U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter ended July 31, 1996
-------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES ACT OF
1934
Commission File Number: 0-10238
---------
U.S. ENERGY SYSTEMS, INC.
- ------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 52-1216347
- ----------------------------------- -----------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
515 N. Flagler Drive, Suite 202, West Palm Beach, FL 33401
- ------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(561)820-9779
- ------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
U.S. ENERGY SYSTEMS, INC.
- ------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for a shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [ X ].
Indicate by check mark whether issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after
distribution of securities under a Plan of Reorganization confirmed by the
court. [ X ].
As of July 31,1996, the number of outstanding shares of the registrant's
Common Stock was as follows:
Title of Class Number of Shares
Common 439,650
Transitional Small Business Disclosure Format: [ ] Yes [ X ] No
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
July 31,1996
(Unaudited)
ASSETS
[S] [C]
Current assets:
Cash $ 1,000
Other current assets 20,000
------------
Total current assets 21,000
Investments in Joint Ventures - at equity:
Lehi Independent Power Associates, L.C. 1,112,000
Plymouth Cogeneration Limited Partnership 669,000
Other assets 274,000
------------
TOTAL $ 2,076,000
============
LIABILITIES
Current liabilities:
Accrued expenses and other current liabilities
(including due to related parties of $707,000) $ 1,663,000
Pre-reorganization income taxes payable and accrued
interest - current 192,000
Loans payable 960,000
------------
Total current liabilities 2,815,000
Convertible subordinated secured debentures
(including due to related parties of $325,000) 1,525,000
Notes payable (including due to related parties of $775,000) 975,000
Deferred interest (including due to related parties of $12,000) 114,000
Pre-reorganization income taxes payable and accrued interest 180,000
Advances from Joint Ventures 24,000
------------
Total liabilities 5,633,000
------------
CAPITAL DEFICIENCY
Preferred stock, $.01 par value, authorized
5,000,000 shares; issued and outstanding 57,500
(liquidating preference $575,000) 1,000
Common Stock, $.01 par value, authorized
35,000,000 shares; issued and outstanding 439,650 4,000
Additional paid-in capital 112,000
Accumulated deficit (3,674,000)
------------
Total capital deficiency (3,557,000)
------------
TOTAL $ 2,076,000
============
See notes to financial statements
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
Three months Ended Six months Ended
July 31 July 31
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ - $ - $ - $ -
---------- ---------- ---------- ----------
Operating expenses - 26,000 - 26,000
Administrative expense 187,000 193,000 408,000 395,000
Interest expense 158,000 124,000 328,000 223,000
Loss from Joint Ventures 53,000 28,000 92,000 62,000
---------- ---------- ---------- ----------
Total Cost and Expenses 398,000 371,000 828,000 706,000
---------- ---------- ---------- ----------
(Loss) before extraordinary
item (398,000) (371,000) (828,000) (706,000)
Extraordinary gain from
restructuring of
Liabilities 83,000 83,000
---------- ---------- ---------- ----------
Net (Loss) $(398,000) $(288,000) $(828,000) $(623,000)
========== ========== ========== ==========
Net (loss) per share $ (0.91) $ (0.66) $ (1.95) $ (1.42)
========== ========== ========== ==========
Weighted Average
Shares Outstanding 439,650 438,296 439,650 438,296
========== ========== ========== ==========
</TABLE>
See notes to financial statements
<PAGE>
U.S. ENERGY SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
Six Months Ended July 31, 1996
(Unaudited)
<TABLE>
Preferred Stock Common Stock
Additional
Number Number Paid-in
of Shares Amount of Shares Amount Capital
--------- ------ ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Balance,
January 31, 1996 57,500 $1,000 439,650 $4,000 $112,000
Net (loss) for the six
months ended July
31, 1996 (Unaudited) --------- ------ ---------- ------- --------
Balance, July 31, 1996
(Unaudited) 57,500 $1,000 439,650 $4,000 $112,000
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deficit Total
------------ ------------
<S> <C> <C>
Balance, January 31, 1996 $(2,846,000) $(2,729,000)
Net (loss) for the six months
ended July 31, 1996 (Unaudited) (828,000) (828,000)
------------ ------------
Balance, July 31, 1996
(Unaudited) $(3,674,000) $(3,557,000)
============ ============
</TABLE>
See notes to financial statements
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended July 31, 1996 & 1995
(Unaudited)
1996 1995
---------- ----------
[S] [C] [C]
Cash flows from operating activities:
Net (loss) $(828,000) $(623,000)
Adjustments to reconcile net
(loss)to net cash (used in)
operating activities:
Amortization of debt discount 10,000 7,000
Amortization of purchase price
in excess of equity in Joint Ventures 26,000 28,000
Amortization of deferred
financing and registration costs 39,000 14,000
Gain from restructuring of liabilities (83,000)
Equity in (income)/loss of Joint
Ventures, net of distributions 66,000 34,000
Deferred interest 61,000
Accrued interest on pre-reorganization
income taxes payable 24,000
Changes in operating assets and liabilities:
(Increase) decrease in other assets (19,000) (11,000)
Increase in accounts payable and
accrued expenses 673,000 134,000
---------- ----------
Net cash (used in) operating activities (9,000) (439,000)
---------- ----------
Cash flows from investing activities:
Collections of loans receivable - officer 59,000
---------- ----------
Net cash provided by (used in)
investing activities 59,000
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of convertible
subordinated debt 25,000
Proceeds from issuance of common stock 63,000
Proceeds from loans payable and preferred stocks 175,000 570,000
Payment of deferred financing costs (85,000)
Payment of pre-reorganization payroll taxes payable (109,000)
Payment of pre-reorganization income taxes payable (11,000)
Advances from Joint Ventures 9,000 3,000
Deferred registration costs (176,000)
---------- ----------
Net cash provided by financing activities 8,000 456,000
---------- ----------
NET INCREASE (DECREASE) IN CASH (1,000) 76,000
Cash - beginning of the period 2,000 8,000
---------- ----------
CASH - END OF THE PERIOD $ 1,000 $ 84,000
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 154,000 $ 60,000
Supplemental schedule of noncash financing activity:
Valuation of preferred stock in connection
with bridge loan $ 29,000
The accompanying notes to financial statements are an integral part hereof.
[/TABLE]
<PAGE>
U. S. ENERGY SYSTEMS, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JULY 31, 1996 AND 1995
(Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with instructions to Form 10-QSB and, accordingly, do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal accruals)
considered necessary for a fair presentation have been included.
For further information see Management's Discussion and Analysis, and
refer to the financial statements and footnotes included in the Company's
Annual Report on Form 10-KB for its fiscal year ended January 31, 1996.
Note 2 Income Taxes
No income tax provisions have been made due to losses incurred.
Deferred income tax benefits have been fully reserved due to the uncertainty
of future realization.
Note 3 Net (Loss) Per Share
Net (loss) per share has been computed on the basis of weighted average
number of shares outstanding during the period. Common stock equivalents have
not been included in the computation since their inclusion would be
anti-dilutive or immaterial.
Note 4 Subsequent Events
On-going Projects
Lehi, Utah. As previously reported, 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 third quarter of the fiscal year. Alternatively, the
Company may decide to sell two of its engines and to replace them with a
larger and more efficient gas turbine. If such sale is made, the Company
would benefit through its 50% share of the revenue from the sale; however,
operations would be delayed until the second quarter of the next fiscal year.
The cost of the new engine is expected to be fully financed directly through
the manufacturer without additional investment by the Company.
Plymouth, New Hampshire. 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,
which would take place during fiscal year 1998.
New Projects
Geothermal Power Plants, Steamboat Hills, Nevada. The Company has
contracted to acquire a 50% interest in a newly formed company, Steamboat
Envirosystems, L.C. ("Steamboat LLC") which will purchase two geothermal power
plants (the "Steamboat Facilities") currently owned by Far West Electric
Energy Fund and by 1-A Enterprises. The Company will contribute a total of
$4,982,000 (including $50,000 as a down payment which was previously paid by
the Company) to Steamboat LLC to complete the acquisition and retire a
mortgage and certain of the royalty interests to which the Steamboat
Facilities are subject. This acquisition is dependent upon the completion of
the financing described below in Note 5.
The Steamboat Facilities produce 15 megawatts of electric power which is
sold under two power purchase agreements to Sierra Pacific Power Company
("Sierra"). This acquisition is expected to give the Company a positive cash
flow from all joint ventures in the current fiscal year.
The current power purchase agreements with Sierra provide for price
adjustment 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 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 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 output of electricity to other electric
utility grids at more favorable prices.
The Company will contribute $1,000,000 to Steamboat LLC for the purpose
of buying out certain royalty interest 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 interest can be bought
out, no agreements have yet been concluded. 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 buy out 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 interest have also already begun, and Management believes they will
be successfully purchased although no assurance can be given.
Other Projects. 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, of which $26,000 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
additional financing outlined in Note 5 below, 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 the 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.
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, seek 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.
Note 5 Additional Financing and Related Party Transactions
The company has contracted for a public offering (the "Offering") and a
private placement (the "Private Placement") which will enable it to make the
Steamboat Facilities acquisition. The net proceeds of the Offering will be
approximately $5,425,000 and the Private Placement of 11% Preferred Stock and
Private Warrants will provide $3,500,000 for a total net proceeds of
$8,925,000. Of this total, the Company's acquisition of 50% of Steamboat LLC
will use $4,932,000 (plus $50,000 that had already been paid as a deposit).
Certain liabilities are required to be paid from the net proceeds as follows:
Bridge loans, including interest, total $1,801,000, secured notes payable,
including interest, total $1,209,000 and accrued interest on the Convertible
Debentures required to be paid as part of the restructuring of these
instruments, total $336,000. These have been adjusted to reflect interest
accrued through September 15, 1996. 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 from 18% to 9% on the balance after consummation of the
Offering and the Private Placement (ii) the payment of secured notes in the
principal amount of $1,000,000 and interest thereon, and (iii) repayment of
all bridge loans. As of September 11, 1996, 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.
Note 6 Committees of the Board
Because of the small size of the Board of Directors, the functions of
Audit and Compensation Committees are preformed by the Board as a whole.
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION
Results of Operations
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>
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 the 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.
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 in five years. The agreements provide for minimum annual payments
totaling $210,000. Payments under these agreements will not be made until
working capital of the Company permits.
As a result of accumulated losses, the Company had a negative working
capital of $2,794,000, and a capital deficiency of $3,557,000 at July 31,
1996.
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. The changes
to be made as a result of the Offering and Private Placement, as detailed in
Note 5 above, will result in net earnings and a net positive cash flow for the
Company.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> APR-30-1996
<CASH> 2,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,998,000
<CURRENT-LIABILITIES> 2,345,000
<BONDS> 1,525,000
0
1,000
<COMMON> 4,000
<OTHER-SE> 3,164,000
<TOTAL-LIABILITY-AND-EQUITY> 1,998,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 260,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 170,000
<INCOME-PRETAX> (430,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (430,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (430,000)
<EPS-PRIMARY> $1.01
<EPS-DILUTED> $1.01
</TABLE>
