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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended July 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
Commission File Number:
0-10238
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U.S. ENERGY SYSTEMS, INC.
Delaware 52-1216347
(State of Incorporation) (I.R.S. Employer Identification Number)
515 N. Flagler Drive
Suite 702
West Palm Beach, FL 33401
(561)820-9779
(Address of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for a shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. [ X ].
Indicate by check mark whether issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act
after distribution of securities under a Plan of
Reorganization confirmed by the court. [ X ].
As of July 31, 1997, the number of outstanding shares of
the registrant's Common Stock was as follows:
Title of Class Number of Shares
-------------- ----------------
Common 4,334,190
Transitional Small Business Disclosure Format:
[ ] Yes [ X ] No
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
July 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash. . . . . . . . . . . . . . . . . $ 2,007,000
Accounts receivable . . . . . . . . . 212,000
Note receivable . . . . . . . . . . . 255,000
Other current assets. . . . . . . . . 62,000
-------------
Total Current Assets 2,536,000
Property, plant and equipment, net. . . . . 4,128,000
Note receivable . . . . . . . . . . . . . . 1,275,000
Investments in Joint Ventures . . . . . . . 1,588,000
Deferred acquisition costs. . . . . . . . . 90,000
Other assets. . . . . . . . . . . . . . . . 150,000
-------------
Total . . . . . . . . . . . . . . . . . . $ 9,767,000
=============
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses. . . . . $ 844,000
Pre-reorganization income taxes payable. . . . 186,000
--------------
Total current liabilities . . . . . . . . 1,030,000
Convertible subordinated secured debentures . . . . 875,000
Other liabilities . . . . . . . . . . . . . . . . . 37,000
--------------
Total liabilities . . . . . . . . . . . . 1,942,000
--------------
Minority interests. . . . . . . . . . . . . . . . . 454,000
--------------
STOCKHOLDERS' EQUITY
Common stock. . . . . . . . . . . . . . . . . . . . 43,000
Additional paid-in capital. . . . . . . . . . . . . 12,718,000
Accumulated (deficit) . . . . . . . . . . . . . . . (5,390,000)
--------------
Total stockholders' equity. . . . . . . . 7,371,000
--------------
Total . . . . . . . . . . . . . . . . . . $ 9,767,000
==============
See notes to financial statements
</TABLE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three months Ended Six months Ended
July 31 July 31
----------------------- ------------------------
1997 1996 1997 1996
----------- ---------- ----------- -----------
Revenues $ 367,000 $ - $ 742,000 $ -
Operating expenses 213,000 - 412,000 -
----------- ---------- ----------- -----------
Gross Profit 154,000 - 330,000 -
Selling, general and
administrative expense 366,000 187,000 685,000 408,000
Litigation Costs 136,000 - 147,000 -
----------- ---------- ----------- -----------
Operating (loss) (348,000) (187,000) (502,000) (408,000)
----------- ---------- ----------- -----------
Interest income 41,000 - 89,000 -
Interest expense (20,000) (158,000) (59,000) (328,000)
Loss from Joint Ventures (34,000) (53,000) (60,000) (92,000)
----------- ---------- ----------- -----------
Net (Loss) before
extraordinary item (361,000) (398,000) (532,000) (828,000)
Extraordinary gain (loss)
from restructuring of
liabilities 36,000 - 36,000 -
----------- ---------- ----------- -----------
Net (loss) $ (325,000) $ (398,000) $ (496,000) $ (828,000)
----------- ----------- ----------- -----------
Dividends on preferred
stock - (14,000) - (29,000)
Net (loss) applicable to
common stock $ (325,000) $ (412,000) $ (496,000) $ (857,000)
=========== =========== =========== ===========
Net (loss) per common
share $ (0.07) $ (0.94) $ (0.11) $ (1.95)
=========== =========== =========== ===========
Weighted average shares
outstanding 4,334,190 439,650 4,334,190 439,650
=========== =========== =========== ===========
See notes to financial statements
</TABLE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL
Six Months Ended July 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Common Stock
-------------------------------
Additional
Number Paid-in Accumulated
of Shares Amount Capital Deficit Total
--------- ------- ----------- ------------ ----------
Balance, January
31, 1997 4,334,193 $43,000 $12,718,000 $(4,894,000) $7,867,000
Cash paid for
fractional shares (3)
Net (Loss) for the
six months ended
July 31, 1997
(Unaudited) (496,000) (496,000)
--------- ------- ----------- ------------ -----------
Balance, July 31,
1997 (Unaudited) 4,334,190 $43,000 $12,718,000 $(5,390,000) $7,371,000
========= ======= =========== ============ ===========
See notes to financial statements
</TABLE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended July 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
------------- -----------
Cash flows from operating activities:
Net (loss) $ (496,000) $ (828,000)
Adjustments to reconcile net (loss)
to net cash (used in) operating activities:
Amortization of debt discount - 10,000
Amortization of deferred financing and
registration costs - 39,000
Amortization of purchase price in excess
of equity in Joint Ventures 28,000 26,000
Equity in (income)/loss of Joint Ventures,
net of distributions 52,000 66,000
Accrued interest on pre-organization
taxes payable - 24,000
Deprecation provision 74,000 -
Gain from restructuring of liabilities (36,000) -
Changes in operating assets and liabilities:
Decrease in current assets 107,000 -
(Increase) in other assets (47,000) (19,000) Increase/(decrease) in accounts
payable and accrued expenses (131,000) 673,000
------------- -----------
Net cash (used in) operating activities (449,000) (9,000)
---------------- ---------------
Cash flows from investing activities:
Loans to Reno Energy LLC (1,275,000) -
Deferred Acquisition Costs (90,000) -
Equipment and leasehold improvements purchase (84,000) -
------------- -----------
Net cash (used in) investing activities (1,449,000) -
------------- ------------
Cash flows from financing activities:
Proceeds from loans payable and
preferred stock - 175,000
Payment of deferred financing costs - (176,000)
Payment of pre-reorganization taxes (197,000) -
Advances from Joint Ventures 7,000 9,000
Payment of convertible subordinated
secured debentures (150,000) -
Contributions by minority investors 120,000 -
------------- -----------
Net cash (used in)/provided by
financing activities (220,000) 8,000
------------- -----------
NET INCREASE (DECREASE) IN CASH (2,118,000) (1,000)
Cash - beginning of period 4,125,000 2,000
------------- -----------
CASH - END OF THE PERIOD $ 2,007,000 $ 1,000
============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 49,000 $ 154,000
Supplemental schedule of noncash financing
activities None None
See notes to financial statements
</TABLE>
U. S. ENERGY SYSTEMS, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JULY 31, 1997 AND 1996
(Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with instructions to Form 10-QSB and, accordingly,
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal accruals)
considered necessary for a fair presentation have been included. The
results for the three and six month periods are not necessarily indicative
of results for the full year.
For further information see Management's Discussion and Analysis of
Financial Condition and Operating Results, and refer to the financial
statements and footnotes included in the Company's Annual Report on Forms
10-KSB and 10-KSB/A for its fiscal year ended January 31, 1997.
Note 2 Income Taxes
No income tax provisions have been made due to losses incurred.
Deferred income tax benefits have been fully reserved due to the uncertainty
of future realization.
Note 3 Net (Loss) Per Share
Net (loss) per share has been computed on the basis of weighted average
number of shares outstanding during the period. Common stock equivalents
have not been included in the computation since their inclusion would be
anti-dilutive.
Note 4 Subsequent Events
New Acquisition
---------------------
American Enviro-Services, Inc., Newburgh, Indiana. On August 18, 1997
the Company acquired American Enviro-Services, Inc., which specializes in
recycling of used motor and industrial oils, waste water treatment,
environmental consulting, remediation services and Phase, I, II and III
environmental assessments. It provides 24 hour emergency response
services throughout midwestern United States. The acquisition which was
accounted for under the purchase method of accounting, was made in exchange
for 665,000 shares of the Company's common stock and $150,000 in cash.
American Enviro-Services, Inc. will continue to operate as a wholly
owned subsidiary of the Company, and will be the nucleus of a new division
called USE-Environmental. Howard A. Nevins, the President of the subsidiary,
has been elected to the Board of Directors of the Company and has been
appointed Executive Vice President of the Company.
Included in the Company's Balance Sheet is Deferred Acquisition Costs
of $90,000. This includes the due diligence costs related to American
Enviro-Services and to other potential acquisitions under consideration.
Item 2 - Management's Discussion and Analysis or Plan of Operation.
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION
Six Months Ended July 31, 1997 Compared to Six Months Ended July 31, 1996
Results of Operations
Revenues and operating expenses in the six months ended July 31, 1997
were generated primarily from Steamboat Envirosystems, LLC, which owns a
geothermal facility in which the Company did not hold an equity interest a
year earlier. The resulting gross profit to the Company in the six months
was $330,000, compared to no revenue in the first six months of 1996.
Selling, general and administrative expenses increased to $685,000 in
the six months ended July 31, 1997, exclusive of $147,000 in legal and
professional fees concerning litigation, as compared to $408,000 in the
same period in 1996. The material elements in these totals are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
--------- ----------
Salaries and consulting fees $ 246,000 $ 239,000
Steamboat royalties 103,000 -
Legal and professional fees 97,000 77,000
Depreciation 73,000 -
Insurance 69,000 2,000
All other 97,000 90,000
--------- ---------
Total $ 685,000 $ 408,000
========= =========
</TABLE>
The Steamboat Envirosystems subsidiary, which did not exist in the 1996
period, accounted for all the royalties in 1997 and is the primary reason
for the depreciation and insurance increases.
The increase in legal and professional fees relates to the growth of
the Company and its responsibilities to stockholders.
The legal costs of the litigation actions in which the Company is
involved have brought these closer to favorable resolution.
Interest income in the amount of $89,000 was earned during the first
six months of 1997 on cash balances from the proceeds of the public offering.
The Company earned no interest in the 1996 period. Due to the Company's
reduction of debt, interest expense for the 1997 period totaled $59,000
compared to $328,000 in the same period of 1996.
Loss from Joint Ventures breaks down as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
-------- ----------
Lehi Independent Power Associates, L.C. $ 31,000 $ 58,000
Plymouth Cogeneration Limited Partnership 29,000 34,000
-------- ----------
Loss from Joint Ventures $ 60,000 $ 92,000
======== ======
</TABLE>
During the first six months of 1997 the Company reached settlements
with tax authorities resulting in extraordinary gains from restructuring of
liabilities of $36,000. The liabilities were paid in August, 1997.
Liquidity and Capital Resources
The Company had a working capital of $1,506,000 and stockholders'
equity of $7,371,000 at July 31, 1997, as compared to deficits of $2,794,000
and $3,557,000, respectively, at July 31, 1996. The increase in working
capital and stockholders' equity is mainly a result of the Company's public
offering of its securities on December 6, 1996.
On August 18, 1997, the Company's acquired American Enviro-Services,
Inc. for 665,000 shares of common stock plus a cash payment of $150,000.
The Company's subsidiary, USE Geothermal, LLC ("USE GEO"), had
previously made a loan of $330,000 (the "Original Loan") to Reno Energy LLC
("Reno Energy"), payable over three years at interest of 9% per annum.
During the first six months of 1997, two payments were made against this
loan. The principal unpaid at July 31, 1997 is $255,000. In consideration
for having made the Original 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 of $100,000 and at an increased exercise price of
$1,200,000.
Rather than exercising its option, on April 10, 1997 USE GEO entered
into and consummated a convertible loan agreement with Reno Energy
(the "Loan"), pursuant to which the Company, through USE GEO, loaned Reno
Energy an additional $1,200,000 and received a note (the "Note") in return.
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
(interest being payable when the Reno facility commences commercial
operations), provided that such interest will be waived in the event
USE GEO exercises its new option (the "Option") to convert the Note to
an equity interest in Reno Energy. 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. 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.
In consideration for making the Loan, USE GEO was granted the Option,
pursuant to which USE GEO may convert, for no additional consideration, at
any time prior to the maturity of the Note, its right to receive principal
repayment of the Note into a 50% membership interest in Reno Energy. This
percentage will be adjusted proportionately 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 Loan was increased by $75,000 during the second quarter of 1997,
bringing the total of the Loan and the Original Loan as of July 31, 1997 to
$1,530,000.
Minority investors in USE GEO contributed $120,000 during the first six
months of 1997.
During the six months ended July 31, 1997, the Company paid $197,000 to
taxing authorities in partial settlement of pre-reorganization tax claims. An
additional $181,000 was paid in further settlement in August 1997, and the
$36,000 gain resulting from this settlement is reflected in the Company's July
31, 1997 financial statements.
The Company repaid three holders of convertible secured debentures
totaling $150,000 during the first quarter of 1997.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Reference is made to the Registrant's Annual Report on Form 10-KSB for
the year ended January 31, 1997 for a description of material legal
proceedings. Discovery hearings have been started, and it is expected that
these matters will be concluded before the end of the fiscal year.
Item 2 - Changes in Securities
None.
Item 3 - Defaults upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
At the Annual Meeting of stockholders of the Company on August 5, 1997
and its adjournments, Theodore Rosen, Richard H. Nelson, Evan Evans, Allen
J. Rothman and Todd Goodwin were elected as Directors. An amendment to the
Company's Certificate of Incorporation was approved, providing for a
staggered Board of Directors. Class I Directors will include Todd Goodwin,
whose term will expire at the 1998 annual meeting of stockholders. Class II
Directors will include Evan Evans and Allen J. Rothman, whose terms will
expire at the 1999 annual meeting of stockholders, and Class III Directors
will include Theodore Rosen and Richard H. Nelson, whose terms will expire
at the 2000 annual meeting of stockholders. At the 1998 and 1999 Annual
Meetings of the stockholders, Class I Directors and Class II Directors,
respectively, will be elected by the stockholders of the Company for full
three year terms. The engagement of Richard A. Eisner & Company, LLP, as
the Company's independent accounts was ratified.
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits and Reports on Form 8-k
(a) Exhibits
None.
(b) Reports on Form 8-K
A Form 8-K, relating to an event which occurred on
August 18, 1997, was filed with the Commission on August 22, 1997. The
Form 8-K was filed in connection with the consummation of a merger of the
Company with American Enviro-Services, Inc. an Indiana Corporation. Certain
material documents were filed with the Form 8-K.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: September 11, 1997
U. S. Energy Systems, Inc.
By:____________/s/_________________
Richard H. Nelson
President and Chief Executive Officer
By:____________ /s/_________________
Seymour J. Beder
Chief Accounting Officer and Controller
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JUL-31-1997
<CASH> 2,007,000
<SECURITIES> 0
<RECEIVABLES> 212,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,536,000
<PP&E> 4,224,000
<DEPRECIATION> 96,000
<TOTAL-ASSETS> 9,767,000
<CURRENT-LIABILITIES> 1,030,000
<BONDS> 875,000
0
0
<COMMON> 43,000
<OTHER-SE> 7,328,000
<TOTAL-LIABILITY-AND-EQUITY> 9,767,000
<SALES> 0
<TOTAL-REVENUES> 367,000
<CGS> 0
<TOTAL-COSTS> 213,000
<OTHER-EXPENSES> 502,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,000
<INCOME-PRETAX> (361,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (361,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 36,000
<CHANGES> 0
<NET-INCOME> (325,000)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
