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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
Amendment No.1
Amending Part I, Items 1 and 2 and Part II, Items 6 and 7
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year ended January 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES ACT
OF 1934
Commission File Number:
0-10238
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U.S. ENERGY SYSTEMS, INC.
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Delaware 52-1216347
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(State of Incorporation) (I.R.S. Employer
Identification Number)
515 N. Flagler Drive, Suite 202, West Palm Beach, FL 33401
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(Address of Principal Executive Offices)
(561)820-9779
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities Registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 Par Value Per Share.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for a shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [ X ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ X ].
There was no revenue for the Fiscal Year ended January 31, 1996.
The aggregate market value of the Common Stock held by nonaffiliates of the
registrant as of January 31, 1996 was approximately $1,930,000.
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Indicate by check mark whether issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act. [ X ].
As of January 31, 1996 the number of outstanding shares of the
registrant's Common Stock was as follows:
Title of Class Number of Shares Outstanding
as of January 31, 1996
Common 439,650 (a)
(a) The stockholders of the Company, at the 1995 annual meeting and its
adjournments, approved a reverse split of the Company's Common Stock, one new
share for forty old shares. The effective date was May 10, 1996, as set by
the Board of Directors. This has been given retroactive effect in this
filing, and all references to shares and per share amounts have been adjusted
to reflect the reverse split.
Documents Incorporated by Reference: Part III, Item 13, lists exhibits and
reports incorporated by reference to annual Form 10-KSB for the year ended
January 31, 1994 and to Registration Statement Form SB-2 filed May 3, 1996,
File No. 333-4612.
<PAGE>
[CAPTION]
PART I
Item 1. Description of the Business.
A. The Company:
U.S. Energy Systems, Inc. (The "Company") is in the business of
developing, owning, and operating cogeneration and independent power
facilities in the United States and overseas.
The Company, formerly called Cogenic Energy Systems, 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. In late 1986, the Company was
impaired by a $2.1 million judgment resulting from a contractual dispute in
California. Although ultimately settled, the protracted court case caused
serious delays in planned expansion and in sales. Despite extensive
restructuring, the increasingly recessionary economic climate during that
period led to a serious cash shortage. By mid-1989, the Company filed for
protection under Chapter 11 of the Bankruptcy Code.
Utility Systems Florida, Inc. ("USF") was formed by Richard H. Nelson in
late 1991 with the objective of entering into the alternative energy industry,
taking advantage of the positive changes which were occurring in the
cogeneration 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.
B. Business of the Company
The Company is engaged in the cogeneration and independent power plant
("IPP") industries as a project developer, owner and operator. Cogeneration is
generally defined as 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 otherwise wasted heat from the exhaust and/or engine
cooling water, which replaces heat which would typically be made from
conventional sources such as furnaces or boilers. An IPP is a power plant
which is not a part of a regulated public electric utility company.
Frequently, but not always, IPPs are cogeneration facilities. Federal and
state laws have been promulgated in recent years to (1) promote competition in
the sale of electric energy in order to reduce consumer costs for energy, (2)
conserve natural resources such as fossil fuels and (3) reduce atmospheric
pollution by more efficient use of fossil fuels. These Federal and state laws
have, among other things, encouraged the development of cogeneration and
independent power facilities which meet this legislative intent.
The Company's business strategy consists of (a) acquiring and operating
existing independent power plants ("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, building and selling special energy-efficient products
using cogeneration technology such as non-electric air conditioning to
specifically identified markets in the United States and abroad. The Company
is opportunistically pursuing: (I) existing IPPs and cogeneration facilities
which can be bought at favorable prices; (ii) independent power and
cogeneration projects not yet built but for which another developer has
successfully negotiated the basic requirements for a plant including power
purchase agreements, environmental permits, etc. and (iii) special market
opportunities for cogeneration and energy savings projects (such as large
shopping malls, resorts, etc.) where such energy applications are not
presently in common use and where the Company can enter into joint development
agreements with the property owners to own and operate such facilities. With
regard to the latter, the Company possesses designs for, and will continue to
seek out or develop, special energy-efficient products such as natural gas
powered air conditioning with emphasis on the health care, food processing,
shopping mall and hotel markets where large quantities of electricity, air
conditioning and hot water are required on a continuous and simultaneous
basis.
The Company believes the greatest future potential for the Company is in
the independent power plant/cogeneration market within the United States in
facilities in the 3 to 50 megawatt size range. Within this range, and
depending on geographic location, these size plants usually fall below
thresholds requiring prolonged environmental and air quality permit procedure,
and are often of a megawatt size which can command a higher price from either
the utility grids or local customers. Plants of this size can be located in
areas of capacity shortages and pose less competitive threat to the local
utility. Additionally, 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.
The Company has begun to develop several "inside the fence" projects in
the 3 to 50 megawatt range. 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 best interests of the public from an
environmental and ecological standpoint, but also have the greatest potential
for earnings when fuel costs are lowest. In addition to potential within the
United States, there are substantial opportunities overseas for such projects,
especially in Latin America and Asia. Dramatic energy shortages, combined with
national policies to privatize power production in many developing countries,
are creating an increasing potential for U.S. companies in the independent
power industry. In addition to international agencies such as the World Bank
and the Inter-American Development Bank, there are a growing number of private
institutional lenders who provide project financing for such developments. The
Company has commenced an effort to create consortiums with both foreign
companies and other U.S. companies to pursue this market.
For descriptions of the projects which the Company has already
undertaken, and which the Company intends to undertake in order to fulfil its
business plan see "Ongoing Company Projects" and "Negotiations for New
Projects," pages 4 through 8.
C. 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 the Public Utility Regulation Policy Act in 1978 ("PURPA"),
which mandated that all state public utility commissions require public
electric utility companies to cooperate with privately owned cogeneration
facilities, both by purchasing electricity from such facilities at the utility
company's "avoided cost" (i.e., the utility company's incremental cost for
generating such electricity itself) and by providing standby power to such
privately owned facilities.
When electricity is produced, whether in a small cogeneration facility or
in a large central utility power plant, the energy efficiency of the fuel used
(the electrical output expressed in BTUs divided by the amount of BTU input to
the engines) does not exceed 35%. The remaining 65% of available energy
efficiency from the fuel is waste heat, either expelled from the exhaust or
removed from the engine's jacket water by radiators. By recovering substantial
portions of this otherwise wasted heat, and by converting this heat into
useful thermal purposes, the fuel efficiency of a cogeneration facility can
approach 75%. This converted waste heat replaces heat that would otherwise
have to be made using yet another fuel. Central utility power plants have the
ability to recover such heat, but the long distances of such plants from
customers who could utilize thermal energy makes recovery and transport
impractical.
In March 1995 the Federal Energy Regulatory Commission ("FERC") stated
that "Retail Wheeling" should be federally mandated, and in April 1996 FERC
commenced promulgating regulations to effect the process, setting the stage
for a total deregulation of the utility industry in the near future. Retail
Wheeling is the process under which consumers of electricity may choose any
electric producer, and the local electric utility company must deliver (i.e.,
"wheel") the power purchased elsewhere to that consumer through the utility
company's transmission lines. This is similar to what has occurred in recent
years in the telecommunications industry, where consumers may choose any long
distance provider and the local telephone company must deliver that service.
Several states have already enacted wheeling regulations, and some states,
notably New York, are considering legislation which will allow a public
utility company to split itself into two separate companies, one company a
regulated transport company and the other company a power marketing company,
buying and selling independently produced power.
D. Competition
There are approximately 150 companies nationwide currently involved with
independent power plants. The independent power industry is basically divided
into three areas: (1) very large power plants (over 50 megawatts);
(2) standard power plants (under 50 megawatts); and (3) "inside-the-fence"
plants, which can be of varying sizes, and so called because they are built
especially to serve the electrical and thermal needs of a specific building or
group of buildings rather than to sell the power to the utility grid and are
located literally "inside-the-fence" of the end user's property. The very
large plants are generally owned and operated by non-regulated subsidiaries of
public utility companies, which have been established by the utility companies
to participate in the IPP industry. Presently, there are about thirty such
companies operating. Because the staffing and corporate philosophy of these
companies emanates from the parent public utilities, these operations are
generally geared to the largest sized plants. While some of these non-
regulated utility subsidiaries have been highly successful in the development
of larger plants, they are limited by federal law to 50% of project ownership.
In many instances, they make ideal partners for projects, and the Company
intends to work with many of these companies when it locates specific projects
fitting the non-regulated subsidiaries' parameters.
In the category of standard sized independent power plants (under 50
megawatts), the vast majority of the developers so involved are either
subsidiaries of other non-utility industrial companies, small privately owned
partnerships or energy funds established to invest in such projects. "Inside-
the-fence" plants are generally owned and operated by the end user itself,
although a number of such plants are built, owned and operated for the end
user by third parties.
E. Current Operations
1. PROJECT COMPLETED FOR THIRD PARTY OWNERS
Waste Motor Oil Project. In November 1992, the Company was engaged to
design and build a 3 megawatt cogeneration plant in Virginia for a private
energy investment fund under a turn-key contract for $1.6 million. 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 (VEPCO) to provide 3,000 kilowatts 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.
2. ON-GOING COMPANY PROJECTS
a.) Lehi Cogeneration Project. In January 1994, the Company purchased a
50% equity interest in a limited liability company called LIPA, which owns an
existing 17 megawatt cogeneration facility in Lehi, Utah including the
underlying real estate, hardware and permits to operate. 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 subordinated convertible debentures. The
Company's joint venture partners in the Lehi project are Far West Capital,
Inc., a Utah Company ("Far West") and Suma Corporation, a Utah company with
interests in waste-to-energy projects.
In December 1995, the Company and its partners concluded a sale of
non-essential engines and parts of the Lehi, Utah plant for a gain of
approximately $236,000, with 50% or $118,000 as the Company's share. The
partnership is using a portion of the funds from this sale to upgrade the
remaining two engines and place them in service. Currently there are no
contracts for the sale of the power output of the Lehi Plant. However,
negotiations for such contracts will begin as soon as the plant is in
operational status, and it is anticipated that cash flow will be generated
during the fourth quarter of the new fiscal year, provided that it obtains the
necessary air quality permits. Alternatively, the Company may decide to sell
two of its engines and to replace them with a larger and more efficient gas
turbine. If such sale is made the Company would benefit through its 50% share
of the revenue from the sale; however, operations would be delayed until the
second quarter of the 1997 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 the future
operations. A permit modification would also be necessary if new engines are
installed or if capacity is increased.
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
Cogeneration Associates, 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, 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 million.
The Lehi plant consists of Cooper Enterprise reciprocating engines.
These engines are dual fuel configuration, and can run on either diesel fuel
or natural gas, or a combination thereof. In this instance, 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 to assure 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.
b.) Plymouth State College, New Hampshire. 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 BTUs for heat at
Plymouth State College, in Plymouth, New Hampshire. The facility provides 100%
of the electrical and heating requirements for the campus, which is a part of
the University of New Hampshire system, under a twenty year contract. The
project, which cost $7 million to construct, is comprised of a combination of
diesel engine-generators, heat recovery and supplemental boilers, and the
complete civil works tying all campus buildings into a single heating loop.
The project was financed prior to the Company's acquisition of a 50% interest
through $5.5 million in State of New Hampshire tax exempt revenue bonds and
$1.5 million in equity. The Company paid a total of $636,000 in cash and
11,400 shares of Common Stock for its 50% interest.
The Plymouth Partners are Central Hudson Cogeneration, Inc., a
wholly owned subsidiary of Central Hudson Electric Company of New York, and
Independent Energy Corporation of Connecticut. The project was completed in
November 1994 and put into full commercial service in January 1995. The plant
is currently operating at 98% availability.
Studies are under way to determine the feasibility of expanding the
existing facility to 10 megawatts to wheel electric power to two other state
college campuses. Under New Hampshire law, retail wheeling is permitted to
three customers from a single "inside-the-fence" cogeneration plant.
Additionally, the partnership is bidding to sell 5 megawatts of expanded power
to the local electric cooperative. Also, plans are currently being developed
to install special fuel treatment equipment which will allow the existing
engines to burn less costly and more efficient fuels. Fuel savings would be
shared equally between the college and the partnership.
c.) Steamboat Geothermal Power Plants. The Company has signed an
agreement, subject to financing, to form a limited liability company
("Steamboat LLC") which will acquire two geothermal power plants, referred to
as the Steamboat Facilities, in Steamboat Hills, Nevada. Total cost to the
Company will be $5,400,000. Electricity is produced in geothermal plants by
the use of geothermally heated water, which drives steam turbines to generate
the electricity. The geothermal brine is then re-injected into the earth.
Geothermal power is considered one of the most environmentally sound methods
of producing electricity, but can only be produced in certain geographic areas
where specific geological formations exist.
The Company will own a 50% equity interest in Steamboat LLC. Far
West will own the other 50% equity interest. Far West was established in 1983
to develop and operate cogeneration and independent power projects,
principally hydroelectric and geothermal, in the western United States and is
the Company's current partner in LIPA. At present, Far West successfully owns
and operates in excess of $80 million in such projects. In the past three
years, Far West has obtained over $60 million in debt financing for its
projects from General Electric Capital Corporation. The two Steamboat
geothermal plants were built in 1988 by Steamboat Development Corporation, a
subsidiary of Far West.
The two geothermal plants produce 8 megawatts of electric power
which is sold under a power purchase agreement to Sierra Pacific Power
Company. The plants have operated at 99% capacity since inception. The
current power purchase agreements expire on December 31, 1996 for Steamboat 1
and on December 31, 1998 for Steamboat 1A, but both must be renewed by the
electric company under Federal rules at a price based on avoided cost (which
is defined by FERC rules as the cost of the electric company to produce an
incremental kilowatt of electricity.) The Company and its partners believe
that the power purchase agreements, if the Company chooses to renew, will be
at a favorable price. Alternatively, under new Retail Wheeling regulations
being promulgated by FERC, the Company would be free to sell the power
elsewhere.
d.) Shopping Malls. The Company has entered into a joint development
agreement with the Cowen Investment Group to develop, build and operate
cogeneration plants at select shopping malls in the United States. The Cowen
Investment Group is a large financier of real estate projects. Under the joint
development agreement, Cowen Investment Group 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 currently
completing negotiations with a major real estate company which owns and
operates approximately 200 shopping malls throughout the United States. Three
test sites have been selected, and engineering is presently being completed
for the first site. 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.
Under the plan currently being negotiated with the mall owner, the
joint development company would engineer, build and operate the cogeneration
facilities, with financing arranged by the Company's joint development
partner. The joint development company and the mall owner would share energy
savings for a fifteen year period, after which time the cogeneration plant
ownership would revert to the mall owner. The proposed agreement calls for at
least ten such installations. The mall owner has indicated, however, that
installations of cogeneration systems would be contemplated at all malls where
certain basic economic criteria for cogeneration exists. The Company and its
joint development partners believe that approximately one-third of the malls
can meet the economic criteria of a minimum of twenty-five percent annual
energy savings. Since all of the malls are of similar configuration and have
similar energy patterns, there would be an economy of scale: project design
could be replicated at multiple locations with only modest configuration
changes. A contract for the first mall is expected to be signed in the second
fiscal quarter of the current year, with construction commencing shortly
thereafter.
e.) U.S. Virgin Islands. The Company has reached agreement with and is
currently in final contract preparation with Bluebeard Holding Company to
build a 2 megawatt cogeneration project for Bluebeard's Castle, a major resort
in St. Thomas, U.S. Virgin Islands. Utility services for the Islands, like
many other areas of the Caribbean, were severely impacted during the 1995
hurricane season, and the Company believes that many public and private
buildings are presently considering "inside-the-fence" cogeneration facilities
in order to assure reliability of electric and hot water services as well as
to reduce present high costs of utility provided services.
It is contemplated that the Company and the resort owner will form a
limited liability entity, with equal equity ownership, which will own and
operate the cogeneration facility, selling discounted power to the hotel and
adjacent commercial buildings. It is also contemplated that the cogeneration
facility will include a fifty 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.
3. NEGOTIATIONS FOR NEW PROJECTS
a.) Raipur, India. The Company, through USE International, LLC,
is bidding on 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. Inside-the-fence projects of this size
are growing in popularity in India because no central or local government
permissions are required and financing is easier since it is based entirely on
the credit-worthiness of the customer. USE International, LLC is 50%-owned by
the Company and the remaining 50% is owned by Indus, L.L.C. Ravi Singh, a
consultant to the Company, is the President and principal shareholder of
Indus, L.L.C.
b.) Panama. The Company has formed a company, Panavisa
Envirosystems, S.A., in order to qualify and bid on several potential power
projects in Panama. The Company is working with a large Panamanian financial
group to form a consortium to design, build, and operate barge-mounted power
plants for Instituto de Recursos Hidraulicos y Electrificacion, the Panamanian
national electric company, which would purchase electricity from the
consortium under a negotiated long-term contract. The Company's role would be
to act as consortium manager. Percentages of ownership among the various
potential consortium partners have not yet been negotiated. The barge-mounted
power plant design would utilize very low speed diesel engines capable of
burning Orimulsion, an emulsified tar recovered from reserves under the
Orinoco River in Venezuela. The Company would be working with Bitor USA, a
wholly owned subsidiary of Petrolanos Venezuela, which holds the patents on
the Orimulsion process. Specific opportunities for such power plants presently
exist in Panama as well as other Central American countries, which are facing
severe power shortages as a result of aging thermal power plants and
reductions in available hydroelectricity. Advantages of barge mounted systems
are quick delivery and total fabrication in the United States.
c.) Israel. The Company has been advised that it is the low
bidder on a 4 megawatt cogeneration plant in Israel. 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. The Company believes
that this absorption chiller, which is capable of delivering substantially
lower temperatures than other absorbers currently on the market, with
substantially reduced annual maintenance costs, would utilize recovered waste
heat from the cogenerators.
d.) 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.
e.) 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.
f.) Locating New Projects. The executives of the Company
communicate frequently with numerous individuals and companies in the
industry. Most of the projects in which the Company is now involved have come
from these contacts. The Company has established several informal and non-
exclusive relationships with other cogeneration developers and with non-
regulated subsidiaries of utility companies to pursue other business
opportunities in areas of interest to the Company. In certain special markets
that the Company seeks to develop, the Company identifies specific potential
customers and makes direct approaches to those customers.
F. Employees
At present the Company has three full time employees and five contract
staff members. The Company retains outside contract staff as required for
engineering, fabrication, construction and maintenance services. Management
believes present staffing is adequate, although it expects that the number of
full time employees will expand over the next year as new projects come on
stream. Partnership projects such as Lehi, Plymouth, and the Steamboat
Facilities have their own professional staffs. These staffs report to a
Management Group in each of the individual partnerships, and a senior Company
officer is an active member of each of the Management Groups.
Item 2. Property of the Company.
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 (nitrous oxides) annually. All costs associated with LIPA
and the operation of the plants, and all income derived therefrom, is divided
pro-rata among the Company and the owners of the remaining 50% of LIPA. Other
than the Company's obligations to its debenture holders and bridge lenders,
there are no other encumbrances or debt associated with LIPA or the Lehi
cogeneration project. Management believes the plant is adequately covered by
insurance.
The Plymouth State College Cogeneration project is owned by Plymouth
Cogeneration Limited Partnership ("PCLP"), a Delaware partnership. The Company
owns 50% of PCLP, 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 PCLP: (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, 1100 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 is adequate until
additional staffing is required.
Item 3: 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, seeks damages "in
excess of $20,000." 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 cows 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.
Item 4: Submission of Matters to a Vote of Security Holders.
The stockholders of the Company, at the 1995 annual meeting and its
adjournments, approved a reverse split of the Company's Common Stock, one new
share for forty old shares, with fractional shares to be paid for in cash at
$4.00 per new share. The effective date was May 10, 1996, as set by the Board
of Directors.
This has been given retroactive effect in this filing, and all references
to shares and per share amounts have been adjusted to reflect the reverse
split.
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder
Matters.
Price Range of Common Stock
The common stock reflected in the following tables and elsewhere in this
document has been adjusted to reflect a 1 for 40 reverse split which was
approved by the shareholders during the fiscal year.
The Common Stock trades on the NASD OTC Bulletin Board under the symbol
USEN. 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. These amounts represent quotations between dealers (not actual
transactions) and do not include retail markups, markdowns or commissions.
<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
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended January 31, 1996:
<S> <C> <C>
First Quarter . . . . . . . . . . . $10.00 $10.00
Second Quarter . . . . . . . . . . . $10.00 $10.00
Third Quarter . . . . . . . . . . . $ 8.40 $ 6.00
Fourth Quarter . . . . . . . . . . . $ 4.00 $ 2.40
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ending January 31, 1997:
<S> <C> <C>
First Quarter through April 29 . . . $2.92 $ 2.48
</TABLE>
As of April 29 there were 1920 record holders of the Company's Common
Stock and approximately 2,285 beneficial holders of the Company's Common
Stock.
On May 3, 1996, the Company filed with the Securities and Exchange
Commission a Registration Statement on Form SB-2 for a public offering of
1,625,000 shares of Common Stock at $4.00 per share, and 1,625,000 Redeemable
Common Stock Purchase Warrants at ten cents per Warrant, (the "Public
Offering"). 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 the offering. The underwriters, Gaines Berland, Inc., have the option to
purchase an additional 243,750 shares of Common Stock and 243,750 Redeemable
Common Stock Purchase Warrants to cover over-allotments, if any. The total of
the offering to the public, before the exercise of the underwriters' over-
allotment option will be $6,662,500.
The Company has also signed contracts with two private investors for a
total of $3,500,000 in Preferred Stock and Private Warrants (the "Private
Placement"), to be closed concurrently with the closing of the public
underwriting described above. 1,600,000 shares of 11% Preferred Stock is to
be sold to Enviro Partners, L.P., ("Enviro") for $3,100,000 and 500,000
Private Warrants are to be sold to Energy Management Corporation ("EMC") for
$400,000. Details of these private investments are given below.
During the fiscal year ended January 31, 1996, the Company arranged for
interim financing as follows:
In June 1995, the Company issued 57,500 shares of Series One Preferred
Stock to Anchor Capital Company, L.L.C. ("Anchor") under the terms of a loan
(the "Anchor Loan") by which Anchor loaned the Company the sum of $600,000
bearing interest at the rate of 18% per annum. The Anchor Loan is cross-
collateralized (together with the Solvation, Inc. ("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 May 31,
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. $700,000 of the proceeds of the
Offering and the Private Placement will be used to repay the Anchor Loan and
$100,000 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 (the
"Preferred Stock Exchange").
In December 1995 the company arranged a loan of $200,000 from Solvation,
Inc. ("Solvation"), which caries an interest rate of 10% per annum, and which
is due when the Offering is closed, but no later than May 31, 1996, (the
"Solvation Loan"). 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. EMC is a subsidiary of
Solvation. Solvation and Enviro are indirectly owned by individual members of
one family who are not otherwise affiliated with the Company.
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.
Item 6: Management's Discussion and Analysis.
A. Analysis of Financial Condition and Results of Operations.
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>
<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 previous planned public offering that
was never consummated.
Legal and professional costs were lower in the 1996 fiscal year due to
the fact that there were no start-up costs for the Company in this year.
Costs already incurred in connection with this Prospectus, approximately
$50,000 as of January 31, 1996, have been deferred.
Interest expense increased in the 1996 fiscal year due to the additional
borrowings in notes payable and bridge loans. The bulk of the increase is
accounted for as follows: The $1,000,000 in notes payable were in existence
only part of the 1995 fiscal year and the interest on them accrued in that
year totaled $28,000, whereas for the full 1996 fiscal year the interest was
$137,000. The bridge loans came into being in June, 1995, so did not affect
the 1995 fiscal year at all. The interest expense in the 1996 fiscal year was
$169,000.
Loss from joint ventures of $17,000 in the 1996 fiscal year and $76,000
in the 1995 fiscal year include $59,000 and $55,000 respectively for
amortization of purchase price over net equities in the fixed assets of Lehi
Independent Power Associates, L.C. ("LIPA") and Plymouth Cogeneration Limited
Partnership ("Plymouth"). For the period ended January 31, 1996, the
Company's allocated share of income or loss from joint ventures equaled
$86,000 gain from LIPA, and $44,000 loss from Plymouth. The Company's gain
from LIPA includes $118,000 gain from sale of unused plant equipment.
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 on October 14, 2001. The agreements provide for minimum annual
payments totaling $210,000. Payments under these agreements will not be made
until the working capital of the Company permits.
As a result of accumulated losses, the Company had a negative working
capital of $1,910,000, and a capital deficiency of $2,729,000 at January 31,
1996. 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. However, as a result of the Public
Offering and the Private Placement, both working capital and capital will be
positive.
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.
B. Plan of Operation
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. As a result of the Private Placement and the Public Offering, the
Company's working capital would be a positive $581,000.
The net proceeds of the Public Offering for which the Company has filed
an SB-2 registration statement as discussed above will be approximately
$5,425,000 and the Private Placement of preferred stock and warrants will
provide $3,500,000 for a total net proceeds of $8,925,000. Of this total, the
Company's acquisition of 50% of Steamboat Envirosystems, LLC, will use
$5,400,000 (plus $50,000 that had already been paid as a deposit.) Other
liabilities required to be paid include bridge loans including interest
totaling $785,000, secured notes payable including interest totaling
$1,141,000, and accrued interest on the Convertible Subordinated Debentures
totaling $213,000, required to be paid as part of the restructuring of these
instruments.
The steps taken to reduce the Company's interest costs include (i) the
capitalization of $500,000 of the Convertible Subordinated Debentures and the
reduction of the interest rate on the balance from 18% to 9%, (ii) the payment
of the secured notes totaling $1,000,000, and (iii) repayment of all bridge
loans. (See "Restructuring of Debt" page 13).
The Steamboat Acquisition should give the Company a positive cash flow
from all joint ventures in the current fiscal year. This will not be impacted
by payment of dividends since the existing convertible preferred stock and the
sale of additional convertible preferred stock will not require cash payment
of dividends. The shares issued to Anchor for the initial bridge loan are
being converted to 205,000 shares of common stock, and the dividends on the
preferred stock issued to Enviro will be paid in additional preferred stock
during the first two years after they are issued, and thereafter in cash or
preferred stock at the Company's option.
Negotiations for the sale of power from the Steamboat Facilities for the
period subsequent to the end of the current contracts (January 1997 for
Steamboat 1 and January 1999 for Steamboat 1A) with Sierra Pacific Electric
Company are under way. While there is no assurance that the present rate of
revenues will continue, management has confidence that cash flow from this
project will continue to provide an attractive return in future years. The
basis for this confidence is that the major expense of the projects is the
existing debt that the projects have carried. Upon acquisition of the
projects by the Company, this debt is retired, thus materially reducing
carrying costs for the projects and allowing the projects to sell electric
output at substantially reduced rates while maintaining a satisfactory cash
flow. If renewal rates offered by Sierra Pacific Electric are not
satisfactory and the Company and its partners therefore decide not to renew
the existing contracts, the option now exists under new retain wheeling
regulations to sell output electricity directly to retail customers in the
immediate Reno area or to sell to other electric utility grids at more
favorable prices.
In December 1995, the Company and its partners concluded a sale of non-
essential engines and parts of the Lehi, Utah plant for a gain of
approximately $236,000, with 50% or $118,000 as the Company's share. The
partnership is using a portion of the funds from this sale to upgrade the
remaining two engines and place them in service. Currently there are no
contracts for the sale of the power output of the Lehi Plant. However,
negotiations for such contracts will begin as soon as the plant is in
operational status, and it is anticipated that cash flow will be generated
during the fourth quarter of the new fiscal year, provided that it obtains the
necessary air quality permits. Alternatively, the Company may decide to sell
two of its engines and to replace them with a larger and more efficient gas
turbine. If such sale is made the Company would benefit through its 50% share
of the revenue from the sale; however, operations would be delayed until the
second quarter of the 1997 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 the future
operations. A permit modification would also be necessary if new engines are
installed or if capacity is increased.
The Plymouth, NH plant is operating. The start-up costs of this
plant resulted in only minor cash flow to the Company until now, but the plant
is operating at projected efficiencies and current expectations are that
regular cash flow will commence before the end of the current fiscal year. In
addition, switching the plant's fuel supply to less expensive waste oil, as is
presently being contemplated, could add significantly to cash flow starting
during the next fiscal year, as the Partnership has an agreement with the
university to share equally in any fuel savings. There are also plans being
studied to expand the size of the project to serve other New Hampshire college
system campuses through wheeling, as described in Item 1, Section E (Current
Operations), which should take place during fiscal year 1998.
The Company also expects revenues from other projects that will be under
way during the next twelve months but are not yet under contract. These
should not require capital outlays, as they will be self-financed. The
working capital remaining after the closing of the Private Placement and the
Public Offering, together with the regular income from Steamboat, L.L.C., will
be adequate for all operational needs.
Restructuring of Debt
Concurrently with the consummation of the Private Investments and the
Public Offering, the Convertible Debentures, of which an aggregate principal
amount of $1,525,000 is outstanding, will be restructured by converting
$500,000 principal amount into 125,000 shares of Common Stock and 125,000
Private Warrants and reducing the conversion rate of the remainder to $8.00
per share from the present $16 per share, making the remainder convertible
into 128,125 shares of Common Stock. From and after the consummation of the
Offering, the interest rate will be 9% instead of the present 18%.
Item 7. Financial Statements.
See Financial Statements and Independent Auditors' Report which are an
integral part of this Report 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors and Executive Officers of the Company.
The directors and executive officers of the Company are 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 70 Director
Seymour J. Beder 69 Treasurer and Chief Financial Officer
</TABLE>
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 Utility Systems
Florida, Inc. ("USF") where he served as president until November 1993. A Plan
of Reorganization was confirmed for Cogenic in March 1993, after which USF and
Cogenic merged, with Cogenic being the surviving corporation and changing its
name to U.S. Envirosystems, Inc. Mr. Nelson was Special Assistant to the
Director of the Peace Corps from 1961 to 1962; thereafter he served as
Military Aide to the Vice President of the United States from 1962 to 1963 and
Assistant to the President of the United States from 1963 to 1967. From 1967
to 1969, Mr. Nelson was Vice President of American International Bank, and
from 1969 to 1973 he was Vice President of Studebaker-Worthington Corp. Mr.
Nelson received his BA degree from Princeton University.
Ronald Moody. Mr. Moody has been a Director of the Company since January
1994. Mr. Moody entered the investment community in 1967 as a senior partner
of a Canadian investment house until 1976, and since that time has been a
private investor for his own account. After several years with the Royal Bank
of Canada, Mr. Moody joined the Montreal Trust Company in 1962 as a manager of
pension fund and individual trust accounts. Mr. Moody received his BA from
the University of Western Ontario.
Fred Knoll. Mr. Knoll has been a Director of the Company since August
1994. During the last five years, Mr. Knoll has been chairman and CEO of
Knoll Capital Management, an investment and cash management firm, in New York.
Mr. Knoll is the Chairman of the Board of Thinking Tools and of Lamar Signal
Processing and a Director of Spradling Holdings, Raphael Glass and the
Columbus Fund. From 1989 until 1993, Mr. Knoll was Chairman of the Board of
Directors of C3/Telos Corporation, a computer systems company. Mr. Knoll
received his B.S. degree in Computer Sciences from M.I.T. and also a B.S.
degree in Management from the Sloan School at M.I.T. He received his MBA from
Columbia University.
Evan Evans. Mr. Evans has been a Director of the Company since August
1995. Since 1983 he has been chairman of Holvan Properties, Inc. ("Holvan"),
a real estate developer, and was managing director of Easco Marine, Ltd. from
1983 to 1988. Also, from 1985 to 1986 Mr. Evans was general manager of Belgian
Refining Corporation ("BRC"), pursuant to a contract between BRC and Holvan.
From 1981 to 1983 he was vice president of Getty Trading and Transportation
Company and president of its subsidiary, Getty Trading International, Inc.
From 1970 to 1981 Mr. Evans was vice president and member of the board of
directors of United Refining Corp. He is currently on the board of directors
of Holvan and BRC. Mr. Evans received his BS degree in Mathematics from St.
Lawrence University and his BS in Civil Engineering from M.I.T.
Seymour J. Beder. Mr. 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.
A. Bruce Schimberg. Mr. Schimberg is a retired partner in the law firm
of Sidley & Austin, and has lectured and written extensively on the subjects
of commercial financial services and secured transactions. He is a member of
the Chicago, Illinois and American Bar Associations, and has chaired numerous
bar association committees and subcommittees. Mr. Schimberg received his Ph.D
degree from the University of Chicago and his JD degree from the University of
Chicago Law School.
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.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires certain officers, directors, and beneficial owners of
more than ten percent (10%) of the Company's Common Stock to file reports of
ownership and changes in their ownership of the equity securities of the
Company with the Securities and Exchange Commission and NASDAQ. Based solely
on a review of the reports and representations furnished the Company during
the last fiscal year, the Company believes that each of these persons is in
compliance with all applicable filing requirements with the exception that
certain Forms 4 for Richard Nelson, Theodore Rosen, Ronald Moody, Seymour
Beder and Marcus Finkle were inadvertently filed late.
Item 10. Executive Compensation.
SUMMARY COMPENSATION TABLE
The following table shows the total compensation paid by the Company
during the fiscal years ended January 31, 1996, 1995 and 1994 to Mr. Richard
H. Nelson, the Company's President and Chief Executive Officer. There were no
other executives of the Company who received total compensation in excess of
$100,000 during any of such years.
<TABLE>
<CAPTION>
Name and Principal Fiscal Salary Bonus Long Term
Position Year Compensation
- ------------------ ------ -------- ----- ------------
<S> <C> <C> <C> <C>
Richard H. Nelson, 1996 $150,000 - -
President and
Chief Executive
Officer (1)
1995 $149,850 - -
1994 $ 24,500
</TABLE>
(1) Mr. Nelson has deferred salary at January 31, 1996 of approximately
$125,500 to be paid by the Company when working capital is adequate, which
shall be determined by the Board of Directors.
Compensation of Directors. Directors are not compensated for attendance
at meetings of the Board, although certain travel expenses relating to
attending meetings are reimbursed.
Employment Contracts. Mr. Nelson has an employment contract with the
Company to serve as its Chief Executive Officer for a term of five years
ending December 31, 2001. Mr. Nelson's contract provides for an annual salary
of $150,000 plus normal benefits. Mr. Nelson has volunteered to defer 50% of
this salary until the Company's cash flow is, in the opinion of the Board of
Directors, sufficient. Under the terms of Mr. Nelson's employment agreement,
he may not disclose any confidential information pertaining to the Company nor
compete with the Company during the term of his employment with the Company.
Mr. Nelson works for the Company full-time.
Mr. Rosen has an employment contract with the Company to serve as its
Chairman of the Board for a term of five years ending December 31, 2001. Mr.
Rosen's contract allows an annual salary of $60,000 which is being deferred
until the Company's cash flow is, in the opinion of the Board of Directors,
sufficient. Mr. Rosen devotes a minimum of 40 hours per week to the Company.
Under the terms of Mr. Rosen's employment agreement, Mr. Rosen agrees that he
will not disclose any confidential information pertaining to the Company nor
compete with the Company during the term of his employment with the Company.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of April 30, 1996
regarding the ownership of the Company's Common Stock by (i) each director of
the Company, (ii) each executive officer of the Company named in the Summary
Compensation Table as set forth elsewhere in this Annual Report on Form 10-
KSB, (iii) each beneficial owner of more than five percent of the Common Stock
of the Company known by management and (iv) all directors and executive
officers of the Company, as a group, and the percentage of Common Stock
beneficially held by them on that date.
<TABLE>
<CAPTION>
Beneficial
Ownership (1)
Name and Address of
Beneficial Owner (1) Shares Percentage
- --------------------------------- ---------- ------------
<S> <C> <C>
Richard Nelson 82,446 18.7%
Theodore Rosen 88,333(2) 17.4%
Ronald Moody 21,500(3) 4.8%
Fred Knoll 171,333(4) 28.6%
Evan Evans 2,500(5) 0.6%
S. Marcus Finkle 63,833(6) 13.9%
117 AABC
Aspen, CO
Guernroy, Ltd. 38,158(7) 8.6%
c/o Royal Bank of Canada
Channel Isles, UK
Anchor Capital Company, LLC 205,000(8) 31.8%
1140 Avenue of the Americas
New York, NY 10036
All officers and directors 55.2%
As a group (6 persons) 381,113(2)
(3)(4)(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.
(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.
(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.
(7) Includes 3,333 shares issuable upon conversion of Convertible
Debentures.
(8) Represents shares issuable upon conversion of 57,500 shares of Series
One Preferred Stock.
Item 12. Certain Relationships and Related Party Transactions.
The Plan of Reorganization of Cogenic Energy Systems, Inc. (see Note a to
Financial Statement) was originally filed and financed by Richard Nelson, who
was then the sole shareholder and sole director of Utility Systems Florida,
Inc. Under the Plan, 100,000 shares of the reorganized debtor was issued to
Richard Nelson as the proponent and financier of the Plan. An additional
125,000 shares (the "merger shares") were issued to Utility Systems Florida,
Inc. upon consummation of the Plan and upon merger of the reorganized debtor
with Utility Systems Florida, Inc. These merger shares were distributed to
individuals and companies who purchased shares of Utility Systems Florida,
Inc. for purposes of capitalizing the company. These shareholders are
described in Item 11 above.
Several directors and affiliates of the Company are also holders of the
18% Subordinated Convertible Debenture, and the effect of conversion of these
debentures is also described in Item 11 above.
All of the directors and one affiliate are lenders in the Plymouth Bridge
Loan, which bears interest at the rate of floating prime plus 2.5%, and in
which the lenders received warrants to purchase 120 shares of the Company's
common stock for each $1,000 loaned at $5.00 per share. The Company's
president and chairman do not receive warrants for their loan participation.
The effects of the warrants, if exercised, are included in Item 11 above.
Item 13. Exhibits and Reports on Form 8-K.
Exhibits.
(2) Plan of Reorganization of Cogenic Energy Systems, Inc. (a)
(3)(i) Articles of Incorporation. (a)
(3)(ii) By-Laws, U.S. Envirosystems, Inc. (a)
(4) Debenture, 18% Convertible Subordinated Debenture of 2004. (a)
(10)(i) Employment Contract, Richard Nelson. (a)
(10)(ii) Employment Contract, Theodore Rosen. (a)
(10)(iii) Lehi Independent Power Associates, LC purchase contract. (a)
(10)(iv) Letter Agreement, dated as of November 8, 1994, between the
Company, PSC Cogeneration Limited Partnership, Central
Hudson Cogeneration, Inc. and Independent Energy Finance
Corporation. (b)
(10)(v) Agreement among the Company, Plymouth Envirosystems, Inc.,
IEC Plymouth, Inc. and Independent Energy Finance Corporation
dated November 16, 1994. (b)
(10)(vi) Amended and Restated Agreement of Limited Partnership of
Plymouth Cogeneration Limited Partnership among PSC
Cogeneration Limited Partnership, Central Hudson
Cogeneration, Inc. and Plymouth Envirosystems, Inc. dated
November 1, 1994. (b)
(10)(vii) Amended and Restated Agreement of Limited Partnership of
PSC Cogeneration Limited Partnership among IEC Plymouth, Inc.
Independent Energy Finance Corporation and Plymouth
Envirosystems, Inc. dated December 28, 1994. (b)
(10)(viii)Joint Development Memorandum of Intent dated September 20,
1994, between the Company and Cowen Partnership. (b)
(10)(ix) Agreement dated as of May 4, 1995, between the Company and
Indus, L.L.C. (b)
(10)(x) Security Agreement and Financing Statement among the Company,
Lehi Envirosystems, Inc., Plymouth Envirosystems, Inc. and
Anchor Capital Company, L.L.C. dated June 14, 1995. (b)
(10)(xi) Stock Pledge Agreement among Richard H. Nelson, Theodore
Rosen, Anchor Capital Company, L.L.C. and the Company dated
June 14, 1995. (b)
(10)(xii) Loan Agreement among the Company, Lehi Envirosystems, Inc.,
Plymouth Envirosystems and Solvation, Inc. Dated as of
December 15, 1995. (b)
(10)(xiii)Pledge Agreement between the Company and Solvation, Inc. dated
as of December 15, 1995. (b)
(10)(xiv) Lease dated September 1, 1995 between the Company and Gaedeke
Holdings, Ltd. (b)
(10)(xv) Purchase and Sale Agreement, dated as of December 31, 1995,
between the Company, Far West Capital, Inc., Far West Capital
Electric Energy Fund, L.P., 1-A Enterprises and Steamboat
Envirosystems, L.L.C. (b)
(11) Explanation of Per Share Earnings.
(21) Subsidiaries of the Company.
(a.) Incorporated by reference to the Registrant's Annual Report on
Form 10-KSB for the year ended January 31, 1994.
(b.) Incorporated by reference to the Registrant's Form SB-2
Registration Statement filed May 3, 1996, File no. 333-4612.
Reports on Form 8-K. No Reports on Form 8-K were filed during the fourth
quarter.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
U.S. ENERGY SYSTEMS, INC.
By________/s/_______________________
Richard H. Nelson
President and Chief Executive Officer
By_______/s/________________________
Seymour J. Beder
Chief Accounting Officer and Controller
<PAGE>
EXHIBIT (11)
U.S. ENERGY SYSTEMS, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE INCOME (LOSS)
<TABLE>
<CAPTION>
Page 1 of 2
Year Ended Year Ended
January 31, 1996 January 31, 1995
<S> <C> <C>
(Loss) from Operations ($1,474,000) ($1,401,000)
Page 2 of 2
Net (Loss) ($1,391,000) ($1,316,000)
Dividends on preferred stock ($ 21,000)
(Loss) applicable to common stock ($1,412,000) ($1,316,000)
(Loss) per common share before
extraordinary item ($3.41) ($3.38)
Net (loss) per common share ($3.22) ($3.17)
Weighted number of
Common Shares outstanding 438,773 (a) 415,022(a)
(a) Adjusted for 1 for 40 reverse split.
</TABLE>
<PAGE>
EXHIBIT (21)
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary Date of State of
Incorporation Incorporation
<S> <C> <C>
Lehi Envirosystems, Inc. 1991 Delaware
Plymouth Envirosystems, Inc. 1994 Delaware
USE International, L.L.C. 1995 New Jersey
</TABLE>
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
- I N D E X -
PAGE
NUMBER
U.S. ENERGY SYSTEMS, INC.:
REPORT OF INDEPENDENT AUDITORS F-3
CONSOLIDATED BALANCE SHEET AS AT
JANUARY 31, 1996 F-4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE YEARS ENDED JANUARY 31, 1996 AND
JANUARY 31, 1995 F-5
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL
DEFICIENCY FOR THE YEARS ENDED JANUARY 31, 1996
AND JANUARY 31, 1995 F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED JANUARY 31, 1996 AND JANUARY 31, 1995 F-7
NOTES TO FINANCIAL STATEMENTS F-8
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
U.S. Energy Systems, Inc.
We have audited the accompanying consolidated balance sheet of 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.
Envirosystems, Inc. and subsidiaries at January 31, 1996, and the results of
its operations and its cash flows for each of the years in the two-year period
then ended in accordance with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has incurred significant losses and as at
January 31, 1996, has a working capital deficiency of approximately $1,910,000
and a capital deficiency of $2,729,000 which raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note A. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/
Richard A. Eisner & Company, LLP
New York, New York
March 1, 1996
With respect to Note J[4]
May 6, 1996
F-3
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT JANUARY 31, 1996
<TABLE>
<CAPTION>
Page 1 of 2
ASSETS
<S> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,000
Other current assets . . . . . . . . . . . . . . . . . . . . 16,000
------------
Total current assets. . . . . . . . . . . . . . . . . . 18,000
Investments in Joint Ventures - at equity:
Lehi Independent Power Associates, L.C. (Note C[1]). . . . . 1,170,000
Plymouth Cogeneration Limited Partnership (Note C[2]). . . . 703,000
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 103,000
------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,994,000
============
LIABILITIES
Current liabilities:
Accrued expenses and other current liabilities
(Including due to related parties of $467,000)
Notes D and L). . . . . . . . . . . . . . . . . . . . . . $ 990,000
Pre-reorganization income taxes payable and accrued
interest - current (Note E) . . . . . . . . . . . . . . . 172,000
Loans payable (Note G) . . . . . . . . . . . . . . . . . . . 766,000
------------
Total current liabilities . . . . . . . . . . . . . . . 1,928,000
Convertible subordinated secured debentures (including
due to related parties of $325,000) (Notes H and L). . . . . 1,525,000
Notes payable (including due to related parties of
$775,000) (Notes I and L). . . . . . . . . . . . . . . . . . 965,000
Deferred interest (including due to related parties of
$12,000) (Notes H and L) . . . . . . . . . . . . . . . . . . 114,000
Pre-reorganization income taxes payable and accrued
interest (Note E). . . . . . . . . . . . . . . . . . . . . . 176,000
Advances from Joint Ventures (Note C[2]). . . . . . . . . . . . . 15,000
------------
Total liabilities . . . . . . . . . . . . . . . . . . . 4,723,000
------------
Page 2 of 2
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
Common stock, $.01 par value, authorized 35,000,000
shares; issued and outstanding 439,650 . . . . . . . . . . . 4,000
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 112,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . (2,846,000)
------------
Total capital deficiency. . . . . . . . . . . . . . . . (2,729,000)
------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,994,000
============
The accompanying notes to financial statements are an integral part hereof.
</TABLE>
F-4
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Page 1 of 2
Year Ended January 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Costs and expenses:
Operating expenses . . . . . . . . . . . . . $ 27,000 $ 109,000
Administrative expenses. . . . . . . . . . . 826,000 897,000
Interest expense . . . . . . . . . . . . . . 604,000 319,000
Loss from Joint Ventures . . . . . . . . . . 17,000 76,000
------------ ------------
Total cost and expenses . . . . . . . . 1,474,000 1,401,000
------------ ------------
(Loss) before extraordinary item. . . . . . . . . (1,474,000) (1,401,000)
Extraordinary gain from restructuring of
Liabilities. . . . . . . . . . . . . . . . . 83,000 85,000
------------ ------------
NET (LOSS). . . . . . . . . . . . . . . . . . . . (1,391,000) (1,316,000)
Dividends on preferred stock. . . . . . . . . . . (21,000)
------------ ------------
(Loss) applicable to common stock . . . . . . . . $(1,412,000) $(1,316,000)
============ ============
(Loss) per share before extraordinary item. . . . $(3.41) $(3.38)
======= =======
Net (loss) per share. . . . . . . . . . . . . . . $(3.22) $(3.17)
======= =======
Weighted average shares outstanding . . . . . . . 438,773 415,022
======= =======
The accompanying notes to financial statements are an integral part hereof.
</TABLE>
F-5
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
(Notes A and J)
<TABLE>
<CAPTION>
Page 1 of 3
Preferred Stock Common Stock
----------------- -------------------------------
Additional
Number Number Paid-in
of Shares Amount of Shares Amount Capital
--------- ------ ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Balance,
January 31, 1994 391,250 $4,000 $(306,000)
Sale of common stock 32,000 139,000
Compensation attributable
to options and warrants 48,000
Shares issued for interest
Joint Ventures 11,400 114,000
Value assigned to warrants
issued in correction
with notes payable 46,000
Net (loss) for the year
ended January
31, 1995
------ ------ ---------- ------- ----------
Balance,
January 31, 1995 434,650 4,000 41,000
Sale of common stock 5,000 34,000
Value assigned to
preferred stock
issued in con-
nection with
loans payable 57,500 $1,000 28,000
Value assigned to
additional warrants
issued in connection
with notes payable 9,000
Net (Loss) for the
year ended Jan-
uary 31, 1996
------ ------ ---------- ------- ----------
BALANCE - JANUARY
31, 1996 57,500 $1,000 439,650 $4,000 $ 112,000
====== ====== ========== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deficit Total
------------ ------------
<S> <C> <C>
Balance, January 31, 1994 $ (139,000) $ (441,000)
Sale of common stock 139,000
Compensation attributable to options
and warrants 48,000
Shares issued for interest Joint Ventures 114,000
Value assigned to warrants issued in
correction with notes payable 46,000
Net (loss) for the year ended
January 31, 1995 (1,316,000) (1,316,000)
------------ ------------
Balance, January 31, 1995 (1,455,000) (1,410,000)
Sale of common stock 34,000
Value assigned to preferred stock issued
in connection with loans payable 29,000
Value assigned to additional warrants
issued in connection with notes payable 9,000
Net (Loss) for the year ended
January 31, 1996 (1,391,000) (1,391,000)
------------ ------------
BALANCE - JANUARY 31, 1996 $(2,846,000) $(2,729,000)
============ ============
The accompanying notes to financial statements are an integral part hereof.
F-6
</TABLE>
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended January 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) . . . . . . . . . . . . . . . . . $(1,391,000) $(1,316,000)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Amortization of debt discount. . . . . . . 42,000 3,000
Amortization of purchase price in excess
of equity in Joint Ventures. . . . . . . . 59,000 55,000
Amortization of deferred financing costs . 72,000
Value assigned to options and warrants . . 48,000
Gain from restructuring of liabilities . . (83,000) (85,000)
Equity in (income)/loss of Joint Ventures,
net of distributions . . . . . . . . . . . (13,000) 21,000
Loss from legal proceedings. . . . . . . . 102,000
Deferred interest. . . . . . . . . . . . . 114,000
Accrued interest on pre-reorganization
income taxes payable . . . . . . . . . . . 39,000
Changes in operating assets and liabilities:
(Increase) decrease in other assets. . . 2,000 (1,000)
Increase in accounts payable and
accrued expenses . . . . . . . . . . . . 671,000 146,000
------------ ------------
Net cash (used in) operating activities (641,000) (874,000)
------------ ------------
Cash flows from investing activities:
Security deposit on proposed acquisition . . (50,000)
Cost incurred in connection with the
Proposed Acquisitions. . . . . . . . . . . . (3,000)
Investment in Joint Ventures . . . . . . . . (636,000)
Advances to Joint Ventures . . . . . . . . . (9,000) (11,000)
Loans to officers. . . . . . . . . . . . . . (47,000)
Collections of loans receivable - officer. . 33,000
------------ ------------
Net cash (used in) investing activities (29,000) (694,000)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of convertible
subordinated debt. . . . . . . . . . . . . . 400,000
Proceeds from issuance of common stock . . . 34,000 139,000
Proceeds from issuance of notes payable. . . 25,000 975,000
Proceeds from loans payable and
preferred stocks . . . . . . . . . . . . . . 785,000
Payment of deferred financing costs. . . . . (102,000)
Payment of pre-reorganization payroll
taxes payable . . . . . . . . . . . . . . . (34,000) (105,000)
Payment of pre-reorganization income
taxes payable. . . . . . . . . . . . . . . . (9,000) (13,000)
Advances from Joint Ventures . . . . . . . . 15,000
Deferred registration costs. . . . . . . . . (50,000)
------------ ------------
Net cash provided by financing
activities . . . . . . . . . . . . . . 664,000 1,396,000
------------ ------------
NET (DECREASE) IN CASH. . . . . . . . . . . . . (6,000) (172,000)
Cash - beginning of the period. . . . . . . . . 8,000 180,000
CASH - END OF THE PERIOD. . . . . . . . . . . . $ 2,000 $ 8,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest . . . . . . . . . . . $ 93,000 $ 163,000
Supplemental schedule of noncash investing activity:
Fair market value of common stock issued and
contributed to investment in Joint Ventures. 114,000
The accompanying notes to financial statements are an integral part hereof.
</TABLE>
F-7
<PAGE>
(NOTE A) - The Company:
- -----------------------
U.S. Envirosystems, 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. ("USE").
On May 17, 1996, the Company amended its Certificate of Incorporation to
change the name of the Company to U.S. Energy Systems, Inc.
The Company is in the business of owning, developing and operating
cogeneration and independent power plants through Joint Ventures.
The Company has incurred significant losses since its reorganization in
1993 and, as at January 31, 1996 has a working capital deficiency of
approximately $1,910,000 and a capital deficiency of approximately $2,729,000.
These factors raise substantial doubt about its ability to continue as a going
concern. Management's plans for which it has letters of intent or agreements
include the following:
a) Obtain $3,500,000 through the sale of convertible preferred stock
and warrants.
b) Obtain net proceeds of approximately $5,425,000 through the sale of
1,625,000 shares of common stock and warrants in a public offering (the
"Proposed Public Offering").
c) Convert the existing preferred stock into 205,000 shares of common
stock.
d) Convert $500,000 of the existing Debentures into 125,000 shares of
common stock and warrants.
e) Acquire an interest in two operating geothermal power plants
("Steamboat 1 and 1A") for an aggregate of $5,400,000 in cash consideration
(the "Proposed Acquisitions").
f) Repay notes payable and other liabilities of approximately
$2,139,000.
All of the above are dependent upon the successful completion of the
proposed public offering referred to in (b) above and to certain other
conditions including the completion of all of the above. There is no
assurance that the above plans can be accomplished. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
(NOTE B) - Significant Accounting Policies:
- -------------------------------------------
Significant accounting policies followed in the preparation of the
financial statements are as follows:
[1] Consolidation:
The consolidated financial statements of the Company include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in the
consolidated balance sheet.
[2] Investments in Joint Ventures:
Investments in Joint Ventures are accounted for under the equity
method. LIPA and Plymouth each have a fiscal year end 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 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 totaling $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, the Project was
not in operation.
In the Proposed Acquisitions, Far West Capital Inc., the other 50%
owner of LIPA, will own an interest of Steamboats in the event the Proposed
Acquisitions are consummated.
[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:
LIPA - buildings - 28 years
- machinery and
equipment - 6 years
Plymouth - plant - 19 years
[4] The following is summarized financial information of LIPA and PCLP
as at December 31, 1995 and for the two-year periods then ended:
<TABLE>
<CAPTION>
December 31, 1995
--------------------------
LIPA PCLP
------------ ------------
<S> <C> <C>
Current assets. . . . . . . . . . . . . . . . . $ 158,000 $ 158,000
Property, plant and equipment at cost (net) 257,000 5,593,000
Other assets. . . . . . . . . . . . . . . . . . 828,000
------------ ------------
Total assets. . . . . . . . . . . . . 415,000 6,579,000
Current liabilities . . . . . . . . . . . . . . (9,000) (343,000)
Long-term debt. . . . . . . . . . . . . . . . . (4,987,000)
------------ ------------
Equity. . . . . . . . . . . . . . . . . . . . . $ 406,000 $ 1,249,000
============ ============
Equity in Joint Ventures. . . . . . . . . . . . $ 203,000 $ 625,000
Investments in Joint Ventures in excess
of equity. . . . . . . . . . . . . . . . . . 967,000 78,000
------------ ------------
Total investments in Joint
Ventures. . . . . . . . . . . . . . $ 1,170,000 $ 703,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
Page 1 of 2
Year Ended December 31,
---------------------------------
LIPA PCLP
--------------------- -----------
1995 1994 1995
--------- ----------- -----------
<S> <C> <C> <C>
Revenue. . . . . . . . . . . . . $1,150,000
-----------
Gain on sale of fixed assets $236,000
---------
Net income (loss). . . . . . . . $172,000 $(41,000) $ (87,000)
========= ========= ===========
Equity in net income (loss) $ 86,000 $(21,000) $ (44,000)
Amortization of purchase
price over equity. . . . . . . (55,000) (55,000) (4,000)
--------- --------- -----------
Net income (loss) from
Joint Ventures . . . . . . . . $ 31,000 $(76,000) $ (48,000)
========= ========= ===========
Page 2 of 2
Plymouth Project commenced operations on January 1, 1995.
</TABLE>
(NOTE D) - Accounts Payable and Accrued Expenses:
- -------------------------------------------------
Accrued expenses and other current liabilities at January 31, 1996 are
comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Professional fees. . . . . . . . . . . . . $293,000
Accrued interest . . . . . . . . . . . . . 417,000
Accrued payroll and related taxes. . . . . 238,000
Other. . . . . . . . . . . . . . . . . . . 42,000
--------
T o t a l. . . . . . . . . . . . $990,000
========
</TABLE>
(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 at January 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997. . . . . . . . . . . . . . $172,000
1998. . . . . . . . . . . . . . 41,000
1999. . . . . . . . . . . . . . 43,000
2000. . . . . . . . . . . . . . 46,000
2001. . . . . . . . . . . . . . 46,000
--------
T o t a l . . . . . . $348,000
</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 at January 31, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Benefit of post-reorganization operating
loss carryforward . . . . . . . . . . . . . . . . . $ 801,000
Expenses for financial reporting, not yet
deductible for taxes. . . . . . . . . . . . . . . . 132,000
Valuation allowance. . . . . . . . . . . . . . . . . . (933,000)
----------
$ - 0 -
==========
</TABLE>
The Company has fully reserved against the deferred tax asset since the
likelihood of realization cannot be determined.
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.
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 carryfowards 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.
(NOTE G) - Loans Payable (the "Loans"):
- ---------------------------------------
Loans payable at January 31, 1996 consist of the following:
<TABLE>
<CAPTION>
Page 1 of 2
<S> <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
(effective rate 39.68%) (a). . . . . . . . . . . . . . $616,000
10% loan, payable on the earlier of
May 31, 1996 or closing of the proposed
public offering (b). . . . . . . . . . . . . . . . . . 100,000
Page 2 of 2
18% unsecured loan payable upon closing of
the proposed public offering . . . . . . . . . . . . . 50,000
--------
$766,000
========
</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, the 9% interest deferred, included in accrued
expenses and other current liabilities, was $160,000.
(NOTE I) - Notes Payable:
- -------------------------
In connection with the acquisition of PCLP (see Note C[2]), the Company
borrowed $1,000,000 from a group comprised principally of officers, directors
and affiliates of the Company. The interest on the Secured Promissory Notes
(the "Notes") is the prime rate plus 2.5% (11% at January 31, 1996) adjusted
quarterly during the term of the Notes. The interest on the Notes is payable
quarterly but only to the extent that the net after tax cash flow of Plymouth
is sufficient to make such interest payment. The Company has not paid
interest on these Notes since the inception of the Notes. At January 31, 1996
the unpaid interest on these Notes was $141,000, included in accrued expenses
and other current liabilities. The Notes are collateralized by the shares of
common stock of Plymouth. The Notes and unpaid interest, are to be paid on
the earlier of: (1) USE's receipt of not less than $1,000,000 in net proceeds
from the Company's next public offering of equity securities, or (2) USE's
receipt of an aggregate of not less than $4,000,000 in net proceeds from a
private debt financing of USE, or (3) October 31, 1997.
In conjunction with the issuance of these Notes, the Company granted to
the investors warrants to purchase 95,000 shares of the Company's common stock
at $16.00 per share before October 31, 1999. The Company valued the warrants
issued at $46,000, which is being accounted for as debt discount. In
connection with the Company's Loans (Note G), the Company was required to
grant certain security interests in the Company's assets including its
ownership interest in Plymouth. In June 1995, in return for granting the
security interests, the Company granted the noteholders additional warrants to
purchase 19,000 shares of the Company's common stock (the "Additional
Warrants"). The Additional Warrants have the same terms as those warrants
initially granted to the note holders. The Company valued the Additional
Warrants issued at $9,500, which is being accounted for as additional debt
discount. 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.
[2] Stock options:
During the year ended January 31, 1996, the Company issued options
to purchase 154,000 shares of common stock with exercise prices of $4.00 to
$10.00 expiring in 2000. 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. At January 31, 1996, options to purchase
174,100 shares of common stock were outstanding with exercise prices of $4.00
to $10.00 expiring from 1999 to 2000. No options were exercised during the
year ended January 31, 1996.
[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.
[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.
(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 is $12,000 due to the Related Parties.
In addition, at January 31, 1996, $467,000 of accrued expenses and other
current liabilities is due to the Related Parties.
During the years ended January 31, 1996 and January 31, 1995, the Company
paid interest of $15,000 and $22,000, respectively, to the Related Parties.
(NOTE M) - Events (Unaudited) Subsequent to the Date of
- -------------------------------------------------------
Independent Auditors' Report
----------------------------
[a] On May 17, 1996, the Company amended its Certificate of
Incorporation to change the name of the Company to U.S. Energy Systems, Inc.
[b] The aggregate purchase price of the Steamboat acquisition referred
to in Note A(e) changed from $5,400,000 to $5,150,000 due to a mortgage
payment made by the seller.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-01-1995
<PERIOD-END> JAN-31-1996
<CASH> 2,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,994,000
<CURRENT-LIABILITIES> 1,928,000
<BONDS> 1,525,000
0
1,000
<COMMON> 4,000
<OTHER-SE> (2,734,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,994,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 870,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 604,000
<INCOME-PRETAX> (1,474,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,474,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 83,000
<CHANGES> 0
<NET-INCOME> (1,391,000)
<EPS-PRIMARY> $3.22
<EPS-DILUTED> $3.22
</TABLE>
