<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSACTION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER:
0-10238
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U.S. ENERGY SYSTEMS, INC.
DELAWARE 52-1216347
(STATE OR JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
515 N. FLAGLER DRIVE
SUITE 702
WEST PALM BEACH, FL 33401
(Address of Principal Executive Offices)
(561)820-9779
(Issuer's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such 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 whether the registrant 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 confirmed by a court.
Yes X No
------- ------
State the number of shares outstanding of each of issuer's classes of
common equity, as of April 30, 1998:
Title of Class Number of Shares
-------------- ----------------
Common 5,160,607
Transitional Small Business Disclosure Format (check one):
Yes X No
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<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash ............................................................................... $ 1,866,000
Accounts receivable (less allowance for doubtful accounts $11,000) ................. 944,000
Notes receivable - current portion ................................................. 109,000
Other current assets ............................................................... 240,000
------------
Total current assets .......................................................... 3,159,000
Property, plant and equipment, net ....................................................... 5,775,000
Notes receivable, less current portion ................................................... 1,838,000
Investments in joint ventures:
Lehi Independent Power Associates, L.C. ............................................ 985,000
Plymouth Cogeneration Limited Partnership .......................................... 544,000
Goodwill, net ............................................................................ 2,045,000
Other assets ............................................................................. 459,000
------------
Total ......................................................................... $ 14,805,000
============
LIABILITIES
Current liabilities:
Current portion of long-term debt .................................................. $ 75,000
Notes payable - bank ............................................................... 207,000
Accounts payable ................................................................... 402,000
Accrued expenses ................................................................... 368,000
Royalties payable .................................................................. 434,000
------------
Total current liabilities ..................................................... 1,486,000
Long-term debt, less current portion ..................................................... 391,000
Convertible subordinated secured debentures (including due to related
parties of $80,000) ................................................................ 875,000
Advances from joint ventures ............................................................. 41,000
------------
Total liabilities ............................................................. 2,793,000
------------
Minority interests ....................................................................... 504,000
------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 5,000,000 shares; issued and
outstanding, 250,000 ............................................................... 3,000
Common stock, $.01 par value, authorized 35,000,000 shares; issued and
outstanding, 5,160,607 ............................................................. 51,000
Additional paid-in capital ............................................................... 17,660,000
Accumulated deficit ...................................................................... (6,206,000)
------------
Total stockholders' equity .................................................... 11,508,000
------------
Total ......................................................................... $ 14,805,000
============
</TABLE>
See notes to financial statements.
2
<PAGE> 3
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revenues ....................................................... $ 889,000 $ 375,000
----------- -----------
Cost and expenses:
Operating expenses
(includes depreciation of $33,000 for 1998) ...... 557,000 199,000
Administrative expenses ............................... 473,000 285,000
Litigation Costs ...................................... 41,000 11,000
Depreciation and amortization ......................... 87,000 34,000
Loss from joint ventures .............................. 4,000 26,000
----------- -----------
1,162,000 555,000
----------- -----------
(Loss) before interest income (expense) ........................ (273,000) (180,000)
Interest income ................................................ 63,000 48,000
Interest expense ............................................... (38,000) (39,000)
----------- -----------
Net (Loss) ..................................................... (248,000) (171,000)
Dividends on preferred stock ................................... (22,000) --
----------- -----------
Net (loss) applicable to common stock .......................... $ (270,000) $ (171,000)
=========== ===========
Net (loss) per common share .................................... $ (0.05) $ (0.04)
=========== ===========
Weighted average shares outstanding ............................ 5,160,607 4,334,193
=========== ===========
</TABLE>
See notes to financial statements.
3
<PAGE> 4
U.S. ENERGY SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL
THREE MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------ ---------------------------
Additional
Number Number Paid-in Accumulated
of Shares Amount of Shares Amount Capital Deficit Total
--------- ----------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1998 -- -- 5,160,609 $ 51,000 $15,454,000 $(5,936,000) $ 9,569,000
Net proceeds from sale of
preferred stock 250,000 $ 3,000 2,206,000 2,209,000
Cash paid for fractional shares (2)
Net (loss) for the three months
ended April 30, 1998 (270,000) (270,000)
--------- ----------- --------- ----------- ----------- ------------ ------------
Balance, April 30, 1998 250,000 $ 3,000 5,160,607 $ 51,000 $17,660,000 $(6,206,000) $11,508,000
========= =========== ========= =========== =========== ============ ============
</TABLE>
See notes to financial statements.
4
<PAGE> 5
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED APRIL 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $ (270,000) $ (171,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................... 120,000 34,000
Equity in loss of joint ventures ....................................... 4,000 22,000
Changes in:
Accounts receivable ................................................ (187,000) (16,000)
Other current assets ............................................... 36,000 22,000
Other assets ....................................................... (53,000) (37,000)
Accounts payable and accrued expenses .............................. (160,000) (193,000)
Royalties payable .................................................. 6,000 6,000
Accrued interest on pre-reorganization taxes payable ............... -- (17,000)
----------- -----------
Net cash used in operating activities .................................. (504,000) (350,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business ................................................... (27,000) --
Loans to Reno Energy LLC .................................................. (67,000) (1,200,000)
Repayments of loan by Reno Energy, LLC .................................... 24,000 22,000
Acquisition of equipment and leasehold improvements ....................... (79,000) (51,000)
----------- -----------
Net cash used in investing activities .................................. (149,000) (1,229,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock ..................................... 2,209,000 --
Proceeds from notes payable ............................................... 7,000 --
Payment of convertible subordinated secured debentures .................... -- (150,000)
Payment of pre-organization taxes payable ................................. -- (152,000)
Payment of long-term debt ................................................. (16,000) --
Minority equity investment in subsidiary .................................. -- 160,000
Advances from joint ventures .............................................. -- 5,000
----------- -----------
Net cash provided by (used in) financing activities .................... 2,200,000 (137,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH ................................................ 1,547,000 (1,716,000)
Cash - beginning of period ..................................................... 319,000 4,125,000
----------- -----------
CASH - END OF PERIOD ........................................................... $ 1,866,000 $ 2,409,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest .................................................... $ 32,000 29,000
Supplemental schedule of non cash financing activities ......................... None None
</TABLE>
See notes to financial statements.
5
<PAGE> 6
U. S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED APRIL 30, 1998 AND 1997
(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
months 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
Form 10-KSB for its fiscal year ended January 31, 1998.
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 the
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 - ADDITIONAL CAPITAL
On March 23, 1998, the Company issued 250,000 shares of its
Series A Convertible Preferred Stock, par value $0.01 per share, for $2,250,000
($9.00 per share) in a private placement. Each share is currently convertible
into four shares of common stock, subject to certain anti-dilutive adjustments
upon the occurrence of certain events, and is entitled to a cumulative
dividend of 9% per annum, in cash or in shares of common stock of the Company.
The Company may redeem the preferred stock after March 1, 2001, and may force
the conversion of the preferred stock to common stock after March 1, 2006.
6
<PAGE> 7
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 RESULTS OF OPERATIONS
Three Months Ended April 30, 1998 Compared to Three Months Ended April 30, 1997
RESULTS OF OPERATIONS
Revenues for the first quarter of 1998 ("First Quarter 1998")
totaled $889,000 as against $375,000 in the first quarter of 1997 ("First
Quarter 1997"). This was made up of $355,000 from the operations of Steamboat
Envirosystems, LLC ("Steamboat") compared to $375,000 in the same period of the
previous year, and $534,000 from the operations of American Enviro-Services,
Inc. and Commonwealth Petroleum Recycling, Inc. (together "AES"), which were
acquired on August 18, 1997 and December 31, 1997 respectively, and so did not
enter into the Company's results in First Quarter 1997. Revenues in the 1998
quarter were reduced due to normal seasonal fluctuations, exacerbated by the
unusually warm winter.
Operating expenses refer to those expenses directly related to
the production of revenues, and totaled $557,000 in First Quarter 1998, compared
to $199,000 in First Quarter 1997, when Steamboat was the only operation
included. Steamboat incurred operating expenses amounting to $154,000 in First
Quarter 1998, compared to $199,000 in First Quarter 1997. AES operating expenses
in the 1998 quarter amounted to $403,000, including depreciation charges of
$33,000, with no comparable costs in the earlier year as these operations had
not yet been acquired.
Administrative expenses in First Quarter 1998 increased to
$473,000 from $283,000 in the same quarter a year earlier. This was to a large
extent due to the fact that AES, whose expenses other than depreciation and
amortization totaled $98,000 during the quarter, did not begin part of the
Company's operations until the third quarter of 1997.
Material elements in administrative expenses for First Quarter
1998 compared to 1997 were as follows:
1998 1997
---- ----
AES, as explained above $ 98,000 $ --
Steamboat royalties 50,000 52,000
Salaries and consulting fees (other than AES) 107,000 127,000
Legal and professional fees 70,000 39,000
Insurance 28,000 34,000
Corporate expenses 49,000 16,000
All other 71,000 17,000
--------- ----------
Total $473,000 $285,000
Legal costs in the 1998 quarter included $15,000 incurred for
Steamboat in connection with negotiations with Sierra Pacific Power Company
regarding power rates, which had not begun in the earlier year. Corporate
expenses increased primarily due to the increased activity in pursuing the
Company's plans for expansion.
7
<PAGE> 8
Litigation costs increased to $41,000 in First Quarter 1998
from $11,000 in the same period a year earlier because legal work on the three
actions in which the Company was involved was beginning to increase. As noted in
the Company's Form 10-KSB for the year ended January 31, 1998, two of the three
actions have since been closed. Depreciation and amortization charges increased
to $87,000 in First Quarter 1998, as compared to $36,000 in the earlier year due
to the inclusion of AES in this year's figures.
The operating expenses and administrative expenses for First
Quarter 1998 include costs that were involved in bringing AES to what will be
its full operating strength. Such costs will continue but will bring with them
increased revenues and earnings.
Loss from Joint Ventures is broken down as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Lehi Independent Power Associates, LC $(1,000) $17,000
Plymouth Cogeneration Limited Partnership 5,000 9,000
------- -------
Loss from Joint Ventures $ 4,000 $26,000
======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
During First Quarter 1998 cash flow used in operations totaled
$504,000, an increase of $154,000 from the $350,000 reflected in the same
quarter of the previous year. Of this increase, $99,000 was due to the increased
loss over the earlier year. Cash flow used in investing activities amount of
$149,000 in First Quarter 1998 as compared to $1,229,000 in First Quarter 1997.
The 1997 figure included $1,200,000 of new loans to Reno Energy, LLC, whereas
only $67,000 in new loans were made to Reno in the 1998 quarter.
Cash flow totaling $2,200,000 was provided from financing
activities during First Quarter 1998, representing the proceeds of the sale of
Preferred Stock to Energy Systems Investors in a private placement. The Company,
therefore, had working capital of $1,673,000 at April 30. These funds and those
that are expected to be provided by Steamboat, by AES and by additional
acquisitions planned, assure that the Company will have adequate liquidity for
the foreseeable future.
8
<PAGE> 9
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, 1998 for a description of material legal
proceedings. There have been no material developments since the Registrants'
last report with respect to the previously disclosed legal proceeding.
Item 2 - Changes in Securities
On March 25, 1998 the Company issued 250,000 shares of its Series A
Convertible Preferred Stock in a private placement with Energy Systems
Investors, LLC, for $2,250,000. Each share of Preferred Stock is currently
convertible into four shares of common stock of the Company at a conversion
price of $2.25 per share, and carries a dividend of 9% per annum. The issuance
was made in reliance on an exemption from the registration requirements of the
Securities Act of 1933, as amended. Proceeds from the sale have been used for
general working purposes. Energy Systems Investors, LLC, also holds a one year
option to acquire an additional $8.0 million of Preferred Stock on the same
terms and conditions, subject to stockholder approval.
Item 3 - Defaults upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None filed herewith.
(b) Reports on Form 8-K
The Company filed a Form 8-K with the Commission dated as of
March 25, 1998. The Form 8-K was filed in connection with the issuance of
250,000 shares of Series A Preferred Stock to Energy Systems Investors, LLC for
$2,250,000 on March 23, 1998. Certain material documents were filed with the
Form 8-K.
9
<PAGE> 10
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: June 15, 1998
U. S. Energy Systems, Inc.
By: /s/ Richard H. Nelson
-------------------------------------
Richard H. Nelson
President and Chief Executive Officer
By: /s/ Seymour J. Beder
-------------------------------------
Seymour J. Beder
Chief Financial and Accounting Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> 1,866,000
<SECURITIES> 0
<RECEIVABLES> 955,000
<ALLOWANCES> 11,000
<INVENTORY> 15,000
<CURRENT-ASSETS> 3,159,000
<PP&E> 5,895,000
<DEPRECIATION> 120,000
<TOTAL-ASSETS> 14,805,000
<CURRENT-LIABILITIES> 1,486,000
<BONDS> 875,000
0
3,000
<COMMON> 51,000
<OTHER-SE> 11,454,000
<TOTAL-LIABILITY-AND-EQUITY> 14,805,000
<SALES> 0
<TOTAL-REVENUES> 889,000
<CGS> 0
<TOTAL-COSTS> 557,000
<OTHER-EXPENSES> 605,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,000
<INCOME-PRETAX> (270,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (270,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (270,000)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
