<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 26, 1996
REGISTRATION NO. 333-04612
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 5
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 EXECUTIVE OFFICES AND NUMBER OF AGENT FOR SERVICE)
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
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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.......... 3,565,000(2) $4.00 $14,260,000 $ 4,321
- -----------------------------------------------------------------------------------------------------
Redeemable Common Stock Purchase War-
rants................................ 3,565,000(3)(8) $ .10 $ 356,500 $ 108
- -----------------------------------------------------------------------------------------------------
Common Stock, par value $.01.......... 3,565,000(4)(8) $4.00 $14,260,000 $ 4,321
- -----------------------------------------------------------------------------------------------------
Common Stock, par value $.01.......... 310,000(5)(8) $6.60 $ 2,046,000 $ 620
- -----------------------------------------------------------------------------------------------------
Redeemable Common Stock Purchase War-
rants................................ 310,000(6)(8) $.165 $ 51,150 $ 16
- -----------------------------------------------------------------------------------------------------
Common Stock, par value $.01.......... 310,000(7)(8) $5.00 $ 1,550,000 $ 470
- -----------------------------------------------------------------------------------------------------
Common Stock, par value $.01.......... 205,000(9) $4.00 $ 820,000 $ 248
- -----------------------------------------------------------------------------------------------------
TOTAL................................. $10,104
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457.
(2) Includes 465,000 shares which the Underwriters have the option to
purchase to cover over-allotments, if any.
(3) Includes 465,000 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.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 NOVEMBER 26, 1996
PROSPECTUS
U.S. ENERGY SYSTEMS, INC.
3,100,000 SHARES OF COMMON STOCK AND
3,100,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
U.S. Energy Systems, Inc. (the "Company") hereby offers (the "Offering")
3,100,000 shares of Common Stock (the "Common Stock") and 3,100,000 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
USEY and USEYW, 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $4.00 $.32 $3.68
- --------------------------------------------------------------------------------
Per Warrant............................. $.10 $.008 $.092
- --------------------------------------------------------------------------------
Total(3)................................ $12,710,000 $1,016,800 $11,693,200
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(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 310,000
shares of Common Stock at $6.60 per share and/or 310,000 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 $381,300 ($438,495 if
the Underwriters' over-allotment option is exercised in full), estimated at
$1,031,300.
(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
465,000 shares of Common Stock and/or an additional 465,000 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 $14,616,500, $1,169,320 and $13,447,180, 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
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically
with the Commission. The address of such Web site is http://www.sec.gov.
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) the acquisition of a 95% interest in two geothermal plants
known as Steamboat 1 and 1A for $4,741,000 (including $50,000 as a downpayment
which was previously paid by the Company) (the "Steamboat Acquisition"), (ii)
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, (iii) the
conversion of $500,000 of convertible subordinated debentures (the "Convertible
Debentures") into 125,000 shares of Common Stock and 125,000 Warrants ("Private
Warrants") having the same terms and conditions as the Warrants (the "Debenture
Conversion") and (iv) the exchange of the 57,500 currently outstanding shares
of the Company's Series One Preferred Stock for 205,000 shares of Common Stock
(the "Preferred Stock Exchange"). The consummation of this Offering is a
condition to the consummation of the Closing Transactions and the consummation
of the Closing Transactions is a condition to the consummation of this
Offering. Accordingly, if any of the Closing Transactions is not consummated,
this Offering will be terminated. Except as otherwise indicated, all
information in this Prospectus assumes no exercise of the Underwriters' over-
allotment option, the Representative's Purchase Option, the Warrants offered
hereby or any of the Company's other outstanding options and warrants to
purchase Common Stock. All numbers and amounts specified herein reflect a one
for forty reverse stock split effective May 6, 1996, unless otherwise
indicated.
THE COMPANY
U.S. Energy Systems, Inc. is engaged in the cogeneration and independent
power plant ("IPP") industries as a project developer, owner and operator.
Cogeneration is the process of producing two or more energy forms (typically
electricity and heat) simultaneously from the same fuel source. A cogeneration
facility is a power plant which produces electricity and, simultaneously,
recovers waste heat to use in place of heat which would otherwise be made from
conventional sources such as furnaces or boilers. An IPP is a power plant which
is not owned and operated by a regulated public electric utility company.
Frequently, IPPs are cogeneration facilities. Federal and state laws have been
promulgated to promote competition in the sale of electric energy and to
encourage cogeneration and independent power facilities.
The Company's strategy is to seek projects requiring power production or
cogeneration and to become an equity participant with the owners, developers or
other involved parties in return for the Company's expertise in the
structuring, design, management and operation of the projects. Often, at the
time of the Company's initial involvement, such projects will have advanced
beyond the conceptualization stage to a point where the engineering, management
and project coordination skills the Company offers are required to proceed.
Projects in which the Company is involved or is negotiating to become involved
include (a) acquiring and operating existing IPPs and cogeneration facilities
in the United States, (b) developing, constructing, and operating new IPPs and
cogeneration facilities in the United States and in certain overseas markets,
(c) designing and constructing cogeneration and IPPs for third party owners,
and (d) developing, constructing and selling energy-efficient products using
cogeneration technology such as non-electric air conditioning.
As a major element of its strategy, the Company intends to focus on projects
such as shopping malls, healthcare centers, food processing centers, hotels and
other facilities where large quantities of electricity, air conditioning and
hot water are required on a continuous and simultaneous basis. The Company has
signed 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
3
<PAGE>
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 was 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 Offering, the Company will acquire, for a total
investment of $4,741,000 (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 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 LLC ("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 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 $4,741,000 (including $50,000 as a downpayment which was
previously paid by the Company) to Steamboat LLC from the proceeds of the
Offering 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 will result in a substantial reduction of the Company's indebtedness.
In December 1994 the holders of the Convertible Debentures agreed to allow the
Company to defer one-half of interest payments due thereafter until the
consummation of an underwritten offering of the Company's securities, when
interest payments so accrued would be paid. See "Use of Proceeds--Repayment of
Debt--Accrued Interest on Debentures." In March 1996, the Company offered a
conversion plan to the debenture holders (the "Debenture Conversion") whereby
the holders could convert on a pro rata basis up to $500,000 in face amount for
125,000 shares of Common Stock and 125,000 Private Warrants, with the 18% rate
of interest reduced to 9% on the unconverted balance. Twenty-three of the
twenty-six debenture holders representing $1,375,000 face amount of the
$1,525,000 total have agreed to the Debenture Conversion. The $150,000 in
principal amount held by the holders declining the offer will continue to
receive 18% interest, and will not participate in the Debenture Conversion. See
"Use of Proceeds" and Pro Forma Financial Statements.
5
<PAGE>
THE OFFERING
Securities offered.......... 3,100,000 shares of Common Stock and 3,100,000
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 3,869,650 shares(1)(2)
Offering...................
Use of proceeds.............
The net proceeds to be received from the sale of
the Securities offered hereby are estimated to be
approximately $10,662,000 (approximately
$12,359,000 if the Underwriters' over-allotment
option is exercised in full). Such net proceeds
will be used as follows: (i) $4,691,000 for the
Steamboat Acquisition, (ii) $265,000 for the
investment in NRG, (iii) $2,767,000 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: USEY
Warrants: USEYW
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) 3,100,000 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 4,264,975 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) 3,845,000 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 Debenture Conversion, and (iii) 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)............ 604 106 319 328 41 223
Loss from Joint Ven-
tures.................. 17 17 76 92 92 62
------- --------- ------- ------- --------- -------
Income (loss) before in-
come taxes............. (1,474) 725 (1,401) (828) 401 (706)
Income taxes (3)........ -- 244 -- -- 135 --
------- --------- ------- ------- --------- -------
Income (loss) before ex-
traordinary items...... (1,474) 481 (1,401) (828) 266 (706)
Preferred dividends..... 21(4) -- -- 29(4) -- --
------- --------- ------- ------- --------- -------
Income (loss) available
for common stockhold-
ers*................... $(1,495) $ 481 $(1,401) $ (857) $ 266 $ (706)
======= ========= ======= ======= ========= =======
(Loss) per share of Com-
mon Stock *............ $ (3.41) $ (3.38) $ (1.95) $ (1.61)
======= ======= ======= =======
(Loss) per share of Com-
mon Stock--Supplemental
(5)*................... $ (1.30) $ (0.66)
======= =======
Pro forma net income per
share of Common Stock
(6)*.................. $ 0.17 $ 0.09
========= =========
Shares used in computing
net income per share of
Common Stock (6)....... 438,773 2,797,292 415,022 439,650 3,014,708 438,296
======= ========= ======= ======= ========= =======
BALANCE SHEET DATA:
<CAPTION>
JULY 31, 1996
----------------------------
PRO FORMA (7)
HISTORICAL AS ADJUSTED
---------- ---------------
<S> <C> <C>
Current assets.......... $ 21 $2,988
Investment in joint ven-
tures.................. 1,834 1,781
Loan receivable......... -- 300(8)
Property, plant and
equipment.............. -- 5,015
Total assets............ 2,076 10,084
Current liabilities..... 2,815 1,250
Long-term liabilities... 2,818 1,343
Minority interest in
subsidiaries........... -- 334
Working capital......... (2,794) 1,738
Stockholders' equity
(deficit).............. (3,557) 7,157
</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 $875,000 of the remainder paying interest at 9% per annum.
(2) Adjusted for reduction on $875,000 principal amount 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. 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.
(4) Provision for dividends on Series One Preferred Stock eliminated as a
result of the Preferred Stock Conversion.
(5) Supplemental loss per share is based on the weighted average number of
shares outstanding and 518,895 (at January 31, 1996) and 569,767 (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 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 (2,103,779 shares at January 31, 1996 and
2,245,058 shares at July 31, 1996). Assumed exercise of options and
warrants have not been reflected as they would be anti-dilutive.
(7) Reflects the sale of Securities offered hereby, 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 November 30, 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 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 ($372,000 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.The Company believes it
is in a position to obtain a satisfactory price for electricity generated in
the Steamboat Facilities because (1) the existing contract with Sierra, which
calls for "short term" avoided cost in the second 10 years, is subject to
negotiation since no "short term" tariff has been recently published by Sierra
with the State of Nevada regulatory authority; (2) even if published, "short
term" rates may not be applicable to a 20 year (long term) contract ; and (3)
the Company is developing other options for sales of both electricity and heat
from the facility, and heat is not subject to the power purchase contract. No
assurance can be given that such efforts will be successful.
10
<PAGE>
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, 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 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
11
<PAGE>
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 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.
12
<PAGE>
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 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 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 November 30, 1996, which will be
repaid from the proceeds of the Offering, amounts to $119,000. 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%. 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
$1,141,000 (including accrued interest to November 30, 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 $250,000
and $175,000, respectively, will be owed to them as of November 30, 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."
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 an active public trading market for the Common Stock or Warrants will
develop and continue after the Offering. The initial offering prices of the
Securities in the Offering have been determined by negotiations between the
Company and the Representative and may bear no relation to the market prices
of the Common Stock and Warrants after the Offering. See "Underwriting."
EFFECT OF WARRANTS, OPTIONS AND CONVERTIBLE SECURITIES OUTSTANDING AFTER
OFFERING
The Company has outstanding options and warrants which provide for the
purchase of an aggregate of 291,850 shares of Common Stock at prices ranging
from $4.00 to $10.00 per share. The Warrants, if exercised, would result in
the issuance of 3,100,000 shares of Common Stock. The Underwriters' over-
allotment option, if fully exercised, including the related Warrants, would
result in the issuance of 930,000 shares of Common Stock.
13
<PAGE>
The Representative's Purchase Option, if fully exercised, including the
related Warrants, would result in the issuance of 620,000 shares of Common
Stock. An additional 128,125 shares of Common Stock are issuable upon
conversion of remaining Convertible Debentures. These issuances of Common
Stock, totalling 5,069,975 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 $2.15 per
share of Common Stock, (approximately 54% 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 secondary prospectus (the "Secondary
Prospectus") to enable 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 Secondary Prospectus; 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
3,869,650 shares of Common Stock. All of the 3,100,000 shares sold in the
Offering (assuming no exercise of the Underwriters' over-allotment option),
will be freely transferable by persons other than affiliates (as defined in
regulations under the Securities Act) without restriction or further
registration under the Securities Act.
Of the 439,650 shares of Common Stock outstanding prior to the Offering,
64,650 are "restricted securities" within the meaning of Rule 144 under the
Securities Act and may not be sold in the absence of registration under the
Securities Act, unless an exemption from registration is available, including
the exemption provided by Rule 144. Under Rule 144 as currently in effect, all
of such 64,650 shares are currently eligible for sale, subject 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
14
<PAGE>
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
The Company anticipates satisfying the Nasdaq SmallCap listing criteria
following the consummation of the Offering, however, 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
15
<PAGE>
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. 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.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to be received from the sale of the securities offered
hereby are estimated to be approximately $10,662,000 (approximately
$12,359,000 if the Underwriters' over-allotment is exercised in full). The
proceeds from the Offering 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............ 2,166,000
Additional contribution for purchase of
royalty interests and capital expenditures to
fund improvements to Steamboat Facilities.... 1,000,000
-----------
Total Steamboat Acquisition..................... 4,691,000 44.00%
Reno Project Investment......................... 265,000 2.48
Repayment of debt, with interest to October 15,
1996:
Plymouth loan................................. $1,232,000
Anchor bridge loan............................ 796,000
Solvation bridge loan......................... 270,000
Other bridge loan............................. 64,000
Accrued interest on debentures................ 405,000
----------
Total repayment of debt......................... 2,767,000 25.95
-----------
Total proceeds used............................. 7,723,000
Balance to working capital...................... 2,939,000 27.57
----------- -----
Total proceeds as above......................... $10,662,000 100.0%
=========== =====
</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. See "Business--Current Operations and On-Going Projects--Nevada District
Heating Project."
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 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 October 20,
1996, will have a face value of $3,800,000 at November 30, 1996 net of an
escrowed reserve, and will be acquired by the Company for $2,166,000 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."
17
<PAGE>
REPAYMENT OF DEBT
An aggregate of $2,767,000 of the net proceeds of the Offering will be used
to retire the following obligations of the Company (including all interest
through November 30, 1996):
Plymouth Loan. $1,232,000 will be used to repay a secured loan of $1,000,000
(plus accrued interest of $232,000) 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 ("Plymouth Cogeneration") 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. $796,000 will be used to repay a loan of $660,000 (plus
accrued interest of ^ $136,000) 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 November 29, 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. The Anchor
Loan is in technical default due to the fact that the Solvation Loan is past
due. It is expected that the Anchor Loan will be paid at closing and no action
has been taken by Anchor to enforce their rights. See "Certain Transactions."
Solvation Bridge Loan. $270,000 will be used to repay a loan of $250,000
(plus $20,000 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, which is past due, bears
interest at the rate of 10% per annum and shall be repaid from the proceeds of
the Offering. 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. See "Certain Transactions."
Other Bridge Loan. $64,000 will be used to repay a loan of $50,000 (plus
accrued interest of $14,000) 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.
Accrued Interest on Debentures. $405,000 will be used to pay interest on the
Company's Convertible Debentures^ including $119,000 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 $875,000 principal amount of 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 Debenture Conversion will participate on a
pro rata basis. The interest expense shown in this Prospectus reflects the
fact that three of the 26 holders of Convertible Debentures, representing
$150,000 in principal amount, have not agreed to participate. See "Description
of Securities--Convertible Debentures" and "Certain Transactions."
18
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock has traded on the NASD OTC Bulletin Board under the symbols
USEY (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 October 28, 1996)....................... $ 3.21 $ 2.58
</TABLE>
As of October 28, 1996, there were 584 record holders of the Company's
Common Stock and approximately 900 beneficial holders of the Company's Common
Stock.
On October 28, 1996, the high bid price was $3.25 and low bid price was
$3.25.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future.
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 November 30, 1996, the pro forma net
tangible book value at that date would be $7,157,000 or $1.85 per share of
Common Stock ($8,854,000 ($2.04 per share) if the Underwriters' over-allotment
option is exercised). This represents an immediate increase in net tangible
book value of $11.75 per share to existing stockholders, and an immediate
dilution of $2.15 (54%) per share to new investors ($1.96 (49%) 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)... 11.75
======
Pro forma net tangible book value after the Offering.......... $1.85
=====
Pro forma dilution to new investors........................... $2.15
=====
</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 3,100,000 shares of Common Stock in this Offering.
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 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 November 30, 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
Common stock, $0.01 par value, 35,000,000 shares au-
thorized; issued and outstanding, 439,650 shares;
to be issued and outstanding, 3,869,650
shares(1)(2)....................................... 4,000 38,000
Additional paid-in capital.......................... 112,000 11,020,000
Accumulated (deficit)^(3)........................... (3,674,000) (3,901,000)
----------- ----------
Total ^ stockholders' equity (deficit)................ (3,557,000) 7,157,000
----------- ----------
Total capitalization.................................. $ 413,000 $8,692,000
=========== ==========
</TABLE>
- --------
(1) Includes (i) 439,650 Shares of Common Stock outstanding prior to the
Offering, (ii) 3,100,000 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 4,264,975 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) 3,845,000 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 Debenture Conversion and (iii) 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 31, 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
3,100,000 shares of Common Stock and 3,100,000 Warrants offered by this
Prospectus for net proceeds of $10,662,000 (b) acquisition of a 95% interest
in two geothermal power plants (the Steamboat Facilities) for an aggregate of
$4,741,000 (including $50,000 as a downpayment which was previously paid by
the Company), (c) acquisition of an 81.5% interest in NRG for $265,000, (d)
repayment of notes payable and other liabilities in the aggregate amount of
$2,767,000 adjusting for accrual of interest and additional bridge loan
financing to November 30, 1996, (e) conversion of 57,500 shares of Series One
Preferred Stock into 205,000 shares of Common Stock, and (f) conversion of
$500,000 principal amount of the existing Convertible Debentures to 125,000
shares of Common Stock and 125,000 Private Warrants. The Pro Forma Condensed
Balance Sheet should be read in conjunction with Pro Forma Statement of
Operations and the historical financial statements of the Company, Lehi
Independent Power Associates, L.C. ("LIPA") and Plymouth Cogeneration included
in this Prospectus.
<TABLE>
<CAPTION>
STEAMBOAT PRO FORMA ADJUSTMENTS
USE 1 AND 1A --------------------------- PRO
HISTORICAL PRO FORMA CONSOLIDATED DEBIT CREDIT FORMA
----------- ---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
A S S E T S
Current assets:
Cash.................... $ 1,000 $ 1,000 $10,662,000(a) $ 4,691,000(b) $ 2,965,000
25,000(i) 2,767,000(c2)
265,000(h)
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 10,687,000 7,723,000 2,988,000
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 4,691,000(b) 4,744,000(g) --
Envirosystems.........
NRG Company LLC........ 265,000(h) 265,000(i) --
Loan receivable, Reno 300,000(i) 300,000
Energy.................
Property, Plant and 5,015,000 5,015,000 5,015,000
Equipment..............
Deferred costs of regis- 221,000 221,000 221,000(a) --
tration................
----------- ---------- ---------- ----------- ----------- -----------
TOTAL.................. $ 2,076,000 $5,018,000 $7,094,000 $15,943,000 $12,953,000 $10,084,000
=========== ========== ========== ----------- ----------- ===========
L I A B I L I T I E S
Loans payable........... $ 960,000 $ 960,000 $ 960,000(c2) $ --
Pre-reorganization in- 192,000 192,000 192,000
come taxes payable.....
Other current liabili- 1,663,000 1,663,000 807,000(c2) 202,000(c1) 1,058,000
ties ..................
----------- ---------- ---------- ----------- ----------- -----------
Total current liabili- 2,815,000 2,815,000 1,767,000 202,000 1,250,000
ties..................
Convertible subordinated 1,525,000 1,525,000 500,000(e) 1,025,000
secured debentures ....
Notes payable .......... 975,000 975,000 1,000,000(c2) 25,000(f) --
Other liabilities ...... 318,000 318,000 318,000
----------- ---------- ---------- ----------- ----------- -----------
Total liabilities...... 5,633,000 5,633,000 3,267,000 227,000 2,593,000
----------- ---------- ----------- ----------- -----------
Minority interests in
subsidiaries:
Steamboat Envirosystems 274,000(g) 274,000
LLC...................
NRG Company LLC........ 60,000(i) 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, ($.01
par value issued and
outstanding, 57,500
shares; to be issued
and outstanding, none). 1,000 1,000 1,000(d) --
Common stock ($.01 par
value, issued and out-
standing, 439,650
shares; to be issued
and outstanding,
3,869,650 shares)...... 4,000 4,000 31,000(a) 38,000
2,000(d)
1,000(e)
Additional paid-in capi- 112,000 112,000 221,000(a) 10,631,000(a) 11,020,000
tal.................... 1,000(d) 499,000(e)
Accumulated deficit..... (3,674,000) (3,674,000) 25,000(f) (3,901,000)
202,000(c1)
Members' equity:
U.S. Energy Systems, 4,744,000 4,744,000 4,744,000(g) --
Inc. .................
Far West Capital, Inc.. 274,000 274,000 274,000(g) --
----------- ---------- ---------- ----------- ----------- -----------
Total stockholders' (3,557,000) 5,018,000 1,461,000 5,468,000 11,164,000 7,157,000
equity (capital
deficiency)...........
----------- ---------- ---------- ----------- ----------- -----------
TOTAL.................. $ 2,076,000 $5,018,000 $7,094,000 $24,678,000 $24,678,000 $10,084,000
=========== ========== ========== =========== =========== ===========
</TABLE>
22
<PAGE>
Notes to Pro Forma Condensed Consolidated Balance Sheet
- --------
(a) To reflect sale of 3,100,000 shares of Common Stock and 3,100,000 Warrants
for net proceeds of $10,662,000.
(b) To reflect purchase of a 95% interest in Steamboat LLC, which is acquiring
the Steamboat Facilities.
<TABLE>
<S> <C>
(c1)To reflect accrual of interest from August 1 to November 30,
1996............................................................... $202,000
(c2)To reflect assumed repayment of debt:
Note payable.................................................... $1,000,000
Bridge loans.................................................... 960,000
Accrued interest................................................ 807,000
----------
$2,767,000
==========
</TABLE>
(d) To reflect conversion of existing Series One Preferred Stock into 205,000
shares of Common Stock.
(e) 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.
(f) 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.
(g) To eliminate Steamboat LLC investment account and set up minority
interest.
(h) To reflect purchase of an 81.5% interest in NRG Company, LLC for $265,000.
(i) 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 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 $875,000 of 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 (476,000)(2) 106,000
(22,000)(5b)
Loss from Joint
Ventures......... 17,000 17,000 17,000
----------- ---------- ---------- --------- ----------
Total expenses.. 1,474,000 1,703,000 3,177,000 2,679,000
----------- ---------- ---------- --------- ----------
Income (loss) be-
fore income tax-
es............... (1,474,000) 1,701,000 227,000 725,000
Income taxes..... -- -- (244,000)(3) 244,000
----------- ---------- ---------- --------- ----------
Net income
(loss)........... (1,474,000) 1,701,000 227,000 481,000
Dividends on pre-
ferred stock..... 21,000 21,000 21,000(4) --
----------- ---------- ---------- --------- ----------
Net income (loss)
available for
common stockhold-
ers (6).......... $(1,495,000) $1,701,000 $ 206,000 $ 481,000
----------- ---------- ---------- --------- ----------
Net income per
common share (7). $ (3.41) $ 0.17
----------- ----------
Shares used in
computing net in-
come per common
share (7)........ 438,773 2,747,292
=========== ==========
<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 (276,000)(2) 41,000
(11,000)(5b)
Loss from Joint
Ventures......... 92,000 92,000 92,000
----------- ------------- ------------ --------------- ------------
Total expenses.. 828,000 977,000 1,805,000 1,518,000
----------- ------------- ------------ --------------- ------------
Income (loss) be-
fore income tax-
es............... (828,000) 942,000 114,000 401,000
Income taxes..... -- -- 135,000 (3) 135,000
----------- ------------- ------------ --------------- ------------
Net income
(loss)........... (828,000) 942,000 114,000 266,000
Dividends on pre-
ferred stock..... 29,000 29,000 (29,000)(4) --
----------- ------------- ------------ --------------- ------------
Net income (loss)
available for
common stockhold-
ers (6).......... $(857,000) $ 942,000 $ 85,000 $ 266,000
----------- ------------- ------------ --------------- ------------
Net income per
common share (7). $ (1.95) $ 0.09
----------- ------------
Shares used in
computing net in-
come per common
share (7)........ 439,650 3,014,708
=========== ============
</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% on
$875,000 of the remaining balance of the Convertible Debentures. The
reduction of the interest rate to 9% will be accounted for prospectively.
(3) To reflect provision for federal and state taxes at 38%, 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.
(4) Provision for dividends on Series One Preferred Stock eliminated as a
result of the Preferred Stock Conversion.
(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 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 (2,103,779 shares at January
31, 1996 and 2,245,058 shares at July 31, 1996). Assumed exercise of
options and warrants 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 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 $5,015,000 as if such acquisition had taken place on June
30, 1996. The total is made up of $4,741,000 (including $50,000 down payment
previously paid by the Company) 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) to obtain a 95% interest in
Steamboat LLC, (2) $2,166,000 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.................................. $4,741,000(a) $1,575,000(c)
1,000,000(d)
2,166,000(f)
Other Assets.......................... 3,000(a) $ 3,000
Property, Plant and Equipment......... 274,000(b)
1,575,000(c)
1,000,000(d)
2,166,000(e) 5,015,000
---------- ---------- ----------
Total............................... $9,759,000 $4,741,000 $5,018,000
========== ========== ==========
LIABILITIES
Notes payable......................... $2,166,000(f) $2,166,000(e)
MEMBERS' EQUITY
U.S. Energy Systems, Inc.............. 4,744,000(a) $4,744,000
Far West Capital, Inc................. 274,000(b) 274,000
---------- ---------- ----------
Total............................... $2,166,000 $7,184,000 $5,018,000
========== ========== ==========
</TABLE>
- --------
(a) To reflect cash contribution of the Company including $50,000 deposit
previously paid.
(b) To reflect contribution of Far West Capital 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 $4,691,000 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 October
20, 1996, which had a face value of $3,800,000 as at November 30, 1996 net of
an escrowed reserve, and will be acquired by the Company for $2,166,000 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 $5,157,000 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:
LIPA......................................................... $ 58,000 $ 40,000
Plymouth Cogeneration........................................ 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.
29
<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 this Offering, the Company's pro forma working
capital at July 31, 1996 would be a positive $1,738,000.
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 $10,662,000. Of this
total, the Company's acquisition of 95% of Steamboat LLC will use $4,691,000
(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 November 30, 1996. The bridge loans,
including interest, total $1,130,000, secured notes payable, including
interest, total $1,232,000, and accrued interest on the Convertible Debentures
required to be paid as part of the restructuring of these instruments, total
$405,000. 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 $875,000 of 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. The interest expense reflected in this Prospectus gives effect to the
fact that 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.
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 shares issued to Anchor
for the initial bridge loan are being converted to 205,000 shares of common
stock.
The current power purchase agreements with 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 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
30
<PAGE>
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, 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 that such negotiations will be successful.
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 in the Lehi Plant 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 Lehi partners may decide to
sell two of the 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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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 paid $41,000 for the installation of the first
of six engine generators, installed September 1996. 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 on $875,000 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 on $875,000 in principal
amount 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 participate in this restructuring.
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.
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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.
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 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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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 FWEEF and I-A
Enterprises subject to 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 October 20, 1996, will have a face value of $3,800,000 at November 30,
1996 net of an escrowed reserve, and will be acquired by the Company for
$2,166,000 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 36%.
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 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
$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
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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 31, 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
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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
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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 this Offering, Messrs. Knoll and Moody will resign. The
remaining directors intend to elect two outside directors to fill the
vacancies. These persons have not yet been identified by the Company.
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 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 are 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 commenced November 11, 1993 and
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 November 30, 1996, the amount of
deferred compensation owed to Mr. Nelson will be $250,000.
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 provides for
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 November 30, 1996, the amount of deferred compensation owed to Mr. Rosen
will be $175,000.
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 of $30,900, $30,900, $92,500, $801,200 and
$185,300, respectively (including accrued interest to November 30, 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 November 30, 1996,
which will be repaid from the proceeds of the Offering, amount to $32,600,
$59,000, $13,800 and $13,100 respectively. As part of the Debenture
Conversion, the conversion rate on $875,000 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. 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 $660,000 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 November 29, 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.
$796,000 of the proceeds of the Offering will be used to repay the Anchor Loan
and $136,000 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."
In December 1995, Solvation loaned the Company $200,000, which carries an
interest rate of 10% per annum and which has matured and will be paid when the
Offering is closed. 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."
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.
All transactions between the Company and its officers, directors, principal
shareholders or other affiliates have been on terms no less favorable than
those that are generally available from unaffiliated third parties. Any such
future transactions will be on terms no less favorable to the Company than
could be obtained from an unaffiliated third party on an arm's-length basis
and will be approved by a majority of the Company's independent and
disinterested directors.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table lists the number of shares of Common Stock owned as of
October 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 2.1%
Theodore Rosen.......... 88,333(2) 17.4% 100,833(2a) 2.6%
Ronald Moody............ 21,500(3) 4.8% 21,500(3) 0.6%
Fred Knoll.............. 171,333(4) 28.6% 191,334(4a) 4.8%
Evan Evans.............. 2,500(5) 0.6% 2,500(5) 0.1%
S. Marcus Finkle........ 63,833(6) 13.9% 68,833(6a) 1.8%
117 AABC
Aspen, CO
Guernroy, Ltd........... 38,158(7) 8.6% 43,158(7a) 1.1%
c/o Royal Bank of Can-
ada
Channel Isles, UK
Anchor Capital Company, 205,000(8) 31.8% 205,000(8) 5.3%
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) 10.0%
(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.
(3) Includes 9,000 shares issuable on exercise of warrants at an exercise
price of $5 per share which became exercisable on October 31, 1994.
(4) Includes (i) 67,500 shares issuable upon exercise of non-qualified options
at an exercise price of $8 per share which became exercisable on December
1, 1995 and (ii) 91,333 shares owned by Europa International Inc.
("Europa"), including 13,333 shares issuable to Europa upon conversion of
Convertible Debentures and 78,000 shares issuable to Europa on exercise of
warrants at an exercise price of $5 per share which became exercisable on
October 31, 1994. Knoll Capital Management has the sole voting power of
the shares owned by Europa. Mr. Knoll is the President and sole
shareholder of Knoll Capital Management.
(4a) Includes Europa holdings of 16,667 shares issuable upon conversion of
Convertible Debentures and 78,000 shares issuable on exercise of warrants
at an exercise price of $5 per share which became exercisable on
51
<PAGE>
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 57,500 shares of Series One
Preferred Stock.
52
<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.
53
<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. 125,000 Private Warrants are 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 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 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.
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
54
<PAGE>
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 on $875,000 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 on $875,000 in principal amount 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. 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 is 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 (the "Supplemental Participation"). As a result of the
Debenture Conversion, the Supplemental Participation will be reduced by one-
third in view of the conversion of $500,000 in principal amount of Convertible
Debentures. See "Business--Current Operations and On-Going Projects--Lehi
Cogeneration Project."
Pursuant to the terms and conditions of a pledge agreement between the
Company and Richard Nelson and Theodore Rosen, acting jointly as pledge agent
for all of the holders of the Convertible Debentures, payment of principal and
interest on the Convertible Debentures and, if applicable, any Supplemental
Participation due is secured by a security interest in all of the issued and
outstanding shares of common stock of LEI, all of which issued and outstanding
shares are owned by the Company. Until such time as the Company's obligations
for the payment of the principal and interest on the Convertible Debentures
and, if applicable, any Supplemental Participation due are paid in full, the
Company shall not cause LEI to issue any additional shares of common stock
unless the security interest granted in LEI shall be extended to such
additional shares.
The Convertible Debentures are subordinate and subject in right of payment
to the prior payment of all "Senior Indebtedness" of the Company. "Senior
Indebtedness" is the principal of, premium, if any, and interest (including
any interest accruing after the filing of a petition in bankruptcy) on and
other amounts due or in connection with any indebtedness of the Company
including, without limitation, the liabilities as defined in and arising under
any loan or security agreement with a bank, insurance company, or other
financial institution or affiliate of any thereof whether outstanding on the
date of the Convertible Debentures, or any indebtedness thereafter created,
incurred, assumed or guaranteed by the Company, and, in each case, all
renewals, extensions, and refundings thereof, except indebtedness which by the
terms of the instrument creating or evidencing such indebtedness created,
incurred, assumed, or guaranteed after the date of the Convertible Debentures
is expressly made equal to or subordinate and subject in right of payment to,
the payment of principal of an interest on the Convertible Debentures.
Notwithstanding anything herein to the contrary, Senior Indebtedness shall not
include (i) indebtedness representing the repurchase price of any preferred
stock or other capital stock of the Company or any dividend or distribution
with respect thereto; (ii) indebtedness of the Company owed directly to any
employee, officer or director thereof; and (iii) indebtedness which, by its
terms, is subordinate in right of payment to the indebtedness of the Company
evidenced by the Convertible Debentures.
To the extent the Company shall have funds legally available for such
payment, commencing January 25, 1998, the Company may redeem at its option the
Convertible Debentures, in whole or in part, at a redemption price equal to
102% of the principal amount of each Convertible Debenture, plus any unpaid
and accrued interest of the Supplemental Participation. Upon any such
redemption, the Company must issue each holder whose Convertible Debenture(s)
have been redeemed a warrant to purchase a number of shares of the Company's
Common Stock equal to the number of shares into which the principal amount
being redeemed is then convertible. The exercise price of these warrants would
be the same as the conversion price at the time of redemption (currently $8.00
per share).
ANTI-TAKEOVER PROVISIONS
The Company is governed by the provisions of Section 203 of the General
Corporation Law of Delaware, an anti-takeover law. In general, this statute
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the
55
<PAGE>
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.
56
<PAGE>
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 3,869,650
shares of Common Stock. All of the 3,100,000 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, all of such 64,650 shares are currently
eligible for sale (none of which are subject to the agreements described below
restricting their sale), subject to the volume limitations of the Rule. The
holders of record of 114,279 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 Secondary
Prospectus to enable 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 Secondary Prospectus, however they are
available for sale in accordance with Rule 144. The Common Stock to be issued
in the Preferred Stock Exchange is subject to a nine month restriction on
resale subject to earlier waiver of such restriction by the Representative in
its sole discretion.
57
<PAGE>
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 3,100,000
shares of Common Stock and 3,100,000 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.............................................. 3,100,000 3,100,000
========= =========
</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 465,000 additional shares
of Common Stock and/or an additional 465,000 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 310,000 shares of Common Stock and/or an aggregate of 310,000
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 $.169 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
58
<PAGE>
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. 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. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
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 Nine Months ended September 30, 1996............................. F-18
Statements of Partners' Capital, for the years ended December 31, 1995,
and 1994, and 1993
and the Nine Months ended September 30, 1996............................. F-19
Statements of Cash Flows, for the years ended December 31, 1995, 1994 and
1993
and the Nine Months ended September 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 Nine Months ended September 30, 1996............................. F-32
Statements of Cash Flows, for the years ended December 31, 1995 and 1994
and the Nine Months ended September 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 net proceeds of approximately $10,662,000 through the sale of
3,100,000 shares of common stock and warrants in a public offering (the
"Proposed Public Offering").
b) Convert the existing preferred stock into 205,000 shares of common
stock.
c) Convert $500,000 of the existing Debentures into 125,000 shares of
common stock and warrants.
d) 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").
e) 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,
------------------------
SEPTEMBER 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............................. 588,000 335,000 629,000
Construction in Progress.............. 118,000 118,000 118,000
Accumulated Depreciation.............. (5,377,000) (6,010,000) (5,859,000)
----------- ----------- -----------
Net Utility Plant.................... 11,328,000 13,159,000 10,887,000
Restricted Cash........................ 1,026,000 1,145,000 1,067,000
Other Assets........................... 106,000 124,000 93,000
Current Assets:
Cash and Cash Equivalents............. 263,000 278,000 207,000
Receivables--Trade.................... 399,000 437,000 271,000
Receivables--Other.................... 6,000 6,000 0
Receivable--Related Party............. 238,000 159,000 0
Prepaid Expenses...................... 4,000 12,000 16,000
----------- ----------- -----------
Total Current Assets................. 910,000 892,000 494,000
----------- ----------- -----------
Total Assets......................... $13,370,000 $15,320,000 $12,541,000
=========== =========== ===========
PARTNERS' CAPITAL AND LIABILITIES
Partners' Capital:
Limited Partners--10,306 units........ $ 5,148,000 $ 4,868,000 $ 5,340,000
General Partner--1 Percent............ (8,000) (11,000) (6,000)
----------- ----------- -----------
Total Partners' Capital.............. 5,140,000 4,857,000 $ 5,334,000
Other Liabilities...................... -- 150,000
Long-term Debt:
Notes Payable--Related Party.......... 188,000 230,000 152,000
Notes Payable......................... 537,000 -- 537,000
----------- ----------- -----------
Partners' Capital and Long-Term Liabil-
ities................................. 5,865,000 5,237,000 6,023,000
Current Liabilities:
Current Portion--Long-term Debt....... 4,563,000 7,140,000 3,911,000
Note Payable--Related Party........... 1,159,000 1,043,000 1,246,000
Payable-Related Party................. 671,000 573,000 274,000
Accrued Liabilities
Operations............................ 402,000 495,000 295,000
Royalties............................. 96,000 220,000 78,000
Interest.............................. 614,000 612,000 714,000
----------- ----------- -----------
Total Current Liabilities............ 7,505,000 10,083,000 6,518,000
----------- ----------- -----------
Total Partners' Capital and Liabili-
ties................................ $13,370,000 $15,320,000 $12,541,000
=========== =========== ===========
</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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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 $2,043,000 $1,794,000
Other Revenues......... 145,000 151,000 622,000 111,000 110,000
---------- ---------- ---------- ---------- ----------
Total Revenues....... 2,674,000 2,879,000 3,784,000 2,154,000 1,904,000
---------- ---------- ---------- ---------- ----------
Expenses:
Operations............. 1,755,000 1,779,000 2,163,000 1,281,000 1,271,000
Bad Debt Expense....... -- -- 31,000 -- --
General and Administra-
tive:
Professional Services. 55,000 54,000 72,000 100,000 42,000
General Partners--Re-
lated Party.......... 98,000 123,000 223,000 78,000 95,000
---------- ---------- ---------- ---------- ----------
Total General and Ad-
ministrative........ 153,000 177,000 295,000 178,000 137,000
---------- ---------- ---------- ---------- ----------
Total Expenses....... 1,908,000 1,956,000 2,489,000 1,459,000 1,408,000
---------- ---------- ---------- ---------- ----------
Income From Opera-
tions............... 766,000 923,000 1,295,000 695,000 496,000
Other Income (Expense):
Interest Income........ 73,000 52,000 38,000 43,000 50,000
Interest Expense....... (744,000) (902,000) (806,000) (544,000) (924,000)
Loss on Sale of Proper-
ty.................... (170,000) -- -- -- (170,000)
---------- ---------- ---------- ---------- ----------
Net Other Expense.... (841,000) (850,000) (768,000) (501,000) (1,044,000)
---------- ---------- ---------- ---------- ----------
Net Income (Loss)
Before Extraordinary
Item............... (75,000) 73,000 527,000 194,000 (548,000)
Extraordinary Item--
Early Extinguishment
of Debt................ 358,000 -- 175,000 -- 358,000
---------- ---------- ---------- ---------- ----------
Net Income........... $ 283,000 $ 73,000 $ 702,000 $ 194,000 $ (190,000)
========== ========== ========== ========== ==========
Net Income Per Lim-
ited Partnership
Unit:
Income Before Ex-
traordinary Item... $ (7.28) $ 7.08 $ 51.14 $ 18.82 $ (53.17)
Extraordinary Item.. 34.74 -- 16.98 -- 34.74
---------- ---------- ---------- ---------- ----------
Net Income........... $ 27.46 $ 7.08 $ 68.12 $ 18.82 $ (18.43)
========== ========== ========== ========== ==========
</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 NINE MONTHS ENDED SEPTEMBER 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).. -- 1,940 -- 192,060 194,000
--- -------- ------ ---------- ----------
Balances at September
30, 1996 (Unaudited)... 1 $ (6,053) 10,306 $5,340,053 $5,334,000
=== ======== ====== ========== ==========
</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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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 $194,000 $(190,000)
Adjustments to Net In-
come (Loss):
Depreciation and Amor-
tization.............. 613,000 661,000 716,000 494,000 475,000
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) 134,000 183,000
(Increase) Decrease in
Prepaid Insurance..... (1,000) -- (9,000) (12,000) (4,000)
(Increase) Decrease in
Other Assets.......... 18,000 18,000 18,000 13,000 14,000
Accrued Income Re-
stricted Cash......... (63,000) (43,000) (31,000) -- (49,000)
Increase (Decrease) in
Accrued Liabilities... 41,000 120,000 (234,000) (25,000) (24,000)
Increase (Decrease) in
Amount Due to
General Partner....... 98,000 100,000 214,000 (246,000) 369,000
-------- -------- ---------- -------- ---------
Total Adjustments..... 477,000 732,000 440,000 359,000 776,000
-------- -------- ---------- -------- ---------
Net Cash Provided by
Operating Activities.. 760,000 805,000 1,142,000 553,000 586,000
-------- -------- ---------- -------- ---------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Cash Draws Restricted
Cash.................. 181,000 -- 207,000 119,000 182,000
Transfers to Restricted
Cash.................. -- -- (205,000) -- --
Capital Expenditures... (253,000) (139,000) (222,000) (41,000) (253,000)
Disposal of Plant and
Equipment............. -- -- -- -- --
-------- -------- ---------- -------- ---------
Net Cash Provided by
(Used) in Investing Ac-
tivities............... (72,000) (139,000) (220,000) 78,000 (71,000)
-------- -------- ---------- -------- ---------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Principal Payments on
Long-Term Debt........ (815,000) (751,000) (1,109,000) (687,000) (600,000)
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) (687,000) (600,000)
-------- -------- ---------- -------- ---------
Increase (Decrease) in
Cash and Cash Equiva-
lents.................. (15,000) (2,000) (16,000) (56,000) (85,000)
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 $207,000 $ 193,000
======== ======== ========== ======== =========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash Paid During the
Period for Interest... $743,000 $727,000 $ 755,000 $411,000 $ 205,000
======== ======== ========== ======== =========
</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,
----------------------
SEPTEMBER 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) (748,320)
---------- ---------- ----------
Net Utility Plant..................... 2,204,933 2,300,974 2,132,902
Restricted Assets:
Cash.................................... 80,626 76,157 82,367
Certificate of Deposit.................. 73,189 70,000 77,644
---------- ---------- ----------
Total Restricted Assets............... 153,815 146,157 160,011
Other Assets:............................ 32,145 40,181 26,118
Current Assets:
Cash and Cash Equivalents............... 80,428 98,642 83,063
Receivables--Trade...................... 98,539 98,600 145,215
Receivables--Other...................... 7,139 6,358 4,714
Receivable--Related Party............... 229,810 267,705 198,498
Prepaid Expenses........................ 1,679 1,348 4,164
---------- ---------- ----------
Total Current Assets.................. 417,595 472,653 435,654
---------- ---------- ----------
Total Assets.......................... $2,808,488 $2,959,965 $2,754,685
========== ========== ==========
PARTNERS' CAPITAL AND LIABILITIES
Partners' Capital........................ $ (293,083) $ (464,613) $ 127,407
Current Liabilities:
Note Payable--See Note 4................ 1,670,995 1,960,732 1,431,593
Note Payable--Related Party............. 728,970 728,970 503,970
Payable--Related Party.................. 358,574 435,193 319,932
Accrued Liabilities:
Operations............................. 3,120 5,767 4,820
Royalties.............................. 302,315 249,799 335,453
Interest............................... 37,597 44,117 31,510
---------- ---------- ----------
Total Current Liabilities............. 3,101,571 3,424,578 2,627,278
---------- ---------- ----------
Total Partners' Capital and Liabili-
ties................................. $2,808,488 $2,959,965 $2,754,685
========== ========== ==========
</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 NINE MONTHS,
DECEMBER 31, ENDED SEPTEMBER 30,
------------------ -----------------------
1995 1994 1996 1995
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Electric Power Revenues............ $875,356 $798,722 $711,178 $688,890
-------- -------- -------- --------
EXPENSES:
Operations......................... 536,756 545,336 409,075 454,914
General and Administrative:
Professional Services............. -- 1,481 3,057 8,232
Related party..................... 14,500 14,500 -- --
-------- -------- -------- --------
Total Expenses................... 551,256 561,317 412,132 463,146
-------- -------- -------- --------
Income From Operations........... 324,100 237,405 299,046 225,744
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest Income.................... 41,037 38,315 24,874 25,226
Interest Expense................... (202,477) (233,513) (128,606) (115,755)
-------- -------- -------- --------
Net other Expense................. (161,440) (195,198) (103,732) (90,529)
-------- -------- -------- --------
Net Income........................ $162,660 $ 42,207 $195,314 $135,215
======== ======== ======== ========
</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 NINE MONTHS ENDED SEPTEMBER 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).............................................. 195,314
---------
Balances at September 30, 1996 (Unaudited).......................... $ 127,407
=========
</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 NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 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 $195,314 $135,215
-------- -------- -------- --------
Adjustments to Net Income (Loss):
Depreciation and Amortization..... 104,078 104,078 78,058 78,058
(Increase) Decrease in Receiv-
ables............................ (721) (18,339) (44,254) (34,567)
(Increase) Decrease in Prepaid In-
surance.......................... (331) (678) (2,484) (2,850)
Accrued Interest Income Restricted
Assets........................... (7,658) (2,859) (6,196) (6,528)
Increase (Decrease) in Accrued Li-
abilities........................ 43,349 48,764 28,752 (32,968)
Increase (Decrease) in Amount Due
to Related Party................. (76,619) 147,519 (263,641) 26,376
-------- -------- -------- --------
Total Adjustments................ 62,098 278,486 (209,765) 27,521
-------- -------- -------- --------
Net Cash Provided by Operating Ac-
tivities......................... 224,758 320,693 (14,451) 162,736
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVI-
TIES:
Principle Payments From Note Re-
ceivable Related Party........... 37,895 33,916 31,312 28,024
Investment in Certificate of De-
posit--Restricted................ -- (70,000) -- --
-------- -------- -------- --------
Net Cash Provided by (Used) in In-
vesting Activities............... 37,895 (36,084) 31,312 28,024
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Principal payments on Long-term
Debt.............................. (289,737) (259,310) (239,402) (214,262)
Proceeds from Partner Contribu-
tions............................. 8,870 4,015 225,176 7,941
-------- -------- -------- --------
Net Cash Provided by (Used) in Fi-
nancing Activities................ (280,867) (255,295) (14,226) (206,321)
-------- -------- -------- --------
Increase (Decrease) in Cash and
Cash Equivalents.................. (18,214) 29,314 2,635 (15,561)
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 $ 83,063 $ 83,081
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash Paid During the Year for In-
terest............................ $208,997 $239,346 $ 97,096 $115,755
======== ======== ======== ========
</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.
NOTE 5--SUBSEQUENT EVENT (UNAUDITED)
In 1996, three of the Partnership's operating permits expired. The
Partnership filed for renewal of these permits prior to their expiration but
has yet to receive approval from the State of New Hampshire. Management
anticipates the permits to be approved.
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.
3,100,000 SHARES OF COMMON STOCK
AND
3,100,000 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 NOVEMBER 26, 1996
PROSPECTUS
U.S. ENERGY SYSTEMS, INC.
205,000 SHARES OF COMMON STOCK
-----------
This Prospectus relates to the offering ("Secondary Offering") by Anchor
Capital Company LLC ("Anchor") of 205,000 shares of Common Stock of the
Company, such shares of Common Stock (collectively, the "Securities") to be
sold from time to time by Anchor (the "Selling Securityholders") following
completion of the Primary Offering (as defined below). Concurrently with this
Secondary Offering, the Company is offering for sale to the public, by means of
a separate prospectus, 3,100,000 shares of Common Stock and 3,100,000 Warrants
(the "Primary Offering").
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.
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 USEY and USEYW, 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 9.
-----------
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
Commission maintains a web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically
with the Commission. The address of such web site is http://www.sec.gov.
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) the acquisition of a 95% interest in two geothermal plants
known as Steamboat 1 and 1A for $4,741,000 (including $50,000 as a downpayment
which was previously paid by the Company) (the "Steamboat Acquisition"), (ii)
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, (iii) the
conversion of $500,000 of convertible subordinated debentures (the "Convertible
Debentures") into 125,000 shares of Common Stock and 125,000 Warrants (the
"Private Warrants") having the same terms and conditions as the Warrants (the
"Debenture Conversion") and (iv) the exchange of the 57,500 currently
outstanding shares of the Company's Series One Preferred Stock for 205,000
shares of Common Stock (the "Preferred Stock Exchange"). The consummation of
the Primary Offering is a condition to the consummation of the Closing
Transactions and the consummation of the Closing Transactions is a condition to
the consummation of 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 was 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 $4,741,000 (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 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
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 $4,741,000 (including $50,000 as a downpayment which was
previously paid by the Company) to Steamboat LLC from the proceeds of the
Primary Offering 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, will result in a substantial reduction of the
Company's indebtedness. In December 1994 the holders of the Convertible
Debentures agreed to allow the Company to defer one-half of interest payments
due thereafter until the consummation of an underwritten offering of the
Company's securities, when interest payments so accrued would be paid. In March
1996, the Company offered a conversion plan to the debenture holders (the
"Debenture Conversion") whereby the holders could convert on a pro rata basis
up to $500,000 in face amount for 125,000 shares of Common Stock and 125,000
Private Warrants, with the 18% rate of interest reduced to 9% on the
unconverted balance. Twenty-three of the twenty-six debenture holders
representing $1,375,000 face amount of the $1,525,000 total have agreed to the
Debenture Conversion. The $150,000 in principal amount held by the holders
declining the Offer will continue to receive 18% interest, and will not
participate in the Debenture Conversion. See "Description of Securities--
Convertible Debentures," "Certain Transaction" and Pro Forma Financial
Statements.
5
<PAGE>
THE OFFERING
Securities offered..........
205,000 shares of Common Stock. See "Description
of Securities."
Common Stock outstanding
prior to the Primary 439,650 shares
Offering...................
Common Stock to be
outstanding after the 3,869,650 shares(1)(2)
Primary Offering...........
Use of proceeds............. The Company will receive no proceeds from the
sale of the Securities offered hereby.
Proposed Nasdaq SmallCap
Market Symbols............. Common Stock: USEY
Warrants: USEYW
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) 3,100,000 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 4,264,975 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) 3,845,000 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 and (iii) 128,125 shares issuable upon conversion of
Convertible Debentures which will remain outstanding after the Primary
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, 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)............ 604 106 319 328 41 223
Loss from Joint Ven-
tures.................. 17 17 76 92 92 62
------- --------- ------- ------- --------- -------
Income (loss) before in-
come taxes............. (1,474) 725 (1,401) (828) 401 (706)
Income taxes (3)........ -- 244 -- -- 135 --
------- --------- ------- ------- --------- -------
Income (loss) before ex-
traordinary items...... (1,474) 481 (1,401) (828) 266 (706)
Preferred dividends..... 21(4) -- -- 29(4) -- --
------- --------- ------- ------- --------- -------
Income (loss) available
for common stockhold-
ers*................... $(1,495) $ 481 $(1,401) $ (857) $ 266 $ (706)
======= ========= ======= ======= ========= =======
(Loss) per share of Com-
mon Stock *............ $ (3.41) $ (3.38) $ (1.95) $ (1.61)
======= ======= ======= =======
(Loss) per share of Com-
mon Stock--Supplemental
(5)*................... $ (1.30) $ (0.66)
======= =======
Pro forma net income per
share of Common Stock
(6)*................... $ 0.17 $ 0.09
========= =========
Shares used in computing
net income per share of
Common Stock (6)....... 438,773 2,797,292 415,022 439,650 3,014,708 438,296
======= ========= ======= ======= ========= =======
BALANCE SHEET DATA:
<CAPTION>
JULY 31, 1996
----------------------------
HISTORICAL PRO FORMA (7)
---------- ---------------
AS ADJUSTED
<S> <C> <C>
Current assets.......... $ 21 $2,988
Investment in joint ven-
tures.................. 1,834 1,781
Loan receivable......... -- 300(8)
Property, plant and
equipment.............. -- 5,015
Total assets............ 2,076 10,084
Current liabilities..... 2,815 1,250
Long-term liabilities... 2,818 1,343
Minority interest in
subsidiaries........... -- 334
Working capital......... (2,794) 1,738
Stockholders' equity
(deficit).............. (3,557) 7,157
</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 $875,000 of the remainder paying interest at 9% per annum.
(2) Adjusted for reduction on $875,000 principal amount 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. 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.
(4) Provision for dividends on Series One Preferred Stock eliminated as a
result of the Preferred Stock Conversion.
(5) Supplemental loss per share is based on the weighted average number of
shares outstanding and 518,895 (at January 31, 1996) and 569,767 (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 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 (2,103,779 shares at January
31, 1996 and 2,245,058 shares at July 31, 1996). Assumed exercise of
options and warrants have not been reflected as they would be anti-
dilutive.
(7) Reflects the sale of Securities offered hereby, 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 November 30, 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.
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 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,
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 ($372,000 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
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. The Company believes it
is in a position to obtain a satisfactory price for electricity generated in
the Steamboat Facilities because (i) the existing contract with Sierra, which
calls for "short term" avoided cost in the second 10 years, is subject to
negotiation since no "short term" tariff has been recently published by Sierra
with the state of Nevada regulatory authority; (2) even if published, "short
term" rates may not be applicable to a 20 year (long term) contract; and (3)
the Company is developing other options for sales of both electricity and heat
from the facility, and heat is not subject to the power purchase contract. No
assurance can be given that such efforts will be successful.
10
<PAGE>
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, 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 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. The
Company plans to obtain $1,000,000 of key man insurance on Mr. Nelson upon
completion of this offering.
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
11
<PAGE>
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 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.
12
<PAGE>
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 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 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 November 30,
1996, which will be repaid from the proceeds of the Primary Offering, amounts
to $119,000. 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%. 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 $1,141,000 (including accrued interest
to November 30, 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 $250,000 and $175,000, respectively, will be owed to
them as of November 30, 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."
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 an active public trading market for the Common Stock or
Warrants will develop and continue after the Primary Offering. The initial
offering prices of the Securities in 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 3,100,000 shares of Common Stock. In the Primary Offering, the
Underwriters'
13
<PAGE>
over-allotment option, if fully exercised, including the related Warrants,
would result in the issuance of 930,000 shares of Common Stock. The
Representative's Purchase Option, if fully exercised, including the related
Warrants, would result in the issuance of 620,000 shares of Common Stock. An
additional 128,125 shares of Common Stock are issuable upon conversion of
remaining Convertible Debentures. These issuances of Common Stock, totalling
5,069,975 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 $2.15
per share of Common Stock, (approximately 54% 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
3,869,650 shares of Common Stock. All of the 3,100,000 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, all of such 64,650 shares are currently eligible for sale, 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 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
14
<PAGE>
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
The Company anticipates satisfying the Nasdaq SmallCap listing criteria
following the consummation of the Primary Offering, however, 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
15
<PAGE>
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. 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.
16
<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
USEY (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 October 28, 1996)....................... $ 3.21 $ 2.58
</TABLE>
As of October 28, 1996, there were 584 record holders of the Company's
Common Stock and approximately 900 beneficial holders of the Company's Common
Stock.
On October 28, 1996, the high bid price was $3.25 and low bid price was
$3.25.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future.
17
<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 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 November 30, 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
Common stock, $0.01 par value, 35,000,000 shares
authorized; issued and outstanding, 439,650
shares; to be issued and outstanding, 3,869,650
shares(1)(2)...................................... 4,000 38,000
Additional paid-in capital......................... 112,000 11,020,000
Accumulated (deficit)^(3).......................... (3,674,000) (3,901,000)
----------- -----------
Total ^ stockholders' equity (deficit)............... (3,557,000) 7,157,000
----------- -----------
Total capitalization................................. $ 413,000 $ 8,692,000
=========== ===========
</TABLE>
- --------
(1) Includes (i) 439,650 Shares of Common Stock outstanding prior to the
Primary Offering, (ii) 3,100,000 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 4,264,975 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) 3,845,000 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 and (iii) 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 31, 1996.
18
<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
3,100,000 shares of Common Stock and 3,100,000 Warrants offered by this
Prospectus for net proceeds of $10,662,000, (b) acquisition of a 95% interest
in two geothermal power plants (the Steamboat Facilities) for an aggregate of
$4,741,000 (including $50,000 as a downpayment which was previously paid by
the Company), (c) acquisition of an 81.5% interest in NRG for $265,000, (d)
repayment of notes payable and other liabilities in the aggregate amount of
$2,767,000 adjusting for accrual of interest and additional bridge loan
financing to November 30, 1996, (e) conversion of 57,500 shares of Series One
Preferred Stock into 205,000 shares of Common Stock, and (f) conversion of
$500,000 principal amount of the existing Convertible Debentures to 125,000
shares of Common Stock and 125,000 Private Warrants. The Pro Forma Condensed
Balance Sheet should be read in conjunction with Pro Forma Statement of
Operations and the historical financial statements of the Company, Lehi
Independent Power Associates, L.C. ("LIPA") and Plymouth Cogeneration included
in this Prospectus.
<TABLE>
<CAPTION>
STEAMBOAT PRO FORMA ADJUSTMENTS
USE 1 AND 1A --------------------------- PRO
HISTORICAL PRO FORMA CONSOLIDATED DEBIT CREDIT FORMA
----------- ---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
A S S E T S
Current assets:
Cash.................... $ 1,000 $ 1,000 $10,662,000(a) $ 4,691,000(b) $ 2,965,000
25,000(i) 2,767,000(c2)
265,000(h)
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 10,687,000 7,723,000 2,988,000
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 4,691,000(b) 4,744,000(g) --
Envirosystems.........
NRG Company LLC........ 265,000(h) 265,000(i) --
Loan receivable, Reno 300,000(i) 300,000
Energy.................
Property, Plant and 5,015,000 5,015,000 5,015,000
Equipment..............
Deferred costs of regis- 221,000 221,000 221,000(a) --
tration................
----------- ---------- ---------- ----------- ----------- -----------
TOTAL.................. $ 2,076,000 $5,018,000 $7,094,000 $15,943,000 $12,953,000 $10,084,000
=========== ========== ========== ----------- ----------- ===========
L I A B I L I T I E S
Loans payable........... $ 960,000 $ 960,000 $ 960,000(c2) $ --
Pre-reorganization in- 192,000 192,000 192,000
come taxes payable.....
Other current liabili- 1,663,000 1,663,000 807,000(c2) 202,000(c1) 1,058,000
ties ..................
----------- ---------- ---------- ----------- ----------- -----------
Total current liabili- 2,815,000 2,815,000 1,767,000 202,000 1,250,000
ties..................
Convertible subordinated 1,525,000 1,525,000 500,000(e) 1,025,000
secured debentures ....
Notes payable .......... 975,000 975,000 1,000,000(c2) 25,000(f) --
Other liabilities ...... 318,000 318,000 318,000
----------- ---------- ---------- ----------- ----------- -----------
Total liabilities...... 5,633,000 5,633,000 3,267,000 227,000 2,593,000
----------- ---------- ----------- ----------- -----------
Minority interests in
subsidiaries:
Steamboat Envirosystems 274,000(g) 274,000
LLC...................
NRG Company LLC........ 60,000(i) 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, ($.01
par value issued and
outstanding, 57,500
shares; to be issued
and outstanding, none). 1,000 1,000 1,000(d) --
Common stock ($.01 par
value, issued and out-
standing, 439,650
shares; to be issued
and outstanding,
3,869,650 shares)...... 4,000 4,000 31,000(a) 38,000
2,000(d)
1,000(e)
Additional paid-in capi- 112,000 112,000 221,000(a) 10,631,000(a) 11,020,000
tal.................... 1,000(d) 499,000(e)
Accumulated deficit..... (3,674,000) (3,674,000) 25,000(f) (3,901,000)
202,000(c1)
Members' equity:
U.S. Energy Systems, 4,744,000 4,744,000 4,744,000(g) --
Inc. .................
Far West Capital, Inc.. 274,000 274,000 274,000(g) --
----------- ---------- ---------- ----------- ----------- -----------
Total stockholders' (3,557,000) 5,018,000 1,461,000 5,468,000 11,164,000 7,157,000
equity (capital
deficiency)...........
----------- ---------- ---------- ----------- ----------- -----------
TOTAL.................. $ 2,076,000 $5,018,000 $7,094,000 $24,678,000 $24,678,000 $10,084,000
=========== ========== ========== =========== =========== ===========
</TABLE>
19
<PAGE>
Notes to Pro Forma Condensed Consolidated Balance Sheet
- --------
(a) To reflect sale of 3,100,000 shares of Common Stock and 3,100,000 Warrants
for net proceeds of $10,662,000.
(b) To reflect purchase of a 95% interest in Steamboat LLC, which is acquiring
the Steamboat Facilities.
<TABLE>
<S> <C>
(c1)To reflect accrual of interest from August 1 to November 30,
1996............................................................... $202,000
(c2)To reflect assumed repayment of debt:
Note payable.................................................... $1,000,000
Bridge loans.................................................... 960,000
Accrued interest................................................ 807,000
----------
$2,767,000
==========
</TABLE>
(d) To reflect conversion of existing Series One Preferred Stock into 205,000
shares of Common Stock.
(e) 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.
(f) 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.
(g) To eliminate Steamboat LLC investment account and set up minority
interest.
(h) To reflect purchase of an 81.5% interest in NRG Company, LLC for $265,000.
(i) 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."
20
<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 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 $875,000 of 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 (476,000)(2) 106,000
(22,000)(5b)
Loss from Joint
Ventures......... 17,000 17,000 17,000
----------- ---------- ---------- --------- ----------
Total expenses.. 1,474,000 1,703,000 3,177,000 2,679,000
----------- ---------- ---------- --------- ----------
Income (loss) be-
fore income tax-
es............... (1,474,000) 1,701,000 227,000 725,000
Income taxes..... -- -- (244,000)(3) 244,000
----------- ---------- ---------- --------- ----------
Net income
(loss)........... (1,474,000) 1,701,000 227,000 481,000
Dividends on pre-
ferred stock..... 21,000 21,000 21,000(4) --
----------- ---------- ---------- --------- ----------
Net income (loss)
available for
common stockhold-
ers (6).......... $(1,495,000) $1,701,000 $ 206,000 $ 481,000
----------- ---------- ---------- --------- ----------
Net income per
common share (7). $ (3.41) $ 0.17
----------- ----------
Shares used in
computing net in-
come per common
share (7)........ 438,773 2,797,292
=========== ==========
<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 (276,000)(2) 41,000
(11,000)(5b)
Loss from Joint
Ventures......... 92,000 92,000 92,000
----------- ------------- ------------ --------------- ------------
Total expenses.. 828,000 977,000 1,805,000 1,518,000
----------- ------------- ------------ --------------- ------------
Income (loss) be-
fore income tax-
es............... (828,000) 942,000 114,000 401,000
Income taxes..... -- -- 135,000 (3) 135,000
----------- ------------- ------------ --------------- ------------
Net income
(loss)........... (828,000) 942,000 114,000 266,000
Dividends on pre-
ferred stock..... 29,000 29,000 (29,000)(4) --
----------- ------------- ------------ --------------- ------------
Net income (loss)
available for
common stockhold-
ers (6).......... $(857,000) $ 942,000 $ 85,000 $ 266,000
----------- ------------- ------------ --------------- ------------
Net income per
common share (7). $ (1.95) $ 0.08
----------- ------------
Shares used in
computing net in-
come per common
share (7)........ 439,650 3,014,708
=========== ============
</TABLE>
21
<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% on
$875,000 of the remaining balance of the Convertible Debentures. The
reduction of the interest rate to 9% will be accounted for prospectively.
(3) To reflect provision for federal and state taxes at 38%, 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.
(4) Provision for dividends on Series One Preferred Stock eliminated as a
result of the Preferred Stock Conversion.
(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 (2,103,779 shares at January 31, 1996 and 2,245,058
shares at July 31, 1996). Assumed exercise of options and warrants have
not been reflected as they would be anti-dilutive.
22
<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 $5,015,000 as if such acquisition
had taken place on June 30, 1996. The total is made up of $4,741,000
(including $50,000 down payment previously paid by the Company) 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)
$2,166,000 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.................................. $4,741,000(a) $1,575,000(c)
1,000,000(d)
2,166,000(f)
Other Assets.......................... 3,000(a) $ 3,000
Property, Plant and Equipment......... 274,000(b)
1,575,000(c)
1,000,000(d)
2,166,000(e) 5,015,000
---------- ---------- ----------
Total............................... $9,759,000 $4,741,000 $5,018,000
========== ========== ==========
LIABILITIES
Notes payable......................... $2,166,000(f) $2,166,000(e)
MEMBERS' EQUITY
U.S. Energy Systems, Inc.............. 4,744,000(a) $4,744,000
Far West Capital, Inc................. 274,000(b) 274,000
---------- ---------- ----------
Total............................... $2,166,000 $7,184,000 $5,018,000
========== ========== ==========
</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.
23
<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 $4,691,000 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 October
20, 1996, which had a face value of $3,800,000 as at November 30, 1996 net of
an escrowed reserve, and will be acquired by the Company for $2,166,000 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 $5,157,000 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.
24
<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
25
<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.
26
<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
$1,738,000.
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 $10,662,000.
Of this total, the Company's acquisition of 95% of Steamboat LLC will use
$4,691,000 (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 November 30, 1996. The
bridge loans, including interest, total $1,130,000, secured notes payable,
including interest, total $1,232,000, and accrued interest on the Convertible
Debentures required to be paid as part of the restructuring of these
instruments, total $405,000. 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 $875,000 of 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. The interest expense reflected in this Prospectus gives effect to the
fact that 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 shares issued to Anchor
for the initial bridge loan are being converted to 205,000 shares of common
stock.
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
27
<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, 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 that such negotiations will be successful.
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 in the Lehi Plant 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 Lehi partners may decide to
sell two of the 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.
28
<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 paid approximately $41,000 for the
installation of the first of six engine generators, installed September 1996.
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 on $875,000 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 on $875,000 in
principal amount 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 participate in this restructuring.
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.
29
<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
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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 October
20, 1996, will have a face value of $3,800,000 at November 30, 1996 net of an
escrowed reserve, and will be acquired by the Company for $2,166,000 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 36%.
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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<PAGE>
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 31, 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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<PAGE>
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, Messrs. Knoll and Moody will
resign. The remaining directors intend to elect two outside directors to fill
the vacancies. These persons have not yet been identified by the Company.
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 commenced November 11, 1993 and
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
45
<PAGE>
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 November 30,
1996, the amount of deferred compensation owed to Mr. Nelson was $250,000.
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 provides for
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 November 30, 1996, the amount of deferred compensation owed to Mr. Rosen
was $175,000.
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 of $30,900, $30,900, $92,500, $801,200
and $185,300, respectively (including accrued interest to November 30, 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 November 30,
1996, which will be repaid from the proceeds of the Primary Offering, amount
to $32,600, $59,000, $13,800 and $13,100 respectively. As part of the
Debenture Conversion, the conversion rate on $875,000 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. 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 $660,000 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
46
<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 November 29, 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. $796,000 of the proceeds of the Primary Offering
and the Private Placement will be used to repay the Anchor Loan and $136,000
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."
In December 1995, Solvation loaned the Company $200,000, which carries an
interest rate of 10% per annum and which has matured and will be paid when the
Offering is closed, but no later than November 15, 1996. A further $50,000 was
loaned to the Company in May 1996 on the same terms and conditions. The
Solvation Loan is cross-collateralized with the Anchor Loan by a first lien on
all of the assets of the Company and 97,250 shares of Common Stock owned by
Messrs. Nelson and Rosen.
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
October 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 2.1%
Theodore Rosen.......... 88,333(2) 17.4% 0 100,833(2a) 2.6%
Ronald Moody............ 21,500(3) 4.8% 0 21,500(3) 0.6%
Fred Knoll.............. 171,333(3) 28.6% 0 191,334(a) 4.8%
Evan Evans.............. 2,500 0.6% 0 2,500 0.1%
S. Marcus Finkle........ 63,833 13.9% 0 68,833(a) 1.8%
117 AABC
Aspen, CO
Guernroy, Ltd........... 38,158 8.6% 0 43,158(a) 1.1%
c/o Royal Bank of
Canada
Channel Isles, UK
Anchor Capital Company, 205,000 31.8% 205,000(8) 0 0%
LLC....................
1140 Avenue of the
Americas
New York, NY 10036
All officers and 381,113(2)(2a) 55.2% 413,613(2)(2a) 10.0%
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.
(3) Includes 9,000 shares issuable on exercise of warrants at an exercise
price of $5 per share which became exercisable on October 31, 1994.
(4) Includes (i) 67,500 shares issuable upon exercise of non-qualified options
at an exercise price of $8 per share which became exercisable on December
1, 1995 and (ii) 91,333 shares owned by Europa International Inc.
("Europa"), including 13,333 shares issuable to Europa upon conversion of
Convertible Debentures and 78,000 shares issuable to Europa on exercise of
warrants at an exercise price of $5 per share which became exercisable on
October 31, 1994. Knoll Capital Management has the sole voting power of
the shares owned by Europa. Mr. Knoll is the President and sole
shareholder of Knoll Capital an Management.
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<PAGE>
(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 57,500 shares of Series One
Preferred Stock.
49
<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 offered in the Primary Offering 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.
50
<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. 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 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
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.
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
51
<PAGE>
Common Stock and 125,000 Private Warrants and reducing the conversion rate on
$875,000 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 on $875,000
in principal amount 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. 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 is 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 (the
"Supplemental Participation"). As a result of the Debenture Conversion, the
Supplemental Participation will be reduced by one-third in view of the
Conversion of $500,000 in principal amount of Convertible Debentures. See
"Business--Current Operations and On-Going Projects--Lehi Cogeneration
Project."
Pursuant to the terms and conditions of a pledge agreement between the
Company and Richard Nelson and Theodore Rosen, acting jointly as pledge agent
for all of the holders of the Convertible Debentures, payment of principal and
interest on the Convertible Debentures and, if applicable, any Supplemental
Participation due is secured by a security interest in all of the issued and
outstanding shares of common stock of LEI, all of which issued and outstanding
shares are owned by the Company. Until such time as the Company's obligations
for the payment of the principal and interest on the Convertible Debentures
and, if applicable, any Supplemental Participation due are paid in full, the
Company shall not cause LEI to issue any additional shares of common stock
unless the security interest granted in LEI shall be extended to such
additional shares.
The Convertible Debentures are subordinate and subject in right of payment
to the prior payment of all "Senior Indebtedness" of the Company. "Senior
Indebtedness" is the principal of, premium, if any, and interest (including
any interest accruing after the filing of a petition in bankruptcy) on and
other amounts due or in connection with any indebtedness of the Company
including, without limitation, the liabilities as defined in and arising under
any loan or security agreement with a bank, insurance company, or other
financial institution or affiliate of any thereof whether outstanding on the
date of the Convertible Debentures, or any indebtedness thereafter created,
incurred, assumed or guaranteed by the Company, and, in each case, all
renewals, extensions, and refundings thereof, except indebtedness which by the
terms of the instrument creating or evidencing such indebtedness created,
incurred, assumed, or guaranteed after the date of the Convertible Debentures
is expressly made equal to or subordinate and subject in right of payment to,
the payment of principal of an interest on the Convertible Debentures.
Notwithstanding anything herein to the contrary, Senior Indebtedness shall not
include (i) indebtedness representing the repurchase price of any preferred
stock or other capital stock of the Company or any dividend or distribution
with respect thereto; (ii) indebtedness of the Company owed directly to any
employee, officer or director thereof; and (iii) indebtedness which, by its
terms, is subordinate in right of payment to the indebtedness of the Company
evidenced by the Convertible Debentures.
To the extent the Company shall have funds legally available for such
payment, commencing January 25, 1998, the Company may redeem at its option the
Convertible Debentures, in whole or in part, at a redemption price equal to
102% of the principal amount of each Convertible Debenture, plus any unpaid
and accrued interest of the Supplemental Participation. Upon any such
redemption, the Company must issue each holder whose Convertible Debenture(s)
have been redeemed a warrant to purchase a number of shares of the Company's
Common Stock equal to the number of shares into which the principal amount
being redeemed is then convertible. The exercise price of these warrants would
be the same as the conversion price at the time of redemption (currently $8.00
per share).
ANTI-TAKEOVER PROVISIONS
The Company is governed by the provisions of Section 203 of the General
Corporation Law of Delaware, an anti-takeover law. In general, this statute
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved
52
<PAGE>
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.
53
<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
3,869,650 shares of Common Stock. All of the 3,100,000 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, all of such 64,650 shares are
currently eligible for sale (none of which are subject to the agreements
described below restricting their sale), subject in each instance to the
volume limitations of the Rule. The holders of record of 114,279 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.
54
<PAGE>
PLAN OF DISTRIBUTION
The Securities are being registered to permit public secondary trading of
the 205,000 shares of Common Stock 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 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.
55
<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.
56
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
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 Nine Months ended September 30, 1996............................. F-18
Statements of Partners' Capital, for the years ended December 31, 1995,
and 1994, and 1993
and the Nine Months ended September 30, 1996............................. F-19
Statements of Cash Flows, for the years ended December 31, 1995, 1994 and
1993
and the Nine Months ended September 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 Nine Months ended September 30, 1996............................. F-32
Statements of Cash Flows, for the years ended December 31, 1995 and 1994
and the Nine Months ended September 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 net proceeds of approximately $10,662,000 through the sale of
3,100,000 shares of common stock and warrants in a public offering (the
"Proposed Public Offering").
b) Convert the existing preferred stock into 205,000 shares of common
stock.
c) Convert $500,000 of the existing Debentures into 125,000 shares of
common stock and warrants.
d) 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").
e) 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,
------------------------
SEPTEMBER 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............................. 588,000 335,000 629,000
Construction in Progress.............. 118,000 118,000 118,000
Accumulated Depreciation.............. (5,377,000) (6,010,000) (5,859,000)
----------- ----------- -----------
Net Utility Plant.................... 11,328,000 13,159,000 10,887,000
Restricted Cash........................ 1,026,000 1,145,000 1,067,000
Other Assets........................... 106,000 124,000 93,000
Current Assets:
Cash and Cash Equivalents............. 263,000 278,000 207,000
Receivables--Trade.................... 399,000 437,000 271,000
Receivables--Other.................... 6,000 6,000 0
Receivable--Related Party............. 238,000 159,000 0
Prepaid Expenses...................... 4,000 12,000 16,000
----------- ----------- -----------
Total Current Assets................. 910,000 892,000 494,000
----------- ----------- -----------
Total Assets......................... $13,370,000 $15,320,000 $12,541,000
=========== =========== ===========
PARTNERS' CAPITAL AND LIABILITIES
Partners' Capital:
Limited Partners--10,306 units........ $ 5,148,000 $ 4,868,000 $ 5,340,000
General Partner--1 Percent............ (8,000) (11,000) (6,000)
----------- ----------- -----------
Total Partners' Capital.............. 5,140,000 4,857,000 $ 5,334,000
Other Liabilities...................... -- 150,000
Long-term Debt:
Notes Payable--Related Party.......... 188,000 230,000 152,000
Notes Payable......................... 537,000 -- 537,000
----------- ----------- -----------
Partners' Capital and Long-Term Liabil-
ities................................. 5,865,000 5,237,000 6,023,000
Current Liabilities:
Current Portion--Long-term Debt....... 4,563,000 7,140,000 3,911,000
Note Payable--Related Party........... 1,159,000 1,043,000 1,246,000
Payable-Related Party................. 671,000 573,000 274,000
Accrued Liabilities
Operations............................ 402,000 495,000 295,000
Royalties............................. 96,000 220,000 78,000
Interest.............................. 614,000 612,000 714,000
----------- ----------- -----------
Total Current Liabilities............ 7,505,000 10,083,000 6,518,000
----------- ----------- -----------
Total Partners' Capital and Liabili-
ties................................ $13,370,000 $15,320,000 $12,541,000
=========== =========== ===========
</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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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 $2,043,000 $1,794,000
Other Revenues......... 145,000 151,000 622,000 111,000 110,000
---------- ---------- ---------- ---------- ----------
Total Revenues....... 2,674,000 2,879,000 3,784,000 2,154,000 1,904,000
---------- ---------- ---------- ---------- ----------
Expenses:
Operations............. 1,755,000 1,779,000 2,163,000 1,281,000 1,271,000
Bad Debt Expense....... -- -- 31,000 -- --
General and Administra-
tive:
Professional Services. 55,000 54,000 72,000 100,000 42,000
General Partners--Re-
lated Party.......... 98,000 123,000 223,000 78,000 95,000
---------- ---------- ---------- ---------- ----------
Total General and Ad-
ministrative........ 153,000 177,000 295,000 178,000 137,000
---------- ---------- ---------- ---------- ----------
Total Expenses....... 1,908,000 1,956,000 2,489,000 1,459,000 1,408,000
---------- ---------- ---------- ---------- ----------
Income From Opera-
tions............... 766,000 923,000 1,295,000 695,000 496,000
Other Income (Expense):
Interest Income........ 73,000 52,000 38,000 43,000 50,000
Interest Expense....... (744,000) (902,000) (806,000) (544,000) (924,000)
Loss on Sale of Proper-
ty.................... (170,000) -- -- -- (170,000)
---------- ---------- ---------- ---------- ----------
Net Other Expense.... (841,000) (850,000) (768,000) (501,000) (1,044,000)
---------- ---------- ---------- ---------- ----------
Net Income (Loss)
Before Extraordinary
Item............... (75,000) 73,000 527,000 194,000 (548,000)
Extraordinary Item--
Early Extinguishment
of Debt................ 358,000 -- 175,000 -- 358,000
---------- ---------- ---------- ---------- ----------
Net Income........... $ 283,000 $ 73,000 $ 702,000 $ 194,000 $ (190,000)
========== ========== ========== ========== ==========
Net Income Per Lim-
ited Partnership
Unit:
Income Before Ex-
traordinary Item... $ (7.28) $ 7.08 $ 51.14 $ 18.82 $ (53.17)
Extraordinary Item.. 34.74 -- 16.98 -- 34.74
---------- ---------- ---------- ---------- ----------
Net Income........... $ 27.46 $ 7.08 $ 68.12 $ 18.82 $ (18.43)
========== ========== ========== ========== ==========
</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 NINE MONTHS ENDED SEPTEMBER 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).. -- 1,940 -- 192,060 194,000
--- -------- ------ ---------- ----------
Balances at September
30, 1996 (Unaudited)... 1 $ (6,053) 10,306 $5,340,053 $5,334,000
=== ======== ====== ========== ==========
</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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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 $194,000 $(190,000)
Adjustments to Net In-
come (Loss):
Depreciation and Amor-
tization.............. 613,000 661,000 716,000 494,000 475,000
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) 134,000 183,000
(Increase) Decrease in
Prepaid Insurance..... (1,000) -- (9,000) (12,000) (4,000)
(Increase) Decrease in
Other Assets.......... 18,000 18,000 18,000 13,000 14,000
Accrued Income Re-
stricted Cash......... (63,000) (43,000) (31,000) -- (49,000)
Increase (Decrease) in
Accrued Liabilities... 41,000 120,000 (234,000) (25,000) (24,000)
Increase (Decrease) in
Amount Due to
General Partner....... 98,000 100,000 214,000 (246,000) 369,000
-------- -------- ---------- -------- ---------
Total Adjustments..... 477,000 732,000 440,000 359,000 776,000
-------- -------- ---------- -------- ---------
Net Cash Provided by
Operating Activities.. 760,000 805,000 1,142,000 553,000 586,000
-------- -------- ---------- -------- ---------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Cash Draws Restricted
Cash.................. 181,000 -- 207,000 119,000 182,000
Transfers to Restricted
Cash.................. -- -- (205,000) -- --
Capital Expenditures... (253,000) (139,000) (222,000) (41,000) (253,000)
Disposal of Plant and
Equipment............. -- -- -- -- --
-------- -------- ---------- -------- ---------
Net Cash Provided by
(Used) in Investing Ac-
tivities............... (72,000) (139,000) (220,000) 78,000 (71,000)
-------- -------- ---------- -------- ---------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Principal Payments on
Long-Term Debt........ (815,000) (751,000) (1,109,000) (687,000) (600,000)
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) (687,000) (600,000)
-------- -------- ---------- -------- ---------
Increase (Decrease) in
Cash and Cash Equiva-
lents.................. (15,000) (2,000) (16,000) (56,000) (85,000)
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 $207,000 $ 193,000
======== ======== ========== ======== =========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash Paid During the
Period for Interest... $743,000 $727,000 $ 755,000 $411,000 $ 205,000
======== ======== ========== ======== =========
</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,
----------------------
SEPTEMBER 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) (748,320)
---------- ---------- ----------
Net Utility Plant..................... 2,204,933 2,300,974 2,132,902
Restricted Assets:
Cash.................................... 80,626 76,157 82,367
Certificate of Deposit.................. 73,189 70,000 77,644
---------- ---------- ----------
Total Restricted Assets............... 153,815 146,157 160,011
Other Assets:............................ 32,145 40,181 26,118
Current Assets:
Cash and Cash Equivalents............... 80,428 98,642 83,063
Receivables--Trade...................... 98,539 98,600 145,215
Receivables--Other...................... 7,139 6,358 4,714
Receivable--Related Party............... 229,810 267,705 198,498
Prepaid Expenses........................ 1,679 1,348 4,164
---------- ---------- ----------
Total Current Assets.................. 417,595 472,653 435,654
---------- ---------- ----------
Total Assets.......................... $2,808,488 $2,959,965 $2,754,685
========== ========== ==========
PARTNERS' CAPITAL AND LIABILITIES
Partners' Capital........................ $ (293,083) $ (464,613) $ 127,407
Current Liabilities:
Note Payable--See Note 4................ 1,670,995 1,960,732 1,431,593
Note Payable--Related Party............. 728,970 728,970 503,970
Payable--Related Party.................. 358,574 435,193 319,932
Accrued Liabilities:
Operations............................. 3,120 5,767 4,820
Royalties.............................. 302,315 249,799 335,453
Interest............................... 37,597 44,117 31,510
---------- ---------- ----------
Total Current Liabilities............. 3,101,571 3,424,578 2,627,278
---------- ---------- ----------
Total Partners' Capital and Liabili-
ties................................. $2,808,488 $2,959,965 $2,754,685
========== ========== ==========
</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 NINE MONTHS,
DECEMBER 31, ENDED SEPTEMBER 30,
------------------ -----------------------
1995 1994 1996 1995
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Electric Power Revenues............ $875,356 $798,722 $711,178 $688,890
-------- -------- -------- --------
EXPENSES:
Operations......................... 536,756 545,336 409,075 454,914
General and Administrative:
Professional Services............. -- 1,481 3,057 8,232
Related party..................... 14,500 14,500 -- --
-------- -------- -------- --------
Total Expenses................... 551,256 561,317 412,132 463,146
-------- -------- -------- --------
Income From Operations........... 324,100 237,405 299,046 225,744
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest Income.................... 41,037 38,315 24,874 25,226
Interest Expense................... (202,477) (233,513) (128,606) (115,755)
-------- -------- -------- --------
Net other Expense................. (161,440) (195,198) (103,732) (90,529)
-------- -------- -------- --------
Net Income........................ $162,660 $ 42,207 $195,314 $135,215
======== ======== ======== ========
</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 NINE MONTHS ENDED SEPTEMBER 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).............................................. 195,314
---------
Balances at September 30, 1996 (Unaudited).......................... $ 127,407
=========
</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 NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 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 $195,314 $135,215
-------- -------- -------- --------
Adjustments to Net Income (Loss):
Depreciation and Amortization..... 104,078 104,078 78,058 78,058
(Increase) Decrease in Receiv-
ables............................ (721) (18,339) (44,254) (34,567)
(Increase) Decrease in Prepaid In-
surance.......................... (331) (678) (2,484) (2,850)
Accrued Interest Income Restricted
Assets........................... (7,658) (2,859) (6,196) (6,528)
Increase (Decrease) in Accrued Li-
abilities........................ 43,349 48,764 28,752 (32,968)
Increase (Decrease) in Amount Due
to Related Party................. (76,619) 147,519 (263,641) 26,376
-------- -------- -------- --------
Total Adjustments................ 62,098 278,486 (209,765) 27,521
-------- -------- -------- --------
Net Cash Provided by Operating Ac-
tivities......................... 224,758 320,693 (14,451) 162,736
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVI-
TIES:
Principle Payments From Note Re-
ceivable Related Party........... 37,895 33,916 31,312 28,024
Investment in Certificate of De-
posit--Restricted................ -- (70,000) -- --
-------- -------- -------- --------
Net Cash Provided by (Used) in In-
vesting Activities............... 37,895 (36,084) 31,312 28,024
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Principal payments on Long-term
Debt.............................. (289,737) (259,310) (239,402) (214,262)
Proceeds from Partner Contribu-
tions............................. 8,870 4,015 225,176 7,941
-------- -------- -------- --------
Net Cash Provided by (Used) in Fi-
nancing Activities................ (280,867) (255,295) (14,226) (206,321)
-------- -------- -------- --------
Increase (Decrease) in Cash and
Cash Equivalents.................. (18,214) 29,314 2,635 (15,561)
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 $ 83,063 $ 83,081
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash Paid During the Year for In-
terest............................ $208,997 $239,346 $ 97,096 $115,755
======== ======== ======== ========
</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.
NOTE 5--SUBSEQUENT EVENT (UNAUDITED)
In 1996, three of the Partnership's operating permits expired. The
Partnership filed for renewal of these permits prior to their expiration but
has yet to receive approval from the State of New Hampshire. Management
anticipates the permits to be approved.
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.............................................................. 9
USE OF PROCEEDS........................................................... 17
PRICE RANGE OF COMMON STOCK............................................... 17
DIVIDEND POLICY .......................................................... 17
CAPITALIZATION ........................................................... 18
PRO FORMA FINANCIAL INFORMATION........................................... 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION ............................................................... 25
BUSINESS ................................................................. 30
MANAGEMENT ............................................................... 43
CERTAIN TRANSACTIONS ..................................................... 46
PRINCIPAL AND SELLING SECURITYHOLDERS .................................... 48
DESCRIPTION OF SECURITIES ................................................ 50
SHARES ELIGIBLE FOR FUTURE SALE .......................................... 54
PLAN OF DISTRIBUTION ..................................................... 55
LEGAL MATTERS ............................................................ 55
EXPERTS .................................................................. 56
FINANCIAL STATEMENTS...................................................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. ENERGY SYSTEMS, INC.
205,000 SHARES OF COMMON STOCK
----------------
PROSPECTUS
----------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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.......................................... $ 10,104
NASD Fee...................................................... 3,802
Nasdaq Fee.................................................... 14,156
Transfer Agent's Fee.......................................... 3,000
Printing and Engraving Fees................................... 75,000
Legal Fees and Expenses....................................... 250,000
Blue Sky Fees and Expenses.................................... 50,000
Accounting Fees and Expenses.................................. 200,000
Representative's Non-Accountable Expense Allowance............ 381,300
Miscellaneous Expenses........................................ 43,938
----------
Total....................................................... $1,031,300
==========
</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 X
3.1 Restated Certificate of Incorporation of X
the Company 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 B
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 B
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 B
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, B
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 May 4, 1995 between the B
Company and Indus LLC
10.16 Security Agreement and Financing Statement X
among The Company, Lehi Envirosystems,
Inc., Plymouth Envirosystems, Inc. and
Anchor Capital Company, LLC dated June 14,
1995, as amended
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 X
Envirosystems, Inc., Plymouth
Envirosystems and Solvation, Inc. dated as
of December 15, 1995, as amended
10.19 Pledge Agreement between the Company and X
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 deleted
10.21(a) Certificate of Designations deleted
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 B
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, B
1988 by and between Far West Capital Inc.
and 1-A Enterprises
10.25(c) Letter dated August 18, 1989 by Gerald W. B
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 B
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 B
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 , B
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 B
$300,000 from Reno Energy, LLC to NRG
Company, LLC
10.29 Letter of Intent dated July 15, 1996 on B
behalf of Reno Energy, LLC
10.30 Limited Liability Company Operating B
Agreement of NRG Company, LLC dated as of
September 8, 1996, and amendments thereto
10.31 Form of Limited Liability Company Operating B
Agreement of Steamboat Envirosystems, L.C.
dated as of October , 1996
10.32 Form of Debenture Conversion Agreement X
11.1 Earnings Per Share Calculations--Historical B
January 31, 1996
11.2 Earnings Per Share Calculations--Historical B
July 31, 1996
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 B
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. 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 424(b) if, in the aggregate, the changes in 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; and
(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.
Undertakings Required by Regulation S-B Item 512(f)
The Company will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company under 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each post-
effective amendment that contains a form of prospectus as a new registration
statement for the securities offered in the registration statement, and that
offering of the securities as the initial bona fide offering of those
securities.
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 25TH DAY OF
NOVEMBER, 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 November 25,
(THEODORE ROSEN) 1996
/s/ Richard Nelson President and Chief
- ------------------------------------- Executive Officer November 25,
(RICHARD NELSON) (Principal 1996
Executive Officer)
/s/ Seymour J. Beder Chief Accounting
- ------------------------------------- Officer and November 25,
(SEYMOUR J. BEDER) Controller 1996
(Principal
Financial and
Accounting Officer)
/s/ Ronald Moody Director
- ------------------------------------- November 25,
(RONALD MOODY) 1996
Director
- ------------------------------------- November 25,
(FRED KNOLL) 1996
/s/ Evan Evans Director
- ------------------------------------- November 25,
(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 X
3.1 Restated Certificate of Incorporation of X
the Company 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 B
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 B
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 B
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, B
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 May 4, 1995 between the B
Company and Indus LLC
10.16 Security Agreement and Financing Statement X
among The Company, Lehi Envirosystems,
Inc., Plymouth Envirosystems, Inc. and
Anchor Capital Company, LLC dated June 14,
1995, as amended
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 X
Envirosystems, Inc., Plymouth
Envirosystems and Solvation, Inc. dated as
of December 15, 1995, as amended
10.19 Pledge Agreement between the Company and X
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
10.21(a) Certificate of Designations
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 B
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, B
1988 by and between Far West Capital Inc.
and 1-A Enterprises
10.25(c) Letter dated August 18, 1989 by Gerald W. B
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 B
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 B
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 , B
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 B
$300,000 from Reno Energy, LLC to NRG
Company, LLC
10.29 Letter of Intent dated July 15, 1996 on B
behalf of Reno Energy, LLC
10.30 Limited Liability Company Operating B
Agreement of NRG Company, LLC dated as of
September 8, 1996, and amendments thereto
10.31 Form of Limited Liability Company Operating B
Agreement of Steamboat, Envirosystems, L.C.
dated as of October , 1996
10.32 Form of Debenture Conversion Agreement X
11.1 Earnings Per Share Calculations--Historical B
January 31, 1996 (herewith amended)
11.2 Earnings Per Share Calculations--Historical B
July 31, 1996
11.3 Pro Forma Earnings Per Share Calculation X
January 31, 1996
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 B
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 1.1
DRAFT
112096
UNDERWRITING AGREEMENT
BETWEEN
U.S. ENERGY SYSTEMS, INC.
AND
GAINES, BERLAND INC.
DATED: __________, 1996
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
----
<S> <C>
INDEX OF DEFINITIONS................................................................................................v
1. Purchase and Sale of Securities............................................................................1
1.1 Firm Units........................................................................................1
1.1.1 Purchase of Firm Securities..............................................................1
1.1.2 Payment and Delivery.....................................................................1
1.2 Over-allotment Option.............................................................................2
1.2.1 Option Securities........................................................................2
1.2.2 Exercise of Over-allotment Option........................................................2
1.2.3 Payment and Delivery.....................................................................3
1.3 Representative's Purchase Option..................................................................3
1.3.1 Purchase Option..........................................................................3
1.3.2 Payment and Delivery.....................................................................3
2. Representations and Warranties of the Company..............................................................3
2.1 Filing of Registration Statement..................................................................3
2.1.1 Pursuant to the Act......................................................................3
2.1.2 Pursuant to the Exchange Act.............................................................4
2.2 No Stop Orders, Etc...............................................................................4
2.3 Disclosures in Registration Statement.............................................................4
2.3.1 Securities Act and 10b-5 Representation..................................................4
2.3.2 Disclosure of Contracts..................................................................5
2.3.3 Prior Securities Transactions............................................................5
2.4 Changes After Dates in Registration Statement.....................................................5
2.4.1 No Material Adverse Change...............................................................5
2.4.2 Recent Securities Transactions, Etc......................................................6
2.5 Independent Accountants...........................................................................6
2.6 Financial Statements..............................................................................6
2.7 Authorized Capital; Options; Etc..................................................................6
2.8 Valid Issuance of Securities; Etc.................................................................6
2.8.1 Outstanding Securities...................................................................6
2.8.2 Securities Sold Pursuant to this Agreement...............................................7
2.9 Registration Rights of Third Parties..............................................................7
2.10 Validity and Binding Effect of Agreements.........................................................7
2.11 No Conflicts, Etc.................................................................................8
2.12 No Defaults; Violations...........................................................................8
2.13 Corporate Power; Licenses; Consents...............................................................8
2.13.1 Conduct of Business......................................................................8
2.13.2 Transactions Contemplated Herein.........................................................9
2.14 Title to Property; Insurance......................................................................9
2.15 Litigation; Governmental Proceedings..............................................................9
</TABLE>
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2.16 Good Standing....................................................................................10
2.17 Taxes............................................................................................10
2.18 Employee Options. ..............................................................................10
2.19 Transactions Affecting Disclosure to NASD........................................................10
2.19.1 Finder's Fees...........................................................................11
2.19.2 Payments Within Twelve Months...........................................................11
2.19.3 Use of Proceeds.........................................................................11
2.19.4 Insiders' NASD Affiliation..............................................................11
2.20 Foreign Corrupt Practices Act....................................................................11
2.21 Nasdaq Eligibility...............................................................................12
2.22 Intangibles......................................................................................12
2.23 Relations With Employees.........................................................................12
2.23.1 Employee Matters........................................................................12
2.23.2 Employee Benefit Plans..................................................................12
2.24 Officers' Certificate............................................................................13
2.25 Warrant Agreement................................................................................13
2.26 Lock-Up Agreements...............................................................................13
2.27 Subsidiaries.....................................................................................13
2.28 Certain Definitions..............................................................................13
2.29 Conditions to Obligations Under Other Agreements.................................................14
3. Covenants of the Company..................................................................................14
3.1 Amendments to Registration Statement.............................................................14
3.2 Federal Securities Laws..........................................................................14
3.2.1 Compliance..............................................................................14
3.2.2 Filing of Final Prospectus..............................................................14
3.2.3 Exchange Act Registration...............................................................14
3.3 Blue Sky Filing..................................................................................15
3.4 Delivery to Underwriters of Prospectuses.........................................................15
3.5 Events Requiring Notice to the Representative....................................................15
3.6 Review of Financial Statements...................................................................15
3.7 Unaudited Financials.............................................................................15
3.8 Secondary Market Trading and Standard & Poor's...................................................16
3.9 Nasdaq Maintenance...............................................................................16
3.10 Warrant Solicitation and Warrant Solicitation Fees...............................................16
3.11 Registration of Common Stock.....................................................................16
3.12 Reports to the Representative....................................................................17
3.12.1 Periodic Reports, Etc...................................................................17
3.12.2 Transfer Sheets and Weekly Position Listings............................................17
3.12.3 Secondary Market Trading Memorandum.....................................................17
3.13 Agreements between the Representative and the Company............................................17
3.13.1 [Intentionally Omitted.]................................................................17
3.13.2 [Intentionally Omitted.]................................................................17
</TABLE>
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<S> <C>
3.13.3 Representative's Purchase Option........................................................17
3.14 Disqualification of Form S-1 (or other appropriate form).........................................18
3.15 Payment of Expenses..............................................................................18
3.15.1 General Expenses........................................................................18
3.15.2 Non-Accountable Expenses................................................................19
3.16 Application of Net Proceeds......................................................................19
3.17 Delivery of Earnings Statements to Security Holders..............................................19
3.18 Key Person Life Insurance........................................................................19
3.19 Stabilization....................................................................................19
3.20 Internal Controls................................................................................19
3.21 Accountants and Lawyers..........................................................................20
3.22 Transfer Agent...................................................................................20
3.23 Sale of Securities...............................................................................20
3.24 Other Transactions...............................................................................20
3.25 Secondary Offering...............................................................................20
4. Conditions of Underwriters' Obligations...................................................................21
4.1 Regulatory Matters...............................................................................21
4.1.1 Effectiveness of Registration Statement.................................................21
4.1.2 NASD Clearance..........................................................................21
4.1.3 No Blue Sky Stop Orders.................................................................21
4.2 Company Counsel Matters..........................................................................21
4.2.1 (a) Effective Date Opinion of Counsel..............................................21
(b) Other Counsel's Opinion........................................................26
4.2.2 Closing Date and Option Closing Date Opinions of Counsel................................27
4.2.3 Reliance................................................................................27
4.2.4 Secondary Market Trading Memorandum.....................................................28
4.3 Cold Comfort Letters.............................................................................28
4.4 Officers' Certificates...........................................................................29
4.4.1 Officers' Certificate...................................................................29
4.4.2 Secretary's Certificate.................................................................30
4.5 No Material Changes..............................................................................30
4.6 Delivery of Agreements...........................................................................31
4.7 Opinion of Counsel for the Underwriters..........................................................31
4.8 Other Transactions...............................................................................31
5. Indemnification...........................................................................................31
5.1 Indemnification of the Underwriters..............................................................31
5.1.1 General.................................................................................31
5.1.2 Procedure...............................................................................32
5.2 Indemnification of the Company...................................................................32
5.3 Contribution.....................................................................................33
5.3.1 Contribution Rights.....................................................................33
</TABLE>
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5.3.2 Contribution Procedure..................................................................33
6. Default by an Underwriter.................................................................................34
6.1 Default Not Exceeding 10% of Firm Securities or Option Securities................................34
6.2 Default Exceeding 10% of Firm Securities or Option Securities....................................34
6.3 Postponement of Closing Date.....................................................................34
7. Additional Covenants......................................................................................34
7.1 Board Designee...................................................................................34
7.2 [Intentionally Omitted.].........................................................................35
7.3 Rule 144 Sales...................................................................................35
7.4 Press Releases...................................................................................35
7.5 Form S-8 or any Similar Form.....................................................................35
7.6 Employment Agreements............................................................................35
7.7 Compensation and Other Arrangements..............................................................36
8. Representations and Agreements to Survive Delivery........................................................36
9. Effective Date of This Agreement and Termination Thereof..................................................36
9.1 Effective Date...................................................................................36
9.2 Termination......................................................................................36
9.3 Notice...........................................................................................37
9.4 Expenses.........................................................................................37
9.5 Indemnification..................................................................................37
10. Miscellaneous.............................................................................................37
10.1 Notices..........................................................................................37
10.2 Headings.........................................................................................38
10.3 Amendment........................................................................................38
10.4 Entire Agreement.................................................................................38
10.5 Binding Effect...................................................................................38
10.6 Governing Law; Jurisdiction......................................................................38
10.7 Execution in Counterparts........................................................................38
10.8 Waiver, Etc......................................................................................39
</TABLE>
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<TABLE>
<CAPTION>
INDEX OF DEFINITIONS
--------------------
Term Section
- ---- -------
<S> <C>
Acquisition Agreement............................................................................................2.28
Acquisition Transactions........................................................................................2.3.2
Act............................................................................................................ 2.1.1
AICPA....................................................................................................... 4.3(iii)
Anchor...........................................................................................................3.25
BSE.............................................................................................................2.2.1
Closing Date....................................................................................................1.1.2
Comfort Letter Subject.........................................................................................4.3(i)
Code...........................................................................................................2.23.2
Commission......................................................................................................2.1.1
Common Stock....................................................................................................1.1.1
Company........................................................................................Introductory Paragraph
Conversion Agreement.............................................................................................2.28
Department.......................................................................................................3.25
Effective Date..................................................................................................1.1.1
ERISA..........................................................................................................2.23.2
ERISA Plans....................................................................................................2.23.2
Exchange Act....................................................................................................2.1.2
Far West..........................................................................................................2.6
Filing Date ...................................................................................................2.19.2
Firm Securities.................................................................................................1.1.1
Insiders.........................................................................................................2.26
Intangibles......................................................................................................2.22
Lehi............................................................................................................2.3.2
NASD...........................................................................................................2.19.1
NRG.............................................................................................................2.3.2
NRG Acquisition Agreement........................................................................................2.28
1-A...............................................................................................................2.6
Opinion Subject..............................................................................................4.2.1(b)
Option Closing Date.............................................................................................1.2.2
Option Securities...............................................................................................1.2.1
Other Counsel................................................................................................4.2.1(b)
Over-allotment Option...........................................................................................1.2.1
Plymouth........................................................................................................2.3.2
Preferred Stock Exchange Agreement...............................................................................2.28
Preliminary Prospectus..........................................................................................2.1.1
Pro Forma Financial Statements................................................................................4.3(iv)
Proposed Financing................................................................................................7.8
Prospectus......................................................................................................2.1.1
Public Securities...............................................................................................1.2.1
Registration Statement..........................................................................................2.1.1
Regulations.....................................................................................................2.1.1
Representative.................................................................................Introductory Paragraph
Representative's Purchase Option................................................................................1.3.1
Representative's Securities.....................................................................................1.3.1
Representative's Shares.........................................................................................1.3.1
Representative's Warrants.......................................................................................1.3.1
</TABLE>
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<TABLE>
<S> <C>
Secondary Market Trading Memorandum............................................................................3.12.3
</TABLE>
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<CAPTION>
Term Section
- ---- -------
<S> <C>
Securities.................................................................................................... .1.3.1
Steamboat Acquisition Agreement..................................................................................2.28
Steamboat Facilities.............................................................................................2.28
Steamboat L.L.C.................................................................................................2.3.2
Subsidiary(ies)................................................................................................. 2.27
Transfer Agent...................................................................................................3.22
Unaudited Financials..............................................................................................3.7
Underwriter....................................................................................Introductory Paragraph
Underwriters...................................................................................Introductory Paragraph
Warrants........................................................................................................1.1.1
Warrant Agreement................................................................................................2.25
</TABLE>
vi
<PAGE>
U.S. ENERGY SYSTEMS, INC.
3,100,000 SHARES OF COMMON STOCK
3,100,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
UNDERWRITING AGREEMENT
----------------------
New York, New York
__________, 1996
Gaines, Berland Inc.
712 Fifth Avenue
21st Floor
New York, New York 10022
Dear Sirs:
The undersigned, U.S. ENERGY SYSTEMS, INC., a Delaware corporation
("Company"), hereby confirms its agreement with Gaines, Berland Inc. (being
referred to herein variously as "you" or the "Representative"), and the other
underwriters named on Schedule 1 hereto (the Representative and the other
underwriters being collectively referred to as the "Underwriters" or
individually as "Underwriter"), as follows:
1. Purchase and Sale of Securities.
-------------------------------
1.1 Firm Units.
----------
1.1.1 Purchase of Firm Securities. On the basis of the
---------------------------
representations and warranties herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to issue and sell to the several
Underwriters, 3,100,000 shares of the Company's Common Stock, par value $0.01
("Common Stock"), and 3,100,000 Redeemable Common Stock Purchase Warrants
("Warrants"), and the Underwriters, severally and not jointly, agree to purchase
from the Company, the numbers of shares of Common Stock and Warrants set forth
opposite their respective names on Schedule 1 hereto for purchase prices of
$3.68 per share of Common Stock and $0.08 per Warrant (net of commissions in
each instance). Such shares of Common Stock and Warrants are hereinafter
referred to as the "Firm Securities." Each Warrant entitles its holder to
purchase one share of Common Stock at an initial exercise price of $4.00 per
share commencing on the first anniversary of the effective date of the
Registration Statement (as hereinafter defined) ("Effective Date") and ending on
the fifth anniversary of the Effective Date.
1.1.2 Payment and Delivery. Delivery and payment for the Firm
--------------------
Securities shall be made at 10:00 A.M., New York time, on or before the third
business day following the date the
<PAGE>
Firm Securities commence trading or at such other time as the Representative
shall determine, at the offices of the Representative or at such other place as
shall be agreed upon by the Representative and the Company. The hour and date of
delivery and payment for the Firm Securities are called the "Closing Date."
Payment for the Firm Securities shall be made on the Closing Date, at the
Representative's election, by wire transfer of funds or by certified or bank
cashier's check(s) in New York Clearing House funds, in accordance with the
instructions of the Company upon delivery to you of certificates (in form and
substance satisfactory to the Representative) representing the Common Stock and
Warrants comprising the Firm Securities for the respective accounts of the
Underwriters. The Firm Securities shall be registered in such name or names and
in such authorized denominations as the Representative may request in writing at
least two full business days prior to the Closing Date. The Company will permit
the Representative to examine and package the Firm Securities for delivery at
least one full business day prior to the Closing Date. The Company shall not be
obligated to sell or deliver the Firm Securities except upon tender of payment
by the Underwriters for all the Firm Securities.
1.2 Over-allotment Option.
---------------------
1.2.1 Option Securities. For the purposes of covering any over-
-----------------
allotments in connection with the distribution and sale of the Firm Securities,
the Underwriters are hereby granted an option to purchase up to an additional
465,000 shares of Common Stock and/or 465,000 Warrants from the Company
("Over-allotment Option"). Such additional securities are hereinafter referred
to as the "Option Securities." The Firm Securities and the Option Securities,
together with the shares of Common Stock issuable upon exercise of the Warrants,
are hereinafter referred to collectively as the "Public Securities." The
purchase price to be paid for the Option Securities will be the same price per
Option Security as the price per Firm Security set forth in Section 1.1.1
hereof.
1.2.2 Exercise of Over-allotment Option. The Over-allotment Option
---------------------------------
granted pursuant to Section 1.2.1 hereof may be exercised by the Representative
on behalf of the Underwriters as to all or any part of the Option Securities at
any time, from time to time, within forty-five days after the Effective Date.
The Underwriters will not be under any obligation to purchase any Option
Securities prior to the exercise of the Over-allotment Option. The Over-
allotment Option granted hereby may be exercised by the giving of oral notice to
the Company from the Representative, which must be confirmed by a letter or
telecopy setting forth the number of Option Securities to be purchased, the date
and time for delivery of and payment for the Option Securities and stating that
the Option Securities referred to therein are to be used for the purpose of
covering over-allotments in connection with the distribution and sale of the
Firm Securities. If such notice is given at least two full business days prior
to the Closing Date, the date set forth therein for such delivery and payment
will be the Closing Date. If such notice is given thereafter, the date set
forth therein for such delivery and payment will not be earlier than five full
business days after the date of the notice. If such delivery and payment for
the Option Securities does not occur on the Closing Date, the date and time of
the closing for such Option Securities will be as set forth in the notice
(hereinafter the "Option Closing Date"). Upon exercise of the Over-allotment
Option, the Company will become obligated to convey to the Underwriters, and,
subject to the terms and conditions set forth herein, the Underwriters will
become obligated to purchase, the number of Option Securities specified in such
notice.
2
<PAGE>
1.2.3 Payment and Delivery. Payment for the Option Securities will
--------------------
be at the Representative's election by wire-transfer or by certified or bank
cashier's check(s) in New York Clearing House funds, payable to the order of the
Company at the offices of the Representative or at such other place as shall be
agreed upon by the Representative and the Company upon delivery to you of
certificates representing such securities for the respective accounts of the
Underwriters. The certificates representing the Option Securities to be
delivered will be in such denominations and registered in such names as the
Representative requests not less than two full business days prior to the
Closing Date or the Option Closing Date, as the case may be, and will be made
available to the Representative for inspection, checking and packaging at the
aforesaid office of the Company's transfer agent or correspondent not less than
one full business day prior to such Closing Date.
1.3 Representative's Purchase Option.
--------------------------------
1.3.1 Purchase Option. The Company hereby agrees to issue and sell
---------------
to the Representative (and/or its designees) on the Closing Date, for an
aggregate purchase price of $100, an option ("Representative's Purchase Option")
for the purchase of an aggregate of 310,000 shares of Common Stock
("Representative's Shares") at an initial exercise price of $6.60 per share
and/or 310,000 Warrants ("Representative's Warrants") at an initial exercise
price of $0.165 for the purchase of each of the Representative's Warrants.
The Representative's Shares and the Representative's Warrants are identical to
the securities comprising the Firm Securities except that the exercise price of
the Representative's Warrants is $5.00 per share. The Representative's Purchase
Option, the Representative's Shares, the Representative's Warrants and the
shares of Common Stock issuable upon exercise of the Representative's Warrants
are hereinafter referred to collectively as the "Representative's Securities."
The Public Securities and the Representative's Securities are hereinafter
referred to collectively as the "Securities".
1.3.2 Payment and Delivery. Delivery and payment for the
--------------------
Representative's Purchase Option shall be made on the Closing Date. The Company
shall deliver to the Representative, upon payment therefor, certificates for the
Representative's Purchase Option in the name or names and in such authorized
denominations as the Representative may request. The Representative's Purchase
Option shall be exercisable for a period of four years commencing one year from
the Effective Date.
2. Representations and Warranties of the Company. The Company represents and
---------------------------------------------
warrants to the Representative as follows:
2.1 Filing of Registration Statement.
--------------------------------
2.1.1 Pursuant to the Act. The Company has filed with the Securities
-------------------
and Exchange Commission ("Commission") a registration statement and an amendment
or amendments thereto, on Form SB-2 (Registration No. 333-04612), including
any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Securities under the Securities Act of 1933, as amended
("Act"), which registration statement and amendment or amendments have been
prepared by the Company in conformity with the requirements of the Act and the
rules and regulations ("Regulations") of the Commission under the Act. Except
as the context may otherwise
3
<PAGE>
require, such registration statement, as amended, on file with the Commission at
the time the registration statement becomes effective (including the prospectus,
financial statements, schedules, exhibits and all other documents filed as a
part thereof or incorporated therein and all information deemed to be a part
thereof as of such time pursuant to paragraph (b) of Rule 430A of the
Regulations) is hereinafter called the "Registration Statement," and the form of
the final prospectus dated the Effective Date (or, if applicable, the form of
final prospectus filed with the Commission pursuant to Rule 424 of the
Regulations) is hereinafter called the "Prospectus." The Registration Statement
has been declared effective by the Commission on the date hereof.
2.1.2 Pursuant to the Exchange Act. The Company has filed with the
----------------------------
Commission a registration statement on Form 8-A providing for the registration
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), of the
Warrants included in the Securities. Such registration has been declared
effective by the Commission on the date hereof. The Common Stock is registered
under the Exchange Act under registration statement on Form 8-A, declared
effective on ________________.
2.2 No Stop Orders, Etc. Neither the Commission nor, to the best of the
--------------------
Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has instituted
or, to the best of the Company's knowledge, threatened to institute any
proceedings with respect to such an order.
2.3 Disclosures in Registration Statement.
-------------------------------------
2.3.1 Securities Act and 10b-5 Representation. At the time the
---------------------------------------
Registration Statement becomes or became effective and at all times subsequent
thereto up to the Closing Date and the Option Closing Date, if any, the
Registration Statement and the Prospectus contained and will contain with
respect to the Company and the Steamboat Facilities (as defined in Section 2.28)
all material statements which are required to be stated therein in accordance
with the Act and the Regulations, and conformed and will in all material
respects conform to the requirements of the Act and the Regulations; neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, on such dates, contained or will contain any untrue statement of a
material fact or omitted or will omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. When any Preliminary
Prospectus was first filed with the Commission (whether filed as part of the
Registration Statement for the registration of the Securities or any amendment
thereto or pursuant to Rule 424(a) of the Regulations) and when any amendment
thereof or supplement thereto was first filed with the Commission, such
Preliminary Prospectus and any amendments thereof and supplements thereto
complied or will comply in all material respects with the applicable provisions
of the Act and the Regulations and did not and will not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The
representation and warranty made in this Section 2.3.1 does not apply to
statements made or statements omitted in reliance upon and in conformity with
written information furnished to the Company with respect to the Underwriters by
the Representative expressly for use in the Registration Statement or Prospectus
or any amendment thereof or supplement thereto.
4
<PAGE>
2.3.2 Disclosure of Contracts. The description in the Registration
-----------------------
Statement and the Prospectus of contracts and other documents is accurate and
presents fairly the information required to be disclosed and there are no
contracts or other documents required to be described in the Registration
Statement or the Prospectus or to be filed with the Commission as exhibits to
the Registration Statement which have not been so described or filed. Each
contract or other instrument (however characterized or described) to which the
Company, Lehi Independent Power Associates, L.C. ("Lehi"), Plymouth
Cogeneration Limited Partnership ("Plymouth") or NRG Company L.L.C. ("NRG") is a
party or by which the property or business of the Company or the Steamboat
Facilities is or may be bound or affected and (i) which is referred to in the
Pro spectus, or (ii) is material to the business of Lehi, Plymouth, NRG or the
Company as it will exist after the acquisition by the Company of a 81.5%
equity interest in NRG and of a 95% equity interest in Steamboat Envirosystems,
L.C., a Utah limited liability company ("Steamboat L.L.C."), and the
acquisition by Steamboat L.L.C. of the Steamboat Facilities (collectively, the
"Acquisition Transactions") has been duly and validly executed, is in full force
and effect in all material respects and is enforceable against the parties
thereto in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally and that the remedy of specific performance and
injunctive relief and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought. None of such contracts or instruments has
been assigned by the Company, Lehi, Plymouth or Steamboat L.L.C., and none of
the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. or, to the best of the
Company's knowledge, any other party is in default thereunder and, to the best
of the Company's knowledge, no event has occurred which, with the lapse of time
or the giving of notice, or both, would constitute a default thereunder. None
of the material provisions of such contracts or instruments violates or will
result in a violation of any existing applicable law, rule, regulation,
judgment, order or decree of any governmental agency or court having
jurisdiction over the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. or any
of their respective assets or businesses, including, without limitation, those
relating to environmental laws and regulations.
2.3.3 Prior Securities Transactions. No securities of the Company
-----------------------------
have been sold by the Company within the three years prior to the date hereof,
except as disclosed in the Registration Statement.
2.4 Changes After Dates in Registration Statement.
---------------------------------------------
2.4.1 No Material Adverse Change. Since the respective dates as of
--------------------------
which information is given in the Registration Statement and the Prospectus,
except as otherwise specifically stated therein, (i) there has been no material
adverse change in the condition, financial or otherwise, or in the results of
operations, business or business prospects of the Company, Lehi, Plymouth, NRG
and Steamboat L.L.C., as they will exist after the Acquisition Transactions,
including, but not limited to, a material loss or interference with its business
from fire, storm, explosion, flood or other casualty, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order or
decree, whether or not arising in the ordinary course of business, and (ii)
there have been no transactions entered into by the Company, Lehi, Plymouth, NRG
or Steamboat L.L.C., other than those in the ordinary course of business, which
are material with respect to the condition, financial or otherwise, or to the
results of operations, business or
5
<PAGE>
business prospects of the Company, Lehi, Plymouth, NRG and Steamboat L.L.C. as
they will exist after the Acquisition Transactions.
2.4.2 Recent Securities Transactions, Etc. Subsequent to the
------------------------------------
respective dates as of which information is given in the Registration Statement
and the Prospectus, and, except as may otherwise be indicated or contemplated
herein or therein, the Company has not (i) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money; or (ii)
declared or paid any dividend or made any other distribution on or in respect to
its capital stock.
2.5 Independent Accountants. Richard A. Eisner & Company, LLP, Traveller
-----------------------
Winn & Mower, PC, and Robison, Hill & Co., P.C. and Price Waterhouse LLP, whose
reports are filed with the Commission as part of the Registration Statement, are
or were independent accountants as required by the Act and the Regulations as of
the dates of their respective reports.
2.6 Financial Statements. The financial statements, including the notes
--------------------
thereto and supporting schedules included in the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company, Lehi, Plymouth, Far West Capital Electric Energy Fund, L.P.
("Far West") and 1-A Enterprises ("1-A") at the dates and for the periods to
which they apply; and such financial statements have been prepared in conformity
with generally accepted accounting principles, consistently applied throughout
the periods involved; and the supporting schedules included in the Registration
Statement present fairly the information required to be stated therein. The pro
forma consolidated financial information set forth in the Registration Statement
reflects all significant assumptions and adjustments relating to the business
and operations of the Company, Lehi, Plymouth, NRG and Steamboat L.L.C. in
connection with the Acquisition Transactions and the operations of the Steamboat
Facilities as described in the Registration Statement.
2.7 Authorized Capital; Options; Etc. The Company had at the date or
---------------------------------
dates indicated in the Prospectus duly authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the Prospectus.
Based on the assumptions and adjustments stated in the Registration Statement
and the Prospectus, the Company will have on the Closing Date the adjusted stock
capitalization set forth therein. Except as set forth in the Registration
Statement and the Prospectus, on the Effective Date and on the Closing Date
there will be no options, warrants, or other rights to purchase or otherwise
acquire any authorized but unissued shares of Common Stock of the Company,
including any obligations to issue any shares pursuant to anti-dilution
provisions, or any security convertible into shares of Common Stock of the
Company, or any contracts or commitments to issue or sell shares of Common Stock
or any such options, warrants, rights or convertible securities.
2.8 Valid Issuance of Securities; Etc.
----------------------------------
2.8.1 Outstanding Securities. All issued and outstanding securities
----------------------
of the Company have been duly authorized and validly issued and are fully paid
and non-assessable; the holders thereof have no rights of rescission with
respect thereto and are not subject to personal liability by reason of being
such holders; and none of such securities were issued in violation of the
preemptive rights of any holders of any security of the Company or similar
contractual rights
6
<PAGE>
granted by the Company. The outstanding options and warrants to purchase shares
of Common Stock constitute the valid and binding obligations of the Company,
enforceable in accordance with their terms, except (i) as such enforceability
may be limited by bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally, (ii) as enforceability of any
indemnification provision may be limited under federal and state securities
laws, and (iii) that the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to the equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought. The
authorized Common Stock and outstanding options and warrants to purchase shares
of Common Stock conform to all statements relating thereto contained in the
Registration Statement and the Prospectus. The offers and sales by the Company
of the outstanding Common Stock, options and warrants to purchase shares of
Common Stock were at all relevant times either registered under the Act and
registered or qualified under the applicable state securities or Blue Sky Laws
or exempt from such registration or qualification requirements and the holders
thereof have no rights of rescission with respect thereto.
2.8.2 Securities Sold Pursuant to this Agreement. The Securities
------------------------------------------
have been duly authorized and, when issued and paid for, will be validly issued,
fully paid and non-assessable; the holders thereof are not and will not be
subject to personal liability by reason of being such holders; the Securities
are not and will not be subject to the preemptive rights of any holders of any
security of the Company or similar contractual rights granted by the Company;
and all corporate action required to be taken for the authorization, issuance
and sale of the Securities has been duly and validly taken. When issued, the
Representative's Purchase Option, the Representative's Warrants and the Warrants
will constitute valid and binding obligations of the Company to issue and sell,
upon exercise thereof and payment therefor, the number and type of securities of
the Company called for thereby and the Representative's Purchase Option, the
Representative's Warrants and the Warrants will be enforceable against the
Company in accordance with their respective terms, except (i) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (ii) as enforceability of
any indemnification provision may be limited under federal and state securities
laws, and (iii) that the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to the equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
2.9 Registration Rights of Third Parties. Except as set forth in the
------------------------------------
Prospectus, no holders of any securities of the Company or of any options,
warrants or other rights of the Company exercisable for or convertible or
exchangeable into securities of the Company have the right to require the
Company to register any such securities under the Act or to include any such
securities in a registration statement to be filed by the Company.
2.10 Validity and Binding Effect of Agreements. To the extent that each
-----------------------------------------
thereof is a party thereto, this Agreement, the Warrant Agreement, the
Representative's Purchase Option, the NRG Acquisition Agreement, the Steamboat
Acquisition Agreement, the Conversion Agreement and the Preferred Stock Exchange
Agreement (as each such agreement is hereinafter defined) have been duly and
validly authorized by the Company or Steamboat L.L.C., as the case may be, and
constitute, or when executed and delivered will constitute, the valid and
binding agreements of the Company or Steamboat L.L.C., enforceable against the
Company and Steamboat L.L.C. in accordance with their respective terms, except
(i) as such enforceability may be limited by bank-
7
<PAGE>
ruptcy, insolvency, reorganization or similar laws affecting creditors' rights
generally, (ii) as enforceability of any indemnification provision may be
limited under federal and state securities laws, and (iii) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
2.11 No Conflicts, Etc. To the extent that each thereof is a party
------------------
thereto, the execution, delivery, and performance by the Company and Steamboat
L.L.C. of this Agreement, the Warrant Agreement, the NRG Acquisition Agreement,
the Steamboat Acquisition Agreement, the Conversion Agreement and the
Preferred Stock Exchange Agreement, the consummation by the Company and
Steamboat L.L.C. of the transactions herein and therein contemplated and the
compliance by the Company and Steamboat L.L.C. with the terms hereof and thereof
do not and will not, with or without the giving of notice or the lapse of time
or both, (i) result in a breach of, or conflict with any of the terms and
provisions of, or constitute a default under, or result in the creation,
modification, termination or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or Steamboat L.L.C. pursuant to the terms
of, any indenture, mortgage, deed of trust, note, loan or credit agreement or
any other agreement or instrument evidencing an obligation for borrowed money,
or any other agreement or instrument to which the Company or Steamboat L.L.C. is
a party or by which the Company or Steamboat L.L.C. may be bound or to which any
of the property or assets of the Company or Steamboat L.L.C. is subject; (ii)
result in any violation of the provisions of the Certificate of Incorporation or
the By-Laws of the Company or Steamboat L.L.C.; (iii) violate any existing
applicable law, rule, regulation, judgment, order or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over the Company or
Steamboat L.L.C. or any of their properties or business; or (iv) have a material
adverse effect on any permit, license, certificate, registration, approval,
consent, license or franchise concerning the Company or Steamboat L.L.C.
2.12 No Defaults; Violations. Except as described in the Prospectus, no
-----------------------
default exists in the due performance and observance of any term, covenant or
condition of any material license, contract, indenture, mortgage, deed of trust,
note, loan or credit agreement, or any other agreement or instrument evidencing
an obligation for borrowed money, or any other material agreement or instrument
to which the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. is a party or by
which any of them may be bound or to which any of their properties or assets is
subject. None of the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. is in
violation of any term or provision of its Certificate of Incorporation or By-
Laws or Certificate of Formation or Operating Agreement or other similar
document or instrument, as the case may be, or in violation of any material
franchise, license, permit, applicable law, rule, regulation, judgment or decree
of any governmental agency or court, domestic or foreign, having jurisdiction
over any of them or any of their properties or business.
2.13 Corporate Power; Licenses; Consents.
-----------------------------------
2.13.1 Conduct of Business. Each of the Company, Lehi, Plymouth, NRG
-------------------
and Steamboat L.L.C. has all requisite corporate or limited liability company
power and authority, and has all necessary material authorizations, approvals,
orders, licenses, certificates and permits of and from all governmental
regulatory officials and bodies, to own or lease its properties and
8
<PAGE>
conduct its business as described in the Prospectus, and each of the Company,
Lehi, Plymouth, NRG and Steamboat L.L.C. is and has been doing business in
compliance with all such material authorizations, approvals, orders, licenses,
certificates and permits and all federal, state and local rules and regulations.
The disclosures in the Registration Statement concerning the effects of federal,
state and local regulation on the business of each of the Company, Lehi,
Plymouth, NRG and Steamboat L.L.C. as currently contemplated are correct in all
material respects and do not omit to state a material fact.
2.13.2 Transactions Contemplated Herein. The Company has all
--------------------------------
corporate power and authority to enter into this Agreement and to carry out the
provisions and conditions hereof, and all consents, authorizations, approvals
and orders required in connection therewith have been obtained. No consent,
authorization or order of, and no filing with, any court, government agency or
other body is required for the valid issuance, sale and delivery, of the
Securities pursuant to this Agreement, the Warrant Agreement and the
Representative's Purchase Option, and as contemplated by the Prospectus, except
with respect to applicable federal and state securities laws. Each of the
Company and Steamboat L.L.C. has all corporate power and authority to enter into
those of the Acquisition Agreement, the Conversion Agreement and the Preferred
Stock Exchange Agreement to which it is a party and to carry out the provisions
and conditions thereof and all consents, authorizations, approvals and orders
required in connection therewith have been obtained.
2.14 Title to Property; Insurance. Each of the Company, Steamboat
----------------------------
L.L.C., Lehi, NRG and Plymouth has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property
(tangible and intangible) owned or leased by it, free and clear of all liens,
encumbrances, claims, security interests, defects and restrictions of any
material nature whatsoever, other than those referred to in the Prospectus and
liens for taxes not yet due and payable or arising by law. The properties in
which each of the Company, Steamboat L.L.C., Lehi, NRG and Plymouth has an
interest are adequately insured against loss or damage by fire or other
casualty. The Company, Steamboat L.L.C., Lehi, NRG and Plymouth each maintains,
in adequate amounts, such other insurance as is usually maintained by companies
engaged in the same or similar business.
2.15 Litigation; Governmental Proceedings. Except as set forth in the
------------------------------------
Prospectus, there is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding pending or, to the best of
the Company's knowledge, threatened against, or involving the properties or
business of, the Company, Steamboat L.L.C., Lehi, NRG or Plymouth which might
materially and adversely affect the financial position, prospects, value or the
operation or the properties or the business of the Company, Steamboat L.L.C.,
Lehi, NRG or Plymouth, or which questions the validity of the capital stock or
membership interests of the Company, Steamboat L.L.C., Lehi, NRG or Plymouth or
this Agreement or the Steamboat Acquisition Agreement or any action taken or to
be taken by the Company or Steamboat L.L.C. pursuant to, or in connection with,
this Agreement, the NRG Acquisition Agreement or the Steamboat Acquisition
Agreement. There are no outstanding orders, judgments or decrees of any court,
governmental agency or other tribunal, domestic or foreign, naming the Company,
Steamboat L.L.C., Lehi, NRG or Plymouth and enjoining the Company, Steamboat
L.L.C., Lehi, NRG or Plymouth from taking, or requiring the Company, Steamboat
L.L.C., Lehi, NRG or Plymouth to take, any action, or to which the Company,
9
<PAGE>
Steamboat L.L.C., Lehi, NRG or Plymouth or their respective properties or
business is bound or subject.
2.16 Good Standing.
-------------
(a) The Company has been duly organized and is validly existing as a
corporation and is in good standing under the laws of the state of its
incorporation and is duly qualified and licensed and in good standing as a
foreign corporation in each jurisdiction in which ownership or leasing of any
properties or the character of its operations requires such qualification or
licensing, except where the failure to qualify would not have a material adverse
effect on it or its properties or business.
(b) Each of Steamboat L.L.C., Lehi, NRG and Plymouth has been duly
organized and is validly existing as a limited liability company or limited
partnership and is in good standing under the laws of the state of its formation
and is duly qualified and licensed and in good standing as a foreign limited
liability company or limited partnership in each jurisdiction in which ownership
or leasing of any properties or the character of its operations requires such
qualification or licensing, except where the failure to qualify would not have a
material adverse effect on it or its properties or business.
2.17 Taxes. Each of the Company, Steamboat L.L.C., Lehi,
-----
NRG and Plymouth has filed all returns (as hereinafter defined) required to be
filed with taxing authorities prior to the date hereof or has duly obtained
extensions of time for the filing thereof. Each of the Company, Steamboat
L.L.C., Lehi, NRG and Plymouth has paid all taxes (as hereinafter defined) shown
as due on such returns that were filed and has paid all taxes imposed on or
assessed against it. The provisions for taxes payable, if any, shown on the
financial statements filed with or as part of the Registration Statement are
sufficient for all accrued and unpaid taxes, whether or not disputed, and for
all periods to and including the dates of such consolidated financial
statements. Except as disclosed in writing to the Representative, (i) no issues
have been raised (and are currently pending) by any taxing authority in
connection with any of the returns or taxes asserted as due from the Company or
Steamboat L.L.C., Lehi, NRG or Plymouth, and (ii) no waivers of statutes of
limitation with respect to the returns or collection of taxes have been given by
or requested from the Company, Steamboat L.L.C., Lehi, NRG and Plymouth. The
term "taxes" mean all federal, state, local, foreign, and other net income,
gross income, gross receipts, sales, use, ad valorem, transfer, franchise,
profits, license, lease, service, service use, withholding, payroll, employment,
excise, severance, stamp, occupation, premium, property, windfall profits,
customs, duties or other taxes, fees, assessments, or charges of any kind
whatever, together with any interest and any penalties, additions to tax, or
additional amounts with respect thereto. The term "returns" means all returns,
declarations, reports, statements, and other documents required to be filed in
respect to taxes.
2.18 Employee Options. No shares of Common Stock are eligible for sale
----------------
pursuant to Rule 701 promulgated under the Act in the 12 month period following
the Effective Date.
2.19 Transactions Affecting Disclosure to NASD.
-----------------------------------------
10
<PAGE>
2.19.1 Finder's Fees. Except as described in the Prospectus, there
-------------
are no claims, payments, issuances, arrangements or understandings for services
in the nature of a finder's, consulting or origination fee with respect to the
introduction of the Company to the Representa tive or the sale of the Securities
hereunder or any other arrangements, agreements, understand ings, payments or
issuance with respect to the Company that may affect the Representative's
compensation, as determined by the National Association of Securities Dealers,
Inc. ("NASD").
2.19.2 Payments Within Twelve Months. The Company has not made any
------------------------------
direct or indirect payments (in cash, securities or otherwise) to (i) any
person, as a finder's fee, investing fee or otherwise, in consideration of such
person raising capital for the Company or introducing to the Company persons who
provided capital to the Company, (ii) to any NASD member, (iii) to any person or
entity that has any direct or indirect affiliation or association with any NASD
member within the twelve month period prior to the date on which the
Registration Statement was filed with the Commission ("Filing Date") or
thereafter, other than payments to (iv) the Representative, (v) Theodore Rosen,
Chairman of the Board of the Company, and (vi) Wharton Capital Corp. in the
amount of $12,500.
2.19.3 Use of Proceeds. None of the net proceeds of the offering
---------------
will be paid by the Company to any NASD member or any affiliate or associate of
any NASD member, except as specifically authorized herein.
2.19.4 Insiders' NASD Affiliation. Other than Theodore Rosen (a) no
--------------------------
officer, director or five percent or greater stockholder of the Company has any
direct or indirect affiliation or association with any NASD member, and (b) no
beneficial owner of the Company's unregistered securities issued within the 12
month period prior to the Filing Date or thereafter has any direct or indirect
affiliation or association with any NASD member. The Company will advise the
Representative and the NASD if any other five percent or greater stockholder
becomes, directly or indirectly, an affiliate or associated person of an NASD
member participating in the distribution.
2.20 Foreign Corrupt Practices Act. Neither the Company nor any of its
-----------------------------
officers, directors, employees or agents or any other person acting on its
behalf has, directly or indirectly, given or agreed to give any money, gift or
similar benefit (other than legal price concessions to customers in the ordinary
course of business) to any customer, supplier, employee or agent of a customer
or supplier, or official or employee of any governmental agency or
instrumentality of any government (domestic or foreign) or any political party
or candidate for office (domestic or foreign) or any political party or
candidate for office (domestic or foreign) or other person who was, is, or may
be in a position to help or hinder the business of the Company (or assist it in
connection with any actual or proposed transaction) which (i) might subject the
Company to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (ii) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the Company
as reflected in any of the financial statements contained in the Prospectus or
(iii) if not continued in the future, might adversely affect the assets,
business, operations or prospects of the Company. The internal accounting
controls and procedures of the Company are sufficient to cause the Company to
comply with the Foreign Corrupt Practices Act of 1977, as amended.
11
<PAGE>
2.21 Nasdaq Eligibility. As of the Effective Date, the Securities have
------------------
been approved for quotation upon notice of issuance on the Nasdaq SmallCap
Market.
2.22 Intangibles. Each of the Company, Steamboat L.L.C., Lehi, NRG and
-----------
Plymouth owns or possesses the requisite licenses or rights to use all
trademarks, service marks, service names, trade names, patents and patent
applications, copyrights and other rights (collectively, "Intangibles")
described as being licensed to or owned by it in the Registration Statement.
The Intangibles which have been registered in the United States Patent and
Trademark Office have been fully maintained and are in full force and effect.
There is no claim or action by any person pertaining to, or proceeding pending
or threatened and none of the Company, Steamboat L.L.C., Lehi, NRG or Plymouth
has received any notice of conflict with the asserted rights of others which
challenges the exclusive right of such company with respect to any Intangibles
used in the conduct of its business except as described in the Prospectus. The
Intangibles and the current products, services and processes of each of the
Company, Steamboat L.L.C., Lehi, NRG and Plymouth do not infringe on any
Intangibles held by any third party. To the best of the Company's knowledge, no
others have infringed upon the Intangibles of the Company, Steamboat L.L.C.,
Lehi, NRG or Plymouth.
2.23 Relations With Employees.
------------------------
2.23.1 Employee Matters. Each of the Company, Steamboat L.L.C.,
----------------
Lehi, NRG and Plymouth has generally enjoyed a satisfactory employer-employee
relationship with its employees and is in compliance in all material respects
with all federal, state and local laws and regulations respecting the employment
of its employees and employment practices, terms and conditions of employment
and wages and hours relating thereto. To the best of the Company's knowledge,
there are no pending investigations involving the Company, Steamboat L.L.C.,
Lehi, NRG or Plymouth by the U.S. Department of Labor or any other governmental
agency, responsible for the enforcement of such federal, state and local laws
and regulations. There is no unfair labor practice charge or complaint against
the Company, Steamboat L.L.C., Lehi, NRG or Plymouth pending before the National
Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or
stoppage pending or threatened against or involving the Company, Steamboat
L.L.C., Lehi, NRG or Plymouth or any predecessor entity, and none has ever
occurred. No question concerning representation exists respecting the employees
of the Company, Steamboat L.L.C., Lehi, NRG or Plymouth and no collective
bargaining agreement or modification thereof is currently being negotiated by
the Company, Steamboat L.L.C., Lehi, NRG or Plymouth. No grievance or
arbitration proceeding is pending under any expired or existing collective
bargaining agreements of the Company, Steamboat L.L.C., Lehi, NRG or Plymouth,
if any.
2.23.2 Employee Benefit Plans. Other than as set forth in the
----------------------
Registration Statement, neither the Company, Steamboat L.L.C., Lehi, NRG or
Plymouth maintains, sponsors nor contributes to, nor is it required to
contribute to, any program or arrangement that is an "employee pension benefit
plan," an "employee welfare benefit plan," or a, "multi-employer plan" as such
terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA
Plans"). The Company and Steamboat L.L.C., Plymouth, NRG and Lehi do not
maintain or contribute to, and have at no time maintained or contributed to, a
defined benefit plan, as defined in Section 3(35) of ERISA. If
12
<PAGE>
the Company, Steamboat L.L.C., Lehi, NRG and Plymouth do maintain or contribute
to a defined benefit plan, any termination of the plan on the date hereof would
not give rise to liability under Title IV of ERISA. No ERISA Plan (or any trust
created thereunder) has engaged in a "prohibited transaction" within the meaning
of Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), which could subject the Company, Steamboat L.L.C., Lehi or
Plymouth to any tax penalty for prohibited transactions and which has not
adequately been corrected. Each ERISA Plan is in compliance with all material
reporting, disclosure and other requirements of the Code and ERISA as they
relate to any such ERISA Plan. Determination letters have been received from the
Internal Revenue Service with respect to each ERISA Plan which is intended to
comply with Code Section 401(a), stating that such ERISA Plan and the attendant
trust are qualified thereunder. None of the Company, Steamboat L.L.C., Lehi and
Plymouth has ever completely or partially withdrawn from a "multi-employer
plan."
2.24 Officers' Certificate. Any certificate signed by any duly
---------------------
authorized officer of the Company or Steamboat L.L.C., Lehi, NRG or Plymouth and
delivered to you or to your counsel shall be deemed a representation and
warranty by the Company to the Representative as to the matters covered thereby.
2.25 Warrant Agreement. The Company has entered into a warrant agreement
-----------------
with respect to the Warrants and the Representative's Warrants substantially in
the form filed as an exhibit to the Registration Statement ("Warrant Agreement")
with American Stock Transfer & Trust Company, in form and substance satisfactory
to the Representative, providing for among other things (i) no redemption of the
Warrants without the consent of the Representative and (ii) the payment of a
warrant solicitation fee as contemplated by Section 3.10 hereof.
2.26 Lock-Up Agreements. The Company has caused to be duly executed
------------------
legally binding and enforceable agreements pursuant to which all of the officers
and directors of the Company (including their family members and affiliates) and
the persons listed on Schedule 2 (collectively, "Insiders") agree not to sell
any shares of Common Stock owned by them (either pursuant to Rule 144 of the
Regulations or otherwise) for a period of thirteen months following the
Effective Date other than as set forth therein except with the consent of the
Representative and, if applicable, a state securities commission.
2.27 Subsidiaries. The representations and warranties made by the
------------
Company in this Agreement shall, in the event that the Company has one or more
subsidiaries (a "subsid iary(ies)"), also apply and be true with respect to each
subsidiary as if each representation and warranty contained herein made specific
reference to the subsidiary each time the term "Company" was used.
2.28 Certain Definitions. As used herein:
-------------------
(i) the term "Conversion Agreement" means the [TO FOLLOW];
(ii) the term "NRG Acquisition Agreement" means that certain
[TO FOLLOW];
13
<PAGE>
(iii) the term "Preferred Stock Exchange Agreement" means the
[TO FOLLOW];
(iv) the term "Steamboat Acquisition Agreement" means the [TO
FOLLOW]; and
(v) the term "Steamboat Facilities" means the [TO FOLLOW].
2.29 Conditions to Obligations Under Other Agreements. As of the
------------------------------------------------
Effective Date, the obligations of the Company and Steamboat L.L.C. which are
conditions to the consummation of the transactions contemplated by the NRC
Acquisition Agreement and the Steamboat Acquisition Agreement, the Conversion
Agreement and the Preferred Stock Exchange Agreement have been fulfilled by the
Company other than the closing of the offering contemplated by the Registration
Statement and those conditions which cannot be satisfied until the closing of
such offering.
3. Covenants of the Company. The Company covenants and agrees as follows:
------------------------
3.1 Amendments to Registration Statement. The Company will deliver to
------------------------------------
the Representative, prior to filing, any amendment or supplement to the
Registration Statement or Prospectus proposed to be filed after the Effective
Date and not file any such amendment or supplement to which the Representative
shall reasonably object.
3.2 Federal Securities Laws.
-----------------------
3.2.1 Compliance. During the time when a Prospectus is required to
----------
be delivered under the Act, the Company will use all reasonable efforts to
comply with all require ments imposed upon it by the Act, the Regulations and
the Exchange Act and by the regulations under the Exchange Act, as from time to
time in force, so far as necessary to permit the continuance of sales of or
dealings in the Public Securities in accordance with the provisions hereof and
the Prospectus. If at any time when a Prospectus relating to the Securities is
required to be delivered under the Act, any event shall have occurred as a
result of which, in the opinion of counsel for the Company or counsel for the
Underwriters, the Prospectus, as then amended or supplemented, includes an
untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify the Representative promptly and prepare and file with the
Commission, subject to Section 3.1 hereof, an appropriate amendment or
supplement in accordance with Section 10 of the Act.
3.2.2 Filing of Final Prospectus. The Company will file the
--------------------------
Prospectus (in form and substance satisfactory to the Representative) with the
Commission pursuant to the requirements of Rule 424 of the Regulations.
3.2.3 Exchange Act Registration. For a period of five years from the
-------------------------
Effective Date, the Company will use its best efforts to maintain the
registration of the Common Stock and the Warrants under the provisions of
Section 12 of the Exchange Act.
14
<PAGE>
3.3 Blue Sky Filing. The Company will endeavor in good faith, in
---------------
cooperation with the Representative, at or prior to the time the Registration
Statement becomes effective to qualify the Public Securities for offering and
sale under the securities laws of such jurisdictions as the Representative may
reasonably designate, provided that no such qualification shall be required in
any jurisdiction where, as a result thereof, the Company would be subject to
service of general process or to taxation as a foreign corporation doing
business in such jurisdiction. In each jurisdiction where such qualification
shall be effected, the Company will, unless the Representa tive agrees that such
action is not at the time necessary or advisable, use all reasonable efforts to
file and make such statements or reports at such times as are or may be required
by the laws of such jurisdiction.
3.4 Delivery to Underwriters of Prospectuses. The Company will deliver
----------------------------------------
to the several Underwriters, without charge, from time to time during the
period when the Prospectus is required to be delivered under the Act or the
Exchange Act such number of copies of each Preliminary Prospectus and the
Prospectus as such Underwriters may reasonably request and, as soon as the
Registration Statement or any amendment or supplement thereto becomes effective,
deliver to you two original executed Registration Statements, including
exhibits, and all post-effective amendments thereto and copies of all exhibits
filed therewith or incorporated therein by reference and all original executed
consents of certified experts.
3.5 Events Requiring Notice to the Representative. The Company will
---------------------------------------------
notify the Representative immediately and confirm the notice in writing (i) of
the effectiveness of the Registration Statement and any amendment thereto, (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding for that purpose, (iii) of the issuance by any
state securities commission of any proceedings for the suspension of the
qualification of the Public Securities for offering or sale in any jurisdiction
or of the initiation, or the threatening, of any proceeding for that purpose,
(iv) of the mailing and delivery to the Commission for filing of any amendment
or supplement to the Registration Statement or Prospectus, (v) of the receipt of
any comments or request for any additional information from the Commission, and
(vi) of the happening of any event during the period described in Section 3.4
hereof which, in the judgment of the Company, makes any statement of a material
fact made in the Registration Statement or the Prospectus untrue or which
requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If the Commission or
any state securities commission shall enter a stop order or suspend such
qualification at any time, the Company will make every reasonable effort to
obtain promptly the lifting of such order.
3.6 Review of Financial Statements. For a period of five years from the
------------------------------
Effective Date, the Company, at its expense, shall cause its regularly engaged
independent accountants to read (but not audit) the Company's financial
statements for each of the first three fiscal quarters prior to the announcement
of quarterly financial information, the filing of the Company's Form 10-Q
quarterly reports and the mailing of quarterly financial information to
stockholders.
3.7 Unaudited Financials. The Company will furnish to the Representative
--------------------
as early as practicable subsequent to the date hereof, but at least three full
business days prior to the Closing Date, a copy of the latest available
unaudited interim financial statements ("Unaudited Financials")
15
<PAGE>
of the Company (which shall be as of a month-end date no more than thirty days
prior to the Effective Date) which have been read by the Company's independent
accountants, as stated in their letter to be furnished pursuant to Section 4.3
hereof.
3.8 Secondary Market Trading and Standard & Poor's. The Company will
----------------------------------------------
take all necessary and appropriate actions to achieve accelerated publication in
Standard and Poor's Corporation Records Corporate Descriptions (within thirty
(30) days after the Effective Date) and to maintain such publication with
updated quarterly information for a period of five years from the Effective
Date, including the payment of any necessary fees and expenses. The Company
shall take such action as may be reasonably requested by the Representative to
obtain a secondary market trading exemption in such states as may be requested
by the Representative, including the payment of any necessary fees and expenses
and the filing of a Form (e.g., 25101(b)) for secondary market trading in the
----
State of California on the Effective Date or as soon thereafter as is
permissible.
3.9 Nasdaq Maintenance. For a period of five years from the date hereof,
------------------
the Company will use its best efforts to maintain the quotation of the Common
Stock and Warrants by Nasdaq SmallCap Market and, if the Company satisfies the
inclusion standards of the Nasdaq National Market System, to apply for and
maintain quotations by the Nasdaq National Market System of such securities
during such period.
3.10 Warrant Solicitation and Warrant Solicitation Fees. The Company
--------------------------------------------------
hereby engages the Representative, on a non-exclusive basis, as its agent for
the solicitation of the exercise of the Warrants. The Company, at its cost,
will (i) assist the Representative with respect to such solicitation, if
requested by the Representative and will (ii) provide the Representative, and
direct the Company's transfer and warrant agent to provide to the
Representative, lists of the record and, to the extent known, beneficial owners
of the Company's Warrants. Commencing one year from the Effective Date, the
Company will pay the Representative a commission of five percent of the Warrant
exercise price for each Warrant exercised, payable on the date of such exercise,
on the terms provided for in the Warrant Agreement, if allowed under the rules
and regulations of the NASD and only if the Representative has provided bona
fide services to the Company in connection with the exercise of such Warrants
and has received written confirmation from the holder that the Representative
has solicited such exercise. In addition to soliciting, either orally or in
writing, the exercise of Warrants, such services may also include disseminating
information, either orally or in writing, to Warrantholders about the Company or
the market for the Company's securities, and assisting in the processing of the
exercise of the Warrants. The Representative may engage sub-agents who are
members of the NASD in its solicitation efforts. The Company will disclose the
arrangement to pay such solicitation fees to the Representative in any
prospectus used by the Company in connection with the registration of the shares
of Common Stock underlying the Warrants.
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3.11 Registration of Common Stock. The Company agrees that prior to the
----------------------------
date that the Warrants become exercisable, it shall file with the Commission a
post-effective amendment to the Registration Statement, if possible, or a new
registration statement, for the registration, under the Act, of the Common Stock
issuable upon exercise of the Warrants. In either case, the Company shall cause
the same to become effective at or prior to the date that the Warrants become
17
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exercisable, and to maintain the effectiveness of such registration statement
and keep current a prospectus thereunder until the expiration of the Warrants in
accordance with the provisions of the Warrant Agreement.
3.12 Reports to the Representative.
-----------------------------
3.12.1 Periodic Reports, Etc. For a period of five years from the
----------------------
Effective Date, the Company will promptly furnish to the Representative, and to
each other Underwriter who may so request, copies of such financial statements
and other periodic and special reports as the Company from time to time files
with any governmental authority or furnishes generally to holders of any class
of its securities, and promptly furnish to the Representative (i) a copy of each
periodic report the Company shall be required to file with the Commission, (ii)
a copy of every press release and every news item and article with respect to
the Company or its affairs which was released by the Company, (iii) copies of
each Form SR, (iv) a copy of each Form 8-K or Schedules 13D, 13G, 14D-1 or 13E-4
received or prepared by the Company, (v) a copy of monthly statements setting
forth such information regarding the Company's results of operations and
financial position (including balance sheet, profit and loss statements and data
regarding operations) as is regularly prepared by management of the Company, and
(vi) such additional documents and information with respect to the Company and
the affairs of any future subsidiaries of the Company as the Representative may
from time to time reasonably request.
3.12.2 Transfer Sheets and Weekly Position Listings. For a period of
--------------------------------------------
five years from the Closing Date, the Company will furnish to the Representative
at the Company's sole expense such transfer sheets and position listings of the
Company's securities as the Representative may request, including the daily,
weekly and monthly consolidated transfer sheets of the transfer agent of the
Company and the weekly security position listings of the Depository Trust
Company.
3.12.3 Secondary Market Trading Memorandum. Until such time as the
-----------------------------------
Public Securities are listed or quoted, as the case may be, on the New York
Stock Exchange, the American Stock Exchange or Nasdaq Smallcap Market, the
Company shall cause the Representative's legal counsel to deliver to the
Representative at the times set forth below a written memorandum detailing those
states in which Public Securities may be traded in non-issuer transactions under
the Blue Sky laws of the fifty states ("Secondary Market Trading Memorandum").
The Secondary Market Trading Memorandum shall be delivered to the Representative
on the Effective Date and on the first day of every calendar quarter thereafter.
The Company shall pay to Representative's legal counsel a one-time fee of $5,000
for such services at the Closing.
3.13 Agreements between the Representative and the Company.
-----------------------------------------------------
3.13.1 [Intentionally Omitted.]
------------------------
3.13.2 [Intentionally Omitted.]
------------------------
18
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3.13.3 Representative's Purchase Option. On the Closing Date, the
--------------------------------
Company will execute and deliver to the Representative the Representative's
Purchase Option substantially in the form filed as an exhibit to the
Registration Statement.
3.14 Disqualification of Form S-1 (or other appropriate form). For a
--------------------------------------------------------
period equal to seven years from the date hereof, the Company will not take any
action or actions which may prevent or disqualify the Company's use of Form S-1
(or other appropriate form) for the registration of the Warrants and the
Representative's Warrants and the securities issuable upon exercise of those
securities under the Act.
3.15 Payment of Expenses.
-------------------
3.15.1 General Expenses. The Company hereby agrees to pay on the
----------------
Closing Date and, to the extent not paid on the Closing Date, on the option
Closing Date, if any, all expenses incident to the performance of the
obligations of the Company under this Agreement, including but not limited to
(i) the preparation, printing, filing, delivery and mailing (including the
payment of postage with respect to such mailing) of the Registration Statement,
the Prospectus and the Preliminary Prospectuses and the printing and mailing of
this Agreement and related documents, including the cost of all copies thereof
and any amendments thereof or supplements thereto supplied to the Underwriters
in quantities as may be required by the Underwriters, (ii) the printing,
engraving, issuance and delivery of the shares of Common Stock and the Warrants
and the Representative's Purchase Option, including any transfer or other taxes
payable thereon, (iii) the qualification of the Public Securities under state or
foreign securities or Blue Sky laws, including the filing fees under such Blue
Sky laws, the costs of printing and mailing the "Preliminary Blue Sky
Memorandum," and all amendments and supplements thereto, fees up to an aggregate
of $35,000 and disbursements of Underwriters' counsel and a one time fee of
$5,000 payable to the Underwriters' counsel for the preparation of the Secondary
Market Trading Memorandum, (iv) filing fees, costs and expenses (including fees
and disbursements of Underwriters' counsel, which fees shall not exceed $5,000)
incurred in registering the offering with the NASD, (v) costs of placing
"tombstone" advertisements in The Wall Street Journal, (vi) fees and
-----------------------
disbursements of the transfer and warrant agent, (vii) the preparation, binding
and delivery of transaction "bibles" and transaction lucite cubes or similar
commemorative items in a form, style and quantity as requested by the
Representative, (viii) any listing of the Public Securities on Nasdaq SmallCap
or National Market, as the case may be, and any securities exchange, and any
listing in Standard & Poor's, (ix) the Company's expenses associated with "due
diligence" meetings arranged by the Underwriter, and (x) all other costs and
expenses incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section 3.15.1. Since an important
part of the public offering process is for the Company to appropriately and
accurately describe both the background of the principals of the Company and the
Company's competitive position in its industry, the Company has engaged and will
pay for an investigative search firm of the Representative's choice to conduct
an investigation of principals of the Company mutually selected by the
Representative and the Company. If the Company's representative have not
submitted to a bindery acceptable to the Representative all of the closing and
other documents material to the transactions contemplated hereby within 30 days
of the Effective Date, the Company shall pay the fees and costs of the
Representative's agents to prepare the transactional bibles and have them bound.
The Representative may deduct from the net proceeds of the offering payable to
the Company on the
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Closing Date, or the Option Closing Date, if any, the expenses set forth herein
to be paid by the Company to the Representative and/or to third parties.
3.15.2 Non-Accountable Expenses. The Company further agrees that, in
------------------------
addition to the expenses payable pursuant to Section 3.15.1, it will pay to the
Representative a non-accountable expense allowance equal to three percent (3%)
of the gross proceeds received by the Company from the sale of the Public
Securities, of which $50,000 has been paid to date, and the Company will pay the
balance on the Closing Date and any additional monies owed attributable to the
Option Securities or otherwise on the Option Closing Date by certified or bank
cashier's check or, at the election of the Representative, by deduction from the
proceeds of the offering contemplated herein. If the offering contemplated by
this Agreement is not consum mated for any reason whatsoever then the following
provisions shall apply: The Company's liability for payment to the
Representative of the non-accountable expense allowance shall be equal to the
sum of the Representative's actual out-of-pocket expenses (including, but not
limited to, counsel fees, "road-show" and due diligence expenses). The
Representative shall retain such part of the non-accountable expense allowance
previously paid as shall equal such actual out-of-pocket expenses. If the
amount previously paid is insufficient to cover such actual out-of-pocket
expenses, the Company shall remain liable for and promptly pay any other actual
out-of-pocket expenses. If the amount previously paid exceeds the amount of the
actual out-of-pocket expenses, the Representative shall promptly remit to the
Company any such excess. Upon request, the Representative shall furnish the
Company with copies of receipts or other evidence of payment of its actual out-
of-pocket expenses.
3.16 Application of Net Proceeds. The Company will apply the net
---------------------------
proceeds from the offering received by it in a manner consistent with the
application described under the caption "Use Of Proceeds" in the Prospectus.
The Company hereby agrees that, without the express prior consent of the
Representative, except as so described, the Company will not apply any net
proceeds from the offering to pay (i) any debt for borrowed funds or (ii) any
debt or obligation owed to any Insider.
3.17 Delivery of Earnings Statements to Security Holders. The Company
---------------------------------------------------
will make generally available to its security holders as soon as practicable,
but not later than the first day of the fifteenth full calendar month following
the Effective Date, an earnings statement (which need not be certified by
independent accountants unless required by the Act or the Regulations, but which
shall satisfy the provisions of Rule 158(a) under Section 11(a) of the Act)
covering a period of at least twelve consecutive months beginning after the
Effective Date.
3.18 Key Person Life Insurance. The Company will maintain, for a period
-------------------------
of not less than one year from the Effective Date, key person life insurance in
an amount no less than $1,000,000 on the life of Richard A. Nelson and pay the
annual premiums therefor and name the Company as the sole beneficiary thereof.
3.19 Stabilization. Neither the Company, nor, to its knowledge, any of
-------------
its employees, directors or stockholders has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in, under the
20
<PAGE>
Exchange Act, or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Public
Securities.
3.20 Internal Controls. The Company maintains and will continue to
-----------------
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authorization, (ii) transactions are recorded
as necessary in order to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
3.21 Accountants and Lawyers. For a period of five years from the
-----------------------
Effective Date, the Company shall retain independent accountants and securities
lawyers acceptable to the Representative. Richard A. Eisner & Co., LLP, and
Reid & Priest, LLP, are acceptable to the Representative.
3.22 Transfer Agent. For a period of five years from the Effective Date,
--------------
the Company shall retain a transfer agent for the Common Stock and Warrants
acceptable to the Representa tive. American Stock Transfer & Trust Company is
acceptable to the Representative.
3.23 Sale of Securities. Except in accordance with the agreements
------------------
referred to in Section 2.26, the Company agrees not to permit or cause a private
or public sale or private or public offering of any of its securities (in any
manner, including pursuant to Rule 144 under the Act) owned nominally or
beneficially by the Insiders for a period of thirteen months following the
Effective Date without obtaining the prior written consent of the
Representative.
3.24 Other Transactions. The Company will take such action as is
------------------
necessary to consummate the Acquisition Transactions and the transactions
contemplated by the Conversion Agreement and the Preferred Stock Exchange
Agreement concurrently with the consummation of the transactions contemplated by
this Agreement.
3.25 Secondary Offering. With respect to the secondary offering of
------------------
securities of the Company by Anchor Capital Company LLC ("Anchor") which has
been registered under the Registration Statement, the Company shall:
(a) submit to the Corporate Financing of the NASD (the
"Department") at the same time they are filed with the Commission all post-
effective amendments to the Registration Statement or supplements to the
Prospectus disclosing actual price and selling terms;
(b) submit to the Department at the same time they are filed with
the Commission all post-effective amendments or prospectus supplements
disclosing actual price and selling terms;
21
<PAGE>
(c) advise the Department if any 5% or greater shareholder of the
Company is or becomes an affiliate or associated person of an NASD member
participating in the distribution;
(d) if a portion of the securities offered by Anchor are
underwritten, prior to the commencement of the distribution (i) submit to the
Department for review copies of all underwriting documents proposed for use and
(ii) submit to the Department for approval the maximum compensation to be paid
to the underwriter(s); and
(e) prior to any distribution or other disposition of the
securities registered for the secondary offering, furnish, or cause the selling
securityholders to furnish, all information required by Department if a member
of the NASD is involved in such distribution or other disposition, whether for
its own account or as a broker, dealer or underwriter, including but not limited
to information concerning the maximum compensation to be received by any NASD
member.
4. Conditions of Underwriters' Obligations. The obligations of the several
---------------------------------------
Underwriters to purchase and pay for the Securities, as provided herein, shall
be subject to the continuing accuracy of the representations and warranties of
the Company as of the date hereof and as of each of the Closing Date and the
Option Closing Date, if any, to the accuracy of the statements of officers of
the Company made pursuant to the provisions hereof and to the performance by the
Company of its obligations hereunder and to the following conditions:
4.1 Regulatory Matters.
------------------
4.1.1 Effectiveness of Registration Statement. The Registration
---------------------------------------
Statement has been declared effective on the date of this Agreement and, at each
of the Closing Date and the Option Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for the purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Graubard Mollen & Miller, counsel to the Underwriters.
4.1.2 NASD Clearance. By the Effective Date, the Representative
--------------
shall have received clearance from the NASD as to the amount of compensation
allowable or payable to the Underwriters as described in the Registration
Statement.
4.1.3 No Blue Sky Stop Orders. No order suspending the sale of the
-----------------------
Securities in any jurisdiction designated by the Representative pursuant to
Section 3.3 hereof shall have been issued on either on the Closing Date or the
Option Closing Date, and no proceedings for that purpose shall have been
instituted or shall be contemplated.
4.2 Company Counsel Matters.
-----------------------
4.2.1 (a) Effective Date Opinion of Counsel. On the Effective Date,
---------------------------------
the Representative shall have received the favorable opinion of Reid & Priest,
LLP, counsel to the
22
<PAGE>
Company, dated the Effective Date, addressed to the Representative and in form
and substance satisfactory to Graubard Mollen & Miller, counsel to the
Underwriters, to the following effect, except that such opinion need not address
any matters relating to Steamboat L.L.C. other than in the following clause (i):
(i) (A) The Company has been duly organized and is validly existing
as a corporation and is in good standing under the laws of its state of
incorporation and is duly qualified and licensed and in good standing as a
foreign corporation in each jurisdiction in which to such counsel's knowledge
its ownership or leasing of any properties or the character of its operations
requires such qualification or licensing, except where the failure to qualify
would not have a material adverse effect on it or its properties or business.
(B) Each of Steamboat L.L.C., NRG and Lehi has been duly organized and
is validly existing as a limited liability company and is in good standing under
the laws of its state of organization and is duly qualified and licensed and in
good standing as a foreign limited liability company in each jurisdiction in
which to such counsel's knowledge its ownership or leasing or any properties or
the character of its operations requires such qualification or licensing, except
where the failure to qualify would not have a material adverse effect on it or
its properties or business.
(C) Plymouth has been duly organized and is validly existing as a
limited partnership and is in good standing under the laws of its state of
organization and is duly qualified and licensed and in good standing as a
foreign limited partnership in each jurisdiction in which to such counsel's
knowledge its ownership or leasing or any properties or the character of its
operations requires such qualification or licensing, except where the failure to
qualify would not have a material adverse effect on it or its properties or
business.
(D) The Company, through its subsidiaries, is the record and, to such
counsel's knowledge, beneficial owner of 50% of the equity interests of Lehi
and Plymouth, of 81.5% of the equity interests of NRG and of 95% of the equity
interests of Steamboat L.L.C.
(ii) Except to the extent that the lack of such authorizations,
approvals, orders, licenses, certificates and permits would not have a
materially adverse effect on the Company or Steamboat L.L.C. or their respective
activities, each of the Company, Lehi, Plymouth, NRG and Steamboat L.L.C. has
all requisite power and authority, and has all necessary authorizations,
approvals, orders, licenses, certificates and permits of and from all
governmental or regulatory officials and bodies to own or lease its properties
and conduct its business as described in the Prospectus, and such counsel has no
actual knowledge that any of the Company, Lehi, Plymouth, NRG or Steamboat
L.L.C. is conducting its activities without material compliance with such
approvals, orders, licenses, certificates and permits. Each of the Company and
Steamboat L.L.C. has all power and authority to enter into those of this
Agreement, the Warrant Agreement, the NRG Acquisition Agreement, the Steamboat
Acquisition Agreement, the Conversion Agreement, the Preferred Stock Exchange
Agreement and the Representative's Purchase Option to which it is a party and to
carry out the provisions and conditions hereof and thereof, and all consents,
authorizations, approvals and orders required in connection therewith
23
<PAGE>
have been obtained. No consents, approvals, authorizations or orders of, and no
filing with any court or governmental agency or body (other than such as may be
required under the Act and applicable Blue Sky laws) are required as to the
Company, Lehi, Plymouth, NRG and Steamboat L.L.C. for the valid authorization,
issuance, sale and delivery of the Securities, and the consummation of the
transactions and agreements contemplated by this Agreement, the Warrant
Agreement, the NRG Acquisition Agreement, the Steamboat Acquisition Agreement,
the Conversion Agreement, the Preferred Stock Exchange Agreement and the
Representative's Purchase Option and as contemplated by the Prospectus or, if so
required, all such authorizations, approvals, consents, orders, registrations,
licenses and permits have been duly obtained and are in full force and effect
and have been disclosed to the Representative.
(iii) All issued and outstanding securities of the Company have been
duly authorized and validly issued and are fully paid and non-assessable; the
holders thereof have no rights of rescission with respect thereto and are not
subject to personal liability by reason of being such holders; and none of such
securities were issued in violation of the preemptive rights of any holders of
any security of the Company or, to the best of such counsel's knowledge, similar
contractual rights granted by the Company. The outstanding options and war
rants to purchase shares of Common Stock constitute the valid and binding
obligations of the Company, enforceable in accordance with their terms, except
(a) as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally, (b) as
enforceability of any indemnification provision may be limited under the federal
and state securities laws, and (c) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the equitable
defenses and to the direction of the court before which any proceeding therefor
may be brought. The offers and sales by the Company of the outstanding Common
Stock and options and warrants to purchase shares of Common Stock were at all
relevant times either registered under the Act and the applicable state
securities or Blue Sky Laws or exempt from such registration requirements. The
authorized and outstanding capital stock of the Company is as set forth under
the caption "Capitalization" in the Prospectus.
(iv) The Securities have been duly authorized and, when issued and
paid for, will be validly issued, fully paid and non-assessable; the holders
thereof are not and will not be subject to personal liability by reason of being
such holders. The Securities are not and will not be subject to the preemptive
rights of any holders of any security of the Company or, to the best of such
counsel's knowledge after due inquiry, similar contractual rights granted by the
Company. All corporate action required to be taken for the authorization,
issuance and sale of the Securities has been duly and validly taken. When
issued, the Warrants, the Representative's Purchase Option and the
Representative's Warrants will constitute valid and binding obligations of the
Company to issue and sell, upon exercise thereof and payment therefor, the
number and type of securities of the Company called for thereby and such
Warrants, Representative's Purchase Option and Representative's Warrants, when
issued, will be enforceable against the Company in accordance with their
respective terms, except (a) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (b) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (c) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to the equitable defenses and to the discretion of the court before
which any
24
<PAGE>
proceeding therefor may be brought. The certificates representing the Securities
are in due and proper form.
(v) To the best of such counsel's knowledge, after due inquiry, except
as set forth in the Prospectus, no holders of any securities of the Company or
of any options, warrants or securities of the Company exercisable for or
convertible or exchangeable into securities of the Company have the right to
require the Company to register any such securities of the Company under the Act
or to include any such securities in a registration state ment to be filed by
the Company.
(vi) To the best of such counsel's knowledge, after due inquiry, the
Units, the shares of Common Stock and the Warrants are eligible for quotation on
the Nasdaq SmallCap Market.
(vii) This Agreement, the Warrant Agreement, the NRG Acquisition
Agreement, the Steamboat Acquisition Agreement, the Conversion Agreement, the
Preferred Stock Exchange Agreement and the Representative's Purchase Option have
each been duly and validly authorized by the Company and Steamboat L.L.C. to the
extent it is a party thereto and, when executed and delivered by the Company and
Steamboat L.L.C., to the extent it is a party thereto, will constitute valid and
binding obligations of the Company and Steamboat L.L.C., as the case may be,
enforceable against the Company and Steamboat L.L.C., to the extent it is a
party thereto, in accordance with their respective terms, except (a) as such
enforce ability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (b) as enforceability of any
indemnification provisions may be limited under the federal and state securities
laws, and (c) that the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to the equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
(viii) The execution, delivery and performance by the Company and
Steamboat L.L.C., to the extent it is a party thereto, of this Agreement, the
Warrant Agreement, the NRG Acquisition Agreement, the Steamboat Acquisition
Agreement, the Conversion Agreement, the Preferred Stock Exchange Agreement
and the Representative's Purchase Option, the issuance and sale of the
Securities by the Company, the consummation of the transactions contemplated
hereby and thereby and the compliance by the Company and Steamboat L.L.C., to
the extent any is a party thereto, with the terms and provisions hereof and
thereof, do not and will not, with or without the giving of notice or the lapse
of time, or both, (a) conflict with, or result in a breach of, any of the terms
or provisions of, or constitute a default under, or result in the creation or
modification of any lien, security interest, charge or encum brance upon any of
the respective properties or assets of the Company or Steamboat L.L.C. pursuant
to the terms of, any material mortgage, deed of trust, note, indenture, written
loan, contract or other material agreement or instrument of which such counsel
has knowledge and, to the best of such counsel's knowledge, to which the Company
or Steamboat is a party or by which the Company or Steamboat or any of their
respective properties or assets may be bound, (b) result in any violation of the
provisions of the respective Certificates of Incorporation, By-Laws, Certificate
of Formation or Operating Agreement of the Company or Steamboat L.L.C., (c)
violate any statute or any judgment, order or decree of which such counsel has
knowledge, rule or regulation applicable to the Company or Steamboat L.L.C.
25
<PAGE>
of any court, domestic or foreign, or of any federal, state or other regulatory
authority or other governmental body having jurisdiction over the Company or
Steamboat L.L.C., their respective properties or assets, or (d) have a material
adverse effect on any permit, certification, registration, approval, consent,
license or franchise of the Company or Steamboat L.L.C.
(ix) The Registration Statement, each Preliminary Prospectus and the
Prospectus and any post-effective amendments or supplements thereto (other than
the financial statements included therein, as to which no opinion need be
rendered) comply as to form in all material respects with the requirements of
the Act and Regulations. The Securities and all other securities issued or
issuable by the Company conform in all respects to the description thereof
contained in the Registration Statement and the Prospectus. The information in
the Prospectus under "Business," "Management," "Certain Transactions,"
"Principal Stockholders," "Description of Securities" and "Shares Eligible for
Future Sale" have been reviewed by such counsel, and insofar as it contains
descriptions of law, descriptions of statutes, rules or regulations or legal
conclusions such information is correct in all material respects. No statute or
regulation or legal or governmental proceeding required to be described in the
Prospectus is not described as required, nor are any contracts or documents of
which such counsel has knowledge of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement not so described or filed as required.
(x) Counsel has participated in conferences with officers and other
representatives of the Company, representatives of the independent accountants
for the Company and representatives of the Representative at which the contents
of the Registration Statement, the Prospectus and related matters were discussed
and although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and Prospectus (except as otherwise set
forth in counsel's opinion), no facts have come to the attention of such counsel
which lead them to believe that neither the Registration Statement or the
Prospectus nor any amendment or supplement thereto, as of the date of such
opinion, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no opinion with
respect to the financial statements and schedules and other financial and
statistical data included in the Registration Statement or Prospectus).
(xi) The Registration Statement is effective under the Act, and, to
the best of such counsel's knowledge, no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the Act or
applicable state securities laws.
(xii) [Intentionally omitted.]
----------------------
(xiii) Except as described in the Prospectus, to the best of such
counsel's knowledge, no material default exists in the due performance and
observance of any term, covenant or condition of any material license, contract,
indenture, mortgage, deed of trust, note, loan or credit agreement, or any other
material agreement or instrument evidencing an
26
<PAGE>
obligation for borrowed money, or any other material agreement or instrument to
which the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. is a party or by
which the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. may be bound or to
which any of the respective properties or assets of the Company, Lehi, Plymouth,
NRG or Steamboat L.L.C. is subject. None of the Company, Lehi, Plymouth, NRG or
Steamboat L.L.C. is in material violation of any term or provision of its
Certificate of Incorporation, By-Laws, Certificate of Formation, Operating
Agreement or other similar document or of any franchise, license, permit,
applicable law, rule, regulation, judgment or decree of any governmental agency
or court, domestic or foreign, having jurisdiction over it or any of its
properties or business, except as described in the Prospectus.
(xiv) [Intentionally omitted.]
----------------------
(xv) To the best of such counsel's knowledge, after due inquiry,
except as described in the Prospectus and except for subsidiaries whose
operations are included in their respective consolidated financial statements
included in the Prospectus, none of the Company, Lehi, Plymouth, NRG or
Steamboat L.L.C. owns an interest in any corporation, partnership, joint
venture, trust or other business entity.
(xvi) To the best of such counsel's knowledge, after due inquiry,
except as set forth in the Prospectus, there is no action, suit or proceeding
before or by any court of governmental agency or body, domestic or foreign, now
pending, or threatened against the Company, Lehi, Plymouth, NRG or Steamboat
L.L.C. which might result in any material and adverse change in the condition
(financial or otherwise), business or prospects of the Company, Lehi, Plymouth,
NRG or Steamboat L.L.C., or might materially and adversely affect the properties
or assets thereof.
(xvii) the Company should not have any liability to Enviro
Partners, L.P. ("Partners") if it refuses to sell its preferred stock to
Partners or its warrants to Energy Management Corporation in accordance with the
terms of the Convertible Preferred Stock Purchase Agreement dated May 3, 1996
between the Company and Partners if such refusal is based upon the inability of
the Company to have its securities listed for quotation on the Nasdaq SmallCap
Market if such sale were to occur.
(xviii) To the best of such counsel's knowledge, after due inquiry,
except as described in the Prospectus, there are no claims, payments, issuances,
arrangements or understandings for services in the nature of a finder's or
origination fee with respect to the sale of the Securities hereunder or
financial consulting arrangements or any other arrangements, agreements,
understandings, payments or issuances that may affect the Representative's
compensation, as determined by the NASD.
(b) Other Counsel's Opinion. On the Effective Date, the
-----------------------
Representative shall have received the opinion of the counsel listed in
Schedule 3 hereto ("Other Counsel") in form and substance satisfactory to
Graubard Mollen & Miller, counsel to the Underwriters, relating to litigation,
title to properties, permits and licenses and environmental and regulatory
matters of that of the Company, Lehi, NRG, Plymouth and Steamboat L.L.C listed
next to its name in Schedule
27
<PAGE>
3 (such counsel's "Opinion Subject"). Such opinion shall include, among other
things, statements to the effect that:
(i) Other Counsel is not aware of any federal, state or local statute,
rule or regulation relating to electricity production, operation, marketing or
transportation matters or environmental matters which it considers to be
material to the operations of its Opinion Subject in the states in which they
operate other than those set forth in the Prospectus (collectively, the
"Applicable Laws and Regulations").
(ii) To the best of Other Counsel's knowledge, after due inquiry, it
is not aware of any state of facts which would lead it to believe that its
Opinion Subject is not in substantial compliance with the Applicable Laws and
Regulations. By "substantial compliance," Other Counsel means that, based on
its experience as attorneys, it believes that any compliance exceptions of which
it has knowledge are not of a level of significance, individually or
collectively, to the various regulatory authorities which enforce the Applicable
Laws and Regulations which would result in its Opinion Subject losing its
ability to operate any of its properties (or to receive the benefits from those
properties operated by others in which it has an interest) or in a fine or
penalty that would significantly affect the financial condition of the Company.
(iii) Other Counsel has examined and passed upon statements
concerning the Applicable Laws and Regulations in the following sections of the
Prospectus: the sections in "Risk Factors" entitled "Governmental Regulation"
and "Environmental Risks" and the section in "Business" entitled "Government
Regulation." Such sections, insofar as they refer to the Applicable Laws and
Regulations, are accurate and complete and do not contain any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements contained therein, in light of the circumstances in which they
were made, not misleading.
(c) Unless the context clearly indicates otherwise, the term "Company"
as used in this Section 4.2.1 shall include each subsidiary of the Company. The
opinion of counsel for the Company and Other Counsel and any opinion relied upon
by such counsel shall include a statement to the effect that it may be relied
upon by counsel for the Representative in its opinion delivered to the
Representative.
4.2.2 Closing Date and Option Closing Date Opinions of Counsel. On
--------------------------------------------------------
each of the Closing Date and the Option Closing Date, if any, the Representative
shall have received the favorable opinions of Company Counsel and Other Counsel,
dated the Closing Date or the Option Closing Date, as the case may be, addressed
to the Representative and in the forms and substance satisfactory to Graubard
Mollen & Miller, counsel to the Underwriters, confirming as of the Closing Date
and, if applicable, the Option Closing Date, the statements made by such counsel
in their opinions delivered on the Effective Date and, in the case of the
opinion of Company Counsel, referring to Steamboat L.L.C. as set forth in
Section 4.2.1.
4.2.3 Reliance. In rendering such opinions, such counsel may rely
--------
(i) as to matters involving the application of laws other than the laws of the
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon
28
<PAGE>
an opinion or opinions (in form and substance reasonably satisfactory to the
Underwriters' counsel) of other counsel reasonably acceptable to the
Underwriters' counsel, familiar with the applicable laws, and (ii) as to matters
of fact, to the extent they deem proper, on certificates or other written
statements of officers of departments of various jurisdiction having custody of
documents respecting the corporate existence or good standing of the Company,
Lehi, Plymouth, NRG and Steamboat L.L.C., provided that copies of any such
statements or certificates shall be delivered to the Underwriters' counsel if
requested. Each such opinion of counsel shall include a statement to the effect
that it may be relied upon by counsel for the Underwriters in its opinion
delivered to the Representative.
4.2.4 Secondary Market Trading Memorandum. On the Effective Date,
-----------------------------------
the Representative shall have received the Secondary Market Trading Memorandum.
4.3 Cold Comfort Letters. At the time this Agreement is executed and at
--------------------
each of the Closing Date and the Option Closing Date, if any, you shall have
received a letter, addressed to the Representative and in form and substance
satisfactory in all respects (including the non-material nature of the changes
or decreases, if any, referred to in clause (iii) below) to you and to Graubard
Mollen & Miller, counsel for the Underwriters, the accounting firms specified
in Schedule 4 hereto, dated, respectively, as of the date of this Agreement and
as of the Closing Date and the Option Closing Date, if any:
(i) confirming that they are independent accountants with respect to
the Company, Lehi, Plymouth or Steamboat L.L.C., as the case may be (such firm's
"Comfort Letter Subject"), within the meaning of the Act and the applicable
Regulations;
(ii) stating that in their opinion the financial statements of its
Comfort Letter Subject included in the Registration Statement and Prospectus
comply as to form in all material respects with the applicable accounting
requirements of the Act and the published Regulations thereunder;
(iii) stating that, based on the performance procedures specified by
the American Institute of Certified Public Accountants ("AICPA") for a review of
the latest available unaudited interim financial statements of its Comfort
Letter Subject (as described in SAS No. 71 Interim Financial Information), with
an indication of the date of the latest available unaudited interim financial
statements, a reading of the latest available minutes of the stockholders and
board of directors and the various committees of the board of directors,
consultations with officers and other employees of its Comfort Letter Subject
responsible for financial and accounting matters and other specified procedures
and inquiries, nothing has come to their attention which would lead them to
believe that (a) the unaudited financial statements of its Comfort Letter
Subject included in the Registration Statement do not comply as to form in all
material respects with the applicable accounting requirements of the Act and the
Regulations or any material modification should be made to the unaudited interim
financial statements included in the Registration Statement for them to be in
conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements of its
Comfort Letter Subject included in the Registration Statement, (b) at a date not
later than five days prior to the Effective Date, Closing Date or Option Closing
Date, as the case may be, there was any change in the capital stock or
29
<PAGE>
long-term debt of the Company, or any decrease in the stockholders' equity of
the Company as compared with amounts shown in the most recent balance sheet
included in the Registration Statement, other than as set forth in or
contemplated by the Registration Statement, or, if there was any decrease,
setting forth the amount of such decrease, and (c) during the period from the
date of the most recent balance sheet included in the Registration Statement, to
a specified date not later than five days prior to the Effective Date, Closing
Date or Option Closing Date, as the case may be, there was any decrease in
revenues, or increase in net loss or net loss per share of Common Stock, in each
case as compared with the corresponding period in the preceding year and as
compared with the corresponding period in the preceding quarter, other than as
set forth in or contemplated by the Registration Statement, or, if there was any
such decrease, setting forth the amount of such decrease;
(iv) as to Steamboat L.L.C., only, stating that, based on the
performance of procedures specified by the AICPA for a review of unaudited pro
forma financial statements of the Company and Steamboat L.L.C. and Steamboat
Facilities and inquiries of the officers and other employees of the Company
responsible for financial and accounting matters and other specified procedures
and inquiries, nothing has come to their attention which would lead them to
believe that (a) the unaudited pro forma condensed consolidated balance sheet at
June 30, 1996 and the unaudited pro forma condensed consolidated statements
of operations for the year ended January 31, 1996 and the six month period
ended July 31, 1996 of the Company and the unaudited pro forma condensed
combined statements of operations for the year ended December 31, 1995 and
the six month period ended June 30, 1996 of Steamboat Facilities included in
the Registration Statement (collectively, the "Pro Forma Financial Statements")
do not comply as to form in all material respects with applicable requirements
of the Act, the Regulations and applicable accounting requirements, (b) that the
pro forma adjustments have not been properly applied to the historical amounts
in the compilation of the Pro Forma Financial Statements, or (c) that the
assumptions used in the preparation of the Pro Forma Financial Statements are
not appropriate;
(v) setting forth, at a date not later than five days prior to the
Effective Date, the amount of liabilities of its Comfort Letter Subject
(including a break-down of commercial paper and notes payable to banks);
(vi) as to the Company only, stating that they have compared specific
dollar amounts, numbers of shares, percentages of revenues and earnings,
statements and other financial information pertaining to the Company, Lehi and
Plymouth set forth in the Prospectus, in each case to the extent that such
amounts, numbers, percentages, statements and information may be derived from
the general accounting records and work sheets of the Company, with the results
obtained from the application of specified readings, inquiries and other
appropriate procedures (which procedures do not constitute an examination in
accordance with generally accepted auditing standards) set forth in the letter
and found them to be in agreement;
(vii) stating that they have not during the immediately preceding
five year period brought to the attention of the management of the Company or
its Comfort Letter Subject any reportable condition related to internal
structure, design or operation as defined in the Statement on Auditing Standards
No. 60 -- "Communication of Internal Control Structure Related Matters Noted in
an Audit," in the internal controls of its Comfort Letter Subject; and
30
<PAGE>
(viii) statements as to such other matters incident to the
transaction contemplated hereby as you may reasonably request.
4.4 Officers' Certificates.
----------------------
4.4.1 Officers' Certificate. At each of the Closing Date and the
---------------------
Option Closing Date, if any, the Representative shall have received a
certificate of the Company signed by the President and the Chief Financial
Officer of the Company, dated the Closing Date or the Option Closing Date, as
the case may be, respectively, to the effect that the Company has performed all
covenants and complied with all conditions required by this Agreement to be
performed or complied with by the Company prior to and as of the Closing Date,
or the Option Closing Date, as the case may be, and that the conditions set
forth in Section 4.5 hereof have been satisfied as of such date and that, as of
Closing Date and the Option Closing Date, as the case may be, the
representations and warranties of the Company set forth in Section 2 hereof are
true and correct. In addition, the Representative will have received such other
and further certificates of officers of the Company as the Representative may
reasonably request.
4.4.2 Secretary's Certificate. At each of the Closing Date and the
-----------------------
Option Closing Date, if any, the Representative shall have received a
certificate of the Company signed by the Secretary of the Company, dated the
Closing Date or the Option Date, as the case may be, respectively, certifying
(i) that the Certificate of Incorporation and By-Laws, as amended, of the
Company are true and complete, have not been modified and are in full force and
effect, (ii) that the resolutions relating to the public offering contemplated
by this Agreement are in full force and effect and have not been modified, (iii)
all correspondence between the Company or its counsel and the Commission, (iv)
all correspondence between the Company or its counsel and Nasdaq concerning
inclusion of the Securities on Nasdaq, and (v) as to the incumbency of the
officers of the Company. The documents referred to in such certificate shall be
attached to such certificate.
4.5 No Material Changes. Prior to and on each of the Closing Date and the
-------------------
Option Closing Date, if any, (i) there shall have been no material adverse
change or development involving a prospective material change in the condition
or prospects or the business activities, financial or otherwise, of the Company,
Lehi, Plymouth, NRG and Steamboat L.L.C., taken together, from the latest dates
as of which such condition is set forth in the Registration Statement and
Prospectus, (ii) there shall have been no transaction, not in the ordinary
course of business, entered into by the Company, Lehi, Plymouth, NRG or
Steamboat L.L.C. from the latest date as of which the financial condition of the
Company, Lehi, Plymouth, NRG and Steamboat L.L.C. is set forth in the
Registration Statement and Prospectus which is materially adverse to the
Company, Lehi, Plymouth, NRG and Steamboat L.L.C., (iii) the Company, Lehi,
Plymouth, NRG and Steamboat L.L.C. shall not be in default under any provision
of any instrument relating to any outstanding indebtedness which default would
have a material adverse effect on it, (iv) no material amount of the assets of
the Company, Lehi, Plymouth, NRG and Steamboat L.L.C. shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus, (v)
no action suit or proceeding, at law or in equity, shall have been pending or
threatened against the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. or
affecting any of its property or business before or by any court or governmental
commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding may materially adversely affect the business,
operations,
31
<PAGE>
prospects or financial condition or income of the Company, Lehi, Plymouth, NRG
and Steamboat L.L.C., except as set forth in the Registration Statement and
Prospectus, (vi) no stop order shall have been issued under the Act and no
proceedings therefor shall have been initiated or threatened by the Commission,
and (vii) the Registration Statement and the Prospectus and any amendments or
supplements thereto contain all material statements which are required to be
stated therein in accordance with the Act and the Regulations and conform in all
material respects to the requirements of the Act and the Regulations, and
neither the Registration Statement nor the Prospectus nor any amendment or
supplement thereto contains any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. As used in this Section 4.5, the term "Company" shall mean the
Company and its subsidiaries, taken as a whole.
4.6 Delivery of Agreements. At the Closing, the Company shall have
----------------------
delivered to the Representative executed copies of the Representative's Purchase
Option.
4.7 Opinion of Counsel for the Underwriters. All proceedings taken in
---------------------------------------
connection with the authorization, issuance or sale of the Securities as herein
contemplated shall be reasonably satisfactory in form and substance to you and
to Graubard Mollen & Miller, counsel to the Underwriters, and you shall have
received from such counsel a favorable opinion, dated the Closing Date and the
Option Closing Date, if any, with respect to such of these proceedings as you
may reasonably require. On or prior to the Effective Date, the Closing Date and
the Option Closing Date, as the case may be, counsel for the Underwriters shall
have been furnished such documents, certificates and opinions as they may
reasonably require for the purpose of enabling them to review or pass upon the
matters referred to in this Section 4.7, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions herein contained.
4.8 Other Transactions. The Acquisition Transactions shall have been
------------------
effected on the Closing Date and all conditions required to consummate the
transactions contemplated by the NRG Acquisition Agreement, the Steamboat
Acquisition Agreement, the Conversion Agreement and the Preferred Stock Exchange
Agreement shall have been fulfilled concurrently with the consummation of the
transactions contemplated by this Agreement.
5. Indemnification.
---------------
5.1 Indemnification of the Underwriters.
-----------------------------------
5.1.1 General. Subject to the conditions set forth below, the
-------
Company agrees to indemnify and hold harmless each of the Underwriters, their
respective directors, officers, agents and employees and each person, if any,
who controls an Underwriter ("controlling person") within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against any and all loss,
liability, claim, damage and expense whatsoever (including but not limited to
any and all legal or other expenses reasonably incurred in investigating,
preparing or defending against any litigation or claims whatsoever, commenced or
threatened, whether arising out of any action between any of the Underwriters
and the Company or between any of the Underwriters and any third-party or
32
<PAGE>
otherwise) to which they or any of them may become subject under the Act, the
Exchange Act or any other statute or at common law or otherwise or under the
laws of foreign countries, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in (i) any Preliminary
Prospectus, the Registration Statement or the Prospectus (as from time to time
each may be amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement and prospectus in which is included
securities of the Company issued or issuable upon exercise of the
Representative's Purchase Option; or (iii) any application or other document or
written communication (in this Section 5 collectively called "application")
executed by the Company or based upon written information furnished by the
Company in any jurisdiction in order to qualify the Securities under the
securities laws thereof or filed with the Commission, any state securities
commission or agency, Nasdaq or any securities exchange; or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, unless such statement or omission
was made in reliance upon and in strict conformity with written information
furnished to the Company with respect to any Underwriter by or on behalf of such
Underwriter expressly for use in any Preliminary Prospectus, the Registration
Statement or Prospectus, or any amendment or supplement thereof, or in any
application, as the case may be. The Company agrees promptly to notify the
Representative of the commencement of any litigation or proceedings against the
Company or any of its officers, directors or controlling persons in connection
with the issue and sale of the Securities or in connection with the Registration
Statement or Prospectus.
5.1.2 Procedure. If any action is brought against an Underwriter or
---------
controlling person in respect of which indemnity may be sought against the
Company pursuant to Section 5.1.1, such Underwriter shall promptly notify the
Company in writing of the institution of such action and the Company shall
assume the defense of such action, including the employment and fees of counsel
(subject to the approval of the Underwriter) and payment of actual expenses.
Such Underwriter or controlling person shall have the right to employ its or
their own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of such Underwriter or such controlling person unless
(i) the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action, or (ii) the Company shall
not have employed counsel to have charge of the defense of such action, or (iii)
such indemnified party or parties shall have reasonably concluded that there may
be defenses available to it or them which are different from or additional to
those available to the Company (in which case the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events the fees and expenses of not more than one
additional firm of attorneys selected by the Underwriter or Underwriters and/or
controlling person shall be borne by the Company. Notwithstanding anything to
the contrary contained herein, if an Underwriter or controlling person shall
assume the defense of such action as provided above, the Company shall have the
right to approve the terms of any settlement of such action which approval shall
not be unreasonably withheld.
5.2 Indemnification of the Company. Each of the Underwriters, severally
------------------------------
and not jointly, agrees to indemnify and hold harmless the Company against any
and all loss, liability, claim, damage and expense described in the foregoing
indemnity from the Company to the several Underwriters, as incurred, but only
with respect to untrue statements or omissions, or alleged
33
<PAGE>
untrue statements or omissions directly relating to the transactions effected by
the Underwriters in connection with this offering made in any Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment or
supplement thereto or in any application in reliance upon, and in strict
conformity with, written information furnished to the Company with respect to an
Underwriter by or on behalf of such Underwriter expressly for use in such
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or in any such application. In case any action
shall be brought against the Company or any other person so indemnified based on
any Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or any application, and in respect of which
indemnity may be sought against any Underwriter, such Underwriter shall have the
rights and duties given to the Company, and the Company and each other person so
indemnified shall have the rights and duties given to the several Underwriters
by the provisions of Section 5.1.2.
5.3 Contribution.
------------
5.3.1 Contribution Rights. In order to provide for just and
-------------------
equitable contribution under the Act in any case in which (i) any person
entitled to indemnification under this Section 5 makes claim for indemnification
pursuant hereto but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 5 provides for indemnification in such case, or (ii) contribution
under the Act, the Exchange Act or otherwise may be required on the part of any
such person in circumstances for which indemnification is provided under this
Section 5, then, and in each such case, the Company and the Underwriters shall
contribute to the aggregate losses, liabilities, claims, damages and expenses of
the nature contemplated by said indemnity agreement incurred by the Company and
the Underwriters, as incurred, in such proportions that the Underwriters are
responsible for that portion represented by the percentage that the underwriting
discount appearing on the cover page of the Prospectus bears to the initial
offering price appearing thereon and the Company is responsible for the balance;
provided, that, no person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
the provisions of this Section 5.3, no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Public Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay in respect of such losses, liabilities,
claims, damages and expenses. For purposes of this Section, each director,
officer and employee of an Underwriter, and each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act shall have the same
rights to contribution as such Underwriter and each director of the Company,
each officer of the Company who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act shall have the same rights to contribution as the Company.
5.3.2 Contribution Procedure. Within fifteen days after receipt by
----------------------
any party to this Agreement (or its representative) of notice of the
commencement of any action, suit or proceeding, such party will, if a claim for
contribution in respect thereof is to be made against another party
("contributing party"), notify the contributing party of the commencement
thereof, but the omission
34
<PAGE>
to so notify the contributing party will not relieve it from any liability which
it may have to any other party other than for contribution hereunder. In case
any such action, suit or proceeding is brought against any party, and such party
notifies a contributing party or its representative of the commencement thereof
within the aforesaid fifteen days, the contributing party will be entitled to
participate therein with the notifying party and any other contributing party
similarly notified. Any such contributing party shall not be liable to any party
seeking contribution on account of any settlement of any claim, action or
proceeding which was effected by such party seeking contribution on account of
any settlement of any claim, action or proceeding effected by such party seeking
contribution without the written consent of such contributing party. The
contribution provisions contained in this Section are intended to supersede, to
the extent permitted by law, any right to contribution under the Act, the
Exchange Act or otherwise available.
6. Default by an Underwriter.
-------------------------
6.1 Default Not Exceeding 10% of Firm Securities or Option Securities.
-----------------------------------------------------------------
If any Underwriter or Underwriters shall default in its or their obligations to
purchase the Firm Securities or the Option Securities, if exercised, hereunder,
and if the number of the Firm Securities or the Option Securities with respect
to which such default relates does not exceed in the aggregate 10% of the number
of Firm Securities or Option Securities which all Underwriters have agreed to
purchase hereunder, then such Firm Securities or Option Securities to which the
default relates shall be purchased by the non-defaulting Underwriters in
proportion to their respective commitments hereunder.
6.2 Default Exceeding 10% of Firm Securities or Option Securities. In
-------------------------------------------------------------
the event that such default relates to more than 10% of the Firm Securities or
Option Securities, you may in your discretion arrange for yourself or for
another party or parties to purchase such Firm Securities or Option Securities
to which such default relates on the terms contained herein. If within one
business day after such default relating to more than 10% of the Firm Securities
or Option Securities you do not arrange for the purchase of such Firm Securities
or Option Securities, then the Company shall be entitled to a further period of
one business day within which to procure another party or parties satisfactory
to you to purchase said Firm Securities or Option Securities on such terms. In
the event that neither you nor the Company arrange for the purchase of the Firm
Securities or Option Securities to which a default relates as provided in this
Section 6, this Agreement may be terminated by you or the Company (but only with
respect to the obligations relating to the Option Securities if such default
occurs after the Closing Date) without liability on the part of the Company
(except as provided in Section 3.15 and Section 5.1 hereof) or the several
Underwriters but nothing herein shall relieve a defaulting Underwriter of its
liability, if any, to the other several Underwriters and to the Company for
damages occasioned by its default hereunder.
6.3 Postponement of Closing Date. In the event that the Firm Securities
----------------------------
or Option Securities to which the default relates are to be purchased by the
non-defaulting Underwriters, or are to be purchased by another party or parties
as aforesaid, you or the Company shall have the right to postpone the Closing
Date or the Option Closing Date for a reasonable period, but not in any event
exceeding five business days, in order to effect whatever changes may thereby be
made necessary in the Registration
35
<PAGE>
Statement or the Prospectus or in any other documents and arrangements, and the
Company agrees to file promptly any amendment to the Registration Statement or
the Prospectus which in the opinion of counsel for the Underwriters may thereby
be made necessary. The term "Underwriter" as used in this Agreement shall
include any party substituted under this Section 6 with like effect as if it had
originally been a party to this Agreement with respect to such Securities.
7. Additional Covenants.
--------------------
7.1 Board Designee. For a period of not less than five years from the
--------------
Effective Date, the Company will recommend and use its best efforts to elect a
designee of the Representative, at the option of the Representative, either as a
member of or a non-voting advisor to the Board of Directors of the Company.
Such designee, if elected or appointed, shall attend meetings of the Board and
receive no more or less compensation than is paid to other non-management
directors of the Company and shall be entitled to receive reimbursement for all
reasonable costs incurred in attending such meetings, including, but not limited
to, food, lodging and transporta tion. To the extent permitted by law, the
Company will agree to indemnify the Representative and its designee for the
actions of such designee as a director of the Company. In the event the Company
maintains a liability insurance policy affording coverage for the acts of its
officers and directors, it will, if possible, include each of the Representative
and its designee as an insured under such policy. If the Representative does
not exercise its option to designate a member of the Company's Board of
Directors, the Representative shall nevertheless have the right to send a
representative (who need not be the same individual from meeting to meeting) to
observe each meeting of the Board of Directors. The Company agrees to give the
Representative written notice of each such meeting and to provide the
Representative with an agenda and minutes of the meeting no later than it gives
such notice and provides such items to the other directors.
7.2 [Intentionally Omitted.]
------------------------
7.3 Rule 144 Sales. During the five year period following the Effective
---------------
Date, the Representative shall have the right to purchase for the
Representative's account or to sell for the account of the Company's officers,
directors and Principal Stockholders any securities sold pursuant to Rule 144
under the Act. Each of the officers, directors and Principal Stockholders ("144
Sellers") will agree to consult with the Representative with regard to any such
sales and will offer the Representative the exclusive opportunity to purchase or
sell such securities on terms at least as favorable to the 144 Sellers as they
can secure elsewhere. If the Represen tative fails to accept in writing any
such proposal for sale by the 144 Sellers within three business days after
receipt of a notice containing such proposal, then the Representative shall have
no claim or right with respect to any such sales contained in any such notice.
If, thereafter, such proposal is modified in any material respect, the 144
Sellers shall adopt the same procedure as with respect to the original proposal.
7.4 Press Releases. Except as required by law, the Company will not
--------------
issue a press release or engage in any other publicity until 25 days after the
Effective Date without the Representative's prior written consent.
7.5 Form S-8 or any Similar Form. The Company shall not file a
----------------------------
Registration Statement on Form S-8 (or any similar or successor form) for the
registration of shares of Common Stock
36
<PAGE>
underlying stock options for a period of one year from the Effective Date
without the Representative's prior written consent.
7.6 Employment Agreements. On or before the Closing Date, Theodore Rosen
---------------------
and Richard H. Nelson shall have entered into employment agreements having terms
of five years from the Effective Date and containing such other terms and
conditions as shall have been approved by the Representative.
7.7 Compensation and Other Arrangements. The Company hereby agrees that,
-----------------------------------
for a period of three years from the Effective Date, all the compensation and
other arrangements between the Company and its officers, directors and
affiliates shall be approved by a Compensation Committee of the Company's Board
of Directors, a majority of the members of which shall have no affiliation or
other relationship with the Company other than as directors.
8. Representations and Agreements to Survive Delivery. Except as the context
--------------------------------------------------
otherwise requires, all representations, warranties and agreements contained in
this Agreement shall be deemed to be representations, warranties and agreements
at the Closing Dates and such representations, warranties and agreements of the
Underwriters and Company, including the indemnity agreements contained in
Section 5 hereof, shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of the Underwriters, the Company or
any controlling person, and shall survive termination of this Agreement or the
issuance and delivery of the Securities to the several Underwriters until the
earlier of the expiration of any applicable statute of limitations and the
seventh anniversary of the later of the Closing Date or the Option Closing Date,
if any, at which time the representations, warranties and agreements shall
terminate and be of no further force and effect.
9. Effective Date of This Agreement and Termination Thereof.
--------------------------------------------------------
9.1 Effective Date. This Agreement shall become effective on the
--------------
Effective Date at the time that the Registration Statement is declared
effective.
9.2 Termination. You shall have the right to terminate this Agreement at
-----------
any time prior to any Closing Date, (i) if any domestic or international event
or act or occurrence has materially disrupted, or in your opinion will in the
immediate future materially disrupt, general securities markets in the United
States; or (ii) if trading on the New York Stock Exchange, the American Stock
Exchange, The Boston Stock Exchange or in the over-the-counter market shall have
been suspended, or minimum or maximum prices for trading shall have been fixed,
or maximum ranges for prices for securities shall have been fixed, or maximum
ranges for prices for securities shall have been required on the over-the-
counter market by the NASD or by order of the Commission or any other government
authority having jurisdiction, or (iii) if the United States shall have become
involved in a war or major hostilities, or (iv) if a banking moratorium has been
declared by a New York State or federal authority, or (v) if a moratorium on
foreign exchange trading has been declared which materially adversely impacts
the United States securities market, or (vi) if the Company shall have sustained
a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage
or other calamity or malicious act which, whether or not such loss shall have
been insured, will, in your opinion, make it inadvisable to proceed with the
delivery of the Securities, or
37
<PAGE>
(vii) if Richard H. Nelson or Theodore Rosen shall no longer serve the Company
in his present capacities, or (viii) if any of the Acquisition Agreement, the
Conversion Agreement or the Preferred Stock Exchange Agreement is terminated, or
(ix) if the Company has breached any of its representations, warranties or
obligations hereunder, or (x) if the Representative shall have become aware
after the date hereof of such a material adverse change in the condition
(financial or otherwise), business, or prospects of the Company, Lehi, Plymouth
and Steamboat L.L.C., or such adverse material change in general market
conditions as in the Representative's judgment would make it impracticable to
proceed with the offering, sale and/or delivery of the Securities or to enforce
contracts made by the Representative for the sale of the Securities.
9.3 Notice. If you elect to prevent this Agreement from becoming
------
effective or to terminate this Agreement as provided in this Section 9, the
Company shall be notified on the same day as such election is made by you by
telephone or telecopy, confirmed by letter.
9.4 Expenses. In the event that this Agreement shall not be carried out
--------
for any reason whatsoever, within the time specified herein or any extensions
thereof pursuant to the terms herein, the obligations of the Company to pay the
expenses related to the transactions contemplated herein shall be governed by
Section 3.15 hereof.
9.5 Indemnification. Notwithstanding any contrary provision contained in
---------------
this Agreement, any election hereunder or any termination of this Agreement, and
whether or not this Agreement is otherwise carried out, the provisions of
Section 5 shall not be in any way affected by such election or termination or
failure to carry out the terms of this Agreement or any part hereof.
10. Miscellaneous.
-------------
10.1 Notices. All communications hereunder, except as herein otherwise
-------
specifically provided, shall be in writing and shall be mailed, delivered or
telecopied and confirmed
If to the Representative:
Gaines, Berland Inc.
712 Fifth Avenue - 21st Floor
New York, New York 10015
Attention: Alan Gaines
Copy to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Attention: David Alan Miller, Esq.
If to the Company:
U.S. Energy Systems, Inc.
515 North Flagler Drive
Suite 202
West Palm Beach, Florida 33401
Attention: President
Copy to:
Reid & Priest, LLP
40 West 57th Street
New York, New York 10019
Attention: Gregory Katz, Esq.
10.2 Headings. The headings contained herein are for the sole purpose of
--------
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Agreement.
10.3 Amendment. This Agreement may only be amended by a written
---------
instrument executed by each of the parties hereto.
10.4 Entire Agreement. This Agreement (together with the other
----------------
agreements and documents being delivered pursuant to or in connection with this
Agreement) constitutes the entire agreement of the parties hereto with respect
to the subject matter hereof, and supersedes all prior agreements and
understandings of the parties, oral and written, with respect to the subject
matter hereof.
10.5 Binding Effect. This Agreement shall inure solely to the benefit of
--------------
and shall be binding upon the Representative, the Underwriters, the Company and
the controlling persons, directors and officers referred to in Section 5 hereof,
and their respective successors, legal representatives and assigns, and no other
person shall have or be construed to have any legal or equitable right, remedy
or claim under or in respect of or by virtue of this Agreement or any provisions
herein contained.
10.6 Governing Law; Jurisdiction. This Agreement shall be governed by
---------------------------
and construed and enforced in accordance with the law of the State of New York,
without giving effect to conflicts of law. The Company hereby agrees that any
action, proceeding or claim against it arising out of, relating in any way to
this Agreement shall be brought and enforced in the courts of the State of New
York or the United States District Court for the Southern District of New York,
and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company hereby waives any objection to such exclusive
jurisdiction and that such courts represent an inconvenient forum. Any such
process or summons to be served upon the Company may be served by transmitting a
copy thereof by registered or certified mail, return receipt requested, postage
prepaid, addressed to it at the address set forth in Section 10.1 hereof. Such
mailing shall be deemed personal service and shall be legal and binding upon the
Company in any action, proceeding or claim. The Company and the Representative
agree that the prevailing party(ies) in any such action shall be entitled to
38
<PAGE>
recover from the other party(ies) all of its reasonable attorneys' fees and
expenses relating to such action or proceeding and/or incurred in connection
with the preparation therefor.
10.7 Execution in Counterparts. This Agreement may be executed in one or
-------------------------
more counterparts, and by the different parties hereto in separate counterparts,
each of which shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement, and shall become effective when one
or more counterparts has been signed by each of the parties hereto and delivered
to each of the other parties hereto.
10.8 Waiver, Etc. The failure of any of the parties hereto to at any
------------
time enforce any of the provisions of this Agreement shall not be deemed or
construed to be a waiver of any such provision, nor to in any way effect the
validity of this Agreement or any provision hereof or the right of any of the
parties hereto to thereafter enforce each and every provision of this Agreement.
No waiver of any breach, non-compliance or non-fulfillment of any of the
provisions of this Agreement shall be effective unless set forth in a written
instrument executed by the party or parties against whom or which enforcement of
such waiver is sought; and no waiver of any such breach, non-compliance or non-
fulfillment shall be construed or deemed to be a waiver of any other or
subsequent breach, non-compliance or non-fulfillment.
If the foregoing correctly sets forth the understanding between the
Representative, for itself and as Representative of the Underwriters listed in
Schedule 1 hereto, and the Company, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement between us.
Very truly yours,
U.S. ENERGY SYSTEMS, INC.
By:_______________________
Name: Richard H. Nelson
Title: President
Accepted as of the date first
above written.
New York, New York
GAINES, BERLAND INC.
(for itself and as Representative
of the Underwriters listed on
Schedule 1 hereto)
39
<PAGE>
By:______________________________
Name: Joseph Berland
Title: Chairman
40
<PAGE>
SCHEDULE 1
==========
U.S. ENERGY SYSTEMS, INC.
3,100,000 SHARES OF COMMON STOCK AND
3,100,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
UNDERWRITER NUMBER OF SHARES OF COMMON NUMBER OF WARRANTS
- ----------- STOCK TO BE PURCHASED TO BE PURCHASED
--------------------------- ------------------
Gaines, Berland Inc.
--------- ---------
3,100,000 3,100,000
41
<PAGE>
SCHEDULE 2
==========
NAME NUMBER OF SHARES LOCK-UP PERIOD
---- ---------------- ==============
42
<PAGE>
SCHEDULE 3
==========
OTHER COUNSEL OPINION SUBJECT
------------- ---------------
Reid & Priest, LLP The Company
Stanford Stoddard Smith
and Wood Quinn & Crapo L.C. Lehi
Brown, Olson & Wilson, P.C. and
Mark R. Dunn Plymouth
Jenkins & Frey Steamboat L.L.C.
NRG
43
<PAGE>
SCHEDULE 4
==========
ACCOUNTING FIRM COMFORT LETTER SUBJECT
--------------- ----------------------
Richard A. Eisner & Company, LLP The Company
Traveller Winn & Mower, PC Lehi
Price Waterhouse LLP Plymouth
Robison, Hill & Co., PC Steamboat L.L.C.
44
<PAGE>
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
U.S. ENERGY SYSTEMS, INC.
(ORIGINALLY INCORPORATED MAY 6, 1981
UNDER THE NAME OF COGENIC ENERGY SYSTEMS, INC.)
U.S. Energy Systems, Inc. a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
FIRST: The name of the corporation is U.S. Energy Systems, Inc.
(hereinafter referred to as the "Corporation").
SECOND: The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road in the City of Wilmington, County of New Castle.
The name of the Corporation's registered agent at such address is THE
CORPORATION SERVICE COMPANY.
THIRD: The purpose for which the Corporation is formed and the business or
objects to be transacted, carried on and promoted by it, is the design, sale,
construction, installation and finance of diesel and natural gas powered
electrical generating systems and to exercise and generally to enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations by the
general laws of the State of Delaware now or thereafter in force.
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is Thirty Five Million (35,000,000) shares of Common
Stock and the par value of each such share is One Cent ($0.01); and Five Million
(5,000,000) shares of Preferred Stock and the par value of each such share is
One Cent ($0.01). The Board of Directors shall determine, at its discretion,
all rights and privileges to be attached to such Preferred Stock.
The preferences, limitations, and relative rights of the above two
classes of stock shall be as follows:
A. PREFERRED STOCK.
---------------
(1) Shares of Preferred Stock may be issued in one or more series at
such time or times and for such consideration as the Board of Directors may
determine. Each such series shall be given a distinguishing designation.
All shares of any one series shall have preferences, limitations and
relative rights identical with those of other shares of the same series,
and, except to the extent otherwise provided in the description of such
series, with those of other shares of Preferred Stock.
<PAGE>
(2) Authority is hereby expressly granted to the Board of Directors to fix
from time to time, by resolutions, providing for the establishment and/or
issuance of any series of Preferred Stock, the designation of such series
and the preferences, limitations and relative rights of the shares of such
series, including the following:
(a) The distinctive designation and number of shares comprising
such series, which number may (except where otherwise provided by the
Board of Directors in creating such series) be increased or decreased
(but not below the number of shares then outstanding) from time to
time by action of the Board of Directors;
(b) The voting rights, if any, which shares of that series shall
have, which may be special, conditional, limited or otherwise;
(c) The rate of dividends, if any, on the shares of that series,
whether dividends shall be non-cumulative, cumulative to the extent
earned, partially cumulative or cumulative (and, if cumulative, from
which date or dates), whether rights, or in shares of the
corporation's capital stock, and the relative rights or priority, if
any, of payment of dividends on shares of that series over shares of
any other series or over the Common Stock;
(d) Whether the shares of that series shall be redeemable and, if
so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, the event of
events upon or after which they shall be redeemable, whether they
shall be redeemable at the option of the corporation, the shareholder
or another person, the amount per share payable in case of redemption
(which amount may vary under different conditions and at different
redemption dates), whether such amount shall be a designated amount or
an amount determined in accordance with a designated formula or by
reference to extrinsic data or events and whether such amount shall be
paid in cash, indebtedness, securities, or other property or rights,
including securities of any other corporation;
(e) Whether that series shall have a sinking fund for the
redemption or purchase of shares of that series and, if so, the terms
of and amounts payable into such sinking fund;
(f) The rights to which the holders of the shares of that series
shall be entitled in the event of voluntary or involuntary dissolution
or liquidation of the corporation, and the relative rights of
priority, if any, of payment of shares of that series over shares of
any other series or over the Common Stock in any such event;
-2-
<PAGE>
(g) Whether the shares of that series shall be convertible into
or exchangeable for cash, shares of stock of any other class or any
other series, indebtedness, or other property or rights, including
securities of another corporation, and, if so, the terms and
conditions of such conversion or exchange, including the rate or rates
of conversion or exchange, and whether such rate shall be a designated
amount or an amount determined in accordance with a designated formula
or by reference to extrinsic data or events, the data or dates upon or
after which they shall be convertible or exchangeable, the duration
for which they shall be convertible or exchangeable, and whether they
shall be convertible or exchangeable at the option of the corporation,
the shareholder or another person, and the method (if any) of
adjusting the rate of conversion or exchange in the event of a stock
split, stock dividend, combination of shares or similar event;
(h) Whether the issuance of any additional shares of such series,
or of any shares of any other series, shall be subject to restrictions
as to issuance, or as to the powers, preferences or rights of any such
other series; and
(i) Any other preferences, privileges and powers and relative,
participating, optional or other special rights and qualifications,
limitations or restrictions of such series, as the Board of Directors
may deem advisable and as shall not be inconsistent with the
provisions of this Article Fourth and to the full extent now or
hereafter permitted by the laws of the State of Delaware.
Before issuing any shares of a series of Preferred Stock the
Corporation shall deliver to the Secretary of State for Filing Certificate
of Incorporation, which shall be effective without shareholder action, that
set forth (a) the name of the corporation, (b) the text of the amendment
determining the terms of the series, (c) the data it was adopted and (d) a
statement that the amendment was duly adopted by the Board of Directors.
B. COMMON STOCK.
------------
(1) After the requirements with respect to preferential dividends, if
any, on any series of Preferred Stock (fixed pursuant to paragraph A(2) (c)
of this Article Fourth) shall have been met, and after the corporation
shall have complied with all requirements, if any, with respect to the
setting aside of sums in a sinking fund for the purchase or redemption of
shares of any series of Preferred Stock (fixed pursuant to paragraph
A(2)(e) of this Article Fourth), then, and not otherwise, the holders of
Common Stock shall receive, to the extent permitted by law and to the
extent the Board of Directors shall determine, such dividends as may be
declared from time to time by the Board of Directors.
(2) After distribution in full of the preferential amount, if any
(fixed pursuant to paragraph A(2)(f) of this Article Fourth), to be
distributed to the holders of any series of Preferred Stock, in the event
of the voluntary or involuntary dissolution or liquidation
-3-
<PAGE>
of the corporation, the holders of Common Stock (and the holders of any
series of Preferred Stock, if and to the extent provided pursuant to
paragraph A(2)(f) of this Article Fourth) shall be entitled to receive the
net assets of the corporation of whatever kind available for distribution.
(3) Except as may be otherwise required by law or by this Certificate
of Incorporation, each holder of Common Stock shall have one vote in
respect of each share of such stock held by him on all matters voted upon
by the stockholders.
Effective as of May 6, 1996, each 40 shares of the issued and outstanding
Common Stock, $.01 par value, of the Corporation shall be reverse split into one
(1) share of Common Stock of the Corporation. This reverse split shall affect
issued and outstanding shares and outstanding options, warrants and other rights
to acquire shares of Common Stock. The total number of shares authorized shall
not be amended and shall be as set forth in the Article FOURTH. Each record and
beneficial bolder of shares of Common Stock of the Corporation whose aggregate
number of shares held in one name and one account is less than 40 shall be
deemed by the Corporation to hold a fractional share of Common Stock. All such
fractional shares of the Corporation's Common Stock are hereby immediately
canceled. The holder of such fractional share shall be entitled to cash payment
in an amount equal to ten cents ($0.10) par (pre-reverse split) share upon
proper surrender of the holder's certificate or certificates.
FIFTH: The name and mailing address of incorporator is:
Name Mailing Address
---- ---------------
Peter Rothberg 280 Park Avenue
New York, New York 10017
SIXTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been
-4-
<PAGE>
made, be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
SEVENTH: All corporate powers shall be exercised by the Board of
Directors, except as otherwise provided by statute or by this Certificate of
incorporation, or any amendment thereof, or by the By-Laws. The By-Laws may be
adopted, amended or repealed by the Board of Directors of the Corporation,
except as otherwise provided by law, but any by-law made by the Board of
Directors is subject to amendment or repeal by the stockholders of the
Corporation.
EIGHTH: As authorized by Section 1202(b)(7) of subsection (b) of Section
102, Title 8 of the Delaware Code (the "Code"), as the same may be interpreted
or amended from time to time,no director shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided, however, that the foregoing 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 Code, or (iv) for any transaction from which
the director derived an improper personal benefit.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which
restates and integrates but does not further amend the provisions of the
Corporation's Certificate of Incorporation and having been duly adopted by the
Board of Directors of the Corporation in accordance with the provisions of
Section 245 of the General Corporation Laws of the State of Delaware, has been
executed this twentieth day of November, 1996 by Seymour J. Beder, its
authorized officer.
U.S. Energy Systems, Inc.
/s/ Seymour J. Beder
--------------------------
Title: Secretary
-5-
<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
December 2, 1997 until 5:00 p.m. Eastern Time on December 1, 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 and presentation and surrender of
this Warrant Certificate, 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 December 1, 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. Each Warrant not exercised on or
before the date called for in such notice shall become void, and all rights
thereunder shall terminate.
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 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.
<PAGE>
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
December __, 1996, by and among the Company, American Stock Transfer & Trust
Company, as Warrant Agent (the "Warrant Agent") and Gains, 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 Company
has covenanted and agreed that it will file a registration statement or a post-
effective amendment to its existing registration statement and will use its best
efforts to cause the same to become effective and to keep it current while any
of the Warrants are outstanding and exercisable. 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.
The 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
<PAGE>
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>
Exhibit 10.16
U.S. ENERGY SYSTEMS, INC.
515 N. Flagler Drive, Suite 202
West Palm Beach, Florida 33401
October 7, 1996
RE: Amendment to Security Agreement, Promissory Note and Financing Statement
between U.S. Energy Systems, Inc. (formerly U.S. Envirosystems, Inc.)
("Borrower") and Solvation, Inc., a Delaware corporation ("Lender"), dated
as of December 15, 1995 and as amended from time to time thereafter
(collectively, the "Loan Agreement")
Gentlemen:
This letter is to confirm our understanding that the maturity of the above-
referenced Loan Agreement has been extended to October 25, 1996 (the
"Extension"), such that the Due Date, as referred to in the Loan Agreement and
related documents, shall mean the earlier of the date of the closing of the
public offering of the Borrower's Common Stock and October 25, 1996. Further,
the Commitment period, as referred to in the Loan Agreement and related
documents, shall mean the period from and including the Closing Date to but not
including the earlier of (i) the date of the closing of the public offering of
the common stock of USE; (ii) USE's decision not to pursue a public offering of
its common stock; (iii) the decision by USE's underwriter that the public
offering of USE's common stock is not feasible by October 25, 1996; and (iv)
October 25, 1996. All other terms and conditions of Loan Agreement shall remain
in effect. All capitalized terms not defined herein shall have the meanings
ascribed to them in the Loan Agreement.
If the forgoing confirms your understanding, please indicate acceptance of the
Extension of the Anchor Bridge Loan by executing and returning to us the
enclosed copy of this letter by facsimile whereupon the Extension shall become
effective.
Sincerely,
U.S. ENERGY SYSTEMS, INC. PLYMOUTH ENVIROSYSTEMS, INC.
BY: /s/ Richard H. Nelson
BY: /s/ Richard H. Nelson
LEHI ENVIROSYSTEMS, INC.
BY: /s/ Richard H. Nelson
AGREED TO:
SOLVATION, INC.
BY: /s/ Bruce Schnelwar
<PAGE>
SECOND AMENDMENT TO
SECURITY AGREEMENT, PROMISSORY NOTE AND FINANCING
STATEMENT DATED JUNE 15, 1995
(and all collateral documents associated therewith)
All collectively hereinafter referred to as the "Anchor Bridge
Loan"
By and Between
ANCHOR CAPITAL COMPANY, LLC ("LENDER")
and
U.S. ENVIROSYSTEMS, INC. ("BORROWER")
AMENDMENT DATED MARCH 11, 1996
It is hereby recognized by Lender and Borrower that Borrower has not as of the
date hereinabove finalized its Registration Statement on Form SB-2 nor filed
same with the U.S. Securities and Exchange Commission ("SEC"). In addition it
is further recognized that the Anchor Bridge Loan shall become due and payable
on March 11, 1996 (the "Due Date"), such date being before the projected date of
Borrower's completing a public offering of Borrower's securities (the "Public
Offering"). Capitalized terms used herein shall have the same meaning as in the
Anchor Bridge Loan and the First Amendment unless otherwise noted herein.
In recognition of the foregoing facts, and in consideration of Lender's
agreement to extend the Due Date to May 31, 1996, Borrower and Lender agree that
the Anchor Bridge Loan shall be amended herewith as follows (Nothing contained
herein shall be deemed to be a waiver of any of Lender's or Borrower's rights
under the Anchor Bridge Loan and the First Amendment to the Anchor Bridge Loan):
A.) Borrower, immediately upon receipt thereof, shall provide Lender with
copies of all correspondence and executed agreements with any Gaines Berland,
Inc. (the "Underwriter"), Far West Capital (the "Far West Agreement"),
Westinghouse Credit Corporation (the Westinghouse Agreement") and Smith (the
"Smith Bridge" and the "Smith Preferred Agreement").
B.) The terms and conditions of the preferred stock issued to Lender on June
15, 1995 shall be amended to provide that:
(1) The preferred stock shall be convertible into 205,000 common shares.
The preferred stock conversion right shall be contemporaneous with the
Public Offering and shall continue for a period of twelve (12) months
subsequent to the Public Offering.
(2) In the event that the conversion ratio results in a price per share
which is greater than the final price per share of the Public Offering (the
Public Offering Price), then the conversion ratio for the preferred stock
retained by Anchor Capital Company, L.L.C. (as per Section B(3) below)
shall be determined using the Public Offering Price multiplied by 85%,
(3) The preferred stock certificate for 57,500 shares currently issued to
Lender shall be reissued by Borrower as follows:
<PAGE>
<TABLE>
<CAPTION>
# OF UNITS
ENTITY # PREFERRED SHARES CONVERTED TO
- ------ ------------------ ------------
<S> <C> <C>
ANCHOR CAPITAL
COMPANY, L.L.C. 34,000 146,250
AMERICAN GROUP OF 33,750
NY, INC. 13,500
KRISHNA K. MEHTA 10,000 25,000
</TABLE>
(4) Borrower shall perform all reasonable and necessary procedures to
ensure that none of the entities described above shall have their shares
subject to a Lock-up Agreement with the Underwriter.
(5) The preferred stock shall (at Lender's sole discretion) take on any
additional rights and preferences granted to Smith, except that,
(6) The Anchor Stock shall be registered in a shelf registration to be
filed within 30 days of the closing of the public offering.
C.) The Registration Statement shall be filed with the SEC before March 13,
1996. Borrower agrees to provide Lender with a copy of same before filing on or
before March 13, 1996. Borrower shall also provide evidence to Lender of the
filing of the Registration Statement on or before March 13, 1996.
D.) Borrower shall pay to Lender at the earlier to occur of May 31, 1996 or the
date of completion of the Public Offering, $660,00 plus such other amounts of
Default Interest and Late Payment Penalties as are calculated under the terms
and conditions of the Anchor Bridge Loan.
E.) The Anchor Bridge Loan shall remain the sole Senior Secured indebtedness of
Borrower.
F.) The due date of the Smith Bridge shall be extended contemporaneously
herewith to May 31, 1996. The Smith Bridge shall not have a due date earlier
than, nor be payable prior to, that of the Anchor Bridge Loan. Evidence of same
shall be provided to Anchor contemporaneously herewith.
G.) The Far West Agreement for the purchase of Geo 1 and Geo 1A shall be
extended to a date not earlier than May 31, 1996.
H.) The Westinghouse Agreement shall be extended to a date not earlier than May
31, 1996.
I.) In the event that Lender shall sell, assign or transfer all or any portion
of its interest in the Anchor Bridge Loan to any party, Lender shall still be
entitled to receive the Anchor Stock as per the terms and conditions of the
Anchor Bridge Loan, the First Amendment to the Anchor Bridge Loan and this
Second Amendment.
J.) In the event that Borrower does not fully comply with the terms and
conditions of this Second Amendment, Lender shall have the right to declare
Borrower in default of the Anchor Bridge Loan and shall proceed to protect its
interests under the terms of the Anchor Bridge Loan and this Second Amendment.
K.) Lender shall have the right to file this Second Amendment with all
governmental authorities which have a recorded lien related to the Anchor Bridge
Loan. The execution of this Second Amendment by Richard H. Nelson and Theodore
Rosen, President and Chairman of Borrower, respectively, shall signify that this
Second Amendment is binding upon Borrower and is as of the date firstabove
written in full force and effect upon Borrower.
-2-
<PAGE>
The execution of this Second Amendment does not signify a waiver by Lender or
Borrower of any of their rights, privileges, remedies and actions currently
existing under the Anchor Bridge Loan. Lender preserves all of its available
rights, remedies and actions under the Anchor Bridge Loan as well as the First
Amendment thereto and this Second Amendment.
Unless otherwise specifically stated herein, this Second Amendment does not
change or alter any of the terms and conditions of the Security Agreement,
Promissory Note and Financing Statement and all collateral documents associated
therewith dated June 15, 1995 and the First Amendment thereto between Borrower
and Lender.
Anchor Capital Company, LLC
/s/ Gregory N. Senkevitch
- --------------------------------------
By: Gregory N. Senkevitch -- President
Date: 3/11/96
US Envirosystems, Inc.
/s/ Theodore Rosen /s/ Richard H. Nelson
- ------------------------------------- ----------------------------------
By: Theodore Rosen -- Chairman By: Mr. Richard H. Nelson -- President
Date: 3/11/96 Date: 3/11/96
-3-
<PAGE>
Exhibit 10.18
U.S. ENERGY SYSTEMS, INC.
515 N. Flagler Drive, Suite 202
West Palm Beach, Florida 33401
November 1, 1996
RE: Amendment to Security Agreement, Promissory Note and Financing Statement
between U.S. Energy Systems, Inc. (formerly U.S. Envirosystems, Inc.)
("Borrower") and Anchor Capital Company, L.L.C. ("Lender"), dated as of
June 15, 1995 and as amended from time to time thereafter (collectively,
the "Anchor Bridge Loan")
Gentlemen:
This letter is to confirm our understanding that the maturity of the above-
referenced Loan Agreement has been extended to November 29, 1996 (the
"Extension"), such that the Due Date, as referred to in the Loan Agreement and
related documents, shall mean the earlier of the date of the closing of the
public offering of the Borrower's Common Stock and November 29, 1996. All
other terms and conditions of the Anchor Bridge Loan, including all amendments
thereto, shall remain in effect. All capitalized terms not defined herein
shall have the meanings ascribed to them in the Anchor Bridge Loan.
If the foregoing confirms your understanding, please indicate acceptance of
the Extension of the Anchor Bridge Loan by executing and returning to us the
enclosed copy of this letter by facsimile whereupon the Extension shall become
effective.
Sincerely,
/s/ Theodore Rosen
Chairman
U.S. Energy Systems, Inc.
ACCEPTED:
ANCHOR CAPITAL COMPANY, L.L.C.
BY: /s/ Michael A. Gales
Title: Chairman and CEO
<PAGE>
EXHIBIT 10.19
PLEDGE AGREEMENT
PLEDGE AGREEMENT, dated as of December 15, 1995, made by U.S. ENVIROSYSTEMS,
INC., a Delaware corporation (the "Pledgor"), in favor of SOLVATION, Inc., a
Delaware corporation, (the "Lender").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, pursuant to the Loan Agreement, dated as of December, 1995 (as
amended, supplemented, restated or otherwise modified from time to time, the
"Loan Agreement"), among the Pledgor, Lehi Envirosystems, Inc., a Delaware
corporation ("Lehi"), Plymouth Envirosystems, Inc., a Delaware corporation
("Plymouth" and, collectively with Lehi and the Pledgor, the "Borrowers"), and
the Lender, the Lender has agreed to extend credit to and for the account of the
Borrowers upon the terms and subject to the conditions set forth therein;
WHEREAS, the Pledgor is the legal and beneficial owner of the shares of
Pledged Stock (as hereinafter defined) listed on Schedule I hereto issued by
Lehi and Plymouth; and
WHEREAS, it is a condition precedent to the obligation of the Lender to make
its extensions of credit to and for the account of the Borrowers under the Loan
Agreement that the Pledgor shall have executed and delivered this Pledge
Agreement to the Lender;
NOW, THEREFORE, in consideration of the premises and to induce the Lenders to
enter into the Loan Agreement and to induce the Lenders to make loans to the
Borrowers under the Loan Agreement, the Pledgor hereby agrees with the Lender as
follows:
1. Defined Terms. Unless otherwise defined herein, terms which are defined in
-------------
the Loan Agreement and used herein are so used as so defined, and the following
terms shall have the following meanings:
"Collateral" means the Pledged Stock and all
----------
Proceeds.
"Lehi Stock" means Pledged Stock issued by Lehi.
----------
<PAGE>
2
"Obligations" means the unpaid principal amount of, and interest on, the Notes
-----------
and all other obligations and liabilities of the Borrowers to the Lender,
whether direct or indirect, absolute or contingent, due or to become due, or now
existing or hereafter incurred, which may arise under, out of, or in connection
with, the Loan Agreement, the Note, or this Pledge Agreement or any other Loan
Document, and any other document executed and delivered in connection therewith
or herewith, whether on account of principal, interest, reimbursement
obligations, fees, indemnities, costs, expenses (including, without limitation,
all fees and expenses of counsel to the Lender) or otherwise.
"Pledge Agent" means the pledge agent for the benefit of the holders of the
------------
Convertible Debentures.
"Pledge Agreement" means this Pledge Agreement, as amended, restated,
----------------
supplemented or otherwise modified from time to time.
"Pledged Stock" means the shares of capital stock of each of Lehi and Plymouth
-------------
listed on Schedule I hereto, and all capital stock of each of Lehi and Plymouth
at any time hereafter owned by the Pledgor, together with all stock
certificates, and all warrants, options or other rights to acquire shares of the
capital stock of Lehi or Plymouth whether now or at any time hereafter owned by
the Pledgor.
"Plymouth Stock" means Pledged Stock issued by Plymouth.
--------------
"Proceeds" means all "proceeds" as such term is defined in Section 9-306(1) of
--------
the UCC on the date hereof and, in any event, shall include, without limitation,
all dividends or other income from the Pledged Stock, collections thereon or
distributions with respect thereto and proceeds from any sale or other
disposition thereof.
"UCC" means the Uniform Commercial Code from time to time in effect in the
State of New York; provided, however, that if by reason of mandatory provisions
-------- -------
of law, the perfection or the effect of perfection or non-perfection of the
security interest in any Collateral is governed by the Uniform Commercial Code
as in effect in a jurisdiction other than New York, "UCC" means the Uniform
Commercial Code as in effect in such other jurisdiction for purposes of the
provisions hereof relating to such perfection or effect of perfection or non-
perfection.
2. Pledge; Grant of Security Interest. The Pledgor hereby pledges, sets over,
----------------------------------
and confirms unto the Lender, all the Pledged Stock, has heretofore delivered to
<PAGE>
3
the Pledge Agent as agent of, and bailee for, the Lender in case of Lehi Stock,
and to Anchor, as agent of and bailee for, the Lender in case of Plymouth Stock,
and hereby grants to the Lender, a security interest in the Collateral, as
collateral security for the prompt and complete payment and performance when due
(whether at the stated maturity, by acceleration or otherwise) of the
Obligations.
3. Stock Powers. The Pledgor shall deliver to the Lender on the Closing Date,
------------
and at any time thereafter upon the Lender's request or as otherwise provided
herein, stock powers covering the certificates representing the Pledged Stock,
duly executed in blank by the Pledgor with, if the Lender so requests, signature
guaranteed.
4. Representations and Warranties. The Pledgor represents and warrants that:
------------------------------
(a) the shares of Pledged Stock of Lehi and Plymouth listed on Schedule I
constitute all the issued and outstanding shares of all classes of the capital
stock of Lehi and Plymouth, as the case may be, and there are no outstanding
commitments to issue any additional shares of the capital stock of Lehi or
Plymouth or any securities convertible into or exchangeable for such shares;
(b) all the shares of the Pledged Stock listed on Schedule I have been duly
and validly issued and are fully paid and nonassessable;
(c) the Pledgor is the record and beneficial owner of, and has good title to,
the Pledged Stock listed on Schedule I, free of any and all Liens or options in
favor of, or claims of, any other Person, except (i) the Lien created by this
Pledge Agreement (ii) the security interest of Anchor in Plymouth Stock and
(iii) the security interest of Anchor and the holders of the Convertible
Debentures in Lehi Stock;
(d) all certificates representing Lehi Stock are as of the date hereof held by
the Pledge Agent pursuant to a pledge agreement between Pledgor and the Pledge
Agent, for the benefit of the holders of the Convertible Debentures, and all
certificates representing Plymouth Stock are as of the date hereof held by
Anchor pursuant to the pledge agreement between the Pledgor and Anchor;
(e) upon delivery of (i) the stock certificates evidencing the Lehi Stock
listed on Schedule I to the Lender or to the Pledge Agent and the acknowledgment
by the Pledge Agent that it holds the Lehi Stock as agent of, and bailee for,
the Lender, and, following the payment in full of all obligations under the
Convertible Debentures
<PAGE>
4
and receipt by Anchor of the Lehi Stock, the acknowledgment by Anchor that it
holds the Lehi Stock as agent of, and bailee for, the Lender, and (ii) the stock
certificates evidencing the Plymouth Stock listed on Schedule I to the Lender or
to Anchor and acknowledgment by Anchor that it holds the Plymouth Stock as agent
of, and bailee for, the Lender, the Lien granted pursuant to this Agreement will
constitute a valid, perfected Lien on the Collateral, enforceable as such
against all creditors of the Pledgor and any Persons purporting to purchase any
Collateral from the Pledgor, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and by general equitable principles.
5. Covenants. The Pledgor covenants and agrees with the Lender, so long as
---------
this Pledge Agreement is in effect, that:
(a) If the Pledgor shall, as a result of its ownership of the Pledged Stock,
become entitled to receive or shall receive any stock certificate (including,
without limitation, any certificate representing a stock dividend or a
distribution in connection with any reclassification, increase or reduction of
capital or any certificate issued in connection with any reorganization), option
or rights, whether in addition to, in substitution of, as a conversion of, or in
exchange for any shares of the Pledged Stock, or otherwise in respect thereof,
the Pledgor shall accept the same as the agent of the Lender, or, as the case
may be, Anchor or the Pledge Agent, hold the same in trust for the Lender and
deliver the same forthwith to the Lender, (or, in the case of Plymouth Stock, to
Anchor as agent of, and bailee for, the Lender and in the case of Lehi Stock, to
the Pledge Agent as agent of, and bailee for, the lender) duly endorsed by the
Pledgor in blank or accompanied by a stock power covering such certificate duly
executed in blank by the Pledgor and with, if the Lender so requests, signature
guaranteed, to be held by the Lender, subject to the terms hereof, as additional
collateral security for the Obligations. Any sums paid upon or in respect of the
Pledged Stock upon the liquidation or dissolution of the Lehi or Plymouth shall
be paid over to the Lender to be held by it hereunder as additional collateral
security for the Obligations, and in case the distribution of capital shall be
made on or in respect of the Pledged Stock or any property shall be distributed
upon or with respect to the Pledged Stock pursuant to the recapitalization or
reclassification of the capital of Lehi or Plymouth or pursuant to the
reorganization thereof, the property so distributed shall be delivered to the
Lender (or, in the case of Plymouth Stock, to Anchor as agent of, and bailee
for, the Lender and in the case of Lehi Stock, to the Pledge
<PAGE>
5
Agent as agent of, and bailee for, the Lender) to be held by it hereunder as
additional collateral security for the Obligations. If any sums of money or
property so paid or distributed in respect of the Pledged Stock shall be
received by the Pledgor, the Pledgor shall, until such money or property is paid
or delivered to the Lender (or, in the case of Plymouth Stock, as agent of, and
bailee for, the Lender and in the case of Lehi Stock, to the Pledge Agent as
agent of, and bailee for, the Lender), hold such money or property in trust for
the Lender, or, as the case may be, Anchor or the Pledge Agent, segregated from
other funds of the Pledgor, as additional collateral security for the
Obligations.
(b) Without the prior written consent of the Lender, the Pledgor will not (i)
vote to enable, or take any other action to permit, Lehi or Plymouth to issue
any stock or other equity securities of any nature or to issue any other
securities convertible into or granting the right to purchase or exchange for
any stock or other equity securities of any nature of Lehi or Plymouth, (ii)
sell, assign, transfer, exchange, or otherwise dispose of, or grant any option
with respect to, the Collateral, or (iii) create, incur or permit to exist any
Lien or option in favor of, or any claim of any Person with respect to, any of
the Collateral, or any interest therein, except for the Lien provided for by
this Pledge Agreement and except to the extent permitted pursuant to Section
5.11 of the Loan Agreement. The Pledgor will defend the right, title and
interest of the Lender in and to the Collateral against the claims and demands
of all Persons whomsoever.
(c) At any time and from time to time, upon the written request of the Lender,
and at the sole expense of the Pledgor, the Pledgor will promptly and duly
execute and deliver such further instruments and documents and take such further
actions as the Lender may reasonably request for the purposes of obtaining or
preserving the full benefits of this Pledge Agreement and of the rights and
powers herein granted. If any amount payable under or in connection with any of
the Collateral shall be or become evidenced by any promissory note, other
instrument or chattel paper, such note, instrument or chattel paper shall be
promptly delivered to the Lender or, in the case of Plymouth Stock, Anchor as
agent of, and bailee for, the Lender and in the case of Lehi Stock, to the
Pledge Agent as agent of, and bailee for, the Lender, duly endorsed in a manner
satisfactory to the Lender, to be held as Collateral pursuant to this Agreement.
(d) The Pledgor agrees to pay, and to save the Lender harmless from, any and
all liabilities with respect to, or resulting from any delay in paying, any and
<PAGE>
6
all stamp, excise, sales or other taxes which may be payable or determined to be
payable with respect to any of the Collateral or in connection with any of the
transactions contemplated by this Pledge Agreement.
6. Cash Dividends; Voting Rights. Unless an Event of Default shall
-----------------------------
have occurred and be continuing, the Pledgor shall be permitted to receive and
apply all cash dividends paid by Lehi or Plymouth, in respect of the Pledged
Stock and to exercise all voting and corporate rights with respect to the
Pledged Stock, provided, however, and that no vote shall be cast or corporate
-------- -------
right exercised or other action taken which, in the Lender's reasonable
judgment, would impair the Collateral or which would be inconsistent with or
result in any violation of any provision of the Loan Agreement, the Note or any
other Loan Document.
7. Remedies.
--------
(a) If an Event of Default shall occur and be continuing, the Lender may
exercise, in addition to all other rights and remedies granted in this Pledge
Agreement and in any other instrument or agreement securing, evidencing or
relating to the Obligations, all rights and remedies of a secured party under
the UCC.
(b) If an Event of Default shall occur and be continuing and the Lender shall
give notice to the Pledgor of its intent to exercise such rights, (i) the Lender
shall have the right to receive any and all cash dividends paid in respect of
the Pledged Stock subject to Section 5 of the Intercreditor Agreement, and make
application thereof to the Obligations in such order as provided under Section
7(e) hereof and (ii) subject to the Intercreditor Agreement, upon request of the
Lender, all shares of the Pledged Stock shall be registered in the name of the
Lender or its nominee, and the Lender or its nominee may thereafter exercise (A)
all voting, corporate and other rights pertaining to such shares of the Pledged
Stock at any meeting of shareholders of Lehi or Plymouth or otherwise and (B)
any and all rights, privileges or options pertaining to such shares of the
Pledged Stock as if it were the absolute owner thereof (including, without
limitation, the right to exchange at its discretion any and all of the Pledged
Stock upon the merger, consolidation, reorganization, recapitalization or other
fundamental change in the corporate structure of Lehi or Plymouth, or upon the
exercise by the Pledgor or the Lender of any right, privilege or option
pertaining to such shares of the Pledged Stock, and in connection therewith, the
right to deposit and deliver any and all of the Pledged Stock with any
committee, depositary, transfer agent, registrar or other designated
<PAGE>
7
agency upon such terms and conditions as it may determine), all without
liability except to account for property actually received by it and except for
its gross negligence or willful misconduct.
(c) If an Event of Default shall occur and be continuing, the Lender, without
demand of performance or other demand, presentment, protest, advertisement or
notice of any kind (except any notice required by law referred to below) to or
upon the Pledgor, Lehi, Plymouth or any other Person (all and each of which
demands, defenses, advertisements and notices are hereby waived to the extent
permitted by applicable law), may, subject to the Intercreditor Agreement, in
such circumstances forthwith collect, receive, appropriate and realize upon the
Collateral, or any part thereof, and/or may forthwith sell, assign, give option
or options to purchase or otherwise dispose of and deliver the Collateral or any
part thereof (or contract to do any of the foregoing), in one or more parcels at
public or private sale or sales, in the over-the-counter market, at any
exchange, broker's board or office of the Lender or elsewhere upon such terms
and conditions as it may deem advisable and at such prices as it may deem best,
for cash or on credit or for future delivery without assumption of any credit
risk. The Lender shall be authorized at any such sale (if it deems it advisable
to do so) to restrict the prospective bidders or purchasers to persons who will
represent and agree that they are purchasing the Collateral for their own
account for investment and not with a view to the distribution or sale thereof,
and upon consummation of any such sale the Lender shall have the right to
assign, transfer and deliver to the purchaser or purchasers thereof the
Collateral so sold. The Lender shall have the right upon any such public sale or
sales, and, to the extent permitted by law, upon any such private sale or sales,
to purchase the whole or any part of the Collateral so sold. Each such purchaser
at any such sale shall hold the property sold absolutely and free from Lien or
other claim or right of whatever kind on the part of the Pledgor, including any
equity or right of redemption of the Pledgor, and the Pledgor, to the full
extent permitted by applicable law, hereby specifically waives all rights of
redemption, stay and appraisal which the Pledgor now has or may have at any time
in the future under any law now existing or hereafter enacted or adopted (as
well as any rights to exoneration, subrogation or reimbursement arising at law,
in equity or otherwise).
(d) If any notice of a proposed sale or other disposition of Collateral shall
be required by law, such notice shall be deemed reasonable and proper if given
at least 10 business days before such sale or other disposition and, in the case
of a proposed public sale, such
<PAGE>
8
notice shall state the time and place fixed for such sale. All waivers by the
Pledgor of rights (including rights to notice), and all rights and remedies
afforded the Lender herein, and all other provisions of this Pledge Agreement,
are expressly made subject to any applicable mandatory provisions of law
limiting, or imposing conditions (including conditions as to reasonableness)
upon, such waivers or the effectiveness thereof or any such rights and remedies.
Any sale or other disposition of the Collateral and the possession thereof by
the Lender shall be in compliance with all provisions of applicable law
(including applicable securities laws and applicable provisions of the UCC). The
Pledgor shall remain liable for any deficiency if the proceeds of any sale or
other disposition of Collateral are insufficient to pay the Obligations and the
reasonable fees and expenses of any counsel or other agency employed by the
Lender to collect such deficiency.
(e) The Proceeds of any sale of, or other realization upon, Collateral
pursuant to or as contemplated by this Pledge Agreement, as well as any
Collateral consisting of cash, shall be promptly applied by the Lender, subject
to Section 5 of the Intercreditor Agreement, as follows:
FIRST, to payment of all reasonable costs and expenses incurred by the Lender
in connection with such sale or incidental to the care or safekeeping of any of
the Collateral or the rights of the Lender hereunder or otherwise in connection
with the Lender's rights under this Pledge Agreement, including, but not limited
to, all court costs and the reasonable fees, expenses and other charges of its
agents and legal counsel, the repayment of all advances made by the Lender
hereunder on behalf of the Pledgor and any other costs or expenses incurred in
connection with the exercise of any right or remedy hereunder;
SECOND, to the payment in full of the Obligations; and
THIRD, to the Pledgor, its successors and assigns, or as a court of competent
jurisdiction may otherwise direct.
(f) The rights of the Lender hereunder shall not be conditioned or contingent
upon the pursuit by the Lender of any right or remedy against the Pledgor or
Lehi or Plymouth or any other Person which may be or become liable in respect of
all or any part of the Obligations or against any collateral security therefor
or right of offset with respect thereto. Neither the Lender nor any Lender shall
be liable for any failure to demand, collect or realize upon all or any part of
the Collateral or for any delay in doing
<PAGE>
9
so, nor shall the Lender be under any obligation to sell or otherwise dispose of
any Collateral upon the request of the Pledgor or any other Person or to take
any other action whatsoever with regard to the Collateral or any part thereof.
The Pledgor waives all claims, damages and demands it may acquire against the
Lender arising out of the exercise by it of any rights hereunder, except to the
extent of any gross negligence, bad faith or willful misconduct on the part of
the Lender.
8. Lender Appointed Attorney-in-Fact; Proxy.
----------------------------------------
(a) Effective upon the occurrence and during the continuance of an Event of
Default, the Pledgor hereby irrevocably appoints the Lender as the Pledgor's
attorney-in-fact for the purpose of carrying out the provisions of this Pledge
Agreement and taking any action and executing any instrument which the Lender
may deem necessary or advisable to accomplish the purposes hereof, which
appointment is irrevocable and coupled with an interest. Without limiting the
generality of the foregoing, the Lender shall have the right, upon the
occurrence and during the continuance of an Event of Default, with full power of
substitution either in the Lender's name or in the name of the Pledgor, to (i)
ask for, demand, sue for, collect, receive receipt and give acquittance for any
and all moneys due or to become due and under and by virtue of any Collateral,
(ii) endorse checks, drafts, orders and other instruments for the payment of
money payable to the Pledgor representing any Proceeds and give full discharge
for the same, (iii) settle, compromise, prosecute or defend any action, claim or
proceeding with respect to any of the foregoing and (iv) sell, assign, endorse,
pledge, transfer and make any agreement respecting, or otherwise deal with, any
of the Collateral.
(b) Effective upon the occurrence and during the continuance of an Event of
Default, the Pledgor hereby irrevocably appoints the Lender as its proxy, with
full power of substitution, to exercise all voting rights, including voting and
other rights with respect to the Pledged Stock, at any annual or special meeting
of the stockholders of the issuer thereof, or any adjournment or postponement
thereof, or by written consent in lieu of meeting, or otherwise. The foregoing
appointment is irrevocable and coupled with an interest.
(c) Nothing contained in this Agreement shall be construed as requiring or
obligating the Lender to make any commitment or to make any inquiry as to the
nature or sufficiency of any payment received by the Lender, or to present or
file any claim or notice, or to take any action with respect to the Collateral
or any part thereof or the
<PAGE>
10
moneys due or to become due on or with respect thereto or any property covered
thereby, and no action taken by the Lender or omitted to be taken with respect
to the Collateral or any part thereof shall give rise to any defense,
counterclaim or offset in favor of the Pledgor or to any claim or action against
the Lender, except in the case of the gross negligence or willful misconduct of
the Lender.
9. Registration Rights: Private Sales.
----------------------------------
(a) If the Lender shall determine to exercise its right to sell any or all of
the Pledged Stock pursuant to Section 7 hereof, and if in the reasonable opinion
of the Lender it is necessary or advisable to have the Pledged Stock, or that
portion thereof to be sold, registered under the provisions of the Securities
Act of 1933, as amended (the "Securities Act"), the Pledgor will cause the
Borrower whose stock is to be so registered to (i) execute and deliver, and use
its best efforts to cause the directors and officers of Lehi or Plymouth, as the
case may be, to execute and deliver, all such instruments and documents, and do
or cause to be done all such other acts as may be, in the reasonable opinion of
the Lender, necessary or advisable to register the Pledged Stock, or that
portion thereof to be sold, under the provisions of the Securities Act, (ii) use
its best efforts to cause the registration statement relating thereto to become
effective and to remain effective for a period of one year from the date of the
first public offering of the Pledged Stock, or that portion thereof to be sold,
and (iii) make all amendments thereto and/or to the related prospectus which, in
the reasonable opinion of the Lender, are necessary or advisable, all in
conformity with the requirements of the Securities Act and the rules and
regulations of the Securities and Exchange Commission applicable thereto. The
Pledgor agrees to use its best efforts to cause Lehi or Plymouth, as the case
may be, whose stock is to be so registered to comply with the provisions of the
securities or "Blue Sky" laws of any and all jurisdictions which the Lender
shall reasonably designate, and use its best efforts to cause Lehi or Plymouth,
as the case may be, to make available to its security holders, as soon as
practicable, an earnings statement (which need not be audited) which will
satisfy the provisions of Section ll(a) of the Securities Act.
(b) The Pledgor recognizes that the Lender may be unable to effect a public
sale of any or all of the Pledged Stock, by reason of certain prohibitions
contained in the Securities Act and applicable state securities laws or
otherwise, or the Lender may determine that in its judgment that a private sale
is advisable, and may be compelled to resort to one or more private sales
thereof to a group of purchasers restricted in number, nature of
<PAGE>
11
business and investment intention for the purposes of complying with the
Securities Act, which group will be obliged to agree, among other things, to
acquire such securities for their own account for investment and not with a view
to the distribution or resale thereof. The Pledgor acknowledges and agrees that
any such private sale may result in prices and other terms less favorable than
if such sale were a public sale and, notwithstanding such circumstances, agrees
that any such private sale shall be deemed to have been made in a commercially
reasonable manner. The Lender shall be under no obligation to delay a sale of
any of the Pledged Stock for the period of time necessary to permit Lehi or
Plymouth, as the case may be, whose stock is to be so registered to register
such securities for public sale under the Securities Act, or under applicable
state securities laws, even if such Issuer would agree to do so.
(c) The Pledgor further agrees to use its best efforts to do or cause to be
done all such other acts as may be necessary to make such sale or sales of all
or any portion of the Pledged Stock pursuant to this Section 9 valid and binding
and in compliance with any and all other applicable Requirements of Law. The
Pledgor further agrees that a breach of any of the covenants contained in this
Section 9 will cause irreparable injury to the Lender, that the Lender have no
adequate remedy at law in respect of such breach and, as a consequence, that
each and every covenant contained in this Section 9 shall be specifically
enforceable against the Pledgor, and the Pledgor hereby waives and agrees not to
assert any defenses against an action for specific performance of such
covenants.
10. Security Interest Absolute. All rights of the Lender hereunder, the grant
--------------------------
of the security interest in the Collateral and all obligations of the Pledgor
hereunder shall be absolute and unconditional irrespective of (i) any lack of
validity or enforceability of the Obligations, the Loan Agreement or any other
Loan Document or any other agreement or instrument relating to any of the
foregoing, (ii) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Obligations, or any other amendment or waiver
of or any consent to any departure from the Loan Agreement or any other Loan
Document or any other agreement or instrument relating to any of the foregoing,
(iii) failure by the Lender to take steps to perfect or maintain perfected its
security interest in, or to preserve its rights to, any of the Collateral, (iv)
any exchange, release or non-perfection of any other collateral, or any release
or amendment or waiver of or consent to or departure from any guaranty, for all
or any of the Obligations, (v) the disallowance under Section 502 of the
Bankruptcy Code of all or any portion of the claims of the
<PAGE>
12
Lender for repayment of the Obligations or (vi) any other circumstance which
might otherwise constitute a legal or equitable defense available to, or a legal
or equitable discharge of, the Pledgor with respect to the Obligations or with
respect to this Agreement other than the indefeasible payment in full of all of
the Obligations.
11. Amendments etc. with respect to the Obligations. The Pledgor shall remain
-----------------------------------------------
obligated hereunder, and the Collateral shall remain subject to the Lien granted
hereby, notwithstanding that, without any reservation of rights against the
Pledgor, and without notice to or further assent by the Pledgor, any demand for
payment of any of the Obligations made by the Lender may be rescinded by the
Lender, and any of the Obligations continued, and the Obligations, or the
liability of the Borrowers or any other Person upon or for any part thereof, or
any collateral security or guarantee therefor in right of offset with respect
thereto, may, from time to time, in whole or in part, be renewed, extended,
amended, modified, accelerated, compromised, waived, surrendered or released
by the Lender or any Lender, and the Loan Agreement, the Note, the other Loan
Documents and any other documents executed and delivered in connection therewith
may be amended, modified, supplemented or terminated, in whole or part, as the
Lender may deem advisable from time to time, and any guarantee, right of offset
or other collateral security at any time held by the Lender for the payment of
the Obligations may be sold, exchanged, waived, surrendered or released. The
Lender shall have no obligation to protect, secure, perfect or insure any other
Lien at any time held by it as security for the Obligations or any property
thereto. The Pledgor waives any and all notice of the creation, renewal,
extension or accrual of any of the Obligations and notice of or proof of
reliance by the Lender upon this Agreement; the Obligations, and any of them,
shall conclusively be deemed to have been created, contracted or incurred in
reliance upon this Pledge Agreement; and all dealings between Lehi, Plymouth and
the Pledgor, on the one hand, and the Lender, on the other, shall likewise be
conclusively presumed to have been had or consummated in reliance upon this
Pledge Agreement. The Pledgor waives diligence, presentment, protest, demand for
payment and notice of default or nonpayment to or upon the Pledgor or any other
Person with respect to the Obligations.
12. Limitation on Duties Regarding Collateral. The Lender's sole duty with
-----------------------------------------
respect to the custody, safekeeping and physical preservation of the Collateral
in its possession, under Section 9-207 of the UCC or otherwise, shall be to deal
with it in the same manner as the Lender would deal with similar securities and
property for its own account. Neither the Lender nor any of its directors,
<PAGE>
13
officers, employees or Lenders shall be liable for failure to demand, collect or
realize upon any of the Collateral or for any delay in doing so or shall be
under any obligation to sell or otherwise dispose of any Collateral upon the
request of the Pledgor or otherwise.
13. Powers Coupled with an Interest. All authorizations and agencies herein
-------------------------------
contained with respect to the Collateral are irrevocable and constitute powers
coupled with an interest.
14. Severability. Any provision of this Pledge Agreement which is prohibited
------------
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
15. Paragraph Headings. The paragraph headings used in this Pledge Agreement
------------------
are for convenience of reference only and are not to affect the construction
hereof or be taken into consideration in the interpretation hereof.
16. No Waiver; Cumulative Remedies. The Lender shall not by any act (except by
------------------------------
a written instrument pursuant to Section 18 hereof), delay, indulgence, omission
or otherwise be deemed to have waived any right or remedy hereunder or to have
acquiesced in any Default or Event of Default or in any breach of any of the
terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the Lender, any right, power or privilege hereunder
shall operate as a waiver thereof. No single or partial exercise of any right,
power or privilege hereunder shall preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. A waiver by the
Lender of any right or remedy hereunder on any occasion shall not be construed
as a bar to any right or remedy which the Lender would otherwise have on any
future occasion. The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any rights or remedies
provided by law.
17. Waivers and Amendments; Successors and Assigns. None of the terms or
----------------------------------------------
provisions of this Pledge Agreement may be waived, amended, supplemented or
otherwise modified except by a written instrument executed by the Pledgor and
the Lender, provided that any provision of this Pledge Agreement may be waived
--------
by the Lender in a written letter or agreement executed by the Lender or by
telex or facsimile transmission from the Lender. This Pledge
<PAGE>
14
Agreement shall be binding upon the successors and assigns of the Pledgor and
shall inure to the benefit of the Lender and the Lenders and their respective
successors and assigns.
18. Notices. Notices by the Lender to be effective shall be in writing and
-------
provided as set forth in the Loan Agreement. The Pledgor and the Borrower may
change their respective addresses and transmission numbers by written notice
to the Lender.
19. Irrevocable Authorization and Instruction to Issuers. The Pledgor hereby
----------------------------------------------------
authorizes and instructs Lehi and Plymouth to comply with any instruction
received by it from the Lender in writing that (a) states that an Event of
Default has occurred and is continuing and (b) is otherwise in accordance with
the terms of this Pledge Agreement, without any other or further instructions
from the Pledgor, and the Pledgor agrees that the Borrower shall be fully
protected in so complying.
20. Duration of Agreement: Release of Security. This Pledge Agreement and the
------------------------------------------
security interests granted hereunder shall terminate when all of the Obligations
(to the extent then capable of being paid) have been fully paid and performed or
otherwise satisfied and the Lender has no further Commitment to make the Loans
or perform any other obligations under the Loan Agreement or any Loan Document.
The release of Collateral or reassignment of rights to the Pledgor upon the
termination of this Agreement shall be without recourse to or warranty by the
Lender and shall be made by the Lender at the expense of the Pledgor. Upon
request of the Pledgor at any time following such termination, the Lender will
deliver (at the sole cost and expense of the Pledgor) to the Pledgor all
certificates and instruments representing or evidencing the Pledged Stock,
together with all other Collateral held by the Lender hereunder, and execute and
deliver (at the sole cost and expense of the Pledgor) to the Pledgor such other
documents as the Pledgor shall reasonably request to evidence such termination.
21. Reinstatement. This Pledge Agreement shall remain in full force and effect
-------------
and continue to be effective should any petition be filed by or against the
Pledgor for liquidation or reorganization, should the Pledgor become insolvent
or make an assignment for any benefit of creditors or should a receiver or
trustee be appointed for all or any significant part of the Pledgor's assets,
and shall continue to be effective or be reinstated, as the case may be, if at
any time payment and performance of the Obligations, or any part thereof, is,
pursuant to applicable law, rescinded or reduced in amount, or must otherwise be
restored or returned by any obligee of the Obligations, whether as a "voidable
<PAGE>
15
preference," "fraudulent conveyance," or otherwise, all as though such payment
or performance had not been made. In the event any payment, or any part thereof,
is rescinded, reduced, restored or returned, the Obligations shall be reinstated
and deemed reduced only by such amount paid and not so rescinded, reduced,
restored or returned.
22. GOVERNING LAW. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
------------
AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
23. WAIVER OF JURY TRIAL. THE LENDER AND THE PLEDGOR HEREBY IRREVOCABLY WAIVE
--------------------
ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
BASED UPON, OR ARISING OUT OF, THIS PLEDGE AGREEMENT, OR ANY COURSE OF
CONDUCT, COURSE OF DEALING, STATEMENTS OR ACTIONS OF THE AGENT OR THE PLEDGOR
RELATING THERETO.
24. Counterparts. This Pledge Agreement may be executed in any number of
identical counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one contract.
<PAGE>
16
IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be
duly executed and delivered as of the date first above written.
U.S. ENVIROSYSTEMS, INC.
By
---------------------------------
Name:
Title:
SOLVATION, INC.
By
---------------------------------
Name:
Title:
<PAGE>
ACKNOWLEDGMENT AND CONSENT
The undersigned hereby acknowledges receipt of a copy thereof and agrees to be
bound thereby and to comply with the terms thereof insofar as such terms are
applicable to it. The undersigned agrees to notify the Agent promptly in writing
of the occurrence of any of the events described in Section 5(a) of the Pledge
Agreement. The undersigned further agrees that the terms of Section 9 of the
Pledge Agreement shall apply to it, mutatis mutandis, with respect to all
------- --------
actions that may be required of it under or pursuant to or arising out of
Section 9 of the Pledge Agreement.
LEHI ENVIROSYSTEMS, INC.
By
---------------------------------
Name:
Title:
<PAGE>
ACKNOWLEDGMENT AND CONSENT
The undersigned hereby acknowledges receipt of a copy thereof and agrees to be
bound thereby and to comply with the terms thereof insofar as such terms are
applicable to it. The undersigned agrees to notify the Agent promptly in writing
of the occurrence of any of the events described in Section 5(a) of the Pledge
Agreement. The undersigned further agrees that the terms of Section 9 of the
Pledge Agreement shall apply to it, mutatis mutandis, with respect to all
------- --------
actions that may be required of it under or pursuant to or arising out of
Section 9 of the Pledge Agreement.
PLYMOUTH ENVIROSYSTEMS, INC.
By
---------------------------------
Name:
Title:
<PAGE>
SCHEDULE 1 to
Pledge Agreement
----------------
DESCRIPTION OF PLEDGED STOCK
<TABLE>
<CAPTION>
Number of
Shares
Stock Represented
Certificate by such
Issuer Class of Interest No. Certificate Date of Certificate
------ ----------------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Lehi Envirosystems, Inc. Common Stock 1 100 --
Plymouth Envirosystems, Inc. Common Stock 1 100 December 15,1995
</TABLE>
<PAGE>
EXHIBIT 10.32
US Envirosystems, Inc.
April __, 1996
To All Holders of Convertible Subordinated Debentures:
We have completed arrangements for a private placement and a public stock
offering for the Company totalling $10 million, which will provide the funds for
future strength and growth. The simultaneous closing is expected to take place
by early June.
The public offering consists of 1,625,000 shares of Common Stock at $4.00 per
share, and 1,625,000 Warrants, exercisable at $4.00 per share, at ten cents per
Warrant. In the underwriting, the Warrants are only offered to purchasers of
the Common Stock.
One requirement of the financing is for a reverse split of our Common Stock, 1
for 40, which has already been approved by a majority of our stockholders, and
which will be put into effect immediately. As a result of the reverse split,
the number of shares of Common Stock into which the Convertible Subordinated
Debentures would now be convertible has changed from 2,666 shares to 66 shares
per $1,000 principal amount of debentures.
Another requirement of the financing is for one-third ($500,000) of our
outstanding Convertible Subordinated Debentures to be converted to Common Stock.
A number of debenture holders have expressed their desire to convert all of
their debentures if the conversion rate were at the public offering price. We
have negotiated with the investment bankers a conversion structure which we
believe you will find advantageous. In order to give everyone an equal
opportunity to convert, we are therefore offering the following:
1. You may tender all of your debentures for conversion into (a) ___ shares of
Common Stock and (b) ___ Warrants exercisable at $4.00 each, per $1,000 of
principal Value of debentures. One third will automatically be accepted for
conversion at these rates. More than one-third will be accepted on a pro-rata
basis if other debenture holders fail to tender. The Company cannot accept more
than a total of $500,000 at these rates. The remaining debentures will continue
to be outstanding, but at a conversion rate of 125 shares (in place of the
present 66 shares) of Common Stock per $1,000 of principal value, and the
interest rate will be reduced to 9%. This offer is valid for 14 days from the
date of this letter.
2. All accrued and deferred interest at the current rates will be paid when the
financings are effective.
<PAGE>
Your past cooperation in helping the Company to this point has been appreciated,
and we feel that these changes are in your best interests. They certainly held
the Company to a promising future, which in turn will enhance the value of the
shares you will own or into which your holdings will be convertible.
Please indicate your wishes by returning the attached form as soon as possible.
/s/ Richard H. Nelson
<PAGE>
NOTE: THIS DOCUMENT MUST BE RETURNED TO THE COMPANY BY MAY 20, 1996. IT IS
NOT NECESSARY TO RETURN THE ORIGINAL DEBENTURE AT THIS TIME.
To: U.S. Envirosystems, Inc.
515 North Flagler Drive, Suite 202
West Palm Beach, FL 33401
Gentlemen:
I hereby tender the 18% Convertible Subordinated Debentures issued by U.S.
Envirosystems, Inc. due 2004 and currently held by me. It is my understanding
that, based on the 1:40 reverse split of the common shares of U.S.
Envirosystems, Inc., each $1,000 face amount of the Debentures are convertible
into 66 common shares. It is my further understanding that this tender will
cause U.S. Envirosystems, Inc. to issue to me 250 fully paid and non-assessable
common shares and 250 warrants to purchase one common share per warrant for each
$1,000 face amount of the Debentures. Since the Debentures have been held for a
period in excess of two years, the common shares so issued will be freely
tradable or transferable by me pursuant to Rule 144 of the Securities Act.
I further understand that U.S. Envirosystems, Inc. guarantees that at least
one-third of the total face value of Debentures not converted as above, will
have a conversion rate of 125 common shares per $1,000 face amount, and that the
continuing interest rate to be paid on the non-converted Debentures will be 9%.
Additionally, all accrued interest will be paid upon closing of the presently
contemplated public financing of the company
/s/________________________
<PAGE>
EXHIBIT 11.3
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
PRO FORMA EARNINGS PER SHARE CALCULATION
JANUARY 31, 1996
<TABLE>
<S> <C> <C>
Weighted average number of shares 438,773
outstanding............................
Anchor preferred stock converted to 129,740
common.................................
Conversion of debentures ($500,000 125,000
principal).............................
Assumed proceeds from sale of
securities required
for transactions in (A) below.......... $7,237,000
Net proceeds per share =
$10,662,000/3,100,000............... $3.44 2,103,779
----- ----------
Total pro forma common shares 2,797,292
outstanding............................ ==========
INCOME BEFORE EXTRAORDINARY ITEM........ $ 481,000
==========
EARNINGS PER SHARE...................... $0.17
==========
</TABLE>
(A) Includes acquisition of Steamboat Facilities, repayment of loans and
accrued interest and purchase of interest in NRG.
<PAGE>
EXHIBIT 11.4
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
PRO FORMA EARNINGS PER SHARE CALCULATION
JULY 31, 1996
<TABLE>
<S> <C> <C>
Number of shares issued and outstanding. 439,650
Anchor preferred stock converted to 205,000
common.................................
Conversion of debentures ($500,000 125,000
principal).............................
Assumed proceeds from sale of
securities required
for transaction in (A) below........... $7,723,000
Net proceeds per share =
$10,662,000/3,100,000................. $3.44 2,245,058
----- ----------
Total pro forma common shares 3,014,708
outstanding............................ ==========
NET INCOME.............................. $ 266,000
==========
EARNINGS PER SHARE...................... $0.09
==========
</TABLE>
(A) Includes acquisition of Steamboat Facilities, repayment of loans and
accrued interest and purchase of interest in NRG.
<PAGE>
EXHIBIT 11.5
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
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>
Loss applicable to common stock -
historical............................. $(1,412,000) $ (857,000)
Addback interest:
Notes payable.......................... $ 110,000 $ 55,000
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........................... =========== ==========
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........... $3.44 $3.44
---------- ----------
518,895 569,767
----------- ----------
OUTSTANDING SHARES - SUPPLEMENTAL....... $ 957,668 $1,009,417
=========== ==========
LOSS PER SHARE - SUPPLEMENTAL........... $(1.30) $(0.66)
=========== ==========
</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
those Prospectuses. We also consent to the reference to our firm under the
caption "Experts" in the Prospectuses.
Richard A. Eisner & Company, LLP
New York, New York
November 25, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in this Registration Statement on Amendment
No. 5 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
November 25, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in this Registration Statement on Amendment
No. 5 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
November 25, 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
November 25, 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 reference
to us under the heading "Experts."
Price Waterhouse LLP
Hartford, Connecticut
November 26, 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 reference
to us under the heading "Experts."
Price Waterhouse LLP
Hartford, Connecticut
November 26, 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> 328,000
<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>
