1995
-------- -------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $1,150,000 $596,000 $570,000
========== ======== ========
Gain on sale of fixed
assets................. $236,000
========
Net income (loss)....... $172,000 $(41,000) $ (87,000) $(68,000) $(24,000) $(64,000) $(44,000)
======== ======== ========== ======== ======== ======== ========
Equity in net income
(loss)................. $ 86,000 $(21,000) $ (44,000) $(34,000) $(12,000) $(32,000) $(22,000)
Amortization of purchase
price over equity...... (55,000) (55,000) (4,000) (24,000) (28,000) (2,000)
-------- -------- ---------- -------- -------- -------- --------
Net income (loss) from
Joint Ventures......... $ 31,000 $(76,000) $ (48,000) $(58,000) $(40,000) $(34,000) $(22,000)
======== ======== ========== ======== ======== ======== ========
</TABLE>
Plymouth Project commenced operations on January 1, 1995.
(NOTE D)--ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accrued expenses and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1996 1996
----------- ----------
<S> <C> <C>
Professional fees.................................... $293,000 $ 501,000
Accrued interest..................................... 417,000 591,000
Accrued payroll and related taxes.................... 238,000 411,000
Other................................................ 42,000 160,000
-------- ----------
Total.............................................. $990,000 $1,663,000
======== ==========
</TABLE>
F-10
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
(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:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1996 1996
----------- --------
<S> <C> <C>
1997.................................................... $172,000 $192,000
1998.................................................... 41,000 46,000
1999.................................................... 43,000 44,000
2000.................................................... 46,000 47,000
2001.................................................... 46,000 43,000
-------- --------
Total................................................. $348,000 $372,000
======== ========
</TABLE>
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.
(NOTE F)--INCOME TAXES:
The deferred tax asset is as follows:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1996 1996
----------- ----------
<S> <C> <C>
Benefit of post-reorganization operating loss
carryforward....................................... $801,000 $1,022,000
Expenses for financial reporting, not yet deductible
for taxes.......................................... 132,000 110,000
Valuation allowance................................. (933,000) (1,132,000)
-------- ----------
$-- 0 -- $ -- 0 --
======== ==========
</TABLE>
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 six-month period
ended July 31, 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 $199,000, respectively.
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.
F-11
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
(NOTE G)--LOANS PAYABLE (THE "LOANS"):
Loans payable consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1996 1996
----------- --------
<S> <C> <C>
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).......................... 100,000 250,000
18% unsecured loan payable upon closing of the proposed
public offering....................................... 50,000 50,000
-------- --------
$766,000 $960,000
======== ========
</TABLE>
(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.
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 July 31, 1996, the 9% interest deferred, included in
accrued expenses and other current liabilities, was $160,000 and $229,000,
respectively.
F-12
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
(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 and 10.75%
at July 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 July 31, 1996, the unpaid interest on these
Notes was $141,000 and $209,000, 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, based on an independent
appraisal, 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 Warrants"). The Additional Warrants have the same terms as
those warrants initially granted to the noteholders. The Company, based on the
appraisal referred to above, valued the Additional Warrants issued at $9,500,
which is being accounted for as additional debt discount. In March 1996, as a
result of continuing negotiations between the parties that commenced when the
additional warrants were issued, the Company reduced the exercise price of the
warrants, including the additional warrants, from $16.00 per share to $5.00
per share. At that time, the market price of the Common Stock was $2.50 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.
F-13
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
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.
[2]Stock options:
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE EXPIRATION DATE
------- -------------- ---------------
(PER SHARE)
<S> <C> <C> <C>
Granted--year ended January 31, 1995. 20,100 $4.00 - $10.00 April 1999 -
January 2000
Granted--year ended January 31, 1996. 154,000 $4.00 - $ 8.00 January 2000 -
------- December 2000
Balance at January 31, 1996 and July
31, 1996
(174,100 exercisable at option
prices $4.00 to $10.00)............. 174,100
</TABLE>
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.
[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.
F-14
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995)
[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. 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 six-month period ended July 31, 1996.
(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 July 31, 1996 is $12,000 due to the Related
Parties. In addition, at January 31, 1996 and July 31, 1996, $467,000 and
$707,000, 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 six months ended
July 31, 1996 and 1995, the Company paid interest of $15,000, $22,000, $13,000
and $17,000, respectively, to the Related Parties.
F-15
<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
F-16
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
JUNE 30,
1995 1994 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Utility Plant:
Plant in Service....................... $15,999,000 $18,716,000 $15,999,000
Equipment.............................. 588,000 335,000 616,000
Construction in Progress............... 118,000 118,000 118,000
Accumulated Depreciation............... (5,377,000) (6,010,000) (5,697,000)
----------- ----------- -----------
Net Utility Plant..................... 11,328,000 13,159,000 11,036,000
Restricted Cash......................... 1,026,000 1,145,000 1,054,000
Other Assets............................ 106,000 124,000 97,000
Current Assets:
Cash and Cash Equivalents.............. 263,000 278,000 245,000
Receivables--Trade..................... 399,000 437,000 317,000
Receivables--Other..................... 6,000 6,000 0
Receivable--Related Party.............. 238,000 159,000 0
Prepaid Expenses....................... 4,000 12,000 27,000
----------- ----------- -----------
Total Current Assets.................. 910,000 892,000 589,000
----------- ----------- -----------
Total Assets.......................... $13,370,000 $15,320,000 $12,776,000
=========== =========== ===========
PARTNERS' CAPITAL AND LIABILITIES
Partners' Capital:
Limited Partners--10,306 units......... $ 5,148,000 $ 4,868,000 $ 5,388,000
General Partner--1 Percent............. (8,000) (11,000) (6,000)
----------- ----------- -----------
Total Partners' Capital............... 5,140,000 4,857,000 $ 5,382,000
Other Liabilities....................... -- 150,000
Long-term Debt:
Notes Payable--Related Party........... 188,000 230,000 163,000
Notes Payable.......................... 537,000 -- 537,000
----------- ----------- -----------
Partners' Capital and Long-Term Liabili-
ties................................... 5,865,000 5,237,000 6,082,000
Current Liabilities:
Current Portion--Long-term Debt........ 4,563,000 7,140,000 4,139,000
Note Payable--Related Party............ 1,159,000 1,043,000 1,201,000
Payable-Related Party.................. 671,000 573,000 275,000
Accrued Liabilities
Operations............................. 402,000 495,000 317,000
Royalties.............................. 96,000 220,000 84,000
Interest............................... 614,000 612,000 678,000
----------- ----------- -----------
Total Current Liabilities............. 7,505,000 10,083,000 6,694,000
----------- ----------- -----------
Total Partners' Capital and Liabili-
ties................................. $13,370,000 $15,320,000 $12,776,000
=========== =========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-17
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ------------------------
1995 1994 1993 1996 1995
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Electric Power Reve-
nues.................. $2,529,000 $2,728,000 $3,162,000 $1,509,000 $1,300,000
Other Revenues......... 145,000 151,000 622,000 68,000 66,000
---------- ---------- ---------- ---------- ----------
Total Revenues....... 2,674,000 2,879,000 3,784,000 1,577,000 1,366,000
---------- ---------- ---------- ---------- ----------
Expenses:
Operations............. 1,755,000 1,779,000 2,163,000 881,000 838,000
Bad Debt Expense....... -- -- 31,000 -- --
General and Administra-
tive:
Professional Services. 55,000 54,000 72,000 70,000 41,000
General Partners--Re-
lated Party.......... 98,000 123,000 223,000 54,000 82,000
---------- ---------- ---------- ---------- ----------
Total General and Ad-
ministrative........ 153,000 177,000 295,000 124,000 123,000
---------- ---------- ---------- ---------- ----------
Total Expenses....... 1,908,000 1,956,000 2,489,000 1,005,000 961,000
---------- ---------- ---------- ---------- ----------
Income From Opera-
tions............... 766,000 923,000 1,295,000 572,000 405,000
Other Income (Expense):
Interest Income........ 73,000 52,000 38,000 26,000 32,000
Interest Expense....... (744,000) (902,000) (806,000) (356,000) (781,000)
Loss on Sale of Proper-
ty.................... (170,000) -- -- -- (170,000)
---------- ---------- ---------- ---------- ----------
Net Other Expense.... (841,000) (850,000) (768,000) (330,000) (919,000)
---------- ---------- ---------- ---------- ----------
Net Income (Loss)
Before Extraordinary
Item............... (75,000) 73,000 527,000 242,000 (514,000)
Extraordinary Item--
Early Extinguishment
of Debt................ 358,000 -- 175,000 -- 358,000
---------- ---------- ---------- ---------- ----------
Net Income........... $ 283,000 $ 73,000 $ 702,000 $ 242,000 $ (156,000)
========== ========== ========== ========== ==========
Net Income Per Lim-
ited Partnership
Unit:
Income Before Ex-
traordinary Item... $ (7.28) $ 7.08 $ 51.14 $ 23.48 $ (49.87)
Extraordinary Item.. 34.74 -- 16.98 -- 34.74
---------- ---------- ---------- ---------- ----------
Net Income........... $ 27.46 $ 7.08 $ 68.12 $ 23.48 $ (15.14)
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-18
<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
AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
GENERAL PARTNER LIMITED PARTNERS
------------------- -------------------
% INCOME NUMBER TOTAL
ALLOCATION AMOUNT OF UNITS AMOUNT AMOUNT
---------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances at December 31,
1992................... 1 $(18,573) 10,306 $4,100,573 $4,082,000
Net Income.............. -- 7,020 -- 694,980 702,000
--- -------- ------ ---------- ----------
Balances at December 31,
1993................... 1 (11,553) 10,306 4,795,553 4,784,000
Net Income.............. -- 730 -- 72,270 73,000
--- -------- ------ ---------- ----------
Balances at December 31,
1994................... 1 $(10,823) 10,306 4,867,823 4,857,000
Net Income.............. -- 2,830 -- 280,170 283,000
--- -------- ------ ---------- ----------
Balances at December 31,
1995................... 1 $ (7,993) 10,306 $5,147,993 $5,140,000
Net Income (Unaudited).. -- 2,420 -- 239,580 242,000
--- -------- ------ ---------- ----------
Balances at June 30,
1996 (Unaudited)....... 1 $ (5,573) 10,306 $5,387,573 $5,382,000
=== ======== ====== ========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-19
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------ -----------------------------
1995 1994 1993 1996 1995
-------- -------- ---------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net Income (Loss)...... $283,000 $ 73,000 $ 702,000 $ 242,000 $ (156,000)
Adjustments to Net In-
come (Loss):
Depreciation and Amor-
tization.............. 613,000 661,000 716,000 329,000 313,000
Loss on Sale of Proper-
ty.................... 170,000 -- -- -- 170,000
Extraordinary Item--
Early Extinguishment
of Debt............... (358,000) -- (175,000) -- (358,000)
(Increase) Decrease in
Receivables........... (41,000) (124,000) (59,000) 87,000 95,000
(Increase) Decrease in
Prepaid Insurance..... (1,000) -- (9,000) (23,000) (16,000)
(Increase) Decrease in
Other Assets.......... 18,000 18,000 18,000 (28,000) 11,000
Accrued Income Re-
stricted Cash......... (63,000) (43,000) (31,000) -- (34,000)
Increase (Decrease) in
Accrued Liabilities... 41,000 120,000 (234,000) (33,000) 144,000
Increase (Decrease) in
Amount Due to
General Partner....... 98,000 100,000 214,000 (140,000) 216,000
-------- -------- ---------- ------------ -------------
Total Adjustments..... 477,000 732,000 440,000 192,000 541,000
-------- -------- ---------- ------------ -------------
Net Cash Provided by
Operating Activities.. 760,000 805,000 1,142,000 434,000 385,000
-------- -------- ---------- ------------ -------------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Cash Draws Restricted
Cash.................. 181,000 -- 207,000 -- 102,000
Transfers to Restricted
Cash.................. -- -- (205,000) -- --
Capital Expenditures... (253,000) (139,000) (222,000) (28,000) (174,000)
Disposal of Plant and
Equipment............. -- -- -- -- --
-------- -------- ---------- ------------ -------------
Net Cash Provided by
(Used) in Investing
Activities............. (72,000) (139,000) (220,000) (28,000) (72,000)
-------- -------- ---------- ------------ -------------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Principal Payments on
Long-Term Debt........ (815,000) (751,000) (1,109,000) (424,000) (345,000)
Proceeds From the Issu-
ance of Debt.......... 112,000 83,000 171,000 -- --
-------- -------- ---------- ------------ -------------
Net Cash Provided by
(Used) in Financing
Activities............ (703,000) (668,000) (938,000) (424,000) (345,000)
-------- -------- ---------- ------------ -------------
Increase (Decrease) in
Cash and Cash
Equivalents............ (15,000) (2,000) (16,000) (18,000) (32,000)
Cash and Cash Equiva-
lents at Beginning of
Period................. 278,000 280,000 296,000 263,000 278,000
-------- -------- ---------- ------------ -------------
Cash and Cash Equiva-
lents at End of Period. $263,000 $278,000 $ 280,000 $ 245,000 $ 246,000
======== ======== ========== ============ =============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash Paid During the
Period for Interest... $743,000 $727,000 $ 755,000 $ 79,000 $ 188,000
======== ======== ========== ============ =============
</TABLE>
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.
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.
F-20
<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.
RECLASSIFICATIONS
Certain amounts in 1994 and 1993 have been reclassified to conform with
financial statement presentations adopted in 1995.
UNAUDITED INTERIM PERIODS
The financial information presented as of June 30, 1996 and for the six-
month periods ended June 30, 1996 and 1995 is unaudited, but in the opinion of
Management contains all adjustments (consisting only of normal recurring
adjustments) necessary for a fair representation of such financial
information. Results of operations for interim periods are not necessarily
indicative of those to be achieved for full fiscal years.
F-21
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--UTILITY PLANT
Plant in service consists of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
ESTIMATED
1995 1994 USEFUL LIVES
----------- ----------- ------------
<S> <C> <C> <C>
Steamboat Springs Thermal Hydroelec-
tric 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
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Loan Origination Fees.................................... $183,000 $183,000
Organization Costs....................................... 65,000 65,000
Other Assets............................................. 35,000 35,000
Accumulated Amortization................................. (177,000) (159,000)
-------- --------
Total Other Assets..................................... $106,000 $124,000
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
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 Crystal Springs Project)...... 537,000 1,800,000
---------- ----------
5,100,000 7,140,000
Less Current Installments Due........................ 4,563,000 7,140,000
---------- ----------
$ 537,000 $ --
========== ==========
</TABLE>
F-22
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER
31,
-----------
<S> <C>
1996......................................................... $ 4,563,000
1997......................................................... --
1998......................................................... --
1999......................................................... --
2000......................................................... 537,000
Thereafter................................................... --
-----------
$ 5,100,000
===========
</TABLE>
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.
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:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
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; unsecured. Interest rate is 11%.... 230,000 268,000
---------- ----------
1,347,000 1,273,000
Less Current Installments Due......................... 1,159,000 1,043,000
---------- ----------
$ 188,000 $ 230,000
========== ==========
</TABLE>
F-23
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
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
Richard W. Harris (.081%)......................... 2,000 2,000 2,000
-------- -------- --------
Total............................................ $405,000 $410,000 $419,000
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1993
----------
<S> <C>
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.................................. $ --
==========
</TABLE>
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.
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
F-24
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
period ended December 31, 1995, the Partnership expensed the following amounts
as cost reimbursements to the general partner:
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
General and Administrative Expenses............... $98,000 $123,000 $223,000
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
General Partner......................................... 530 530 530
Limited Partners........................................ 9,776 9,776 9,776
------ ------ ------
Total................................................. 10,306 10,306 10,306
====== ====== ======
</TABLE>
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.
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.
F-25
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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 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
F-26
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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
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.
F-27
<PAGE>
FAR WEST ELECTRIC ENERGY FUND, L.P.
A DELAWARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following pro forma statement of operations give effect to the above
events as if they had occurred on January 1, 1995:
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PRO FORMA
AS REPORTED IN ADJUSTMENTS PRO FORMA
ACCOMPANYING FOR STATEMENT
FINANCIAL SUBSEQUENT OF
STATEMENTS EVENTS OPERATIONS
-------------- ----------- ----------
<S> <C> <C> <C>
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 Part-
nership Unit....................... $ 9.22 $ 6.21 $ 15.43
========== ======= ==========
</TABLE>
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.
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.
F-28
<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
F-29
<PAGE>
1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
JUNE 30,
1995 1994 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Utility Plant:
Plant..................................... $2,431,222 $2,431,222 $2,431,222
Development Costs......................... 450,000 450,000 450,000
Accumulated Depreciation.................. (676,289) (580,248) (724,310)
---------- ---------- ----------
Net Utility Plant....................... 2,204,933 2,300,974 2,156,912
Restricted Assets:
Cash...................................... 80,626 76,157 82,781
Certificate of Deposit.................... 73,189 70,000 76,159
---------- ---------- ----------
Total Restricted Assets................. 153,815 146,157 158,940
Other Assets:.............................. 32,145 40,181 28,127
Current Assets:
Cash and Cash Equivalents................. 80,428 98,642 79,190
Receivables--Trade........................ 98,539 98,600 130,620
Receivables--Other........................ 7,139 6,358 4,904
Receivable--Related Party................. 229,810 267,705 209,226
Prepaid Expenses.......................... 1,679 1,348 6,661
---------- ---------- ----------
Total Current Assets.................... 417,595 472,653 430,601
---------- ---------- ----------
Total Assets............................ $2,808,488 $2,959,965 $2,774,580
========== ========== ==========
PARTNERS' CAPITAL AND LIABILITIES
Partners' Capital.......................... $ (293,083) $ (464,613) $ 22,105
Current Liabilities:
Note Payable--See Note 4.................. 1,670,995 1,960,732 1,513,617
Note Payable--Related Party............... 728,970 728,970 503,970
Payable--Related Party.................... 358,574 435,193 381,153
Accrued Liabilities:
Operations............................... 3,120 5,767 7,348
Royalties................................ 302,315 249,799 313,277
Interest................................. 37,597 44,117 33,110
---------- ---------- ----------
Total Current Liabilities............... 3,101,571 3,424,578 2,752,475
---------- ---------- ----------
Total Partners' Capital and Liabilities. $2,808,488 $2,959,965 $2,774,580
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS,
DECEMBER 31, ENDED JUNE 30,
------------------ -----------------------
1995 1994 1996 1995
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Electric Power Revenues............ $875,356 $798,722 $410,427 $404,800
-------- -------- -------- --------
EXPENSES:
Operations......................... 536,756 545,336 249,908 252,875
General and Administrative:
Professional Services............. -- 1,481 -- --
Related party..................... 14,500 14,500 -- --
-------- -------- -------- --------
Total Expenses................... 551,256 561,317 249,908 252,875
-------- -------- -------- --------
Income From Operations........... 324,100 237,405 160,519 151,925
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest Income.................... 41,037 38,315 17,047 7,017
Interest Expense................... (202,477) (233,513) (87,554) (94,469)
-------- -------- -------- --------
Net other Expense................. (161,440) (195,198) (70,507) (87,452)
-------- -------- -------- --------
Net Income........................ $162,660 $ 42,207 $ 90,012 $ 64,473
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1995, AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<S> <C>
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)
Contributions (Unaudited)........................................... 225,176
Net Income (Unaudited).............................................. 90,012
---------
Balances at June 30, 1996 (Unaudited)............................... $ 22,105
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------ -----------------------
1995 1994 1996 1995
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net Income (Loss).................. $162,660 $ 42,207 $ 90,012 $ 64,473
-------- -------- -------- --------
Adjustments to Net Income (Loss):
Depreciation and Amortization..... 104,078 104,078 52,039 52,039
(Increase) Decrease in Receiv-
ables............................ (721) (18,339) (29,846) (17,586)
(Increase) Decrease in Prepaid In-
surance.......................... (331) (678) (4,982) (5,368)
Accrued Interest Income Restricted
Assets........................... (7,658) (2,859) (5,125) (2,193)
Increase (Decrease) in Accrued Li-
abilities........................ 43,349 48,764 10,703 (1,658)
Increase (Decrease) in Amount Due
to Related Party................. (76,619) 147,519 (202,421) 10,997
-------- -------- -------- --------
Total Adjustments................ 62,098 278,486 (179,632) 36,231
-------- -------- -------- --------
Net Cash Provided by Operating Ac-
tivities......................... 224,758 320,693 (89,620) 100,704
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVI-
TIES:
Principle Payments From Note Re-
ceivable Related Party........... 37,895 33,916 20,584 18,422
Investment in Certificate of De-
posit--Restricted................ -- (70,000) -- --
-------- -------- -------- --------
Net Cash Provided by (Used) in In-
vesting Activities............... 37,895 (36,084) 20,584 18,422
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Principal payments on Long-term
Debt.............................. (289,737) (259,310) (157,378) (140,851)
Proceeds from Partner Contribu-
tions............................. 8,870 4,015 225,176 4,191
-------- -------- -------- --------
Net Cash Provided by (Used) in Fi-
nancing Activities................ (280,867) (255,295) 67,798 (136,660)
-------- -------- -------- --------
Increase (Decrease) in Cash and
Cash Equivalents.................. (18,214) 29,314 (1,238) (17,534)
Cash and Cash Equivalents at Begin-
ning of Year...................... 98,642 69,328 80,428 98,642
-------- -------- -------- --------
Cash and Cash Equivalents at End of
Year.............................. $ 80,428 $ 98,642 $ 79,190 $ 81,108
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash Paid During the Year for In-
terest............................ $208,997 $239,346 $ 92,041 $ 64,469
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-33
<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.
UNAUDITED INTERIM PERIODS
The financial information presented as of June 30, 1996 and for the six-
month periods ended June 30, 1996 and 1995 is unaudited, but in the opinion of
Management contains all adjustments (consisting only of normal recurring
adjustments) necessary for a fair representation of such financial
information. Results of operations for interim periods are not necessarily
indicative of those to be achieved for full fiscal years.
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:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
NOTE 3--OTHER ASSETS
Other assets consist of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Loan Origination Fees.................................... $ 80,363 $ 80,363
Accumulated Amortization................................. (48,218) (40,182)
-------- --------
Total Other Assets....................................... $ 32,145 $ 40,181
======== ========
</TABLE>
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.
F-34
<PAGE>
1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
NOTE 4--LONG-TERM DEBT
Long-term debt as of December 31, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Note Payable to a corporation is payable in quar-
terly 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
---------- ----------
$ -- $ --
========== ==========
</TABLE>
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996........................................................ $1,670,995
1997........................................................ --
1998........................................................ --
1999........................................................ --
2000........................................................ --
Thereafter.................................................. --
----------
$1,670,995
==========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
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
-------- --------
$ -- $ --
======== ========
</TABLE>
*Two of the general partners of the Company are majority owners of Far West
Capital, Inc.
F-35
<PAGE>
1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
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:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Sierra Pacific Power Company (10%)........................ $ 87,536 $ 79,872
Benson Schwarzhoff & Helzel (3.888%)...................... 34,034 31,054
Far West Electrical Energy Fund, L.P.(15%)................ 86,904 86,654
G. Martin Booth (.081%)................................... 709 647
Richard W. Harris (.081%)................................. 709 647
-------- --------
Total.................................................... $209,892 $198,874
======== ========
</TABLE>
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 notepayable
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 $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:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
General and Administrative Expenses......................... $14,500 $14,500
</TABLE>
F-36
<PAGE>
1-A ENTERPRISES
A NEVADA GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
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 EnergyFund,
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
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.
F-37
<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
F-38
<PAGE>
LEHI INDEPENDENT POWER ASSOCIATES, L.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
JUNE 30,
1995 1994 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 41,460 $ 2,113 $ 7,305
Due from member................................. -- 3,335 --
Note receivable................................. 115,750 -- 113,750
Prepaid insurance............................... 853 -- 1,117
-------- -------- --------
Total current assets........................... 158,063 5,448 122,172
Property, plant and equipment, net............... 257,125 278,921 250,464
-------- -------- --------
Total assets................................... $415,188 $284,369 $372,636
======== ======== ========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable................................ $ 4,873 $ 951 $ 34,329
Accrued expenses................................ 4,373 -- 373
Related party note payable...................... -- 3,440 --
-------- -------- --------
Total current liabilities...................... 9,246 4,391 34,702
Members' equity:
Member contributions............................ 292,662 292,662 292,662
Additional capital contributions................ 42,104 28,149 42,105
Retained earnings (deficit)..................... 71,176 (40,833) 3,167
-------- -------- --------
Total members' equity.......................... 405,942 279,978 337,934
-------- -------- --------
Total liabilities and members' equity............ $415,188 $284,369 $372,636
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE>
LEHI INDEPENDENT POWER ASSOCIATES, L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE JANUARY 24 FOR THE SIX MONTHS
YEAR ENDED THROUGH ENDED JUNE 30
DECEMBER 31, DECEMBER 31, -----------------------
1995 1994 1996 1995
------------ -------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INCOME:
Gain on sale of fixed
asset................. $236,194 $ -- $ -- $ --
EXPENSES:
General and administra-
tive.................. 49,195 27,092 61,347 16,925
Write-down of property,
plant and equipment... 14,990 13,741 6,661 7,495
-------- -------- -------- --------
Total expenses........ 64,185 40,833 68,008 24,420
-------- -------- -------- --------
Net income (loss)....... $172,009 $(40,833) $(68,008) $(24,420)
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-40
<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
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
MEMBER CAPITAL EARNINGS MEMBERS'
CONTRIBUTIONS CONTRIBUTIONS (DEFICIT) EQUITY
------------- ------------- --------- --------
<S> <C> <C> <C> <C>
Balance January 24, 1995....... $ -- $ -- $ -- $ --
Members contributions.......... 292,662 28,149 -- 320,811
Net loss....................... -- -- (40,833) (40,833)
-------- ------- ------- --------
Balance December 31, 1994...... 292,662 28,149 (40,833) 279,978
Members contributions--Suma,
Corp.......................... -- 3,489 -- 3,489
Members contributions--Far West
Capital, Inc.................. -- 3,489 -- 3,489
Members contributions--Lehi
Envirosystems, Inc............ -- 6,977 -- 6,977
Members distribution--Suma
Corp.......................... -- -- (15,000) (15,000)
Members distribution--Far West
Capital, Inc.................. -- -- (15,000) (15,000)
Members distribution--Lehi
Envirosystems, Inc............ -- -- (30,000) (30,000)
Net income..................... -- -- 172,009 172,009
-------- ------- ------- --------
Balance December 31, 1995...... 292,662 42,104 71,176 405,942
-------- -------
Net (Loss) (Unaudited)......... (68,008) (68,008)
------- --------
Balance June 30, 1996 (Unau-
dited)........................ $292,662 $42,104 $ 3,168 $337,934
======== ======= ======= ========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
LEHI INDEPENDENT POWER ASSOCIATES, L.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD FOR THE SIX MONTHS
ENDED ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------------
1995 1994 1996 1995
------------ -------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)......... $172,009 $(40,833) $(68,008) $(24,240)
Adjustment to reconcile
net income to net cash
provided by operating
activities:
Write-down of property,
plant and equipment...... 14,990 13,741 6,661 7,495
Gain on sale of equipment. (236,194) -- -- --
Changes in assets and lia-
bilities................. -- -- -- --
Prepaid insurance......... (853) -- (264) 1,036
Note Receivable........... -- -- 2,000 --
Accounts payable.......... 3,922 951 29,456 9,943
Accrued expenses.......... 4,373 -- (4,000) --
-------- -------- -------- --------
Net cash (used) by operat-
ing activities........... (41,753) (26,141) (34,155) (8,018)
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) -- 1,245
Net payment and proceeds
of related party note
payable................. (3,440) 3,440 -- (3,440)
Additional capital con-
tributions.............. 13,955 28,149 -- 10,705
Members' distribution.... (60,000) -- -- --
-------- -------- -------- --------
Net cash provided (used)
by financing activities.. (46,150) 28,254 -- 8,510
-------- -------- -------- --------
Net increase in cash and
cash equivalents......... 39,347 2,113 (34,155) 492
Cash and cash equivalents
at beginning of period... 2,113 -- 41,460 2,113
-------- -------- -------- --------
Cash and cash equivalents
at end of period......... $ 41,460 $ 2,113 $ 7,305 $ 2,605
======== ======== ======== ========
</TABLE>
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.
F-42
<PAGE>
LEHI INDEPENDENT POWER ASSOCIATES, L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 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.
NOTE 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.
NOTE 3--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and consisted of the
following at December 31:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
F-43
<PAGE>
LEHI INDEPENDENT POWER ASSOCIATES, L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
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.
NOTE 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.
NOTE 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.
NOTE 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.
F-44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Plymouth Cogeneration Limited Partnership
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in partners' capital and cash flows present fairly, in
all material respects, the financial position of Plymouth Cogeneration Limited
Partnership at December 31, 1995 and 1994, and the results of their operations
and their cash flows for the year ended December 31, 1995, in conformity with
generally accepted accounting principles. 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 audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
February 27, 1996
Hartford, Connecticut
F-45
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
JUNE 30,
1995 1994 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 15,944 $ 8,233 $ 65,481
Accounts receivable......................... 90,865 76,881 89,394
Prepaid expenses............................ 18,087 14,198 47
Restricted cash............................. 33,773 619,820 33,707
---------- ---------- ----------
Total current assets....................... 158,669 719,132 188,629
---------- ---------- ----------
Plant, at cost............................... 5,888,172 5,882,464 5,893,333
Less: accumulated depreciation............... 295,411 -- 443,289
---------- ---------- ----------
5,592,761 5,882,464 5,450,044
---------- ---------- ----------
Debt service reserve......................... 497,085 500,020 496,717
Deferred financing costs, less accumulated
amortization of
$8,141 in 1995.............................. 154,683 162,824 150,613
Rent receivable.............................. 176,184 -- 228,468
---------- ---------- ----------
Total assets............................... $6,579,382 $7,264,440 $6,514,471
========== ========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Note payable--general contractor (Note 2)... $ -- $ 586,000 $ --
Accounts payable and accrued expenses....... 262,013 286,917 257,600
Deferred revenue............................ 81,127 74,806 81,127
---------- ---------- ----------
Total current liabilities.................. 343,140 947,723 338,727
---------- ---------- ----------
Long-term debt, net of discount (Note 3)..... 4,987,181 4,980,717 4,990,413
---------- ---------- ----------
Partners capital:
General partners............................ 180,599 193,639 171,039
Limited partners............................ 1,068,462 1,142,361 1,014,292
---------- ---------- ----------
Total partners' capital.................... 1,249,061 1,336,000 1,185,331
---------- ---------- ----------
Total liabilities and partners' capital.... $6,579,382 $7,264,440 $6,514,471
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED
ENDED JUNE 30,
DECEMBER 31, -----------------------
1995 1996 1995
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUES
Facility lease............................ $ 598,968 $ 299,484 $ 299,484
Management services....................... 551,461 278,642 270,979
---------- --------- ---------
Total revenues.......................... 1,150,429 578,126 570,463
---------- --------- ---------
OPERATING EXPENSES
Operating and maintenance................. 426,948 222,310 212,298
Depreciation and amortization............. 303,552 151,948 152,575
General and administrative................ 149,830 85,111 75,045
---------- --------- ---------
Total operating expenses................ 880,330 459,369 439,918
---------- --------- ---------
Income before interest income and ex-
pense.................................. 270,099 118,757 130,545
---------- --------- ---------
INTEREST INCOME AND EXPENSE
Interest expense.......................... (403,736) (201,919) (201,110)
Interest income........................... 46,698 19,432 26,893
---------- --------- ---------
(357,038) (182,487) (174,217)
---------- --------- ---------
Net loss................................ $ (86,939) $ (63,730) $ (43,672)
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
PARTNERS' CAPITAL PARTNERS' CAPITAL PARTNERS' CAPITAL
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 NET LOSS 1995 NET LOSS 1996
----------------- -------- ----------------- ----------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
General Partners........ $ 193,639 $(13,040) $ 180,599 $ (9,560) $ 171,039
Limited Partners........ 1,142,361 (73,899) 1,068,462 (54,170) 1,014,292
---------- -------- ---------- -------- ----------
$1,336,000 $(86,939) $1,249,061 $(63,730) $1,185,331
========== ======== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR SIX MONTHS
ENDED ENDED JUNE 30,
DECEMBER 31, ----------------------
1995 1996 1995
------------ ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................. $(86,939) $(63,730) $ (43,672)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization........... 303,552 151,948 152,575
Bond discount amortization.............. 6,464 3,232 3,232
Changes in assets and liabilities:
Accounts receivable..................... (13,984) 1,471 (6,909)
Prepaid expenses........................ (3,889) 18,040 1,458
Transfer from restricted cash........... 47 66 --
Rent receivable......................... (176,184) (52,284) (88,092)
Accounts payable and accrued expenses... (24,904) (4,413) (19,983)
Deferred revenue........................ 6,321 -- --
-------- -------- ---------
Net cash provided (used) by operating
activities............................ 10,484 54,330 (1,391)
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for plant................... (5,708) (5,161) --
Use of restricted cash................... 586,000 -- 226,241
-------- -------- ---------
Net cash provided (used) by investing ac-
tivities................................ 580,292 (5,161) 226,241
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment out of debt service reserve...... 2,935 368 10
Payment of note payable.................. (586,000) -- (230,959)
-------- -------- ---------
Net cash (used) provided by financing
activities............................ (583,065) 368 (230,949)
-------- -------- ---------
Net increase (decrease) in cash and
cash equivalents...................... 7,711 49,537 (6,099)
Cash and cash equivalents, beginning...... 8,233 15,944 8,233
-------- -------- ---------
Cash and cash equivalents, ending......... $ 15,944 $ 65,481 $ 2,134
======== ======== =========
SUPPLEMENTAL DISCLOSURES
Interest paid............................ $421,305 $198,012 $ 198,013
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 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.
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
F-50
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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.
F-51
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information presented as of June 30, 1996 and for the six
month periods ended June 30, 1996 and June 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 operation for interim periods are not necessarily
indicative of those to be achieved for full fiscal years.
NOTE 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.
NOTE 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.
F-52
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<S> <C>
1996.......................... $ --
1997.......................... 70,000
1998.......................... 100,000
1999.......................... 125,000
2000.......................... 175,000
Thereafter.................... 4,640,000
----------
$5,110,000
==========
</TABLE>
NOTE 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.
F-53
<PAGE>
PLYMOUTH COGENERATION LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
1995 1994
------ -------
<S> <C> <C>
Employee group health insurance and office related........... $ -- $37,703
Interest expense on advances................................. 1,108
</TABLE>
Amounts due to affiliates of the General Partner included in accounts
payable and accrued expenses of the Partnership at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
------- ----
<S> <C> <C>
Interest bearing advances at prime.............................. $28,520 $--
Accrued interest on advances.................................... 1,108 --
</TABLE>
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.
F-54
<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 AU-
THORIZED BY THE COMPANY. THIS 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 PER-
SON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER 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 CON-
TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 2
PROSPECTUS SUMMARY........................................................ 3
RISK FACTORS.............................................................. 10
USE OF PROCEEDS........................................................... 18
PRICE RANGE OF COMMON STOCK............................................... 18
DIVIDEND POLICY .......................................................... 18
CAPITALIZATION ........................................................... 19
PRO FORMA FINANCIAL INFORMATION........................................... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION ............................................................... 26
BUSINESS ................................................................. 31
MANAGEMENT ............................................................... 44
CERTAIN TRANSACTIONS ..................................................... 47
PRINCIPAL AND SELLING SECURITYHOLDERS .................................... 49
DESCRIPTION OF SECURITIES ................................................ 51
SHARES ELIGIBLE FOR FUTURE SALE .......................................... 55
PLAN OF DISTRIBUTION ..................................................... 56
LEGAL MATTERS ............................................................ 56
EXPERTS .................................................................. 57
FINANCIAL STATEMENTS...................................................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. ENERGY SYSTEMS, INC.
1,805,000 SHARES OF COMMON STOCK
AND
500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
---------------
PROSPECTUS
---------------
GAINES, BERLAND INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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:
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 9,565
NASD Fee........................................................ 2,730
Nasdaq Fee...................................................... 14,156
Transfer Agent's Fee............................................ 3,000
Printing and Engraving Fees..................................... 50,000
Legal Fees and Expenses......................................... 200,000
Blue Sky Fees and Expenses...................................... 50,000
Accounting Fees and Expenses.................................... 150,000
Representative's Non-Accountable Expense Allowance.............. 261,375
Miscellaneous Expenses.......................................... 48,424
--------
Total......................................................... $789,250
========
</TABLE>
II-1
<PAGE>
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 raising capital .
The total proceeds of the sale were $52,750.
<TABLE>
<CAPTION>
NUMBER OF
NAME OF PURCHASER SHARES PURCHASED PURCHASE PRICE
----------------- ----------------- --------------
<S> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
NUMBER OF AMOUNT OF
NAME OF PURCHASER SHARES PURCHASED CONSIDERATION PAID DATE OF PURCHASE
----------------- ----------------- ------------------- ----------------
<S> <C> <C> <C>
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
</TABLE>
II-2
<PAGE>
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
INCORPORATED EXHIBIT
EXHIBIT BY REFERENCE NO. IN
NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT
------- ----------- -------------- ---------
<C> <S> <C> <C>
1.1 Form of Underwriting Agreement B
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)
3.3 Articles of Organization of Steamboat B
Envirosystems, L.C.
4.1 Specimen Stock Certificate B
4.2 Form of Warrant X
4.3 Form of Warrant Agreement B
4.4 Form of Representative's Purchase Option B
5.1 Opinion of Reid & Priest LLP X
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 X
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 X
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
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
INCORPORATED EXHIBIT
EXHIBIT BY REFERENCE NO. IN
NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT
------- ----------- -------------- ---------
<C> <S> <C> <C>
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
10.13(a) Letter Agreement, dated September 25, X
1996, between the Company and Far West
Capital, Inc.
10.14 Joint Development Memorandum of Intent B
dated September 20, 1994, between the
Company and Cowen Partnership
10.15 Agreement dated as of May 4, 1995 between B
the 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
10.21(a) Certificate of Designations X
10.22 Purchase Agreement between the Company and B
Westinghouse Electric Corporation dated as
of November 6, 1995 and amendments thereto
10.23 Letter of intent to the Company from B
Bluebeard's Castle, Inc. dated August 6,
1996.
10.24 Form of Joint Venture Agreement among the B
Company and Bluebeard's Castle, Inc. and
Bluebeard Hilltop Villas dated as of
.
10.25(a) Long-Term Agreement for the Purchase and X
Sale of Electricity Between Sierra Pacific
Power Company and Far West Capital Inc.,
dated October 29, 1988
10.25(b) Assignment of Interest, dated December 10, X
1988 by and between Far West Capital Inc.
and 1-A Enterprises
10.25(c) Letter dated August 18, 1989 by Gerald W. X
Canning, Vice President of Electric
Resources, consenting to the Assignment of
Interest on behalf of Sierra Pacific Power
Company
10.26(a) Agreement for the Purchase and Sale of X
Electricity, dated as of November 18, 1983
between Geothermal Development Associates
and Sierra Pacific Power Company
10.26(b) Amendment to Agreement for Purchase and X
Sale of Electricity, dated March 6, 1987,
by and between Far West Hydroelectric
Fund, Ltd. and Sierra Pacific Power
Company
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
INCORPORATED EXHIBIT
EXHIBIT BY REFERENCE NO. IN
NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT
------- ----------- -------------- --------
<C> <S> <C> <C>
10.27 Loan and Option Agreement dated August , X
1996 by and among NRG Company, LLC and Reno
Energy, LLC and ART, LLC and FWC Energy,
LLC, and amendments thereto
10.28 Promissory Note dated August 9, 1996 for X
$300,000 from Reno Energy, LLC to NRG
Company, LLC
10.29 Letter of Intent dated July 15, 1996 on X
behalf of Reno Energy, LLC
10.30 Limited Liability Company Operating X
Agreement of NRG Company, LLC dated as of
September 8, 1996, and amendments thereto
10.31 Form of Limited Liability Company Operating X
Agreement of Steamboat, LLC dated as of
October , 1996
11.1 Earnings Per Share Calculations--Historical B
January 31, 1996 (herewith amended)
11.2 Earnings Per Share Calculations--Historical B
July 31, 1996 (herewith amended)
11.3 Pro Forma Earnings Per Share Calculation X
January 31, 1996 (herewith amended)
11.4 Pro Forma Earnings Per Share Calculation X
July 31, 1996 (herewith amended)
11.5 Supplemental Historical Earnings Per Share X
Calculations--January 31 1996 and July 31,
1996
11.6 Earnings Per Share Calculations--Historical B
January 31, 1995
13.1 Annual Report of the Company on Form 10-KSB B
for the year ended January 31, 1996
13.2 Quarterly Report of the Company on Form 10- B
QSB for the quarter ended October 31, 1995
13.3 Quarterly Report of the Company on Form 10- C
QSB for the quarter ended July 31, 1996
21.1 Subsidiaries of the Company B
23.1 Consent of Reid & Priest LLP (included in X
Exhibit 5.1)
23.2 Consent of Richard A. Eisner & Company, LLP X
23.3 Consent of Robison, Hill & Co., P.C. (Far X
West)
23.4 Consent of Robison, Hill & Co., P.C. (1-A X
Enterprises)
23.5 Consent of Traveller Winn & Mower, PC X
23.6 Consent of Price Waterhouse LLP (Primary X
Prospectus)
23.7 Consent of Price Waterhouse LLP (Secondary X
Prospectus)
24.1 Power of Attorney B
27 Financial Data Schedule X
</TABLE>
- --------
A Annual Report of the Company on Form 10-KSB for the year ended January 31,
1994 (File No. 0-10238).
B Previously filed.
C Quarterly Report of the Company on Form 10-QSB for the quarter ended July
31, 1996 (File No. 0-10238).
X Filed herewith.
II-5
<PAGE>
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 new 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.
II-6
<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 NEW YORK, AND STATE OF NEW YORK, ON THE 15TH DAY OF
OCTOBER, 1996.
U.S. Energy Systems, Inc.
/s/ Richard Nelson
By: _________________________________
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
- ------------------------------------- Board October 15,
(THEODORE ROSEN) 1996
/s/ Richard Nelson President and Chief
- ------------------------------------- Executive Officer October 15,
(RICHARD NELSON) (Principal 1996
Executive Officer)
/s/ Seymour J. Beder Chief Accounting
- ------------------------------------- Officer and October 15,
(SEYMOUR J. BEDER) Controller 1996
(Principal
Financial and
Accounting Officer)
/s/ Ronald Moody Director
- ------------------------------------- October 15,
(RONALD MOODY) 1996
Director
- ------------------------------------- October 15,
(FRED KNOLL) 1996
/s/ Evan Evans Director
- ------------------------------------- October 15,
(EVAN EVANS) 1996
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
INCORPORATED EXHIBIT
EXHIBIT BY REFERENCE NO. IN
NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT
------- ----------- -------------- ---------
<C> <S> <C> <C>
1.1 Form of Underwriting Agreement B
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)
3.3 Articles of Organization of Steamboat B
Envirosystems, L.C.
4.1 Specimen Stock Certificate B
4.2 Form of Warrant X
4.3 Form of Warrant Agreement B
4.4 Form of Representative's Purchase Option B
5.1 Opinion of Reid & Priest LLP X
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 X
the Company and Richard Nelson, dated
October 15, 1996
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 X
the Company and Theodore Rosen dated
October 15, 1996
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INCORPORATED EXHIBIT
EXHIBIT BY REFERENCE NO. IN
NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT
------- ----------- -------------- ---------
<C> <S> <C> <C>
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
10.13(a) Letter Agreement, dated September 25, X
1996, between the Company and Far West
Capital, Inc.
10.14 Joint Development Memorandum of Intent B
dated September 20, 1994, between the
Company and Cowen Partnership
10.15 Agreement dated as of May 4, 1995 between B
the 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
10.21(a) Certificate of Designations X
10.22 Purchase Agreement between the Company and B
Westinghouse Electric Corporation dated as
of November 6, 1995 and amendments thereto
10.23 Letter of intent to the Company from B
Bluebeard's Castle, Inc. dated August 6,
1996.
10.24 Form of Joint Venture Agreement among the B
Company and Bluebeard's Castle, Inc. and
Bluebeard Hilltop Villas dated as of
.
10.25(a) Long-Term Agreement for the Purchase and X
Sale of Electricity Between Sierra Pacific
Power Company and Far West Capital Inc.,
dated October 29, 1988
10.25(b) Assignment of Interest, dated December 10, X
1988 by and between Far West Capital Inc.
and 1-A Enterprises
10.25(c) Letter dated August 18, 1989 by Gerald W. X
Canning, Vice President of Electric
Resources, consenting to the Assignment of
Interest on behalf of Sierra Pacific Power
Company
10.26(a) Agreement for the Purchase and Sale of X
Electricity, dated as of November 18, 1983
between Geothermal Development Associates
and Sierra Pacific Power Company
10.26(b) Amendment to Agreement for Purchase and X
Sale of Electricity, dated March 6, 1987,
by and between Far West Hydroelectric
Fund, Ltd. and Sierra Pacific Power
Company
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INCORPORATED EXHIBIT
EXHIBIT BY REFERENCE NO. IN
NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT
------- ----------- -------------- --------
<C> <S> <C> <C>
10.27 Loan and Option Agreement dated August , X
1996 by and among NRG Company, LLC and Reno
Energy, LLC and ART, LLC and FWC Energy,
LLC, and amendments thereto
10.28 Promissory Note dated August 9, 1996 for X
$300,000 from Reno Energy, LLC to NRG
Company, LLC
10.29 Letter of Intent dated July 15, 1996 on X
behalf of Reno Energy, LLC
10.30 Limited Liability Company Operating X
Agreement of NRG Company, LLC dated as of
September 8, 1996, and amendments thereto
10.31 Form of Limited Liability Company Operating X
Agreement of Steamboat, LLC dated as of
October , 1996
11.1 Earnings Per Share Calculations--Historical B
January 31, 1996 (herewith amended)
11.2 Earnings Per Share Calculations--Historical B
July 31, 1996 (herewith amended)
11.3 Pro Forma Earnings Per Share Calculation X
January 31, 1996 (herewith amended)
11.4 Pro Forma Earnings Per Share Calculation X
July 31, 1996 (herewith amended)
11.5 Supplemental Historical Earnings Per Share X
Calculation January 31, 1996 and July 31,
1996
11.6 Earnings Per Share Calculations--Historical B
January 31, 1995
13.1 Annual Report of the Company on Form 10-KSB B
for the year ended January 31, 1996
13.2 Quarterly Report of the Company on Form 10- B
QSB for the quarter ended October 31, 1995
13.3 Quarterly Report of the Company on Form 10- C
QSB for the quarter ended July 31, 1996
21.1 Subsidiaries of the Company B
23.1 Consent of Reid & Priest LLP (included in X
Exhibit 5.1)
23.2 Consent of Richard A. Eisner & Company, LLP X
23.3 Consent of Robison, Hill & Co., P.C. (Far X
West)
23.4 Consent of Robison, Hill & Co., P.C. (1-A X
Enterprises)
23.5 Consent of Traveller Winn & Mower, PC X
23.6 Consent of Price Waterhouse LLP (Primary X
Prospectus)
23.7 Consent of Price Waterhouse LLP (Secondary X
Prospectus)
24.1 Power of Attorney B
27 Financial Data Schedule X
</TABLE>
- --------
A Annual Report of the Company on Form 10-KSB for the year ended January 31,
1994 (File No. 0-10238).
B Previously filed.
C Quarterly Report of the Company on Form 10-QSB for the quarter ended July
31, 1996 (File No. 0-10238).
X Filed herewith.
<PAGE>
EXHIBIT 4.2
NUMBER VOID AFTER 5:00 P.M., EASTERN TIME WARRANT
- ----------------- -----------------
ON
W- , 2001
- ----------------- -----------------
REDEEMABLE WARRANT CERTIFICATE FOR
PURCHASE OF SHARES OF COMMON STOCK
U.S. ENERGY SYSTEMS, INC.
CUSIP 902951 11 0
This certifies that FOR VALUE RECEIVED
or registered assigns ("Registered Holder"), is the owner of the number of
warrants set forth above. Each Warrant (subject to adjustments as hereinafter
referred to) entitles the Registered Holder to purchase at any time from
, 1997 until 5:00 p.m. Eastern Time on , 2001 one fully paid and
non-assessable share of common stock (the "Common Stock") of U.S.Energy Systems,
Inc., a Delaware corporation (the "Company") (such shares of Common Stock being
hereinafter referred to as "Shares" or a "Share"), upon payment of the warrant
price (as hereinafter described), provided, however, that under certain
conditions set forth in the Warrant Agreement hereinafter mentioned, the number
of Shares purchasable upon the exercise of this Warrant may be increased or
reduced and the warrant price may be adjusted. Subject to adjustment as
aforesaid, the warrant price per Share (hereinafter called the "Warrant Price")
shall be $4.00 per Share if exercised on or before 5:00 p.m. Eastern Time on
, 2001. As provided in said Warrant Agreement, the Warrant Price is
payable upon the exercise of the Warrant, either in cash or by certified check
or bank draft to the order of the Company.
Under certain conditions set forth in the Warrant Agreement, this
Warrant may be called for redemption at the option of the Company, at any time
after the Warrants become exercisable and prior to their expiration, at a
redemption price of $0.01 per Warrant upon at least 30 days' written notice if
the last sales price of the Common Stock has been at least one hundred fifty
percent (150%) of the Warrant Price on each of the twenty (20) consecutive
trading days during a period ending on the third business day prior to the date
on which the notice of redemption is given.
Upon the exercise of this Warrant, the form of election to purchase on
the reverse hereof must be properly completed and executed. In the event that
this Warrant is exercised in respect not less than all of such Shares, a new
Warrant for the remaining number of Shares will be issued on such surrender.
This Warrant is issued under and the rights represented hereby are
subject to the terms and provisions contained in a Warrant Agreement dated as of
,1996, by and among the Company, American Stock Transfer & Trust
Company, as Warrant Agent (the "Warrant Agent") and Gaines, Berland Inc., all
the terms and provisions of which the Registered Holder of this Warrant, by
acceptance hereof, assents. Reference is hereby made to said Warrant Agreement
for a more complete statement of the rights and limitations of rights of the
Registered Holders hereof, the rights and duties of the Warrant Agent and the
rights and obligations of the Company thereunder. Copies of said Warrant
Agreement are on file at the office of the Warrant Agent.
The Company shall not be obligated to deliver any Shares pursuant to the
exercise of any Warrants unless a registration statement under the Securities
Act of 1933 with respect to such Shares is effective. The Warrants represented
hereby shall not be exercisable by a Registered Holder in any state where such
exercise would be unlawful.
The Company shall not be required upon the exercise of this Warrant to
issue fractions of Shares, but shall make adjustment therefor in cash on the
basis of the current market value of any fractional interest as provided in the
Warrant Agreement.
This Warrant is transferable at the office of the Warrant Agent (or of
its successor as Warrant Agent) by the Registered Holder hereof in person or by
attorney duly authorized in writing, but only in the manner and subject to the
limitations provided in the Warrant Agreement and upon surrender of this Warrant
and the payment of any transfer taxes. Upon any such transfer, a new Warrant or
new Warrants of different denominations, of this tenor and representing in the
aggregate the right to purchase a like number of Shares will be issued to the
transferee in exchange for this Warrant.
This Warrant, when surrendered at the office of the Warrant Agent (or
its successor as Warrant Agent) by the Registered Holder hereof in person or by
attorney duly authorized in writing, may be exchanged in the manner and subject
to the limitations provided in the Warrant Agreement, for another Warrant, or
other Warrants of different denominations, of like tenor and representing in
the aggregate the right to purchase a like number of Shares equal to the number
of such Warrants.
If this Warrant Certificate shall be surrendered for exercise within any
period during which the transfer books for the Company's Common Stock or other
securities purchasable upon the exercise of the Warrants are closed for any
purpose, the Company shall not be required to make delivery of certificates for
the securities purchasable upon exercise until the date of the reopening of said
transfer books.
The holder of this Warrant shall not be entitled to any of the rights of
a shareholder of the Company prior to the exercise hereof.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent.
WITNESS the facsimile seal of the Company and the facsimile signature of
its duly authorized officers.
<PAGE>
U.S. ENERGY SYSTEMS, INC.
ELECTION TO PURCHASE
To Be Executed by the Registered Holder in Order to Exercise Warrants
To: U.S. ENERGY SYSTEMS, INC.
c/o: American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant(s) for and to purchase them under, __________
______________________ shares of Common Stock provided for therein and tenders
herewith payment of the purchase price in full to the order of the Corporation
and requests that certificates for such shares shall be issued in the
name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
- -----------------------------------------
- --------------------------------------------------------------------------------
(Please Print or Typewrite)
and be delivered to
------------------------------------------------------------
(Name)
at
------------------------------------------------------------------------------
(Street Address) (City) (State) (Zip Code)
and, if said number of shares shall not be all the shares purchasable
thereunder, that a new Warrant for the balance remaining of the shares
purchasable under the within Warrant be registered in the name of, and delivered
to, the undersigned at the address stated below;
The undersigned represents that the exercise of the within Warrant was solicited
by a member of the National Association of Securities Dealers. If not solicited
by an NASD member, please write "unsolicited" in the space below. Unless
otherwise indicated by listing the name of another NASD member firm, it will be
assumed that the exercise was solicited by Gaines, Borland Inc.
Date: Signature:
--------------------------- -----------------------------------
Note: The above signature must
correspond with the name as written
upon the face of the Warrant or
with the name of the assignee
appearing in the assignment form
below in every particular without
alteration or enlargement or any
change whatever.
Name:
---------------------------
(Please Print or Typewrite)
Address: *Signature Guaranteed:
------------------------ -----------------------
(Street)
----------------------
- --------------------------------
(City) (State) (Zip Code)
----------------------
PLEASE INSERT SOCIAL
SECURITY OR OTHER
IDENTIFYING NUMBER
ASSIGNMENT
_________________________
For value received, _________________________________________ hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------------
- --------------------------------------------------------------------------------
Please Print or typewrite name and address including postal zip code of assignee
- --------------------------------------------------------------------------------
( ) Warrants
- ----------------------------------------------------------- ---------- --------
represented by the within Warrant Certificate, together with all right, title
and interest therein, and do hereby irrevocably constitute and appoint
---------
attorney
- ------------------------------------------------------------------------
to transfer said Warrant on the books of the within named Corporation, with full
power of substitution in the promises.
Dated , 19
-------------------------- ----
Signature:
--------------------------------------
Note: The above signature must
correspond with the name as written
upon the face of this Warrant in every
particular without alteration or
enlargement or any change whatever.
*Signature Guaranteed:
-----------------------------
*In case of assignment, or if the Common Stock issued upon exercise is to be
registered in the name of a person other than the holder, the holder's signature
must be guaranteed by a commercial bank, trust company or an NASD member firm.
<PAGE>
EXHIBIT 5.1
-----------
New York, New York
October , 1996
U.S. Energy Systems, Inc.
515 North Flagler Drive, Suite 202
West Palm Beach, Florida 33401
Re: U.S. Energy Systems, Inc.
Registration Statement on Form SB-2
-----------------------------------
Ladies and Gentlemen:
We have acted as counsel to U.S. Energy Systems, Inc., a
Delaware corporation (the "Registrant"), in connection with the
preparation and filing with the Securities and Exchange Commission (the
"Commission") of a Registration Statement on Form SB-2, File No. 333-
04612 (the Registration Statement") with respect to the registration
under the Securities Act of 1933, as amended (the "Act"), of (i) a
primary offering by the Registrant of 2,443,750 shares of Common Stock
(the "Common Stock") including 318,750 shares which the Underwriter
has the option to purchase to cover over-allotments, if any, and
2,443,750 Redeemable Common Stock Purchase Warrants (the "Warrants")
including 318,750 Warrants which the Underwriter has the option to
purchase to cover over-allotments, if any, (ii) 212,500 shares of Common
Stock and 212,500 Warrants to be issued to the Representative (as such
term is defined in the Registration Statement), its officers or such
other designees as may be permitted by the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. (the "Representative's
Purchase Option"), entitling the Representative to purchase from the
Company 212,500 shares of Common Stock and 212,500 Warrants at an
exercise price of $5.00 per Warrant and (iii) a secondary offering (the
"Secondary Offering") by (a) Enviro Partners L.P. ("Enviro") of
1,600,000 shares of Common Stock of the Registrant, (b) Anchor Capital
Company LLC ("Anchor") of 205,000 shares of Common Stock of the
Registrant and (c) Energy Management Corporation ("EMC") of 500,000
Warrants of the Registrant.
In connection with the proposed offerings, we have examined
the Certificate of Incorporation, as amended, and the By-Laws of the
Registrant, resolutions of the Board of Directors of the Registrant, and
the Registration Statement. We have also made such inquiries and have
examined originals, certified copies or copies of other instruments as
we have deemed necessary or appropriate for the purpose of this opinion,
For purposes of such examination, we have assumed the genuineness of all
signatures on and the authenticity of all documents submitted to us as
originals, and the conformity to the originals of all documents
submitted to us as certified or photostatic copies.
Based upon the foregoing and having regard for such legal
considerations as we deem relevant, we are of the opinion that:
<PAGE>
1. The Registrant is a corporation duly incorporated and existing
in good standing under the laws of the State of Delaware.
2. The shares of Common Stock being issued and sold to the
Underwriter by the Registrant pursuant to the Underwriting Agreement
have been duly authorized and, when issued and delivered upon payment
therefor in accordance with the terms and conditions of the Underwriting
Agreement, will be validly issued, fully paid and non-assessable.
3. The shares of Common Stock issuable upon exercise of the
Warrants have been duly authorized and reserved for issuance and, when
issued and delivered upon payment therefor in accordance with the terms
of the Warrants will be validly issued, fully paid and non-assessable.
4. The shares of Common Stock issuable upon exercise of the
Warrants issuable upon exercise of the Representative's Purchase Option
have been duly authorized and reserved for issuance and, when issued and
delivered upon payment therefor in accordance with the terms and
conditions of the Underwriting Agreement, will be validly issued, fully
paid and non-assessable.
5. The Warrants and the Representative's Purchase Option, when
issued and delivered in accordance with the terms and conditions of the
Underwriting Agreement and the Warrants issuable upon the exercise of
the Representative's Purchase Option, in accordance with the terms and
conditions thereof, will be valid obligations of the Registrant.
6. The 205,000 shares of Common Stock to be sold by Anchor
pursuant to the Secondary Offering have been duly authorized and, when
issued and delivered, upon conversion of the Series One Preferred
Stock, will be validly issued, fully paid and non-assessable.
7. The 1,600,000 shares of Common Stock to be sold by Enviro
pursuant to the Secondary Offering have been duly authorized and, when
issued and delivered upon conversion of the 11% Cumulative Redeemable
Convertible Preferred Stock, will be validly issued, fully paid and non-
assessable.
8. The 500,000 Warrants to be sold by EMC (the "EMC Warrants")
pursuant to the Secondary Offering have been duly authorized and,
when issued and delivered pursuant to the terms of the Warrant Purchase
Agreement between the Registrant and EMC, will be valid obligations of
the Registrant.
9. The shares of Common Stock issuable upon exercise of the EMC
Warrants have been duly authorized and when issued and delivered upon
exercise of the EMC Warrants will be validly issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as Exhibit 5.1
to the Registration Statement and to the reference therein to our firm
under the caption "Legal Matters." In giving the foregoing consent, we
do not thereby admit that we are in the category of persons whose
consent is required under Section 7 of the Act or the rules and
regulations of the Commission promulgated thereunder.
Very truly yours,
<PAGE>
EXHIBIT 10.3(a)
AMENDED EMPLOYMENT AGREEMENT
----------------------------
Amended Employment Agreement, dated as of May 3, 1996, by and between U.S.
Envirosystems, Inc., a Delaware corporation, (hereinafter referred to as the
"Company") and Richard H. Nelson (hereinafter referred to as the "Executive").
Capitalized terms not defined herein shall have the meanings ascribed to them in
the Employment Agreement.
W I T N E S S E T H
WHEREAS, the Company and the Executive executed that certain Employment
Agreement dated December 3, 1993 (the "Employment Agreement"); and
WHEREAS, the Company and the Executive now desire to amend the Employment
Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
1. Section 2 of the Employment Agreement shall be amended to read as
follows:
2. Term.
----
Unless sooner terminated as provided in the Employment
Agreement, the term of employment of the Executive hereunder
shall be for an initial period of five (5) years, commencing on
October 15, 1996. Either the Executive or the Company may
terminate this Amended Employment Agreement on October 14, 2001
by at least six months' prior notice to the other party.
Subsequent to October 14, 1996, the term of employment shall
continue on a year to year basis, provided that either party ,ay
terminate the Agreement by not less than six months' prior
written notice to the other given as any time. In the event that
the Executive give notice of termination to the Company pursuant
to this Section 2, the Company may terminate the Executive's
employment and further obligations to thereafter compensate the
Executive hereunder at any time after receipt of such termination
notice during the last year of employment.
2. Section 8(b)(2) of the Employment Agreement shall be amended to read as
follows:
For the purposes of this Amended Employment Agreement, the Non-
Competitive Period shall mean the the period that the Executive is
employed by the Company plus an
<PAGE>
additional two (2) years after the date that the Executive's
employment is terminated hereunder.
3. Except as herein specifically amended, all of the terms, covenants,
provisions and conditions of the Employment Agreement shall continue to remain
in full force and effect.
4. This Amended Employment Amendment may be executed in two counterparts
provided that such counterparts. Each such counterpart shall be construed
together and shall constitute one Amended Employment Amendment binding upon all
the parties hereto.
IN WITNESS WHEREOF, the parties hereto, after being duly sworn, have
executed this Amended Employment Agreement as of the date first above written.
THE COMPANY:
U.S. ENERGY SYSTEMS, INC.
By /s/Theodore Rosen
-------------------
THE EXECUTIVE:
/s/Richard H. Nelson
-------------------------
Richard H. Nelson
<PAGE>
EXHIBIT 10.4(a)
AMENDED EMPLOYMENT AGREEMENT
----------------------------
Amended Employment Agreement, dated as of May 3, 1996, by and between U.S.
Envirosystems, Inc., a Delaware corporation, (hereinafter referred to as the
"Company") and Theodore Rosen (hereinafter referred to as the "Executive").
Capitalized terms not defined herein shall have the meanings ascribed to them in
the Employment Agreement.
W I T N E S S E T H
WHEREAS, the Company and the Executive executed that certain Employment
Agreement dated December 3, 1993 (the "Employment Agreement"); and
WHEREAS, the Company and the Executive now desire to amend the Employment
Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
1. Section 2 of the Employment Agreement shall be amended to read as
follows:
2. Term.
----
Unless sooner terminated as provided in the Employment
Agreement, the term of employment of the Executive hereunder
shall be for an initial period of five (5) years, commencing on
October 15, 1996. Either the Executive or the Company may
terminate this Amended Employment Agreement on October 14, 2001
by at least six months' prior notice to the other party.
Subsequent to October 14, 1996, the term of employment shall
continue on a year to year basis, provided that either party ,ay
terminate the Agreement by not less than six months' prior
written notice to the other given as any time. In the event that
the Executive give notice of termination to the Company pursuant
to this Section 2, the Company may terminate the Executive's
employment and further obligations to thereafter compensate the
Executive hereunder at any time after receipt of such termination
notice during the last year of employment.
2. Section 8(b)(2) of the Employment Agreement shall be amended to read as
follows:
For the purposes of this Amended Employment Agreement, the Non-
Competitive Period shall mean the the period that the Executive is
employed by the Company plus an
<PAGE>
additional two (2) years after the date that the Executive's
employment is terminated hereunder.
3. Except as herein specifically amended, all of the terms, covenants,
provisions and conditions of the Employment Agreement shall continue to remain
in full force and effect.
4. This Amended Employment Agreement may be executed in two counterparts.
Each such counterpart shall be construed together and shall constitute one
Amended Employment Agreement binding upon all the parties hereto.
IN WITNESS WHEREOF, the parties hereto, after being duly sworn, have
executed this Amended Employment Agreement as of the date first above written.
THE COMPANY:
U.S. ENERGY SYSTEMS, INC.
By /s/Richard H. Nelson
---------------------
THE EXECUTIVE:
/s/Theodore Rosen
------------------------
Theodore Rosen
<PAGE>
EXHIBIT 10.13(a)
U.S. ENERGY SYSTEMS, INC.
515 N. Flagler Drive, Suite 202
West Palm Beach, Florida 33401
September 25, 1996
Far West Capital, Inc.
921 Executive Park Drive
Salt Lake City, UT 84117
Attention: Mr. Ron Burch, President
RE: Acquisition of Steamboat 1 and 1A
---------------------------------
Dear Sir:
This letter agreement sets forth our understanding regarding the
amendment to our acquisition of Steamboat 1 and 1A as follows:
U.S. Energy Systems, Inc. (formerly U.S. Envirosystems, Inc.) ("USE")
will form a new company, Steamboat LLC, which will acquire 100% of Steamboat 1
and 1A in accordance with the contracts and operating agreements, together with
all exhibits and schedules thereto (the "Agreements"), which have already been
agreed to by the various parties and were outlined in the Proxy Statement filed
by Far West Electric Energy Fund LP and approved by its limited partners. Under
the Agreements, Far West Capital, Inc. ("FWC") would receive a 50% equity
interests in Steamboat LLC. FWC hereby agrees to reduce its participation to a
5% equity interest in Steamboat LLC, and USE will thereby hold a 95% equity
interest in Steamboat LLC.
In consideration for the above, USE will pay, or cause Steamboat LLC
to pay, to FWC an amount equal to 55% (fifty-five percent) of the net income of
Steamboat 1 and 1A in excess of $1,800,000 (one million eight hundred thousand
dollars) on an annual basis for each of five years commencing with the first
year of ownership by USE following closing. These payments will be based on
annual net earnings and will not be cumulative.
Additionally, the Agreements are hereby amended as follows: (i) new
Articles of Organization of Steamboat LLC, or any other form necessary to create
Steamboat LLC, along with any related documents, will be drafted and filed in
order to create Steamboat LLC in the state of USE's choice and with terms and
conditions proposed by USE; (ii) mediation and arbitration under the Agreements,
if any, will go forward in the state of New York, or any other state of USE's
choice; and (iii) a cash amount equal to the accrual and unpaid
<PAGE>
Mr. Ron Burch
September 25, 1996
Page 2
interest and principal accruals on debt owed by Steamboat 1 and Steamboat 1A in
connection with the Westinghouse loan position will be pro rated by the Seller
to the date of closing.
In addition to the Agreements already agreed to, which will remain in
force and effect, as amended by this letter agreement and with any amendments or
restated agreements which may be required to accomplish the intent of this
letter agreement, USE and FWC will incorporate the following in the closing
documents:
1. A mutual resource exploitation agreement, which will in essence
set forth that (i) neither USE nor FWC will operate its projects (Steamboat 1
and 1A in the case of USE and Steamboat 2 and 3 in the case of FWC) in any
manner which would diminish the value of the other's projects and (ii) the
parties will cooperate to maximize the utilization of the resource.
2. A mutual Right of First Refusal stating that should USE sell
Steamboat 1 and 1A or any parts thereof, it will grant FWC a right of first
refusal to acquire the projects or parts thereof, and that should FWC and/or
Steamboat Development Corp. sell Steamboat 2 and 3 or any parts thereof, it will
grant USE a right of first refusal to acquire the projects or parts thereof. It
is understood by the parties to this letter agreement that Sierra Pacific Power
Company and General Electric Capital Corporation presently hold certain rights
of first refusal which may be senior to any such right contemplated by this
letter agreement.
3. USE agrees to retain SBGEO as the operator of the Project for as
long as its operation and maintenance of the Project meets industry standards
for similar power plants and its rate is competitive.
<PAGE>
Mr. Ron Burch
September 25, 1996
Page 3
4. This letter agreement will be void if the purchase of Steamboat 1
and 1A is not made by USE.
Sincerely,
/s/ Richard H. Nelson
---------------------------------------
Richard H. Nelson, President
U.S. Energy Systems, Inc.
AGREED:
/s/ Ron Burch
- ---------------------------------------
Ron Burch, President
Far West Capital, Inc.
as owner of Steamboat 1A and Steamboat Development Corp.
and as General Partner of Far West Electric Energy Fund L.P.
<PAGE>
EXHIBIT 10.21(a)
U.S. ENERGY SYSTEMS, INC.
CERTIFICATE OF DESIGNATION
OF 11% CUMULATIVE REDEEMABLE CONVERTIBLE
PREFERRED STOCK SETTING FORTH THE POWERS,
PREFERENCES, RIGHTS, QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS OF
SUCH SERIES OF PREFERRED STOCK
Pursuant to Section 151 of the Delaware General Corporation Law,
U.S. Energy Systems, Inc., a Delaware corporation (the "Company"), DOES
-------
HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of
Directors of the Company by the Certificate of Incorporation of the Company
(the "Certificate of Incorporation"), the Board of Directors of the
-------------
Company on _______ __, 1996 adopted the following resolution creating a series
of Preferred Stock designated as 11% Cumulative Redeemable Convertible
Preferred Stock, and such resolution has not been modified and is in full force
and effect on the date hereof:
RESOLVED that, pursuant to the authority vested in the Board of
Directors of the Company in accordance with the provisions of the Certificate
of Incorporation, a series of the class of authorized Preferred Stock, par
value $.01 per share, of the Company is hereby created and that the designation
and number of shares thereof and the voting powers, preferences and relative,
participating, optional and other special rights of the shares of such series,
and the qualifications, limitations and restrictions thereof are as follows:
Section 1. Designation and Number.
----------------------
(a) The shares of such series shall be designated as "11%
Cumulative Redeemable Convertible Preferred Stock" (the "Preferred Stock"). The
number of shares constituting the Preferred Stock shall be 4,600,000.
(b) The Preferred Stock shall, with respect to dividend rights
and rights on liquidation, dissolution or winding up, rank prior to all other
classes and series of capital stock of the Company now or hereafter authorized
(except as may be authorized pursuant to Section 3(b)), including, without
limitation, the Common Stock, par value $.01 per share, of the Company.
(c) Capitalized terms used herein and not otherwise defined shall
have the meanings set forth in Section 10 below.
<PAGE>
Section 2. Dividends and Distributions.
---------------------------
(a) The holders of shares of Preferred Stock, in preference to
the holders of shares of Common Stock and of any shares of other capital stock
of the Company, shall be entitled to receive, when, as and if declared by the
Board of Directors, out of the assets of the Company legally available
therefor, cumulative dividends at an annual rate on the Liquidation Preference
thereof equal to 11%, calculated on the basis of a 360-day year consisting of
twelve 30-day months, accruing and payable in equal quarterly payments, on the
last Business Day of January, April, July and October in each year (each such
date being referred to herein as a "Quarterly Dividend Payment
--------- -------- -------
Date") commencing on January 31, 1997; provided, however, that with
- ---- -------- -------
respect to such first Quarterly Dividend Payment Date, the holders of shares of
Preferred Stock shall be entitled to receive, when, as and if declared by the
Board of Directors, out of the assets of the Company legally available
therefor, a cumulative dividend in respect of each share of Preferred Stock in
the amount of (i) $.05328125 multiplied by (ii) a fraction equal to (A) the
number of days from (and including) the Issue Date (as defined in Section 12)
to (but excluding) such Quarterly Dividend Payment Date divided by (B) 90. If
the holders of shares of Preferred Stock are entitled to receive cumulative
dividends as provided herein on a date other than a Quarterly Dividend Payment
Date (an "Other Payment Date"), the cumulative dividend in respect of each
share of Preferred Stock for the period from the immediately preceding
Quarterly Dividend Payment Date to the Other Payment Date shall be in the
amount of (x) $.05328125 multiplied by (y) a fraction equal to (aa) the number
of days from (and including) the date of such immediately preceding Quarterly
Dividend Payment Date to (but excluding) the Other Payment Date divided by (bb)
90.
(b) Dividends payable pursuant to Section 2(a) shall begin to
accrue and be cumulative from the Issue Date, and shall accrue on a daily
basis, in each case whether or not declared. Dividends paid on the shares of
Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares of Preferred Stock at the time
outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Preferred Stock entitled to receive
payment of a dividend declared thereon, which record date shall be no more than
60 days or less than 10 days prior to the date fixed for the payment thereof.
Accumulated but unpaid dividends for any past quarterly dividend periods may be
declared and paid at any time, without reference to any regular Quarterly
Dividend Payment Date, to holders of record on such date, not more than 60 nor
less than 10 days preceding the payment date thereof, as may be fixed by the
Board of Directors.
-2-
<PAGE>
(c) Dividends payable pursuant to Section 2(a) shall be payable,
through the Quarterly Dividend Date ending on or immediately following the
second anniversary of the Issue Date, by issuing to such holders additional
fully paid and nonassessable shares of Preferred Stock at a rate of one (1)
share in respect of each $1.9375 of such dividends ("PIK Dividends"), and
-------------
thereafter, at the option of the Company, in cash or by issuing such PIK
Dividends. The issuance of such additional shares shall constitute full
payment of such dividend and shall include issuance of any fractional shares
included in the dividend, but the amount of any such dividend shall be reduced
to the nearest one-thousandth of a share. The terms "Preferred Stock"
--------- -----
and "shares" of Preferred Stock as used herein refer also to any such
------
fractional shares, and any rights associated with such shares, including
dividend, voting, and liquidation preference rights, shall be prorated for
fractional shares. Such PIK Dividends, when so issued, shall be duly issued,
fully paid and non-assessable. In lieu of issuing any fractional shares of PIK
Dividends, the Company shall pay in cash such amount of the dividend for such
fractional share.
(d) In addition to the dividends or distributions on the
Preferred Stock described in Section 2(a), in the event that the Company shall
declare a dividend or make any other distribution (including, without
limitation, in cash, in capital stock (which shall include, without limitation,
any options, warrants or other rights to acquire capital stock) of the Company,
whether or not pursuant to a shareholder rights plan, "poison pill" or similar
arrangement, or other property or assets), other than a Regular Dividend, to
holders of Common Stock, then the Board of Directors shall declare, and the
holder of each share of Preferred Stock shall be entitled to receive, a
dividend or distribution in an amount equal to the amount of such dividend or
distribution received by a holder of the number of shares of Common Stock for
which such share of Preferred Stock is convertible on the record date for such
dividend or distribution. Any such amount shall be paid to the holders of
shares of Preferred Stock at the same time such dividend or distribution is
made to holders of Common Stock.
(e) The holders of shares of Preferred Stock shall not be
entitled to receive any dividends or other distributions except as provided
herein.
Section 3. Voting Rights.
-------------
In addition to any voting rights provided by law, the holders of
shares of Preferred Stock shall have the following voting rights:
-3-
<PAGE>
(a) Except as otherwise required by applicable law, so long as
the Preferred Stock is outstanding, each share of Preferred Stock shall entitle
the holder thereof to vote, in person or by proxy, at a special or annual
meeting of stockholders, on each of the matters entitled to be voted on by
holders of Common Stock voting together as a single class with other shares
entitled to vote thereon. With respect to any such vote, each share of
Preferred Stock shall entitle the holder thereof to cast that number of votes
per share as is equal to the number of votes that such holder would be entitled
to cast had such holder converted its shares of Preferred Stock into Common
Stock on the record date for determining the stockholders of the Company
eligible to vote on any such matters.
(b) Unless the consent or approval of a greater number of shares
shall then be required by applicable law, the affirmative vote of the holders
of at least a majority of the outstanding shares of Preferred Stock, voting
separately as a single class, in person or by proxy, at a special or annual
meeting of stockholders called for the purpose, shall be necessary to (i)
authorize, increase the authorized number of shares of, or issue (including on
conversion or exchange of any convertible or exchangeable securities or by
reclassification), any shares of any class or classes of Senior Stock or Parity
Stock, (ii) authorize, increase the authorized number of shares of, or issue
any shares of any class of capital stock of the Company having an optional or
mandatory redemption date earlier than the tenth anniversary of the Issue Date
or amend the terms of any class of capital stock of the Company to provide that
such class of capital stock has an optional or mandatory redemption date
earlier than the tenth anniversary of the Issue Date, (iii) authorize, adopt or
approve an amendment to the Certificate of Incorporation that would increase or
decrease the par value of the shares of Preferred Stock, or alter or change the
powers, preferences or special rights of the shares of Preferred Stock, other
Parity Stock or Senior Stock, (iv) amend, alter or repeal the Certificate of
Incorporation so as to affect the shares of Preferred Stock adversely,
including, without limitation, by granting any voting right to any holder of
notes, bonds, debentures or other debt obligations of the Company, or by
amending the provisions of Section 3(c) below, (v) authorize or issue any
security convertible into, exchangeable for or evidencing the right to purchase
or otherwise receive any shares of any class or classes of Senior Stock or
Parity Stock and (vi) amend, modify or repeal Article I - Section 2, Article I
- - Section 3, Article II - Section 2, Article II - Section 6, Article II -
Section 8, Article II - Section 13, or Article X of the By-laws of the Company.
(c) (i) The outstanding shares of Preferred Stock voting
separately as a single class, by written consent as provided herein or in
person or by proxy, at an annual meeting of
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<PAGE>
stockholders or special meeting of stockholders called for the purpose of
electing directors or special meeting of holders of Preferred Stock, shall have
the right to elect two directors to the Board of Directors of the Company,
which shall be in addition to any directors elected pursuant to Section 3(a)
above. Any directors elected pursuant to this Section 3(c)(i) shall be deemed
to be "Preferred Stock Directors."
(ii) If, on any date on which there are Preferred Stock
Directors then in office, the Board of Directors of the Company takes any
action (other than an action with respect to the exercise of optional
redemption right of the Company set forth in Section 5(a) hereof) and the
majority of such Directors taking such action does not include at least one
Preferred Stock Director, then the number of Directors constituting the entire
Board of Directors shall, without further action, be increased by two and the
holders of shares of Preferred Stock shall have, in addition to the other
voting rights set forth herein, the exclusive voting rights, voting separately
as a single class, to elect two additional Directors of the Company to fill the
vacancies created by such increase in the number of directors. Such vote may be
by written consent as provided herein, at a special meeting of such holders
called as provided herein, at an annual meeting of stockholders or a special
meeting called for the purpose of electing directors. The increase provided
for herein shall be made only once. Any rights under this Section 3(c)(ii)
shall be in addition to the right to elect Directors under Sections 3(c)(i) and
3(c)(ii) above.
(iii) If on any date (A) the Company shall have failed
to declare, or shall have failed to pay, the full amount of dividends payable
on the Preferred Stock for two quarterly dividend periods (whether consecutive
or not), or (B) the Company shall have failed to satisfy its obligation to
convert shares of Preferred Stock pursuant to Section 8 or to redeem shares of
Preferred Stock pursuant to Section 5, or (C) a breach of any of Sections 8.7,
8.9 and 8.10 of the Stock Purchase Agreement shall have occurred and be
continuing for a period of at least 30 days, then the number of directors
constituting the entire Board of Directors shall, without further action, be
increased by two and the holders of shares of Preferred Stock shall have, in
addition to the other voting rights set forth herein, the exclusive right,
voting separately as a single class, to elect two directors of the Company to
fill such newly created directorship, by written consent as provided herein, or
at a special meeting of such holders called as provided herein. Any such
additional director elected pursuant to this Section 3(c)(iii) shall continue
as a director (subject to reelection or removal as provided in Section
3(d)(ii)) and the holders of Preferred Stock shall have such additional voting
rights until such time as (A) dividends then payable on the Preferred Stock
shall have been declared and paid in full or (B) any redemption
-5-
<PAGE>
or conversion obligation provided in Section 5 or Section 8, as the case may
be, that has become due shall have been satisfied or all necessary funds have
been set aside for payment or (C) there shall exist no breach of any of
Sections 8.7, 8.9 and 8.10 of the Stock Purchase Agreement, as the case may be,
at which time such additional directors shall cease to be directors and such
additional voting rights of the holders of Preferred Stock shall terminate
subject to revesting in the event of each and every subsequent event of the
character indicated above. Any rights under this Section 3(c)(ii) shall be in
addition to the right to elect Directors under Sections 3(c)(i) or 3(c)(ii)
above.
(d) (i) The right of holders of shares of Preferred Stock to
take any action as provided in Section 3(c) may be exercised at any annual
meeting of stockholders, special meeting of stockholders called for the purpose
of electing directors, at a special meeting of holders of shares of Preferred
Stock held for such purpose as hereinafter provided, or by the written consent,
delivered to the Secretary of the Company, of the holders of the minimum number
of shares required to take such action, which shall be a majority of the
outstanding shares of Preferred Stock unless otherwise required by law.
So long as such right to vote continues (and unless such right has
been exercised by written consent of the minimum number of shares required to
take such action), the President of the Company may call, and upon the written
request of holders of record of at least 5% of the outstanding shares of
Preferred Stock, addressed to the Secretary of the Company at the principal
office of the Company, shall call, a special meeting of the holders of shares
of Preferred Stock entitled to vote as provided herein. Such meeting shall be
held within 30 days after delivery of such request to the Secretary, at the
place and upon the notice provided by law and in the by-laws of the Company for
the holding of meetings of stockholders.
(ii) At each meeting of stockholders at which the holders of
shares of Preferred Stock shall have the right, voting separately as a single
class, to take any action, the presence in person or by proxy of the holders of
record of a majority of the total number of shares of Preferred Stock then
outstanding and entitled to vote on the matter shall be necessary and
sufficient to constitute a quorum. At any such meeting or at any adjournment
thereof:
(A) the absence of a quorum of the holders of shares of
Preferred Stock shall not prevent the election of directors other than
those to be elected by the holders of shares of Preferred Stock, and the
absence of a quorum of the holders of shares of any other class or series
of capital stock shall not prevent the election of directors to
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<PAGE>
be elected by the holders of shares of Preferred Stock, or the taking of
any action as provided in this Section 3; and
(B) in the absence of a quorum of the holders of shares of
Preferred Stock, a majority of the holders of such shares present in
person or by proxy shall have the power to adjourn the meeting as to the
actions to be taken by the holders of shares of Preferred Stock from time
to time and place to place without notice other than announcement at the
meeting until a quorum shall be present.
For taking of any action as provided in Section 3(b) or Section
3(c) by the holders of shares of Preferred Stock, each such holder shall have
one vote for each share of such stock standing in his name on the transfer
books of the Company as of any record date filed for such purpose or, if no
such date be fixed, at the close of business on the Business Day next preceding
the day on which notice is given, or if notice is waived, at the close of
business on the Business Day next preceding the day on which the meeting is
held; provided, however, that shares of Preferred Stock owned by the
-------- -------
Company or any Affiliate of the Company shall not be deemed to be outstanding
for purposes of taking any action as provided in this Section 3.
Each director elected by the holders of shares of Preferred Stock
as provided in Section 3(c) shall, unless his or her term shall expire earlier
in accordance with the provisions thereof, hold office until the annual meeting
of stockholders next succeeding his election or until his or her successor, if
any, is elected and qualified.
If any director so elected by the holders of Preferred Stock shall
cease to serve as a director before his or her term shall expire (except by
reason of the termination of the voting rights accorded to the holders of
Preferred Stock in accordance with Section 3(c)), the holders of the Preferred
Stock then outstanding and entitled to vote for such director may, by written
consent as provided herein, or at a special meeting of such holders called as
provided herein, elect a successor to hold office for the unexpired term of the
director whose place shall be vacant.
Any director elected by the holders of shares of Preferred Stock
voting separately as a single class may be removed from office with or without
cause by the vote or written consent of the holders of at least a majority of
the outstanding shares of Preferred Stock, at the time of removal. A special
meeting of the holders of shares of Preferred Stock may be called in accordance
with the procedures set forth in Section 3(d)(i).
-7-
<PAGE>
Section 4. Certain Restrictions.
--------------------
(a) Whenever quarterly dividends payable on shares of Preferred
Stock as provided in Section 2 are not paid in full, at such time and
thereafter until all unpaid dividends payable, whether or not declared, on the
outstanding shares of Preferred Stock shall have been paid in full or declared
and set apart for payment, or whenever the Company shall not have converted
shares of Preferred Stock at a time required by Section 8, at such time and
thereafter until all conversion obligations provided in Section 8 that have
come due shall have been satisfied or all necessary funds have been set apart
for payment, the Company shall not: (A) declare or pay dividends, or make any
over distributions, on any shares of Junior Stock, or (B) declare or pay
dividends, or make any other distributions, on any shares of Parity Stock,
except dividends or distributions paid ratably on the Preferred Stock and all
Parity Stock on which dividends are payable or in arrears, in proportion to the
total amounts to which the holders of all shares of the Preferred Stock and
such Parity Stock are then entitled.
(b) Whenever dividends payable on shares of Preferred Stock as
provided in Section 2 are not paid in full, at such time and thereafter until
all unpaid dividends payable, whether or not declared, on the outstanding
shares of Preferred Stock shall have been paid in full or declared and set
apart for payment, or whenever the Company shall not have converted shares of
Preferred Stock at a time required by Section 8, at such time and thereafter
until all conversion obligations provided in Section 8 that have come due shall
have been satisfied or all necessary funds have been set apart for payment, the
Company shall not redeem, purchase or otherwise acquire for consideration, or
require the conversion of, any shares of Junior Stock or Parity Stock;
provided, however, that (A) the Company may accept shares of any Senior
- -------- -------
Stock, Parity Stock or Junior Stock for conversion into Junior Stock and (B)
the Company may at any time redeem, purchase or otherwise acquire shares of any
Parity Stock pursuant to any mandatory redemption, put, sinking fund or other
similar obligation contained in such Parity Stock, pro rata with the Preferred
Stock in proportion to the total amount then required to be applied by the
Company to redeem, repurchase, convert, exchange or otherwise acquire shares of
Preferred Stock and shares of such Parity Stock.
(c) The Company shall not permit any Subsidiary of the Company,
or cause any other Person, to purchase or otherwise acquire for consideration
any shares of capital stock of the Company unless the Company could, pursuant
to Section 4(b), purchase such shares at such time and in such manner.
-8-
<PAGE>
Section 5. Redemption.
----------
(a) The Company shall not have any right to redeem any shares of
Preferred Stock prior to fourth anniversary of Issue Date. On and after such
date, subject to the restrictions contained in Section 4, the Company shall
have the right, at its sole option and election, to redeem the shares of
Preferred Stock, in integral multiples of 5,000 shares, on not less than 30
days notice of the date of redemption (any such redemption date pursuant to
this Section 5(a) being referred to herein as an "Optional Redemption
-------- ----------
Date") at a price per share (the "Optional Redemption Price")
- ---- -------- ---------- -----
equal to (x) 100% of the Liquidation Preference of such share plus (y) an
amount per share equal to all accrued and unpaid dividends thereon, whether or
not declared or payable, to the applicable Optional Redemption Date, in
immediately available funds.
(b) If pursuant to Section 5(a) less than all shares of Preferred
Stock at the time outstanding are to be redeemed, the shares to be redeemed
shall be determined pro rata or, if the shares of Preferred Stock are then
publicly held, by lot.
(c) Notice of any redemption of shares of Preferred Stock
pursuant to Section 5(a) shall, unless there shall be less than 100 holders of
record of the Preferred Stock, be given by publication in a newspaper of
general circulation in the Borough of Manhattan, The City of New York (if such
publication shall be required by applicable law, rule, regulation or securities
exchange requirement), not less than 30, nor more than 60, days prior to the
date fixed for redemption; and, in any case, a similar notice shall be mailed
at least 30, but not more than 60, days prior to the date fixed for redemption
to each holder of shares of Preferred Stock to be redeemed, at such holder's
address as it appears on the transfer books of the Company. In order to
facilitate the redemption of shares of Preferred Stock, the Board of Directors
may fix a record date for the determination of shares of Preferred Stock to be
redeemed, or may cause the transfer books of the Company for the Preferred
Stock to be closed, not more than 60 days or less than 30 days prior to the
date fixed for such redemption.
(d) On the date of any redemption being made pursuant to Section
5(a) which is specified in a notice given pursuant to Section 5(c), the Company
shall, and at any time after such notice shall have been mailed and before the
date of redemption the Company may, deposit for the benefit of the holders of
shares of Preferred Stock to be redeemed the funds necessary for such
redemption with a bank or trust company in the Borough of Manhattan, The City
of New York, having a capital and surplus of at least $100,000,000. Any moneys
so deposited by the Company and unclaimed at the end of two years from the date
designated for such redemption shall revert to the general funds of the
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<PAGE>
Company. After such reversion, any such bank or trust company shall, upon
demand, pay over to the Company such unclaimed amounts, and thereupon such bank
or trust company shall be relieved of all responsibility in respect thereof and
any holder of shares of Preferred Stock to be redeemed shall look only to the
Company for the payment of the Optional Redemption Price. Any interest accrued
on funds deposited pursuant to this Section 5(d) shall be paid from time to
time to the Company for its own account.
(e) Notice of redemption having been given as aforesaid, upon the
deposit of funds pursuant to Section 5(d) in respect of shares of Preferred
Stock to be redeemed pursuant to Section 5(a), notwithstanding that any
certificates for such shares shall not have been surrendered for cancellation,
from and after the date of redemption (i) the shares of Preferred Stock
represented thereby shall no longer be deemed outstanding, (ii) the rights to
receive dividends thereon shall cease to accrue, (iii) all rights of the
holders of shares of Preferred Stock to be redeemed shall cease and terminate,
excepting only the right to receive the Optional Redemption Price therefor and
the right to convert such shares into shares of Common Stock until the close of
business on the Business Day immediately preceding the date of redemption in
accordance with Section 8; provided, however, that if the Company shall
-------- -------
default in the payment of the Optional Redemption Price, the shares of
Preferred Stock that were to be redeemed shall thereafter be deemed to be
outstanding and the holders thereof shall have all of the rights of a holder of
Preferred Stock until such time as such default shall have been waived by
holders of at least a majority of the then outstanding shares of Preferred
Stock.
Section 6. Reacquired Shares.
-----------------
Any shares of Preferred Stock converted, exchanged, redeemed,
purchased or otherwise acquired by the Company or any of its Subsidiaries or
other Affiliates in any manner whatsoever shall be retired and canceled
promptly after the acquisition thereof. All such shares of Preferred Stock
shall upon their cancellation become authorized but unissued shares of
preferred stock, $.01 par value, of the Company and, upon the filing of an
appropriate certificate with the Secretary of State of the State of Delaware,
may be reissued as part of another series of preferred stock, par value S.01
per share, of the Company subject to the conditions or restrictions on issuance
set forth herein, but in any event may not be reissued as shares of Preferred
Stock or other Parity Stock unless all of the shares of Preferred Stock issued
on the Issue Date or as PIK Dividend shall have already been redeemed,
converted or exchanged.
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<PAGE>
Section 7. Liquidation, Dissolution or Winding Up.
--------------------------------------
(a) If the Company shall commence a voluntary case under the
United States bankruptcy laws or any applicable bankruptcy, insolvency or
similar law of any other country, or consent to the entry of an order for
relief in an involuntary case under any such law or to the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Company or of any substantial part of its property, or
make an assignment for the benefit of its creditors, or admit in writing its
inability to pay its debts generally as they become due, or if a decree or
order for relief in respect of the Company shall be entered by a court having
jurisdiction in the premises in an involuntary case under the United States
bankruptcy laws or any applicable bankruptcy, insolvency or similar law of any
other country, or appointing a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Company or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and on account of any such event the Company shall liquidate,
dissolve or wind up, or if the Company shall otherwise liquidate, dissolve or
wind up, no distribution shall be made (i) to the holders of shares of Junior
Stock unless, prior thereto, the holders of shares of Preferred Stock, subject
to Section 8, shall have received the Liquidation Preference, plus all accrued
and unpaid dividends, whether or not declared or currently payable, to the date
of distribution, with respect to each share, or (ii) to the holders of shares
of Parity Stock, except distributions made ratably on the Preferred Stock and
all other Parity Stock in proportion to the total amounts to which the holders
of all shares of the Preferred Stock and other Parity Stock are entitled upon
such liquidation, dissolution or winding up.
(b) Neither the consolidation or merger of the Company with or
into any other Person nor the sale or other distribution to another Person of
all or substantially all the assets, property or business of the Company shall
be deemed to be a liquidation, dissolution or winding up of the Company for
purposes of this Section 7.
Section 8. Conversion.
----------
(a) Any holder of Preferred Stock shall have the right, at its
option, at any time and from time to time, to convert, subject to the terms and
provisions of this Section 8, any or all of such holder's shares of Preferred
Stock into such number of fully paid and non-assessable shares of Common Stock
as is equal, subject to Section 8(g), to the product of the number of shares of
Preferred Stock being so converted, multiplied by the quotient of (i) the
Liquidation Preference divided by the
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<PAGE>
Conversion Price (as defined below) then in effect, except that with respect to
any share which shall be called for redemption, such right shall terminate at
the close of business on the Business Day immediately prior to the date of
redemption for such share, unless in any such case the Company shall default in
performance or payment due upon redemption thereof. The Conversion Price shall
be $1.9375 per share, subject to adjustment as set forth in Section 8(d). Such
conversion right shall be exercised by the surrender of the shares of Preferred
Stock to be converted (the "Shares") to the Company at any time during
------
usual business hours at its principal place of business to be maintained by it,
accompanied by written notice that the holder elects to convert such Shares and
specifying the name or names (with address) in which a certificate or
certificates for shares of Common Stock are to be issued and (if so required by
the Company) by a written instrument or instruments of transfer in form
reasonably satisfactory to the Company duly executed by the holder or its duly
authorized legal representative and transfer tax stamps or funds therefor, if
required pursuant to Section 8(k). All Shares surrendered for conversion shall
be delivered to the Company for cancellation and canceled by it and no Shares
shall be issued in lieu thereof.
(b) As promptly as practicable after the surrender, as herein
provided, of any Shares for conversion pursuant to Section 8(a), the Company
shall deliver to or upon the written order of the holder of the Shares so
surrendered a certificate or certificates representing the number of fully paid
and non-assessable shares of Common Stock into which such Shares may be or have
been converted in accordance with the provisions of this Section 8. Subject to
the following provisions of this Section 8, such conversion shall be deemed to
have been made immediately prior to the close of business on the date that such
Shares shall have been surrendered in satisfactory form for conversion, and the
Person or Persons entitled to receive the Common Stock deliverable upon
conversion of such Shares shall be treated for all purposes as having become
the record holder or holders of such Common Stock at such appropriate time, and
such conversion shall be at the Conversion Price in effect at such time;
provided, however, that no surrender shall be effective to constitute
- -------- -------
the Person or Persons entitled to receive the Common Stock deliverable upon
such conversion as the record holder or holders of such Common Stock while the
share transfer books of the Company shall be closed (but not for any period in
excess of five days), but such surrender shall be effective to constitute the
Person or Persons entitled to receive such Common Stock as the record holder or
holders thereof for all purposes immediately prior to the close of business on
the next preceding day on which such share transfer books are open, and such
conversion shall be deemed to have been made at, and shall be made at the
Conversion Price in effect at, such time on such next preceding day. In case
of the redemption of any shares of Preferred Stock pursuant
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<PAGE>
to Section 5(a) or 5(b), the right of conversion shall cease and terminate, as
to the shares to be redeemed, at the close of business on the Business Day
immediately prior to the date fixed for redemption, unless the Company shall
default (i) in the payment of the applicable redemption price for the shares to
be redeemed or the amounts, if any, payable pursuant to Section 8(c) or (ii) in
the performance of its obligation to issue Common Stock in exchange therefor,
as the case may be.
If the last day for the exercise of the conversion right shall not
be a Business Day, then such conversion right may be exercised on the next
preceding Business Day.
(c) To the extent permitted by law, when shares of Preferred
Stock are converted, all dividends accrued and unpaid (whether or not declared
or currently payable) on the Preferred Stock so converted to the date of
conversion shall be immediately due and payable and must accompany the shares
of Common Stock issued upon such conversion.
(d) The Conversion Price shall be subject to adjustment as
follows:
(i) In case the Company shall at any time or from time to
time (A) pay a dividend or make a distribution (other than a dividend or
distribution paid or made to holders of shares of Preferred Stock in the manner
provided in Section 2(d)) on the outstanding shares of any of its common stock
in capital stock (which, for purposes of this Section 8(d) shall include,
without limitation, any dividends or distributions in the form of options,
warrants or other rights to acquire capital stock) of the Company or any
Subsidiary or Affiliate thereof, (B) subdivide the outstanding shares of any of
its common stock into a large number of shares, (C) combine the outstanding
shares of any of its common stock into a smaller number of shares, (D) issue
any shares of its capital stock in a reclassification of any of its common
stock or (E) pay a dividend or make distribution (other than a dividend or
distribution paid or made to holders of shares of Preferred Stock in the manner
provided in Section 2(d)) on the outstanding shares of any of its common stock
in shares of its capital stock pursuant to a shareholder rights plan, "poison
pill" or similar arrangement, then, and in each such case, the Conversion Price
in effect immediately prior to such event shall be adjusted (and any other
appropriate actions shall be taken by the Company) so that the holder of any
share of Preferred Stock thereafter surrendered for conversion shall be
entitled to receive the number of shares of Common Stock or other securities of
the Company that such holder would have owned or would have been entitled to
receive upon or by reason of any of the events described above, had such share
of Preferred Stock been converted immediately prior to the occurrence of such
event. An adjustment made pursuant to this Section 8(d)(i) shall become
effective
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<PAGE>
retroactively (A) in the case of any such dividend or distribution, to a date
immediately following the close of business on the record date for the
determination of holders of any of its common stock entitled to receive such
dividend or distribution or (B) in the case of any such subdivision,
combination or reclassification, to the close of business on the day upon which
such corporate action becomes effective.
(ii) In case the Company shall at any time or from time to
time issue or sell shares of any of its common stock (or securities convertible
into or exchangeable for shares of common stock, or any options, warrants or
other rights to acquire shares of common stock) at a price per share that is
less than the Current Market Price per share of such common stock then in
effect as of the record date referred to in the following sentence (the
"Relevant Date") (treating the price per share of common stock, in the
-------- ----
case of the issuance of any security convertible or exchangeable or exercisable
into common stock, as equal to (A) the sum of the price for such security
convertible, exchangeable or exercisable into common stock plus any additional
consideration payable (without regard to any anti-dilution adjustments) upon
the conversion, exchange or exercise of such security into common stock divided
by (B) the number of shares of common stock initially underlying such
convertible, exchangeable or exercisable security), other than issuances or
sales for which an adjustment is made pursuant to another paragraph of this
Section 8(d), then, and in each such case, the Conversion Price then in effect
shall be adjusted by dividing the Conversion Price in effect on the day
immediately prior to such Relevant Date by a fraction (x) the numerator of
which shall be the sum of the number of shares of common stock outstanding on
the Relevant Date plus the number of additional shares of common stock issued
or to be issued (or the maximum number into which such convertible or
exchangeable securities initially may convert or exchange or for which such
options, warrants or other rights initially may be exercised) and (y) the
denominator of which shall be the sum of the number of shares of common stock
outstanding on the Relevant Date plus the number of shares of common stock
which the aggregate consideration for the total number of such additional
shares of common stock so issued (or into which such convertible or
exchangeable securities may convert or exchange or for which such options,
warrants or other rights may be exercised plus the aggregate amount of any
additional consideration initially payable upon conversion, exchange or
exercise of such security) would purchase at the Current Market Price per share
of common stock on the Relevant Date. Such adjustment shall be made whenever
such shares, securities, options, warrants or other rights are issued, and
shall become effective retroactively to a date immediately following the close
of business on the record date for the determination of stockholders entitled
to receive such shares, securities, options, warrants or other rights;
provided, however, that the determination as to whether an
- -------- -------
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<PAGE>
adjustment is required to be made pursuant to this Section 8(d)(ii) shall only
be made upon the issuance of such shares or such convertible or exchangeable
securities, options, warrants or other rights, and not upon the issuance of the
security into which such convertible or exchangeable security converts or
exchanges, or the security underlying such option, warrants or other right;
provided, however, that if any convertible or exchangeable securities,
- -------- -------
options, warrants or other rights (or any portions thereof) which shall have
given rise to an adjustment pursuant to this Section 8(d)(ii) shall have
expired or terminated without the exercise thereof and/or if by reason of the
terms of such convertible or exchangeable securities, options, warrants or
other rights there shall have been an increase or increases, with the passage
of time or otherwise, in the price payable upon the exercise or conversion
thereof, then the Conversion Price hereunder shall be readjusted (but to no
greater extent than originally adjusted) on the basis of (x) eliminating from
the computation any additional shares of common stock corresponding to such
convertible or exchangeable securities, options, warrants or other rights as
shall have expired or terminated, (y) treating the additional shares of common
stock, if any, actually issued or issuable pursuant to the previous exercise of
such convertible or exchangeable securities, options, warrants or other rights
as having been issued for the consideration actually received and receivable
therefor and (z) treating any of such convertible or exchangeable securities,
options, warrants or other rights which remain outstanding as being subject to
exercise or conversion on the basis of such exercise or conversion price as
shall be in effect at the time.
(iii) In case the Company shall at any time or from
time to time distribute to all holders of shares of its common stock (including
any such distribution made in connection with a consolidation or merger in
which the Company is the resulting or surviving corporation and the common
stock is not changed or exchanged) cash, evidences of indebtedness of the
Company or another issuer, securities of the Company or another issuer or other
assets (excluding (A) dividends or distributions paid or made to holders of
shares of Preferred Stock in the manner provided in Section 2(d), (B) Regular
Dividends and (C) dividends payable in shares of Common Stock for which
adjustment is made under Section 8(d)(i)) or rights or warrants to subscribe
for or purchase securities of the Company (excluding those in respect of which
adjustments in the Conversion Price is made pursuant to Section 8(d)(ii)),
then, and in each such case, the Conversion Price then in effect shall be
adjusted by dividing the Conversion Price in effect immediately prior to the
date of such distribution by a fraction (x) the numerator of which shall be the
Current Market Price of the common stock on the record date referred to below
and (y) the denominator of which shall be such Current Market Price of the
common stock less the then Fair Market Value (as determined in good faith by
the Board of
-15-
<PAGE>
Directors of the Company, a certified resolution with respect to which shall be
mailed to the holders of the Preferred Stock) of the portion of the cash,
evidences of indebtedness, securities or other assets so distributed or of such
subscription rights or warrants applicable to one share of Common Stock (but
such denominator not to be less than one); provided, however, that no
-------- -------
adjustment shall be made with respect to any distribution of rights to purchase
securities of the Company if the holder of shares of Preferred Stock would
otherwise be entitled to receive such rights upon conversion at any time of
shares of Preferred Stock into Common Stock unless such rights are subsequently
redeemed by the Company, in which case such redemption shall be treated for
purposes of this Section 8(d)(iii) as a dividend on the Common Stock. Such
adjustment shall be made whenever any such distribution is made and shall
become effective retroactively to a date immediately following the close of
business on the record date for the determination of stockholders entitled to
receive such distribution.
(iv) In case the Company at any time or from time to time
shall take any action affecting its common stock other than an action described
in any of Section 8(d)(i) through 8(d)(iii), inclusive, or Section 8(h), then,
the Conversion Price shall be adjusted in such manner and at such time as the
Board of Directors of the Company in good faith determines to be equitable in
the circumstances (such determination to be evidenced in a resolution, a
certified copy of which shall be mailed to the holders of the Preferred Stock).
(v) Notwithstanding anything herein to the contrary, no
adjustment under this Section 8(d) need be made to the Conversion Price unless
such adjustment would require an increase or decrease of at least 1% of the
Conversion Price then in effect. Any lesser adjustment shall be carried
forward and shall be made at the time of and together with the next subsequent
adjustment, which, together with any adjustment or adjustments so carried
forward, shall amount to an increase or decrease of at least 1% of such
Conversion Price. Any adjustment to the Conversion Price carried forward and
not theretofore made shall be made immediately prior to the conversion of any
shares of Preferred Stock pursuant hereto.
(e) If the Company shall take a record of the holders of any of
its common stock for the purpose of entitling them to receive a dividend or
other distribution, and shall thereafter and before the distribution to
stockholders thereof legally abandon its plan to pay or deliver such dividend
or distribution, then thereafter no adjustment in the Conversion Price then in
effect shall be required by reason of the taking of such record.
(f) Upon any increase or decrease in the Conversion Price, then,
and in each such case, the Company promptly shall
-16-
<PAGE>
deliver to each registered holder of Preferred Stock at least 10 Business Days
prior to effecting any of the foregoing transactions a certificate, signed by
the President or a Vice-President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the Company, setting
forth in reasonable detail the event requiring the adjustment and the method by
which such adjustment was calculated and specifying the increased or decreased
Conversion Price then in effect following such adjustment.
(g) No fractional shares or scrip representing fractional shares
shall be issued upon the conversion of any shares of Preferred Stock. If more
than one share of Preferred Stock shall be surrendered for conversion at one
time by the same holder, the number of full shares of Common Stock issuable
upon conversion thereof shall be computed on the basis of the aggregate number
of the shares of Preferred Stock so surrendered. If the conversion of any
share or shares of Preferred Stock results in a fraction, an amount equal to
such fraction multiplied by the Current Market Price of the Common Stock on the
Business Day preceding the day of conversion shall be paid to such holder in
cash by the Company.
(h) In case of any capital reorganization or reclassification or
other change of outstanding shares of common stock (other than a change in par
value, or from par value to no par value, or from no par value to par value),
or in case of any consolidation or merger of the Company with or into another
Person (other than a consolidation or merger in which the Company is the
resulting or surviving Person and which does not result in any reclassification
or change of outstanding Common Stock), or in case of any sale or other
disposition to another Person of all or substantially all of the assets of the
Company (any of the foregoing, a "Transaction"), the Company, or such
-----------
successor or purchasing Person, as the case may be, shall execute and deliver
to each holder of Preferred Stock at least 10 Business Days prior to effecting
any of the foregoing Transactions a certificate that the holder of each share
of Preferred Stock then outstanding shall have the right thereafter to convert
such share of Preferred Stock into the kind and amount of shares of stock or
other securities (of the Company or another issuer) or property or cash
receivable upon such Transaction by a holder of the number of shares of Common
Stock into which such share of Preferred Stock could have been converted
immediately prior to such Transaction. Such certificate shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 8. If, in the case of any such
Transaction, the stock, other securities, cash or property receivable thereupon
by a holder of Common Stock includes shares of stock or other securities of a
Person other than the successor or purchasing Person and other than the
Company, which controls or is controlled by the successor or
-17-
<PAGE>
purchasing Person or which, in connection with such Transaction, issues stock,
securities, other property or cash to holders of Common Stock, then such
certificate also shall be executed by such Person, and such Person shall, in
such certificate, specifically acknowledge the obligations of such successor or
purchasing Person and acknowledge its obligations to issue such stock,
securities, other property or cash to the holders of Preferred Stock upon
conversion of the shares of Preferred Stock as provided above. The provisions
of this Section 8(h) and any equivalent thereof in any such certificate
similarly shall apply to successive Transactions.
(i) In case at any time or from time to time:
(A) the Company shall declare a dividend (or any other
distribution) on or with respect to its common stock;
(B) the Company shall authorize the granting to the holders
of its common stock of rights or warrants to subscribe for or purchase any
shares of stock of any class or of any other rights or warrants;
(C) there shall be any reclassification of the common
stock, or any consolidation or merger to which the Company is a party and for
which approval of any shareholders of the Company is required, or any sale or
other disposition of all or substantially all of the assets of the Company; or
(D) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then the Company shall mail to each holder of shares of Preferred Stock at such
holder's address as it appears on the transfer books of the Company, as
promptly as possible but in any event at least ten days prior to the applicable
date hereinafter specified, a notice stating (x) the date on which a record is
to be taken for the purpose of such dividend, distribution or rights or
warrants or, if a record is not to be taken, the date as of which the holders
of Common Stock of record to be entitled to such dividend, distribution or
rights are to be determined, or (y) the date on which such reclassification,
consolidation, merger, sale, conveyance, dissolution, liquidation or winding up
is expected to become effective; provided that in the case of any event to
--------
which Section 8(h) applies, the Company shall give at least 10 days' prior
written notice as aforesaid. Such notice also shall specify the date as of
which it is expected that holders of Common Stock of record shall be entitled
to exchange their Common Stock for shares of stock or other securities or
property or cash deliverable upon such reclassification, consolidation, merger,
sale, conveyance, dissolution, liquidation or winding up.
-18-
<PAGE>
(j) The Company shall at all times reserve and keep available for
issuance upon the conversion of the Preferred Stock, such number of its
authorized but unissued shares of Common Stock as will from time to time be
sufficient to permit the conversion of all outstanding shares of Preferred
Stock, and shall take all action required to increase the authorized number of
shares of Common Stock if at any time there shall be insufficient authorized
but unissued shares of Common Stock to permit such reservation or to permit the
conversion of all outstanding shares of Preferred Stock.
(k) The issuance or delivery of certificates for Common Stock
upon the conversion of shares of Preferred Stock pursuant to this Section 8
shall be made without charge to the converting holder of shares of Preferred
Stock for such certificates or for any taxes in respect of the issuance or
delivery of such certificates or the securities represented thereby, and such
certificates shall be issued or delivered in the respective names of, or in
such names as may be directed by, the holders of the shares of Preferred Stock
converted; provided, however, that the Company shall not be required to
-------- -------
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate in a name other than that of the
holder of the shares of Preferred Stock converted, and the Company shall not be
required to issue or deliver such certificate unless or until the Person or
Persons requesting the issuance or delivery thereof shall have paid to the
Company the amount of such tax or shall have established to the reasonable
satisfaction of the Company that such tax has been paid.
Section 9. Termination of Certain Rights.
-----------------------------
Upon transfer of the shares of Preferred Stock by the original
holder of Preferred Stock or of control of such holder to any Person other than
its Affiliate or a Person who is controlled by a member of the family who
controls the original holder of Preferred Stock, the rights of a holder of
Preferred Stock set forth in Sections 3(b)(vi), 3(c)(i) and 3(c)(ii) shall
terminate with respect to the shares of Preferred Stock so transferred or with
respect to the shares of Preferred Stock held by such holder, as the case may
be.
Section 10. Certain Remedies.
----------------
Any registered holder of Preferred Stock shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of this
Certificate of Designation and to enforce specifically the terms and provisions
of this Certificate of Designation in any court of the United States or any
state
-19-
<PAGE>
thereof having jurisdiction, this being in addition to any other remedy to
which such holder may be entitled at law or equity.
Section 11. Definitions.
-----------
For the purposes of this Certificate of Designation of Preferred
Stock, the following terms shall have the meanings indicated:
"Affiliate" shall have the meaning ascribed to such term in
---------
Rule 12b-2 of the General Rules and Regulations under the Exchange Act.
"Business Day" shall mean any day other than a Saturday, Sunday
------------
or other day on which commercial banks in the City of New York are authorized
or required by law or executive order to close.
"Common Stock" of the Company shall mean the Common Stock, par
------------
value $0.01 per share, of the Company issued from time to time.
"Conversion Price" shall have the meaning given it in Section 8
----------------
hereof.
"Current Market Price" per share shall mean, on any date
--------------------
specified herein for the determination thereof, (a) the average daily Market
Price of the Common Stock for those days during the period of 30 days, ending
on such date, on which the national securities exchanges were open for trading,
and (b) if the common stock is not then listed or admitted to trading on any
national securities exchange or quoted in the over-counter market, the Market
Price on such date determined in the second sentence of the definition of
"Market Price."
"Exchange Act" shall mean the Securities Exchange Act of 1934,
------------
as amended, and the rules and regulations of the Securities and Exchange
Commission thereunder.
"Issue Date" shall mean the first date on which shares of
----------
Preferred Stock are issued.
"Junior Stock" shall mean any capital stock of the Company
------------
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Preferred Stock.
"Liquidation Preference" with respect to a share of Preferred
----------------------
Stock shall mean $1.9375.
"Market Price" shall mean, per share of Common Stock, on any
------------
date specified herein: (a) the closing price per share of
-20-
<PAGE>
the Common Stock on such date published in The Wall Street Journal or, if
-----------------------
no such closing price on such date is published in The Wall Street Journal,
-----------------------
the average of the closing bid and asked prices on such date, as officially
reported on the principal national securities exchange on which the Common
Stock is then listed or admitted to trading; or (b) if the Common Stock is not
then listed or admitted to trading on any national securities exchange but is
designated as a national market system security by the NASD, the last trading
price of the Common Stock on such date; or (c) if there shall have been no
trading on such date or if the Common Stock is not so designated, the average
of the reported closing bid and asked prices of the Common Stock, on such date
as shown by NASDAQ and reported by any member firm of the New York Stock
Exchange, Inc. selected by the Company. If the Common Stock is not then listed
or admitted to trading on any national securities exchange or quoted in the
over-the-counter market, "Market Price" shall mean a market price per share
determined at the Company's expense by an appraiser chosen by the holders of a
majority of the shares of Preferred Stock or, if no such appraiser is so chosen
more than 20 Business Days after notice of the necessity of such calculation
shall have been delivered by the Company to the holders of Preferred Stock,
then by an appraiser chosen by the Company.
"NASD" shall mean the National Association of Securities
----
Dealers, Inc.
"NASDAQ" shall mean the National Market System of the National
------
Association of Securities Dealers, Inc. Automated Quotations System.
"Parity Stock" shall mean any capital stock of the Company,
------------
including the Preferred Stock, ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Preferred Stock.
"Person" shall mean any individual, firm, corporation,
------
partnership, trust, incorporated or unincorporated association, joint venture,
joint stock company, government (or an agency or political subdivision thereof)
or other entity of any kind, and shall include any successor (by merger or
otherwise) of such entity.
"Regular Dividend" shall mean a dividend on any of the
----------------
Company's Common Stock declared by the Board of Directors of the Company with
respect to the most recent completed quarter of the fiscal year of the Company
(the "Quarter") that satisfies the following conditions: (i) the product of
-------
four times the per share amount of such Common Stock dividend declared with
respect to such Quarter shall be less than or equal to 110% of the aggregate
per share amounts of the Common Stock dividends declared and paid with respect
to the immediately preceding four fiscal quarters and (ii) the aggregate per
share amounts of Common Stock
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<PAGE>
dividends declared with respect to such Quarter and the immediately preceding
three fiscal quarters shall be less than or equal to 25% of the consolidated
net income of the Company and its Subsidiaries (as determined in accordance
with generally accepted accounting principles) for the 12-month period ending
on the last day of such Quarter. In the case of a dividend on the Common Stock
declared by the Board of Directors of the Company with respect to a semi-annual
or annual period during which no quarterly dividends were declared, the
preceding formula will be adjusted and applied appropriately to determine
whether such dividend is a Regular Dividend.
"Senior Stock" shall mean any capital stock of the Company
------------
ranking senior (either as to dividends or upon liquidation, dissolution or
winding up) to the Preferred Stock.
"Stock Purchase Agreement" shall mean the Convertible Preferred
------------------------
Stock Purchase Agreement, dated as of May 3, 1996 by and between the Company
and Enviro Partners, L.P., as the same may be amended from time to time.
"Subsidiary" of any Person shall mean any corporation or other
----------
entity of which a majority of the voting power of the voting equity securities
or equity interest, or rights to profits, is owned, directly or indirectly, by
such Person.
-22-
<PAGE>
IN WITNESS WHEREOF, U.S. Energy Systems, Inc. has caused this
Certificate to be duly executed in its corporate name on this __th day of __,
1996.
U.S. ENERGY SYSTEMS, INC.
By:
--------------------------
Name:
Title:
Attest:
- ----------------------------
Name:
Title:
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<PAGE>
EXHIBIT 10.25(A)
LONG-TERM AGREEMENT
FOR THE PURCHASE AND SALE OF ELECTRICITY
BETWEEN
SIERRA PACIFIC POWER COMPANY
AND
FAR WEST CAPITAL, INC.
<PAGE>
LONG-TERM AGREEMENT
FOR THE PURCHASE AND SALE OF ELECTRICITY
BETWEEN
SIERRA PACIFIC POWER COMPANY
AND
FAR WEST CAPITAL, INC.
Table of Contents
Section Title Page
- ------- ----- ----
1. RECITALS.................................... 1
2. DEFINITIONS................................. 2
3. EXHIBITS.................................... 4
4. TERM AND TERMINATION........................ 4
5. REMEDIES.................................... 5
6. SALE OF CAPACITY AND ENERGY................. 5
7. DETERMINATION OF COMMERCIAL OPERATION DATE
AND CONTRACT RATING......................... 6
8. RATE........................................ 7
9. PROJECT SCHEDULE............................ 9
10. METERING.................................... 9
11. SELLER'S PURCHASE OF CAPACITY AND ENERGY.... 10
12. PAYMENT..................................... 10
13. MAINTENANCE................................. 11
14. CONTINUITY OF DELIVERIES.................... 12
15. PROJECT DESIGN, CONSTRUCTION, AND OPERATION. 12
16. INTERCONNECTION............................. 14
17. CONDITIONS.................................. 15
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<PAGE>
18. LIABILITY AND INDEMNIFICATION.............. 16
19. INSURANCE.................................. 17
20. PERMITS, LICENSES, AND AUTHORIZATIONS...... 18
21. NOTICES.................................... 18
22. FORCE MAJEURE.............................. 19
23. SUCCESSORS IN INTEREST..................... 21
24. ASSIGNMENT................................. 21
25. COLLATERAL ASSIGNMENTS..................... 21
26. ENTIRE AGREEMENT........................... 22
27. GOVERNING LAW.............................. 22
28. PSCN APPROVAL.............................. 22
29. NOTICE OF SALE OF PROJECT.................. 23
30. DISPUTE RESOLUTION......................... 24
31. MULTIPLE ORIGINALS......................... 24
-ii-
<PAGE>
LONG-TERM AGREEMENT
FOR THE PURCHASE AND SALE
OF ELECTRICITY
THIS AGREEMENT for the purchase and sale of electricity is entered
into as of the date of its execution by and between SIERRA PACIFIC POWER
COMPANY, a Nevada corporation ("Sierra"), and FAR WEST CAPITAL, INC. a Utah
Corporation ("Seller"). Seller and Sierra are sometimes referred to
individually as "Party" and collectively as "Parties."
1. RECITALS. This Agreement is based upon the following facts:
--------
a. Sierra is a public utility engaged in the purchase, production,
transmission, distribution, and sale of electric capacity and energy;
and
b. Seller proposes to construct and own a 2,000 KW geothermal generating
facility located at Steamboat Springs near Sierra's Steamboat
Substation in Washoe County in Sierra's Nevada service territory,
which facility is expected to be certified as a Qualifying Facility
("QF") as that term is defined below; and
c. Seller desires to sell the electric capacity and energy produced at
Seller's generating facility to Sierra pursuant to the provisions of a
long-term contract; and
d. Sierra purchases the capacity and energy produced by Qualifying
Facilities pursuant to provisions of the Public Utility Regulatory
Policies Act of 1978 ("PURPA") and the rules and regulations
promulgated thereunder by the Federal Energy Regulatory Commission
("FERC"), the California Public Utility Commission
<PAGE>
("CPUC"), and the Public Service Commission of Nevada ("PSCN").
In consideration of the premises, and the mutual covenants contained
herein, the Parties agree as follows:
2. DEFINITIONS. When used with initial capitalizations, whether in the
-----------
singular or in the plural, the following terms as used in this agreement
shall have the following meanings:
a. "Adjusted Net Metered Output" shall mean Net Metered Output, as
adjusted for system transmission losses, if any, pursuant to Section
8a.
b. "Agreement" shall mean this Long-Term Agreement for the Purchase and
Sale of Electricity.
c. "Commercial Operation Date" shall mean 2400 hours on the date upon
which Seller's Project meets the criteria set forth in Section 7.
d. "Contract Year" shall mean each one (1) year period commencing on
either the Commercial Operation Date or each anniversary of such date
thereafter, and ending on the next anniversary of the Commercial
Operation Date.
e. "Contract Rating" shall mean that amount, expressed in kilowatts, as
determined in Section 7.
f. "Interconnection Equipment" shall mean the equipment and facilities
required to effect an electrical interface between Sierra's electrical
system and Seller's Project including, but not limited to,
-2-
<PAGE>
electric lines, protective equipment, metering and communication
equipment.
g. "Net Metered Output" shall mean all electric capacity and energy
produced by Seller's Project less Seller's Project Station Use and
transformation and transmission losses, if any, between the meter and
the Point of Delivery.
h. "Point of Delivery" shall mean the point where Seller's electrical
conductors contact Sierra's system as it shall exist whenever the
deliveries are being made.
i. "Prudent Electrical Practice(s)" shall mean those practices, methods,
and equipment, as changed from time to time, that are commonly used in
prudent electrical engineering and operations to design and operate
electric equipment.
j. "Qualifying Facility" shall mean a cogeneration or small power
production facility which meets the criteria as defined in Title 18,
Code of Federal Regulations, Section 292.201 through 292.207.
k. "Scheduled Maintenance Periods" shall mean those times during which
Seller's Project is shut down for routine scheduled maintenance.
l. "Seller's Project" or "Project" shall mean the generating facilities
owned and operated by the Seller as defined in Section 6.
m. "Station Use" shall mean the capacity and energy used to operate the
Project's auxiliary equipment. Auxiliary equipment includes, but is
not limited to,
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<PAGE>
forced and induced draft fans, well pumps, cooling towers, boiler feed
pumps, lubricating oil systems, plant lighting, fuel handling systems,
control systems, and sump pumps.
3. EXHIBITS. The following Exhibits A through N are attached hereto and
--------
incorporated herein by reference. Exhibits C, G, H, I, J and K, upon
approval by the PSCN of any amendments or supplements to, or replacements
of such rules or schedules, shall be modified to reflect such amendments,
supplements, or replacements (Exhibits A, B, D, E, F, L, M and N may be
modified by mutual agreement of the Parties.)
Exhibit A Project Unit Listing
Exhibit B Contract Rating
Exhibit C Schedule CSPP
Exhibit D Payment Schedule
Exhibit E Sample Billing Calculations
Exhibit F Estimated Project Schedule
Exhibit G Rule No. 16, Service Connections, Meters, and
Customer's Facility
Exhibit H Rule No. 17, Meter Tests and Adjustments of Bills
for Error
Exhibit I Rate Schedule FSS, Firm Standby Service
Exhibit J Rule No. 2 Description of Service
Exhibit K Rule No. 15 Cogenerators and Small Power
Producers (QFs)
Exhibit L SPPCo. Engineering Standard 2.2GN02
Exhibit M Facility Wiring Diagram and Specifications
Exhibit N Final Interconnection Drawing
4. TERM AND TERMINATION. This Agreement shall be effective from the date of
--------------------
its execution by both Parties and shall continue thereafter for a term of
thirty (30) years after 2400 hours on the Commercial Operation Date (the
"Term").
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<PAGE>
This Agreement may be terminated at any time by written notice from Sierra
to Seller in the event either of the following conditions occur:
a. Seller fails to meet any one of the Project completion dates specified
in Section 9 in this Agreement.
b. Seller's Project does not deliver any capacity and energy to Sierra
during any continuous 180 day period after the Commercial Operation
Date of such Project and Seller is not exercising reasonable efforts
to resume operation of the Project.
A notice of termination under this section shall be delivered under the
provisions of Section 21.
5. REMEDIES. Upon either Party's failure to perform any condition of this
--------
agreement, the other Party, except to the extent specifically limited by
this Agreement, may exercise any rights or remedies it may have in law or
in equity including but not limited to compensation for monetary damages,
injunctive relief and specific performance; provided, however, that neither
Party shall be liable to the other Party for any indirect, consequential,
incidental, punitive or exemplary damages.
6. SALE OF CAPACITY AND ENERGY. Seller shall sell and Sierra shall purchase
---------------------------
all capacity and energy generated, available for sale, and delivered to the
Point of Delivery from Seller's Project. Seller's Project means a
geothermal plant located within Sierra's service territory near Steamboat,
Nevada, consisting of two (2) units with a total site specific nameplate
rating of 2,000 kilowatts. Specific make, model, and generator nameplate
rating for the units are contained in Exhibit A, Project Unit Listing.
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<PAGE>
Seller's Project is expected to deliver 1800 kilowatts maximum to Sierra
during any hour, subject to seasonal variation. Seller expects to provide
14,000,000 kilowatt hours of energy to Sierra during each Contract Year.
7. DETERMINATION OF COMMERCIAL OPERATION DATE AND CONTRACT
--------------------------------------------------------
RATING.
-------
a. Prior to declaring the Project commercially operable, Seller shall
demonstrate the Project capability by way of a shakedown period of
operation. The period of sustained operation shall be a minimum of
thirty (30) continuous days during which period the plant shall be
generating a minimum of 500 hours. The average generation net output
level during the 500 hours shall be at least 1200 kW. Seller's
demonstration shall include a showing of the operability of the
Project's auxiliary equipment as noted in Section 2.m.
b. Seller shall notify Sierra that the Project capability demonstration
is complete and certify that the project is commercially operable.
Sierra shall review recorded data to verify the certification.
c. Coincident with or subsequent to Sierra's review of the data, Seller
may begin the test period for determination of the Contract Rating.
Said test period shall consist of 100 hours of continuous operation,
designated by Seller, and delivery of capacity and energy by the
Project to Sierra. As soon as possible after the completion of the
test period of 100 hours, Seller shall notify Sierra that the test is
complete, and specify the beginning and ending hour of said 100 hour
test period.
-6-
<PAGE>
d. Sierra will determine, (1) the average Adjusted Net Metered Output
during the 100-hour period, and (2) the average of the 25 maximum on-
peak and mid-peak hours of Adjusted Net Metered Output during the test
period, regardless of whether said 25 hours are continuous. The
Contract Rating for purposes of this Agreement shall be the lesser of
(1) the 100 hour average divided by eight-tenth (0.80) or (2) the
average of the 25 maximum on-peak and mid-peak hours in that time
period.
e. In accordance with the provisions of section 21, Sierra shall notify
Seller, as soon as reasonably practicable after Seller's Commercial
Operation Date, of the Contract Rating established under this Section.
Said notification shall be incorporated into this Agreement as Exhibit
B.
8. RATE.
----
a. Net Metered Output quantities shall be reduced to reflect the
additional system transmission losses, if any, that are determined to
be applicable to Seller's Project. The amount of the reduction shall
be deemed zero for purposes of this Agreement. All payments under
this Section shall be based upon such Adjusted Net Metered Output
quantities.
b. Sierra shall pay Seller for the Adjusted Net Metered Output of
Seller's Project produced between the effective date of this Agreement
and 2400 hours on the Commercial Operation Date pursuant to Sierra's
Schedule CSPP, attached hereto and incorporated by reference as
Exhibit C.
-7-
<PAGE>
c. If the Commercial Operation Date of the Project is on or before 2400
hours on December 31, 1988, then
(1) Sierra will pay Seller, during the period commencing on the
Commercial Operation Date and continuing for the first ten (10)
years of the Term, for all Adjusted Net Metered Output purchased
from Seller's Project at a rate calculated at 90% of the rates
set forth in Exhibit D.
(2) Sierra will pay Seller, during the period commencing on the tenth
(10th) anniversary of the Commercial Operation Date and
continuing for the balance of the Term, for all Adjusted Net
Metered Output purchased from Seller's Project under the rates
set forth in Exhibit C.
d. If the Commercial Operation Date is after December 31, 1988 but before
March 31, 1989 then;
(1) Sierra will pay Seller, during the period commencing on the
Commercial Operation Date and continuing for the first ten (10)
years of the Term, for all Adjusted Net Metered Output purchased
from Seller's Project under the rates set forth in Exhibit D.
(2) Sierra will pay Seller, during the period commencing on the tenth
(10th) anniversary of the Commercial Operation Date and
continuing for the balance of the Term, for all Adjusted Net
Metered Output purchased from Seller's Project under the rates
set forth in Exhibit C.
-8-
<PAGE>
9. PROJECT SCHEDULE. Seller's best estimate of its completion dates for
----------------
project activities related to establishing a Commercial Operation Date by
March 31, 1989 are set forth below. Seller shall complete the project
activities by 2400 hours on the date specified for each activity. If any
activity is not completed by the time specified, this Agreement shall
terminate effective 2400 hours on the specified completion date.
ACTIVITY COMPLETION DATE
-------- ---------------
a. Pouring of concrete foundations for the
turbine-generators. August 1, 1988
b. Placement of the two turbine generators
on their foundation and the connection
of all required fuel piping including
geothermal and hydrocarbon fluid piping. Nov. 14, 1988
c. Establish the Commercial Operation Date-
this shall mean the completion of the
activities required in Section 7.a.,
7.b., and 7.c. March 30, 1989
10. METERING. Seller's Adjusted Net Metered Output shall be determined by
--------
meters installed at or compensated to the Point of Delivery and adjusted
for appropriate system transmission losses pursuant to Section 8.a. The
metered quantities shall be the gross Project output less Station Use. All
meters will be sealed, operated, and tested in accordance with Sierra's
Electric Rules No. 16 and No. 17, attached hereto and incorporated by
reference as Exhibits G and H, respectively. Upon approval by the PSCN of
any amendments or supplements to, or replacement of such Rules,
-9-
<PAGE>
Exhibits G and H shall be changed to reflect those amendments, supplements
or replacements.
11. SELLER'S PURCHASE OF CAPACITY AND ENERGY.
----------------------------------------
a. Subject to Sierra's transmission capacity limitations,
Sierra agrees to provide electric capacity and energy to meet Seller's
Station Use at times when Seller's Project generation output is less
than the Project Station Use. Such service shall be provided pursuant
to the applicable rate schedule attached hereto as Exhibit I, which is
applicable to the backup/standby service that is being provided to
Seller under this Agreement. Such sale shall be subject to the
provisions of Rule No. 2 "Description of Service" attached hereto as
Exhibit J.
b. Seller agrees to limit the starting inrush electric current of its
generators and motors so as not to cause more than a 4 percent voltage
dip on Sierra's distribution system to which Seller's Project is
interconnected.
12. PAYMENT.
-------
a. Capacity and energy sold to Sierra, pursuant to Section 6, shall be
determined by meters installed at or compensated to the Point of
Delivery. Such meters shall be read on a monthly billing period basis
by Sierra and resulting amounts shall be used by Sierra to calculate
the payment to Seller pursuant to Section 8. Within thirty (30) days
of receipt of such meter readings, Sierra shall deliver payment for
such capacity and energy to Seller at the address provided in Section
21.
-10-
<PAGE>
b. Electricity supplied to Seller pursuant to Section 11 shall be
paid for by Seller upon receipt of billing from Sierra,
pursuant to Exhibit I. Should Seller fail to pay statement(s)
from Sierra in full pursuant to Exhibit I, Sierra may offset
future payments to Seller under this Agreement by such amounts.
c. Any other payments required to be made to Sierra under this
Agreement shall be made by Seller within thirty (30) days of
receipt of an invoice from Sierra requesting said payment.
Should Seller fail to pay the amount of such invoice, Sierra
may offset future payments to Seller under this Agreement by
such amounts.
13. MAINTENANCE.
-----------
a. Seller shall provide Sierra with a list of Scheduled
Maintenance Periods by July 1 of each calendar year, but not
later than six (6) months prior to beginning the proposed
scheduled maintenance. Sierra shall provide Seller with
scheduled maintenance periods on equipment that will impact the
delivery of capacity and energy from Seller's Project as soon
as reasonably practicable. The Parties shall coordinate with
each other whenever possible to perform scheduled maintenance
in order to minimize the impact on the Parties' systems .
b. In the event the Project must be shut down for unscheduled
maintenance, Seller shall notify Sierra as soon as practicable
of the necessity of such shutdown, the time when such shutdown
has occurred, or will occur, and the anticipated duration of
the shutdown. Seller shall take all reasonable measures and
exercise
-11-
<PAGE>
reasonable efforts to avoid unscheduled maintenance and to limit the
duration of the shutdown.
c. An operating procedures document prepared by Sierra which
details the operation procedures to be followed by the Project
operators ad Sierra's dispatchers shall be executed prior to delivery
of capacity and energy from the Project.
14. CONTINUITY OF DELIVERIES. Subject to Prudent Electrical Practices, Sierra
------------------------
may require Seller to curtail, interrupt, or reduce deliveries of Net
Metered Output, in order for Sierra to construct, install, maintain,
repair, replace, remove, investigate, or inspect any of Sierra's equipment
or any part of its system, or if Sierra determines that curtailment,
interruption, or reduction is necessary because of emergencies, operating
conditions, other than economic dispatch, on its system. Seller shall
reduce its generation at Sierra's request on any hour that Sierra would
otherwise be required to operate Sierra's plants below a minimum
operational level. In such circumstances, Sierra shall not be obligated to
accept deliveries of, or pay Seller for, Adjusted Net Metered Output that
otherwise would have been delivered during such period of curtailment,
interruption, or reduction. Sierra shall use reasonable efforts to resume
acceptance as soon as is reasonably practicable.
15. PROJECT DESIGN, CONSTRUCTION, AND OPERATION.
-------------------------------------------
a. Seller shall, at Seller's expense, design, construct, install,
operate, and maintain Seller's Project. Specific special Project
requirements as noted in the interconnection study conducted by Sierra
dated July 7, 1987 shall be incorporated into the design of the
Project. Seller shall provide Sierra with those
-12-
<PAGE>
specification, drawings, and electrical data concerning the Project
necessary to allow Sierra to make stability and protection studies.
All specifications and changes in specifications, including new or
additional equipment, shall be subject to Sierra's review and
acceptance. Such review and acceptance shall be completed promptly
but in no event longer than sixty (60) days after receipt by Sierra
and shall be for the sole purpose of insuring that Seller's Project is
compatible with Sierra's system. Such acceptance shall not be
unreasonably withheld. Sierra's acceptance of Seller's
specifications, drawings, and electrical data shall not be construed
as confirming nor endorsing the design, nor as a warranty of safety,
durability, or reliability of the Project. Sierra shall not, by
reason of any review, acceptance, or failure to review, be responsible
for the Project, including but not limited to the strength, details of
design, adequacy or capacity thereof, nor shall Sierra's acceptance be
deemed to be an endorsement of the Project.
b. The design and construction of the Project shall be Seller's
responsibility, and Seller shall ensure that the requirements of all
applicable federal, state, and local laws, and all regulations
promulgated by such laws are met. Prior to commencement of generation,
and upon completion of any major changes, Seller at Seller's expense,
shall arrange for the Project to be inspected and approved by
appropriate federal, state, and local officials to the extent required
by applicable law.
c. Once Seller's and Sierra's electrical facilities are connected, both
Parties will operate their respective facilities in accordance with
Rule No. 15 (Exhibit K)
-13-
<PAGE>
Sierra's Specification 2.2 GN 02 (Exhibit L), and revisions and
replacements thereto; the Facility Wiring Diagram and Specifications
(Exhibit M) and the Final Interconnect Drawing agreed upon by the
Parties to this Agreement (Exhibit N). The Parties acknowledge that
with operating experience adjustment of the operating requirements may
be necessary.
d. Sierra's obligation to interconnect Seller's Project is contingent
upon the approval of plans and specifications described in Section 16
below.
16. INTERCONNECTION
---------------
a. Seller shall install all Seller's Interconnection Equipment. Seller's
Interconnection Equipment shall be of utility grade and of a rating
sufficient to accommodate the delivery of the generation under this
Agreement. Seller shall allow Sierra to review the adequacy of all
protective devices and to establish requirements for settings and
periodic testing, provided, however, that neither such action or
inaction by Sierra shall be construed as warranting the safety or
adequacy of Seller's Interconnection Equipment. Seller shall not make
any modification to Seller's Interconnection Equipment which
substantially affects the delivery of electricity without advance
written notification to Sierra and ultimate acceptance of each change
by Sierra. Such review shall be done promptly but in any event no
longer than sixty (60) days from Sierra's receipt of all information
necessary for such review. Such acceptance shall not be unreasonably
withheld. All such equipment installed hereunder shall conform with the
National Electrical Code. Seller shall reimburse Sierra for Sierra's
costs associated
-14-
<PAGE>
with initial and periodic testing of Seller's Interconnection
Equipment.
b. Connection of Seller's Interconnection Equipment to Sierra's system
shall be by or under the direction of Sierra at Seller's expense.
Sierra shall schedule and complete the final interconnection and
testing of the interconnection facilities pursuant to a Special
Facilities Agreement.
c. In the event that it is necessary for Sierra to install any facilities
and equipment on Sierra's system or to reinforce Sierra's system to
accommodate Seller's deliveries, Seller shall reimburse Sierra for all
of Sierra's costs associated therewith, in accordance with the
provisions of a Special Facilities Agreement. Not less often than
annually, Seller shall also reimburse Sierra pursuant to Section 12
above, for all of Sierra's operation and maintenance costs resulting
from Sierra's installation of facilities and equipment under a Special
Facilities Agreement. In addition, Seller shall pay for the cost of
the replacement of any such facilities during the term of this
Agreement. Sierra shall use reasonable efforts to minimize such costs.
17. CONDITIONS. The obligation of Sierra to accept delivery of or purchase
----------
capacity and energy under this Agreement is conditioned upon receipt of copies
of the following documents by Sierra prior to the initial delivery of Adjusted
Net Metered Output.
a. Evidence of the certification of Seller's Project as a cogeneration or
small power production facility by the FERC pursuant to PURPA and the
regulations promulgated pursuant to said Act; and
-15-
<PAGE>
b. Evidence of application for and receipt by Seller of any permits or
other approvals required by Chapter 704 of the Nevada Revised Statutes;
and
c. A statement by independent qualified professionals sufficient to
establish that Seller's Project has geothermal resource supply and
generation equipment capable of producing energy and capacity at its
Contract Rating for the full Term of this Agreement; and
d. Plans and specifications for Seller's Project and Interconnection
Equipment which are acceptable to Sierra, as set forth in Sections 15
and 16 above; and
e. Evidence that Seller has made all filings necessary to qualify to do
business in the State of Nevada.
18. LIABILITY AND INDEMNIFICATION. Each Party shall indemnify and hold
-----------------------------
harmless the other Party against and from any and all loss and liability for
personal injury or property damage, resulting from or arising out of (1) the
engineering, design, construction, maintenance, or operation of or (2) the
making of replacements, additions, or betterments to, the indemnitor's
facilities. Neither Party shall be indemnified for liability or loss to the
extent such liability or loss results from, or is contributed to by, that
Party's negligence or willful misconduct. The indemnitor shall, on the other
Party's request, defend any suit asserting a claim covered by this indemnity,
and shall pay all costs, including reasonable attorney fees, that may be
incurred by the other Party in enforcing this indemnity.
-16-
<PAGE>
19. INSURANCE.
---------
a. Seller shall maintain worker's compensation or self-insurance which
satisfies the applicable requirements of Nevada law. Within thirty
(30) days after execution of this Agreement, Seller shall provide
Sierra with a certificate evidencing such insurance.
b. Prior to connection of the Project to Sierra's system, Seller shall
secure and continuously carry for the Term hereof, with an insurance
company or companies acceptable to Sierra, insurance policies for
bodily injury and property damage liability. Such acceptance shall not
be unreasonably withheld. Such insurance shall include: provisions or
endorsements naming Sierra as additional insured as its interest may
appear; provisions that such insurance is primary insurance with
respect to the interest of Sierra and that any insurance maintained by
Sierra is excess and not contributory insurance with the insurance
required hereunder; cross-liability or severability of insurance
interest clause; and provisions that such policies shall not be
cancelled or their limits of liability reduced without thirty (30)
days prior written notice to Sierra. Initial limits of liability for
all requirements under this Section shall be not less than $1,000,000
for each occurrence.
c. Seller shall provide Sierra with a copy of each insurance policy
required under this Section, certified as a true copy by an authorized
representative of the issuing insurance company or, at the discretion
of Sierra, in lieu thereof, a certificate in a form satisfactory to
Sierra certifying to the issuance of such insurance. Seller shall
submit such documents at
-17-
<PAGE>
the address listed in Section 21 prior to connection of the Project to
Sierra's system and at all other times such as insurance policies are
renewed or changed.
d. If Seller has not obtained such insurance or maintained the status of
such insurance, Seller shall not deliver capacity and energy to
Sierra, and Sierra shall have no obligation to accept any tenders of
delivery until appropriate insurance is obtained or reinstated.
Sierra's obligation to purchase shall be reinstated only upon receipt
of certificates of insurance showing that such insurance has, in fact,
been obtained or reinstated.
20. PERMITS, LICENSES, AND AUTHORIZATIONS. It shall be Seller's responsibility
-------------------------------------
to obtain any and all state, federal, and local permits, licenses, or other
documents necessary to the construction and operation of Seller's Project and
the sale of energy and capacity therefrom to Sierra. If Seller has not obtained
such documents or maintained the status and approvals they represent, Seller
shall not deliver capacity and energy to Sierra and Sierra shall have no
obligation to accept any tenders of delivery until the appropriate documents are
obtained or reinstated. Sierra's obligation to purchase shall be reinstated
only upon receipt of proof that such documents have, in fact, been obtained or
reinstated.
21. NOTICES. Whenever in this Agreement it shall be required, permitted,
-------
or desired that notice or demand be given by either Party to or on the other,
such notice or demand shall be in writing and may be either personally served or
sent by United States mail and shall be deemed to have been given when
personally served or when deposited in the United States mail, certified or
registered, with postage prepaid and properly addressed. For the purposes
hereof, the addresses of the Parties
-18-
<PAGE>
hereto, until notice of a change thereof is given as provided in
this paragraph, shall be as follows:
Sierra: Sierra Pacific Power Company
Attention: Manger, Power and Fuel Contracts
6100 Neil Road, Reno, NV 89511
P.O. Box 10100
Reno, NV 89520
Phone: (702) 689-4889
Telecopy: (702) 689-4202
Seller: Far West Capital, Inc.
Attn: Thomas A. Quinn
1135 East South Union
Avenue Midvale, Utah 84047
Phone: (801) 566-7771
Telecopy: (801) 566-5541
22. FORCE MAJEURE.
-------------
a. The term Force Majeure as used herein means unforeseeable causes beyond
the reasonable control of and without the fault or negligence of the
Party claiming Force Majeure including, but not limited to, acts of
God; labor disputes; sudden actions of the elements; actions by
federal, state, and municipal agencies; and actions of legislative,
judicial, or regulatory bodies which prohibit or seriously impede
performance under or compliance with the terms of this Agreement.
Unless caused by an independent identifiable event of Force Majeure,
the non-availability of geothermal resource supply to generate capacity
and energy from the Project shall not be considered an event of Force
Majeure.
-19-
<PAGE>
b. If either Party, because of Force Majeure, is rendered wholly
or partly unable to perform its obligations under this
Agreement, that Party shall be excused from whatever
performance is affected by the Force Majeure to the extent so
affected, provided that:
(1) The Party claiming Force Majeure promptly gives the other
Party oral notice, followed by written confirmation
describing the particulars of the occurrence.
(2) The suspension of performance is of no greater scope and
of no longer duration than is required by the Force
Majeure.
(3) The nonperforming Party uses its best efforts to remedy
its inability to perform. This subsection shall not
require settlement of any strike, walkout, lockout, or
other labor dispute on terms which in the sole judgment of
the Party involved in the dispute, are contrary to its
interest. It is understood and agreed that settlement of
strikes, walkouts, lockouts, or other disputes shall be at
the sole discretion of the Party having the difficulty.
-20-
<PAGE>
(4) When the nonperforming Party is able to resume performance
of its obligation under this Agreement, that Party shall
give the other Party written notice to that effect.
23. SUCCESSORS IN INTEREST. This Agreement shall be binding on both Parties,
----------------------
and on their heirs, successors in interest, and permitted assigns except as
provided in Section 25 below.
24. ASSIGNMENT. Subject to Section 25 below, neither Party shall voluntarily
----------
assign this Agreement without the prior written consent of the other Party.
Such consent shall not be unreasonably withheld. Any assignment made
without such consent shall be void.
25. COLLATERAL ASSIGNMENTS. Either Party shall have the right, without the
----------------------
other Party's consent, but with a thirty (30) day prior written notice to
the other Party, to make a collateral assignment of its rights under this
Agreement to satisfy the requirements of any development, construction, or
other long-term financing.
A collateral assignment as described above shall not constitute a
delegation of Seller's obligations under this Agreement, and this Agreement
shall not bind the collateral
-21-
<PAGE>
assignee. Any collateral assignee succeeding to any portion of the
ownership interest of Seller in the Project shall be considered Seller's
successor in interest and shall thereafter be bound by this Agreement.
26. ENTIRE AGREEMENT. This document constitutes the entire agreement of the
----------------
Parties and supersedes all previous agreements whether written or oral.
This Agreement may be amended only by an instrument in writing signed by
both Parties hereto.
27. GOVERNING LAW. This Agreement shall be interpreted, governed by and
-------------
construed according to the laws of the Sate of Nevada, as if executed and
to be performed wholly within the State of Nevada, and any litigation by
the Parties as to this Agreement shall be in a court of competent
jurisdiction within the State of Nevada.
28. PSCN APPROVAL. The obligation of Sierra to purchase capacity and energy
-------------
from Seller pursuant to this Agreement is hereby made expressly conditional
on the approval of this Agreement by the PSCN. The Parties shall take all
reasonable actions necessary to secure approval by the PSCN of this
Agreement in its entirety and without change. PSCN approval shall be
sought as soon as reasonably practicable subsequent to the date of
execution of this Agreement.
-22-
<PAGE>
Failure of the PSCN to approve this Agreement shall terminate this
Agreement effective as of the date of such PSCN action. PSCN approval
shall not be considered to have occurred unless the PSCN issues an order
within ninety (90) days of the filing of this Agreement for approval, which
order:
a. Approves this Agreement in its totality and without change; and
b. Makes a specific finding and order that (1) in the event the 85 MW cap
established in the PSCN Opinion and Order in Docket 87-126, as
modified, is not filled, the Project's Contract Rating shall be
included in the 85 MW cap or (2) in the event the 85 MW cap is filled,
the Project's Contract Rating shall be included as a Sierra capacity
resource eligible to meet Sierra's load requirements; and
c. Makes a specific finding and order that Sierra acted in a reasonable
and prudent manner in executing this Agreement.
29. NOTICE OF SALE OF PROJECT. Seller is aware that Sierra may be interested
-------------------------
in purchasing the Project at some future date. In the event Seller is
considering a sale of the Project, it
-23-
<PAGE>
will use reasonable effort to notify Sierra of the Project's availability
for sale. In no event shall this be construed to be a first right of
refusal.
30. DISPUTE RESOLUTION. In the event that a dispute should arise between
------------------
Sierra and Seller concerning the terms and enforcement of this Agreement,
the Parties agree to resolve their dispute by means of binding arbitration
conducted in Reno, Nevada, under the rules and procedures of the American
Arbitration Association. The Parties shall first endeavor to select a
single arbitrator who, by reason of his/her education and experience, is
mutually acceptable to both Parties. If the Parties are unable to agree
upon a single arbitrator, they shall each choose one (1) arbitrator, and
the two arbitrators thus selected shall chose a third arbitrator to form a
three-member panel to hear and resolve the dispute. In preparing their
cases for presentation to the arbitrator(s), the Parties shall have the
same rights of discovery afforded to litigants under the Nevada Rules of
Civil Procedure and the local rules of the Second Judicial District Court
for Washoe County, Nevada.
31. MULTIPLE ORIGINALS. Two (2) copies of this Agreement have been executed by
------------------
the Parties. Each executed copy shall be deemed an original.
-24-
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this
Agreement this 29th day of October, 1988.
Sierra: SIERRA PACIFIC POWER COMPANY
By /s/ Gerald Canning
----------------------------------
Title: Vice President,
------------------------------
Electronic Resources
------------------------------
Seller:
FAR WEST CAPITAL, INC.
By /s/ Alan O. Melchior
----------------------------------
Title: President
------------------------------
Date: _______________________________
-25-
<PAGE>
EXHIBIT 10.25(b)
ASSIGNMENT OF INTEREST
----------------------
This Assignment of Interest is entered into effective the 10th day of
December, 1988, by and between Far West Capital, Inc., a Utah Corporation with
its principal place of business at 1135 East South Union Avenue, Midvale, Utah
84047, ("Assignor") and 1-A Enterprises, a Nevada General Partnership with its
principal place of business at 1135 East South Union Avenue, Midvale, Utah
84047, ("Assignee").
RECITALS
--------
A. Assignor has acquired the rights to buy, own and operate turnkey
an electricity generating facility comprised of two Ormat Energy Converter
("OEC") units with a gross capacity of approximately 2 MW to use geothermal
fluids previously pumped and utilized by an existing plant to generate
electricity (the "1-A Expansion") pursuant to an Amended Purchase Agreement (and
Exhibits) dated December 31, 1987, by and between Ormat Energy Systems, Inc.
("Ormat") as Seller and Far West Capital, Inc. as Buyer, a copy of which is
attached hereto as "Attachment A."
B. In acquiring the right associated with the 1-A Expansion, Assignor
was acting as the developer of the 1-A Expansion and as such as the agent for
Assignee pursuant to the Agreement Re Acquisition of 1-A Expansion to the
Steamboat Nevada Geothermal Power Plant dated January 21, 1988, a copy of which
is attached hereto as Attachment "B."
<PAGE>
C. Assignor, having completed the duties as developer, now desires to
assign, transfer, grant and convey each and every such right, title and interest
in the said 1-A Expansion thus acquired to Assignee together with any and all
obligations associated therewith.
D. Assignee desires to become the owner of the said 1-A Expansion and
to accept and receive such rights, title and interest and assume such
obligations associated therewith.
NOW THEREFORE, based on the foregoing and the mutual covenants
contained herein, and other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:
1. Assignor hereby assigns, transfers, grants, conveys, and quit
claims to Assignee all of its right, title and interest in and to the above said
1-A Expansion including without limitation all right, title and interest
acquired by Assignor pursuant to the said Amended Purchase Agreement (and
Exhibits) dated December 31, 1987, a copy of which is attached hereto as
Attachment "A" and made a part hereof, together with any and all obligations
associated therewith, all in accordance with the terms of this Agreement and the
said Amended Purchase Agreement (and Exhibits), which Assignment also includes,
but is not limited to, all of Assignor's right, title and interest in and to:
-2-
<PAGE>
a. The Long-Term Agreement for the Purchase and Sale of Electricity
Between Sierra Pacific Power Company and Far West Capital, Inc.
dated October 29, 1988, a copy of which is attached hereto as
Attachment "C" and made a part hereof;
b. The Special Facilities Agreement by and between Sierra Pacific Power
Company and Far West Capital, Inc. dated October 29, 1988, a copy of
which is attached hereto as Attachment "D" and made a part hereof;
c. The Geothermal Resources Sublease by and between Far West
Hydroelectric Fund, Ltd. and Far West Capital, Inc. originally dated
June 1, 1988, and subsequently revised as of October 28, 1988, and
amended by Amendment to Geothermal Resource Sublease to become
effective as of June 1, 1988, and amended by Second Amendment to
Geothermal Resources Sublease entered into as of June 1, 1988, all
of which is intended to be revised and restated by a Revised and
Restated Geothermal Resources Sublease.
d. The Operating Agreement by and Between Ormat Energy Systems, Inc.,
and Far West Capital, Inc. dated November 1, 1988, a copy of which
is attached hereto as Attachment "F" and made a part hereof.
2. Assignment hereby accepts and receives the foregoing assignment,
transfer and conveyance and hereby assumes any and all obligations associated
therewith and does hereby undertake
-3-
<PAGE>
and agree to perform all of the said obligations of Assignor under and pursuant
to the said Amended Purchase Agreement (and Exhibits) attached hereto as
Attachment "A" and the said Agreements attached hereto as Attachments B, C, D,
E, and F, and to comply with all the terms and conditions thereof from and after
the date hereof, all in accordance with the terms of this Agreement and the
terms contained therein and agrees to indemnify and hold Assignor harmless from
any claims, losses, suits or expenses associated therewith arising from any
claim that Assignor has failed to perform any obligations of Assignor under any
of the Attachments hereto.
IN WITNESS WHEREOF, the parties have executed this Assignment of Interest
as of the day and year first above written.
ASSIGNOR:
FAR WEST CAPITAL, INC.
By: /s/ Alan O. Melchior
--------------------------
Its: President
----------------------
-4-
<PAGE>
ASSIGNEE:
1-A ENTERPRISES
______________________________
General Partner
______________________________
General Partner
______________________________
General Partner
-5-
<PAGE>
EXHIBIT 10.25(c)
[LETTERHEAD OF SIERRA PACIFIC POWER COMPANY]
August 18, 1989
Mr. Thomas A. Quinn
Far West Capital, Inc.
921 Executive Park Drive, Suite B
Salt Lake City, UT 84117
Dear Mr. Quinn:
The purpose of this letter is to provide documentation of Sierra Pacific Power
Company's consent to the assignment of (i) the Long Term Agreement for the
Purchase and Sale of Electricity between Sierra Pacific Power Company and Far
West Capital (the "Agreement") and (ii) the Special Facilities Agreement between
Sierra Pacific Power Company and Far West Capital to 1-A Enterprises, a Nevada
General Partnership comprised of Alan D. Melchior, Thomas A. Quinn and Mark
Zobrist as general partners.
The Agreement described in (i) above was fully executed on October 29, 1988 and
approved by the PSCN. Section 24 of the Agreement provides for assignment of
the Agreement with prior written consent of Sierra Pacific. Far West has
assigned this Agreement to 1-A Enterprises, contingent upon Sierra's consent.
1-A Enterprises will become the Seller under the Agreement. The Agreement
described in (ii) above was fully executed on October 29, 1988. Far West
Capital has assigned this Agreement to 1-A Enterprises contingent upon Sierra's
consent.
Sierra has reviewed the documentation submitted by Far West Capital and consents
to the assignments to 1-A Enterprises. Sierra Pacific's consent is given under
the condition that such consent shall in no way diminish Sierra's rights or
increase its obligations under the Agreement.
Sincerely,
/s/ Gerald W. Canning
Gerald W. Canning
Vice President
Electric Resources
<PAGE>
EXHIBIT 10.26(a)
AGREEMENT FOR THE PURCHASE
AND SALE OF ELECTRICITY
-----------------------
THIS AGREEMENT for the purchase and sale of electricity is entered
into as of the date of this execution by and between GEOTHERMAL DEVELOPMENT
ASSOCIATES, a Nevada corporation, ("Seller"), and SIERRA PACIFIC POWER COMPANY,
a Nevada corporation ("Purchaser"), upon the following terms and conditions:
IT IS AGREED:
(1) Sale of Electricity. Seller shall sell and Purchaser shall
-------------------
purchase all of the electricity generated and delivered to the Point of
Delivery, defined herein, by Seller at its facility for generation of electric
power ("the Plant") to be located on land leased from Purchaser which land is
more particularly described in Exhibit A, attached hereto and incorporated
herein by this reference. Said Plant shall have nameplate rating of 5MW (net-
maximum) and shall be fueled by geothermal energy.
(2) Performance Criteria. Seller shall comply with the following
--------------------
performance criteria:
(a) Within 270 days of the execution of this Agreement, Seller
shall complete and bring to commercial fluid production, one geothermal well on
the land leased from Purchaser under that certain lease of even date hereinwith,
or land pooled or unitized therewith. For purposes of this Agreement, the term
"Commercial Fluid Production" shall mean the point at which a geothermal well,
alone or in combination with other wells, is
<PAGE>
producing, or its capable of producing, a resource of sufficient temperature and
volume to supply twenty-five percent (25%) of the Plant's heat requirements.
(b) Within three (3) calendar years of the execution of this
Agreement, Seller shall construct and bring to commercial power production, one
electrical generating plant with a maximum nameplate rating of 5 MW (net-
maximum). For the purposes of this Agreement, the term "commercial power
production" shall mean the point at which the first kilowatt hour is delivered
to the Point of Delivery.
If Seller should fail to meet either of the performance criteria in
the time stated, this Agreement shall be null and void and the obligations of
both parties hereunder shall terminate automatically and without notice.
Seller's compliance with the performance criteria shall be subject to written
verification by Purchaser, which verification shall not be unreasonably
withheld. Time frames quoted above may be extended by Purchaser if
circumstances beyond Seller's control have impeded Seller's performance,
provided Seller has used due diligence in attempting to mitigate such
circumstances and meet the stated time limitation. Purchaser's extension of the
time limit for one performance criterion does not constitute a waiver of the
other, or affect in any way the Purchaser's right to its enforcement.
-2-
<PAGE>
(3) Rate.
----
(a) For all power purchased from Seller's facility at the Point of
Delivery, Purchaser shall pay Seller the sum of $0.0717 per kWh. For the
purposes of this Agreement, "Point of Delivery" shall be the Steamboat
substation 25 kv source closest to the plant, which source is owned by
Purchaser. Seller agrees to comply with Purchaser's Electric Rules 2 and 15,
all special conditions of Schedule CSPP and all subsequent revisions of said
schedule and rules.
(b) Monthly bills will be submitted to Purchaser by Seller. The
amount of each bill will be computed on the basis of energy delivered to
Purchaser during the billing period just ended, multiplied by the rate specified
above. The billing period shall be the time interval between two consecutive
meter readings taken for billing purposes. Purchaser shall pay each bill within
fifteen (15) days of the billing date. A monthly penalty of 1.0 percent of the
unpaid balance will be assessed on bills not paid within fifteen (15) days after
the billing date.
(4) Term. This Agreement shall be effective upon the date of its
----
execution and shall continue until a period of ten (10) years has elapsed from
the commencement of the production and sale of electricity by Seller's plant,
and shall continue thereafter from year to year unless terminated by one of the
parties hereto.
(5) Design and Operating Equipments. Once Seller's and Purchaser's
-------------------------------
facilities are connected, both parties will
-3-
<PAGE>
operate their respective facilities in accordance with Purchaser's standard 2.2
GN 01 (Exhibit B), which is attached hereto and incorporated herein by this
reference, and the approved facility wiring diagram and specification described
in Paragraph 11 below, as well as any subsequent amendments to either document
which are reasonably applicable to Seller's plant and interconnection
facilities. Seller shall be given reasonable prior notice of all such
amendments. The parties acknowledge that with operating experience adjustment
of the operating requirements may be necessary. Seller shall not make any
modification to its facilities which substantially affects performance without
advance notification to Purchaser.
(6) Metering. Seller's facility will be metered according to Metering
--------
Option 1, as described in Paragraph 3.1 of Exhibit B.
(7) Conditions. The obligations of either party under this Agreement
----------
are conditioned upon the following events having occurred:
(a) Seller's attainment of qualifying facility status for the
plant pursuant to the Public Utilities Regulatory Policy Act of 1978 and 18 CFR
292, and any applicable amendments or supplements thereto.
(b) Seller's compliance with any applicable portions of General
Order 32 of the Public Service Commission of Nevada and any amendments or
supplements thereto.
-4-
<PAGE>
(c) Approval of the pricing provisions herein as a portion of
Purchaser's purchased power costs by the Public Service Commission of Nevada.
(8) Responsibility for Maintenance. It shall be the responsibility of
------------------------------
Seller at its sole cost and expense to maintain all of the facilities, including
all control and protective devices, from the metering devices to Seller's
generation facility. It shall be the responsibility of the Purchaser at its
sole cost and expense to maintain facilities for the transmission of electrical
energy, up to and including the service drop and the devices for metering
electrical energy installed pursuant to this Agreement.
Seller agrees to give Purchaser sixty (60) days' written notice of
all scheduled maintenance periods.
(9) Special Facilities. Seller shall be responsible for all standard
------------------
interconnection costs. In the event it is necessary for Purchaser to install
any special or additional interconnection facilities, including control or
protective devices, line extensions, multiple metering, or reinforcement of its
system to receive or continue to receive the power delivered under this
Agreement, Seller shall reimburse Purchaser for its costs associated with the
installation of such facilities under a separate special facilities agreement.
(10) Prior Approval. Equipment specifications and detailed plans for
--------------
the installation of Seller's interconnection facilities, control and protective
devices, and facilities to
-5-
<PAGE>
accomodate Purchaser's meters will be submitted to Purchaser for review and
advance written approval prior to actual installation. Such review and written
approval are acknowledgements that Seller's facility complies with Purchaser's
requirements only. Purchaser shall not, by reason of such review and approval
or failure to review and approve, be responsible for strength, details of
design, adequacy, or capability of any of Seller's equipment, nor shall
Purchaser's acceptance be deemed an endorsement of any item of equipment.
Seller and Purchaser acknowledge that the equipment specifications and detail
plans submitted to Purchaser are intended only for the specific site and
installation described in this Agreement.
(11) Right of Entry. Purchaser may enter Seller's premises (a) at any
--------------
reasonable time, to inspect Seller's protective devices, or (b) at any time
without notice, to disconnect the interconnection facilities if, in Purchaser's
opinion, a hazardous condition exists and immediate disconnection is necessary
to protect Purchaser's customers, other persons, Purchaser's facilities, or
Seller's facilities from damage.
Purchaser and Purchaser's escorted visitors may also enter Seller's
premises, with reasonable notice and permission of Seller, to conduct tours of
the generation plant and related facilities and to observe and monitor Seller's
generating facilities.
(12) Information Transfer. Seller agrees to make available to
--------------------
Purchaser upon request any and all information
-6-
<PAGE>
related to the installation, operation and maintenance of the facility and the
use of the resource. Such data will be treated as confidential and can only be
released by Purchaser with written permission of Seller, which permission shall
not be unreasonably withheld. The parties will cooperate in developing mutually
agreeable tests and/or modifications to be performed on the plant and resource.
(13) Follow-On Plants. If Seller intends to build additional
----------------
geothermal generation plant(s) on any portion of the land described in Exhibit
A, or on land pooled, unitized, or combined therewith, and Seller intends to
sell a portion of said plant(s) to another party, Seller shall first offer such
portion to Purchaser at the price and on the terms that would be offered to such
a third party. Any such offers shall be in writing and Purchaser shall have
ninety (90) days from the date of receipt of such an offer to accept or reject
it. Upon receipt of Purchaser's rejection of such an offer, or upon expiration
of the ninety-day period described above, whichever comes first, Seller may
offer the same portion of such plant or plants to a third party or parties. In
no event shall such offer be on different terms or at a lower price than those
offered to Purchaser, unless such terms or price have first been offered to
Purchaser according to the procedure outlined in this section.
(14) Additional Resources. If Seller intends to purchase or lease
--------------------
additional geothermal rights in the Steamboat Springs Known Geothermal Resource
Area (KGRA), or purchase or
-7-
<PAGE>
lease additional land in the KGRA, for the purpose of developing geothermal
resources, Purchaser shall have the right to purchase up to seventy-five percent
(75%) interest in said rights or lands. The purchase price of any such interest
shall be one-third of the Seller's total cost of any parcel or right, or portion
thereof, in return for a one-quarter interest in the portion of the rights or
lands in which Purchaser is buying an interest.
Seller shall give Purchase written notice of Seller's intent to
acquire such rights or lands at least ninety (90) days prior to such
acquisition. Purchaser shall then have ninety (90) days from its receipt of
such notice to notify Seller of its intent to purchase some or all of the
seventy-five percent (75%) interest available to it. Said notice shall be in
writing and shall specify the amount to be purchased, the purchase price, and
the terms of payment. If Seller does not receive such a notice within the
stated period, Purchaser shall have no further rights to any portion of the
acquisition.
Upon Seller's receipt of Purchaser's notice, Seller and Purchaser
agree to negotiate in good faith an agreement defining the relative right and
responsibilities of the parties with regard to any subsequent development of the
rights or lands in which Purchaser has brought an interest.
(15) Liability and Indemnification. Each party shall indemnify and
-----------------------------
hold harmless the other party and the directors, officers, and employees of such
other party against and from any
-8-
<PAGE>
and all loss and liability for injuries to persons, including employees of
either party, and damages, including property of either party, resulting from or
arising out of (a) the engineering, design, construction, maintenance, or
operation of or (b) the making of replacements, additions, or betterments to,
the indemnitor's facilities. This provision shall apply notwithstanding the
active or passive negligence of the indemnitee. Neither party shall be
indemnified for liability or loss resulting from its sole negligence or willful
misconduct. The indemnitor shall, on the other party's request, defend and suit
asserting a claim covered by this indemnity and shall pay all costs, including
reasonable attorney's fees, that may be incurred by the other party in enforcing
this indemnity.
(16) A. Insurance. During the term of this Agreement, Seller shall
---------
maintain the following insurance:
(a) Workers' Compensation of self-insurance which satisfies the
applicable requirements of Nevada law. Within thirty (30) days after execution
of this Agreement, Seller shall provide Purchaser with a certificate evidencing
such insurance, and providing for thirty-day written notice to Purchaser prior
to cancellation, termination, alternation or material change of such insurance.
(b) Comprehensive General Liability and Comprehensive Automobile
Liability of not less than $500,000 combined single limit or equivalent for
bodily injury, personal injury and property damage as the result of any one
occurrence.
-9-
<PAGE>
(c) Comprehensive General Liability shall include coverage for
Premises-Operations, Owners and Contractors Protective Products/Completed
Operations Hazard, Explosion, Collapse, Underground, Contractual Liability, and
Broad Form Property Damage including Completed Operations. Comprehensive
Automobile Liability shall include coverage for Owned, Hired and Non-owned
automobiles.
B. Additional Insurance Provisions:
-------------------------------
(a) Evidence of coverage described in Paragraph 17(A) above shall
state that coverage provided is primary and is not excess to or contributing
with any insurance or self-insurance maintained by Purchaser.
(b) Purchaser shall have the right to inspect or obtain a copy of the
original policy(ies) of insurance.
(c) All insurance certificates, and a thirty-day advance notice of
cancellations, terminations, alterations and material changes of such insurance
shall be issued and submitted to the following:
Sierra Pacific Power Company
Attn: Richard Miolini
P.O. Box 10100
Reno, Nevada 89520
(17) Permits and Licenses. Seller agrees to obtain any and all state,
--------------------
federal and local permits, licenses, or other documents necessary for the
operation of Seller's facility and the sale of energy therefrom to Purchaser.
-10-
<PAGE>
(18) Notices. Whenever in this Agreement it shall be required,
-------
permitted or desired that notice or demand be given by either party to or on the
other, such notice or demand shall be in writing and may be either personally
served or sent by United States mail and shall be deemed to have been given when
personally served or when deposited in the United States mail, certified or
registered, with postage prepaid and properly addressed. For the purposes
hereof the addresses of the parties hereto (until notice of a change thereof is
given as provided in this paragraph) shall be as follows:
Seller: Geothermal Development Associates
G. Martin Booth, III
President
251 Ralston Street
Reno, Nevada 89503
Purchaser: Sierra Pacific Power Company
Attn: Max L. Jones, Jr.
Senior Vice President
P.O. Box 10100
Reno, Nevada 89520
(19) Successors in Interest. This Agreement shall be binding on both
----------------------
parties, and on their heirs, successors in interest and permitted assigns.
(20) Several Obligations. Except where specifically stated in this
-------------------
Agreement to be otherwise, the duties, obligations and liabilities of the
Parties are intended to be several and not joint or collective. Nothing
contained in this Agreement shall ever be construed to create an association,
trust, partnership, or joint venture or impose a trust or partnership duty,
obligation or liability on or with regard to either Party. Each
-11-
<PAGE>
Party shall be individually and severally liable for its own obligations under
this Agreement.
(21) Force Majeure. If the performance of any obligations under this
-------------
Agreement is prevented by casualty, accident, strike, labor dispute, political
disturbance, or other violence, any law, proclamation or regulation of any
governmental agency, inability to secure environmental permits or any other
condition beyond the control of the party affected thereby, such party shall be
excused from performance hereunder and either party hereto shall be entitled to
terminate this Agreement.
(22) Assignment. (a) Neither party shall voluntarily assign this
----------
Agreement without the prior written consent of the other party, except to a
partnership in which a party hereto is a general partner.
(b) In the event that either party wishes to assign this agreement to
a corporation or other entity which does not fall into the two categories
described in (a) above, said party shall send written notice of such intent to
the other party. Said notice shall describe the financial organization and
assets of the potential assignee in sufficient detail to permit the noticed
party to evaluate the effect of the assignment on its interest in this Agreement
and the even-dated geothermal lease executed by the parties. The noticed party
shall have thirty days from its receipt of the notice to consent or refusal to
consent to the assignment. Failure to give written consent or refusal within
said thirty day period shall be interpreted as
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<PAGE>
consent by the noticed party. In no event shall consent to any assignment be
unreasonably withheld.
(23) Entire Agreement. This document constitutes the entire agreement
----------------
of the parties and supersedes all previous agreements, whether written or oral.
This Agreement may be amended only by an instrument in writing signed by both
parties hereto.
(24) Governing Law. As to portions of its composition and performance
-------------
to which state law is applicable, this Agreement shall be construed in
accordance with the laws of the State of Nevada.
EXECUTED this 18th day of November, 1983.
SELLER: PURCHASER:
GEOTHERMAL DEVELOPMENT SIERRA PACIFIC POWER
ASSOCIATES COMPANY
251 Ralston Street P.O. Box 10100
Reno, Nevada 89503 Reno, Nevada 89520
By /s/ By /s/
--------------------------- ---------------------------
Title_________________________ Title_________________________
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<PAGE>
EXHIBIT 10.26(b)
AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF ELECTRICITY
This Amendment is entered into as of the date of its execution by and
between FAR WEST HYDROELECTRIC FUND, LTD., a Utah Limited Partnership,
hereinafter referred to as "FAR WEST", and SIERRA PACIFIC POWER COMPANY, a
Nevada corporation, hereinafter referred to as "SIERRA". Far West and Sierra
are sometimes referred to collectively as "Parties".
WITNESSETH
----------
WHEREAS, an Agreement for the Purchase and Sale of Electricity
(hereinafter referred to as the "Power Purchase Agreement") was entered into on
November 18, 1983, between Geothermal Development Associates, a Nevada
corporation (hereafter, "GDA"), and Sierra for the purchase of all electricity
generated by GDA's pilot plant located in the Steamboat Springs area; and
WHEREAS, effective December 1, 1985, GDA assigned the Power Purchase
Agreement to Ormat Systems, Inc.; Ormat Systems further assigned the Power
Purchase Agreement to Bonneville Pacific Corporation; Bonneville Pacific
Corporation further assigned the Power Purchase Agreement to Far West Capital
Inc.; finally, Far West Capital, Inc. assigned the Power Purchase Agreement to
Far West Hydroelectric Fund, Ltd., the current Seller under the Power Purchase
Agreement; and
WHEREAS, Far West Hydroelectric Fund. Ltd. and Sierra desire to extend
the term of the Power Purchase Agreement to
<PAGE>
provide greater certainty of payments to be made during such extended term of
the Agreement; and
WHEREAS, Far West Hydroelectric Fund, Ltd. and Sierra now wish to
amend the Power Purchase Agreement to reflect the extension of the term of the
rates to be paid for such term.
NOW, THEREFORE, the Parties hereto mutually agree as follows:
1. EFFECTIVE DATE
--------------
This Amendment shall be effective upon the date of its execution.
2. TERM
----
Section 4, Term, of the Power Purchase Agreement is hereby amended to
read as follows:
"This Agreement shall be effective upon the date of its execution and
shall continue until midnight on December 5, 2006, and shall continue thereafter
from year to year pursuant to the terms and conditions hereunder unless
terminated by one of the Parties."
3. RATE
----
Section (3)(a), Rate, of the Power Purchase Agreement is hereby
amended to read as follows:
"For the first ten (10) years beginning on 1600 hours on December 5,
1986, for all power purchased from Seller's facility at the Point of Delivery up
to a maximum of 43,800,000 kWH per calendar year, Purchaser shall pay Seller the
sum of $.0717 per kWH. Any energy purchased from Seller's facility at
-2-
<PAGE>
the Point of Delivery in excess of 43,800,000 kWH per calendar year will be
purchased at Sierra's short term avoided cost energy and capacity rates in
effect at that time. Sierra's current short term avoided cost rates submitted
for approval to the PSCN are attached and hereby incorporated herein by
reference as Exhibit A.
In the eleventh year following the commencement of the commercial
production and sale of electricity by Seller's plant, Purchaser shall pay Seller
for the remainder of the term of the Agreement for all power purchased from
Seller's facility at the Point of Delivery in the following manner:
(1) If the total of Sierra's non-time differentiated short term
avoided cost rates for both energy and capacity, as approved by
the Public Service Commission of Nevada ("PSCN") for the first
calendar quarter of the eleventh year of the Term of the
Agreement, is greater than $.0583 per kWH, Purchaser shall pay
Seller on a time differentiated basis, ninety percent (90%) of
the short term avoided cost rate for both energy and capacity in
effect for the billing period during which the meter reading took
place, but in no event shall the non-time differentiated rate be
less than $.0700 per kWH and shall not be greater than $.0900 per
kWH; or
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<PAGE>
(2) If the total of Sierra's non-time differentiated short term
avoided cost rates for both energy and capacity, as approved by
the PSCN for the first calendar quarter of the eleventh year of
the Term of the Agreement, is equal to or smaller $.0583 per kWH,
Purchaser shall pay Seller on a time differentiated basis, the
short term avoided cost rates for both energy and capacity
approved by the PSCN and in effect for each billing period
thereafter.
Seller agrees to comply with Purchaser's Electric Rules No. 2 and 15,
all special conditions of Schedule CSPP, and all subsequent revisions
of said Schedule and Rules."
4. NOTICES
-------
The Parties to whom notice is to be given pursuant to Section 18,
Notices, of the Power Purchase Agreement are hereby changed to the following:
SELLER: Far West Hydroelectric Fund, Ltd.
Attn: Thomas A. Quinn
1135 East South Union Avenue
Midvale, Utah 84047
PURCHASER: Sierra Pacific Power Company
Attn: Vice President, Electric
System Planning
P.O. Box 10100
Reno, Nevada 89520
5. INSURANCE
---------
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<PAGE>
SECTION 16 B(c) of Additional Insurance Provisions is hereby amended
and reads as follows:
"c) All insurance certificates, and a thirty (30) day advance
notice of cancellations, terminations, alterations and material
changes of such insurance shall be issued and submitted to Purchaser
as provided for in Section 18."
6. ASSIGNMENT
----------
SECTION 22, ASSIGNMENT, of the Power Purchase Agreement is hereby
amended to read as follows:
"Neither Party shall voluntarily assign this Agreement without the
prior written consent of the other Proxy except that either Party shall
have the right, without the other Party's consent, but with a thirty (30)
day prior written notice to the other Party, to make a collateral
assignment of its rights under this Agreement to satisfy the requirements
of any development, construction, or other long term financing. Such
consent shall not be unreasonably withheld. Any assignment made without
such consent shall be void.
7. STATUS OF AMENDMENT
-------------------
It is expressly understood and agreed by the Parties hereto that this
Amendment is supplemental to the Power Purchase Agreement. It is further
understood and agreed that all the terms, conditions, and provisions of the
Power Purchase Agreement, unless specifically modified herein, are to apply to
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<PAGE>
this Amendment and are made part of this Amendment as though they were expressly
rewritten, incorporated and included herein.
8. PSCN APPROVAL
-------------
Sierra and Far West will operate pursuant to the provisions of this
Amendment upon its execution. The obligation of Sierra to purchase capacity and
energy from Seller pursuant to this Amendment is hereby made expressly
conditional on the approval of this Amendment by the PSCN. Sierra shall take
all reasonable actions necessary to secure approval by the PSCN of this
Amendment in its entirety and without change. PSCN approval shall be sought as
soon as reasonably practicable subsequent to the date of execution of this
Amendment. Failure of the PSCN to approve this Amendment shall terminate this
Amendment effective as of the date of such PSCN action in which case the
obligations of the Parties will remain as specified in the Power Purchase
Agreement and the Power Purchase Agreement shall automatically be reinstated as
it existed prior to the execution of this Amendment.
-6-
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to
be executed in their respective names, first above written.
Dated this 6th day of March, 1987
SELLER:
FAR WEST HYDROELECTRIC FUND, LTD.,
a Utah limited partnership
By: FAR WEST CAPITAL, INC.,
a Utah corporation
Its General Partner
By: /s/ Thomas Quinn
-------------------------------
Its Vice President
--------------------------
Date: 3/6/87
-------------------------
PURCHASER:
SIERRA PACIFIC POWER COMPANY
By: /s/
---------------------------
Title: ________________________
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<PAGE>
EXHIBIT 10.27
LOAN AND OPTION AGREEMENT
-------------------------
LOAN and OPTION AGREEMENT, dated as of August ______, 1996, by and
between N.R.G. Company, L.L.C., a Delaware limited liability company ("NRG" or
"Lender") and Reno Energy, LLC a Nevada limited liability company ("Borrower" or
the "Company"), and ART, LLC, a Utah limited liability company ("ART") and FWC
Energy, LLC, a Utah limited liability company ("FWCE").
RECITALS
NRG wishes to make and the Borrower wishes to receive a $300,000.00
loan (the "Loan") memorialized by a note from Borrower to NRG of even date (the
"Note"). As an inducement to and in consideration of the consummation of the
Loan, the Company, ART and FWCE hereby agree with and warrant and represent to
NRG as follows:
1. DEFINED TERMS.
-------------
(a) The "LETTER OF INTENT" shall mean the letter agreement between
Borrower and the Company, as of July 15, 1996 attached hereto as Exhibit "A" and
made a part hereof.
(b) The "NOTE" shall mean the $300,000.00 Note from the Company to NRG
of even date herewith, attached hereto as Exhibit "B" and made a part hereof.
(c) The "PROJECT" shall mean the development of a geothermal heating
district servicing the area in and around Reno, Nevada including all
construction and permitting associated therewith. The Project specifically
excludes any transactions resulting from electrical generation.
<PAGE>
2. REPRESENTATIONS AND WARRANTIES. The Company, ART and FWCE jointly and
------------------------------
severally represent and warrant to NRG that:
(a) ORGANIZATION. The Company is a limited liability company duly
------------
organized, validly existing and in good standing under the laws of the State of
Nevada. The Company is duly qualified to transact business and is in good
standing in each other jurisdiction where the properties owned, leased or
operated, or the business conducted, by it require qualification. Attached
hereto as Exhibits C, D, and E and made a part hereof are respectively, a
Certificate of Existence with status of good standing, a correct and complete
copy of its Articles of Organization and a UCC Form UCC 3 which have not been
amended.
(b) OWNERSHIP. ART and FWCE each own 50% of the outstanding
---------
membership interests in the Company and no other party holds options or rights
respecting membership interests in the Company or any rights to distributions of
any kind from the Company or any rights respecting the Project.
(c) SUBSIDIARIES. The Company does not presently own or control,
------------
directly or indirectly, any interest in any other corporation, company,
association or other business entity.
(d) AUTHORIZATION. The Company, ART and FWCE have the power to enter
-------------
into this Loan and Option Agreement and the Note and to carry out their
respective obligations thereunder. All action on the part of the Company and
ART and FWCE necessary for the authorization, execution, delivery and
performance of the Loan and Option Agreement and the Note and the transactions
contemplated thereby has been
2
<PAGE>
taken. The Loan Agreement and Option Agreement and the Note constitute the valid
and legally binding obligations of the Company, ART and FWCE and are enforceable
in accordance with their respective terms.
(e) GOVERNMENTAL CONSENTS. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company or ART or FWCE is required in connection with the execution,
delivery or performance of this Loan and Option Agreement or the Note or the
Letter of Intent and the transactions contemplated thereby which has not been
obtained, granted or filed. It is understood that the project must file for and
obtain necessary permits and consents.
(f) NO BREACH; CONSENTS. The execution, delivery and performance of
-------------------
this Loan and Option Agreement, the Note, and the Letter of Intent and the
consummation of the transactions contemplated thereby do not and will not (with
or without the passage of time or the giving of notice or both) constitute a
breach or violation of or a default under (i) the Articles of Organization or
Operating Agreement of the Company or ART or FWCE ; (ii) any applicable law,
rule, regulation, judgment, decree, order, governmental permit or license, or
(iii) any mortgage, indenture, contract, agreement, lease or other material
instrument to which the Company, ART or FWCE are a party or by which the
Company, ART or FWCE, or any of their properties or assets may be bound, or
create any right on the part of any party thereto to unilaterally modify, amend
or terminate any such mortgage, indenture, contract, agreement, lease or other
instrument. The execution, delivery and performance of this Loan and Option
Agreement
3
<PAGE>
and the Note, and the Letter of Intent and the consummation of those agreements
will not require the consent or approval of any person or entity which has not
been obtained.
(g) NO VIOLATIONS. The Company, ART and FWCE are not in violation of
-------------
any applicable law, permit, rule, regulation, judgment, decree or order or any
court or governmental entity, covenant or restriction and there are no judgments
or outstanding orders, injunctions, decrees, stipulations or awards (whether
rendered by a court or administrative agency or by arbitration) against the
Company, ART or FWCE. The Company is duly licensed to do business in the State
of Nevada.
(h) NO DEFAULTS. The Company, ART and FWCE are not, nor have they
-----------
received notice that they are or that they would be with the passage of time, in
default or violation of any term, condition or provision of: (i) their Articles
of Organization, or Operating Agreements; (ii) any judgment, decree or order or
(iii) any mortgage, deed of trust, guarantee, indenture, shareholder agreement,
contract, agreement, management agreement, operating agreement, lease, operating
licenses or other instrument to which they are a party or by which they or any
of their properties or assets are bound.
i. LITIGATION. There is no lawsuit, action, proceeding, audit or
----------
investigation pending or to the Company's, ART's or FWCE's knowledge threatened
against the Company, ART or FWCE or the Project, by any person or entity
(including, without limitation, governmental entities or agencies) of any nature
whatsoever. There is no action, suit or proceeding by the Company currently
pending or which the Company intends to initiate.
4
<PAGE>
j. TITLE TO PROPERTY AND ASSETS. The Company, ART and FWCE own no
----------------------------
properties or assets other than certain proprietary plans and studies. No
person or entity has any legal or equitable interest in the property of the
Company, ART or FWCE for expenses or in or to any revenues, profits, cash flow
or gains therefrom or in respect thereto or to the Project other than a loan
from FWC to the Company for predevelopmental expense of $50,000.00. The
Membership Interest in the Company to be issued to Lender upon exercise of the
option described in paragraph 4 hereof shall upon payment of the Exercise
Payment provided for hereunder be validly issued, fully paid and non-assessable
and will be free of any liens and encumbrances and shall not be subject to any
preemptive rights and shall represent 50% of the outstanding membership
interests in the Company on a fully diluted basis
k. FINANCIAL INFORMATION. Any financial statements, if any, provided
---------------------
to NRG and its agents relating to the Company will be complete and correct in
all material respects will accurately present and describe the financial
condition of the Company with respect to the time periods to which they relate.
The Company, ART and FWCE have no liabilities, contingent or otherwise,
whatsoever except as set forth in subsections j above. Any financial proformas
provided by the Company are based upon its best information at the time and are
subject to change with the development of new data. NRG is hereby advised to
and does hereby agree to independently review all financial assumptions and to
make decisions based solely upon its independent review.
l. TAX RETURNS. The Company, ART and FWCE have timely filed all
-----------
federal, state and local income, franchise, property and other tax returns and
reports as
5
<PAGE>
required by law (none) and have paid all taxes and other assessments shown
therein to be due. The Company, ART and FWCE have no existing obligation to pay
any assessments (special or otherwise) to any government entity and no
government entity has made a claim or threatened to impose any such assessments.
m. COMPETITION. To the Company's knowledge there are currently no
-----------
applications by any party other than Borrower pending, and to the Company's,
ART's and FWCE's knowledge, contemplated for a geothermal heating district in
the area which the Company intends to service in its first phase. Two other
heating districts currently exist in Reno.
n. DISCLOSURE. All documents provided by the Company and ART to the
----------
Lender or its agents constitute true accurate and complete copies of the
originals of such documents. To the knowledge of the Company neither this Loan
Agreement and Option nor the Note, nor any other agreement, document,
certificate or written statement furnished to Lender to Lender or its agents by
or on behalf of the Company, ART and FWCE in connection with the transactions
contemplated hereby or thereby contains any untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements
contained herein or therein not misleading.
o. USE OF PROCEEDS. The $300,000.00 to be lent to the Company with
---------------
uses as follows: $50,000.00 to be paid to Far West Capital, Inc. immediately
and $250,000.00 deposited into a jointly controlled checking account and the
funds shall be used in accordance with Schedule F herein.
6
<PAGE>
p. The Company is not a party to any agreements, letters of intent,
options or instruments other than this Agreement.
3. COVENANTS
---------
The Company, ART and FWCE jointly and severally agree with Lender that:
(a) Unless agreed to in advance in writing by Lender, until the
exercise by the Lender of the Option described in paragraph 4 or the termination
of such Option, (i) the Company shall issue no membership interests or options
or rights with respect to membership interests in the Company or rights to
distributions of any kind in the Company and (ii) ART and FWCE shall not sell,
hypothecate, assign or transfer or grant any option with respect to their
membership interest in the Company (or any rights related thereto) or rights to
distributions of any kind in the Company and shall not enter into any agreement
to do so.
(b) Until the exercise by Lender of the Option described in paragraph
4 hereof or full payment of the Note whichever comes later, the Company shall
not incur any indebtedness except in the ordinary course of business or incur
indebtedness in one transaction or a related series of transactions in excess of
$100,000.00, other than the bond financing contemplated by this agreement.
(c) Until the exercise by Lender of the Option described in paragraph
4 hereof or full payment of the Note whichever comes later, the Company shall
not make any distributions to any member and shall not pay any compensation of
any kind to any member or any affiliate, officer, employee or owner of any
member without prior written approval of the Lender.
7
<PAGE>
(d) The Company shall comply with all applicable laws, regulations and
ordinances and shall pay all taxes when they come due.
(e) Until the exercise by Lender of the Option described in paragraph
4 hereof or full payment of the Note whichever comes later, the Company shall
not sell, assign, transfer, lease or hypothecate its assets except in the
ordinary course of business or with the prior approval of Lender it being
understood that a sale, transfer, lease, assignment or hypothecation of
substantially all of the assets of the Company shall be considered outside the
ordinary course of business.
(f) The Company shall attempt in good faith to consummate the project
including obtaining necessary permits and financing. The Company shall keep
lender informed on the progress of the project on a regular, current basis.
(g) The Company shall only use the proceeds from the Loan for the
purposes described in paragraph 2(o).
4. OPTION. In consideration of and as an inducement to the Loan by NRG,
------
the Company hereby grants NRG or its designee a fully vested irrevocable option
to purchase a 50% membership interest in the Company and all rights relating
thereto on a fully diluted basis under the terms and conditions below.
(a) EXERCISE PAYMENT. The Exercise Payment of the Option during the
----------------
Initial Term (defined below) shall be $1,000,000.00, The Exercise Payment
during the Extension Term (defined below) shall be $1,200,000.00. The parties
fully acknowledge, understand and agree that the Exercise Payment constitutes
the fair market value of the 50% interest in the Company.
8
<PAGE>
(b) TERM OF OPTION. The term of the Option shall commence on the day
--------------
hereof and shall terminate on November 1, 1996 (the "Initial Term"). Provided
that NRG pays the Company a non-refundable extension fee of $100,000.00 at any
time prior to the expiration of the Initial Term, the term of the Option shall
be extended to February 1, 1997 (the "Extension Term").
(c) EXERCISE OF THE OPTION. The Option may be exercised by giving
----------------------
timely written notice, as set forth in Section 8(b) hereof, to the Company,
addressed to its office, listed above, Attention: Ron Burch and shall pay the
Exercise Payment to the Company. The Lender shall notify the Company at least
two business days in advance of its intent to exercise the option although it
shall be under no obligation to do so. Upon receipt of the notice referred to
in the previous sentence the Company, ART and FWCE shall provide Lender with a
certificate executed by duly authorized officers of such companies that as of
the date of the certificate the warranties and representations contained in
paragraph 2 hereof are true and accurate in all material respect and that the
Company, ART and FWCE have complied with all covenants contained in paragraph 3
hereof in all respects and (ii) execute the Amended Operating Agreements
described in Section 4(e) and; provided further, notwithstanding any other
provision in this document, that if the Exercise Payment is not paid to ART/FWCE
by November 1, 1996 for $1,000,000 or by February 1, 1997 for $1,200,000 the
option will be withdrawn and shall automatically terminate.
(d) USE OF THE EXERCISE PAYMENT. The Company shall deposit the
---------------------------
Exercise Payment in a segregated reserve account maintained by the Company and
shall
9
<PAGE>
not use such funds for general corporate purposes. The Company shall be
authorized to immediately pay the Exercise Payment to ART/FWCE as a fee or a
distribution.
(e) OPERATING AGREEMENT. Upon exercise of the Option, the Company
-------------------
shall execute a First Amended Operating Agreement ("FAOA") for the Company
containing the terms normally found in such agreements and will incorporate the
provisions of Schedule 1 herein.
5. RIGHTS OF FIRST REFUSAL. At any time after the expiration of the
-----------------------
Option described in paragraph 4 and before the Loan is repaid in full, if (i)
ART or FWCE wish to sell all or part of their interest in the Company, (ii) ART
or FWCE wish to cause the Company to issue new equity interests in the Company,
(iii) the owners of ART or FWCE wish to sell equity interests in ART or FWCE or
(iv) the Company wishes to sell substantially all of its assets, (any of the
foregoing constituting a "Transaction"), it shall first offer to enter into such
Transaction in writing to NRG for cash (the "Offer") with a closing in no more
than 60 days of such offer. The Offer shall contain all material terms to the
Transaction, including without limitation, the purchase price. NRG shall have
10 business days from receipt of the Offer to accept or reject the Offer in
writing. Failure to respond in writing during such period shall be deemed a
rejection. If NRG rejects the Offer, ART and/or FWCE shall have the right to
consummate the Transaction in materially the form described in the Offer for a
period of 60 days. In the event the Company wishes to change the terms of the
Transaction from that offered to NRG, or does not consummate the Transaction
within the 60 day period set forth in the previous
10
<PAGE>
sentence then ART and/or FWCE must re-offer the Transaction to NRG based on the
changed terms and the same procedures described above shall apply to the re-
offer.
6. BANKING FEE. NRG shall have the right to arrange non-recourse Project
-----------
Financing for the Project on terms acceptable to the Company for a period not to
extend beyond July 1, 1998. NRG shall receive a banking fee equal to 1% of the
amount raised plus reasonable and preapproved out of pocket expenses incurred by
it in connection with such efforts. The banking fee shall be paid at the
closing of the Project Financing. This fee will only be due and payable if a
majority in interest of the members of the Company approve the financing
transaction. In addition to the aforesaid banking fee, the parties shall use
their best efforts to structure the terms of any debt financing for the Project
to provide for transaction/development fees to be paid to the members of the
Company in the maximum amount which can be supported by the financing and which
shall be split 50/50 between ART and FWCE on the one hand and NRG on the other
hand.
7. STEAMBOAT CONTRACT. In consideration of the Loan, the Company agrees
------------------
that it will enter into a market-based 10 Year contract to purchase from
Steamboat I and IA ("SB I & IA") all of the geothermal heat requirements which
SB I & IA can reasonably produce without a detriment to either current or future
electrical production provided that a contract can be negotiated under market-
based economically viable terms which are acceptable to the Company between the
SB I & IA project owner, the land owner (Sierra Pacific Power Company), and any
other material parties who could limit or control the use of the SB I & IA
effluent hot water.
8. GENERAL
-------
11
<PAGE>
(a) This Loan and Option Agreement (i) constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof except for
the Letter of Intent; (ii) may be executed in several counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument; and (iii) may be modified only by an instrument
signed by the duly authorized representatives of the parties.
(b) All notices, demands, consents, approvals and other communications
(collectively, "Notices") hereunder shall be in writing and shall be sent by
-------
reputable overnight courier service, delivery next business day, addressed to
the party to be notified as set forth below:
If to NRG:
---------
c/o Richard Nelson
12012 Longwood Green Drive
Wellington, Florida 33414
With a mandatory copy to:
-------------------------
Robinson Brog Leinwand Greene
Genovese & Gluck P.C.
1345 Avenue of the Americas
New York, New York 10105
(1) 586-4050
If to the Company and/or ART and/or FWCE
----------------------------------------
Reno Energy LLC
c/o Ron Burch
1010 Power Plant Drive
Reno, Nevada 89511
(702) 852-2079
12
<PAGE>
Notices shall be deemed given when delivered one business day after being sent,
with failure to accept delivery constituting delivery for this purpose. Any
party hereto may change the addresses for Notices set forth above by giving at
least ten (10) days' prior Notice of such change in writing to the other party
as aforesaid and otherwise in accordance with these provisions.
(c) This Loan and Option Agreement shall be governed in all respects,
including validity, interpretation and effect by, and shall be enforceable in
accordance with the laws of the State of New York without reference to any
conflict of law rules. If any provision of this Loan Agreement shall be held to
be invalid by any court of competent jurisdiction, the invalidity of such
provision shall be affect any of the remaining provisions. Any action to
enforce must be brought in a state of federal court located within the state of
Nevada.
(d) The company may not assign its rights or delegate its obligations
under this Agreement with the prior written consent of Lender. This Loan and
Option Agreement shall be binding and enure to the benefit of the heirs,
successors and assigns of the parties. In the event NRG assigns any rights
under the Note, in whole or in part, or in subdivided parts, NRG shall also have
the right to similarly assign its rights hereunder to such assignors with the
consent of the Company or Guarantors which shall not be unreasonably withheld.
(e) All warranties, representations and covenants contained herein
shall survive the consummation of the Loan and the exercise of any Option.
13
<PAGE>
NRG Company, L.L.C.
By: /s/ Richard H. Nelson
-----------------------------
Name: Richard H. Nelson
Title: President
ACCEPTED AND AGREED:
Reno Energy Company, LLC
By: /s/ Ron E. Burch
-----------------------------
Name: Ron E. Burch
Title: President
ART, LLC
By: /s/ Ron E. Burch
-----------------------------
Its: Member
-----------------------------
FWC ENERGY, LLC
By: /s/ Ron E. Burch
-----------------------------
Its: Member
-----------------------------
14
<PAGE>
SCHEDULE 1
- ----------
1. ART and FWCE and NRG shall have equal voting power either as co-managing
members or with the right to designate an equal number of managers. Unanimous
consent shall be required for all Company actions.
2. ART and FWCE shall have, for the first five operating years of the project,
a 20% preference on net cash flow distributions provided the Project meets the
pro-forma projections of $321,977; $730,644; $1,344,250; $2,564,183 and
$4,895,866 supplied by the Company during the first five years of operation. If
the Project does not meet projected income in any of first five years, the
preference for such year will be adjusted downwards proportionately as a
percentage of the income not met (see pp. 4-5 of the Letter of Intent for
examples). The foregoing preference shall terminate after the fifth operating
year.
3. During the first five operating years of the Project, ART and FWCE shall
have a 20% preference on any distributions from capital transactions (sale or
refinance) or any sale of 100% of the interests of the Company less any
preferential cash flow distributions described in paragraph 2 received by ART
and FWCE during such period. After the fifth operating year, all distributions
of proceeds from capital transactions shall be on a 50/50 basis.
4. Any capital contributions shall be made on a 50/50 basis.
5. NRG shall have the right to grant U.S. Envirosystems, Inc. ("USE") a five
year option to acquire NRG's interest in the Company in exchange for USE shares
at fair
15
<PAGE>
market value. No 20% preference would apply to such a transaction unless ART and
FWCE participated in the transaction so that 100% of the interests were sold.
16
<PAGE>
NRG COMPANY, L.L.C.
12012 LONGWOOD GREEN DRIVE
WELLINGTON, FLORIDA 33414
AUGUST 29, 1996
RENO ENERGY, L.L.C.
1010 POWER PLANT DRIVE
RENO, NEVADA 89511
ATTN: RON BURCH
DEAR RON:
REFERENCE IS MADE TO THE LOAN AND OPTION AGREEMENT DATED AS OF AUGUST 1996
BY AND AMONG NRG COMPANY LLC ("NRG"), RENO ENERGY LLC ("RENO"), ART LLC ("ART"),
AND FWC ENERGY LLC ("FWC") ("THE LOAN AND OPTION AGREEMENT") AND THE NOTE DATED
AUGUST 9, 1996 FROM RENO TO NRG ("THE NOTE")(TOGETHER, THE "LOAN DOCUMENTS").
THE LOAN DOCUMENTS ARE MODIFIED AS FOLLOWS:
1. THE DATE OF THE NOTE IS SEPTEMBER 1, 1996.
2. NRG SHALL INITIALLY LOAN RENO $50,000 WHICH MAY BE PAID TO FAR WEST
CAPITAL, INC.
THE REMAINDER OF THE LOAN SHALL BE TENDERED WHEN U.S. ENERGY SYSTEMS, INC.
COMPLETES ITS SECONDARY OFFERING.
3. THE LOAN AND OPTION AGREEMENT SHALL ONLY BECOME EFFECTIVE WHEN THE
FULL $300,000 LOAN AMOUNT IS FUNDED. THE INITIAL TERM SHALL TERMINATE ON
DECEMBER 1, 1996 AND THE EXTENSION TERM SHALL TERMINATE ON MARCH 1, 1997 AND ALL
DATES CONTAINED IN SECTION 4 OF THE LOAN AND OPTION AGREEMENT SHALL BE ADJUSTED
ACCORDINGLY.
4. NRG SHALL HAVE THE RIGHT TO ASSIGN THE OPTION IN ITS SOLE DISCRETION.
IN ALL OTHER RESPECTS THE LOAN DOCUMENTS REMAIN IN FULL FORCE AND EFFECT.
<PAGE>
SINCERELY,
NRG COMPANY LLC
BY: /s/ Richard H. Nelson
---------------------------
PRESIDENT
AGREED:
RENO ENERGY LLC
BY: /s/ Ron E. Burch
--------------------------
ART LLC
BY: /s/ Ron E. Burch
--------------------------
FWC ENERGY LLC
BY: /s/ Ron E. Burch
--------------------------
<PAGE>
EXHIBIT 10.28
NOTE
PRINCIPAL AMOUNT: DATE OF ISSUE: August 9, 1996
U.S. $300,000.00
FOR VALUE RECEIVED, Reno Energy LLC., a Nevada Limited Liability Company
(the "Maker"), with an address at 1010 Power Plant Drive, Reno, Nevada 89511,
hereby promises to pay, to N.R.G. Company, L.L.C., a Delaware Limited Liability
Company, with an address at 12012 Longwood Green Drive, Wellington, Florida
33414 (the "Holder") the principal sum of $300,000.00. The interest rate on this
Note shall be nine (9%) percent per annum. Interest and Principal shall be paid
in equal, quarterly self-amortizing installments commencing on October 31, 1996
and thereafter on January 31, April 30, July 31 and October 31 of each year
during the term (three years) of this Note in accordance with the schedule
annexed hereto as Exhibit A.
1. Notwithstanding anything to the contrary in the previous paragraph
herein, in the event the Maker consummates a financing transaction in which it
receives debt and/or equity financing equal to or in excess of $2,000,000 in one
or more related transactions (other than the exercise of the option under the
Option Agreement executed on even date), the outstanding principal balance of
this Note and all unpaid, accrued interest shall immediately become due and
payable. Any failure by Maker to repay all principal and accrued and unpaid
interest on or before the date provided in the previous sentence shall be
<PAGE>
deemed an Event of Default hereunder entitling Holder to all of the rights and
remedies under paragraph 6 hereunder.
2. This Note may be prepaid at the Maker's option prior to maturity in
whole or at any time, or in part from time to time in inverse order of maturity,
but without premium or penalty therefore; provided, however, that all accrued
and unpaid interest hereon shall be paid contemporaneously with such prepayment;
and provided further that in the event interests in this Note are assigned, all
assignees shall be pre-paid pro rata. In case the Maker shall desire to prepay
all, or, as the case may be, any part of this Note, the Maker shall mail a
notice thereof not less than ten (1O) days prior to the prepayment date to the
Holder. Such notice shall specify the date fixed for prepayment and the amount
of this Note then proposed to be prepaid and shall state that such prepayment,
together with all accrued and unpaid interest due on this Note, will be made at
the office of the Maker upon presentation and surrender of this Note. Interest
on the principal of this Note that shall be prepaid hereunder shall cease to
accrue on such date fixed for prepayment. In case this Note is to be prepaid
only in part, upon surrender hereof the Holder will be issued, without charge, a
new Note, dated the date of the Note so surrendered, in the principal amount
equal to the unprepaid portion hereof, or this Note (or any replacement hereof)
shall be appropriately stamped to indicate the reduced principal amount hereof
as a result of such payment.
3. The Maker covenants that it will duly and punctually pay or cause to be
paid the principal of and interest on the Note according to the terms hereof.
Maker hereby waives
2
<PAGE>
presentment and demand for payment, notice of dishonor, protest and notice of
protest of this Note.
4. The Maker covenants that, so long as the Note remains outstanding, it
will maintain an office or agency in the state in which it is currently located
where notices and demands to or upon the Maker in respect of the Note may be
served and where the Note may be presented for payment.
5. In case this Note shall become mutilated, destroyed, lost or stolen, the
Maker shall execute and deliver a new Note, in exchange and substitution for the
mutilated Note, or in lieu of an substitution for the Note so destroyed, lost or
stolen. In every case the applicant for a substitute Note shall furnish to the
maker such security or indemnity as may be reasonably requested by it, and, in
every case of destruction, loss or theft, the applicant shall also furnish to
the Maker evidence to its satisfaction of the destruction, loss or theft of such
Note and of the ownership thereof. Upon the issuance of any substitute Note,
the Maker may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto.
6. In case of any one or more of the following events ("Event of Default")
shall occur:
(i) a default shall be made in the payment of any installment of
interest or principal on this Note or any replacement Notes issued in connection
with an assignment of a divided interest in this Note when and as such
installment of interest or principal shall become due and payable, and such
default shall continue for a period of three (3) days after
3
<PAGE>
written notice thereof shall have been given to the Maker by the Holder or an
assignee of Holder; or
(ii) an encumbrancer shall take possession of or a receiver or
similar officer shall be appointed for the whole or any part of the assets,
rights or revenues of the Maker or ART, LLC ("ART") or FWC Energy, LLC ("FWCE"),
or a distress execution, sequestration or other process shall be levied or
enforced upon or sued out against any part of the assets, rights or revenues of
the Maker or ART or FWCE and shall not be discharged within sixty (60) days; or
(iii) The Maker or ART or FWCE shall suspend payments of their debts or
default under any agreement to which they are a party or guarantor relating to
indebtedness in excess of $150,000.00, or shall be unable or shall admit
inability to pay their debts as they fall due or shall propose or enter into any
composition or together arrangement for the benefit of its creditors generally,
or they shall commence proceedings in relation to reconstruction or readjustment
of debts generally; or
(iv) the Maker or ART or FWCE shall transfer, sell, pledge, assign or
lease substantially all of its assets to a third party except pursuant to a
transaction approved by Holder in advance in writing; or
(v) a petition under any Chapter of Title 11 of the United States Code
or any similar law or regulation is filed by or against Maker, ART, FWCE or any
of their affiliates (and in the case of an involuntary petition in bankruptcy,
such petition is not discharged within sixty (60) days of its filing), or a
custodian, receiver or trustee for Maker or ART or
4
<PAGE>
FWCE is appointed, or Maker or ART or FWCE makes an assignment for the benefit
of creditors, or any of them are adjudged insolvent by any state or federal
court of competent jurisdiction, or an attachment or execution is levied against
any of the assets of Maker or ART or FWCE; or
(vi) ART or FWCE shall transfer, assign, pledge or sell its interest in
Maker or Ron Burch shall transfer, assign, pledge or sell his ownership interest
in ART or FWCE; or
(vii) the Maker or ART or FWCE shall breach a written covenant in any
Transaction Document or any written warranty or representation made by or on
behalf of Maker or any guarantor of this Note in any Transaction Document prove
to have been false or misleading in any respect on the date when made or deemed
made. For purposes of this paragraph a Transaction Document includes the Loan
and Option Agreement amongst Maker, ART or FWCE and Holder of even date and any
document executed or delivered by the Maker or ART or FWCE in connection with
the transactions described in the Letter of Intent between Holder and Maker
dated July 15, 1996;
(viii) the Maker does not obtain an operating permit from the Nevada
Public Service Commission on or before August 15, 1997;
(ix) the Maker does not consummate debt financing for the Project equal
to or in excess of $30,000,000.00 on or before February 15, 1998.
then and in each and every such case, unless the principal of the Note shall
then be due and payable, the Holder, by notice in writing to the Maker, may
declare the outstanding principal
5
<PAGE>
balance under this Note, and all interest accrued thereon, to be due and
payable immediately, and upon any such declaration the same shall become and
shall be immediately due and payable, anything herein to the contrary
notwithstanding, provided, however, that Holder shall give a written notice of
default and Maker shall have 10 days after receipt of such notice to cure the
default specified in the Notice. If default is timely cured, the notice of
default shall be deemed null and void and the Note shall be deemed in good
standing.
(a) In case the Holder shall have proceeded to enforce any right
hereunder and such proceedings shall have been discontinued or abandoned or
cured because of a rescission or annulment or for any other reason or shall have
been determined adversely to the Holder, then, and in every such case, the Maker
and the Holder shall be restored respectively to their positions and rights
hereunder, and all rights, remedies and powers of the Maker and the Holder shall
continue as though no such proceedings had been taken.
(b) From and after the occurrence of an uncured Event of Default, all
amounts due and unpaid hereunder shall, to the extent permitted by law, bear
interest until paid, at the lesser of 15% per annum and the maximum rate
permitted under applicable law, such interest shall be calculated on the basis
of 360 day year.
7. Maker shall pay principal, interest and other amounts under, and in
accordance with the terms of, this Note, free and clear of, and without
deduction for, any and all present and future taxes, levies, imposts,
deductions, charges, withholdings, and all liabilities with respect thereto,
excluding income and franchise taxes payable by Holder to the United States of
America or any political subdivision thereof. In addition, Maker shall pay any
federal,
6
<PAGE>
state or local taxes on the acquisition of this Note by Holder and any
stamp or other taxes levied by any jurisdiction on the execution, delivery,
registration, performance and enforcement of this Note or any replacement
Note(s).
8. Notwithstanding any provision of this Note regarding the determination
and payment of amounts due and payable hereunder, it is expressly understood and
agreed by Maker and Holder, that the relationship between Maker on the one hand
and Holder on the other with regard to this Note shall be solely that of debtor
to creditor and not that of joint venturers, partners, tenants in common or
joint tenants.
9. All agreements between Maker and Holder contained herein are hereby
expressly limited so that in the event the performance of Maker's obligations
under this Note or any other Transaction document shall cause Maker to pay
Holder interest in excess of that permissible under applicable law, then ipso
----
facto, the amount which would be excessive interest shall be first prorated,
- -----
spread and allocated, to the fullest extent permitted by law, to such period and
principal amounts as will cause such amount to conform to any comply with
applicable law, and the balance, if any, shall be applied to the reduction of
the principal balance as evidenced by this Note and not to the payment of
interest. This provision shall control every other provision of this Note and
all other agreements and instruments between Maker and Holder relative hereto.
10. As used herein, the term "Holder" shall mean, in addition to the
initial payee hereof, each person from time to time who is an endorsee of this
Note or the bearer, if this Note is at the time payable to bearer.
7
<PAGE>
11. NOTWITHSTANDING ANY PROVISION IN THIS AGREEMENT OR THE LETTER OF INTENT
TO THE CONTRARY, NOTHING CONTAINED IN THIS NOTE OR IN ANY OTHER DOCUMENT SHALL
REQUIRE HOLDER OR ITS AFFILIATES TO MAKE ANY ADDITIONAL LOANS OR CAPITAL
INVESTMENTS IN ORDER THAT THE MAKER PERFORM ITS OBLIGATIONS UNDER THIS NOTE.
NOTWITHSTANDING ANY PROVISION IN ANY TRANSACTION DOCUMENT TO THE CONTRARY,
HOLDER'S STATUS AS A MEMBER OF MAKER OR THE STATUS OF ANY MEMBER OR MANAGER OF
HOLDER AS A MANAGER OF MAKER, SHALL NOT PREVENT HOLDER FROM EXERCISING ANY RIGHT
OR ENFORCING ANY PROVISION OF THIS NOTE, IN ACCORDANCE WITH ITS RESPECTIVE
TERMS. IN THE EVENT HOLDER ELECTS, AT ITS SOLE OPTION, TO PURSUE ITS RIGHTS AND
OPTIONS UNDER THIS NOTE, SUCH ACTIONS BY HOLDER ARE SPECIFICALLY PERMITTED AND
SHALL NOT BE CONSIDERED TO A BREACH OF HOLDER'S FIDUCIARY RESPONSIBILITY TO THE
MAKER, IF ANY, OR A BREACH OF ANY DUTY OF FAIR DEALING BY HOLDER, IT BEING
UNDERSTOOD THAT HOLDER WOULD NOT HAVE MADE ANY LOAN(S) IF HOLDER'S OPTIONS TO
ENFORCE ITS RIGHTS UNDER THE NOTE WOULD BE OR WOULD HAVE BEEN LIMITED IN ANY
MANNER BY THIS AGREEMENT OR ITS RELATIONSHIP TO MAKER.
12. All powers and remedies given by Section 6 to the Holder shall, to the
extent permitted by law, be deemed cumulative and not exclusive of any thereof
or of any other
8
<PAGE>
powers and remedies available to the Holder, by judicial proceedings or
otherwise, to enforce the performance and observance of the covenants and
agreements contained in this Note, and no delay or omission of the Holder to
exercise any right or power accruing upon any default occurring and
continuing as aforesaid shall impair any such right or power, or shall be
construed to be a waiver of any such default or in acquiescence therein.
13. All covenants, stipulations, promises and agreements in this Note
contained by or on behalf of the Maker shall bind its respective successors and
assigns, whether so expressed or not.
14. Nothing in this Note, expressed or implied, shall have or be construed
to give to any person, firm or corporation, other than the parties hereto and
their respective successors and assigns, any legal equitable rights, remedy or
claim under or in respect to the Note, or under any covenant, condition or
provision herein contained; and all its covenants, conditions and provision
shall be for the sole benefit of the parties hereto and of the Holder.
15. In any case where the date of maturity of interest on or principal
of this Note, or the date fixed for any prepayment of this Note, shall be
Saturday, Sunday or legal holiday or a day on which banking institutions in the
state in which the Maker currently resides or is located are authorized by law
to close, then payment of interest or principal may be made on the next
succeeding business day with the same force and effect as if made on the date of
maturity or the date fixed for prepayment.
16. Any notice or demand which by any provision of this Note is required or
permitted to be given or served on the Maker or the Holder shall be deemed to
have been so
9
<PAGE>
sufficiently (unless otherwise herein expressly provided) if in writing and sent
by reputable overnight air courier guaranteeing next business day delivery, to
the Maker or Holder (as the case may be) at its address as it appears on this
Note (or such other address, within the same state, as shall be designated by
the Maker or Holder by written notice to the other) and shall be deemed given on
the next business day after it was sent.
17. The Holder shall have the right to assign its rights in this Note in
whole or in divided interests without the consent of the Maker provided that, in
the event of such assignment, Holder shall notify Maker of the name and address
of the assignees. In the event of an assignment, and at no expense to Holder,
Holder shall have the right to surrender this Note in exchange for replacement
Note(s) to the assignees which shall be in the form hereof except to the extent
the principal amount must be adjusted to reflect any divided assignment or
partial prepayment at principal as of the date of the issuance of the
replacement notes.
18. All reasonable and necessary costs and expenses incurred by the Holder
in connection with the enforcement of this Note in the event of an uncured
default, shall be paid by Maker hereof immediately upon demand.
19. This Note shall be deemed to be a contract made under the laws of New
York, and for all purposes shall be governed by, construed and enforced in
accordance with the internal laws thereof, without reference to principles of
conflict of laws. However, any action brought to enforce the Note must be
brought in a state or federal court located in the State of Nevada.
10
<PAGE>
20. This Note and the Transaction Documents set forth the entire agreement
and understanding of Holder and Maker. Maker absolutely, unconditionally and
irrevocably waives any and all right to unilaterally setoff any amount or claim
of any nature whatsoever with respect to payments under this Note or the
obligations of Maker under this Note. Maker acknowledges that no oral or other
agreements, understandings, misrepresentations or warranties exist with respect
to this Note or with respect to the obligations of Maker under this Note, except
those specifically set forth in this Note.
21. Maker (and the undersigned representative of Maker, if any) represents
that Maker has full power, authority and legal right to execute and deliver this
Note and that the debt hereunder constitutes a valid and binding obligation of
Maker enforceable in accordance with its terms.
22. MAKER HEREBY IRREVOCABLY INTENTIONALLY AND UNCONDITIONALLY WAIVES, AND
HOLDER BY ITS ACCEPTANCE OF THIS NOTE IRREVOCABLY INTENTIONALLY AND
UNCONDITIONALLY WAIVES, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT
OR COUNTERCLAIM ARISING IN CONNECTION WITH, OUT OF OR OTHERWISE RELATING TO THE
LOAN, THIS NOTE OR THE OTHER LOAN DOCUMENTS.
23. When used, the singular number shall include the plural, the plural the
singular and the words "Holder" and "Maker" shall include their respective
successors and assigns, provided that Maker shall have no right to assign or
transfer its obligations under this Note.
11
<PAGE>
24. This Note may only be modified, amended, changed or terminated by an
agreement in writing signed by Holder and Maker. No waiver of any term,
covenant or provision of this Note shall be effective unless given in writing by
Holder and if so given by Holder shall only be effective in the specific
instance in which given.
IN WITNESS WHEREOF, MAKER has caused this Note to be duly executed in its
name by a duly authorized officer and has caused its corporate seal to be
affixed hereto as of the date first above written.
RENO ENERGY, L.L.C.
By: /s/ Ron E. Burch
----------------------
Its: President
12
<PAGE>
EXHIBIT 10.29
RENO ENERGY, LLC
July 15, 1996
Mr. Richard Nelson
President
NRG Power, LLC.
515 N. Flagler Drive, Suite 202
West Palm Beach, Florida 33401
Dear Richard:
On behalf of Reno Energy, LLC ("Reno Energy") I am pleased to offer NRG Power,
LLC ("NRG") an opportunity to participate in what I believe will become one of
the largest utilities in the State of Nevada. Reno Energy was formed to sell hot
water to commercial, industrial and residential customers who are located in and
around Reno, Nevada. The hot water will be delivered to its customers through an
underground closed-loop piping system which would be heated by geothermal
energy. The hot water would be used by these customers for many purposes which
would reduce or eliminate the customers need to purchase natural gas or
electricity.
Reno Energy can purchase, at market price, hot Geothermal brine from one or more
entities which control hot and commercially viable geothermal resources at the
Steamboat Known Geothermal Resource Known Area ("KGRA") which is located
approximately 10 miles south of Reno. One of those entities is Far West
Capital, Inc. ("FWC"). FWC and its affiliates control several hundred acres of
commercially producing geothermal resources at the Steamboat KGRA. Such
entities have sold electrical power to the local utility for almost 10 years.
Presently these power plants produce a total of over 300,000,000 kilowatts per
year. Hot geothermal brine could be purchased from FWC to heat Reno Energy's
closed loop system.
I believe that Reno Energy will be able to offer its customers reliable energy
from geothermally heated water for about 60 - 70 percent of the customers
present cost of energy from natural gas or electricity. I have furnished you a
report that was produced by the University of Nevada at Reno. It concludes that
a geothermal heating district (the "Project") would be viable in Reno, Nevada.
The report predicts that the annual revenues from such a district would exceed
$14 million for only the first stage of development. Our first stage of
development is an industrial park which is currently under construction near
the site of the power plants. The report goes on to state those revenue figures
could more than double upon full build-out of the Project.
1010 Power Plant Dr. Reno, Nevada 89511 (702) 852-2079
<PAGE>
Reno Energy Proposal 07/15/96
Presently Reno Energy is preparing an application to the Nevada Public Service
Commission for the appropriate operating permits. Additionally, we are
submitting an application through the State of Nevada for what could be up to a
$5 million grant which is presently being solicited by the Department of Energy
for the purpose of promoting geothermal development in the state.
The deadline for its submittal is August 31, 1996.
I have attached a proposal which would allow NRG to participate in the Project.
It is important to us that if we have an early development partner in the
Project that this partner must make binding commitments now to enjoy the return
of their early investment risk. Accordingly. I respectfully submit the
enclosed proposal for your review. Please call me at (801) 268-4444 extension
3015 or (801) 598-1932 when you have had an opportunity to review my proposal.
Very truly yours,
Reno Energy, LLC
ART, LLC
/s/ Ron Burch
Ron Burch
President
REB:11
2
<PAGE>
Reno Energy Proposal 07/15/96
TERM SHEET
Reno Energy would agree to borrow the sum of $300,000 (the "Loan") from NRG
based upon the following terms and conditions. As additional consideration for
the Loan, Reno Energy would arrange make available up to fifty-percent (50%) of
the member ownership interest of Reno Energy for its sale and purchase by NRG.
I. LOAN TERMS:
- ---------------------
Amount: $300,000.00
Interest Rate: 9% simple
Term: 3 years
1st Payment Due: 1st payment due 3 months after proceeds delivered to
Reno Energy
Remaining Payments: Equally every three months thereafter until paid in
full
Early payment: Loan may be paid off at anytime with no prepayment penalty
Guarantor: Reno Energy, LLC
II. ADDITIONAL CONSIDERATION
- -----------------------------
As additional consideration for NRG making the Loan under the terms of this
proposal ART, LLC, the 100% owner of Reno Energy's member ownership interest,
has tentatively agreed that NRG would be granted:
A. a right of first refusal to purchase up to fifty percent (50%) of the
member ownership interest of Reno Energy provided that NRG exercises this right
by responding in writing to the submittal of a bonafide offer within 5 business
days of its receipt of a Notice of Offer by Reno Energy. This right of first
refusal would be in force for as long as the Loan has an outstanding balance.
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Reno Energy Proposal 07/15/96
B. a right to purchase fifty-percent (50%) of the member ownership interest
of Reno Energy ("Right to Purchase") under the following terms and conditions:
1. The purchase price would be $1 million if this amount is paid in full no
latter than 90 days after the signing of the Loan Documents (hereinafter
defined). All terms, conditions and documentation of such purchase must be
completed to the reasonable satisfaction of the parties and the money
transferred to ART, LLC by the 90th day for this purchase price to be
applicable.
2. By the end of the 90th day, NRG may extend its Right to Purchase for an
additional 60 days for a cash payment to ART, LLC of $100,000 ("Extension Cash
Payment"). Once this cash payment is received by ART, LLC fifty-percent (50%)
of the interest of Reno Energy may be purchased by NRG for the price of $1.2
million provided that the price is paid in full to ART, LLC no later than the
150 days after the execution of the Loan Documents. Should the 60 day extension
expire without NRG making full payment to ART, LLC of the $1.2 million the
$100,000 Extension Cash Payment will immediately become non-refundable, all
purchase options provided for by this agreement, other than the right of first
refusal as described in II A, shall be withdrawn and become null and void and no
further purchase options will be made available.
3. (a) In the event NRG exercises its right to purchase a 50% member
ownership interest under paragraph (B. 1 or 2) above, the interest so purchased
by NRG shall be considered a Class B interest, with the 50% interest retained by
FWC being considered Class A interest. The Class A interest shall, for five
years after the project is in operation, have a 20% preference on net
distribution as long as the project meets projected net distribution cash flow
as per Page 2 of the Pro-Forma of $321,977, $730,644, $1,344,250, $2,564,183,
and $4,895,866 in years 1998 through 2002 respectively (first five years of full
operation). If the project does not meet projected income in any of the first
five years, the preference will be adjusted downwards as a percentage for the
income not met.
For example, if the projected net income for Year 3 has been set at
$1,344,250, and that figure is met, the distribution would be as follows:
---- $268,850 as the preference to Class A.
---- $537,700 to Class A.
---- $537,700 to Class B.
If the net income in Year 3 has been projected for $1,344,250, and the
net income is only half, or $672,125, then the preference would be downwards by
the percentage (50%) not met, or adjusted to 10% for that year. The
distribution would be:
---- $ 67,212 as the preferred to Class A
---- $302,456 to Class A
---- $302,456 to Class B
4
<PAGE>
Reno Energy Proposal 07/15/96
(b). After the fifth year, the preference shall cease to exist, and the
liquidation value and income distribution shall be a full 50% each to Class A
and Class B interest holders.
(c). For the first five years, the Class A interest shall have a 20%
preference on sale or exchange of the project, lease and income preference
distribution received during the period.
For example, if, in the third year, the entire project is sold for ten time
earnings (assuming the earnings are then at $1,344,250) or $13,442,500, then the
distribution on the sale
would be as follow:
---- $2,688,500 to Class A as the preference less prior income
preference
---- $5,377,000 to Class A
---- $5,377,000 to Class B
Again, after the fifth year, the preference disappears.
4. It is understood and agreed that NRG will grant to U.S.
Envirosystems, Inc. ("USE") an option for five years to exchange its Class B
interest for USE shares at fair market value. The preference stated in
paragraph 3 (c) above would not apply to that exchange unless the Class A
interest holders also exchanged their interest so that 100% of the project were
so sold. Similarly, if the Class A interest holders sold or exchanged their
interest with another third party, and the Class B interest holders did not
participate, the 20% preference on sale or exchange would not apply, although
the 20% preference on income would apply for any of the remaining five years.
C. Arrange project financing for Reno Energy through a major
national banking firm. NRG will be entitled to a fee of one-percent (1%) of
the amount raised through the investment banking firm's financing. Such amount
to be paid contemporaneously with the closing of the financing and shall be
considered a condition of closing. The right to perform this service expires 2
years from the date of the Loan document.
III. OTHER TERMS AND CONDITIONS
- -------------------------------
A. NRG agrees to fund fifty-percent (50%) of any future Project related
development costs which exceed the amount of $250,000. Reno Energy will provide
NRG with a budget for its approval prior to exceeding the $250,000, such
approval shall not be unreasonably withheld. It is understood that Reno Energy
will repay ART, LLC $50,000 for prior development cost which they advanced.
B. Reno Energy has the irrevocable right to withdraw and terminate this
offer if the Loan is not funded by July 31, 1996. Please be advised that Reno
Energy will not be liable for any
5
<PAGE>
Reno Energy Proposal 07/15/96
claim to damage which NRG or its owners, employees or agents could bring due to
the good faith withdraw and termination of this offer.
C. This proposal is intended to set forth the general terms and conditions
for the Loan which would be acceptable to Reno Energy. It is understood
that definitive documents (the "Loan Documents") including but not limited
to, operating agreements for Reno Energy and NRG, a purchase agreement
between ART, LLC and NRG, and a loan agreement will be required to be
executed. Reno Energy and ART LLC agree that they will not seek, solicit,
or entertain any other offers, in regard to the terms of this document,
prior to July 31, 1996.
6
<PAGE>
EXHIBIT 10.30
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF
NRG COMPANY, LLC
LIMITED LIABILITY COMPANY AGREEMENT of NRG COMPANY LLC, dated as of
September 8, 1996, among RICHARD NELSON, THEODORE ROSEN, RONALD MOODY, ARTHUR
PERGAMENT, HAROLD BOYER, FRED KNOLL, DONALD ENGEL and JOHN ROSENTHAL (each a
"Member" and collectively, the "Members").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, NRG Company LLC (the "Company"), a Delaware limited liability
company, was formed on July 12, 1996; and
WHEREAS, the Members desire to set forth their agreement with respect to (a)
the business of the Company, (b) the conduct of the Company's affairs, and (c)
the rights, powers, preferences, limitations and responsibilities of the Members
of the Company; and
WHEREAS, the Members of the Company desire that the Company be treated as a
partnership for federal income tax purposes.
NOW, THEREFORE, in consideration of the mutual covenants and premises hereof
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto, intending to be legally bound,
agree as follows:
DEFINITIONS
-----------
For the purposes of this Agreement, the following terms shall have the
indicated meanings:
0.1 "Agreement" means this Limited Liability Company Agreement of the
Company, by and among the Members referred to herein.
0.2 "Capital Account" means, with respect to any Member, the capital
account maintained for such Member in accordance with the provisions of Section
5 hereof.
<PAGE>
0.3 "Capital Contribution" means the total amount of capital actually
contributed to the Company by each Member pursuant to the terms of this
Agreement.
0.4 "Code" means the Internal Revenue Code of 1986, as amended from time to
time, or corresponding provisions of future law.
0.5 "Company" means NRG Company LLC, the limited liability company formed
pursuant to this Agreement and the LLC Law.
0.6 "Damages" means any and all damages, disbursements, suits, claims,
liabilities, obligations, judgments, fines, penalties, charges, amounts paid in
settlement, expenses, costs and expenses (including, without limitation,
attorneys' fees and disbursements) arising out of or related to litigation, and
interest on any of the foregoing.
0.7 "Dispose" means to make a Disposition.
0.8 "Disposition" means a transfer, gift, assignment, sale, pledge or other
disposition of all or any part of an Interest.
0.9 "Fiscal Year" means the calendar year.
0.10 "Interest" means, with respect to any Member, the Capital Account, the
Percentage Interest and all other rights with respect to the Company, of such
Member.
0.11 LLC Law" means the Delaware Limited Liability Company Act and any
successor statute, as amended from time to time.
0.12 "Loan and Option Agreement" shall refer to the agreement so titled
amongst the Company, Reno Energy LLC, ART LLC, FWC Energy LLC dated as of August
15, 1996 as amended.
0.13 "Managers" shall mean Richard Nelson, Theodore Rosen and Ronald Moody
or any other person who becomes Manager in accordance with the terms of this
Agreement. If there shall be only one Manager the term "Managers" shall be
deemed to be singular.
2
<PAGE>
0.14 "Member" means each of the parties who executes a counterpart of this
Agreement as a Member and each of the parties who may hereafter become Members.
0.15 "Net Cash Flow" means all funds from whatever source which are
available for distribution (or payment of loans) to the Members, reduced by
payments of or provisions made for the debts, expenses and liabilities of the
Company, expenses incurred in connection with the collection of such proceeds,
and after reduction for allowances for reasonable reserves established by the
Managers.
0.16 "Net Profits and Net Losses" means the net taxable income or net
taxable loss of the Company, respectively, as determined for federal income tax
purposes, for each Fiscal Year of the Company, plus any income that is exempt
from federal income tax and minus expenditures that are not deductible in
computing federal taxable income and not properly chargeable to capital
accounts, in each case to the extent such items are not otherwise taken into
account in computing Net Profits or Net Losses.
0.17 "Note" shall refer to the $300,000 Note from Reno Energy LLC to the
Company dated August 9,1996 as amended.
0.18 "Option" means the option to purchase an interest in
Reno Energy LLC in accordance with Section 4 of the Loan and Option Agreement.
0.19 "Percentage Interest" means the percentage interest of a Member in the
Company at any time based upon the relative Capital Contribution of each Member.
The Percentage Interest of the Members as of the date hereof is set forth on
Schedule 1.
0.20 "Person" means any association, corporation, joint stock company,
estate, general partnership, limited association, limited liability company,
foreign limited liability company, joint venture, limited partnership, limited
liability partnership, natural person, real estate investment trust, business
trust or other trust, custodian, nominee or any other individual or entity in
its own or any representative capacity.
3
<PAGE>
1 FORMATION OF THE COMPANY
------------------------
1.1 Formation. On July 12, 1996, the Company was organized as a Delaware
---------
limited liability company by the filing of the Certificate of Formation with the
Delaware Department of State. This Agreement is executed and delivered pursuant
to the LLC Law.
1.2 Name. The name of the Company is NRG Company LLC, and its business
----
shall be carried on in such name with such variations and changes as the
Managers deem necessary to comply with requirements of the jurisdictions in
which the Company's operations are conducted.
1.3 Principal Address. The principal address of the Company in the State
-----------------
of Delaware shall be c/o U.S. Energy Systems, Inc. 515 N. Flagler Drive, Suite
202, West Palm Beach, Florida 33401. The Company shall have such other offices
as the Managers shall determine and as to which the Managers shall promptly
notify all Members.
1.4 Term. The term (the "Term") of the Company commenced upon the filing
----
of the Certificate of Formation with the Delaware Department of State and shall
continue until December 31, 2045 unless earlier terminated upon the events of
dissolution set forth in Section 18-801 of the LLC Law or as otherwise provided
in this Agreement.
1.5 Title to Company Property. All of the Company's right, title and
-------------------------
interest in tangible property, intangible property, real property, personal
property and other assets acquired by the Company shall be held in the name of
the Company as an entity. Upon the acquisition of any such property, the
Managers shall execute such documents as may be necessary to reflect the
Company's ownership interest in such property. No Member shall have an
ownership interest in any property of the Company in his individual name or
right and each Member's Percentage Interest shall be personal property for all
purposes.
1.6 Purposes of the Company. The purposes of the Company are as follows:
-----------------------
4
<PAGE>
(a) to extend one or more loans to Reno Energy, LLC, a Nevada limited
liability company ("Reno"), in accordance with the terms of the Note and in
connection therewith to receive, extend and exercise the Option.
(b) to engage in any activity that limited liability companies may engage in
under the LLC Law reasonably related to the activities described in clause (a)
above. The Company shall not engage in any other business activities without
the unanimous consent of the Members.
2 MEMBERS' CAPITAL CONTRIBUTIONS
------------------------------
2.1 Capital Contribution.
--------------------
(a) First Stage Capitalization. Each Member shall initially
--------------------------
contribute an amount of cash to the capital of the Company as is set forth on
Schedule 1 which in the aggregate shall total $70,000.00 (the "First Stage
Capitalization"). The First Stage Capitalization shall be used to fund an
initial loan to Reno of $50,000.00 in accordance with the Note and the remainder
shall be used to pay out of pocket expenses of the Company and for Company
working capital.
(b) Upon consummation by U.S. Energy Systems, Inc. of its secondary
public offering or upon such other date determined by a majority of the
Managers, the Company shall issue an optional capital call notice to the Members
for up to an additional $280,000.00 (the "Second Stage Capitalization"). The
Members shall have 5 business days from the receipt of the aforementioned notice
to contribute their pro-rata share to the Second Stage Capitalization on a pro
---
rata basis in accordance with their Membership Interests. In the event all of
- ----
the Members do not contribute the pro-rata share, the contributing Member may
make up the short-fall pro-rata or as they otherwise agree. In the event the
then Members do not fully fund the Second Stage Capitalization pursuant to the
two preceding sentences, the Managers shall be authorized to make up the short-
fall by issuing new Membership Interests in the Company to new Members
(including, without limitation U.S. Energy Systems, Inc.) on terms which, in
their discretion, they deem appropriate provided that such terms shall be non-
dilutive to the then Members. All Members shall cooperate with the Company in
such sale of new Membership Interests and shall execute and deliver such
5
<PAGE>
documentation as the Managers deem necessary in order to consummate such sale.
(c) Third Stage Capitalization. Upon a vote of a majority of the
--------------------------
Managers to exercise and/or extend the Option, the Company shall issue an
optional call to all then Members for 105% of the sum required for such exercise
or extension as provided in the Loan and Option Agreement (the "Third Stage
Capitalization"). The then Members shall have 10 business days from the receipt
of the aforementioned notice to contribute their pro-rata share of the Third
Stage Capitalization in accordance with their then Membership Interests. If all
of the Members so contribute their pro-rata share, the Company shall proceed to
extend or exercise the Option as the case may be. In the event all of the
Members do not contribute their pro-rata share, the contributing Members shall
have the right but not the obligation to form a new entity which shall be
capitalized by the contributing members (to the "Third Stage Capitalization")
pro rata, based on their interests in the Company or as they otherwise agree,
and the Company shall assign its entire right, title and interest to the Option
to such new entity for $1.
3 MEMBERS; PERCENTAGE INTERESTS
-----------------------------
3.1 Members. The Members are those Persons who execute a
-------
counterpart of this Agreement as Members.
3.2 Initial Percentage Interests. The names and addresses of
----------------------------
the Members and their initial respective Percentage Interests as of the date
hereof are set forth on Schedule 1 hereto.
3.3 The Members' Percentage Interests are subject to modification in
accordance with Section 2 above.
4 INTEREST ON CAPITAL CONTRIBUTIONS
---------------------------------
4.1 No Interest on Capital Contributions. Members shall not receive
------------------------------------
interest on Capital Contributions.
4.2 No Rights to Withdraw Capital Contributions. Members shall not have
-------------------------------------------
the right to demand the return of or otherwise withdraw their Capital
Contributions, except as specifically set forth in this Agreement.
6
<PAGE>
5 CAPITAL ACCOUNTS
----------------
Each Member's Capital Account shall be maintained in accor-
dance with the following provisions:
5.1 Maintenance of Capital Accounts. A separate Capital Account shall be
-------------------------------
maintained on the books of the Company for each Member in accordance with
Treasury Regulation Section 1.704-1(b)(2)(iv). The Capital Accounts shall be
adjusted, as described below, (i) as of December 31 of each year, (ii)
immediately prior to the acquisition of an Interest by any Person, (iii)
effective as of the date of the sale of the Company (whether by way of asset
sale, sale of Interests or merger) in which the Members immediately prior to
such transaction shall cease to own a majority of the Interests, and (iv) on the
date of dissolution of the Company.
5.2 Initial Capital Account. Each Member's Capital Account shall initially
-----------------------
equal the cash such Member contributes to the capital of the Company upon his
admission to the Company.
5.3 Increases in Capital Account. Each Member's Capital Account shall
----------------------------
be increased by (a) the amount of any additional cash or the fair
market value of property (net of liabilities secured by such contributed
property that the Company is considered to assume or take subject to under Code
Section 752) subsequently contributed by such Member to the capital of the
Company, and (b) the amount of any profits or items thereof allocated to such
Member pursuant to Section 5.5.
5.4 Reductions in Capital Account. Each Member's Capital Account shall be
-----------------------------
reduced by (a) the amount of all cash distributions made to such Member to the
extent provided in Section 6 hereof, (b) the fair market value of any property
(net of liabilities secured by such distributed property that the Member is
considered to assume or take subject to under Code Section 752) distributed by
the Company to such Member, and (c) the amount of any losses or items thereof
allocated to such Member pursuant to Section 5.5 hereof.
5.5 Net Profits and Net Losses. Net Profits earned by the Company since
--------------------------
the last date on which Net Profits shall have been allocated shall be credited
to each Member's Capital Account
7
<PAGE>
and Net Losses incurred by the Company since the last date Net Losses shall have
been allocated shall be debited from each Member's Capital Account. Net Profits
and Net Losses shall be allocated to the Members in proportion to their
respective Percentage Interests subject to Section 5.7.1 below.
5.6 Special Allocations.
-------------------
5.6.1 Subject to Treasury Regulation Section 1.704-1(b)(2)(iv), no
adjustment shall be made to any Member's Capital Account as a result of the use
by the Company of property owned by such Member, notwithstanding the fact that
such Member is not compensated for the use of such property.
5.6.2 Payment by the Company to a Member for services rendered shall
be treated by the Company as an expense. If such payments are treated by the
Internal Revenue Service for Federal income tax purposes as a distribution, then
Company income, in an amount equal to such payment, shall be allocated to such
Member, for Federal income tax purposes.
5.7 Tax Allocations.
---------------
5.7.1 Transfer or Change in Company Interest. If the respective
--------------------------------------
Interests of the existing Members in the Company change or if an Interest is
transferred to any other person or entity, then with respect to the applicable
Fiscal Year all income, gains, losses, deductions, tax credits and other tax
incidents resulting from the operations of the Company shall be allocated, as
between transferor and transferee, by taking into account their varying
Interests in accordance with Section 706 of the Code. A transferee of an
Interest in the Company shall succeed to the Capital Account of the transferor
Member to the extent it relates to the transferred Interest. The Members hereby
agree to be bound by the provisions of this Section 5.7 in reporting their
respective shares of items of Company income, gain, loss, deduction and credit.
6 DISTRIBUTIONS OF NET CASH FLOW
------------------------------
Net Cash Flow shall be distributed or paid to the Members at such time or
times as the Managers shall determine, and in accordance with the Members'
respective Percentage Interests.
8
<PAGE>
7 POWERS AND RESPONSIBILITIES OF THE MANAGERS
-------------------------------------------
7.1 Managers. The Managers as of the date of this Agreement are Theodore
--------
Rosen, Richard Nelson and Ronald Moody. Any Person who is not a Manager shall
not have any right to participate in the management of the Company except as
otherwise set forth in this Agreement. Other Persons may become Managers as
provided by this Agreement.
7.2 Management. The business and affairs of the Company shall be
----------
exclusively managed by its Managers, subject to the terms and conditions hereof.
The Managers shall direct, manage, and control the business of the Company to
the best of their ability. Except for situations in which the approval of the
Members is expressly required by this Agreement or by non-waivable provisions of
applicable law, the Managers shall have full and complete authority, power, and
discretion to manage and control the business, affairs, and properties of the
Company, to make all decisions regarding those matters and to perform any and
all other acts or activities customary or incident to the management of the
Company's business. All decisions by the Managers shall be based on a majority
vote of the Managers.
7.3 Number, Tenure and Qualifications. The Company initially shall have
---------------------------------
three (3) Managers, which shall be Theodore Rosen, Richard Nelson and Ronald
Moody, each of which shall serve as Managers until the earlier of (i) his
resignation, (ii) the sale or assignment by any Manager of his entire Interest,
or (iii) the election of other or additional Managers by a vote of the Members
holding not less than a majority Percentage Interest.
7.4 Resignation. Any Manager of the Company may resign
-----------
at any time by giving written notice to the Members. The resignation of any
Manager shall take effect upon receipt of such notice.
7.5 Certain Powers of Managers. Without limiting the
generality of Section 7.2, but subject to Section 7.6 hereof the Managers, based
on a majority vote of the Managers shall have power and authority, on behalf of
the Company:
7.5.1 To purchase liability and other insurance to protect the Company's
property and business;
9
<PAGE>
7.5.2 To hold and own any Company real and/or personal properties in the
name of the Company;
7.5.3 To invest any Company funds temporarily including, without
limitation, in time deposits, short-term governmental obligations, commercial
paper, or other investments;
7.5.4 To execute on behalf of the Company all instruments and documents,
including, without limitation: checks, drafts, notes contracts and other
negotiable instruments, documents providing for the acquisition, or disposition
of the Company's property, and other instruments or documents necessary, in the
opinion of the Managers, to the business of the Company;
7.5.5 To employ employees, accountants, legal counsel, or other experts or
third parties to perform services for the Company and to compensate them from
Company funds;
7.5.6 To enter into any and all other agreements on behalf of the Company,
in such forms as the Managers may approve; and
7.5.7 Accept the Note from Reno Energy LLC and make the Loan
described thereunder; execute, deliver and perform the Loan and Option
Agreement, including any actions necessary to consummate the Option including
the negotiation and execution of any operating agreement respecting Reno Energy
LLC upon exercise of the Option.
7.5.8 To do and perform all other acts as may be necessary or appropriate
to the conduct of the Company's business.
7.6 Limitation on Managers' Authority. Notwithstanding the provisions
---------------------------------
of Sections 7.2 and 7.5 or any other provision of this Agreement to the
contrary, the Managers shall not take any of the following actions without the
approval of Members holding not less than 51% of the Percentage Interests:
7.6.1 Sell, transfer, convey or otherwise dispose of all or substantially
all of the assets of the Company.
10
<PAGE>
7.6.2 Dissolve the Company or wind up its affairs.
7.6.3 Incur obligations for borrowed money.
7.6.4 Admit any additional Members except as described in Section 2
hereof.
7.6.5 Take any action with respect to seeking protection under any
bankruptcy, insolvency or similar laws.
7.6.6 Give any guarantee or indemnity to secure the liabilities or
obligations of any person or entity.
7.6.7 Take any action with respect to the Company's engagement in any
merger, consolidation or similar business combination.
7.6.8 Create any charge or lien, other than a lien arising by
operation of law, or other encumbrance over the whole or any part of the
property or assets of the Company.
7.7 Liability for Certain Acts. The Managers shall perform their Managers'
--------------------------
duties in good faith, in a manner they reasonably believe to be in the best
interests of the Company, and with such care as an ordinarily prudent person in
a like position would use under similar circumstances. A Manager who so
performs the duties of Manager shall not have any liability by reason of being
or having been a Manager of the Company. A Managers does not, in any way,
guarantee the return of the Members' Capital Contributions or a profit for the
Members from the operations of the Company. A Manager shall not be liable to
the Company or to any Member for any loss or damage sustained by the Company or
any Member, unless the loss or damage shall have been the result of fraud,
deceit, gross negligence, willful misconduct, or a wrongful taking by such
Manager.
7.8 Duty of Managers to Company. The Managers shall have the right to
---------------------------
serve as directors, officers and shareholders of US Energy Systems, Inc. (and
they shall not be required to recuse themselves from any vote of the Managers
even if such vote would affect USE) and engage in such activities which are
unrelated to the Company as they deem appropriate and shall commit only such
11
<PAGE>
of their business time to the management and operation of the Company as may be
reasonably necessary.
7.9 Bank Accounts. The Managers may from time to time open bank accounts
-------------
in the name of the Company, and designate the signatories thereon.
7.10 Indemnification of Managers. The Company shall, to the maximum extent
---------------------------
permitted by applicable law, indemnify and hold harmless the Managers from and
against any and all Damages, including, without limitation, Damages incurred in
investigating, preparing or defending any action, claim, suit, inquiry,
proceeding, investigation or appeal taken from any of the foregoing by or before
any court or governmental, administrative or other regulatory agency, body or
commission, whether pending or threatened, whether or not a Managers is or may
be a party thereto, which arises out of, relates to or is in connection with
this Agreement or the management or conduct of the business or affairs of the
Company, except for any such Damages that are finally found by a court of
competent jurisdiction to have resulted primarily from the bad faith or
intentional misconduct of, or breach of this Agreement or knowing violation of
law by, the Managers seeking indemnification. The termination of any proceeding
by settlement shall not be deemed to create a presumption that the Managers
involved in such settlement acted in a manner which constituted bad faith,
intentional misconduct or a knowing violation of law. All judgments against a
Manager wherein such Manager is entitled to indemnification shall, to the extent
available, be satisfied from Company assets.
7.11 Not liable for Return of Capital. No Member, officer, director,
---------------------------------
Managers , member, stockholder, partner, employee or agent of any Member shall
be personally liable for the return of the Capital Contributions of any other
Member or any portion thereof, and such return shall be made solely from
available Company's assets, if any.
8 RESPONSIBILITY OF MEMBERS
-------------------------
8.1 Limitation of Liability. The Members shall have no
-----------------------
personal liability with respect to the liabilities, obligations, debts or losses
of the Company. Without limiting the foregoing, each Member's liability shall
be limited as set forth in this Agreement, the LLC Law and other applicable law.
12
<PAGE>
9 MEETINGS OF MEMBERS
-------------------
9.1 Annual Meeting. There shall be no requirement that annual meetings of
--------------
the Members be held.
9.2 Special Meetings. Special meetings of the Members, for any purpose or
----------------
purposes, unless otherwise prescribed by statute, may be called by a Manager or
by any Member or Members.
9.3 Place of Meetings. The Members may designate any place, either within
-----------------
or outside the State of New York, as the place of meeting for any of the
Members. All meetings may be held telephonically as provided by Section 403 of
the LLC Law.
9.4 Notice of Meetings. Written notice stating the place, day and hour of
------------------
the meeting and the purpose or purposes for with the meeting is called shall be
delivered no fewer than 10 nor more than 50 days before the date of the meeting,
either personally or by mail, by or at the direction of the Managers or Person
calling the meeting, to each Member entitled to vote at the meeting.
9.5 meeting of All Members. If all of the Members shall meet at any time
----------------------
and place, either within or outside of the State of New York, and consent to the
holding of a meeting at that time and place, the meeting shall be valid without
call or notice, and at the meeting any lawful action may be taken.
9.6 Record Date. For the purpose of determining Members
-----------
entitled to notice of or to vote at any meeting of Members or any
adjournment of the meeting, or Members entitled to receive
payment of any distribution, or to make a determination of Members for any other
purpose, the date on which notice of the meeting is mailed or the date on which
the resolution declaring the distribution is adopted, as the case may be, shall
be the record date for the determination of Members. When a determination of
Members entitled to vote at any meeting of Members has been made as provided in
this Section, the determination shall apply to any adjournment of the meeting.
9.7 Quorum. Members holding at least 66 2/3% of all Percentage Interests
in the Company, represented in person or by proxy, shall constitute a
quorum at any meeting of Members. In
13
<PAGE>
the absence of a quorum at any meeting of Members, a majority of the Percentage
Interests in the Company so represented may adjourn the meeting from time to
time for a period not to exceed 60 days without further notice. However, if the
adjournment is for more than 60 days, or if after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting shall
be given to each Member of record entitled to vote at the meeting. At an
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. The Members present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
during the meeting of that number of Percentage Interests in the Company whose
absence would cause less than a quorum.
9.8 Manner of Acting. If a quorum is present, the affirmative
----------------
vote of Members holding 51% of the Percentage Interests in the Company shall be
the act of the Members, unless the vote of a greater or lesser proportion or
number is otherwise required by the LLC Law, the Articles of Organization or by
this Agreement. Unless otherwise provided in this Agreement or required under
applicable law, Members who have an interest in the outcome of any particular
matter upon which the Members vote or consent may vote or consent upon any such
matter and their Percentage Interest in the Company, vote or consent, as the
case may be, shall be counted in the determination of whether the requisite
matter was approved by the Members.
9.9 Proxies. At all meetings of Members, a member may vote in person or by
-------
proxy executed in writing by the Member or by a duly authorized attorney-in-
fact. The proxy shall be filed with the Managers before or at the time of the
meeting. No proxy shall be valid 12 months from the date of its execution
unless otherwise provided in the proxy.
9.10 Waiver of Notice. When any notice is required to be given to any
----------------
Member, a waiver of the notice in writing signed by the Person entitled to the
notice, whether before, at, or after the time stated therein, shall be
equivalent to the giving of the notice.
14
<PAGE>
10 DISPOSITION OF MEMBERS' INTERESTS
---------------------------------
10.1 Restriction on Disposition by Members. Each Member agrees that no
-------------------------------------
part of an Interest may be Disposed of, except as permitted by this Section 10.
10.2 Permitted Disposition by Members. All or part of the Interest of any
---------------------------------
Member may be Disposed by will, or in the case of intestacy, by the laws of
descent and distribution, to any person.
10.3 Consent to a Disposition. Except for Dispositions described in
------------------------
Section 10.2, a Member may not Dispose of his Interest, or any portion thereof,
without the prior written consent of a majority of the Percentage Interests.
Any Disposition or attempted Disposition of any Interest in violation of this
Section 11 shall be void, and the Company shall not record such Disposition on
its books and records or any purported transferee as the owner of the Interest
for any purpose.
10.4 Effect of Disposition. At the time of the Disposition of any
---------------------
Member's Interest, all of the rights possessed as a Member in connection with
the assigned Interest (other than the right to share in cash distributions,
profits or losses and tax items), which rights otherwise would be held either by
the assignor or the assignee, shall terminate unless the assignee is admitted as
a substitute Member pursuant to the provisions of Section 10.5.
10.5 Admission as a Substitute Member. No purchaser, assignee, donee, or
--------------------------------
other transferee shall become a substituted Member unless all of the following
conditions have been satisfied:
10.5.1 The Disposition complies with Section 10.2 or 10.3 of this
Agreement;
10.5.2 The prospective transferee has executed an instrument, in
form and substance satisfactory to the Managers, accepting and agreeing
to be bound by all terms and conditions of this Agreement and to pay
all expenses of the Company in effecting the Disposition; and
15
<PAGE>
10.5.3 All requirements of the LLC Law have been complied with by the
transferee and the transferring Member and the Company.
10.6 Transferor Remains Liable for Existing Obligations. A Disposition of
--------------------------------------------------
an Interest by a Member, including Dispositions of all or less than all rights
hereunder, shall not relieve the Member of any obligations under this Agreement,
the LLC Law, or otherwise imposed by law, arising prior to such Disposition.
10.7 Effective Date of Disposition. A Disposition of a Member's Interest
-----------------------------
shall be effective as of the first day of the calendar month succeeding the
month in which the Disposition occurs. All allocations and distributions made
after such effective date on account of the Disposed Interest shall be allocated
and paid to the transferee. In the absence of notice to the Managers of the
Disposition of an Interest, whether by operation of law or otherwise,
administrators or legal representatives shall acquit the Company and the
Managers of liability, to the extent of such payment made, to any other person
and/or entity who may be interested in such payment.
11 BOOKS AND RECORDS; ACCOUNTING AND TAX ACCOUNTING
------------------------------------------------
11.1 Books and Records; Right to Inspect. The Company shall keep adequate
-----------------------------------
books and records reflecting all financial activities of the Company. The books
and records will be based on the accrual method of accounting in accordance with
(i) generally accepted accounting principles, as consistently applied, and (ii)
the Code. Such books and records may be inspected and audited by any Member or
his duly authorized representative at any time during business hours, at the
principal office of the Company.
11.2 Tax Return; Tax Matters Partner. The Managers shall cause the Company
-------------------------------
to file a Federal income tax information return and all other tax returns
required to be filed by the Company for each taxable year or part thereof.
Within three months after the end of each taxable year of the Company, the
Managers shall cause each Member to be furnished with information necessary for
preparing such Member's income tax return. In connection with any examination
of the Company's Federal income tax information returns, Richard Nelson is
hereby appointed as the "tax matters partner". As such, it shall have
substantial responsibility and
16
<PAGE>
authority in connection with any examination of the Company's Federal income tax
information returns, including, without limitation, the authority to enter into
agreement with the Internal Revenue Service on behalf of each Member to extend
the period for assessing against such Member a Federal income tax deficiency
attributable to "partnership items" as that term is defined in Section
6231(a)(3) of the Code.
11.3 Federal Income Tax Elections. The "tax matters partner" is authorized
----------------------------
to cause the Company to make such elections for Federal income tax purposes as
it deems advisable, including, in the event of a transfer of all or part of the
Percentage Interest of any Member, an election pursuant to Section 754 of the
Code to adjust the basis of the assets of the Company.
11.4 Partnership Status. It is the intention of the Members that the
------------------
Company shall be taxed as a "partnership" for federal, state and local income
tax purposes. The Members shall take all reasonable actions, including the
amendment of this Agreement and the execution of other documents, as may be
required in order for the Company to qualify as a partnership for these
purposes.
12 DISSOLUTION AND TERMINATION
---------------------------
12.1 Events Causing Dissolution. The Company shall be dissolved upon the
--------------------------
earlier to occur of the following:
12.1.1 December 31, 2045;
12.1.2 the determination of Members holding not less than 51%
of the Percentage Interests to dissolve the Company; or
12.1.3 subject to Section 13.2, the bankruptcy, death, insanity,
retirement, resignation or expulsion (an "Event of Withdrawal") of any
Member, or any other event that under the LLC Law causes the
dissolution of a limited liability company.
12.2 Withdrawal of a Member and Continuation of Company. Upon the
--------------------------------------------------
occurrence of an Event of Withdrawal of any Member, the Company will not be
dissolved if, within 90 days after such event, the remaining Members holding a
majority of Percentage
17
<PAGE>
Interests (among such remaining Members) agree in writing to continue the
business of the Company.
12.3 Liquidation of Assets Upon Dissolution. Upon dissolution of the
--------------------------------------
Company, a Certificate of Cancellation shall be filed pursuant to Section 18-203
of the LLC Law and the Managers shall cause the Company's assets to be sold in
such manner as to obtain the highest price therefor. Pending the sale thereof,
the Managers may continue to operate and otherwise deal with the assets of the
Company.
12.4 Distribution of Liquidation Proceeds. The proceeds of any sales made
------------------------------------
pursuant to Section 12.3, plus any unsold assets of the Company, shall be
distributed as follows:
12.5 First, all Company debts and liabilities to Persons other than Members
shall be paid and discharged;
12.5.1 Second, to the setting up of any funds or reserves which the
Managers may deem reasonably necessary for any contingent or unforeseen
liabilities or obligations of the Company. Such funds or reserves shall be
placed in escrow by the Managers for the purpose of disbursing such amounts in
payment of any of the contingencies, liabilities or obligations of the Company
and, at the expiration of such period as the Managers shall deem advisable, the
balance remaining shall be distributed in the manner hereinafter provided;
12.5.2 Third, to the repayment of any loans or advances that may have
been made by any of the Members to the Company;
12.5.3 Fourth, to any Members with positive Capital Accounts (after
taking into account any adjustments to Capital Accounts pursuant to Section 5
hereof) in proportion to such Members' Capital Account balances until such
Capital Account balances have been reduced to zero; and
18
<PAGE>
12.5.4 Finally, to the Members in proportion to their respective
Percentage Interest in the Company.
13 AMENDMENTS
----------
Amendments to this Agreement may be adopted by the affirmative vote of those
Members holding 51% of the Percentage Interests in the Company; provided,
however, that if any such amendment would increase the liability or required
capital contributions of any Members or change their rights and interest in cash
distributions, then the consent of such affected Members shall be required in
order for such amendment to be effective with respect to such affected Members.
14 MISCELLANEOUS
-------------
14.1 Prohibition Against Partition. Each Member hereby permanently waives
-----------------------------
and relinquishes any and all rights to cause all or any part of the property of
the Company to be partitioned, it being the intention of the Members to prohibit
any Member from bringing a suit for partition against the other Members, or any
of them.
14.2 Choice of Law. This Agreement and all matters relating to the Company
-------------
shall be governed and construed in accordance with the law of the State of
Delaware.
14.3 Notices. Notices or other communications of any kind
-------
and shall be.deemed given when sent as provided in subsection 14.3.1 to the
Members at the addresses set forth in Schedule 1 hereto.
14.3.1 All notices required or permitted under this Agreement shall
be in writing and shall be sufficiently given only if (a) mailed by registered
or certified mail, return receipt requested, in which case they shall be
effective upon the actual receipt or (b) sent by expedited or overnight delivery
service with return receipt, in which case they shall be effective when
delivered. The address for notices may be changed by any Member by written
notice to the Managers.
14.4 Execution in Counterpart; Binding Effect. This
----------------------------------------
Agreement may be executed in counterparts and shall be binding
upon each party executing this or any counterpart. This Agree-
19
<PAGE>
ment shall be binding upon and inure to the benefit of the parties, their heirs,
devises, personal representatives, successors and permitted assigns.
14.5 Entire Agreement. This Agreement constitutes the entire contract
----------------
between the parties and supercedes all previous agreements and understandings.
14.6 Section Headings. The section and subsection headings in this
----------------
Agreement are for convenience only, and shall not be used to construe or
interpret this Agreement.
14.7 Section References. Except as otherwise indicated, all references to
------------------
Sections shall refer to sections or subsections of this Agreement.
14.8 Further Assurances. The Members agree to execute any additional
------------------
documents and/or agreements and writings and take any other actions which may be
necessary or expedient in connection with the organization of the Company and
the achievement of its purposes; including without limitation (a) any amendments
to this Agreement and such certificates and other documents as the Members deem
necessary or appropriate to form, qualify or continue the Company as a limited
liability company in all jurisdictions in which the Company conducts or plans to
conduct business and (b) all such agreements, certificates, tax statements, tax
returns and other documents as may be required of the Company or its Members by
the laws of the United States of America or any jurisdiction in which the
Company conducts or plans to conduct business, or any political subdivision or
agency thereof.
14.9 The Members consent to the immediate assignment of the Company's right
to a 1% Banking Fee described in Section 6 of the Loan and Option Agreement to
Richard Nelson and Theodore Rosen for $1 in consideration of the fact that they,
rather than the Company, shall effect the financing referred to therein.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and date first above written.
NRG Company, LLC
By: /s/ Theodore Rosen
----------------------
20
<PAGE>
Theodore Rosen, Manager
/s/ Theodore Rosen
-------------------------
Theodore Rosen
As Member and Manager
/s/ Richard Nelson
-------------------------
Richard Nelson
As Member and Manager
/s/ Ronald Moody
-------------------------
Ronald Moody
As Member and Manager
/s/ Arthur Pergament
-------------------------
Arthur Pergament
As Member
/s/ Harold Boyer
-------------------------
Harold Boyer
As Member
/s/ Fred Knoll
-------------------------
Fred Knoll
As Member
/s/ John Rosenthal
-------------------------
John Rosenthal
As Member
/s/ Donald Engel
-------------------------
Donald Engel
As Member
21
<PAGE>
AMENDED SCHEDULE 1
------------------
FIRST STAGE CAPITALIZATION
<TABLE>
<CAPTION>
Amount of
Name and Address Capital Percentage
of Member Contribution Interest
- ----------------- ------------ ----------
<S> <C> <C>
U.S. ENERGY SYSTEMS, INC. $10,000 14.28%
515 N. Flagler Drive
Suite 202
West Palm Beach, Florida 33401
RONALD MOODY $10,000 14.28%
6451 North Thimble Path
Tucson, Arizona 85715
ARTHUR PERGAMENT $10,000 14.28%
c/o Cramer Rosenthal
McGlynn, Inc.
520 Madison Avenue
New York, New York
HAROLD BOYER $10,000 14.28%
3141 Point Grey Road
Vancouver, British Columbia V6Kl33
FRED KNOLL $10,000 14.28%
Knoll Capital Management
200 Park Avenue
Suite 3900
New York, New York 10166
JOHN ROSENTHAL $10,000 14.28%
1112 Park Avenue
New York, New York 10128
DONALD ENGEL $10,000 14.28%
570 Park Avenue
New York, New York 10021
</TABLE>
22
<PAGE>
AGREEMENT OF CONSENT, AMENDMENT AND WAIVER
------------------------------------------
This Agreement of Consent, Amendment and Waiver (the "Agreement") is
entered into as of this day of October, 1996 by and among NRG Company, LLC
(the "Company") and U.S. Energy Systems, Inc. ("USE"), Theodore Rosen ("Rosen"),
Richard Nelson ("Nelson"), Ronald Moody, Arthur Pergament, Harold Boyer, Fred
Knoll, John Rosenthal and Donald Engel.
Preliminary Statement
---------------------
A. The parties to this Agreement except USE are parties to a Limited
Liability Company Operating Agreement of NRG Company, LLC dated as of September
8, 1996 (the "Operating Agreement").
B. The parties wish to amend the Operating Agreement in certain
respects.
C. Accordingly, the parties wish to enter into this Agreement.
NOW, THEREFORE, in consideration of the preliminary statements and the
agreements contained herein and for other good, valuable and binding
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties, intending to be bound hereby agree as follows:
Statement of Agreement
----------------------
1. The parties hereto irrevocably acknowledge and consent to (i) the
assignment by Nelson and Rosen of their entire Membership Interests in the
Company (in
<PAGE>
the aggregate 14.28%) to USE, (ii) the admission of USE as a Member of the
Company and (iii) any action taken by the Managers on behalf of the Company
which they deem advisable to implement the transactions described in clauses (i)
and (ii) above. Upon consummation of such transaction, Schedule 1 to the
Operating Agreement shall be deemed amended as set forth in the Amended Schedule
1 annexed hereto.
2. Section 2.1(b) of the Operating Agreement is amended to read as
follows:
"Upon consummation by U.S. Energy Systems, Inc. of its public offering
through Gaines Berland, Inc., U.S. Energy Systems, Inc. shall have the
right but not the obligation to make a capital contribution to the
Company of $280,000 (the "Second Stage Capitalization"). If U.S.
Energy Systems, Inc. fails to fund the Second Stage Capitalization by
November 1, 1996, the Company shall issue an optional capital call
notice to the Members for the Second Stage Capitalization. The Members
shall have 5 business days from the receipt of the aforementioned
notice to contribute their pro-rata share to the Second Stage
Capitalization in accordance with their Membership Interests. In the
event all of the Members do not contribute their pro-rata share, the
contributing Members shall have the right but not the obligation to
make up the short-fall pro-rata or as they otherwise agree. In the
event the then Members do not fully fund the Second Stage
Capitalization pursuant to the three preceding sentences, the Managers
shall be authorized to make up the short-fall by issuing new Membership
Interests in the Company to new Members on terms which, in their
discretion, they deem appropriate provided that such terms shall be
substantially similar to the terms and conditions upon which the then
Members invested in the Company. All Members shall cooperate with the
Company in such sale of new Membership Interests and shall execute and
deliver such documentation as the Managers deem necessary in order to
consummate such sale."
2
<PAGE>
3. The parties hereto agree that Nelson and Rosen may continue to serve
as Managers of the Company notwithstanding their sale of the Membership
Interests and irrevocably waive the provisions of Section 7.3(ii) of the
Operating Agreement but only to the extent they are inconsistent with the
consent contained in this paragraph.
4. Miscellaneous.
-------------
a. Enforceability. This Agreement is for the benefit of each of the
--------------
parties hereto and is intended to be legally binding and enforceable by each of
them in accordance with its terms.
b. Limited Effect. Other than as expressly provided herein, this
--------------
Agreement does not supersede the Operating Agreement which, except as
specifically modified hereby, remains in full force and effect.
c. Amendments. This Agreement may be amended only as provided in the
----------
Operating Agreement except that the second sentence of Section 2.1(b) of the
Operating Agreement, as amended by this Agreement, cannot be amended without the
consent of USE.
d. Headings. The headings contained in this Agreement are intended
--------
solely for the convenience of the parties to this Agreement and shall not affect
their rights hereunder.
e. Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties hereto in separate
3
<PAGE>
counterparts, and delivered by means of facsimile transmission or
otherwise, each of which when so executed and delivered shall be deemed
to be an original and all of which when taken together shall constitute
but one and the same agreement. If any party hereto elects to execute
and deliver a counterpart signature page by means of facsimile
transmission, it shall deliver an original of such counterpart to each
of the other parties within ten (10) business days of the date hereof,
but in no event will the failure to do so affect in any way the
validity of the facsimile signature or its delivery.
f. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
NRG Company, LLC
By:________________________
Theodore Rosen, Manager
U.S. Energy Systems, Inc.
As Member
By:_________________________
-------------------------
Theodore Rosen
As Manager
4
<PAGE>
----------------------
Richard Nelson
As Manager
----------------------
Ronald Moody
As Member and Manager
----------------------
Arthur Pergament
As Member
----------------------
Harold Boyer
As Member
----------------------
Fred Knoll
As Member
----------------------
John Rosenthal
As Member
----------------------
Donald Engel
As Member
5
<PAGE>
EXHIBIT 10.31
LIMITED LIABILITY COMPANY AGREEMENT
OF
STEAMBOAT ENVIROSYSTEMS, L.L.C.
LIMITED LIABILITY COMPANY AGREEMENT dated as of the __ day of October
1996, by and between U.S. ENERGY SYSTEMS, INC. (formerly U.S. Envirosystems,
Inc.), a Delaware corporation ("USE"), and FAR WEST CAPITAL, INC., a Utah
corporation ("FWC") (individually a "Member" and collectively the "Members").
W I T N E S S E T H:
-------------------
WHEREAS, the Members desire to form a limited liability company
pursuant to and in accordance with the Delaware Limited Liability Company Act,
as amended from time to time (the "Act").
NOW, THEREFORE, in consideration of the contributions to be made as
provided herein and of these premises, the parties hereto agree as follows:
1. NAME. The name of the limited liability company (the "Company")
----
is Steamboat Envirosystems, L.L.C. or such other name as the Members may
hereafter select.
2. TERM. The term (the "Term") of the Company shall continue for
----
thirty (30) years from the date of filing the Certificate of Formation with the
Secretary of State of the State of Delaware unless dissolved before such date
in accordance with the Act or this Agreement.
<PAGE>
3. PURPOSE. The primary purpose of the Company shall be to own and
-------
operate SB-1 and SB-1A geothermal power plants located within the Steamboat
Springs KGRA approximately 10 miles south of downtown Reno, NV near the
intersection of U.S. 395 and the Mt. Rose Highway located on an approximate 30
acre parcel of real property located in Washoe County, Nevada. The Company
shall have all powers necessary to the accomplishment of such purpose.
4. MEMBERS. The name and the business address of the Members are
-------
as follows:
U.S. Energy Systems, Inc.
515 North Flagler Drive, Suite 202
West Palm Beach, FL 33401
Far West Capital, Inc.
921 Executive Park Drive, Suite B
Salt Lake City, Utah 84117
5. REGISTERED OFFICE. The address of the Company's registered
-----------------
office shall initially be Corporation Service Company, 1013 Centre Road,
Wilmington, Delaware 19805. The Company shall have such other offices as
determined by USE.
6. MANAGEMENT.
----------
6.01 MANAGEMENT. Management of the Company shall be vested in USE
----------
(when acting in such capacity, the "Manager").
6.02 DECISIONS. USE shall have sole authority to manage the Company
---------
and to make all decisions regarding any actions or undertakings of or by the
Company.
-2-
<PAGE>
6.03 EXECUTION OF DOCUMENTS. Any instrument may be executed and
----------------------
delivered on behalf of the Company by an authorized representative or officer
of USE. All persons dealing with the Company may rely upon a certificate from
USE to the effect that he is acting as a representative or officer of USE or
upon the basis of documents executed on behalf of the Company by a designated
representative or officer of USE.
7. MEETINGS.
--------
7.01 NOTICE. Meetings of Members may be called by USE specifying
------
the actions to be considered by the Members. At any meeting of the Members,
all Members represented in person or by proxy, shall constitute a quorum. At
all meetings of Members, a Member may vote by proxy executed in writing by the
Member or by his duly authorized attorney-in-fact. Such proxy shall be filed
with the Company before or at the time of the meeting.
7.02 VOTING. Any act of the Members, whether at a meeting, by
------
written consent or otherwise, shall require the approval of a majority in
interest, except to the extent otherwise specifically provided for in this
Agreement. Each Member shall have the right to cast one vote for each
percentage of ownership of record on the books of the Company, which as of the
date of this Agreement indicates that USE holds 95% and FWC holds 5% of the
percentage ownership of the Company.
-3-
<PAGE>
7.03 WRITTEN CONSENT. Any action required to be taken at a meeting
---------------
of the Members, or any other action which may be taken at a meeting of the
Members, may be taken without a meeting if a consent in writing, setting forth
the action so taken, shall be signed by Members holding more than 50% of the
interest in the Company.
8. CAPITAL CONTRIBUTIONS.
---------------------
8.01 ORIGINAL CONTRIBUTIONS. The Members' original contributions
----------------------
to the capital of the Company are as follows:
(a) Initial Contributions by USE. USE's contribution to the Company
----------------------------
will be cash in the amount of $1,575,000 (of which $50,000 has previously been
contributed). In addition, USE, in its discretion, may contribute up to
$1,000,000 to be used to buy out gross royalties and certain net revenue
royalties in the SB-1 and SB-1A projects and to finance improvements in the SB-
1 and SB-1A power plants. Any part of such $1,000,000 which is not used for
those purposes may be withdrawn by USE without affecting USE's percentage
ownership of the Company.
USE may purchase the balance of that certain Westinghouse loan (the
"Westinghouse Loan"), evidenced by those certain Term Loan Agreements by and
among (i) Westinghouse Electric Corporation, successor by merger to
Westinghouse Credit Corporation ("Westinghouse"), and Far West Electric Energy
Fund, L.P. ("FWEEF"), dated as of December 28, 1989 and
-4-
<PAGE>
(ii) Westinghouse and 1-A Enterprises, dated as of December 28, 1989, on the
SB-1 and SB-1A power plants, respectively. If USE does purchase the
Westinghouse position, USE may contribute that debt position to the Company as
a part of its capital contribution to the Company, and the Company may cancel
the debt and all related encumbrances on the SB-1 and SB-1A projects. If the
Westinghouse debt is so contributed and canceled, the Company shall immediately
assign to USE all of its right, title and interest in and to the funds held in
the SB-1 and SB-1A loan reserves. The contribution by USE of the Westinghouse
loan position or the subsequent cancellation of that position shall not affect
USE's ownership in the Company.
(b) Initial Contributions by FWC. FWC's initial contribution to the
----------------------------
Company will be the assignment thereto of outstanding debt owed by FWEEF and 1-
A Enterprises ("1-A") to FWC in the estimated amount of $2,500,000 and the
assignment of the debt owed by 1-A to FWC estimated to be in excess of
$950,000. Such contribution shall be deemed to have a value of $274,000 for
purposes of FWC's Capital Account (as herein defined).
8.02 ADDITIONAL CONTRIBUTIONS. No Member shall be required to make
------------------------
additional capital contributions to the Company. In the event the Company
requires additional capital, the Members may contribute such amounts in the
form of cash or other property having monetary value, and such contributions do
not have to be proportionate with their then capital in the
-5-
<PAGE>
Company. The Company also may obtain such capital from third parties who shall
become additional Members.
8.03 CAPITAL ACCOUNT. A capital account shall be established for
---------------
each Member (the "Capital Account") on the books of the Company, and shall be
adjusted as provided herein. A Member's Capital Account shall be credited with
such Member's original contribution, any additional capital contribution and
any net profits allocated to such Member, and shall be debited with any net
losses allocated to such Member and the amount of any distributions made to
him. No Member shall have the right to demand the payment of the balance of
his Capital Account, except to the extent provided herein upon distribution,
dissolution or withdrawal.
8.04 TAX ELECTION. It is the desire and intent of the Members that
------------
the Company be treated as a partnership for purposes of federal and state
income taxes. USE is hereby designated as the tax matters partner.
8.05 TAX ALLOCATION. Notwithstanding any provision in this
--------------
Agreement to the contrary, each Member's Capital Account shall be maintained
and adjusted, and allocations, to the extent required, shall be made, in
accordance with the Internal Revenue Code of 1986, as amended (the "Code"), and
this Agreement, including without limitation, (i) the adjustments permitted or
required by Code Section 704(b) and, to the extent applicable, the principles
expressed
-6-
<PAGE>
in Code Section 704(c); (ii) the adjustments required to maintain Capital
Accounts in accordance with the "substantial economic effect test" set forth in
Code Section 704(b); and (iii) the allocation required by the "qualified income
offset" requirement of Treasury Regulations section 1.704-1(b(2)(ii)(d).
8.06 LOANS TO THE COMPANY. If any Member shall make any loan to the
--------------------
Company or advance money on its behalf, the loan or advance shall not increase
the lending Member's capital account, entitle the lending Member to any greater
share of Company distributions, or subject the Member to any greater proportion
of Company losses. The amount of the loan or advance shall be a debt owed by
the Company to the lender Member, repayable on the terms and conditions, and
bearing interest at two percent over the Prime Rate published in the Wall
Street Journal.
9. DISTRIBUTIONS. The Company may make distributions to the
-------------
Members. In the event of a distribution, it shall be made as follows:
(a) For each year of the Term, USE shall receive a distribution of
100% of the first $1.8 million of net income ("Net Income") of SB-1 and SB-1A.
For each of the first five years of the Term, USE shall be entitled to receive
a distribution of 45% of Net Income in excess of $1.8 million. During such
time period, FWC shall receive a distribution of 55% of Net Income in excess of
$1.8 million.
-7-
<PAGE>
(b) In each year beyond the first five years of the Term, USE shall
receive a distribution of 95% of Net Income and FWC shall receive a
distribution of 5% of Net Income in excess of $1.8 million.
10. TRANSFER OF EQUITY INTERESTS.
----------------------------
10.01 RESTRICTIONS. Except as otherwise provided under this
------------
Agreement, no Member shall sell, assign, pledge, encumber or otherwise transfer
(collectively, "Transfer") his Equity Interest or any portion thereof, or
withdraw from the Company. Any such Transfer or attempted withdrawal other
than as permitted under this Agreement shall be void ab initio. Upon a
-- ------
Transfer by a Member of his entire Equity Interest in a manner permitted or
required pursuant to the provisions of this Agreement, such Member shall be
deemed to have withdrawn as a Member and shall have no further rights as a
Member hereunder.
10.02 RIGHT OF FIRST REFUSAL. In the event any Member should desire
----------------------
to transfer his Equity Interest or any portion thereof (the "Withdrawing
Member") to a non-Member (the "Offeror"), he shall first deliver to the other
Member (the "Offeree Member") a written notice in which the Withdrawing Member
shall (i) state his intention to transfer any or all of his Equity Interest
(the "Offered Interest"), (ii) state the price and terms of the best bona fide
offer (the "Offer") the Withdrawing Member has received for such Interest,
including the identity of the Offeror, and (iii) grant the Offeree Member
-8-
<PAGE>
a twenty (20) day option (the "Option") to purchase any or all of the
Withdrawing Member's Offered Interest on the same terms and conditions set
forth in the Offer. If the Option is not exercised in full by the Offeree
Member within the twenty (20) day period, the Withdrawing Member may transfer
the Offered Interest (not acquired by the Offeree Member) only to the original
Offeror, provided that the Offeree Member consents to such sale (such consent
to be granted or denied in the Offeree Member's sole and absolute discretion),
the sale is on the same terms as those in the Offer and the Offeror becomes a
party to this Agreement. Any other offers received must undergo the same
procedure set forth in this Agreement.
10.03 WITHDRAWAL OF A MEMBER. In the event that any Member wishes
----------------------
to withdraw from the Company he shall notify the other Member (the "Offeree
Member") in writing of such desire and shall offer to sell all of his Equity
Interest to the Offeree Member at a price and on such other terms as are
specified in such notice. Within twenty (20) days of the date of receipt of
such notice the Offeree Member shall do one of the following: (i) notify the
Withdrawing Member of the acceptance of the Withdrawing Member's offer at the
price and on the other terms specified or (ii) permit the withdrawal, and upon
the permitted withdrawal the Withdrawing Member shall be entitled to receive an
amount equal to the fair value of its interest as of the date of its withdrawal
based upon its right to share in distributions; provided that unless the
Offeree
-9-
<PAGE>
Member consents in writing to the withdrawal, such withdrawal shall be deemed a
violation of this Agreement and the Company may recover damages from the
Withdrawing Member for such breach and offset such damages against amounts
otherwise payable to the Withdrawing Member.
11. ADMISSION OF ADDITIONAL MEMBERS. One or more additional persons
-------------------------------
may be admitted as Members of the Company with the consent of all of the then
existing Members.
12. LIABILITY.
---------
12.01 MEMBERS. No Member shall have any liability for the
-------
obligations or liabilities of the Company except to the extent provided in the
Act.
12.02 EXCULPATION. A Member or Manager shall not be liable for any
-----------
breach of duty in either such capacity, except that if a judgment or other
final adjudication adverse to him establishes that his acts or omissions were
in bad faith or involved intentional misconduct or a knowing violation of law
or that he personally gained in fact a financial profit or other advantage to
which he was not legally entitled or that with respect to a distribution to
Members his acts were not performed in accordance with the Act.
13. DISSOLUTION.
-----------
13.01 EVENTS OF DISSOLUTION. The Company shall be dissolved upon
---------------------
the earliest to occur of the following:
(i) the withdrawal or bankruptcy of any Member or the occurrence of
any other event that
-10-
<PAGE>
terminates the continued membership of any Member in the Company
under the Act (but excluding a termination of membership
resulting from a permitted transfer of a Member's entire Equity
Interest pursuant to this Agreement), unless the business of the
Company is continued by the unanimous consent of all remaining
Members within thirty (30) days following the occurrence of any
such event;
(ii) the Members unanimously elect to dissolve the Company;
(iii) the end of the Company's term; or
(iv) except as otherwise herein provided, the occurrence of any other
event causing a dissolution of the Company under the Act.
13.02 PROCEDURE OF DISSOLUTION. Upon dissolution of the Company,
------------------------
the Managers or other person as is designated by the then remaining Members
shall proceed to wind up the business and affairs of the Company in accordance
with the terms of this Agreement and the requirements of the Act. A reasonable
amount of time shall be allowed for the period of winding up. This Agreement
shall remain in full force and effect during the period of winding up.
13.03 LIQUIDATING DISSOLUTION. In connection with the winding up of
-----------------------
the Company, the assets of the Company shall be distributed as follows:
-11-
<PAGE>
(i) to creditors, including Members or former Members who are
creditors, in satisfaction of loans or other liabilities of the
Company;
(ii) to establishing any reserves deemed reasonably necessary for any
contingent or unforeseen liabilities of the Company; and
(iii) thereafter to the Members, in accordance with their respective
Capital Account balances.
14. MISCELLANEOUS.
-------------
14.01 GOVERNING LAW. This Agreement shall be governed by, and
-------------
construed under, the laws of the State of Delaware, all rights and remedies
being governed by said laws.
14.02 ENTIRE AGREEMENT. This Agreement sets forth the entire
----------------
agreement of the parties hereto with respect to the subject matter herein, and
cannot be amended, modified or terminated except by an agreement in writing
executed by the parties hereto.
14.03 NOTICES. All notices to be given to Members hereunder shall
-------
be in writing, sent by mail or personally delivered to the address set forth in
Section 4 hereof or such other address as either Member may hereafter duly give
to the Company and the other Members.
14.04 SEVERABILITY. Any term or provision of this Agreement which
------------
is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such invalidity or lack of enforceability
without
-12-
<PAGE>
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement, or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound
hereby, have duly executed this Agreement as of the day and year first above-
written.
U.S. ENERGY SYSTEMS, INC.
___________________________
Name:
Title:
FAR WEST CAPITAL, INC.
___________________________
Name:
Title:
-13-
<PAGE>
AGREEMENT OF CONSENT, AMENDMENT AND WAIVER
------------------------------------------
This Agreement of Consent, Amendment and Waiver (the "Agreement") is
entered into as of this day of October, 1996 by and among NRG Company, LLC
(the "Company") and U.S. Energy Systems, Inc. ("USE"), Theodore Rosen ("Rosen"),
Richard Nelson ("Nelson"), Ronald Moody, Arthur Pergament, Harold Boyer, Fred
Knoll, John Rosenthal and Donald Engel.
Preliminary Statement
---------------------
A. The parties to this Agreement except USE are parties to a Limited
Liability Company Operating Agreement of NRG Company, LLC dated as of September
8, 1996 (the "Operating Agreement").
B. The parties wish to amend the Operating Agreement in certain
respects.
C. Accordingly, the parties wish to enter into this Agreement.
NOW, THEREFORE, in consideration of the preliminary statements and the
agreements contained herein and for other good, valuable and binding
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties, intending to be bound hereby agree as follows:
Statement of Agreement
----------------------
1. The parties hereto irrevocably acknowledge and consent to (i) the
assignment by Nelson and Rosen of their entire Membership Interests in the
Company (in
<PAGE>
the aggregate 14.28%) to USE, (ii) the admission of USE as a Member of the
Company and (iii) any action taken by the Managers on behalf of the Company
which they deem advisable to implement the transactions described in clauses (i)
and (ii) above. Upon consummation of such transaction, Schedule 1 to the
Operating Agreement shall be deemed amended as set forth in the Amended Schedule
1 annexed hereto.
2. Section 2.1(b) of the Operating Agreement is amended to read as
follows:
"Upon consummation by U.S. Energy Systems, Inc. of its public offering
through Gaines Berland, Inc., U.S. Energy Systems, Inc. shall have the
right but not the obligation to make a capital contribution to the
Company of $280,000 (the "Second Stage Capitalization"). If U.S.
Energy Systems, Inc. fails to fund the Second Stage Capitalization by
November 1, 1996, the Company shall issue an optional capital call
notice to the Members for the Second Stage Capitalization. The Members
shall have 5 business days from the receipt of the aforementioned
notice to contribute their pro-rata share to the Second Stage
Capitalization in accordance with their Membership Interests. In the
event all of the Members do not contribute their pro-rata share, the
contributing Members shall have the right but not the obligation to
make up the short-fall pro-rata or as they otherwise agree. In the
event the then Members do not fully fund the Second Stage
Capitalization pursuant to the three preceding sentences, the Managers
shall be authorized to make up the short-fall by issuing new Membership
Interests in the Company to new Members on terms which, in their
discretion, they deem appropriate provided that such terms shall be
substantially similar to the terms and conditions upon which the then
Members invested in the Company. All Members shall cooperate with the
Company in such sale of new Membership Interests and shall execute and
deliver such documentation as the Managers deem necessary in order to
consummate such sale."
2
<PAGE>
3. The parties hereto agree that Nelson and Rosen may continue to serve
as Managers of the Company notwithstanding their sale of the Membership
Interests and irrevocably waive the provisions of Section 7.3(ii) of the
Operating Agreement but only to the extent they are inconsistent with the
consent contained in this paragraph.
4. Miscellaneous.
-------------
a. Enforceability. This Agreement is for the benefit of each of the
--------------
parties hereto and is intended to be legally binding and enforceable by each of
them in accordance with its terms.
b. Limited Effect. Other than as expressly provided herein, this
--------------
Agreement does not supersede the Operating Agreement which, except as
specifically modified hereby, remains in full force and effect.
c. Amendments. This Agreement may be amended only as provided in the
----------
Operating Agreement except that the second sentence of Section 2.1(b) of the
Operating Agreement, as amended by this Agreement, cannot be amended without the
consent of USE.
d. Headings. The headings contained in this Agreement are intended
--------
solely for the convenience of the parties to this Agreement and shall not affect
their rights hereunder.
e. Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties hereto in separate
3
<PAGE>
counterparts, and delivered by means of facsimile transmission or
otherwise, each of which when so executed and delivered shall be deemed
to be an original and all of which when taken together shall constitute
but one and the same agreement. If any party hereto elects to execute
and deliver a counterpart signature page by means of facsimile
transmission, it shall deliver an original of such counterpart to each
of the other parties within ten (10) business days of the date hereof,
but in no event will the failure to do so affect in any way the
validity of the facsimile signature or its delivery.
f. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
NRG Company, LLC
By:________________________
Theodore Rosen, Manager
U.S. Energy Systems, Inc.
As Member
By:_________________________
-------------------------
Theodore Rosen
As Manager
4
<PAGE>
----------------------
Richard Nelson
As Manager
----------------------
Ronald Moody
As Member and Manager
----------------------
Arthur Pergament
As Member
----------------------
Harold Boyer
As Member
----------------------
Fred Knoll
As Member
----------------------
John Rosenthal
As Member
----------------------
Donald Engel
As Member
5
<PAGE>
Exhibit 11.3
U.S. Energy Systems, Inc. and Subsidiaries
Pro Forma Earnings Per share Calculation
January 31, 1996
<TABLE>
<S> <C> <C> <C>
Number of shares issued and outstanding....... 438,773
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...(A)................... $ 3,802,000
Net proceeds per share = $7,052,000/2,125,000 $ 3.32 1,145,181
---------
Total Pro Forma common shares outstanding..... 1,838,694
=========
Income before extraordinary items............. $ 493,000
Provision for preferred dividend.............. (341,000)
---------
Net available for common stockholders......... $ 152,000
=========
Earnings per share ........................... $ 0.08
</TABLE>
(A) Includes acquisition of Steamboat Facilities of loans and accrued interest
less proceeds from issuance of preferred stock and private warrants.
<PAGE>
Exhibit 11.4
U.S. Enviro Systems, Inc.
Pro Forma Earnings Per share Calculation
July 31, 1996
<TABLE>
<S> <C> <C> <C>
Number of shares issued and outstanding................................. 439,650
Anchor preferred stock converted to common.............................. 205,000
Conversion of debentures ($500,000 principal)........................... 125,000
New issue per prospectus, limited to use of proceeds
Total use of proceeds.....(A)........................................... 4,302,000
Net proceeds per share = $7,052,000/2,125,000.......................... 3.32 1,295,783
---------
Total pro forma common shares outstanding............................... 2,065,433
=========
Net Income.............................................................. $ 263,000
Provision for preferred dividend........................................ (171,000)
----------
Net available for common stockholders................................... $ 92,000
==========
Earnings per share: ($252,000.......................................... $0.04
</TABLE>
(A) Includes acquisition of Steamboat Facilities, Repayment of loans and accrued
interest less proceeds from issuance of preferred stock and private warrants.
<PAGE>
Exhibit 11.5
U.S. Envirosystems, Inc.
Supplemental Historical Earnings Per Share Calculation
January 31, 1996 and July 31, 1996
<TABLE>
<CAPTION>
January 31, 1996 July 31, 1996
------------------------ -----------------------
<S> <C> <C> <C> <C>
Net/(Loss) applicable to common stock -- historical $(1,412,000) $(857,000)
Addback interest: $ 110,000 $ 55,000
Notes payable
Loans payable 71,000 86,000
--------- ----------
181,000 141,000
Addback debt discount:
Notes payable 20,000 10,000
Loans payable 18,000 9,000
Deferred financing on bridge 34,000 31,000
---------- ----------
72,000 50,000
----------- ---------
Loss applicable to common stock -- $(1,159,000) $(666,000)
supplemental =========== =========
Less extraordinary gain 83,000
-----------
Net loss before extraordinary gain -- $(1,242,000)
supplemental ===========
Outstanding common shares -- historical 438,773 439,650
Shares for which proceeds are to be used to
retire debt:
Notes payable 1,000,000 1,000,000
Loans payable 785,000 960,000
---------- ----------
1,785,000 1,960,000
Net proceeds per common share 3.32 3.32
---------- ----------
537,651 590,361
----------- ---------
Outstanding shares -- supplemental 976,424 1,030,011
=========== =========
Loss per share -- supplemental $(1.27) $(0.65)
=========== =========
</TABLE>
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in both Prospectuses 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 our firm under the caption
"Experts" in the Prospectus.
/s/ Richard A. Eisner & Company, LLP
New York, New York
October 11, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in this Registration Statement on Amendment
No. 3 to Form SB-2 and the prospectuses included therein 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.
Robison, Hill & Co.
Certified Public Accountants
Salt Lake City, Utah
October 11, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTS
We hereby consent to the inclusion in this Registration Statement on Amendment
No. 3 to Form SB-2 and the prospectuses included therein 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.
Robison, Hill & Co.
Certified Public Accountants
Salt Lake City, Utah
October 11, 1996
<PAGE>
EXHIBIT 23.5
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated March 19, 1996, with respect to the financial
statements of Lehi Independent Power Associates, L.C. in the Registration
Statement (Form SB-2 No.333-04612) and related Prospectuses of U.S. Energy
Systems, Inc.
/s/ Traveller Winn & Mower, PC
Salt Lake City, Utah
October 11, 1996
<PAGE>
Exhibit 23.6
Consent of Independent Accountants
We hereby consent to the use in the Primary Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated February 27, 1996
relating to the financial statements of Plymouth Cogeneration Limited
Partnership, which appears in such Prospectus. We also consent to the references
to us under the heading "Experts."
Price Waterhouse LLP
Hartford, Connecticut
October 10, 1996
<PAGE>
Exhibit 23.7
Consent of Independent Accountants
We hereby consent to the use in the Secondary Prospectus constituting part of
this Registration Statement on Form SB-2 of our report dated February 27, 1996
relating to the financial statements of Plymouth Cogeneration Limited
Partnership, which appears in such Prospectus. We also consent to the references
to us under the heading "Experts."
Price Waterhouse LLP
Hartford, Connecticut
October 10, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
STATEMENTS OF OPERATIONS, BALANCE SHEET, 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> JUL-31-1996
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 20,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,076,000
<CURRENT-LIABILITIES> 2,815,000
<BONDS> 1,525,000
0
1,000
<COMMON> 4,000
<OTHER-SE> (3,562,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,076,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 500,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 170,000
<INCOME-PRETAX> (828,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (828,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (828,000)
<EPS-PRIMARY> (1.95)
<EPS-DILUTED> (1.95)
</TABLE>
