<PAGE> 1
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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 OCTOBER 31, 1999
[ ] 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 issuer's classes of common
equity, as of September 14, 1999:
TITLE OF CLASS NUMBER OF SHARES
- -------------- ----------------
Common 5,153,005
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
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<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
October 31, January 31,
1999 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 195,000 $ 776,000
Accounts receivable (less allowance for doubtful accounts $15,000) 832,000 763,000
Notes receivable - current portion 40,000 196,000
Prepaid expenses and other current assets 291,000 355,000
------------ ------------
Total current assets 1,358,000 2,090,000
Property, plant and equipment, net 5,859,000 5,832,000
Notes receivable, less current portion 1,990,000 1,883,000
Investments in joint ventures:
Lehi Independent Power Associates, L.C. 899,000 939,000
Plymouth Cogeneration Limited Partnership 479,000 503,000
Goodwill, net 1,831,000 1,939,000
Deferred acquisition costs 830,000 668,000
Other assets 467,000 317,000
------------ ------------
$ 13,713,000 $ 14,171,000
============ ============
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 112,000 $ 114,000
Notes payable - bank 300,000 300,000
Accounts payable and accrued expenses 1,001,000 892,000
Accounts payable and accrued expenses for litigation settlement 223,000 --
------------ ------------
Total current liabilities 1,636,000 1,306,000
Long-term debt, less current portion 429,000 396,000
Litigation settlement liability (see note 4) 900,000 --
Convertible subordinated secured debentures 366,000 875,000
Advances from joint ventures 74,000 57,000
------------ ------------
Total liabilities 3,405,000 2,634,000
------------ ------------
Minority interests 540,000 524,000
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 10,000,000 shares:
Series A, cumulative, convertible, issued and outstanding 277,778
shares (liquidation value of $2,551,000) 3,000 3,000
Series B, cumulative, convertible, issued and outstanding 509 shares -- --
Common stock, $.01 par value, authorized 50,000,000 shares; issued and
outstanding 5,160,605 shares 51,000 51,000
Treasury stock, 7,600 shares of common stock at cost (15,000) (3,000)
Additional paid-in capital 17,970,000 17,467,000
Accumulated deficit (8,241,000) (6,505,000)
------------ ------------
Total stockholders' equity 9,768,000 11,013,000
------------ ------------
$ 13,713,000 $ 14,171,000
============ ============
</TABLE>
See notes to financial statements
2
<PAGE> 3
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
-------------------------------- -------------------------------
1999 1998 1999 1998
----------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 1,378,000 $ 1,117,000 $ 3,241,000 $ 3,020,000
----------- ----------- ----------- -----------
Costs and expenses:
Operating expenses 817,000 554,000 2,053,000 1,565,000
Administrative expenses 503,000 481,000 1,445,000 1,484,000
Depreciation 151,000 130,000 429,000 371,000
Loss from joint ventures 27,000 18,000 69,000 57,000
----------- ----------- ----------- -----------
1,498,000 1,183,000 3,996,000 3,477,000
----------- ----------- ----------- -----------
(120,000) (66,000) (755,000) (457,000)
Interest income 66,000 78,000 204,000 226,000
Interest expense (42,000) (29,000) (100,000) (105,000)
Minority interest (5,000) -- (16,000) --
----------- ----------- ----------- -----------
Loss before litigation settlement
costs and extraordinary item (101,000) (17,000) (667,000) (336,000)
Litigation settlement costs -- -- 1,138,000 47,000
----------- ----------- ----------- -----------
Loss before extraordinary item (101,000) (17,000) (1,805,000) (383,000)
Extraordinary gain on exchange of
debentures to preferred stock -- -- 69,000 --
----------- ----------- ----------- -----------
Net loss (101,000) (17,000) (1,736,000) (383,000)
Dividends on preferred stock (60,000) (51,000) (179,000) (123,000)
----------- ----------- ----------- -----------
Loss applicable to common stock $ (161,000) $ (68,000) $(1,915,000) $ (506,000)
=========== =========== =========== ===========
Loss per share of common stock - basic and diluted:
Loss applicable to common stock before
extraordinary item $ (0.03) $ (0.01) $ (0.38) $ (0.10)
=========== =========== =========== ===========
Net loss applicable to common stock $ (0.03) $ (0.01) $ (0.37) $ (0.10)
=========== =========== =========== ===========
Weighted average number of common share outstanding 5,153,005 5,160,605 5,154,141 5,160,605
=========== =========== =========== ===========
</TABLE>
See notes to financial statements
3
<PAGE> 4
U.S. ENERGY SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL
NINE MONTHS ENDED OCTOBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock - Series A Preferred Stock - Series B Treasury Stock
--------------------------- --------------=------------ ---------------------------
Number Number Number
of Shares Amount of Shares Amount of Shares Amount
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1999 250,000 $ 3,000 -- -- (2,600) $ (3,000)
Treasury stock (5,000) (12,000)
Shares issued in connection with
private placement offering 27,778 (*)
Series B Preferred Stock issued
in exchange for debentures 509 (*)
Change related to modification
of warrant terms
Net (Loss) for the nine months
ended October 31, 1999
Dividends on Preferred Stock:
Series A
Series B
------- ------------ --- ----- ------ --------
Balance, October 31, 1999 277,778 $ 3,000 509 $ -- (7,600) $ (15,000)
======= ============ === ===== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Common Stock
-------------------------- Additional
Number Paid-in Accumulated
of Shares Amount Capital Deficit Total
--------- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, January 31, 1999 5,160,605 $ 51,000 $ 17,467,000 $ (6,505,000) $ 11,013,000
Treasury stock (12,000)
Shares issued in connection with
private placement offering 234,000 234,000
Series B Preferred Stock issued
in exchange for debentures 433,000 433,000
Change related to modification
of warrant terms 15,000 15,000
Net (Loss) for the nine months
ended October 31, 1999 (1,736,000) (1,736,000)
Dividends on Preferred Stock:
Series A (155,000) (155,000)
Series B (24,000) (24,000)
--------- ------------ ------------ ------------ ------------
Balance, October 31, 1999 5,160,605 $ 51,000 $ 17,970,000 $ (8,241,000) $ 9,768,000
========= ============ ============ ============ ============
</TABLE>
- ------------------
(*) Less than $1,000
See notes to financial statements
4
<PAGE> 5
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended October 31,
-----------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (1,736,000) (383,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 429,000 371,000
Equity in loss of joint ventures 64,000 52,000
Minority interest 16,000 --
Gain on exchange of debentures for preferred stock (69,000) --
Changes in:
Accounts receivable (69,000) 64,000
Other current assets 64,000 54,000
Other assets (142,000) (190,000)
Accounts payable and accrued expenses 109,000 (532,000)
Accounts payable and accrued expenses for litigation settlement 1,123,000 --
-------- --------
Net cash used in operating activities (211,000) (564,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business -- (27,000)
Loans to Reno Energy, LLC (109,000) (164,000)
Repayments of loan by Reno Energy, LLC 158,000 74,000
Acquisition of equipment and leasehold improvements (348,000) (351,000)
Deferred acquisition costs (162,000) (295,000)
----------- -----------
Net cash used in investing activities (461,000) (763,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock 234,000 2,190,000
Proceeds from notes payable -- 31,000
Purchase of treasury shares (12,000) --
Payment of long-term debt (99,000) (2,000)
Proceeds from long-term debt 130,000 --
Dividends on preferred stock (179,000) (123,000)
Advances from joint ventures 17,000 --
----------- -----------
Net cash provided by financing activities 91,000 2,096,000
----------- -----------
NET INCREASE (DECREASE) IN CASH (581,000) 769,000
Cash - beginning of period 776,000 319,000
-------- --------
CASH - END OF PERIOD $ 195,000 $ 1,088,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 67,000 $ 95,000
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCIANG ACTIVITIES None None
</TABLE>
5
<PAGE> 6
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with instructions to Form 10-QSB and, accordingly,
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal accruals) considered
necessary for a fair presentation have been included. The results for the three
and nine month periods are not necessarily indicative of results for the full
year.
For further information see Management's Discussion and Analysis of
Financial Condition and Operating Results, and refer to the financial statements
and footnotes included in the Company's Annual report on form 10-KSB for its
fiscal year ended January 31, 1999.
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
On March 8, 1999 the holders of $509,000 of the Company's 9% Convertible
Subordinated Debentures exchanged their debentures for 509 shares of the
Company's 9% Series B Convertible Preferred Stock. As of October 31, 1999,
$366,000 of the Convertible Subordinated Debentures remained outstanding. The
exchange also resulted in an extraordinary gain of $69,000, which was reflected
in the results for the nine months ended October 31, 1999.
During the quarter ended April 30, 1999 the Company purchased for the
treasury a total of 5,000 shares of its common stock. The total number of shares
of common stock now in the Company's treasury is 7,600.
On August 26, 1998, the Company granted to Energy Systems Investors, LLC,
an option to acquire up to 888,888 shares of the Company's Series A Convertible
Preferred Stock at an aggregate purchase price of approximately $8.0 million.
Energy Systems Investors, LLC ("ESI"), a Delaware limited liability company, is
controlled by Lawrence I. Schneider, a director of the Company. Each share of
Series A 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. On June 15, 1999, ESI exercised a portion of such
option and acquired 27,778 shares of its Series A Convertible Preferred Stock
for $250,000 ($9.00 per share). Net proceeds to the Company were $234,000. The
remainder of the option remains open.
6
<PAGE> 7
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
(UNAUDITED) (CONTINUED)
NOTE 4 - CONTINGENCIES
None
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 and Nine Months Ended October 31, 1999 Compared to
Three Months and Nine Months Ended October 31, 1998
RESULTS OF OPERATIONS
Revenues for the three and nine month periods were as follows:
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------------- -------------------------------------
1999 1998 1999 1998
---------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Energy Division $ 357,000 $ 538,000 $ 899,000 $ 1,311,000
Environmental Division 1,021,000 579,000 2,342,000 1,709,000
---------------- ---------------- ----------------- ---------------
$1,378,000 $1,117,000 $3,241,000 $ 3,020,000
================ ================ ================= ===============
</TABLE>
Energy Division revenues decreased by approximately $181,000 or 34% in the
three month period and approximately $412,000 or 31% in the nine month period,
which resulted from a change in the rate basis. During 1998, the Company's
Steamboat 1A facility was still under a contractual long term fixed rate
schedule which provided higher rates than the current contractual rate schedule
which uses fluctuating open market rates. In addition, the change from fixed
rates to market rates was during the colder months which are typically the
months of lowest revenue when the open market rates paid for electricity are the
lowest of the year. Environmental Division revenues increased by 76% in the
three month period and 37% in the nine month period, or approximately $442,000
and $633,000 respectively, as a result of expanded operations and new contracts
in water treatment and oil recycling.
7
<PAGE> 8
Operating expenses, costs directly related to the production of revenues,
were as follows:
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
-------------------------------------- -------------------------------------
1999 1998 1999 1998
---------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Energy Division $167,000 $170,000 $ 527,000 $ 482,000
Environmental Division 650,000 384,000 1,526,000 1,083,000
---------------- ---------------- ----------------- ---------------
$817,000 $554,000 $ 2,053,000 $ 1,565,000
================ ================ ================= ===============
</TABLE>
Comparing 1999 to 1998, operating expenses for the Energy Division
decreased 2% or approximately $3,000 in the three month period, and increased
9%, or approximately $45,000 in the nine month periods. Certain necessary
equipment repairs made during the first six months of the year primarily
accounted for the increase in the nine month period. In line with the
Environmental Division's enlarged business operations and increased revenue,
operating expenses increased 70% and 41%, or approximately $267,000 and
$443,000, respectively.
Depreciation charges previously reported as part of 1998 operating expenses
in the Environmental Division have been reclassified to the Depreciation line in
the Statement of Operations.
Administrative expenses in the three and nine month periods were $503,000
and $1,445,000, respectively, in the current fiscal year as compared to $481,000
and $1,484,000, respectively, in the 1998 year.
Material elements for the comparative periods were as follows:
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
-------------------------------------- -------------------------------------
1999 1998 1999 1998
---------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Salaries and consulting $195,000 $176,000 $ 607,000 $ 551,000
Steamboat royalties 50,000 76,000 121,000 184,000
Legal and professional 58,000 43,000 198,000 198,000
Insurance 36,000 40,000 123,000 114,000
Corporate expenses 60,000 65,000 138,000 166,000
State income taxes 20,000 7,000 27,000 7,000
Other 84,000 74,000 231,000 264,000
---------------- ---------------- ----------------- ---------------
$503,000 $481,000 $ 1,445,000 $ 1,484,000
================ ================ ================= ===============
</TABLE>
In September 1999, an agreement was reached in connection with litigation
in which the Company has been involved, and as a consequence operating results
for the nine months ended October 31, 1999 reflect a charge of $1,138,000.
Details of the case may be found under Legal Proceedings, Part II, Item 1 of
this Form 10-QSB.
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<PAGE> 9
Depreciation expense, which includes amortization of goodwill, increased to
$151,000 and $429,000 in the three and nine month periods ending October 31,
1999, respectively, compared to $130,000 and $371,000, respectively, in the same
periods of 1998 due to increased investment in depreciable assets.
Losses from Joint Ventures, Lehi Independent Power Associates, L.C. and
Plymouth Cogeneration Limited Partnership, are detailed as follows:
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
-------------------------------------- -------------------------------------
1999 1998 1999 1998
---------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Lehi $13,000 $15,000 $ 44,000 $ 33,000
Plymouth 14,000 7,000 25,000 24,000
---------------- ---------------- ----------------- ---------------
$27,000 $22,000 $69,000 $57,000
================ ================ ================= ===============
</TABLE>
The Company's net loss for the three and the nine month periods ended
October 31, 1999 was $101,000 and $1,736,000, respectively, as compared to a net
loss of $17,000 and $383,000, respectively, for the same periods a year earlier.
The nine month increase of $1,353,000 was primarily a result of the
non-operational one-time charge of $1,138,000 for the costs related to
settlement of the litigation described in Legal Proceedings in this Form 10-QSB.
The net loss in the nine months ended October 31, 1999 included an
extraordinary gain of $69,000 from the exchange of a portion of the Company's
Convertible Subordinated Debentures for Series B Convertible Preferred Stock.
Dividends paid on preferred stock for the three and nine months of 1999
totaled $60,000 and $179,000, respectively, compared to $51,000 and $123,000,
respectively, in the like periods of the previous year. The increase was due to
the issuance of additional shares of Series A Preferred Stock in June 1999, and
the issuance of shares of Series B Preferred Stock in March 1999.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1999 cash totaled approximately $195,000 as compared to
$776,000 at January 31, 1999. The $581,000 decrease in cash, along with $91,000
from financing activities, was used to fund $211,000 of operating activities and
$461,000 of investing activities.
During the first nine months of 1999 the Company used $211,000 in operating
activities compared with $564,000 used in operating activities in the like
period last year. During the 1999 period accounts payable and accrued expenses
increased by $109,000. In the 1998 period accounts payable and accrued expenses
were reduced by $532,000, of which the payment of accrued royalties of $374,000
was the single largest item. In the current six month period accounts payable
and accrued expenses for the litigation settlement amounted to $1,123,000. There
was no similar provision in the 1998 period.
9
<PAGE> 10
The Company used $461,000 in investing activities in the first nine months
of 1999 compared to $763,000 in the like period of 1998. Loans to Reno Energy
decreased to $109,000 from $164,000 and repayments of such loans increased to
$158,000 from $74,000. Costs of new equipment, primarily for the Environmental
Division, totaled $348,000 in the first six months of 1999 compared to $351,000
in the 1998 period. Costs incurred in connection with pending acquisitions were
$162,000 in the 1999 period compared to $295,000 in the same period in 1998.
Cash provided by financing activities in the first nine months of 1999 was
a net of $91,000, with $234,000 having been provided by the sale of additional
Series A Convertible Preferred Stock to ESI as described in Note 3 to the
Financial Statements. In the first nine months of 1999, the Company repurchased
5,000 shares of its Common Stock for $12,000. During the same period, $99,000
was applied to payment of long term debt. Dividends on preferred stock were
$179,000 in the current year. In the first nine months of 1998 financing
activities provided cash of $2,096,000 primarily from the sale of the Series A
Convertible Preferred Stock to ESI in a private placement.
During September 1999, the Company entered into an agreement for the
settlement of litigation. The $900,000 settlement is due in November 2000, and
bears an interest rate of 9%. At July 31, 1999 the Company recorded a charge of
$1,138,000 which includes the settlement cost and related legal expenses.
During October 1999 the Company extended certain outstanding warrants for
the purchase of common stock by one year to October 31, 2000, resulting in a
charge of $15,000.
The Company's working capital was a negative $278,000 at October 31, 1999
compared to $784,000 at January 31, 1999.
10
<PAGE> 11
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 its internal systems are in full compliance.
In addition, the Company has communicated with its major suppliers and
customers to determine their year 2000 compliance readiness and the extent to
which the Company is vulnerable to any third party year 2000 issues. The Company
believes that only Sierra Pacific Power Company ("Sierra"), to which the Company
sells power from its Energy Division facilities, may be affected by the
programming code problem to an extent that could have a material adverse effect
on the Company. Sierra has assured the Company that its internal programs will
be in compliance and that the interface with the Company's facilities is in
compliance with year 2000 requirements. However, there can be no guarantee that
the systems of other companies on whom the Company's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company. The Company continues to review possible contingency
plans in this respect.
The total cost to the Company of these year 2000 compliance activities has
not been, and is not anticipated to be, material to its financial position or
results of operations in any given year. This is based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ from those
plans.
No contingency plans are believed necessary in light of the assurances
received from suppliers and customers.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
This Form 10-QSB contains certain "forward looking statements" which
represent the Company's expectations or beliefs, including, but not limited to,
statements concerning industry performance and the Company's operations,
performance, financial condition, growth and strategies. For this purpose, any
statements contained in this Form 10-QSB that are not statements of historical
fact may be deemed to be forward looking statements. Without limiting the
generality of the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "intend," "could," "estimate" or "continue" or the negative or
other variations thereof or comparable terminology are intended to identify
certain forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, certain of which are beyond the Company's
control, and actual results may differ materially depending on a variety of
important factors which are noted herein, including but not limited to the
potential impact of competition, changes in local or regional economic
conditions, the ability of the Company to continue its growth strategy,
dependence on management and key personnel, supervision and regulation issues
and an inability to find financing on terms suitable to the company.
11
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On March 1, 1997, the Company filed suit for declaratory judgement in the
United States District Court for the Southern District of New York against
ENVIRO PARTNERS, L.P. ET AL AND ENERGY MANAGEMENT CORPORATION in connection with
a financing transaction in 1996 that was never consummated. Enviro Partners,
L.P. and Energy Management Corporation filed a counter suit against the Company
for damages amounting to $6 million based upon breach of contract in connection
with the 1996 financing transaction. On September 17, 1999 the parties filed
notice of an agreement in principle settling the action with the court, and the
Company recorded a charge on its books at July 31, 1999 in the amount of
$1,138,000, which includes the settlement amount of $900,000 and related legal
costs. The agreement was executed effective September 1, 1999. In spite of the
fact that it believed that the Company's position in the case would have
prevailed, management concluded that the substantial additional costs associated
with a trial, combined with the extensive consumption of management time and the
uncertainty of outcome of a jury proceeding, made a settlement the prudent
course of action.
ITEM 2 - CHANGES IN SECURITIES
On November 15, 1999, after the end of the Company's third quarter, the
Company issued an aggregate of 20,357 shares of common stock at a price of $1.15
per share to Theodore Rosen, Richard Nelson, Henry Schneider, Seymour J. Beder,
all officers of the Company, in lieu of their respective salaries for the month
of November 1999. The restricted shares were issued pursuant to the Company's
1998 Stock Option Plan.
On March 8, 1999 the holders of $509,000 of the Company's 9% Convertible
Subordinated Debentures exchanged their debentures for 509 shares of the
Company's 9% Series B Convertible Preferred Stock. This exchange replaces
$509,000 of debt with preferred stock, leaving $366,000 as debenture debt. The
exchange also resulted in an extraordinary gain of $69,000. The issuance was
made in reliance on an exemption from the registration requirements of the
Securities Act of 1933, as amended.
During the nine months ended October 31, 1999 the Company purchased for the
treasury a total of 7,600 shares of its common stock, which remain in treasury.
On August 26, 1998, the Company's stockholders approved granting to Energy
Systems Investors an option to acquire up to 888,888 shares of the Company's
Series A Convertible Preferred Stock at an aggregate purchase price of
approximately $8.0 million. On June 9, 1999 the Company received the first
$250,000 of the $8 million option granted to Energy Systems Investors, and
issued 27,778 shares of Series A Preferred Stock to Energy Systems Investors.
The issuance was made in reliance on an exemption from the registration
requirements of the Securities Act of 1933, as amended.
ITEM 3- DEFAULTS UPON SENIOR SECURITIES
None.
12
<PAGE> 13
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company on November 16, 1999,
Evan Evans, Allen J. Rothman and Henry N. Schneider were elected as Class II
directors, to serve for three year terms, and Richard T. Brandt was elected as
Class I director, to serve for a one year term (5,235,389 votes were in favor,
47,475 votes against, and none withheld.) Richard H. Nelson, Howard Nevins,
Theodore Rosen and Lawrence I. Schneider are the other directors whose terms of
office continued after the meeting.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
(a) Exhibits
27 -- Financial Data Schedule.
(b) Reports on Form 8-K
None.
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 duly authorized
Dated: December 15, 1999
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
13
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<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
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0
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