<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, 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 of issuer's classes of
common equity, as of June 11, 1999:
Title of Class Number of Shares
-------------- ----------------
Common 5,160,605
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
April 30, 1999 January 31, 1999
-------------- ----------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 396,000 $ 776,000
Accounts receivable (less allowance for doubtful accounts $15,000) 427,000 763,000
Notes receivable - current portion 95,000 196,000
Prepaid expenses and other current assets 530,000 355,000
------------ ------------
Total current assets 1,448,000 2,090,000
Property, plant and equipment, net 5,808,000 5,832,000
Notes receivable, less current portion 1,913,000 1,883,000
Investments in joint ventures:
Lehi Independent Power Associates, L.C. 924,000 939,000
Plymouth Cogeneration Limited Partnership 494,000 503,000
Goodwill, net 1,903,000 1,939,000
Deferred acquisition costs 727,000 668,000
Other assets 367,000 317,000
------------ ------------
$ 13,584,000 $ 14,171,000
============ ============
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 114,000 $ 114,000
Notes payable - bank 103,000 300,000
Accounts payable and accrued expenses 800,000 838,000
Royalties payable 54,000 54,000
Total current liabilities 1,071,000 1,306,000
Long-term debt, less current portion 376,000 396,000
Convertible subordinated secured debentures 366,000 875,000
Advances from joint ventures 74,000 57,000
------------ ------------
Total liabilities 1,887,000 2,634,000
------------ ------------
Minority interests 529,000 524,000
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 10,000,000 shares:
Series A, cumulative, convertible, issued and outstanding 250,000
shares (liquidation value of $2,301,000) 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 17,852,000 17,467,000
Accumulated deficit (6,723,000) (6,505,000)
------------ ------------
Total stockholders' equity 11,168,000 11,013,000
------------ ------------
$ 13,584,000 $ 14,171,000
============ ============
</TABLE>
See notes to financial statements
1
<PAGE> 3
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended April 30,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues $ 902,000 $ 889,000
----------- -----------
Costs and expenses:
Operating expenses 594,000 524,000
Administrative expenses 466,000 473,000
Litigation Costs 1,000 41,000
Depreciation 134,000 120,000
Loss from joint ventures 24,000 4,000
----------- -----------
1,219,000 1,162,000
----------- -----------
Loss before interest income (expense) and extraordinary item (317,000) (273,000)
Interest income 70,000 63,000
Interest expense (35,000) (38,000)
Minority interest (5,000) --
----------- -----------
Loss before extraordinary item (287,000) (248,000)
Extraordinary gain on exchange of debentures to preferred stock 69,000 --
----------- -----------
Net loss (218,000) (248,000)
Dividends on preferred stock (55,000) (22,000)
----------- -----------
Loss applicable to common stock $ (273,000) $ (270,000)
=========== ===========
Loss per share of common stock - basic and diluted:
Loss applicable to common stock before extraordinary item $ (0.07) $ (0.05)
=========== ===========
Net loss applicable to common stock $ (0.05) $ (0.05)
=========== ===========
Weighted average number of common shares outstanding 5,156,488 5,160,607
=========== ===========
</TABLE>
See notes to financial statements
2
<PAGE> 4
U.S. ENERGY SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL
Three Months Ended April 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Series A 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)
Series B Preferred Stock issued
in exchange for debentures 509 (*)
Net (Loss) for the quarter
ended April 30, 1999
Dividends on Preferreed Stock:
Series A
Series B
Balance, April 30, 1999 250,000 $ 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)
Series B Preferred Stock issued
in exchange for debentures 440,000 440,000
Net (Loss) for the quarter
ended April 30, 1999 (218,000) (218,000)
Dividends on Preferreed Stock:
Series A (51,000) (51,000)
Series B (4,000) (4,000)
Balance, April 30, 1999 5,160,605 $ 51,000 $ 17,852,000 $ (6,723,000) $ 11,168,000
========= ======== ============ ============ ============
</TABLE>
(*) Less than $1,000
See notes to financial statements
3
<PAGE> 5
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended April 30,
-------------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (218,000) $ (270,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 134,000 120,000
Equity in loss of joint ventures 24,000 4,000
Minority interest 5,000
Gain from exchange of debentures for preferred stock (69,000)
Changes in:
Accounts and notes receivable, trade 408,000 (187,000)
Other current assets (175,000) 36,000
Other assets (50,000) (53,000)
Accounts payable and accrued expenses (38,000) (160,000)
Royalties payable - 6,000
---------- ----------
Net cash used in operating activities 21,000 (504,000)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business - (27,000)
Loans to Reno Energy LLC (30,000) (67,000)
Repayments of loan by Reno Energy, LLC 29,000 24,000
Acquisition of equipment and leasehold improvements (74,000) (79,000)
Deferred acquisition costs (59,000)
---------- ----------
Net cash used in investing activities (134,000) (149,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock - 2,209,000
(Payments on) proceeds from notes payable (197,000) 7,000
Payment of convertible subordinated secured debentures -
Payment of long-term debt (20,000) (16,000)
Purchase of treasury shares (12,000) -
Dividends on preferred stock (55,000) -
Advances from joint ventures 17,000 -
---------- ----------
Net cash provided by (used in) financing activities (267,000) 2,200,000
---------- ----------
NET INCREASE (DECREASE) IN CASH (380,000) 1,547,000
Cash - beginning of period 776,000 319,000
---------- ----------
CASH - END OF PERIOD $ 396,000 $ 1,866,000
========= ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 32,000 $ 32,000
Supplemental schedule of non cash financing activities None None
</TABLE>
See notes to financial statements
4
<PAGE> 6
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED APRIL 30, 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 months are not necessarily indicative of results for the full year.
For further information see Management's Discussion and Analysis of
Financial Condition and Results of Operations, 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, leaving $366,000 of the
debentures outstanding. The exchange also resulted in an extraordinary gain of
$69,000.
On June 9, 1999, Energy Systems Investors, LLC ("ESI"), the holder of
an option to purchase up to 888,888 shares of the Company's Series A Convertible
Preferred Stock, granted to the Company a call option on up to $250,000 of ESI's
option, in return for a one-year extension to the term of ESI's option. The
Company has notified ESI that it intends to exercise its call option on the full
amount of $250,000 on June 15, 1999. 27,778 shares of Series A Preferred Stock
will be issued to ESI when the funds are received by the Company.
During the quarter ended April 30, 1999 the Company repurchased 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.
5
<PAGE> 7
NOTE 4 - CONTINGENCIES
U. S. ENERGY SYSTEMS, INC. VS. ENVIRO PARTNERS, L.P. AND ENERGY
MANAGEMENT CORPORATION ET. AL., 97 CIV. 1748 (JFK) is in the pre-trial period.
On May 10, 1999 the United States District Court for the Southern District of
New York denied the Company's motion for reconsideration, thereby affirming its
previous denial of both sides' motion and cross-motion for summary judgment.
Pre-trial appearances are set for September 3, 1999. Additional information with
respect to the case may be found in the Company's Annual report in Form 10-KSB
for January 31, 1999. The Company believes that its position in this case will
prevail. However, an adverse outcome of this proceeding could have a material
adverse effect on the Company's financial condition.
Item 2 - Management's Discussion and Analysis or Plan of Operation
THREE MONTHS ENDED APRIL 30, 1999 COMPARED TO THREE MONTHS ENDED APRIL 30, 1998
RESULTS OF OPERATIONS
Revenues increased 1% or approximately $13,000, to $902,000 for the
three months ended April 30, 1999 ("First Quarter 1999") as compared to the
three months ended April 30, 1998 ("First Quarter 1998). First Quarter 1999
revenues are comprised of $252,000 from the Energy Division and $650,000 from
the Environmental Division, as compared to $355,000 and $534,000, respectively,
for First Quarter 1998. The 29%, or approximately $103,000, decrease as compared
to the First Quarter 1998 revenues generated from the Energy Division resulted
from a change in the rate basis. During 1998 Steamboat 1A was under a
contractual rate schedule which provided higher rates than the current market
rates used in 1999. In addition, the winter months are typically the months of
lowest revenue, because the open market rates paid for electricity are the
lowest of the year. The 22% or approximately $116,000 increase in revenues from
the Environmental Division resulted from increased capabilities and new
year-round contracts in water treatment and oil recycling.
6
<PAGE> 8
Operating expenses, costs directly related to the production of
revenues, increased 13%, or approximately $70,000 to $594,000 in the First
Quarter 1999 as compared to $524,000 in First Quarter 1998. The following table
provides a breakdown of the Company's operating expenses.
FIRST QUARTER 1999 FIRST QUARTER 1998
------------------ ------------------
Energy Division $171,000 $154,000
Environmental Division 423,000 370,000
-------- --------
$594,000 $524,000
======== ========
Operating expenses for the Energy Division were 11% or approximately
$17,000 higher in the First Quarter 1999 compared to the previous year. This
increase primarily resulted from certain necessary equipment repairs occurring
during the current period. The 14%, or approximately $53,000, increase in the
Environmental Division's operating expenses was essentially caused by the
Division's increased business operations.
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 First Quarter 1999 decreased to $466,000
from $473,000 in First Quarter 1998. The composition of these amounts are listed
below:
1999 1998
-------- --------
Salaries and consulting costs $202,000 $185,000
Steamboat royalties 35,000 50,000
Legal and professional fees 58,000 70,000
Insurance 42,000 34,000
Corporate expenses 31,000 49,000
Other 98,000 86,000
-------- --------
$466,000 $473,000
======== ========
Litigation costs related to U.S. ENERGY SYSTEMS, INC. VS. ENVIRO
PARTNERS L.P., ET AL, decreased to $1,000 in First Quarter 1999 from $41,000 in
the same period a year earlier. This decrease was due to the reduction in
litigation activity during 1999. As preparatory work for trial of the action
progresses, the Company expects that these costs will increase in the second
quarter of 1999. See "Legal Proceedings," Part II, Item 1.
Depreciation expense, which includes amortization of goodwill,
increased to $134,000 in first Quarter 1999 from $120,000 in the same quarter of
1998 due to increased investment in depreciable assets necessary in positioning
the Company for growth.
7
<PAGE> 9
Losses from Joint Ventures is detailed as follows:
1999 1998
------- -------
Lehi Independent Power Associates, L.C $15,000 ($1,000)
Plymouth Cogeneration Limited Partnership 9,000 5,000
------- -------
$24,000 $ 4,000
The Company's net loss for the First Quarter 1999 was $218,000 as
compared to a net loss of $248,000 for the same period a year earlier. The 1999
period included an extraordinary gain of $69,000 from the exchange of the
Company's Convertible Subordinated Debentures for Series B Convertible Preferred
Stock. Dividends paid on preferred stock for the quarter totaled $55,000,
compared to $22,000 in the previous year. The Series A Preferred Stock was
issued in March 1998 and the Series B Preferred Stock was issued in March 1999.
The increase is a result of dividends recorded for the entire quarter in 1999,
totaling $51,000, as opposed to the partial quarter dividends recorded in 1998,
totaling $22,000. The remaining $4,000 in dividends was paid on the Series B
Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1999, cash totaled approximately $396,000, as compared to
$776,000 at April 30, 1998. The $380,000 decrease in cash, along with $21,000
from operating activities were used to fund $134,000 of investing activities and
$267,000 of financing activities.
During the first three months of 1999, the Company generated $21,000 of
cash from operating activities compared with $504,000 of cash used in operations
in the like period last year. The increase in cash generated from operations in
1999 was primarily due to increased collections of notes and accounts
receivable.
The $134,000 used in investing activities in the First Quarter 1999
compared to $149,000 in the same period of 1998 included $59,000 of deferred
costs expended on pending acquisitions as compared to $27,000 in 1998. Loans to
Reno Energy decreased from $67,000 in First Quarter 1998 to $30,000 in First
Quarter 1999.
Cash used in financing activities in First Quarter 1999 totaled
$267,000, of which $197,000 was a reduction of bank loans and $55,000 was for
payment of dividends on preferred stock. In First Quarter 1998 financing
activities provided cash of $2,200,000 primarily from the sale of the Series A
Convertible Preferred Stock to ESI in a private placement.
The Company's working capital was $377,000 at April 30, 1999 compared
to $784,000 at January 31, 1999. On June 15, 1999, the Company intends to
exercise its call option on $250,000 of the $8 million option to purchase shares
of the Company's Series A Convertible Preferred Stock granted to ESI on August
26, 1998. The $7.75 million remainder of this option, when and if exercised,
would provide the Company with sufficient funds for possible future acquisitions
and internal expansion as well as for general working capital. There can be no
assurance that the remainder of the option will be exercised.
8
<PAGE> 10
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, however, 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.
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.
9
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
U. S. ENERGY SYSTEMS, INC. VS. ENVIRO PARTNERS, L.P. AND ENERGY
MANAGEMENT CORPORATION ET. AL., 97 CIV. 1748 (JFK) is in the pre-trial period.
On May 10, 1999 the United States District Court for the Southern District of
New York denied the Company's motion for reconsideration, thereby affirming its
previous denial of both sides' motion and cross-motion for summary judgment.
Pre-trial appearances are set for September 3, 1999. Additional information with
respect to the case may be found in the Company's Annual report in Form 10-KSB
for January 31, 1999. The Company believes that its position in this case will
prevail. However, an adverse outcome of this proceeding could have a material
adverse effect on the Company's financial condition.
ITEM 2 - CHANGES IN SECURITIES
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.
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.
ITEM 3- DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
10
<PAGE> 12
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: June 14, 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
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 396,000
<SECURITIES> 0
<RECEIVABLES> 442,000
<ALLOWANCES> 15,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,448,000
<PP&E> 5,808,000
<DEPRECIATION> 134,000
<TOTAL-ASSETS> 13,584,000
<CURRENT-LIABILITIES> 1,072,000
<BONDS> 366,000
0
3,000
<COMMON> 51,000
<OTHER-SE> 11,129,000
<TOTAL-LIABILITY-AND-EQUITY> 13,583,000
<SALES> 0
<TOTAL-REVENUES> 902,000
<CGS> 0
<TOTAL-COSTS> 594,000
<OTHER-EXPENSES> 625,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,000
<INCOME-PRETAX> (273,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (273,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (273,000)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
