==============================================================================
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, 1997
[ ] 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.
Delaware 52-1216347
(State of Incorporation) (I.R.S. Employer Identification Number)
515 N. Flagler Drive
Suite 702
West Palm Beach, FL 33401
(561)820-9779
(Address of registrant's principal executive offices)
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 December 10, 1997, the number of outstanding shares of the
registrant's Common Stock was as follows:
Title of Class Number of Shares
-------------- ----------------
Common 5,010,613
Transitional Small Business Disclosure Format: [ ] Yes [ X ] No
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
October 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current Assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,004,000
Accounts receivable . . . . . . . . . . . . . . . . . . 885,000
Note receivable . . . . . . . . . . . . . . . . . . . . 232,000
Other current assets . . . . . . . . . . . . . . . . . 64,000
------------
Total Current Assets. . . . . . . . . . . . . . . . . 2,185,000
Property, plant and equipment, net. . . . . . . . . . . . 5,231,000
Note receivable . . . . . . . . . . . . . . . . . . . . . 1,340,000
Investments in Joint Ventures . . . . . . . . . . . . . . 1,557,000
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . 2,049,000
Deferred acquisition costs . . . . . . . . . . . . . . . 76,000
Other assets. . . . . . . . . . . . . . . . . . . . . . . 150,000
------------
Total . . . . . . . . . . . . . . . . . . . . . . . . $12,588,000
============
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses . . . . . . . . . $ 697,000
Reserve for royalties payable . . . . . . . . . . . . . 422,000
Note payable, bank. . . . . . . . . . . . . . . . . . . 200,000
Mortgage and equipment notes payable,current portion. . 36,000
------------
Total current liabilities . . . . . . . . . . . . . . 1,355,000
Mortgage and equipment notes payable. . . . . . . . . . . 296,000
Convertible subordinated secured debentures . . . . . . . 875,000
Other liabilities . . . . . . . . . . . . . . . . . . . . 41,000
------------
Total liabilities . . . . . . . . . . . . . . . . . . 2,567,000
------------
Minority interests. . . . . . . . . . . . . . . . . . . . 454,000
------------
STOCKHOLDERS' EQUITY
Common stock. . . . . . . . . . . . . . . . . . . . . . . 50,000
Additional paid-in capital. . . . . . . . . . . . . . . . 15,105,000
Accumulated (deficit) . . . . . . . . . . . . . . . . . . (5,588,000)
------------
Total stockholders' equity. . . . . . . . . . . . . . 9,567,000
------------
Total . . . . . . . . . . . . . . . . . . . . . . . . $12,588,000
============
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
--------------------- ------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
---------- ---------- ----------- ------------
Revenues $ 795,000 $ 41,000 $1,537,000 $ 41,000
Operating expenses 344,000 38,000 683,000 38,000
---------- ---------- ----------- ------------
Gross Profit 451,000 3,000 854,000 3,000
Selling, general and
administrative expenses 434,000 189,000 1,119,000 593,000
Litigation Costs 105,000 - 252,000 -
Depreciation/Amortization 70,000 - 144,000 -
---------- ---------- ----------- ------------
Operating (loss) (158,000) (186,000) (661,000) (590,000)
---------- ---------- ----------- ------------
Interest income 29,000 - 118,000 -
Interest expense (35,000) (163,000) (93,000) (491,000)
Loss from Joint Ventures (34,000) (38,000) (94,000) (134,000)
---------- ---------- ----------- ------------
Net (Loss) before
extraordinary item (198,000) (387,000) (730,000) (1,215,000)
Extraordinary gain (loss)
from restructuring
of liabilities - - 36,000 -
---------- ---------- ----------- ------------
Net (loss) $(198,000) $(387,000) $ (694,000) $(1,215,000)
---------- ---------- ----------- ------------
Dividends on preferred
stock - (14,000) - (43,000)
Net (loss) applicable
to common stock (198,000) $(401,000) $ (694,000) $(1,258,000)
========== ========== =========== ============
Net (loss) per common
share $ (0.04) $ (0.91) $ (0.15) $ (2.86)
========== ========== =========== ============
Weighted average shares
outstanding 4,885,628 439,650 4,520,022 439,650
========== ========== =========== ============
See notes to financial statements
</TABLE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL
Nine Months Ended October 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
-------------------------------
Additional
Number of Paid-in Accumulated
Shares Amount Capital Deficit Total
--------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance,
Feb. 1, 1997 4,334,193 $43,000 $12,718,000 $(4,894,000) $7,867,000
Cash paid for
fractional shares (10)
Shares issued in
connection with
acquisition of
American Enviro-
Services, Inc. 676,430 7,000 2,387,000 2,394,000
Net(Loss)for the
nine months ended
Oct. 31,1997
(Unaudited) (694,000) (694,000)
--------- ------- ----------- ------------ -----------
Balance, Oct. 31,
1997 (Unaudited) 5,010,613 $50,000 $15,105,000 $(5,588,000) $9,567,000
========= ======= =========== ============ ===========
See notes to financial statements
</TABLE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended October 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
------------ ------------
Cash flows from operating activities:
Net (loss). . . . . . . . . . . . . . . . $ (694,000) $(1,215,000)
Adjustments to reconcile net(loss)to
net cash (used in) operating activities:
Amortization of debt discount . . . . . - 15,000
Amortization of deferred financing
and registration costs. . . . . . . . . - -
Amortization of purchase price in
excess of equity in Joint Ventures. . . 41,000 41,000
Equity in (income)/loss of Joint
Ventures, net of distributions. . . . . 70,000 135,000
Accrued interest on pre-organization
taxes payable . . . . . . . . . . . . . - 31,000
Deprecation provision. . . . . . . . . . 120,000 -
Amortization of goodwill . . . . . . . . 24,000 -
Gain from restructuring of liabilities . (36,000) -
Changes in operating assetsandliabilities:
(Increase)/decrease in current assets. 18,000 -
(Increase)/decrease in other assets. . 18,000 2,000
Increase/(decrease) in accounts
payable and accrued expenses . . . . (216,000) 1,042,000
------------ ------------
Net cash (used in) operating activities. (655,000) 51,000
------------ ------------
Cash flows from investing activities:
Loans to Reno Energy LLC . . . . . . . . . (1,340,000) -
Note Receivable. . . . . . . . . . . . . . 8,000 -
Acquisition of subsidiary, American
Enviro-Services, Inc. . . . . . . . . . . (362,000) -
Deferred Acquisition Costs . . . . . . . . (76,000) -
Equipment and leasehold
improvements purchases. . . . . . . . . . (245,000) -
------------ ------------
Net cash (used in) investing activities (2,015,000) -
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable and
preferred stock . . . . . . . . . . . . . 87,000 212,000
Payment on loans payable for mortgage
and equipment . . . . . . . . . . . . . . (140,000) -
Deferred registration cost . . . . . . . . - (272,000)
Payment of pre-reorganization taxes. . . . (378,000) -
Advances from Joint Ventures . . . . . . . 10,000 13,000
Payment of convertible subordinated
secured debentures. . . . . . . . . . . . (150,000) -
Contributions by minority investors. . . . 120,000 -
------------ ------------
Net cash (used in)/provided by
financing activities. . . . . . . . . . (451,000) (47,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH. . . . . . . (3,121,000) 4,000
Cash - beginning of period . . . . . . . . . 4,125,000 2,000
------------ ------------
CASH - END OF THE PERIOD. . . . . . . . . . $ 1,004,000 $ 6,000
============ ============
Supplemental disclosure of cash
flow information:
Cash paid for interest . . . . . . . . . $ 111,000 $ 154,000
Supplemental schedule of noncash
investing activities:
Common stock issued for acquisition
of subsidiary. . . . . . . . . . . . . . $ 2,394,000 None
See notes to financial statements
</TABLE>
U. S. ENERGY SYSTEMS, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Nine Months Ended October 31, 1997 And 1996
(Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated 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 three and nine month periods are not necessarily indicative of results
for the full year.
For further information see Management's Discussion and Analysis of
Financial Condition and Operating Results, and refer to the financial
statements and footnotes included in the Company's Annual Report on Forms
10-KSB and 10-KSB/A for the fiscal year ended January 31, 1997.
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.
Note 4 Contingencies
With regard to legal proceedings involving Enviro Partners LP and
Energy Management Corporation, the Company intends to seek summary judgement
before the end of the current fiscal year.
Note 5 Subsequent Events
New Acquisition
---------------
Commonwealth Petroleum Recycling, Inc., Louisville, Kentucky. On
December 5, 1997 the Company signed an agreement to acquire
Commonwealth Petroleum Recycling, Inc. ("Commonwealth"), which
specializes in the recycling of used motor and industrial oils.
The agreement calls for the acquisition of the net assets of
Commonwealth, and will be in exchange for 150,000 shares of the
Company's common stock. The consummation of the acquisition is
subject to customary conditions including the satisfactory
completion of a due diligence examination by the Company.
Commonwealth will be a division of American Enviro-Services, Inc.
("AES"), and will operate under the AES name. Commonwealth will be
the base for an expansion of the AES environmental and remediation
services into Kentucky.
Item 2 - Management's Discussion and Analysis or Plan of Operation.
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION
Nine Months Ended October 31, 1997 Compared to Nine Months Ended
October 31, 1996
Results of Operations
This is the first report that includes the results of operations of the
Company's new USE-Environmental Division. The operations of that division
commenced on August 18, 1997, with the acquisition of AES.
Revenues and operating expenses in the nine months ended October 31,
1997 were generated primarily from Steamboat Envirosystems, LLC, in which
the Company acquired an equity interest in December 1996, and the
USE-Environmental Division which the Company formed in August 1997.
The resulting gross profit to the Company was $854,000, compared to $3,000
in the first nine months of 1996. A breakdown of the revenues and
operating expenses is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Steamboat USE-Environmental Other
(2/1-10/31/97) (8/18-10/31/97) (2/1-10/31/97)
-------------- ----------------- --------------
Revenues $1,163,000 $357,000 $17,000
Operating expenses 504,000 179,000 -
---------- -------- -------
Gross Profit $ 659,000 $178,000 $17,000
========== ======== =======
</TABLE>
Selling, general and administrative expenses increased to $1,119,000 in
the nine months ended October 31, 1997, exclusive of $144,000 in depreciation
and amortization charges and $252,000 in litigation fees and settlement
costs, as compared to $593,000 in the same period in 1996. The inclusion
of expenses related to Steamboat Envirosystems, LLC, and the USE-
Environmental division, together with the growth of the Company, accounts
for the bulk of the increase. Major elements in the consolidated totals are
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---------- --------
Salaries and consulting fees $ 422,000 $347,000
Steamboat royalties 164,000 0
Legal and professional fees 135,000 124,000
Corporate expenses 82,000 20,000
Insurance 109,000 2,000
All other 207,000 100,000
---------- --------
Total $1,119,000 $593,000
========== ========
</TABLE>
Included in the 1997 nine month expenses shown above are the following
expenses of the newly formed USE-Environmental Division:
<TABLE>
<CAPTION>
<S> <C>
Salaries and consulting fees $32,000
Legal and professional fees 4,000
Insurance 5,000
All other 21,000
-------
Total $62,000
=======
</TABLE>
Depreciation and amortization charges were $144,000 for the nine
month period ended October 31, 1997, compared to none in the earlier year.
These charges include $26,000 for the USE-Environmental Division.
Litigation fees and settlement costs for the nine months ended October
31, 1997 totaled $252,000. At the start of the fiscal year, February 1,
1997, the Company was involved in three actions, the following two of which
are now disposed of: (i) the suit filed against Lehi Independent
Power Associates ("LIPA") has been withdrawn by the plaintiff and (ii)
the arbitration concerning the contract dispute with Indus Enterprises,
L.L.C. and Ravi Singh has been settled. The one pending legal proceeding is
the action involving Enviro Partners LP and Energy Management Corporation,
for which the Company expects to seek summary judgement before the end of
the current fiscal year.
Interest income in the amount of $118,000 was earned during the first
nine months of 1997 on cash balances from the proceeds of the Company's
public offering which closed in December 1996. The Company had earned no
interest in the comparable 1996 period. Due to the Company's reduction of
debt, interest expense for the 1997 period totaled $93,000 compared to
$491,000 in the same period of 1996.
Loss from Joint Ventures breaks down as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
------- --------
Lehi Independent Power Associates, L.C. $48,000 $ 80,000
Plymouth Cogeneration Limited Partnership 46,000 54,000
------- --------
Loss from Joint Ventures $94,000 $134,000
======= ========
</TABLE>
Liquidity and Capital Resources
The Company had working capital of $830,000 and stockholders' equity
of $9,567,000 at October 31, 1997, as compared to deficits of $3,193,000
and $3,944,000, respectively, at October 31, 1996. The increase in working
capital and stockholders' equity is due primarily to the Company's public
offering which closed on December 6, 1996.
On December 5, 1997, the Company signed an agreement to purchase the
assets of Commonwealth for 150,000 shares of common stock.
The Reno Energy Geothermal Heating District has received Compliance
Order approval from the Nevada Public Utilities Commission. The Washoe
County Planning Commission has also issued its Special Use Permit for the
Reno Energy Project. The project is now positioned to move forward, and is
expected to be completed in 1999. The Company has been participating in the
funding of the initial development stages of the Reno Energy Geothermal
District Heating Project through its convertible note in the amount of
$1,200,000. This note is convertible into a 50% equity interest in the
project.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Reference is made to the Registrant's Annual Report on Form 10-KSB
for the year ended January 31, 1997 for a description of material legal
proceedings. At the start of this fiscal year the Company was involved in
three actions, the following two of which are now disposed of: (i) the
suit filed against LIPA has been withdrawn by the plaintiff, (ii) the
arbitration concerning the contract dispute with Indus Enterprises, L.L.C.
and Ravi Singh has been settled. The one pending legal proceeding is the
action involving Enviro Partners LP and Energy Management Corporation, for
which the Company expects to seek summary judgement before the end of the
current fiscal year.
Item 2 - Changes in Securities
None.
Item 3 - Defaults upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company on August 5,
1997 and adjournments thereto, Theodore Rosen, Richard H. Nelson, Evan
Evans, Allen J. Rothman and Todd Goodwin were elected as Directors. In
addition, an amendment to the Company's Certificate of Incorporation was
approved, providing for a staggered Board of Directors. Class I Directors
will include Todd Goodwin, whose term will expire at the 1998 Annual
Meeting of Stockholders. Class II Directors will include Evan Evans and
Allen J. Rothman, whose terms will expire at the 1999 Annual Meeting of
Stockholders, and Class III Directors will include Theodore Rosen and
Richard H. Nelson, whose terms will expire at the 2000 Annual Meeting of
Stockholders. At the 1998 and 1999 Annual Meetings of Stockholders, Class
I Directors and Class II Directors, respectively, will be elected by the
stockholders of the Company for full three year terms. The engagement of
Richard A. Eisner & Company, LLP, as the Company's independent accountants
was also ratified.
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits and Reports on Form 8-k
(a) Exhibits
None.
(b) Reports on Form 8-K
A Form 8-K, relating to an event which occurred on August 18,
1997, was filed with the Commission on August 22, 1997. The Form 8-K was
filed in connection with the consummation of a merger of the Company with
AES. Certain material documents were filed with the Form 8-K.
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 12, 1997
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> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> OCT-31-1997
<CASH> 1,004,000
<SECURITIES> 0
<RECEIVABLES> 896,000
<ALLOWANCES> 11,000
<INVENTORY> 9,000
<CURRENT-ASSETS> 2,185,000
<PP&E> 5,396,000
<DEPRECIATION> 165,000
<TOTAL-ASSETS> 12,588,000
<CURRENT-LIABILITIES> 1,355,000
<BONDS> 875,000
0
0
<COMMON> 50,000
<OTHER-SE> 9,517,000
<TOTAL-LIABILITY-AND-EQUITY> 12,588,000
<SALES> 0
<TOTAL-REVENUES> 795,000
<CGS> 0
<TOTAL-COSTS> 344,000
<OTHER-EXPENSES> 609,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,000
<INCOME-PRETAX> (198,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (198,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (198,000)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
