U.S.SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter ended October 31, 1996
-------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
Commission File Number: 0-10238
----------
U.S. ENERGY SYSTEMS, INC.
- - -----------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 52-1216347
- - ---------------------------- --------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
515 N. Flagler Drive, Suite 202, West Palm Beach, FL 33401
- - ------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(561)820-9779
- - ------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for a shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [ X ].
Indicate by check mark whether issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after
distribution of securities under a Plan of Reorganization confirmed by the
court. [ X ].
As of October 31, 1996, the number of outstanding shares of the registrant's
Common Stock was as follows:
Title of Class Number of Shares
Common 439,650
Transitional Small Business Disclosure Format: [ ] Yes [ X ] No
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
BALANCE SHEET
October 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash in bank. . . . . . . . . . . . . . . . . . . . . $ 6,000
Inventory . . . . . . . . . . . . . . . . . . . . . . 13,000
Other current assets. . . . . . . . . . . . . . . . . 1,000
-------------
Total Current Assets 20,000
Investment in joint ventures - at equity:
Lehi Independent Power Associates, L.C. . . . . . . . 1,069,000
Plymouth Cogeneration Limited Partnership . . . . . . 628,000
Other Assets:
Steamboat Envirosystems Deposit . . . . . . . . . . . 53,000
Deferred costs of new registration . . . . . . . . . . 322,000
-------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . $2,092,000
=============
LIABILITIES
Current liabilities:
Accrued expenses and other current liabilities
(including due to related parties of $754,000). . . $2,050,000
Pre-reorganization income taxes payable and
accrued interest. . . . . . . . . . . . . . . . . . 203,000
Loans payable . . . . . . . . .. . . . . . . . . . . . 960,000
-------------
Total current liabilities . . . . . . . . . . . . 3,213,000
Convertible subordinated secured debentures
(including due to related parties of $325,000) . . . . . 1,525,000
Notes payable (including due to related parties
of $775,000) . . . . . . . . . . . . . . . . . . . . . . 980,000
Deferred interest (including due to related
parties of $12,000). . . . . . . . . . . . . . . . . . . 114,000
Pre-reorganization income taxes payable and
accrued interest . . . . . . . . . . . . . . . . . . . . 176,000
Advances from Joint Ventures. . . . . . . . . . . . . . . . 28,000
-------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . 6,036,000
-------------
CAPITAL DEFICIENCY
Preferred stock, $.01 par value, authorized
5,000,000 shares; issued and outstanding 57,500
(liquidating preference $575,000). . . . . . . . . . . . 1,000
Common stock, $.01 par value, authorized 35,000,000
shares; issued and outstanding 439,650 . . . . . . . . . 4,000
Additional paid-in capital. . . . . . . . . . . . . . . . . 112,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (4,061,000)
--------------
TOTAL CAPITAL DEFICIENCY. . . . . . . . . . . . . (3,944,000)
--------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . $2,092,000
==============
See notes to financial statements
</TABLE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months Ended Nine months Ended
October 31 October 31
---------------------- ------------------------
1996 1995 1996 1995
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues $ 41,000 $ - $ 41,000 $ -
---------- ---------- ------------ ----------
Cost of Sales 38,000 - 38,000 26,000
Selling and Administrative
expense 189,000 164,000 593,000 560,000
Interest expense 163,000 178,000 491,000 401,000
Loss from Joint Ventures 38,000 25,000 134,000 86,000
---------- ---------- ------------ ----------
Total Cost and Expenses 428,000 367,000 1,256,000 1,073,000
---------- ---------- ------------ ----------
(Loss) before extraordinary
item (387,000) (367,000) (1,215,000) (1,073,000)
Extraordinary gain from
restructuring of
liabilities 83,000
---------- ---------- ------------ ----------
Net (Loss) (387,000) (367,000) (1,215,000) (990,000)
Dividends on preferred stock (14,000) (43,000)
---------- ---------- ------------ ----------
(Loss) applicable to
common stock $(401,000) $(367,000) $(1,258,000) $(990,000)
========== ========== ============ ==========
Net (Loss) per share $ (0.91) $ (0.84) $ (2.86) $ (2.26)
========== ========== ============ ==========
Weighted average shares
outstanding 439,650 438,377 439,650 438,379
========== ========== ============ ==========
See notes to financial statements
</TABLE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- -------------------------------
Additional
Number Number Paid-in
of Shares Amount of Shares Amount Capital
---------- ------ --------- ------ ----------
<S> <C> <C> <C> <C> <C>
Balance -
January 31, 1996 57,500 $1,000 439,650 $4,000 $ 112,000
Net (loss) for the
six months ended
July 31, 1996
---------- ------ --------- ------ ----------
Balance -
July 31, 1996 57,500 1,000 439,650 4,000 112,000
Net (loss) for the
three months ended
October 31, 1996
---------- ------ --------- ------ ----------
Balance -
October 31, 1996 57,500 $1,000 439,650 $4,000 $ 112,000
========== ====== ========= ====== =========
Accumulated
Deficit Total
------------ ------------
<S> <C> <C>
Balance -
January 31, 1996 $(2,846,000) $(2,729,000)
Net (Loss) for the
six months ended
July 31, 1996 (828,000) (828,000)
------------ ------------
Balance -
July 31, 1996 (3,674,000) (3,557,000)
Net (Loss) for the
three months ended
October 31, 1996 (387,000) (387,000)
------------ ------------
Balance -
October 31, 1996 $(4,061,000) $(3,944,000)
============ ============
See notes to financial statements
</TABLE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 3, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) . . . . . . . . . . . . . . $(1,215,000) $( 990,000)
Adjustments to reconcile net (loss)
to net cash (used in)operating
activities:
Amortization of debt discount . . . . . 15,000 11,000
Amortization of purchase price
in excess of equity in Joint Ventures. 41,000 41,000
Amortization of deferred financing
and registration costs. . . . . . . . - 43,000
Gain from restructuring of liabilities. - (83,000)
Equity in (income)/loss of Joint
Ventures, net of distributions 135,000 45,000
Deferred interest . . . . . . . . . . . - 127,000
Accrued interest on pre-reorganization
income taxes payable 31,000 -
Changes in operating assets and
liabilities:
(Increase) decrease in other assets . 2,000 (9,000)
Increase in accounts payable and
accrued expenses. . . . . . . . . . 1,042,000 136,000
------------ -----------
Net cash (used in) operating
activities . . . . . . . . . . . . 51,000 (679,000)
------------ -----------
Cash flows from investing activities:
Collections of loans receivable - officer - 59,000
------------ -----------
Net cash provided by (used in)
investing activities . . . . . . . - 59,000
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of convertible
subordinated debt . . . . . . . . . . . - 25,000
Proceeds from issuance of common stock . - 63,000
Proceeds from loans payable and
preferred stocks. . . . . . . . . . . . 212,000 690,000
Payment of deferred financing costs . . . - (85,000)
Payment of pre-reorganization payroll
taxes payable . . . . . . . . . . . . . - (117,000)
Payment of pre-reorganization income
taxes payable . . . . . . . . . . . . . - (7,000)
Advances from Joint Ventures . . . . . . 13,000 3,000
Deferred registration costs. . . . . . . (272,000) 41,000
------------ -----------
Net cash provided by financing
activities . . . . . . . . . . . . (47,000) 613,000
------------ -----------
NET INCREASE (DECREASE) IN CASH . . . . . . 4,000 (7,000)
Cash - beginning of the period . . . . . . . 2,000 8,000
------------ -----------
CASH - END OF THE PERIOD . . . . . . . . . . $ 6,000 $ 1,000
============ ===========
Supplemental disclosure of cash flow
information:
Cash paid for interest . . . . . . . . . $ 154,000 $ 44,000
Supplemental schedule of noncash
financing activity:
Valuation of preferred stock in
connection with bridge loan $ 29,000
See notes to financial statements
</TABLE>
U. S. ENERGY SYSTEMS, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED OCTOBER 31, 1996 AND 1995
(Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with instructions to Form 10-QSB and, accordingly, do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal accruals)
considered necessary for a fair presentation have been included. The results
for the nine months are not necessarily indicative of results for the full
year.
For further information see Management's Discussion and Analysis, and
refer to the financial statements and footnotes included in the Company's
Annual Report on Forms 10-KSB and 10-KSB/A for its fiscal year ended January
31, 1996.
Note 2 Income Taxes
No income tax provisions have been made due to losses incurred.
Deferred income tax benefits have been fully reserved due to the uncertainty
of future realization.
Note 3 Net (Loss) Per Share
Net (loss) per share has been computed on the basis of weighted
average number of shares outstanding during the period. Common stock
equivalents have not been included in the computation since their inclusion
would be anti-dilutive or immaterial.
Note 4 Subsequent Events
On-going Projects
---------------------
Lehi, Utah. As previously reported, in 1995, the Company and its
partners concluded a sale of non-essential engines and parts of the Lehi, Utah
plant for a gain of approximately $236,000, with 50% or $118,000 as the
Company's share. The partnership is using a portion of the funds from this
sale to upgrade the remaining two engines and place them in service.
Currently there are no contracts for the sale of the power output of the Lehi
Plant. However, negotiations for such contracts will begin as soon as the
plant is in operational status, and it is anticipated that cash flow will be
generated during the fourth quarter of the fiscal year, provided the
necessary operating permit is obtained. Alternatively, the Company may decide
to sell two of its engines and to replace them with a larger and more
efficient gas turbine. A recently received offer on the engines is being
evaluated. If such sale is made, the Company would benefit through its 50%
share of the revenue from the sale; however, operations would be delayed until
the second quarter of the next fiscal year a new operating permit will also be
required for the larger turbine. The cost of the new engine is expected to be
fully financed directly through the manufacturer without additional investment
by the Company.
Plymouth, New Hampshire. The Plymouth, NH plant has been operating
since January 1995 and historically has not provided revenues or cash flow to
the Company because of costs related to equipment adjustments and operational
reserves required by the terms of the financing. However, the plant has begun
to provide cash flow to the Company. The Company received its first
distribution amounting to $20,000 in August 1996. In addition, switching the
plant's fuel supply to less expensive waste oil, as is presently being
contemplated, could add to cash flow starting during the next fiscal year, as
the Partnership has an agreement with the university to share equally in any
fuel savings. There are also plans being studied to expand the size of the
project to serve other New Hampshire college system campuses through wheeling,
which would take place during fiscal year 1998.
New Projects
---------------
Geothermal Power Plants, Steamboat Hills, Nevada. The Company has
acquired a 95% interest in a newly formed company, Steamboat Envirosystems,
L.C. ("Steamboat LLC") which has purchased two geothermal power plants (the
"Steamboat Facilities") from Far West Electric Energy Fund and from 1-A
Enterprises. The Company has contributed a total of $4,693,000 (including
$50,000 as a down payment which was previously paid by the Company) to
Steamboat LLC to complete the acquisition and retire a mortgage to which the
Steamboat Facilities were subject, plus future acquisition of certain royalty
interests and plant improvements.
The Steamboat Facilities produce 8 megawatts of electric power which
is sold under two power purchase agreements to Sierra Pacific Power Company
("Sierra"). This acquisition is expected to give the Company a positive cash
flow from operations in the future.
The current power purchase agreements with Sierra provide for price
adjustment in December 1996 for Steamboat 1 and in December 1998 for Steamboat
1A. Under the contracts, Steamboat LLC is required to sell power to Sierra
for additional 10 year periods at the then-prevailing short-term avoided costs
for electricity for Sierra. However, Sierra has indicated that it would be
willing to negotiate a mutual release of the contract. If the price
adjustments were to be made now, the new prices based on the contract formula
would be substantially less than the existing contract rates. Although
Management believes that revenues generated will still be in excess of the
costs of production, there is no assurance that future prices at which the
electricity generated by the Steamboat Facilities may be sold will exceed the
cost of production, or that Steamboat LLC will generate adequate cash flow
from operations to meet its investing and financing requirements. Although
the prices are variable and fluctuate, if, as expected, a substantial
reduction in power prices for Steamboat 1 takes place in December 1996, the
result would mean a decrease in the Company's share of net earnings of
Steamboat LLC, which, depending on the extent of the price reduction, could
result in the Company reflecting a net loss. If rates offered by Sierra are
not satisfactory, the Company and its partners may seek to negotiate
termination of the existing contracts. The Company believes that under new
regulations it will be able to sell the output of electricity to other
electric utility purchasers at more favorable prices.
The Company has contributed $1,000,000 to Steamboat LLC for the
purpose of buying out certain royalty interest and to fund certain
improvements to the Steamboat Facilities which are expected to result in
higher electricity output. While negotiations with certain royalty owners
have already begun, and the Company and its partners believe that these
interest can be bought out, no agreements have yet been concluded. Additional
royalty agreements, applying only to Steamboat 1, call for payment of a total
of 30% of the net revenue of Steamboat 1 after certain deductions, starting
March 1, 1997. The resulting effect on the net income of Steamboat LLC and on
the Company's after tax income will depend on the other elements of power
sales revenues outlined above. Assuming the reduction in income from power
sales illustrated above, and the buyout of no royalty interests, the cost of
these net revenue royalties could be in the range of $50,000 to $100,000
annually. Negotiations with these interest have also already begun, and
Management believes they will be successfully purchased although no assurance
can be given.
The Company has acquired an 81.5% interest in NRG Company, LLC
("NRG"), for $265,000. NRG was recently formed and funded at $70,000 by
several investors in the Company, including Messrs. Rosen and Nelson. From
these funds, NRG made a loan of $50,000 to Reno Energy LLC ("Reno Energy").
$250,000 from the Company's capital contribution to NRG has been loaned to
Reno Energy to bring the total loan of $300,000. The purpose is to fund pre-
development expenses associated with the proposed development of a geothermal
heating project (the "Reno Project"). The loan is to be repaid over three
years with interest at 9% per annum, or with the proceeds of any financing
transaction.
In order to participate in the Reno Project and eliminate any
potential conflict of interest, the Company has acquired the interests of
Messrs. Rosen and Nelson in NRG. Of the $265,000 to be paid by the Company
for its 81.5% interest in NRG, $10,000 will be used to purchase these
interests, for which Messrs. Rosen and Nelson had paid that amount. Messrs.
Moody and Knoll, who resigned as directors of the Company upon the
consummation of the financing described in Note 5 below, will each continue to
own $10,000 (3.08%) interests in NRG.
There is a large industrial park being developed in Reno on a 1200
acre area in close proximity to the geothermal field. The first phase of the
park is already sold out, and the entire park is expected to be developed
within the next four to seven years. An examination of the current property
owners of the park indicates that the park will house mostly commercial
buildings with some industrial facilities. Also, a 200-bed hospital and 300-
room hotel are planned to be built in the park, with many more prospective
tenants. Therefore, the industrial park will create a huge demand for space
heating and cooling as well as process heating. It is expected that the total
building, adding up to 30,000,000 square feet of floor space, will be
connected to the geothermal grid to meet their heating and cooling needs.
Additionally, there is a high school located nearby and a college campus is
planned in addition to other development in the area. Each of these is likely
to be a major consumer of geothermal energy.
Reno Energy plans to construct and operate a plant which will use
geothermally heated fresh water for space heating and cooling and for process
heating in the industrial park and the other nearby development. To meet the
requirements of these commercial and industrial facilities, a pipeline with
supply and return lines would be built that would loop through the industrial
park. A binary hot water system with fresh water circulating through the loop
will be used to avoid any concerns associated with the direct use of
geothermal brine such as scale build-up in the pipes, corrosion in pipes and
equipment, and possible pollution of the ground in case of a spill. Fresh
water will be heated in heat exchangers at the site where geothermal brine is
extracted and reinjected; only fresh water will be circulated in the loop.
The heat thus provided will be sold at a discount from the cost of producing
an equivalent amount of heat from conventional natural gas furnaces.
Under the terms of the agreements between NRG and Reno Energy, NRG
has an option to acquire a 50% interest in Reno Energy (subject to certain
preferential distribution interest of the founders of Reno Energy) (the "Reno
Option"). The Reno Option, which would be paid for out of working capital,
will be exercisable for $1 million until December 31, 1996 but extendable,
upon payment of $100,000, until March 1, 1997 at an exercise price of
$1,200,000. If the Company determines to exercise the Reno Option, it will
use the funds designated for use as working capital, if such funds are still
available. It is estimated that approximately $35,000,000 is required for
construction, procurement and other costs associated with the commencement of
operations at Reno Energy. Such amount is expected to be financed through
industrial revenue bonds and/or vendor financing, in addition to other types
of tax-exempt debt financing. Efforts begun on the Reno Project include
retention of an international engineering firm to provide preliminary
engineering and design services to support Reno Energy's application to the
Nevada Public Service Commission for authorization, as well as retention of a
financial consultant to assist in securing debt financing for Reno Project.
Under the terms of the agreements governing NRG, the Company, which
owns 81.5% of NRG, will have decision making authority on all matters. If the
Reno Option is exercised, each of the investors in NRG will be given an
opportunity to fund its pro rata share of the option price in order to
maintain its interest in NRG.
The Reno Project is still in the planning and development stage. As
yet there are no contracts with any end users, nor are there approvals from
local and state authorities. The Company will have to satisfy itself as to
these and other factors before NRG's option would be exercised.
Other Projects.
The Company also expects revenues from other projects, currently
being negotiated, that will be under way during the next twelve months but are
not yet under contract. There are five such projects, not including
Steamboat, at least four of which the Company believes will be secured and
from which revenues are anticipated to commence within the next twelve months.
These include two projects for two separate shopping malls in El Paso, TX, a
large resort and commercial center in St. Thomas, USVI, a residential and
commercial center at a kibbutz in Haifa, Israel, and in the long term a steel
mill in Raipur, India. With regard to the shopping malls and the St. Thomas
resort, the Company and its joint development partners in each case will own
and operate the cogeneration facilities. The Company has signed a letter of
intent with the owners of Bluebeard's Castle, a large resort and commercial
complex in St. Thomas, USVI, to build and operate a 3 megawatt cogeneration
plant and a 120,000 gallon per day water recovery system in the resort's
property. The Company, the resort manager and the resort owners will own the
cogeneration plant and water system and share revenues based on capital
investment in the project. The resort owners have paid approximately $41,000
for the installation of the first of six engine generators during September
1996. While the Company anticipates realizing additional revenues for its
engineering and equipment sales to the project immediately upon the start of
construction, and anticipates that the main stream of revenue will be the sale
of energy to the host facilities over the fifteen year term of the contract,
there can be no assurance that this will occur. In the case of the Israeli
kibbutz project, the Company would be selling the hardware and providing
engineering services for installation to the kibbutz, and the Company's
revenues will be derived from these sales. In the case of the Raipur steel
mill, the Company will provide consulting services to the steel mill for the
acquisition, shipping and installation of the hardware. The consulting fee
will be a percentage of total cost.
These other projects should not require capital outlays, as they
will be self-financed. The working capital remaining after the closing of the
additional financing outlined in Note 5 below, together with the regular
income from Steamboat LLC, will be adequate for operational needs during the
next twelve months.
While the Company does not conduct research and development per se,
it will expend funds to investigate and develop new projects. It is
anticipated that the total of approximately $100,000 will be spent over the
next twelve months on such endeavors, which will come from working capital as
available. Although each project which comes on stream has its own project
staff which becomes a cost of the specific project, the Company does plan to
add at least three more employees to headquarters staff to assist management.
Legal Proceedings
----------------------
There are no legal proceedings currently pending or threatened
against the Company.
The owner of a farm adjacent to the LIPA facility in Lehi, Utah, has
sued LIPA for "nuisance, trespass, and negligence" alleging that in May 1995
diesel fuel from the power plant invaded the drainage ditch dividing the two
properties. The drainage ditch feeds a watering hole on the farmer's
property. The plaintiff's suit alleges that one bull died and five calves
were aborted as a result of petroleum toxosis from ingestion of the fuel in
the ditch and the watering hole. The suit, filed in Utah state court on
January 25, 1996, seek damages "in excess of $20,000." Depositions of both
sides have been completed. Although there was a spill of several hundred
gallons of fuel on the LIPA property in 1991, prior to ownership by either the
Company or its partners, the 1991 spill was remediated. Prior to the
Company's purchase of its interest in the power plant in 1994, Phase I and
Phase II Environmental Assessments were conducted which did not identify any
environmental problems. There is no pathology evidence that the bull died of
petroleum toxosis, or that the calves were aborted as a result of petroleum
toxosis in the mother cows. No other cattle drinking from the same water hole
appeared to be affected. While neither the Company nor its partners believe
the plaintiff has a strong case, LIPA is exploring settlement options with the
plaintiff which would be less costly than the further extensive testing,
expert analyses and litigation.
Note 5 Additional Financing and Related Party Transactions
The company completed a public offering (the "Offering") on December
6, 1996. The net proceeds of the Offering was approximately $10,458,000. Of
this amount, the Company's acquisition of 95% of Steamboat LLC used $4,643,000
(plus $50,000 that had already been paid as a deposit), and the investment in
NRG used $265,000. Certain liabilities were required to be paid from the net
proceeds as follows: Bridge loans, including interest, total $1,216,000,
secured notes payable, including interest, total $1,232,000 and accrued
interest on the Convertible Debentures required to be paid as part of the
restructuring of these instruments, total $405,000. These have been adjusted
to reflect interest accrued through December 6, 1996. It is Management's
belief that the funds remaining as working capital, together with the income
from the projects including the Steamboat Facilities, will be sufficient to
meet the requirements of the Company for the next 12 months of operation
without having to raise additional funds except on a project finance basis for
new projects.
Concurrently with the consummation of the Offering, the Convertible
Debentures, of which an aggregate principal amount of $1,525,000 is
outstanding, have been 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 126,125 shares of Common
Stock. From and after the consummation of the Offering, the interest rate
will be 9% instead of the present 18%. Three of the 26 holders of Convertible
Debentures, representing $150,000 in principal amount, did not agree to the
restructuring. The holders who agreed to the restructuring are participating
on a pro-rata basis.
The steps taken to reduce the Company's interest costs include (i)
the capitalization of $500,000 of the Convertible Debentures and the reduction
of the interest rate from 18% to 9% on the balance after consummation of the
Offering and the Private Placement (ii) the payment of secured notes in the
principal amount of $1,000,000 and interest thereon, and (iii) repayment of
all bridge loans. Three of the 26 holders of Convertible Debentures,
representing $150,000 in principal amount, did not agree to the interest rate
reduction from 18% to 9% per annum.
For a further understanding of how these transactions affect the
Company's position, see the Pro Forma Condensed Consolidated Balance Sheet as
of October 31, 1996 on the following pages.
Note 6 Committees of the Board
Because of the small size of the Board of Directors, the functions
of Audit and Compensation Committees are preformed by the Board as a whole.
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 31, 1996
The following Pro Forma Condensed Consolidated Balance Sheet gives
effect to the following transactions as if they had occurred on October 31,
1996: (i) sale of 3,100,000 shares of Common Stock and 3,100,000 Warrants,
(ii) acquisition of a 95% interest in the Steamboat Facilities, (iii)
acquisition of an 81.5% interest in NRG, (iv) repayment of notes payable and
other liabilities, adjusted for accrual of interest to December 6, 1996, (v)
conversion of 57,500 shares of Preferred Stock into 205,000 shares of Common
Stock, and (vi) conversion of $500,000 principal amount of existing
Convertible Debentures to 125,000 shares of Common Stock and 125,000 Warrants.
See notes on following page.
<TABLE>
<CAPTION>
USE ProForma Adjustments
ASSETS Historical Debit Credit Pro Forma
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Current assets:
Cash $ 6,000 $10,458,000(a) $4,643,000(b) $2,723,000
25,000(g) 2,858,000(c2)
265,000(g)
Inventory 13,000 13,000
Other current assets 1,000 3,000(b) 4,000
---------- ----------- ---------- -----------
Total current
assets 20,000 10,486,000 7,766,000 2,740,000
Investments in Joint
Ventures - at equity:
Lehi Independent
Power Assoc,LC 1,069,000 1,069,000
Plymouth Cogen-
eration Ltd
Partnership 628,000 628,000
Steamboat Enviro-
systems,LLC 53,000 53,000(b) -
NRG Company, LLC 265,000(g) 265,000(g) -
Loan Receivable,
Reno Energy 300,000(g) 300,000
Property, Plant
and Equipment 4,967,000(b) 4,967,000
Deferred costs
of registration 322,000 322,000(a) -
---------- ----------- ---------- -----------
TOTAL $2,092,000 $16,018,000 $8,406,000 $9,704,000
=========== =========== ========== ===========
LIABILITIES
Current liabilities:
Accrued expenses
and other current
liabilities $2,050,000 $ 898,000(c2) $ 120,000(c1) $1,272,000
Pre-reorganization
income taxes
payable and
accrued interest 203,000 203,000
Loans payable 960,000 960,000(c2) -
---------- ---------- ---------- -----------
Total current
liabilities 3,213,000 1,858,000 120,000 1,475,000
Convertible
subordinated
secured debentures 1,525,000 500,000(e) 1,025,000
Notes payable 980,000 1,000,000(c2) 20,000(f) -
Deferred interest 114,000 114,000
Pre-reorganization income
taxes payable and
accrued interest 176,000 176,000
Advances from Joint
Ventures 28,000 28,000
---------- ---------- ---------- -----------
Total liabilities 6,036,000 3,358,000 140,000 2,818,000
---------- ---------- ---------- -----------
Minority interest in
subsidiaries:
Steamboat Enviro-
systems, LLC 274,000(b) 274,000
NRG Company, LLC 60,000(g) 60,000
---------- ---------- ---------- -----------
Total Minority
Interests 334,000 334,000
---------- ---------- ----------- -----------
STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
Preferred stock, $0.01
par value,issued and
outstanding 57,500
shares, to be issued
and outstanding, none 1,000 1,000(d)
Common stock, $0.01 par
value, issued and
outstanding 439,650
shares, to be issued
and outstanding,
3,869,650 shares 4,000 31,000(a) 38,000
2,000(d)
1,000(e)
Additional paid-in
capital 112,000 322,000(a) 10,427,000(a) 10,715,000
1,000(d) 499,000(e)
Accumulated deficit (4,061,000) 120,000(c1) (4,201,000)
20,000(f)
---------- ---------- ----------- -----------
Total stockholders'
equity (capital
deficiency) (3,944,000) 464,000 10,960,000 6,552,000
---------- ---------- ----------- -----------
TOTAL $2,092,000 $19,840,000 $19,840,000 $9,704,000
========== ========== =========== ===========
</TABLE>
Notes to Pro Forma Condensed Balance Sheet:
(a) To reflect sale of 3,100,000 shares of Common Stock and 3,100,000
Warrants for net proceeds of $10,458,000, and the write-off of the deferred
costs of the registration.
(b) To reflect purchase of a 95% interest in Steamboat, LLC, which is
acquiring the Steamboat Facilities for an aggregate of $4,693,000 (including
$50,000 as a down payment which was previously paid by the Company), the
resulting investment in plant and equipment, and the minority interest in the
subsidiary.
(c1) To reflect accrual of interest from November 1
to December 6, 1996. $ 120,000
===========
(c2) To reflect payment of debt:
Notes payable $1,000,000
Bridge loans 960,000
Accrued interest 898,000
----------
$2,858,000
==========
(d) To reflect conversion of existing Preferred Stock into 205,000 shares
of Common Stock.
(e) To reflect conversion of $500,000 principal amount of existing
Convertible Debentures into 125,000 shares of Common Stock and 125,000 Private
Warrants. No value has been assigned to these warrants.
(f) To eliminate unamortized debt discount on debt repaid. This charge
will be treated as an extraordinary loss in the next period.
(g) To reflect purchase of an 81.5% interest in NRG Company, LLC, for
$265,000, the loan by NRG to Reno Energy, and the minority interest in NRG.
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION
Results of Operations
Nine months Ended October 31, 1996 Compared to 1995
The Company had revenues of $41,000 from the instrallation of the first
of six engine generators at Bluebeard's Castle in St. Thomas, USVI. (See
"Other projects".) There were no revenues in the 1995 period.
During the 1996 period, the Company had cost of sales amounting to
$38,000 in connection with the Bluebeard's Castle instalaltion referred to
above. In the 1995 period, the $26,000 shown resulted from the adjudication
of a project which had been completed and reported on earlier.
The Selling and Administrative expenses were made up of the following
major elements:
<TABLE>
1996 1995
-------- --------
<S> <C> <C>
Salaries and consuslting fees $342,000 $290,000
Legal and professional fees 124,000 79,000
Corporate expenses 20,000 54,000
All other 107,000 178,000
-------- --------
Total selling and administrative expenses $593,000 $601,000
======== ========
Te nine month joint venture losses break down as follows:
Lehi Independent Power Associates, L.C. $ 80,000 $ 57,000
Plymouth Cogeneration Limited Partnership 54,000 29,000
-------- --------
Total (Loss) from Joint Ventures $134,000 $ 86,000
======== ========
</TABLE>
The increase in salaries and consulting fees was due to the fact that some of
the consulting agreements were not in effect during the entire 1995 period.
Legal and professional fees were higher in the current period due to the costs
related to the additional bridge loans, amortized over the period of the
loans. Costs incurred in connection with the new financing has been deferred.
As of October 31, 1996 these amounted to $322,000.
The corporate expenses in the 1995 period included a non-recurring cost of
$25,000 for a previously planned public offering that was never consummated.
Interest costs in the 1996 period were $491,000 as against $401,000 in 1995
due to higher levels of borrowing, including bridge loans which began in June,
1995.
Liquidity and Capital Resources
As a result of accumulated losses, the Company had a negative working
capital of $3,193,000, and a capital deficiency of $3,944,000 at October 31,
1996. The Company and its underwriter closed on a public offering on December
6, 1996 as previously reported. The Pro Forma Condensed Consolidated Balance
Sheet presented on the previous pages presents the transactions that took
place on December 6, 1996 as if they had taken place on October 31, 1996.
They show that the working capital and capital would have been a positive
$1,265,000 and $6,552,000 respectively. Details of the items included in that
pro forma balance sheet are given in the notes attached thereto.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: December 16, 1996
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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> OCT-31-1996
<CASH> 6,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 13,000
<CURRENT-ASSETS> 20,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,092,000
<CURRENT-LIABILITIES> 3,213,000
<BONDS> 1,525,000
0
1,000
<COMMON> 4,000
<OTHER-SE> (3,949,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,092,000
<SALES> 41,000
<TOTAL-REVENUES> 41,000
<CGS> 38,000
<TOTAL-COSTS> 38,000
<OTHER-EXPENSES> 727,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 491,000
<INCOME-PRETAX> (1,215,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,215,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,215,000)
<EPS-PRIMARY> ($2.86)
<EPS-DILUTED> ($2.86)
</TABLE>
