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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FILING FEE, EFFECTIVE OCTOBER 7, 1996]
For the Fiscal Year ended January 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Transition Period from ________________ to __________________
COMMISSION FILE NUMBER:
0-10238
U.S. ENERGY SYSTEMS, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 52-1216347
(State of Incorporation) (I.R.S. Employer Identification Number)
515 NORTH FLAGLER DRIVE
SUITE 702
WEST PALM BEACH, FL 33401
(561)820-9779
(Address of Principal Executive Offices and
Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None.
Securities Registered pursuant to Section 12(g)
of the Exchange Act:
Common Stock, Par Value $.01 Per Share
--------------------------------------
Title of Class
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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.
Yes X No
---- ----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will 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
---
The issuer's revenues for its most recent fiscal year were $266,000.
As of April 25, 1997, the aggregate market value of the voting stock
held by non-affiliates, computed by reference to the price at which the stock
was sold, or the average bid and asked price of such stock, was $16,748,396.
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes X No
--- ---
As of April 25, 1997, the number of outstanding shares of the issuer's
Common Stock was as follows:
Title of Class Number of Shares Outstanding
-------------- ----------------------------
Common 4,334,191
Transitional Small Business Disclosure Format (check one). Yes No X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Proxy Statement for its 1997 Annual Meeting
of Shareholders are incorporated by reference into Part III of this Report.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
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 and Chief Executive Officer of the Company, is one of the two
founders of the Company. 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 Mr. Nelson in late
1991 with the objective of entering into the alternative energy industry by
taking advantage of the positive changes which were occurring in the
cogeneration industry. USF proposed a plan of reorganization (the "Plan") for
the Company with the intent of merging USF with the reorganized company. The
Plan was approved by the creditors and stockholders of the Company, and the
United States Bankruptcy Court for the Southern District New York confirmed the
Plan in March 1993. Pursuant to the Plan, USF was merged into the Company and
the Company was renamed U.S. Envirosystems, Inc. Mr. Nelson resumed the
positions of President and Chief Executive Officer of the Company when it
emerged from bankruptcy. On May 17, 1996, the Company changed its name from U.S.
Envirosystems, Inc. to U.S. Energy Systems, Inc.
BUSINESS OF THE COMPANY
The Company is engaged in the independent power plant ("IPP") industry
as a project developer, owner and operator. IPPs produce electricity for sale to
either direct end users or to regulated public electric utility companies
("Regulated Electric Companies"). Regulated Electric Companies have historically
held a monopolistic position with regard to the production and distribution of
electricity to end users in specific geographic territories. The exclusive right
to the distribution of electric power within a specific territory is granted to
Regulated Electric Companies by the various state public utility
commissions, which regulate the rates charged for electric power and other
services, as well as the overall operations of Regulated Electric Companies.
In recent years, however, federal and state laws have been promulgated
to reduce and/or eliminate Regulated Electric Companies' monopoly over the
production and sale of electric power in order to enhance competition among
electricity providers. The result has been the emergence of IPPs. In addition to
conserving natural resources and reducing atmospheric pollution by encouraging
more efficient production of electric power, industry analysts anticipate that
competition should result in lower consumer costs for energy.
In April 1996, the Federal Energy Regulatory Commission ("FERC")
promulgated a regulation which orders all Regulated Electric Companies to open
their transmission lines to independent power producers, thus allowing wholesale
purchase of power by Regulated Electric Companies from distant independent
producers ("wholesale wheeling"). While the federal regulation does not mandate
that the transmission lines be opened for direct sale of power by independent
producers to retail end users ("retail wheeling"), many states have adopted or
are expected to adopt such regulations in the future.
"Independent power plants" and "cogeneration plants" are frequently
used interchangeably to describe the power industry which is an alternative to
the regulated power industry. IPPs generally, but not always, produce power
utilizing a process known as "cogeneration."Cogeneration is defined as the
production of two or more energy forms (typically electricity and heat)
simultaneously from the same fuel source. While producing electricity, otherwise
wasted heat is recovered from the exhaust and/or engine coolants. This recovered
heat can be used to replace heat which would
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otherwise be made from conventional furnaces and boilers. Other IPPs may not
technically be "cogenerators" but rather utilize renewable fuel sources such as
geothermal, wind, solar, hydro, and waste products such as waste oil, waste wood
and other bio-mass waste, or landfill gas. The favorable economics of
cogeneration or innovative and inexpensive renewable fuel sources allow IPPs to
compete with the longer established Regulated Electric Companies.
The Company's strategy has been to seek projects requiring power
production or cogeneration and to become an equity participant with the owners,
developers or other involved parties in return for capital investments and/or
the Company's expertise in the structuring, design, management and operation of
the projects. Often, at the time of the Company's initial involvement, such
projects will have advanced beyond the conceptualization stage to a point where
the engineering, management and project coordination skills the Company offers
are required to proceed.
In furtherance of its strategy, the Company pursues (i) existing IPPs
and cogeneration facilities which can be bought at favorable prices, (ii) IPP
and cogeneration projects not yet built but for which another developer has
successfully negotiated the basic requirements for a plant including power
purchase agreements, environmental permits, etc., and (iii) special market
opportunities for cogeneration and energy savings projects (such as large
shopping malls or resorts) 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.
The Company believes that substantial opportunities exist for the
Company in the IPP and cogeneration market within the United States in
facilities in the 3 to 50 megawatt small to medium-sized range. Additionally,
the Company believes that the largest potential for "inside-the-fence"
facilities (where all the electrical and thermal energy produced is consumed at
the power plant location) falls into this sized facility. This range is
advantageous because, depending on geographic location, small to medium-sized
plants usually (i) fall below thresholds requiring prolonged environmental and
air quality permit application procedures, (ii) may achieve more favorable
pricing for their electricity and (iii) can generally be located in specific
areas of power capacity shortages.
The air quality permitting process for small to medium-sized plants is
generally faster, easier and more assured than in the larger projects. Although
permits are always required before commencement of operations, the basis for
granting air quality permits varies from location to location. In applying for
such permits, the facility developers generally present a computer model of
emissions of carbon monoxide and nitrous oxides which would be expected to issue
from the facility over a one year period. This model is based on the fuel used,
the anticipated annual hours of operation, the engine manufacturer's
specifications for emissions, and the reduction of such emissions from
application of catalytic converters or other devices. The emissions are then
expressed in weight, e.g., "tons per year." The local air quality authority will
then determine if the emission levels are acceptable for the area. The local air
quality authority may or may not require continuous emissions monitoring to
insure that the level of emissions granted in the permit are not exceeded.
If the facility is recovering waste heat and utilizing such heat to
displace heat which would otherwise be made from burning fuels in conventional
furnaces or boilers (i.e. a cogeneration facility), and if the emissions from
the cogeneration facility are less than the emissions which would be forthcoming
from the conventional furnaces or boilers so displaced, there is said to be a
"net reduction" in emissions for the area, and the permitting authorities will
normally act promptly and favorably to grant the permit. If the facility is not
using recovered waste heat to displace other heat source emissions (i.e. a
non-cogenerating facility), there could be a "net increase" in emissions in that
geographic area. Under such circumstances, the permitting process could be
prolonged and complicated by public hearings, public interventions and the
heightened scrutiny of the local air quality authorities.
In the small to medium-sized range, specifically inside-the-fence
projects, nearly all of the electrical and thermal output can be utilized by the
host site. The thermal output of the cogeneration system replaces conventional
thermal output from the host's boilers and furnaces with substantially less
atmospheric emissions of carbon monoxide and nitrous oxides because of the
emission control technology available to cogeneration engines which is not
available to boilers and furnaces. Since the cogeneration system results in a
net reduction in emissions for the specific site, air quality permitting
authorities will generally respond quickly and favorably. In contrast, while the
larger projects (over 50 megawatts) usually have no problems in placing the
electrical output, there is a problem in finding suitable thermal hosts which
can use the vast quantities of heat produced. Under such circumstances, even if
all of the host's thermal requirements
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are offset, there is still an increase in net emissions in the area of the power
plant, often resulting in a prolonged and difficult permitting process.
The Company has begun to develop several projects in the 3 to 50
megawatt small to medium-sized range with an emphasis on inside-the-fence
applications. In addition to these projects in the United States, there are
substantial opportunities internationally for such projects, especially in Latin
America and the Caribbean Rim. The Company believes that energy shortages,
combined with national policies to privatize power production in many developing
countries, are creating an increasing potential for U.S. companies in the
independent power industry.
The Company also emphasizes projects which utilize alternative and/or
renewable fuels, since such projects not only serve the interests of the public
from an environmental and ecological standpoint but also have the greatest
potential for earnings because of the low fuel costs. In keeping with this
policy, the Company has acquired two operating geothermal power plants (see
Operations - Current Projects - Geothermal Power Plants), and is in the process
of developing a geothermal district heating project (see Operations - Current
Projects - Nevada District Heating Project). Geothermal energy is considered
one of the most environmentally sound forms of energy since there are virtually
no atmospheric emissions or pollutants in the process. The Company is seeking to
expand its geothermal operations, and is also investigating other types of
renewable energy projects such as hydroelectric.
COMPETITION
There are approximately 150 companies nationwide currently involved in
the IPP industry, within which the Company currently occupies a relatively minor
position. The IPP industry is basically divided into three areas, based upon
size or physical placement of facility: (i) large power plants (over 50
megawatts); (ii) small to medium-sized power plants (3 to 50 megawatts); and
(iii) inside-the-fence plants (which can be of varying sizes, but usually under
50 megawatts).
Many of the large plants are owned and operated by subsidiaries of
Regulated Electric Companies and large industrial companies which have
established these subsidiaries to participate in the IPP industry. Approximately
18 of the 25 largest independent power companies are owned and operated in such
a manner. The operations of most of these companies are geared to power plants
in the over 50 megawatt size range due to the need to make significant
investments to achieve returns large enough to have an impact on a public
utility's or industrial company's operating results. Some of these companies
have been highly successful in the development of these large plants; but under
federal law, utility subsidiaries may not own more than 50% of non-regulated
(i.e. IPP) projects. Subsidiaries of large industrial companies and other
non-utility companies, however, have no similar restrictions. Additionally,
under federal law, a new category of independent power producer has been created
known as exempt wholesale generators ("EWGs"). EWGs have no ownership
limitations nor do they have requirements similar to non-regulated plants with
regard to useful thermal output or fuel efficiency and operating efficiency
criteria. To receive qualification as an EWG, the owner need only demonstrate
that the entire output of the facility is sold exclusively in the wholesale
market. EWGs are prohibited from making retail sales and therefore cannot be
developed for inside-the-fence projects. In many instances, subsidiaries of
public utilities and large industrial companies make ideal partners for any such
projects and the Company intends to work with such companies when it locates a
specific project fitting its investment parameters.
In the category of small to medium-sized IPPs, the vast majority of the
developers are either subsidiaries of other non-utility industrial companies,
small privately owned partnerships, or energy funds established to invest in
such projects. Inside-the-fence plants are generally owned and operated by the
end user, although a number of such plants are built, owned and operated for the
end user by third parties.
OPERATIONS
CURRENT PROJECTS
Geothermal Power Plants, Steamboat Hills, Nevada. In December 1996, the
Company acquired a 95% interest in Steamboat Envirosystems, LLC ("Steamboat
LLC"), a newly-organized Nevada limited liability company formed to acquire two
geothermal power plants in Steamboat, Nevada ("Steamboat Plant 1" and "Steamboat
Plant 1A," and collectively, the "Steamboat Facilities"). Far West Capital
retained ownership of the remaining 5% equity interest in the Steamboat
Facilities. Electricity is produced by the Steamboat Facilities through a
"binary system" in which hot water from the earth's sub-strata magma formation
is circulated in one closed loop and, in another closed loop, inert gas is
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heated and compressed. The compressed inert gas drives turbines which generate
electricity. The geothermal water is reinjected into the earth to be re-heated.
Geothermal power is considered one of the most environmentally sound methods of
producing electricity because (i) there are virtually no atmospheric emissions
or pollutants in the process, (ii) the natural resource (water) is constantly
returned to the earth to avoid depletion of the underground aquifer water table,
and (iii) the heat source is the earth's natural magma layer rather than the
conversion of a depletable fossil fuel. Geothermal power, however, can only be
produced in locations where specific geological formations exist.
Steamboat LLC acquired the Steamboat Facilities subject to mortgages in
favor of Westinghouse Financial Corp. ("Westinghouse") and certain net revenue
and royalty interests in steam extraction rights. The mortgages, which had an
aggregate balance of $3,800,000 at November 30, 1996, net of an escrowed
reserve, were simultaneously purchased from Westinghouse by the Company for
$1,792,000. The Company paid $1,575,000 (including a $50,000 deposit previously
paid) and assumed liabilities of $503,000 to purchase the Steamboat Facilities.
The Company also contributed $1,000,000 to provide funding for certain
improvements to the Steamboat Facilities and for the potential acquisition of
the royalty interests. For its 5% equity interest, Far West Capital contributed
to Steamboat LLC debt owed to it by the company which formerly owned the
Steamboat Facilities in the amount of $274,000. Pursuant to the acquisition
agreement, the Company will receive the first $1,800,000 of Steamboat LLC annual
net income, 45% of net income over $1,800,000 during the first five years, and
95% of net income over $1,800,000 thereafter.
Far West Capital was established in 1983 and has been a developer and
operator of cogeneration and independent power projects, principally
hydroelectric and geothermal, in the western United States, and is the Company's
current partner in Lehi Independent Power Associates, which owns a cogeneration
facility in Lehi, Utah. Steamboat Plant 1 and Steamboat Plant 1A were built in
1986 and 1988, respectively, by Far West Capital and are managed by the
professional operations staff of SB Geo, Inc. ("SB Geo"), a company in which the
principals of Far West Capital own a majority equity interest. The Company has
contracted with SB Geo for its continued management services at prices
negotiated at arms length, which may not exceed charges for similar services
which could be obtained from other sources.
The Steamboat Facilities produce a combined 8 megawatts of electric
power which is sold under two power purchase agreements with Sierra Pacific
Power Company ("Sierra"). The plants have operated at 99% capacity since
inception. The power purchase agreements called for price adjustments at the end
of the first ten years of operation, which require Sierra to purchase and
Steamboat LLC to provide electricity at Sierra's then-prevailing short term
avoided cost. Ten years of operation for Steamboat Plant 1 ended in December
1996, and the ten years for Steamboat Plant 1A will end in December 1998. The
rate currently being paid to the Company by Sierra for Steamboat Plant 1's power
production is substantially lower than what had been paid until December 1996.
The Company has formed an industry association with other geothermal
producers in Nevada faced with similar price reductions. This organization,
called The Nevada Geothermal Industry Council (the "Council"), has filed an
intervention with the Nevada Public Service Commission on hearings currently
being held to determine the short term avoided cost rates Sierra which will be
allowed to offer. The Company feels that the current revenue it is receiving for
Steamboat Plant 1 power can be increased significantly either through
adjustments in the rate from Sierra or, in the alternative, selling its power
outside of Sierra's territory under existing wheeling laws with the consent of
Sierra. Although Sierra has previously stated that it would consent to sales
outside its territory under negotiated terms, the Company has not yet
re-commenced such discussions. There is no assurance that the Company can
successfully implement either of these possibilities.
There are currently five geothermal power projects operating in
Steamboat Hills, Nevada, which collectively produce approximately 62 megawatts
of output. In addition to the 8 megawatt Steamboat Facilities which came on line
in 1986 and 1988, the 35 megawatt Steamboat Plants 2 and 3 were developed and
built by Far West Capital in 1992 and remain owned by an affiliate of Far West
Capital. In addition, Caithness Power, Inc. brought a 12 megawatt project on
line in 1995. There is currently a total of approximately 170 megawatts of
geothermal power being produced in Nevada, with production from the Steamboat
Hills area accounting for approximately 36%.
Plymouth State College, New Hampshire. In 1994 the Company, through its
subsidiary Plymouth Envirosystems, Inc. ("Plymouth"), acquired a 50% equity
interest in Plymouth Cogeneration Limited Partnership ("Plymouth Cogeneration"),
which owns and operates a cogeneration plant producing 2.5 megawatts of
electricity
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and 25 million BTUs of heat at Plymouth State College, in Plymouth, New
Hampshire (the "Plymouth Facility"). The Plymouth Facility provides all of the
electrical and heating requirements for the campus, which is part of the
University of New Hampshire system, under a 20-year contract. The Plymouth
Facility, which cost approximately $5.9 million to construct, is comprised of a
combination of diesel engine-generators, heat recovery and supplemental boilers,
and the complete piping infrastructure tying all campus buildings into a single
heating loop. The project was financed, prior to the Company's acquisition of a
50% interest, through $5,110,000 in State of New Hampshire tax exempt revenue
bonds and $700,000 in equity. The Company paid a total of $636,000 in cash and
11,400 shares of its common stock for its 50% interest.
The Company's partners in Plymouth Cogeneration are Central Hudson
Enterprises Corporation ("Central Hudson"), a wholly-owned subsidiary of Central
Hudson Gas & Electric Corporation of New York, and Independent Energy
Corporation ("IEC"), a division of Equitable Resources, Inc. The Plymouth
Facility was completed in November 1994 and put into full commercial service in
January 1995. IEC Plymouth, Inc. ("IEC Plymouth"), a wholly-owned subsidiary of
IEC, runs the day-to-day operations of the plant. Management decisions are
resolved by a committee which is composed of representatives of the Company, IEC
and Central Hudson.
The State of New Hampshire has initiated a study to determine the
feasibility of expanding the Plymouth Facility to wheel electric power to two
other state college campuses. Also, plans are currently being developed by
Plymouth Cogeneration to install special fuel treatment equipment which will
allow the existing engines to burn less costly and more efficient fuels. Fuel
cost savings would be shared equally between the college and Plymouth
Cogeneration. There can be no assurance that such fuel treatment equipment will
be installed or that such fuel cost savings will be realized.
Lehi Cogeneration Project. In January 1994, the Company, through its
subsidiary, Lehi Envirosystems, Inc. ("LEHI"), purchased a 50% equity interest
in Lehi Independent Power Associates ("LIPA"), which owned a 17 megawatt
cogeneration facility in Lehi, Utah (the "Lehi Facility") and the underlying
real estate, hardware and permits to operate. Although the Lehi Facility has
been dormant since 1990, LIPA is evaluating possibilities of re-commencing
operations with existing equipment, which the Company estimates will cost
$30,000 and will require the renewal of its operating permit. The successful
commencement of operations of the Lehi Facility also requires either the
negotiation of an agreement with a utility company to purchase the electrical
output, or negotiation of an agreement to wheel the power produced to direct end
users. LIPA has been negotiating with the municipal authority and the town of
Lehi. In addition, LIPA has begun exploring retail wheeling to direct end users
both within Utah and outside the state. 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 equity interest through the
issuance of convertible debentures. Of this amount, $875,000 in convertible
debentures remain outstanding, which the Company may convert or redeem during
1997. The Company's partners in the Lehi project are Far West Capital and Suma
Corporation ("Suma"), a Utah company with interests in waste-to-energy projects.
The Lehi Facility is managed by a committee composed of representatives of Far
West Capital, Suma and the Company.
The Lehi Facility originally had three engine generators totaling 17
megawatts of electrical output. One unit which would have required extensive and
costly repairs was sold in December 1995. The two remaining units, totaling 10
megawatts, could be prepared to allow them to be put in operation if a
satisfactory purchase agreement for their output can be obtained. However, LIPA
is also evaluating the option of selling the remaining engines. If a
satisfactory sales price can be obtained, LIPA would thereafter begin plans to
acquire and install combined cycle gas turbines of substantially greater
efficiency.
Whether the present engines are refurbished or new engines are
installed, under Title V of the Clean Air Act, the Lehi Facility 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
Lehi Facility, but will be a requirement for future operations. A permit
modification would also be necessary if new engines are installed or if capacity
is increased. Because all existing and operating facilities were required to
submit operating permit applications in 1995, the Utah Division of Air Quality
has had a significant backlog. An engineering firm is being engaged to commence
feasibility studies for such expansion and to prepare emissions modeling
required for the operating permit update.
Shortly after purchasing the Company's interest in LIPA, Micron
Technologies, Inc. ("Micron") announced it intended to build a $1.5 billion
manufacturing facility in the town of Lehi on property one mile from the Lehi
Facility. The town announced that it would supply power to Micron through its
municipal power authority. The town itself does
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not have a power generation capability, but acquires power through the Utah
Association of Municipal Power Systems ("UAMPS"). Over a year was spent in
discussions with Micron, the town of Lehi, and UAMPS as to the feasibility of
increasing the capacity of the facility to serve the 35 megawatt requirements of
Micron. Partially as a result of these discussions, the Company and its partners
decided to sell the one non-functional seven megawatt engine in order to make
room in the plant for a larger and more efficient engine. The Company also
decided during this period that it was premature to put the plant in operation
before its full intended utilization was determined. The Company had been
negotiating with Micron to provide direct sale of 35 megawatts from the Lehi
Facility. During these prolonged negotiations, and up until Micron's decision in
April 1995 to suspend construction of its new plant, the Company was constrained
by local political sensitivity from seeking to sell electricity from the Lehi
Facility to other potential purchasers. The Company believes, however, that the
substantial population and industrial growth being experienced in the Lehi area
is creating a large, future market for power. For this reason, the Company
believes that increasing the Lehi Facility's size substantially using high
efficiency gas turbines will be prudent.
Shopping Malls. The Company has entered into a joint development
agreement with the Cowen Investment Group ("Cowen"), a financier of real estate
projects, to develop, build and operate cogeneration plants in the United
States. Under the joint development agreement, Cowen will provide customers and
cogeneration project financing in return for 60% of the net revenue from the
projects. The Company will retain 40% of the net revenue in consideration for
its technical expertise, design and equipment selection and installation
services. The joint venture has been negotiating with a real estate company
which owns and operates approximately 200 shopping malls throughout the United
States. Three of the malls have been considered for initial test sites for an
inside-the-fence cogeneration unit, and engineering feasibility studies have
been done for the first site. The Company is carrying the cost of preliminary
engineering which will be reimbursed from the project if it is undertaken. The
Company and Cowen have also begun discussions with a second owner and operator
of over 40 malls and has begun feasibility studies to determine the best initial
sites. The targeted shopping malls are all enclosed structures with an average
interior space of 500,000 square feet. Such malls have substantial electric
demand, with 18 hours of daily power plant operation, seven days per week, and
with almost year-round air conditioning requirements regardless of 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
1,000 tons of supplemental non-electric air conditioning. The supplemental
non-electric air conditioning, in most cases, would be provided by engine driven
chillers (each an "EDC"). An EDC produces chilled water by utilizing
conventional compressors which are driven by natural gas fueled engines as
opposed to electric motors. The EDC units would be manufactured by
sub-contractors from designs developed and owned by the Company. While initial
plans have been drawn and reviewed with the mall owners, there can be no
assurance that the joint effort with Cowen will lead to any contracts being
signed with mall owners or cogeneration systems being installed.
Under the plan discussed with the mall owners, a joint development
company would engineer, build and operate the cogeneration facilities, with
financing arranged by Cowen. The joint development company and the mall owner
would share energy savings for a 15-year period, after which time the
cogeneration plant ownership would revert to the mall owners. A proposed
agreement with the larger mall owner calls for at least ten such installations.
Both mall owners have indicated, however, that installations of cogeneration
systems would be contemplated at all malls where certain basic criteria for
cogeneration exists. The Company and Cowen believe that approximately one-third
of both owners' malls can meet the criteria for such systems. Since all of the
malls are of similar configuration and have similar energy patterns, project
design could be replicated at multiple locations with only modest configuration
changes, thus producing an economy of scale savings. A contract for the first
mall is expected to be signed in the second or third fiscal quarter of 1997 with
construction commencing shortly thereafter.
U.S. Virgin Islands. The Company has signed a letter of intent and is
currently in final contract negotiations with Bluebeard Holding Company
("Bluebeard") to build a 3 megawatt cogeneration project for Bluebeard's Castle
(the "Bluebeard Facility"), a resort complex in St. Thomas, U.S. Virgin Islands.
Utility services for the Virgin 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.
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It is contemplated that the Company and the manager and owner of
Bluebeard's Castle will form a limited liability entity, which will own and
operate the Bluebeard Facility, and sell discounted power to Bluebeard's Castle
and to adjacent commercial buildings. The profits from this venture will be
distributed pro rata on the basis of the capital contributions of the parties to
the contract. The Company will be credited for its capital contributions as a
result of the services it will provide to the joint venture. The Bluebeard
Facility may also include a 120,000 gallon per day reverse osmosis water
purification system to convert sea water to potable water. It is contemplated
that Bluebeard will arrange 20% equity financing for the project, with the
balance being financed through loans from local banks. The Company will provide
design, equipment selection and installation services for the project. Bluebeard
is also in the planning stage for a large 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 will own and operate this future facility and will
seek additional resort facilities for cogeneration throughout the Virgin Islands
and other islands in the Caribbean. While final contracts are still in
preparation, the project has already begun with the receipt of initial funding
from Bluebeard and the installation of the first of six engine generators to be
used in the project.
Nevada District Heating Project. The Company previously reported that
USE Geothermal LLC ("USE GEO"), a Nevada limited liability company which is
86.5% owned by the Company, had made a $300,000 loan to Reno Energy LLC ("Reno
Energy"), payable over three years and bearing an interest rate of 9% per annum.
In consideration for making the loan, USE GEO was granted an option to acquire a
50% equity interest in Reno Energy on or before December 31, 1996 for
$1,000,000. The expiration date of the option was subsequently extended at an
additional cost to USE GEO of $100,000 and an increase in the exercise price of
the option to $1,200,000.
Rather than exercising the option, on April 10, 1997 USE GEO entered
into and consummated a convertible loan agreement with Reno Energy (the "Loan"),
pursuant to which USE GEO loaned Reno Energy an additional $1,200,000 and
received a note (the "Note") in return. USE GEO may convert the Note for no
additional consideration into an equity interest in Reno Energy. Reno Energy
plans to construct and operate a facility (the "Reno Facility") which will use
geothermally-heated fresh water for space heating and cooling, as well as for
process heating for nearby developments, including an industrial park.
The Note matures on April 10, 2027, subject to acceleration upon the
occurrence of certain events of default. The Note accrues interest at a rate of
12% per annum while the Reno Facility is being developed, provided that such
interest will be waived in the event USE GEO exercises its new option (the
"Option") to convert the Note into an equity interest in Reno Energy, or if Reno
Energy pays all operating period interest (described in the following sentence)
in a timely manner. After the Reno Facility has commenced commercial operations,
Reno Energy will be required to pay interest on the Note based on a percentage
(currently 50%) of (i) Reno Energy's net cash flow from operations and (ii) net
cash proceeds from certain capital transactions, after payment of certain
distributions to members of Reno Energy. USE GEO may exercise the Option to
convert the Note into a 50% equity interest in Reno Energy for no additional
consideration at any time prior to the maturity of the Note. Such equity
percentage will be adjusted proportionally in the event of additional funding of
Reno Energy by USE GEO or Reno Energy's members prior to the exercise of the
Option. The Note is secured by a first lien on all of the assets of Reno Energy
and is personally guaranteed by Reno Energy's members. Such personal guarantees
are, in turn, secured by a first lien and pledge of the respective guarantors'
membership interest in Reno Energy.
The industrial park currently being developed in close proximity to the
Reno Facility is located on a 1200 acre parcel. The first of several phases 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. The Company anticipates that the
industrial park will create a substantial demand for space heating and cooling
as well as process heating. It is expected that all the buildings in the park,
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. In addition to the
commercial park, the Company may provide heating to a nearby 200-bed hospital, a
300-room hotel, a high school, a proposed college campus and other developments
in the area.
To meet the requirements of the nearby industrial park, a pipeline with
supply and return lines would be built that would loop through the 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
7
<PAGE> 9
on pipes and equipment, and possible pollution of the ground in case of a spill.
Fresh water will be heated in heat exchangers at the site where geothermal brine
is extracted and reinjected. The heat thus provided may be sold at a discount
from the cost of producing an equivalent amount of heat from conventional
natural gas furnaces.
Reno Energy has represented to the Company and USE GEO that it plans to
use the proceeds of the Loan to provide preliminary engineering, design and
financial services in connection with the Reno Facility, which 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 to proceed with
the construction of Reno Facility.
It is estimated that approximately $40,000,000 is required for
construction, procurement and other costs associated with the commencement of
operations of the Reno Facility. Such amount is expected to be financed through
industrial revenue bonds or other conventional financing mechanisms. There is no
assurance, however, that such financing can be obtained on terms acceptable to
Reno Energy.
NEGOTIATIONS FOR NEW PROJECTS
With the infusion of working capital as a result of the Company's
recent public equity offering, the expansion of staff and the acquisition of the
Steamboat Facilities, numerous opportunities for expansion have presented
themselves. The Company is presently evaluating the potential acquisition of
several new projects in the geothermal and hydroelectric field. In addition, the
Company is evaluating several projects for conventional cogeneration
application. Although preliminary efforts have been undertaken in connection
with certain of these projects, there is no assurance that any of them will be
developed.
EMPLOYEES
The Company presently has six full-time employees and four contract
staff members. The Company retains outside contract staff as required for
engineering, fabrication, construction and maintenance services. Management of
the Company believes present staffing is adequate to meet its current needs, but
expects that the number of full time employees will increase over the next year
as new projects are brought on line. Plants such as the Lehi Facility, the
Plymouth Facility and the Steamboat Facilities have their own professional
staffs. These staffs report to a management group formed by each of the
individual operating partnerships.
ITEM 2. DESCRIPTION OF PROPERTY.
The Lehi Facility is owned by LIPA, a Utah limited liability company,
of which the Company owns a 50% equity interest. 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. All costs associated with LIPA and the operation
of the Lehi Facility, 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, there are no other encumbrances
or debt associated with LIPA or the Lehi Facility. Management of the Company
believes the plant is adequately covered by insurance.
The Plymouth Facility is owned by Plymouth Cogeneration, a Delaware
partnership, of which the Company owns a 50% equity interest. Plymouth
Cogeneration owns all the plant and equipment associated with the cogeneration
project including the diesel engines, generators, three auxiliary boilers,
switchgear, controls and piping. The New Hampshire state university system has
two contracts with Plymouth Cogeneration: (1) a 20-year lease on the equipment,
and (2) a 20-year management contract. Both contracts have escalation clauses.
Management believes the plant is adequately covered by insurance.
The Steamboat Facilities are owned by the Company's 95%-owned
subsidiary, Steamboat LLC. Located on a geothermal field in Steamboat Hills,
Nevada, ownership of Steamboat Plant 1 and Steamboat Plant 1A includes buildings
and improvements, generators, motors, switchgear and controls, production and
injection wells and associated piping. Management believes the plant is
adequately covered by insurance.
8
<PAGE> 10
The Company has signed a five-year lease on 1,800 square feet of office
space in a commercial office building in West Palm Beach, Florida where its
executive offices are located. The Company also maintains regional offices in
Reno, Nevada, on the site of the Steamboat Facilities. Contract employees work
out of their own offices.
ITEM 3. LEGAL PROCEEDINGS.
The owner of a farm adjacent to the Lehi Facility 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, which
feeds a watering hole on the plaintiff's property. The suit, filed in Utah state
court on January 25, 1996, seeks damages in excess of $20,000 for injuries to
the plaintiff's livestock. 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 linking the isolated injuries to the livestock to any fuel
spill or to petroleum toxosis. 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. On April 10, 1996, the Utah Division of
Water Quality issued a notice of violation and order charging LIPA with
illegally discharging diesel fuel to the Lehi Irrigation Company canal on May 9,
1995. LIPA appealed that notice of violation on May 10, 1996, but the Division
of Water Quality has not responded formally to the appeal. Under Utah state law,
the Division of Water Quality cannot impose monetary penalties in an
administrative proceeding; it must bring a civil action in court to do so. No
further formal action has occurred on this appeal or towards issuance of the
renewed permit. The Division of Water Quality also has not filed any civil
actions seeking penalties. On November 4, 1996 the Division of Water Quality
inspected the facility and found no deficiencies.
On March 12, 1997, the Company filed an action for declaratory judgment
against Enviro Partners LP et al. and Energy Management Corporation ("EMC"),
which are related entities, in the United States District Court for the Southern
District of New York. An action for declaratory judgment is one in which the
court is asked to make a judicial determination concerning the rights of parties
in dispute. The dispute involves certain agreements the Company entered into
with Enviro Partners and EMC for a private sale of the Company's securities. The
agreements were conditional upon (1) a public offering of Company securities
occurring simultaneously with the private sale to Enviro Partners and EMC, and
(2) the Company's securities being approved for listing on The Nasdaq SmallCap
Market. During the approval process, Nasdaq determined that the private sale
would be "contrary to just and equitable principles of trade,"and refused
listing if the private sale were consummated. Thus, a critical condition of the
agreements, which had been imposed by Enviro Partners and EMC themselves, could
not be met. Setting aside the private sale, the Company was able to successfully
conclude the public offering with Nasdaq approval. Neither Enviro Partners nor
EMC objected to the public offering going forward. Subsequently, however, Enviro
Partners and EMC asserted demands against the Company for "lost" profits of up
to $6 million which they allegedly might have realized had the private sale
occurred. Enviro Partners and EMC asserted a counterclaim for $6 million on
March 28, 1997. The Company believes that the facts in this case argue for the
Company. An adverse outcome of this matter could, however, have a material
adverse effect on the Company.
The Company is currently engaged in arbitration before the American
Arbitration Association concerning a contract dispute with an outside
consultant, Indus Enterprises, L.L.C., and its president, Ravi Singh
(collectively, "Singh"). The Company and Singh entered into an agreement on May
4, 1995, pursuant to which Singh agreed to generate opportunities for the
Company to participate in power plant projects in Asia and the Middle East.
Singh claims in the arbitration that the Company improperly terminated the
agreement and seeks damages for an unspecified amount. The Company believes that
Singh's claims are without merit and will actively defend the claim. While the
Company does not believe that an adverse outcome in this arbitration would have
a material adverse effect on the Company's financial position or statement of
operations, the outcome of this matter is presently indeterminable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote by security holders during the
fourth quarter of the fiscal year ended January 31, 1997.
9
<PAGE> 11
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
In May 1996, the market symbol for the Company's common stock, par
value $0.01 per share (the "Common Stock") was changed from USEE to USEY, and
trading continues under the market symbol USEY.
PRICE RANGE OF COMMON STOCK
The Common Stock was subject to a 1 for 40 reverse split, effective
May 10, 1996. The prices reflected in the following tables reflect this change.
The Common Stock traded on the NASD OTC Bulletin Board until December
2, 1996. The first table below 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. On
December 3, 1996, the Common Stock began trading on the Nasdaq SmallCap Market
under the symbol USEY. The second table below sets forth, for the periods
indicated, the high and low sales prices for the Common Stock as reported by the
Nasdaq SmallCap Market.
NASD OTC BULLETIN BOARD
<TABLE>
<CAPTION>
Bid Price
---------
High Low
---- ---
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
Fiscal Year Ended January 31, 1997
First Quarter .................................................. $ 3.75 $ 2.50
Second Quarter ................................................. $ 2.50 $ 1.50
Third Quarter .................................................. $ 3.38 $ 1.50
Fourth Quarter (November 1, 1996 to December 2, 1996) .......... $ 5.56 $ 3.00
</TABLE>
NASDAQ SMALLCAP MARKET
<TABLE>
<CAPTION>
Sales Price
-----------
High Low
---- ---
<S> <C> <C>
Fiscal Year Ending January 31, 1997
Fourth Quarter (December 3, 1996 to January 31, 1997) .......... $5.56 $3.88
Fiscal Year Ending January 31, 1998
First Quarter (February 1, 1997 to April 25, 1997).............. $5.63 $3.88
</TABLE>
As of April 25, 1997, there were 596 record holders of the Common Stock.
10
<PAGE> 12
DIVIDENDS
The Company has not paid cash dividends on the Common Stock and does
not anticipate paying cash dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS
Year ended January 31, 1997 compared to year ended January 31, 1996
In the fiscal year ended January 31, 1997 ("Fiscal 1996"), revenues
included $225,000 from the Steamboat Facilities from December 6, 1996 to January
31, 1997 and $41,000 from the initial installation at the Bluebeard Facility,
for a total of $266,000. The Company had no revenue during the fiscal year ended
January 31, 1996 ("Fiscal 1995"). The Company treats the investments in its LEHI
and Plymouth subsidiaries on the equity basis, and the revenues of LEHI and
Plymouth are not included in the revenues line item. Details of the results of
the LEHI and Plymouth joint ventures may be found in the accompanying financial
statements.
Net loss before extraordinary item in Fiscal 1996 and Fiscal 1995 were
$2,023,000 and $1,474,000, respectively, comprised of the following elements:
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
----------- -----------
<S> <C> <C>
Revenues $ 266,000 $ 0
----------- ----------
Operating expenses 162,000 27,000
Selling and administrative expenses 1,159,000 826,000
Interest expense 805,000 604,000
Loss from joint ventures 163,000 17,000
----------- ----------
Net loss before extraordinary item $ 2,023,000 $1,474,000
</TABLE>
Operating expenses in Fiscal 1996 included depreciation and costs of
operations for the Steamboat Facilities of $111,000, and the initial costs of
the Bluebeard Facility installations of $51,000. Operating expenses in Fiscal
1995 resulted from the adjudication of legal action on a project which had been
completed and reported on in a previous year.
Major items included in selling and administrative expenses were:
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
----------- -----------
<S> <C> <C>
Salaries and consulting fees $704,000 $431,000
Legal and professional costs 147,000 148,000
Corporate expenses 46,000 70,000
</TABLE>
Salaries and consulting fees in Fiscal 1996 include $187,000
representing the charge incurred in connection with the issuance of options to
persons other than officers and directors. These costs were also higher due to
the addition of personnel and necessity for additional consulting time in the
evaluation of proposals for new ventures. Legal and
11
<PAGE> 13
professional costs resulting from the Company's public offering of Common Stock
and redeemable common stock purchase warrants (the "Warrants") which closed
December 6, 1996 (the "Offering"), have been considered costs of the Offering
and have been charged to equity. Corporate expenses in Fiscal 1995 included a
$25,000 non-recurring cost for a previously planned public offering that was not
consummated.
Interest expense increased in Fiscal 1996 primarily due to additional
bridge loans that were outstanding until repaid in December 1996. Total bridge
loan interest in Fiscal 1996 was $366,000, compared to $169,000 in Fiscal 1995.
Loss from joint ventures of $163,000 and $17,000 in Fiscal 1996 and
Fiscal 1995, respectively, include $59,000 in both years for amortization of
purchase price over net equities in the fixed assets of LIPA and Plymouth
Cogeneration. The Company's allocated share of loss from joint ventures included
$44,000 from LIPA and $60,000 from Plymouth in Fiscal 1996, compared to a gain
of $86,000 from LIPA and a loss of $44,000 from Plymouth in Fiscal 1995. The
LIPA gain in Fiscal 1995 was due to a $118,000 non-recurring gain from sale of
unused plant equipment.
LIQUIDITY AND CAPITAL RESOURCES
During Fiscal 1996, net cash used in operating activities was
$2,315,000. Cash used in investing activities was $3,722,000, of which
$3,357,000 was for the acquisition of the Steamboat Facilities, $265,000 was for
the investment in USE GEO, and $100,000 was for the loan to Reno Energy.
The Offering resulted in net proceeds to the Company of $11,957,000.
Notes and bridge loans were repaid therefrom in the amount of $1,960,000. Other
items brought the total cash provided by financing activities during Fiscal 1996
to $10,160,000.
During Fiscal 1995, 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 acquisition of the Steamboat Facilities, offset in part by
collections of a loan from an officer of the Company. The total cash flow from
investing activities was $664,000, including $34,000 from the sale of common
stock and $785,000 from the proceeds of loans payable and preferred stock.
An additional improvement in the Company's financial position was due
to the conversion of $500,000 of 18% interest debentures (the "18% Debentures")
to 125,000 shares of Common Stock and 125,000 Warrants. An additional $150,000
in 18% Debentures were redeemed for cash. The remaining $875,000 in 18%
Debentures were converted to debentures which bear interest at the rate of 9%
per annum (the "9% Debentures"). The rights and obligations of the Company under
the 9% Debentures are substantially similar to those under the 18% Debentures.
As a result of the completion of the Offering and the exercise by the
underwriters of their overallotment option, the Company had a working capital of
$3,218,000 and a capital of $7,867,000 at January 31, 1997, compared to negative
figures on January 31, 1996 of $1,910,000 and $2,729,000 respectively.
ITEM 7. FINANCIAL STATEMENTS.
See Financial Statements and Independent Auditors' Report which are an
integral part of this Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
12
<PAGE> 14
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Age Position(s)
--- -----------
<S> <C> <C>
Theodore Rosen 72 Chairman of the Board of Directors
Richard H. Nelson 57 President, Chief Executive Officer
and Director
Seymour J. Beder 70 Treasurer and Chief Financial Officer
Terrence Page 50 Vice President
Evan Evans 71 Director
Allen J. Rothman 40 Director
Todd Goodwin 65 Director
</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.
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.
Terrence Page. Mr. Page was appointed Vice President for Western
Resources of the Company in March 1997. Prior to his employment with the
Company, Mr. Page served on the Nevada Public Service Commission since 1982.
From 1982 to 1989 he was Regulatory Operations Supervisor, and from 1989 until
he resigned to join the Company, he served as Director of Regulatory Operations.
In this position, he had final responsibility for developing all staff positions
13
<PAGE> 15
brought before the Commission, and coordinated with Federal, state, and local
government agencies on matters of regulatory policy. Mr. Page holds his BS in
Business from the University of the State of New York, and his MS in management
from the American University. He has served on the Nevada Department of
Information Services Advisory Committee, the Ohio State University's National
Regulatory Research Institute Advisory committee, the Las Vegas Regional
Transportation Advisory Committee, and the Washoe Regional Water Planning
Commission.
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.
Allen J. Rothman. Mr. Rothman was appointed to the Board of Directors
of the Company in January 1997. Mr. Rothman is a partner with the law firm of
Robinson Brog Leinwand Greene Genovese & Gluck P.C. in New York with whom he has
been associated since January, 1996. Mr. Rothman specializes in corporate,
finance and real estate law. Prior to joining Robinson Brog, he was associated
with several New York law firms. Mr. Rothman received his BA degree from
Columbia University (cum laude, Phi Beta Kappa) and his JD degree from Harvard
University.
Todd Goodwin. Mr. Goodwin was appointed to the Board of Directors of
the Company in January 1997. From 1984 until the present, Mr. Goodwin has been a
general partner of Gibbons, Goodwin, van Amerongen, an investment banking firm
in New York. From 1978 until 1984, he was Managing Director of Merrill Lynch
Capital Markets, specializing in corporate finance, advising major client
corporations on acquisitions, divestitures and financings. Mr. Goodwin was
general partner of White Weld & Co. from 1969 until that firm was acquired by
Merrill Lynch in 1978. Mr. Goodwin is also a Director of Schuller Corporation,
The Rival Company, Schult Homes Corporation and Wells Aluminum Corp. He is a
trustee of Southampton Hospital and the Madison Avenue Boys and Girls Club. Mr.
Goodwin received his A.B. degree in Economics from Harvard University.
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 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 consulted, from both a business and
legal standpoint numerous environmental and energy project developments in both
the public and private sector. 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 Cogenic. 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.
Nils A. Kindwall. Mr. Kindwall has served as a consultant to the
Company since 1994. 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 directors 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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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 Common Stock to file reports of
14
<PAGE> 16
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 such reports and certain representations furnished the Company during the
last fiscal year, the Company believes that no officers, directors or beneficial
owners of more than ten percent (10%) of the Common Stock failed to file on a
timely basis reports required by Section 16(a) of the Exchange Act during the
fiscal year ended January 31, 1997.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by Item 10 of Form 10-KSB is contained in and
is incorporated by reference from, the Proxy Statement for the Company's 1997
Annual Meeting of Shareholders, which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 11 of Form 10-KSB is contained in and
is incorporated by reference from, the Proxy Statement for the Company's 1997
Annual Meeting of Shareholders, which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 12 of Form 10-KSB is contained in and
is incorporated by reference from, the Proxy Statement for the Company's 1997
Annual Meeting of Shareholders, which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 18-K.
A. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company filed with
the Secretary of State of Delaware *
3.2 By-Laws of the Company **
3.3 Articles of Organization of Steamboat Envirosystems, L.C. *
4.1 Specimen Stock Certificate *
4.2 Form of Warrant *
4.3 Form of Warrant Agreement *
4.4 Form of Representative's Purchase Option *
10.1 Plan of Reorganization of Cogenic Energy Systems, Inc. **
10.2 18% Convertible Subordinated Debenture due 2004 **
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.3 Employment Agreement, dated as of November 11, 1993,
between the Company and Richard Nelson **
10.3(a) Amendment to Employment Agreement between October 15,
1996 **
10.4 Employment Agreement, dated as of December 11, 1993,
between the Company and Theodore Rosen **
10.4(a) Amendment to Employment Agreement between the Company
and Theodore Rosen dated October 15, 1996 *
10.5 Purchase Agreement, dated as of January 24, 1994,
between Lehi Co-Gen Associates, L.C. and Lehi
Envirosystems, Inc. **
10.6 Operating Agreement among Far West Capital, Inc., Suma
Corporation and Lehi Envirosystems, Inc. dated January
24, 1994 *
10.7 Form of Purchase and Sale Agreement between Far West
Capital, Inc., Far West Electric Energy Fund, L.P., 1-A
Enterprises, the Company and Steamboat LLC *
10.8 Form of Operation and Maintenance Agreement between
Steamboat LLC and S.B. Geo, Inc. *
10.9 Letter Agreement, dated as of November 8, 1994, between
the Company, PSC Cogeneration Limited Partnership,
Central Hudson Cogeneration, Inc. and Independent Energy
Finance Corporation *
10.10 Agreement among the Company, Plymouth Envirosystems,
Inc., IEC Plymouth, Inc. and Independent Energy Finance
Corporation dated November 16, 1994 *
10.11 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 *
10.12 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 *
10.13 Purchase and Sale Agreement, dated as of December 31,
1995, between the Company, Far West Capital, Inc., Far
West Electric Energy Fund, L.P., 1-A Enterprises and
Steamboat Envirosystems, LLC *
10.13(a) Letter Agreement, dated September 25, 1996, between the
Company and Far West Capital, Inc. *
10.14 Joint Development Memorandum of Intent dated September
20, 1994, between the Company and Cowen Partnership *
10.15 Agreement dated May 4, 1995 between the Company and
Indus LLC *
10.16 Security Agreement and Financing Statement among the
Company, Lehi Envirosystems, Inc., Plymouth
Envirosystems, Inc. and Anchor Capital Company, LLC
dated June 14, 1995, as amended *
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.17 Stock Pledge Agreement among Richard H. Nelson, Theodore
Rosen, Anchor Capital Company, LLC and the Company dated
June 14, 1995 *
10.18 Loan Agreement among the Company, Lehi Envirosystems,
Inc., Plymouth Envirosystems and Solvation, Inc. dated
as of December 15, 1995, as amended *
10.19 Pledge Agreement between the Company and Solvation, Inc.
dated as of December 15, 1995 *
10.20 Lease dated September 1, 1995 between the Company and
Gaedeke Holdings, Ltd. *
10.21 Documents related to Private Placement *
10.21(a) Certificate of Designations *
10.22 Purchase Agreement between the Company and Westinghouse
Electric Corporation dated as of November 6, 1995 and
amendments thereof *
10.23 Letter of intent to the Company from Bluebeard's Castle,
Inc. dated August 8, 1996 *
10.24 Form of Joint Venture Agreement among the Company and
Bluebeard's Castle, Inc. and Bluebeard Hilltop Villas
dated as of August 6, 1996 *
10.25(a) Long-Term Agreement for the Purchase and Sale of
Electricity Between Sierra Pacific Power Company and Far
West Capital, Inc. dated October 29, 1988 *
10.25(b) Assignment of Interest, dated December 10, 1988 by and
between Far West Capital, Inc. and 1-A Enterprises *
10.25(c) Letter dated August 18, 1989 by Gerald W. Canning, Vice
President of Electric Resources, consenting to the
Assignment of Interest on behalf of Sierra Pacific Power
Company *
10.26(a) Agreement for the Purchase and Sale of Electricity,
dated as of November 18, 1983 between Geothermal
Development Associates and Sierra Pacific Power Company
*
10.26(b) Amendment to Agreement for Purchase and Sale of
Electricity, dated March 6, 1987, by and between Far
West Hydroelectric Fund, Ltd. and Sierra Pacific Power
Company *
10.27 Loan and Option Agreement dated August, 1996 by and
among NRG Company, LLC and Reno Energy, LLC and ART, LLC
and FWC Energy, LLC, and amendments thereto *
10.28 Promissory Note dated August 9, 1996 for $300,000 from
Reno Energy, LLC to NRG Company, LLC *
10.29 Letter of Intent dated July 15, 1996 on behalf of Reno
Energy, LLC *
10.30 Limited Liability Company Operating Agreement of NRG
Company, LLC dated as of September 8, 1996, and
amendments thereto *
10.31 Form of Limited Liability Company Operating Agreement of
Steamboat, Envirosystems, L.C. dated as of October ,
1996 *
10.32 Form of Debenture Conversion Agreement *
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.33(a) First Amended and Restated Loan and Option Agreement,
dated April 9, 1997, by and between USE Geothermal LLC,
and Reno Energy LLC, ART, LLC and FWC Energy, LLC ***
10.33(b) Note in the amount of $1,200,000, dated as of April 9,
1997, made by Reno Energy LLC in favor of USE Geothermal
LLC ****
10.33(c) Security Agreement, dated as of April 9, 1997, made by
Reno Energy LLC in favor of USE Geothermal LLC ****
10.33(d) Form of Security Agreement and Collateral Assignment,
entered into by and between USE Geothermal LLC and both
FWC Energy LLC and ART LLC ****
10.33(e) Guaranty Agreement, dated as of April 9, 1997, made by
FWC Energy LLC and ART LLC in favor of USE Geothermal
LLC ****
10.34 1996 Stock Option Plan
10.35 Employment Agreement, dated as of March 1, 1997, between
the Company and Terrence Page
10.36 Form of 9% Convertible Subordinated Secured Debenture
due 2004
21.1 Subsidiaries of the Company
27 Financial Data Schedule
</TABLE>
* Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File No. 333-94612).
** Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended January 31, 1994 (File No. 0-10238).
*** Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended July 31, 1996 (File No. 0-10238).
**** Incorporated by reference to the Company's Current Report on Form 8-K
filed on April 24, 1997 (File No. 0-10238).
B. REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Registrant during the last
quarter of the fiscal year ended January 31, 1997.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act, the Issuer has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
U.S. ENERGY SYSTEMS, INC.
By /s/ Seymour J. Beder
-------------------------------------------
Seymour J. Beder
Chief Financial and Accounting Officer
and Controller
April 30, 1997
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Richard H. Nelson and Seymour J.
Beder as his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-KSB and to file the same with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
U.S. ENERGY SYSTEMS, INC
<S> <C> <C>
/s/ Theodore Rosen
- --------------------------------
Theodore Rosen Chairman of the Board of Directors April 30, 1997
/s/ Richard H. Nelson
- --------------------------------
Richard H. Nelson President and Chief Executive Officer April 30, 1997
(Principal Executive Officer)
/s/ Seymour J. Beder
- --------------------------------
Seymour J. Beder Chief Financial and Accounting Officer April 30, 1997
and Controller (Principal Financial and
Accounting Officer)
/s/ Evan Evans
- --------------------------------
Evan Evans Director April 30, 1997
/s/ Allen Rothman
- --------------------------------
Allen Rothman Director April 30, 1997
/s/ Todd Goodwin
- --------------------------------
Todd Goodwin Director April 30, 1997
</TABLE>
19
<PAGE> 21
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
U.S. Energy Systems, Inc. and Subsidiaries:
Report of Independent Auditors............................ F-2
Consolidated Balance Sheet as at January 31, 1997......... F-3
Consolidated Statements of Operations for the Years Ended
January 31, 1997 and January 31, 1996.................. F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended January 31, 1997 and January 31,
1996................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
January 31, 1997 and January 31, 1996.................. F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 22
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
U.S. Energy Systems, Inc.
West Palm Beach, Florida
We have audited the accompanying consolidated balance sheet of U.S. Energy
Systems, Inc. (formerly U.S. Envirosystems, Inc.) and subsidiaries as at January
31, 1997 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the two-year period
then ended. These statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the financial position of U.S. Energy
Systems, Inc. and subsidiaries at January 31, 1997, and the results of their
operations and their cash flows for each of the years in the two-year period
then ended in accordance with generally accepted accounting principles.
/s/ Richard A. Eisner & Company, LLP
New York, New York
March 20, 1997
With respect to Note C[2]
April 10, 1997
F-2
<PAGE> 23
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
CONSOLIDATED BALANCE SHEET
AS AT JANUARY 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 4,125,000
Accounts receivable....................................... 225,000
Note receivable (Note C[2])............................... 300,000
Other current assets...................................... 112,000
-----------
Total current assets.............................. 4,762,000
Property, plant and equipment, net (Notes B[2] and D)....... 4,111,000
Investments in Joint Ventures -- at equity:
Lehi Independent Power Associates, L.C. (Notes B[3] and
E[1]).................................................. 1,046,000
Plymouth Cogeneration Limited Partnership (Notes B[3]and
E[2]).................................................. 619,000
Deposit (Note C[2])......................................... 100,000
Other assets................................................ 13,000
-----------
Total............................................. $10,651,000
===========
</TABLE>
LIABILITIES
<TABLE>
<S> <C>
Current liabilities:
Accrued expenses and other current liabilities (Note F)... $ 1,011,000
Convertible subordinated secured debentures (Notes I and
L)..................................................... 150,000
Pre-reorganization income taxes payable and accrued
interest (Note F)...................................... 383,000
-----------
Total current liabilities......................... 1,544,000
Convertible subordinated secured debentures (including due
to related parties of $207,000) (Notes I and L)........... 875,000
Advances from Joint Ventures (Note E[2]).................... 31,000
-----------
Total liabilities................................. 2,450,000
-----------
Minority interest........................................... 334,000
-----------
Commitments and contingencies (Note K)
</TABLE>
STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Preferred stock, $.01 par value, authorized 5,000,000
shares; issued and outstanding, none (Note J[1])
Common stock, $.01 par value, authorized 35,000,000 shares;
issued and outstanding 4,334,193.......................... 43,000
Additional paid-in capital.................................. 12,718,000
Accumulated deficit......................................... (4,894,000)
-----------
Total stockholders' equity........................ 7,867,000
-----------
Total............................................. $10,651,000
===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE> 24
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues.................................................... $ 266,000 $ 0
----------- -----------
Cost and expenses:
Operating expenses........................................ 162,000 27,000
Administrative expenses................................... 1,159,000 826,000
Interest expense (net of interest income of $18,000 in
1997).................................................. 805,000 604,000
Loss from Joint Ventures.................................. 163,000 17,000
----------- -----------
Total cost and expenses........................... 2,289,000 1,474,000
----------- -----------
(Loss) before extraordinary item............................ (2,023,000) (1,474,000)
Extraordinary gain (loss) from restructuring of liabilities
(Note G).................................................. (25,000) 83,000
----------- -----------
NET (LOSS).................................................. (2,048,000) (1,391,000)
Fair value of common shares issued over carrying amount of
preferred stock exchanged (Note B[4])..................... (633,000)
Dividends on preferred stock................................ (21,000)
----------- -----------
(Loss) applicable to common stock........................... $(2,681,000) $(1,412,000)
=========== ===========
Per share of common stock:
(Loss) before extraordinary item.......................... $ (2.56) $ (3.41)
=========== ===========
Net (loss)................................................ $ (2.58) $ (3.22)
=========== ===========
Weighted average common shares outstanding.................. 1,037,239 438,773
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-4
<PAGE> 25
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------- ---------------------------------
NUMBER NUMBER ADDITIONAL
OF OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------- --------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- February 1, 1995.... 434,650 $ 4,000 $ 41,000 $(1,455,000) $(1,410,000)
Sale of common stock........... 5,000 34,000 34,000
Value assigned to preferred
stock issued in connection
with loans payable........... 57,500 $1,000 28,000 29,000
Value assigned to additional
warrants issued in connection
with notes payable........... 9,000 9,000
Net (loss) for the year ended
January 31, 1996............. (1,391,000) (1,391,000)
------- ------- --------- ------- ----------- ----------- -----------
Balance -- January 31, 1996.... 57,500 1,000 439,650 4,000 112,000 (2,846,000) (2,729,000)
Cash paid for fractional
shares....................... (457)
Proceeds from public offering,
net of registration costs.... 3,565,000 36,000 11,921,000 11,957,000
Conversion of debentures to
common stock and warrants.... 125,000 1,000 499,000 500,000
Exchange of preferred stock for
common stock................. (57,500) (1,000) 205,000 2,000 (1,000) 0
Fair value of options issued
for consulting services...... 187,000 187,000
Net (loss) for the year ended
January 31, 1997............. (2,048,000) (2,048,000)
------- ------- --------- ------- ----------- ----------- -----------
Balance -- January 31, 1997.... 0 $ 0 4,334,193 $43,000 $12,718,000 $(4,894,000) $ 7,867,000
======= ======= ========= ======= =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE> 26
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss)................................................ $(2,048,000) $(1,391,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization........................... 23,000
Amortization of debt discount........................... 54,000 42,000
Amortization of purchase price in excess of equity in
Joint Ventures........................................ 59,000 59,000
Amortization of deferred financing costs................ 72,000
Options issued for consulting services.................. 187,000
Loss (gain) from restructuring of liabilities........... 25,000 (83,000)
Equity in (income) loss of Joint Ventures, net of
distributions......................................... 146,000 (13,000)
Changes in operating assets and liabilities:
(Increase) in accounts receivable.................... (225,000)
(Increase) in other current assets................... (96,000)
Decrease in other assets............................. 93,000 2,000
(Increase) decrease in accrued expenses and other
current liabilities.................................. (596,000) 671,000
Accrued interest on pre-reorganization income taxes
payable.............................................. 63,000
----------- -----------
Net cash (used in) operating activities............ (2,315,000) (641,000)
----------- -----------
Cash flows from investing activities:
Acquisition of business, net of cash acquired............. (3,357,000)
Acquisition of equity interest in subsidiary.............. (265,000) (9,000)
Deposit................................................... (100,000)
Security deposit on proposed acquisition.................. (50,000)
Costs incurred in connection with the proposed
acquisitions............................................ (3,000)
Collection of loans receivable -- officer................. 33,000
----------- -----------
Net cash (used in) investing activities............ (3,722,000) (29,000)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 14,616,000 34,000
Proceeds from loans payable and preferred stock........... 175,000 785,000
Proceeds from issuance of notes payable................... 25,000
Public offering costs..................................... (2,659,000)
Payment of notes payable.................................. (1,000,000)
Payment of loans payable.................................. (960,000)
Payment of deferred financing costs....................... (102,000)
Payment of pre-reorganization payroll taxes payable....... (28,000) (34,000)
Payment of pre-reorganization income taxes payable........ (9,000)
Advances from Joint Ventures.............................. 16,000 15,000
Deferred registration costs............................... (50,000)
----------- -----------
Net cash provided by financing activities.......... 10,160,000 664,000
----------- -----------
NET INCREASE (DECREASE) IN CASH............................. 4,123,000 (6,000)
Cash -- beginning of the period............................. 2,000 8,000
----------- -----------
CASH -- END OF THE PERIOD................................... $ 4,125,000 $ 2,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 1,083,000 $ 93,000
Supplemental disclosures of noncash financing activities:
Conversion of debentures to common stock and warrants..... 500,000
Exchange of common stock for preferred stock.............. 3,000
Details of acquisition:
Fair value of assets acquired............................. $ 4,134,000
Liabilities assumed....................................... (503,000)
Minority interest......................................... (274,000)
-----------
Cash paid for acquisition................................... $ 3,357,000
===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-6
<PAGE> 27
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE A -- THE COMPANY:
U.S. Energy Systems, Inc. ("USE") and subsidiaries (collectively, the
"Company") are the successors to Cogenic Energy Systems, Inc. ("Cogenic").
Cogenic emerged from Chapter 11 Bankruptcy Proceedings on March 22, 1993. The
Plan of Reorganization, as amended, provided that Cogenic merge with Utilities
Systems Florida, Inc. ("USF") and change the name of the reorganized Cogenic to
U.S. Envirosystems, Inc. ("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.
In February 1996, the stockholders approved a 1 for 40 reverse stock split,
effective May 6, 1996, which has been given effect in the accompanying
consolidated 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 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 subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
the consolidated balance sheet.
[2] Property, plant and equipment: Property, plant and equipment are
stated at cost and are depreciated using the straight-line method over
their estimated useful life of thirty years.
[3] Investments in Joint Ventures: Investments in Joint Ventures are
accounted for under the equity method. Lehi Independent Power Associates,
L.C. ("LIPA") and Plymouth Cogeneration Limited Partnership ("PCLP") each
have a fiscal year end December 31 which differs to the fiscal year end of
the Company. No material adjustment is necessary to reconcile the December
31 year end to the Company's January 31 year end.
[4] 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. In 1997, the excess of the fair
value of the common shares issued over the carrying amount of the preferred
stock has been added to net loss to arrive at net loss applicable to common
shareholders.
[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.
[6] Fair values of financial instruments: The estimated fair value of
financial instruments has been determined based on available market
information and appropriate valuation methodologies. The carrying amounts
of cash, escrow deposits, accounts receivable, notes receivable, other
current assets, and accrued expenses and other current liabilities
approximate fair value at January 31, 1997 because of the short maturity of
these financial instruments. The estimated carrying value of the
convertible subordinated secured debentures and pre-reorganization income
taxes payable and accrued interest approximate fair value because the
interest rates on these instruments approximate the market price at January
31, 1997. The fair value estimates were based on information available to
management as of January 31, 1997.
F-7
<PAGE> 28
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
[7] Stock-based compensation: The Company accounts for employee stock
option grants under the basis of Accounting Principles Board Opinion No.
25. In fiscal 1997 the Company adopted the "disclosures only" alternative
available under Financial Accounting Standards Board No. 123 ("FASB 123")
for its employee stock option grants.
NOTE C -- ACQUISITIONS:
[1] Steamboat Envirosystems, L.C.: The Company acquired a 95% interest in
Steamboat Envirosystems, L.C. ("Steamboat") which has purchased two geothermal
power plants (the "Steamboat Facilities") from Far West Electric Energy Fund
("FWEEF") and from 1-A Enterprises. Far West Capital Inc., the general partner
and a limited partner in FWEEF, owns the remaining 5%. The transaction was
accounted for as a purchase. The operating results of Steamboat have been
included in the consolidated statement of operations from date of acquisition.
The Company paid a total of $3,870,000 (including $50,000 as a down payment
which was previously paid by the Company) to Steamboat to complete the
acquisition of the plants and a mortgage to which the Steamboat Facilities were
subject, and fund the future acquisition of certain royalty interests and plant
improvements.
Pursuant to the agreements, the Company will receive the first $1,800,000
of Steamboat's annual net income. For net income above $1,800,000, Far West
Capital Inc. will receive: (i) 55% for the first five years and (ii) 5%
thereafter, with the balance going to the Company.
The Steamboat Facilities produce eight megawatts of electric power which is
sold under two power purchase agreements to Sierra Pacific Power Company
("Sierra"). The current power purchase agreements with Sierra provide for price
adjustment in December 1996 for Steamboat Facility 1 and December 1998 for
Steamboat Facility 1A. The rate currently being paid to the Company by Sierra
for Steamboat Plant 1's power production is substantially lower than what had
been paid until December 1996. Under the contracts, Steamboat is required to
sell power to Sierra for additional ten-year periods at the then-prevailing
short-term avoided costs for electricity for Sierra.
The Steamboat facilities are subject to certain royalty agreements which
include payments for royalties in steam extraction rights and thirty percent of
the net revenue of Steamboat Facility 1 after certain deductions, starting March
1, 1997. The Company has been negotiating to acquire such royalty interests.
The following unaudited pro forma information of the Company for the years
ended January 31, 1997 and January 31, 1996 gives effect to the acquisition of
Steamboat as though the acquisition occurred at February 1, 1995.
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
Revenue.................................................... $ 3,449,000 $3,549,000
Loss before extraordinary item............................. (1,069,000) (449,000)
Net loss................................................... (1,094,000) (366,000)
Net loss per share......................................... (1.20) (.27)
</TABLE>
[2] USE Geothermal, LLC (formerly NRG Company, LLC): The Company acquired
for $265,000 an 81.5% interest in USE Geothermal, LLC ("USE GEO"), a Delaware
limited liability company. USE GEO is involved in the development of a
geothermal heating project (the "Reno Project") with Reno Energy LLC ("Reno
Energy"), a Nevada limited liability company. The transaction was accounted for
as a purchase.
Under the terms of the agreements between USE GEO and Reno Energy, USE GEO
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 Company paid $100,000 as a deposit towards the Reno Option, which
is exercisable at an exercise price of $1,200,000. USE GEO did not exercise the
option. On April 10, 1997, USE GEO consummated a convertible loan agreement with
Reno Energy in the amount of $1,200,000 at an interest rate of
F-8
<PAGE> 29
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12% per annum maturing on April 10, 2027. The loan is convertible into a 50%
equity interest in Reno Energy. The percentage is subject to pro-rata adjustment
in the event of additional funding of the Reno Project. The loan is secured by a
first lien on all the assets of Reno Energy and is personally guaranteed by Reno
Energy's members.
In addition, USE GEO granted a $300,000 loan to Reno Energy to fund
pre-development expenses associated with the Reno Project. The loan is to be
repaid over three years with an interest rate at 9% per annum, or with the
proceeds of any financing transaction in excess of $2,000,000.
NOTE D -- PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following at January 31, 1997:
<TABLE>
<S> <C>
Steamboat Springs Thermal Hydroelectric Power
Plants -- cost............................................ $4,134,000
Less accumulated depreciation............................... 23,000
----------
Balance........................................... $4,111,000
==========
</TABLE>
NOTE E -- 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 LIPA, which owns a cogeneration project (the "Project")
located in Lehi, Utah.
The operating agreement of LIPA provides for, among other matters, the
allocation of the net profits and net losses to the owners in proportion to
their ownership interest. The agreement also provides for additional
contributions totalling $875,000 to be shared by the owners in the event that
any modification, as defined, is required to bring the Project back to full
operational condition. LIPA terminates in January 2024, unless sooner dissolved
by certain conditions as set forth in the operating agreement.
During the two-year period ended January 31, 1997, the Project was not in
operation.
Far West Capital Inc., the other 50% owner of LIPA, also owns a 5% interest
in Steamboat Envirosystems, L.C. (see Note C[1]).
[2] Plymouth Cogeneration Limited Partnership: In 1994 the Company,
through its subsidiary, Plymouth Envirosystems, Inc. acquired a 50% interest in
Plymouth Cogeneration which owns and operates a cogeneration plant which
produces electricity and heat at Plymouth State College, in Plymouth, New
Hampshire. The facility provides 100% of the electrical and heating requirements
for the campus, which is a part of the University of New Hampshire system, under
a twenty year contract. The project, which cost $5.9 million to construct, is
comprised of a combination of diesel engine-generators, heat recovery and
supplemental boilers, and the complete civil works tying all campus buildings
into a single heating loop. The project was financed prior to the Company's
acquisition of a 50% interest through $5,110,000 in State of New Hampshire tax
exempt revenue bonds and $700,000 in equity. The Company paid a total of
$636,000 in cash and 11,400 shares of common stock for its 50% interest.
F-9
<PAGE> 30
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
[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, 1997, the estimated remaining life of the plants is as
follows:
<TABLE>
<S> <C>
-- 27
LIPA -- buildings years
-- 5
-- machinery and equipment years
-- 18
Plymouth -- plant years
</TABLE>
[4] The following is summarized financial information of LIPA and PCLP as
at December 31, 1996 and for the two-year periods then ended:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
LIPA PCLP
---------- ----------
<S> <C> <C>
Current assets.............................................. $ 36,000 $ 180,000
Property, plant and equipment at cost (net)................. 257,000 5,335,000
Other assets................................................ 941,000
---------- ----------
Total assets...................................... 293,000 6,456,000
Current liabilities......................................... (25,000) (443,000)
Long-term debt.............................................. (4,924,000)
---------- ----------
Equity...................................................... $ 268,000 $1,089,000
========== ==========
Share of equity in Joint Ventures........................... $ 134,000 $ 545,000
Investments in Joint Ventures in excess of equity........... 912,000 74,000
---------- ----------
Total investments in Joint Ventures............... $1,046,000 $ 619,000
========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
LIPA PCLP
------------------- -----------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue.................................... $1,189,000 $1,150,000
========== ==========
Gain on sale of fixed assets............... $236,000
========
Net income (loss).......................... $(87,000) $172,000 $ (120,000) $ (87,000)
======== ======== ========== ==========
Equity in net income (loss)................ $(44,000) $ 86,000 $ (60,000) $ (44,000)
Amortization of purchase price over
equity................................... (55,000) (55,000) (4,000) (4,000)
-------- -------- ---------- ----------
Net income (loss) from Joint Ventures...... $(99,000) $ 31,000 $ (64,000) $ (48,000)
======== ======== ========== ==========
Return of capital/distribution/dividend.... $ 25,000 $ 20,000
======== ==========
</TABLE>
F-10
<PAGE> 31
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities at January 31, 1997 are
comprised of the following:
<TABLE>
<S> <C>
Payables relating to acquisition............................ $ 503,000
Offering costs payable...................................... 217,000
Professional fees........................................... 230,000
Accrued interest............................................ 8,000
Accrued payroll and related taxes........................... 10,000
Other....................................................... 43,000
----------
Total............................................. $1,011,000
==========
</TABLE>
NOTE G -- 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 initial payment was not paid until April 1997. The Company is
currently negotiating the settlement of the remaining balance.
During the year ended January 31, 1996, the Company reached settlements
with the tax authorities resulting in extraordinary gains from restructuring of
liabilities of $83,000.
NOTE H -- INCOME TAXES:
Deferred taxes at January 31, 1997 are as follows:
<TABLE>
<S> <C>
Potential benefit of post-reorganization operating loss
carryforward.............................................. $ 1,443,000
Expenses for financial reporting, not yet deductible for
taxes..................................................... 109,000
Gain on installment sale.................................... (158,000)
Valuation allowance......................................... (1,394,000)
-----------
$ 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
$461,000.
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 $190,000 expiring from 1998 to 2000.
Utilization of the acquired net operating loss and tax credit carryforwards may
be subject to limitations as a result of the reorganization. Accordingly, the
Company has not recognized the deferred tax asset attributable to the acquired
net operating loss and tax credit carryforwards.
At January 31, 1997, the Company has a post-reorganization net operating
loss carryforward of $3,600,000 expiring from 2010 to 2012. Under Section 382 of
the Internal Revenue Code, the Company is subject to annual limitation on
utilization of its net operating loss carryforwards because an ownership change
of more than 50% has occured. This annual limitation is approximately $150,000
plus any built-in gain recognized in the five year period beginning on the date
of the ownership change.
F-11
<PAGE> 32
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- CONVERTIBLE SUBORDINATED SECURED DEBENTURES:
In January 1994, the Company issued $1,525,000 Convertible Subordinated
Debentures (the "Debentures") bearing interest at 18% due on January 25, 2004.
The Debenture holders are entitled to 50% of the Company's share of net profits
of LIPA, as defined. The Debentures are collateralized by the outstanding shares
of LEHI and are subordinated to senior indebtedness. Commencing January 25,
1998, the Company has the option to redeem the Debentures at 102, plus unpaid
and accrued interest.
In May 1995, the Debenture holders agreed to a partial deferment of
interest payment, in return for which 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.
Concurrent with the public offering in December 1996, $500,000 principal
amount of debentures were converted into 125,000 shares of common stock and
125,000 private warrants.
In addition, the conversion rate of $875,000 of the Debentures was reduced
to $8.00 per share (109,375 shares of common stock) and the interest rate of
$875,000 in principal amount was reduced to 9%.
Debenture holders representing $150,000 in principal amount, did not agree
to participate in the restructuring and were paid in February 1997.
NOTE J -- STOCKHOLDERS' EQUITY:
[1] Preferred stock: In June 1995, the Company issued 57,500 shares of
Series One Preferred Stock in connection with borrowings which were 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 was being amortized over the life of
the loan. In December 1996, the loans were paid and the remaining balance of the
loan discount amounting to $19,000 was charged to current year's operations.
Concurrent with the public offering in December 1996, the 57,500 shares of
Series One Preferred Stock were converted into 205,000 shares of common stock.
The excess of the fair value of the common shares issued over the carrying
amount of the preferred stock has been added to net loss to arrive at net loss
applicable to common shareholders for earnings per share purposes.
[2] Stock options and warrants: In December 1996, the Board of Directors
approved the 1996 Stock Option Plan (the "1996 Plan") which provides for the
granting of nonstatutory options for up to 1,000,000 shares of common stock to
officers, employees, directors and consultants of the Company. The 1996 Plan is
administered by a committee appointed by the Board of Directors which, within
the limitation of the 1996 Plan, determines the persons to whom options will be
granted, the number of shares to be covered by each option, the duration and
rate of exercise of each option, the exercise price and manner of exercise, and
the time, manner and form of payment upon exercise of an option. Options granted
under the 1996 Plan may not be granted at a price less than the fair value of
the common stock, as determined by the committee on the date of grant, and will
expire not more than ten years from the date of grant.
Options granted under the 1996 Plan are exercisable one (1) year after the
date of its grant with respect to 50% of the total number of shares subject to
the option, and two (2) years after the date of its grant with respect to the
remaining 50% of the total number of shares subject to the option.
Prior to December 1996, the Company granted options totalling 174,100 to
officers, employees, directors and consultants of the Company under several
Stock Option Agreements. Options granted under these agreements are exercisable
for a period of up to five (5) years from date of grant at an exercise price as
stated in the agreements.
F-12
<PAGE> 33
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------------------
1997 1996
------------------- -------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year....... 174,100 $7.66 20,100 $7.01
Granted........................................ 642,500 3.92 154,000 7.74
------- -------
Options outstanding at end of year............. 816,600 4.71 174,100 7.66
======= =======
Options exercisable at end of year............. 174,100 7.66 174,100 7.66
======= =======
</TABLE>
The following table presents information relating to stock options
outstanding at January 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------- --------------------------
WEIGHTED-AVERAGE
RANGE OF WEIGHTED-AVERAGE REMAINING LIFE WEIGHTED-AVERAGE
EXERCISE PRICE SHARES EXERCISE PRICE IN YEARS SHARES EXERCISE PRICE
-------------- ------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$ 3.88 445,000 $ 3.88 9.92 20,000 $ 4.00
4.00 217,500 4.00 9.28 144,000 8.00
8.00 144,000 8.00 3.76 10,100 10.00
10.00 10,100 10.00 2.90
------- -------
816,600 8.58 174,100
======= =======
</TABLE>
As of January 31, 1997, a total of 583,400 options (including 357,500
options under the 1996 Plan) are available for future grant.
The weighted-average fair value at date of grant for options granted during
1997 and 1996 was $3.14 and $0.96 per option, respectively. The fair value of
the options at date of grant was estimated using the Black-Scholes
option-pricing model utilizing the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31,
------------
1997 1996
---- ----
<S> <C> <C>
Risk-free interest rates.................................... 6.43% 5.53%
Expected option life in years............................... 10 5
Expected stock price volatility ............................ 70% 70%
Expected dividend yield..................................... 0% 0%
</TABLE>
Had the Company elected to recognize compensation cost based on the fair
value of the options at the date of grant as prescribed by FASB 123, net (loss)
applicable to common stock in 1997 and 1996 would have been ($3,450,000) and
($1,476,000), respectively, or ($3.33) per share and ($3.36) per share,
respectively.
As at January 31, 1997, the Company has warrants outstanding for the
purchase of its common stock as follows:
<TABLE>
<CAPTION>
EXERCISE EXPIRATION
DESCRIPTION SHARES PRICE DATE
- ----------- --------- -------- -------------
<S> <C> <C> <C>
Convertible debt............................. 125,000(a) $ 4.00 December 2001
Debt......................................... 114,000 5.00 October 1999
Consulting services.......................... 3,750 16.00 October 1999
Public offering.............................. 3,565,000(a) 4.00 December 2001
</TABLE>
F-13
<PAGE> 34
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(FORMERLY U.S. ENVIROSYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(a) Redeemable at $.01 per warrant under certain conditions.
NOTE K -- COMMITMENTS AND CONTINGENCIES:
[1] The Company has employment agreements which expire through November 30,
1998 with three of its officers. The agreements provide for minimum annual
payments of $324,000 subject to upward adjustment at the discretion of the Board
of Directors.
[2] USE International, L.L.C.: 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 had an initial term of one year and expired 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 is presently in arbitration with Indus. Indus claims that the
Company breached its consulting arrangement. Management believes that the
outcome will not have a material effect on the Company's financial position or
statement of operations, however, the outcome is presently indeterminable.
[3] U.S. Energy Systems, Inc. v. Enviro Partners, L.P. et al.: On March
27, 1997, the Company filed for a declaratory judgement action against Enviro
Partners, L.P. ("Enviro") and other partners of the Enviro Limited Partnership.
The Company had intended to close a private placement of its securities to
Enviro concurrent with a public offering of its securities. The Company was
unable to close the private placement because a condition to the private
placement, NASDAQ's approval of listing the Company's publicly offered
securities on the NASDAQ Small Cap Market, would not be satisfied if the private
placement proceeded. NASDAQ refused to approve the requested listing because it
concluded that the private placement was unfair to potential NASDAQ investors.
The Company completed its public offering without closing the private placement
in December 1996.
The Company commenced the action because of threats to sue the Company by
Enviro for damages sustained as a result of not completing the private
placement. On March 28, 1997, Enviro counterclaimed seeking $6,000,000 of
damages. Management believes the counterclaim has no merit and intends to
contest vigorously, however, the outcome is presently indeterminable.
NOTE L -- RELATED PARTY TRANSACTIONS:
Included in the outstanding debentures are amounts due to officers and an
affiliate of a director (collectively the "Related Parties") of $207,000. In
connection with the notes payable issued in November 1994 and paid in December
1996, an affiliate of a director was granted warrants to purchase 78,000 shares
of the Company's common stock at $5.00 per share before October 31, 1999.
During the years ended January 31, 1997 and January 31, 1996, the Company
paid interest of $286,000 and $15,000, respectively, to the Related Parties.
F-14
<PAGE> 1
EXHIBIT 10.34
U.S. ENERGY SYSTEMS, INC.
-----------------------------------------------------
1996 STOCK OPTION PLAN
-----------------------------------------------------
1. STATEMENT OF PURPOSE. This 1996 Stock Option Plan (the "Plan") is
intended to provide certain employees, directors (both employee and
non-employee directors), independent contractors and consultants of U.S. Energy
Systems, Inc., a Delaware corporation (the "Company"), and its subsidiaries
with an added incentive to provide their services to the Company and to induce
them to exert their maximum effort toward the Company's success through the
encouragement of stock ownership in the Company by such persons.
2. ADMINISTRATION. The Plan shall be administered by a committee (the
"Committee"), appointed by the Board of Directors, consisting of two or more
outside directors (each of whom qualifies as an "outside director" under
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
and as a "non-employee director" under Rule 16b-3 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")), whose interpretation of the
terms and provisions of the Plan shall be final and conclusive. The selection
of employees, directors (both employee and non-employee directors), independent
contractors and consultants for participation in the Plan and all decisions
concerning the timing, pricing and amount of any grant or award under the Plan
shall be made solely by the Committee. In the event a Committee of two or more
qualifying directors cannot be formed, the Plan shall be administered by the
Board of Directors. No member of the Board of Directors or of the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any option granted or option agreement entered into hereunder.
The Committee or Board of Directors, as the case may be, may authorize an
executive officer of the Company to execute a stock option agreement on behalf
of the Company and in accordance with the requirements of this Plan and the
specific instructions of the Committee or Board of Directors.
3. ELIGIBILITY. Options shall be granted only to employees (including
officers) and directors (both employee and non-employee directors) of the
Company and it subsidiaries, as well as independent contractors and consultants
performing services for the Company and it subsidiaries (collectively, the
"Optionees"), selected initially and from time to time by the Committee on the
basis of their importance to the business of the Company or its subsidiaries.
4. GRANTING OF OPTIONS. Subject to Section 10 of the Plan, the Company
may grant to Optionees from time to time options to purchase an aggregate of up
to 1,000,000 shares of the Company's common stock, par value $.01 per share
(the "Common Stock"). In the event that an option expires or is terminated or
canceled unexercised as to any shares, such released shares may again be
optioned (including a grant in substitution for a canceled option). Shares
subject to options may be made available from authorized and unissued shares of
Common Stock. Options granted under the Plan shall not constitute "incentive
stock options" for purposes of Section 422 of the Code.
<PAGE> 2
The maximum number of shares of Common Stock with respect to which options may
be granted during any calendar year to any person shall be 500,000. All options
granted pursuant to the Plan may be evidenced by agreements, to be executed by
the Company and by the Optionee, in such form or forms as the Committee shall
from time to time determine. Option agreements covering options granted from
time to time or at the same time need not contain provisions specified in the
Plan; provided, however, that all such option agreements shall comply with all
terms and provisions of the Plan. The date of grant of an option under this
Plan shall be the date as of which the Committee approves the grant.
5. OPTION PRICE. The option price (the "Option Price") shall be
determined by the Committee and, subject to the provisions of Section 10
hereof, shall be not less than the fair market value, as determined by the
Committee at the time the option is granted, of the shares of Common Stock
subject to the option.
6. DURATION OF OPTIONS, INCREMENTS AND EXTENSIONS. Subject to the
provisions of Section 8 hereof, each option shall be for such term of not more
than ten (10) years, as shall be determined by the Committee at the time the
option is granted. Each option shall become exercisable one (1) year after the
date of its grant with respect to 50% of the total number of shares subject to
the option, and two (2) years after the date of its grant with respect to the
remaining 50% of the total number of shares subject to the option.
Notwithstanding the foregoing, the Committee may in its discretion (i)
specifically provide for another time or times of exercise at the time the
option is granted; (ii) accelerate the exercisability of any option subject to
such terms and conditions as the Committee deems necessary and appropriate; or
(iii) at any time prior to the expiration or termination of any option
previously granted, extend the term of any option (including such options held
by officers) for such additional period as the Committee in its discretion
shall determine. In no event, however, shall the aggregate option period with
respect to any option, including the original term of the option and any
extensions thereof, exceed ten (10) years. Subject to the foregoing and the
other provisions of this Plan, all or any part of the shares to which the right
to purchase has accrued may be purchased at the time of such accrual or at any
time or times thereafter during the option period.
In the event of a Change in Control (as defined below), all
outstanding options shall become immediately exercisable. Notwithstanding any
other provisions hereunder, during the period of 30 days after a Change in
Control, each Optionee shall have the right to require the Company to purchase
from such Optionee any option granted under this Plan at a purchase price equal
to the excess of fair market value per share over the option price multiplied
by the number of option shares specified by the Optionee for purchase in a
written notice to the Company, attention of the Secretary. A "Change in
Control" shall be deemed to occur if any person (i) shall acquire direct or
indirect control of at least 50% of the outstanding voting stock, or (ii) has
the power (whether such power arises as a result of the ownership of capital
stock by contract or otherwise) or the ability to elect or cause the election
of directors consisting at the time of such election of a majority of the
Company's Board of Directors. As used herein, "person" shall mean any person,
corporation, partnership, joint venture or other entity or any group (as such
term is defined in Section 13(d) of the Exchange Act,
2
<PAGE> 3
and the rules promulgated thereunder). For purposes of this paragraph, "fair
market value per share" shall mean the average of the highest sales price per
share of the Common Stock as quoted on The Nasdaq SmallCap Market, The Nasdaq
National Market or by the principal exchange upon which the Common Stock is
listed, on each of the five trading days immediately preceding the date on
which such individual so notifies the Company. The amount payable to each such
individual by the Company shall be in cash or by certified check and shall be
reduced by any taxes required to be withheld.
7. EXERCISE OF OPTION. As a condition to the exercise of any option,
the Quoted Price (as defined below) per share of Common Stock on the date of
exercise must be equal to or exceed the Option Price. An option may be
exercised by giving written notice to the Company, attention of the Secretary,
specifying the number of shares to be purchased, accompanied by the full
purchase price for the shares to be purchased (i) in cash, (ii) by check, (iii)
to the extent permitted by applicable law by a promissory note in a form
specified by the Company and payable to the Company no later than 15 business
days after the date of exercise of the option, (iv) if so approved by the
Committee, by shares of Common Stock of the Company, (v) by delivering a
written direction to the Company that the option be exercised pursuant to a
"cashless" exercise/sale procedure (pursuant to which funds to pay for exercise
of the option are delivered to the Company by a broker upon receipt of stock
certificates from the Company) or a cashless exercise/loan procedure (pursuant
to which the Optionee would obtain a margin loan from a broker to fund the
exercise) through a licensed broker acceptable to the Company whereby the stock
certificate or certificates for the shares for which the option is exercised
will be delivered to such broker as the agent for the individual exercising the
option and the broker will deliver to the Company cash (or cash equivalents
acceptable to the Company) equal to the option price for the shares of Common
Stock purchased pursuant to the exercise of the option plus the amount (if any)
of federal and other taxes that the Company may, in its judgment, be required
to withhold with respect to the exercise of the option, (vi) by delivering a
written direction to the Company in lieu of payment in cash by the Optionee,
instructing the Company to withhold from the shares otherwise issuable upon the
exercise of the Option that number of shares which have an aggregate Quoted
Price equal to the aggregate cash Option Price of the shares being purchased,
or (vii) by a combination of these methods of payment. The "Quoted Price" and
the per share value of Common Stock for purposes of paying or off-setting the
Option Price in accordance with the immediately preceding sentence shall equal
the closing selling price per share of Common Stock on the business day
immediately prior to the exercise date.
At any time of any exercise of any option, the Company may, if it
shall determine it necessary or desirable for any reason, require the Optionee
(or his or her heirs, legatees or legal representative, as the case may be), as
a condition upon the exercise thereof, to deliver to the Company a written
representation of present intention to purchase the shares for investment and
not for distribution. In the event such representation is required to be
delivered, an appropriate legend may be placed upon each certificate delivered
to the Optionee (or his or her heirs, legatees or legal representative, as the
case may be) upon his or her exercise of part or all of the option and a stop
transfer order may be placed with the transfer agent. Each option shall also be
subject to the requirement that, if at any time the Company determines, in its
discretion, that the listing, registration or qualification of the
3
<PAGE> 4
shares subject to the option upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body is
necessary or desirable as a condition of or in connection with, the issuance or
purchase of the shares thereunder, the option may not be exercised in whole or
in part unless such listing, registration, qualification, consent or approval
shall have been effected or obtained free of any conditions not acceptable to
the Company in its sole discretion. The Company shall not be obligated to take
any affirmative action in order to cause the exercisability or vesting of an
option or to cause the exercise of an option or the issuance of shares pursuant
thereto to comply with any law or regulation of any governmental authority.
At the time of the exercise of any option, the Committee may require,
as a condition of the exercise of such option, the Optionee (i) to pay the
Company an amount equal to the amount of tax the Company may be required to
withhold to obtain a deduction for federal income tax purposes as a result of
the exercise of such option by the Optionee, or (ii) to make such other
arrangements with the Company which would enable the Company to pay such
withholding tax, including, without limitation, holding back a number of shares
issuable upon exercise of the option equal to the amount of such withholding
tax, or permitting the Optionee to deliver a promissory note in a form
specified by the Committee or withhold taxes from other compensation payable to
the Optionee by the Company, or (iii) a combination of the foregoing.
8. TERMINATION OF RELATIONSHIP AND EXERCISE THEREAFTER. In the event
the employment, directorship, contractor or consulting relationship between the
Company and an Optionee is terminated for any reason other than death,
permanent disability or retirement, such Optionee's options shall expire and
all rights to purchase shares pursuant thereto shall terminate immediately. The
Committee may, in its sole discretion, permit any option to remain exercisable
for such period after such termination as the Committee may prescribe, but in
no event after the expiration date of the option. Unless otherwise determined
by the Committee, temporary absence from employment or as a member of the Board
of Directors, an independent contractor or a consultant because of illness,
vacation, approved leaves of absence and transfers of employment among the
Company and its subsidiaries, shall not be considered to terminate employment,
directorship or contract or consulting relationship or to interrupt continuous
employment, directorship or contract or consulting relationship.
In the event of termination of said relationship because of death,
permanent disability (as that term is defined in Section 22(e)(3) of the Code,
as now in effect or as subsequently amended), or retirement, the option may be
exercised in full, without regard to any installments or vesting schedule
established under Section 6 hereof, by the Optionee or, if he or she is not
living, by his or her heirs, legatees or legal representatives (as the case may
be) during its specific term prior to three years after the date of death,
permanent disability or retirement, or such longer period as the Committee may
prescribe, but in no event after the expiration date of the option.
9. NON-TRANSFERABILITY. During the lifetime of the Optionee, options
shall be exercisable only by the Optionee, and options shall not be assignable
or transferable by the Optionee otherwise than by will or by the laws of
descent and distribution, or pursuant to a qualified domestic
4
<PAGE> 5
relations order as defined by the Code, or Title I of the Employment Retirement
Income Security Act of 1974, as amended, or the rules thereunder.
10. ADJUSTMENTS. The number of shares subject to the Plan and options
granted under the Plan shall be adjusted as follows: (i) in the event that the
number of outstanding shares of Common Stock is changed by any stock dividend,
stock split or combination of shares, the number of shares subject to the Plan
and to options granted hereunder shall be proportionately adjusted; (ii) in the
event of any merger, consolidation or reorganization of the Company with any
other corporation or corporations, there shall be substituted, on an equitable
basis, for each share of Common Stock then subject to the Plan, whether or not
at the time subject to outstanding options, the number and kind of shares of
stock or other securities to which the holders of shares of Common Stock will
be entitled pursuant to the transaction; and (iii) in the event of any other
relevant change in the capitalization of the Company, an equitable adjustment
shall be made in the number of shares of Common Stock then subject to the Plan,
whether or not then subject to outstanding options. In the event of any such
adjustment, the purchase price per share shall be proportionately adjusted. The
grant of an option pursuant to the Plan shall not affect or limit in any way
the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes in its capital or business structure or to merge,
consolidate, dissolve or liquidate, or to sell or transfer all or any part of
its business or capital.
11. AMENDMENT OF PLAN. The Board of Directors may amend or discontinue
the Plan at any time. However, no amendment or discontinuance shall be made
without the requisite approval of the shareholders of the Company if such
approval is required as a condition to the Plan continuing to comply with the
provisions of Section 162(m) of the Code.
12. CASH PROCEEDS. Any cash proceeds received by the Company from the
sale of shares pursuant to the options granted under the Plan shall be used for
general corporate purposes.
13. NO IMPAIRMENT OF RIGHTS. Nothing contained in the Plan or any
option granted pursuant thereto shall confer upon any Optionee any right to be
continued in the employment of the Company or its subsidiaries or to be
continued as an independent contractor or a consultant to the Company or its
subsidiaries, or interfere in any way with the right of the Company or its
subsidiaries to terminate such employment or contract or consulting
relationship and/or to remove any Optionee who is a director from service on
the Board of Directors of the Company or its subsidiaries at any time in
accordance with the Company's By-Laws or any provisions of applicable law.
14. COMPLIANCE WITH RULE 16B-3. The Plan is intended to comply with
all provisions of Rule 16b-3 or its successors promulgated under the Exchange
Act necessary to secure an exemption from Section 16(b) of the Exchange Act for
participating officers and directors, regardless of whether such provisions are
set forth in the Plan. To the extent any provision of the Plan or action of the
Plan administrators fails to so comply, it shall be deemed null and void, to
the extent permitted by law and deemed advisable by the Plan administrators.
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<PAGE> 6
15. SEVERABILITY. If any provision of the Plan or any option agreement
shall be determined to be illegal or unenforceable by any court of law in any
jurisdiction, the remaining provisions hereof and thereof shall be severable
and enforceable in accordance with their terms, and all provisions shall remain
enforceable in any other jurisdiction.
16. GOVERNING LAW. The validity and construction of this Plan and the
instruments evidencing the options granted hereunder shall be governed by the
laws of the State of Florida (excluding its choice of law rules).
17. EFFECTIVE DATE. On December 16, 1996, the Plan was adopted and
authorized by the Board of Directors. The Plan shall be effective as of the
date of adoption by the Board of Directors.
6
<PAGE> 1
EXHIBIT 10.35
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
the 1st day of March, 1997 by and between U.S. ENERGY SYSTEMS, INC., a
Delaware corporation (hereinafter referred to as "Company"), and TERRENCE PAGE,
a resident of the State of Nevada (hereinafter referred to as "Employee").
W I T N E S S E T H:
WHEREAS, Employee has certain knowledge and experience with respect to
the type of business and affairs conducted by the Company;
WHEREAS, the Company desires to obtain the services of and employ the
Employee, and the Employee desires to make his services available to the
Company, pursuant to the terms and conditions of this Agreement;
NOW THEREFORE, in consideration of the premises and of the covenants
and agreements herein contained, the Company and Employee covenant and agree as
follows:
1. EMPLOYMENT. The Company agrees to employ the Employee and the
Employee agrees to render services to the Company pursuant to the terms and
conditions of this Agreement. During the term of Employment, the Employee shall
diligently perform all services as may be reasonably assigned to him by the
President of the Company (the "President"), and shall exercise such power and
authority as may from time to time be delegated to him by the President. The
Employee shall devote his full time and attention to the business and affairs
of the Company, render such services to the best of his ability, and use his
best efforts to promote the interests of the Company.
2. TERM. The employment of the Employee hereunder shall commence as of
March 1, 1997 and shall continue for a period of two (2) years or until
the earlier termination of this Agreement by either of the parties as provided
herein (the "Term"). This Agreement shall automatically renew for unlimited
additional one (1) year terms unless either party shall have given the other
written notice of its intent not to so renew at least sixty (60) days prior to
the expiration of the current one (1) year term. After expiration of the Term
and the termination of Employee's employment hereunder, the Employee shall
continue to be subject to the provisions of paragraphs 14 and 15 and the other
provisions of this Agreement related thereto.
3. COMPENSATION. During the period of employment, the Company shall
pay or provide to the Employee as compensation for the services of the Employee
a salary of Ninety Thousand Dollars ($90,000.00) per annum, payable in
semi-monthly installments. The Company shall review Employee's salary at least
annually and if the Company determines to make a salary adjustment, then
Employee's new salary shall commence effective on the annual anniversary date
of the execution of this Agreement or at such other time as determined by the
Company. In addition to the base salary set forth above, Employee shall receive
upon the signing of this Agreement options to purchase
<PAGE> 2
30,000 shares of the common stock of the Company (the "Options") pursuant to
the Company's 1996 Stock Option Plan, and which Options, the terms and prices
thereof, shall be evidenced by the Stock Option Agreement attached to this
Agreement.
4. INCENTIVE COMPENSATION. In addition to the base salary and Options
granted pursuant to Section 3 hereof and the Stock Option Agreement, the
Employee may receive an annual incentive performance bonus, in such amount and
at such time as determined by the President and the Board with consideration of
the then current annual net revenues of the Company, the job performance of the
Employee, other related objective criteria determined by the President and the
Board.
5. PERFORMANCE OF DUTIES. The Employee agrees to devote his efforts,
attention and ability on a full time basis to the business and affairs of the
Company in the discharge of his duties and responsibilities under this
Agreement. The Employee shall have such responsibilities, duties and title(s)
as may be set forth by the President and the Board of the Company or by such
other person as may be designated by the President. The Employee's initial
title shall be Vice President/Western Resources and the Employee shall report
directly to the President or to such other person as designated by the
President. As an employee of Company, Employee shall be bound by a fiduciary
duty to act exclusively for the benefit of Company, and shall not engage in any
transactions for his personal benefit at the expense of Company, or which
otherwise may present a conflict of interest, without the prior consent of the
Board of the Company. The Employee shall render such services to the best of
his ability, and use his best efforts to promote the interests of the Company.
6. VACATION/HOLIDAYS. The Employee shall be entitled to two (2) weeks
paid vacation per year during Employee's employment with the Company. Employee
may only take such vacation at such time or times during each year as shall be
approved by the President. Vacation time that is not taken or used in excess of
four weeks shall expire and shall not carry forward. Employee shall also be
entitled to observe that number of holidays annually (not to exceed eight (8)
days per year unless approved by the President) that are taken as holidays by
the Company. The Employee shall be entitled to full compensation accruing
during his vacation period and approved holidays.
7. REIMBURSEMENT OF EXPENSES. Upon submission of reasonable
documentation satisfactory to the Company, the Company shall reimburse the
Employee for his reasonable and ordinary expenses incurred in connection with
his employment hereunder that have been approved in advance by the Company
("Reimbursements"). The parties understand and agree that the reimbursable
expenses shall normally consist of lodging, per diem, transportation expenses
(other than to and from work) and other out of pocket expenses incurred in the
performance of the duties hereunder. Lodging expenses including rates,
locations and accommodations may be subject to the prior approval of the
Company. Airfare and other transportation expenses shall be subject to the
prior approval of the Company. Employee acknowledges that the Company shall not
approve first class airfare accommodations or other costly modes of travel when
less costly means are available.
2
<PAGE> 3
8. POLICIES AND PROCEDURES. The Board of the Company shall have the
exclusive authority to establish from time to time policies, procedures and
regulations to be followed by the Employee in fulfilling and discharging his
duties under this Agreement. The Employee agrees to comply with such policies,
procedures and regulations as the Company may promulgate from time to time.
9. REMOVAL FOR DISABILITY. The Board may at any time remove the
Employee for reasons of disability, resulting from illness or injury, such that
the Employee is unable to perform the essential job functions associated with
his employment by the Company with or without reasonable accommodation for a
continuous period of six (6) months or more when coupled with a statement from
a physician (who is not an employee of the Company and is qualified to practice
medicine by the State of Nevada and is qualified in the particular specialty of
medicine that relates to the disability in question) that such disability is
permanent or likely to continue for six (6) months or more. The Employee, by
signature to this Agreement, agrees, in the case of a question of disability,
to subject himself to examination by a physician(s) of the Company's choosing.
10. TERMINATION BY COMPANY. For any reason the Company by action taken
by its Board, may terminate the employment of the Employee at any time and
immediately upon written notice to the Employee if such termination is for
cause, or upon 60 days written notice to the Employee if such termination is
without cause. In the notice of termination furnished to the Employee under
this paragraph 10, the reason or reasons for said termination shall be given,
if the termination is for cause. By way of illustration, any one or more of the
following conditions shall be deemed to be grounds for termination of the
employment of the Employee for cause under this Agreement:
i. In the event the Employee shall fail or refuse to comply
with the duties and responsibilities assigned to him as an employee,
or with the policies, procedures or regulations of the Company from
time to time established;
ii. In the event the Employee shall fail or refuse to report
for work at any time(unless otherwise excused by the Board); and
iii. In the event that the Employee conducts himself in an
unprofessional, immoral, criminal or fraudulent manner, or should the
Employee's conduct discredit the Company or be detrimental to the
reputation, character and standing of the Company.
In the event of termination for cause by the Board, the Company shall
have no further obligations to the Employee hereunder as of the date of
termination, other than to pay Employee any unpaid salary or reimbursement
accrued through the effective date of termination specified in the written
notice. In addition, upon termination of the Employee for case, all unexercised
Options, whether vested or un-vested at the time of giving notice, shall expire
immediately and shall become void and non-exercisable. In the event of
termination by the Board without cause, the Company shall have no further
obligations to the Employee as of the date of termination other than to pay
Employee (i) any unpaid salary reimbursement accrued through the effective date
of termination
3
<PAGE> 4
specified in the written notice, and (ii) a severance payment equal to one (1)
days salary for each month Employee is employed by the Company under this
Agreement up to a maximum of sixty (60) days salary. In addition, upon
termination of the Employee without case, all unexercised Options, whether
vested or un-vested at the time of giving notice, shall expire within six
months, at which time all unexercised Options shall become void and
non-exercisable. Such acceleration of the term of the Options shall in no event
accelerate the date that the Options shall vest, and as a result, all Options
which shall not vest within six months of the date of notice of termination of
the Employee without cause shall expire immediately and shall become void and
non-exercisable.
11. TERMINATION BY EMPLOYEE. Employee may at any time give the Company
at least 60 days prior written notice of his termination of employment
hereunder, such termination to be effective at the end of such 60 day notice
period.
12. NOTICE. All notices permitted or required to be given to either
party under this Agreement shall be in writing and shall be deemed to have been
given (i) by mail three (ii) days after the same has been mailed by certified
mail, return receipt requested, and deposited postage prepaid in the U.S.
Mails, addressed to the other party, and (iii) by any other reasonable method,
when actually received by the other party. A copy of any notice hereunder from
Employee to Company shall be sent to the Company at 515 North Flagler Drive,
Suite 202, West Palm Beach, Florida 33401. A copy of any notice hereunder from
the Company to Employee shall be sent to the Employee at the address set forth
following the Employee's signature below. Either party may change the address
at which said notice is to be given by giving notice of such to the other party
to this Agreement in the manner set forth herein.
13. CONFIDENTIAL MATTERS. The Employee agrees that during his
employment by the Company and thereafter subsequent to the termination or
expiration of his employment for any reason whatsoever, he will not use for his
own account, or release or divulge or make known for any unauthorized reason or
purpose, any information not otherwise publicly available whatsoever relating
to the Company, to any other person or persons whomsoever without the prior
express written consent of the Company. The Employee is aware and acknowledges
that the Employee shall have access to confidential information by virtue of
his employment and he agrees to keep such information confidential at all
times. The type of confidential information covered by this paragraph shall
include, but is not limited to, customer, contractor or supplier lists, trade
secrets and the Company's proprietary services, processes, software, hardware
and other services and projects performed by the Company. This provision does
not preclude the Employee from discussing such confidential matters with
properly authorized representatives of clients and customers of the Company in
order to carry out his assigned responsibilities and duties during the term of
employment.
14. NON-SOLICITATION/NON-COMPETE. The Employee agrees that during his
employment by the Company and for an additional period of one (1) year from and
after the termination of Employee's employment with the Company, that he shall
not, either directly or indirectly, and whether as principal or as agent,
officer, director, employee, consultant or otherwise, alone or in association
with any other person, solicit for any purpose any employees, clients,
customers,
4
<PAGE> 5
contractors or suppliers of the Company, wherever said persons are located, and
not to directly or indirectly carry on, be engaged, concerned or take part in,
render services to, or own any interest in, any business that provides services
to any person or entity for which the Company has provided services at any time
during the one (1) year period preceding the date of termination of the
Employee's employment hereunder. Notwithstanding the above, Employee shall be
free to hold up to a one percent (1%) interest in any publicly traded security
of a business that provides services to any person or entity for which the
Company has so provided services.
In the event of termination by the Company for any reason, Employee
shall be prohibited from employment or consulting services with any company or
other entity operating within the service territory of the Company for a period
of one (1) year from the date of termination.
15. INJUNCTION WITHOUT BOND. In the event there is a breach or
threatened breach by the Employee of the provisions of paragraphs 13 and 14
hereof, the Company shall be entitled to a temporary and permanent injunction
without bond to restrain the Employee from disclosing in whole or in part any
confidential matters or from rendering a service or payment to any person or
business entity, as prohibited thereunder, and the Company will be entitled to
reimbursement for all costs and expenses, including reasonable attorneys' fees,
in connection therewith. Nothing herein shall be construed as prohibiting the
Company from pursuing such other remedies available to it for such breach or
threatened breach including recovery of damages from the Employee.
16. DOCUMENTS AND INFORMATION. The Employee will, at all times upon
request, fully advise and inform the Board of the Company with respect to all
matters which the Employee may be developing or working on while employed by
the Company. The Employee further agrees that upon the expiration or earlier
termination of his employment for any reason whatsoever that he will
immediately deliver and surrender to the Company all materials of any nature
relating to the Company in his possession including, but not limited to, all
client, customer, supplier or contractor lists, processes, analyses, manuals,
software programs, technical and operating data, financial statements, records,
files, and all other material whatsoever furnished to him by the Company or
produced or obtained by him during his employment with the Company.
17. INVALID PROVISION. In the event any provision should be or become
invalid or unenforceable, the validity and enforceability of any other
provision of this Agreement shall not be affected. Similarly, if the scope of
any restriction or covenant contained herein should be or become too broad or
extensive to permit enforcement thereof to its full extent, then any such
restriction or covenant shall be enforced to the maximum extent permitted by
law, and Employee hereby consents and agrees that the scope of any such
restriction or covenant may be modified accordingly in any judicial proceeding
brought to enforce such restriction or covenant.
18. GOVERNING LAW. This Agreement shall be construed in accordance
with and shall be governed by the laws of the State of Florida.
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<PAGE> 6
19. NO THIRD PARTY BENEFICIARY. This Agreement is solely between the
parties hereto and no person not a party to this Agreement shall have any
rights hereunder, either as a third party beneficiary or otherwise.
20. MISCELLANEOUS. The rights and duties of the parties hereunder are
personal and may not be assigned or delegated without the express written
consent of the other party to this Agreement. The captions used herein are
solely for the convenience of the parties and are not used in construing this
Agreement. Time is of the essence of this Agreement and the performance by each
party of its or his duties and obligations hereunder.
21. COMPLETE AGREEMENT. This Agreement constitutes the complete
agreement between the parties hereto and incorporates all prior discussions,
agreements and representations made in regard to the matters set forth herein.
This Agreement may not be amended, modified or changed except by a writing
signed by the party to be charged by said amendment, change or modification.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
U.S. ENERGY SYSTEMS, INC. a Delaware
corporation
By: /s/ Richard Nelson
----------------------------
Richard H. Nelson, President
EMPLOYEE:
/s/ Terrence Page
-------------------------------
Terrence Page
Address:
-----------------------
-------------------------------
6
<PAGE> 1
EXHIBIT 10.36
FORM OF 9% CONVERTIBLE SUBORDINATED SECURED DEBENTURE
THIS DEBENTURE AND THE SHARES OF COMMON STOCK ("SHARES")
ISSUABLE UPON CONVERSION OF THE DEBENTURE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAWS. THE DEBENTURE AND THE SHARES MAY
NOT BE SOLD UNLESS REGISTERED THEREUNDER OR UNLESS AN
EXEMPTION FROM SUCH REGISTRATION SHALL BE AVAILABLE. THE
TRANSFER OF THIS NOTE IS SUBJECT TO THE TRANSFER RESTRICTIONS
AND OTHER OBLIGATIONS AND CONDITIONS SPECIFIED HEREIN.
9% CONVERTIBLE SUBORDINATED SECURED DEBENTURE
December 6, 1996 $______
For value received, the undersigned, U.S. ENERGY SYSTEMS,
INC., a Delaware corporation (the "Company"), hereby promises to pay to
________________ (the "Holder"), the principal amount
of____________________________, together with interest thereon calculated from
the date of issuance hereof in accordance with the provisions of this 9%
Convertible Subordinated Secured Debenture ("Debenture"). The capitalized terms
set forth in this Debenture shall have the meanings set forth in Section 8,
unless otherwise defined herein.
1. Payment of Interest.
(a) Rate. Interest will accrue on the unpaid principal amount
of this Debenture outstanding from time to time at a rate equal to nine percent
(9%) per annum (calculated on the basis of a 365 day year). Subject to Section
3 and the terms of any Senior Indebtedness, the Company will pay interest
accrued monthly ("Interest Payment") commencing January 6, 1997 (each monthly
Interest Payment date is referred to herein as an "Interest Payment Date"),
provided, however, that the first six monthly Interest Payments shall be
deferred and shall be paid on the earlier to occur of (i) the date that is six
months prior to the Maturity Date (as hereinafter defined) and (ii) the date
that this Debenture is redeemed pursuant to the provisions of Sections 5 and 6
herein.
(b) Supplemental Participation in Net Revenue. In addition to
the Interest Payment provided for in Section 1(a) above, the Company shall pay
the Holder a pro rata portion of fifty percent (50%) of Lehi's share of the net
revenue (net of funds required for the Interest Payment) resulting from the
Project's energy sales (the Supplemental Participation"). The Holder's
Supplemental Participation shall be pro rata to the interest in the
Supplemental Participation of the holders of all other Debentures subscribed to
pursuant to the terms of the Amended Private Offering Memorandum (as defined
below)(individually, a "Debenture Holder" and, collectively, the "Debenture
Holders") as of the date of expiration of the offering of the Debentures
thereunder. In the event the Company shall redeem less than all of the
Debentures in accordance with Section 5 hereof or fewer than all the Debenture
Holders shall have converted their Debentures into Common Stock in accordance
with Section 9 hereof, the Holder's pro rata interest in the Supplemental
Participation shall remain equal to the Holder's interest in the Supplemental
Participation calculated as of the date of expiration of the offering of the
Debentures under the Amended Private Offering Memorandum. The Company shall
calculate the net revenue resulting from Lehi's share of the net revenue
resulting from the Project's energy sales not later than sixty (60) days
subsequent to the end of each calendar year beginning with the calendar year
1994 and shall pay the Holder its pro rata interest in the Supplemental
Participation not later than ninety (90) days subsequent to the end of each
calendar year.
<PAGE> 2
(c) Certain Terms. Interest Payments are to be made on this
Debenture, at the Holder's address stated at the end of this Debenture, in
lawful money of the United States of America. If payment is due on any day that
is not a Business Day, the date shall be extended to the next succeeding
Business Day.
2. Payment of Principal.
(a) Scheduled Repayment. (i) Subject to Section 3 and the
terms of any Senior Indebtedness, unless earlier redeemed pursuant to the
provisions of this Debenture, the Company shall repay the principal amount of
this Debenture on January 25, 2004 (the "Maturity Date").
(b) Certain Terms. Payments of principal are to be made at
the Holder's address stated at the end of this Debenture, in lawful money of
the United States of America. If payment is due on any day that is not a
Business Day, the due date shall be extended to the next succeeding Business
Day.
3. Security.
(a) Security Interest in Shares of Lehi Envirosystems, Inc.
Payment of principal, interest, any unpaid and accrued interest on the
Debentures and, if applicable, any Supplemental Participation due will be
secured by a security interest in all of the issued and outstanding shares of
common stock ("Lehi Common Stock") of Lehi Envirosystems, Inc., a Delaware
corporation ("Lehi"), all of which issued and outstanding shares are owned by
the Company. Until such time as the Company's obligations for the payment of
the principal, interest, any unpaid and accrued interest on the Debentures and,
if applicable, any Supplemental Participation due are outstanding and not fully
satisfied, the Company shall not cause Lehi to issue any additional shares of
common stock unless the security interest granted in this section shall be
extended to such additional shares.
(b) Pledge of Lehi Common Stock. The Company agrees that at
the closing of the sale of the Debentures, it will pledge all of the shares of
Lehi Common Stock owned by it to secure the Company's obligations for the
payment of the principal, interest, any unpaid and accrued interest on the
Debentures and, if applicable, any Supplemental Participation due, pursuant to
the terms and conditions of a pledge agreement between the Company and Richard
H. Nelson and Theodore Rosen, acting jointly as pledge agent ("Pledge Agent")
for all of the Debenture Holders (the "Pledge Agreement").
(c) Perfection and Protection of Security Interest. The
Company shall perform all steps necessary to perfect, maintain, protect and
enforce the liens in the Lehi Common Stock pledged as collateral to secure the
Company's obligations for the payment of the principal, interest, any unpaid
and accrued interest on the Debentures and, if applicable, any Supplemental
Participation due, including, without limitation: (i) executing and delivering
the Pledge Agreement, (ii) executing and filing financing and continuation
statements in form reasonably satisfactory to the Pledge Agent, (iii)
delivering to the Pledge Agent the original certificates of the Lehi Common
Stock and the originals of any other instruments or documents of which the
Pledge Agent reasonably determines it should have possession in order to
perfect and protect the Pledge Agent's security interest therein, duly endorsed
or assigned to the Pledge Agent without restriction, (iv) placing notations on
the Company's books of account to disclose the Pledge Agent's security interest
and (v) taking such other steps as are reasonably deemed necessary by the
Pledge Agent to maintain and enforce its lien in the Lehi Common Stock. To the
extent permitted by applicable law, the Pledge Agent may file, without the
Company's signature one or more financing statements disclosing its liens in
the Lehi Common Stock.
From time to time, the Company shall, upon the Pledge Agent's request,
execute and delivery confirmatory written instruments pledging to the Pledge
Agent, for the benefit of the Holders, the Lehi Common Stock, but the Company's
failure to do so shall not affect or limit the Pledge Agent's security interest
or the Pledge Agent's other rights in the Lehi Common Stock. So long as the
Company's obligations for the payment of the principal, interest, any unpaid
and accrued interest on the Debentures and, if applicable, any Supplemental
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<PAGE> 3
Participation due are outstanding and not fully satisfied, the lien of the
Pledge Agent shall remain in full force and effect.
4. Subordination.
(a) Debenture Subordinated to Senior Indebtedness. The
Company, for itself, its successors and assigns, covenants and agrees, and the
Holder of the Debenture likewise covenants and agrees, that the indebtedness
evidenced by the Debenture, including the principal of, premium, if any, and
interest thereon and any other amounts payable with respect to the Debenture,
shall be subordinate and subject in right of payment, to the extent and in the
manner hereinafter set forth, to the prior payment of all Senior Indebtedness
of the Company and that each holder of Senior Indebtedness of the Company
whether now outstanding or hereafter created, incurred, assumed or guaranteed
shall be deemed to have acquired Senior Indebtedness of the Company in reliance
upon the covenants and provisions contained in this Debenture.
(b) Company Not to Make Payments with Respect to the
Debenture in Certain Circumstances.
(i) Upon a default ("Payment Default") in the payment of
principal of, premium, if any, interest on or other amounts owing
under any Senior Indebtedness of the Company or any of its
subsidiaries when the same becomes due and payable, whether at
maturity or at a date fixed for prepayment or otherwise, then, unless
and until such default shall have been cured or waived or shall have
ceased to exist, no direct or indirect payment in cash, property or
securities, by set-off or otherwise, shall be made or agreed to be
made by the Company on account of the principal of, premium, if any,
or interest on this Debenture, or in respect of any redemption,
prepayment, retirement, purchase or other acquisition of the
Debenture.
(ii) In the case of a default or an event of default
(which, with notice, lapse of time or both, would constitute
such a default) with respect to any Senior Indebtedness of
the Company, as such default or event of default is defined
in the agreements or instruments under which the same is
outstanding, pursuant to which the holder(s) thereof are (or,
with due notice or lapse of time or both, would be) entitled
to accelerate the maturity thereof, then, commencing on the
date written notice of such default or event of default to
the Company by any holder or holders of such Senior
Indebtedness or their representative or representatives
("Default Notice"), and continuing until the date such event
of default or default shall have been cured or waived in
accordance with the terms of the applicable agreements or
instruments, no direct or indirect payments in cash, property
or securities, by set-off or otherwise, shall be made or
agreed to be made by the Company on account of the principal
of, premium, if any, or interest on this Debenture, or in
respect of any redemption, retirement, prepayment, purchase
or other acquisition of this Debenture.
(iii) In the event that, notwithstanding the
provisions of this Section 4(b), any direct or indirect
payment or distribution shall be received by any Holder of
this Debenture in contravention of the provisions of this
Section 4(b), such payments and distributions shall be held
in trust for the benefit of, and upon receipt by such Holder
of written notice that such payment or distribution has been
made in violation of this Section 4(b), shall be immediately
paid over to, the holder(s) of all Senior Indebtedness of the
Company at the time outstanding or their representative or
representatives or to the trustee or trustees under any
indenture under which any instruments evidencing any such
Senior Indebtedness of the Company may have been issued, as
their respective interests may appear, for application to the
pro rata payment of all such Senior Indebtedness of the
Company until all such Senior Indebtedness of the Company
shall have been paid in full, after giving effect to any
concurrent payment or distribution to the holder(s) of such
Senior Indebtedness of the Company.
- 3 -
<PAGE> 4
(iv) The Company shall give written notice to the Holder of
this Debenture of any default or event of default under any Senior
Indebtedness or under any agreement pursuant to which Senior
Indebtedness of the Company may have been issued.
(c) Not Subordinated to Prior Payment of All Senior
Indebtedness on Dissolution, Liquidation, Reorganization, etc. of the Company.
Upon any payment or distribution of the assets of the Company of any kind or
character, whether in cash, property or securities, to creditors upon any
dissolution, winding-up, total or partial liquidation, reorganization,
recapitalization or readjustment of the Company or its securities (whether
voluntary or involuntary, or in bankruptcy, insolvency, reorganization,
liquidation, receivership proceedings, or upon an assignment for the benefit of
creditors, or any other marshalling of the assets and liabilities of the
Company, or otherwise), then in such event, all Senior Indebtedness shall first
be paid in full (including principal, premium, if any, prepayment charge, if
any, interest and other amounts owing with respect thereto) or provision
satisfactory to the holders of Senior Indebtedness shall have been made for
such payment before any payment is made on account of the principal of,
interest on and other amounts payable in respect of the Indebtedness evidenced
by this Debenture.
(d) Holder of this Debenture to be Subrogated to Right of
Holders of Senior Indebtedness. Subject to the prior payment in full of all
Senior Indebtedness of the Company, the Holder of this Debenture shall be
subrogated (equally and ratably with the holders of all Indebtedness of the
Company which by its terms is not superior in right of payment to this
Debenture and which ranks in a parity with this Debenture) to the rights of the
holders of Senior Indebtedness of the Company to receive payments or
distributions of assets of the Company applicable to the Senior Indebtedness of
the Company until the principal of and interest on the Debenture shall be paid
in full, and for purposes of such subrogation, no payments or distributions to
the holders of Senior Indebtedness of the Company of cash, property, or
securities, distributable to the holders of Senior Indebtedness of the Company
under the provisions hereof to which the holders would be entitled except for
the provisions of this Section 4, and no payment pursuant to the provisions of
this Section 4 to the holders of Senior Indebtedness of the Company by the
Holder shall, as between the Company, its creditors other than the holders of
Senior Indebtedness of the Company, and the Holder, be deemed to be a payment
by the Company to or on account of Senior Indebtedness of the Company, it being
understood that the provisions of this Section 4 are and are intended solely
for the purpose of defining the relative rights of the Holder, on the one hand,
and the holder(s) of Senior Indebtedness of the Company, on the other hand.
(e) Subordination and Subrogation Not To Apply To Pledge
Agreement. The provisions of this Section 4 relating to subordination and
subrogation shall not apply to the enforcement of the rights of the Debenture
Holders by the Pledge Agent under the Pledge Agreement or the prerogative of
the Pledge Agent to apply the proceeds of any sale of the Lehi Common Stock
under applicable law to the Company's obligations for the payment of the
principal, interest, any unpaid and accrued interest on the Debentures and, if
applicable, any Supplemental Participation due. Notwithstanding any other
provision of this Debenture, the Company hereby covenants and agrees not to
take any action to impair the Pledge Agent's ability to enforce the rights of
the Debenture Holders under the Pledge Agreement or to apply the proceeds of
any sale of the Lehi Common Stock to the Company's obligations for the payment
of the principal, interest, any unpaid and accrued interest on the Debentures
and, if applicable, any Supplemental Participation due without the consent of
the Debenture Holders holding at least two-thirds (2/3) of the outstanding
principal amount of all outstanding Debentures.
5. Redemption. (a) To the extent the Company shall have funds legally
available for such payment, commencing January 25, 1998 the Company may redeem
at its option the Debentures, in whole or in part, at a redemption price per
Debenture equal to one hundred and two percent (102%) of the principal amount
of this Debenture, plus any unpaid and accrued interest of Supplemental
Participation, including the first six deferred monthly Interest Payments
unless earlier paid (the "Liquidation Value"), on the date fixed for redemption
(collectively, the "Redemption Payments").
- 4 -
<PAGE> 5
(b) Upon any redemption pursuant to Section 5(a), the Company
agrees that in addition to the Redemption Payments, it will issue to each
Debenture Holder whose Debenture(s) have been redeemed a warrant to purchase
shares of the Company's common stock, $.01 par value per share ("Common
Stock"). The number of shares of Common Stock issuable upon exercise of such
warrant shall be that number of shares determined by dividing the principal
amount of Debentures redeemed by the Company by the then current Conversion
Number (as hereinafter defined). The Warrants shall be exercisable until the
Maturity Date.
6. Procedure for Redemption. (a) In the event that fewer than
all of the then outstanding Debentures are to be redeemed, the Debentures to be
redeemed shall be redeemed pro rata to the total number of Debentures
outstanding or in accordance with any other method selected by the Board of
Directors which is not inconsistent with applicable law.
(b) In the event the Company shall redeem Debentures, notice
of such redemption shall be given by first class mail, postage prepaid, mailed
not less than 60 days prior to the redemption date, to each holder of record of
the Debentures to be redeemed at such holder's address as the same appears on
the Debenture register of the Company. Each such notice shall state: (i) the
redemption date, (ii) the number of Debentures to be redeemed and, if fewer
than all of the Debentures held by such holder are to be redeemed from such
holder, the number of Debentures to be redeemed from such holder; (iii) the
redemption price; (iv) the place or places where certificates for such shares
are to be surrendered for payment of the redemption price; and (v) that
interest on the Debentures to be redeemed will cease to accrue on such
redemption date.
(c) Notice having been mailed as provided in Section 6(b),
from and after the redemption date (unless default shall be made by the Company
in providing money for the payment of the redemption price of the Debentures
called for redemption) interest on the Debentures so called for redemption
shall cease to accrue, and such Debentures shall no longer be deemed to be
outstanding and all rights of the holders thereof as holders of Debentures of
the Company (except the right to receive from the Company the redemption price
and the warrants as provided in Section 5) shall cease. Upon surrender in
accordance with said notice of the Debentures so redeemed (properly endorsed or
assigned for transfer, if the Board of Directors of the Company shall so
require and the notice shall so state), such Debentures shall be redeemed by
the Company at the redemption price aforesaid.
7. Events of Default.
(a) The following events shall constitute events of default
hereunder ("Events of Default"):
(i) the Company shall fail to pay the principal
amount of this Debenture when due in accordance with the
terms hereof, or fail to make an Interest Payment on an
applicable Interest Payment Date in accordance with the terms
hereof, and in each case such event shall not have been
remedied within one hundred twenty (120) days after it has
occurred; or
(ii) (a) the Company shall commence any case,
proceeding or other action (I) under any existing or future
law of any jurisdiction, domestic or foreign, relating to
bankruptcy, insolvency, reorganization or relief of debtors,
seeking to have an order for relief entered with respect to
it, or seeking to adjudicate it a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief with
respect to it or its debts, or (II) seeking appointment of a
receiver, trustee, custodian or other similar official for it
or for all or any substantial part of its assets, or the
Company shall make a general assignment for the benefit of
its creditors; or (b) there shall be commenced against the
Company any case, proceeding or other action of a nature
referred to in clause (a) above which (I) results in the
entry of an order for relief or any such adjudication or
appointment, or (II) remains undismissed, undischarged, or
unbonded for a period of sixty (60) days; or (c) there shall
be commenced against the Company any case, proceeding or
other action seeking issuance of a
- 5 -
<PAGE> 6
warrant of attachment, execution, distraint or similar
process against all or any substantial part of its
assets,which results in the entry of any order for any such
relief which shall not have been vacated, discharged, or
stayed on bond pending appeal within sixty (60) days from the
entry thereof; or (d) the Company shall take any action in
furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth in clause (a), (b)
or (c) above; or (e) the Company shall generally not, or
shall be unable to, or shall admit in writing its inability
to, pay its debts as they become due; or
(iii) the Company shall have defaulted
under the Pledge Agreement, and such default is not cured
within one hundred and twenty (120) days after it has
occurred.
(b) Consequences of Events of Default.
(i) Subject to the provisions of Section 3 hereof,
if an Event of Default has occurred, the Holder may demand
(by 10 days' prior written notice to the Company and to the
holders of Senior Indebtedness known to the Holder) immediate
payment of all or any portion of the outstanding principal
amount of the Debenture owned by the Holder; the principal
amount of, and interest accrued to the date of Default on,
the Debenture so accelerated shall thereafter bear interest
until paid at the rate provided in Section 1(a); and the
Company will give prompt written notice of such election to
any other Holder(s) of the Debentures, each of which may
demand immediate payment of all or any portion of the
principal of the Debenture held by such Holder by mailing
written notice thereof to the Company within 15 days after
receipt of the Company's notice.
(ii) Upon the occurrence of an Event of Default, the
Holder shall also have the right to exercise its rights
(through the Pledge Agent) under the Pledge Agreement.
8. Definitions. For purposes of this Debenture, the following
capitalized terms have the following meaning.
"Business Day" shall mean any day that is not a Saturday,
Sunday, or day on which banks in New York, New York are not required to be
open.
"Indebtedness" shall mean, with respect to any Person, any
indebtedness, contingent or otherwise, in respect of borrowed money (whether or
not the recourse of the lender is to the whole of the assets of such Person or
only to a portion thereof), or evidenced by bonds, notes, debentures, or
similar instruments or letters of credit or representing the balance deferred
and unpaid of the purchase price of any property (except any such balance that
constitutes a trade payable in the ordinary course of business that is not
overdue by more than 120 days or is being contested in good faith), if and to
the extent any of the foregoing indebtedness would appear as a liability upon a
balance sheet of such Person prepared on a consolidated basis in accordance
with generally accepted accounting principles consistently applied, and shall
also include, to the extent not otherwise included, any obligations in respect
of capitalized leases, and guaranties of items which would be included within
this definition (irrespective of whether such items would appear upon such
balance sheet).
"Person" shall mean any individual, corporation, partnership,
joint venture, association, joint stock company, trust, organization, or
government or any agency or political subdivisions thereof.
"Project" shall mean the Project defined and described in the
Confidential Private Offering Memorandum.
"Senior Indebtedness" shall mean the principal of, premium,
if any, and interest (including any interest accruing after the filing of a
petition in bankruptcy) on and other amounts due or in connection with any
Indebtedness of the Company including without limitation, the liabilities as
defined in and arising under any loan or
- 6 -
<PAGE> 7
security agreement with a bank, insurance company, or other financial
institution or affiliate of any thereof whether outstanding on the date of this
Debenture, or any Indebtedness thereafter created, incurred, assumed, or
guaranteed by the Company, and, in each case, all renewals extensions, and
refundings thereof, except Indebtedness which by the terms of the instrument
creating or evidencing such Indebtedness created, incurred, assumed, or
guaranteed after the date of this Debenture is expressly made equal to or
subordinate and subject in right of payment to, the payment of principal of and
interest on the Debenture. Notwithstanding anything herein to the contrary,
Senior Indebtedness shall not include: (i) Indebtedness representing the
repurchase price of any preferred stock or other capital stock of the Company
or any dividend or distribution with respect thereto; (ii) Indebtedness of the
Company owed directly to any employee, officer or director thereof; and (iii)
Indebtedness which, by its terms, is subordinate in right of payment to the
Indebtedness of the Company evidenced by this Debenture.
9. Conversion. Each Debenture may be converted at any time, at the
option of the Holder hereof, into shares of Common Stock on the terms and
conditions set forth below in this Section 9.
(a) Subject to the provisions for adjustment hereinafter set
forth and the Company's forced conversion right set forth in Section 10 herein,
each $1,000 principal amount of Debentures shall be initially convertible at
the option of the Holder thereof, in the manner hereinafter set forth, into one
hundred twenty five (125)(rounded to the nearest whole share) (the "Conversion
Number") fully paid and nonassessable shares of Common Stock.
(b) The number of shares of Common Stock into which each
$1,000 principal amount of Debentures is convertible shall be adjusted from
time to time as follows:
(i) In case the Company shall at any time or from
time to time declare or pay any dividend on its Common Stock
payable in shares of its Common Stock or effect a subdivision
of the outstanding shares of Common Stock (by
reclassification, split or otherwise than by payment of a
dividend in its Common Stock), then, and in each such case,
the number of shares of Common Stock into which each $1,000
principal amount of Debentures is convertible shall be
adjusted so that the holder of each Debenture thereof shall
be entitled to receive, upon the conversion thereof, the
number of shares of Common Stock determined by multiplying
(a) the number of shares of Common Stock into which such
$1,000 principal amount of Debentures was convertible
immediately prior to the occurrence of such event by (b) a
fraction, the numerator of which is the sum of (I) the number
of shares of Common Stock into which such $1,000 principal
amount of Debentures was convertible immediately prior to the
occurrence of such event plus (II) the number of shares of
Common Stock which such holder would have been entitled to
receive in connection with the occurrence of such event had
such $1,000 principal amount of Debentures been converted
immediately prior thereto, and the denominator of which is
the number of shares of Common Stock determined in accordance
with clause (I) above. An adjustment made pursuant to this
subparagraph (b)(i) shall become effective in the case of any
such dividend, immediately after the close of business on the
record date for the determination of holders of Common Stock
entitled to receive such dividend, or in the case of any such
subdivision, at the close of business on the day immediately
prior to the day upon which such corporate action became
effective;
(ii) In case the Company at any time or from time to
time shall combine or consolidate the outstanding shares of
its Common Stock into a lesser number of shares of Common
Stock, by reverse split, reclassification or otherwise, then,
and in each such case, the number of shares of Common Stock
into which each $1,000 principal amount of Debentures is
convertible shall be adjusted so that the holder of each
$1,000 principal amount of Debentures thereof shall be
entitled to receive, upon the conversion thereof, the number
of shares of Common Stock determined by multiplying (a) the
number of shares of Common Stock into which such $1,000
principal amount of Debentures was convertible immediately
prior to the occurrence of such event by (b) a fraction, the
numerator of which is the number of shares which the holder
would have owned after giving
-7-
<PAGE> 8
effect to such event had such $1,000 principal amount of
Debentures been converted immediately prior to the occurrence
of such event and the denominator of which is the number of
shares of Common Stock into which such $1,000 principal
amount of Debentures was convertible immediately prior to the
occurrence of such event. An adjustment made pursuant to this
subparagraph (b)(ii) shall become effective at the close of
business on the day immediately prior to the day upon which
such corporate action becomes effective; and
(iii) In case of any capital reorganization or
reclassification of the capital stock of the Company or in
case of the consolidation or merger of the Company with
another corporation or in the case of any sale or conveyance
of all or substantially all of the property of the Company,
each $1,000 principal amount of Debentures shall thereafter
be convertible into the number of shares of stock or other
securities or cash or other property receivable upon such
capital reorganization, reclassification of capital stock,
consolidation, merger, sale or conveyance, as the case may
be, by a holder of the number of shares of Common Stock into
which such $1,000 principal amount of Debentures was
convertible immediately prior to such capital reorganization,
reclassification of capital stock, consolidation, merger,
sale or conveyance.
10. Forced Conversion.
(a) Commencing January 25, 1997, the Company shall have the
right to convert all, and not less than all, the then outstanding Debentures
into shares of Common Stock at the then current Conversion Number if the Market
Price (as hereinafter defined) of the shares of Common Stock equals or exceeds
$1.00 for more than twenty (20) consecutive trading days prior to the date
fixed for conversion by the Company.
(b) The term "Market Price" with respect to a share of Common
Stock shall mean for each trading day the reported closing sale price, or, if
there were no sales on such day, the average of the reported closing bid and
asked prices regular way, in either case on the principal securities exchange
on which the Common Stock is listed or admitted to trading, or, if not listed
or admitted to trading on any national securities exchange, in the NASDAQ
National Market System or, if the Common Stock is not listed or admitted to
trading on any national securities exchange or quoted on the NASDAQ National
Market System, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member firm
selected from time to time by the Company for the purpose, or, if such prices
are not available, the fair market value set by, or in a manner established by,
the Board of Directors of the Company in good faith.
11. Amendment and Waiver. Subject to Section 4 hereof, the provisions
of this Debenture may be amended and the Company may take any action herein
prohibited, or omit to perform any act herein required to be performed by it,
only if the Company has obtained the written consent of the Holder(s).
12. Debentures Transferable.
(a) Right to Transfer. The Holder shall be entitled to
assign, transfer or pledge all or any part of this Debenture to any Person; it
being expressly understood that any Person becoming a Holder shall by
acceptance of this Debenture be bound by all of the terms and conditions
hereof. Transfer of this Debenture is also subject to the terms and conditions
set forth in the confidential Amended Private Offering Memorandum which expired
on February 28, 1994, unless extended in accordance with the terms thereof (the
"Amended Private Offering Memorandum").
(b) Procedure. Upon the surrender of this Debenture in
connection with any transfer or assignment, the Company shall issue a new
Debenture or Debentures payable to the Person or Persons designated by the
Holder as the transferee or transferees of such transfer in the aggregate
principal amount equal to the unpaid principal amount of the Debenture so
surrendered and substantially in the form of such Debenture with appropriate
revisions. Any assignment or transfer pursuant to the terms of this Section
shall be without charge to the Holder;
-8-
<PAGE> 9
provided, however, to the extent that there are any transfer taxes owing on any
such assignment or transfer, such taxes shall be payable by the Holder.
13. Miscellaneous.
(a) Loss. Upon receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction, or mutilation of this Debenture,
and of a letter of indemnity reasonably satisfactory to the Company, and upon
reimbursement to the Company of all reasonable expenses incident thereto, and
upon surrender or cancellation of this Debenture, if mutilated, the Company
will make and deliver a new Debenture of like tenor in lieu of such lost,
stolen, destroyed, or mutilated Debenture.
(b) Collection. If the Holder shall institute any action to
enforce collection of this Debenture, there shall become due and payable from
the Company, in addition to the unpaid principal amount and interest, all costs
and expenses of that action (including, but not limited to, reasonable
attorneys' fees) and the Holder shall be entitled to judgment for all such
additional amounts.
(c) Delay. No delay or failure on the part of the Holder to
exercise any power or right given under this Debenture, including, but not
limited to, the right to accelerate the amounts due, shall operate as a waiver
of the power or right, and no right or remedy of the Holder shall be deemed
abridged or modified by the course of conduct.
(d) Waiver. The Company waives presentment, demand for
payment, notice of dishonor, and all other notices or demands in connection
with the delivery, acceptance, performance, default, or endorsement of this
Debenture.
(e) Notices. All notices, requests, and demands to or upon
the Holder hereof or the Company to be effective shall be in writing and shall
be deemed to have been duly given or made when delivered by hand, by a
recognized overnight courier or five Business Days after being mailed by
certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Company, to:
U.S. ENERGY SYSTEMS, INC.
515 North Flagler Drive, Suite 202
West Palm Beach, Florida 33401
Attention: Richard H. Nelson
President
If to the Holder, to:
(f) LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED IN NEW YORK.
(g) Successors. This Debenture shall be binding upon the
Company and its successors and assigns.
- 9 -
<PAGE> 10
U.S. ENVIROSYSTEMS, INC.
By:
------------------------------------
Name: Theodore Rosen
Title Chairman, Board of
Directors
- 10 -
<PAGE> 1
EXHIBIT (21)
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Date of State of
Subsidiary Incorporation Incorporation
- ---------- ------------- -------------
<S> <C> <C>
Lehi Envirosystems, Inc. 1991 Delaware
Plymouth Envirosystems, Inc. 1994 Delaware
USE International, L.L.C. 1995 New Jersey
Steamboat Envirosystems, L.L.C. 1996 Delaware
USE Geothermal, L.L.C. 1996 Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 4,125,000
<SECURITIES> 0
<RECEIVABLES> 525,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,762,000
<PP&E> 4,111,000
<DEPRECIATION> 23,000
<TOTAL-ASSETS> 10,651,000
<CURRENT-LIABILITIES> 1,544,000
<BONDS> 875,000
0
0
<COMMON> 43,000
<OTHER-SE> 7,824,000
<TOTAL-LIABILITY-AND-EQUITY> 10,651,000
<SALES> 0
<TOTAL-REVENUES> 266,000
<CGS> 0
<TOTAL-COSTS> 2,289,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 823,000
<INCOME-PRETAX> (2,681,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,023,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (25,000)
<CHANGES> 0
<NET-INCOME> (2,681,000)
<EPS-PRIMARY> (2.58)
<EPS-DILUTED> (2.58)
</TABLE>
