<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 July 31, 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
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 July 31, 1998:
Title of Class Number of Shares
-------------- ----------------
Common 5,160,605
Transitional Small Business Disclosure Format (check one):
Yes [X] No [ ]
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JULY 31, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash .......................................................................... $ 1,279,000
Accounts receivable (less allowance for doubtful accounts $11,000) ............ 690,000
Notes receivable - current portion ............................................ 113,000
Other current assets .......................................................... 221,000
------------
Total current assets ................................................... 2,303,000
Property, plant and equipment, net ................................................ 5,781,000
Notes receivable, less current portion ............................................ 1,864,000
Investments in joint ventures:
Lehi Independent Power Associates, L.C ................................. 972,000
Plymouth Cogeneration Limited Partnership .............................. 527,000
Goodwill, net ..................................................................... 2,009,000
Other assets ...................................................................... 732,000
------------
Total .................................................................. $ 14,188,000
============
LIABILITIES
Current liabilities:
Current portion of long-term debt ............................................. $ 73,000
Notes payable - bank .......................................................... 155,000
Accounts payable .............................................................. 394,000
Accrued expenses .............................................................. 384,000
Royalties payable ............................................................. 54,000
------------
Total current liabilities .............................................. 1,060,000
Long-term debt, less current portion .............................................. 386,000
Convertible subordinated secured debentures (including due to related
parties of $80,000) ........................................................... 875,000
Advances from joint ventures ...................................................... 41,000
------------
Total liabilities ...................................................... 2,362,000
------------
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, 5,160,605) ....................................................... 51,000
Additional paid-in capital ........................................................ 17,642,000
Accumulated deficit ............................................................... (6,374,000)
------------
Total stockholders' equity ............................................. 11,322,000
------------
Total .................................................................. $ 14,188,000
============
</TABLE>
See notes to financial statements.
2
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U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues .................................................. $ 1,014,000 $ 367,000 $ 1,903,000 $ 742,000
----------- ----------- ----------- -----------
Cost and expenses:
Operating expenses
(includes depreciation of $65,000 for 1998) ...... 520,000 174,000 1,077,000 339,000
Administrative expenses ............................. 530,000 366,000 1,003,000 685,000
Litigation costs .................................... 6,000 136,000 47,000 147,000
Depreciation and amortization ....................... 88,000 39,000 175,000 73,000
Loss from joint ventures ............................ 35,000 34,000 39,000 60,000
----------- ----------- ----------- -----------
1,179,000 749,000 2,341,000 1,304,000
----------- ----------- ----------- -----------
(Loss) before interest income (expense) ................... (165,000) (382,000) (438,000) (562,000)
Interest income ........................................... 85,000 41,000 148,000 89,000
Interest expense .......................................... (38,000) (20,000) (76,000) (59,000)
----------- ----------- ----------- -----------
Net (loss) before extraordinary item ...................... (118,000) (361,000) (366,000) (532,000)
Extraordinary gain from restructuring of liabilities ...... -- 36,000 -- 36,000
----------- ----------- ----------- -----------
Net (loss) ................................................ (118,000) (325,000) (366,000) (496,000)
Dividends on preferred stock .............................. (50,000) -- (72,000) --
----------- ----------- ----------- -----------
Net (loss) applicable to common stock ..................... $ (168,000) $ (325,000) $ (438,000) $ (496,000)
=========== =========== =========== ===========
Net (loss) per common share ............................... $ (0.03) $ (0.07) $ (0.08) $ (0.11)
=========== =========== =========== ===========
Weighted average shares outstanding ....................... 5,160,605 4,334,190 5,160,605 4,334,190
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
3
<PAGE> 4
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL
SIX MONTHS ENDED JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------------- -----------------------------
Number Number
of Shares Amount of Shares Amount
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 31, 1998 -- -- 5,160,609 $ 51,000
Net proceeds from sale
of preferred stock 250,000 $ 3,000
Cash paid for fractional shares (4)
Net (Loss) for the six
months ended July 31, 1998
--------- ------------ ------------ ------------
Balance, July 31, 1998 250,000 $ 3,000 $ 5,160,605 $ 51,000
========= ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-in Accumulated
Capital Deficit Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance, January 31, 1998 $ 15,454,000 $ (5,936,000) $ 9,569,000
Net proceeds from sale
of preferred stock 2,188,000 2,191,000
Cash paid for fractional shares
Net (Loss) for the six
months ended July 31, 1998 (438,000) (438,000)
------------ ------------ ------------
Balance, July 31, 1998 $ 17,642,000 $ (6,374,000) $ 11,322,000
============ ============ ============
</TABLE>
See notes to financial statements.
4
<PAGE> 5
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JULY 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................................... $ (366,000) $ (496,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................ 240,000 74,000
Equity in loss of joint ventures ......................................... 34,000 80,000
Gain from restructuring of liabilities ................................... -- (36,000)
Changes in:
Accounts receivable ................................................... 67,000 13,000
Other current assets .................................................. 55,000 94,000
Other assets .......................................................... (325,000) (137,000)
Accounts payable and accrued expenses ................................. (151,000) (135,000)
Royalties payable ..................................................... (374,000) (13,000)
Accrued interest on pre-reorganization taxes payable .................. -- 17,000
----------- -----------
Net cash used in operating activities .................................... (820,000) (539,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business ...................................................... (27,000) --
Loans to Reno Energy, LLC .................................................... (122,000) (1,275,000)
Repayments of loan by Reno Energy, LLC ....................................... 49,000 --
Acquisition of equipment and leasehold improvements .......................... (171,000) (84,000)
----------- -----------
Net cash used in investing activities .................................... (271,000) (1,359,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock ........................................ 2,191,000 --
Payment of dividends on preferred stock ...................................... (72,000) --
Payment of notes payable ..................................................... (45,000) --
Payment of convertible subordinated secured debentures ....................... -- (150,000)
Payment of pre-organization taxes payable .................................... -- (197,000)
Payment of long-term debt .................................................... (23,000) --
Minority equity investment in subsidiary ..................................... -- 120,000
Advances from joint ventures ................................................. -- 7,000
----------- -----------
Net cash provided by (used in) financing activities ...................... 2,051,000 (220,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH ............................................... 960,000 (2,118,000)
Cash - beginning of period .................................................... 319,000 4,125,000
----------- -----------
CASH - END OF PERIOD .......................................................... $ 1,279,000 $ 2,007,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest ....................................................... $ 251,000 $ 49,000
Supplemental schedule of non cash financing activities ........................ None None
</TABLE>
See notes to financial statements.
5
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U. S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JULY 31, 1998 AND 1997
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with instructions to Form 10-QSB and,
accordingly, do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal accruals)
considered necessary for a fair presentation have been included. The results for
the three and 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 Form 10-KSB/A for its
fiscal year ended January 31, 1998.
NOTE 2 - 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 3 - ADDITIONAL CAPITAL
At the Annual Meeting of the Company to be held on August 26, 1998, a
Proposal will be voted on which would approve the issuance of an option to
purchase up to 888,888 shares of the Company's Series A Convertible Preferred
Stock in a private placement. If fully exercised, this would provide an
investment of $8,000,000 in the Company. The terms and conditions of the
additional option are the same as those in the original private placement of
250,000 shares of the Series A Convertible Preferred Stock which was issued on
March 23, 1998. The new option would be to the same optionee.
NOTE 4 - CONTINGENCIES
On March 27, 1997, the Company filed for a declaratory judgement
against Enviro Partners, L.P. ("Enviro") and other partners of the Enviro
Limited Partnership. 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. Full
details can be found in the Company's Form 10-KSB/A for January 31, 1998.
6
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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
Six Months Ended July 31, 1998 Compared to Six Months Ended July 31, 1997
RESULTS OF OPERATIONS
Revenues for the six months ended July 31, 1998 ("First Six Months
1998") totaled $1,903,000 as against $742,000 in the six months ended July 31,
1997 ("First Six Months 1997"). This consisted of $773,000 from the operations
of Steamboat Envirosystems, LLC ("Steamboat") compared to $742,000 in the same
period of the previous year, and $1,130,000 from the operations of American
Enviro-Services, Inc. and Commonwealth Petroleum Recycling, Inc. (together
"AES"), which were acquired on August 18, 1997 and January 5, 1998 respectively,
and therefore did not enter into the Company's results in First Six Months 1997.
Operating expenses refer to those costs directly related to the
production of revenues, and totaled $1,077,000 in First Six Months 1998,
compared to $339,000 in First Six Months 1997, when Steamboat was the only
operation included. Steamboat incurred operating expenses amounting to $312,000
in First Six Months 1998, compared to $339,000 in First Six Months 1997. AES
operating expenses in the 1998 period amounted to $765,000, including
depreciation charges of $65,000, with no comparable costs in the earlier year as
these operations had not yet been acquired.
Administrative expenses in First Six Months 1998 increased to
$1,003,000 from $685,000 in the same period a year earlier. This was to a large
extent due to the fact that AES, whose expenses other than depreciation and
amortization totaled $217,000 during the six months, did not begin being part of
the Company's operations until the third quarter of 1997.
Material elements in administrative expenses for First Six Months 1998
compared to 1997 were as follows:
1998 1997
---------- ----------
AES, as explained above $ 217,000 $ --
---------- ----------
Exclusive of AES:
Steamboat royalties 108,000 103,000
Salaries and consulting fees 235,000 246,000
Legal and professional fees 123,000 97,000
Insurance 61,000 69,000
Corporate expenses 101,000 46,000
Sundry other 158,000 124,000
---------- ----------
Total $1,003,000 $ 685,000
Legal and professional fees in the 1998 period above included $25,000
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.
Litigation costs decreased to $47,000 in First Six Months 1998 from
$147,000 in the same period a year earlier primarily due to settlement of
actions in the earlier year. Depreciation and amortization charges increased to
$175,000 in First Six Months 1998, as compared to $73,000 in the earlier year
due to the inclusion of AES in this year's figures.
7
<PAGE> 8
Loss from Joint Ventures is broken down as follows:
1998 1997
------- -------
Lehi Independent Power Associates, LC $17,000 $31,000
Plymouth Cogeneration Limited Partnership 22,000 29,000
------- -------
Loss from Joint Ventures $39,000 $60,000
======= =======
LIQUIDITY AND CAPITAL RESOURCES
During First Six Months 1998 cash flow used in operations totaled
$820,000, an increase of $281,000 from the $539,000 reflected in the same period
of the previous year. The primary cause for this increase was the payment of
$385,000 in deferred royalties and interest to Sierra Pacific Power Company in
June, 1998. Cash flow used in investing activities amounted to $271,000 in First
Six Months 1998 as compared to $1,359,000 in First Six Months 1997. The 1997
figure included $1,275,000 of new loans to Reno Energy, LLC, whereas only
$122,000 in new loans were made to Reno in the 1998 period.
Cash flow totaling $2,051,000 was provided from financing activities
during First Six Months 1998, primarily representing the proceeds of the sale of
Preferred Stock to Energy Systems Investors in a private placement. The Company,
therefore, had working capital of $1,243,000 at July 31. The Company believes
that these funds and those that are expected to be provided by Steamboat and by
AES assure that the Company will have sufficient liquidity to enable it to meet
the working capital requirements of its existing operations.
Among the matters to be voted on by the Company's stockholders at the
Annual Meeting on August 26, 1998 is a proposal to approve the option issued by
the Board of Directors, subject to stockholder approval, to Energy Systems
Investors, LLC, to acquire up to an additional $8.0 million of Preferred Stock
on the same terms and conditions as exist on the March 25, 1998 issue of 250,000
shares of Preferred Stock for $2,250,000 reflected in the Financial Statements.
Sierra Pacific Power Company has agreed to a stipulation which
increases the rates paid under the power purchase agreement for power produced
by the Steamboat 1 plant effective July 20, 1998. These rates will also be
applied to power production of Steamboat plant 1-A when its present rate
structure ends in December, 1998.
YEAR 2000 COMPUTER ISSUE
The Company has assessed the issues associated with the programming
code in its existing computer systems with respect to a two digit year value as
the year 2000 approaches and believes that addressing such issues is not a
material event or uncertainty that would cause reported financial information
not to be indicative of future operating results or financial condition. The
Company has also considered the effect of the year 2000 issue as it pertains to
its customers and believes that only Sierra Pacific Power Company ("Sierra"), to
which the Company sells power from its Steamboat Facilities, may be affected by
the programming code problem to an extent which could have a material adverse
effect on the Company. Sierra has assured the Company, however, that it is
currently working on resolving its year 2000 issues.
8
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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 capital purposes. Energy Systems Investors, LLC, also holds a
one year option to acquire up to an additional $8.0 million of Preferred Stock
on the same terms and conditions, subject to stockholder approval, which will be
voted on at the Company's Annual Meeting on August 26, 1998.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
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: August 28, 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
