<PAGE> 1
As filed with the Securities and Exchange Commission on February 16, 2000
Registration No. 333-04612
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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U.S. ENERGY SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
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<S> <C> <C>
DELAWARE 4931 52-1216347
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
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<TABLE>
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<S> <C>
LAWRENCE SCHNEIDER, PRESIDENT
U.S. ENERGY SYSTEMS, INC.
515 NORTH FLAGLER DRIVE, SUITE 702 515 NORTH FLAGLER DRIVE, SUITE 702
WEST PALM BEACH, FL 33401 WEST PALM BEACH, FL 33401
(561) 820-9779 (561) 820-9779
(Address and telephone number of principal executive (Name, address and telephone number
offices and principal place of business) of agent for service)
</TABLE>
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COPIES TO:
PAUL BERKOWITZ, ESQ.
LISA CARSTARPHEN, ESQ.
GREENBERG TRAURIG, P.A.
1221 BRICKELL AVENUE
MIAMI, FLORIDA 33131
(305) 579-0500
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities, and we are not soliciting offers to buy these
securities, in any jurisdiction where the offer or sale is not permitted.
================================================================================
PROSPECTUS
U.S. ENERGY SYSTEMS, INC.
4,185,000 SHARES OF COMMON STOCK
310,000 COMMON STOCK PURCHASE WARRANTS
U.S. Energy Systems, Inc. is offering up to an aggregate of 4,185,000
shares of our common stock and 310,000 redeemable common stock purchase
warrants. Up to 3,565,000 of these shares will be issued upon the exercise of
redeemable common stock purchase warrants which are outstanding and entitle the
holder to purchase one share of common stock for $4.00. Up to 310,000 shares of
common stock and 310,000 common stock purchase warrants will be issued upon the
exercise of a purchase option. The remaining 310,000 shares of common stock will
be issued upon the exercise of the purchase option warrants.
Our common stock is listed on the Nasdaq SmallCap Market under the symbol
USEY and our warrants are listed on the Nasdaq SmallCap Market under the symbol
USEYW.
---------------
INVESTING IN OUR COMMON STOCK AND WARRANTS INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
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PER SHARE PROCEEDS TOTAL PROCEEDS
NUMBER OFFERED HEREBY TO U.S. ENERGY TO U.S. ENERGY(1)
--------------------- ---------------------- --------------------------
<S> <C> <C> <C>
Common stock......................... 3,565,000 $4.00 $14,206,000
Common stock......................... 310,000 $6.60 $ 2,046,000
Common stock purchase warrants....... 310,000 $0.165 $ 51,150
Common stock......................... 310,000 $5.00 $ 1,550,000
-----------
$17,907,150
</TABLE>
(1) Assumes the exercise of all outstanding warrants and the purchase option,
but does not include estimated expenses of $100,000. There can be no
assurance that any or all of the warrants or the purchase option will be
exercised.
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The date of this prospectus is February 17, 2000
<PAGE> 3
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF OUR COMMON STOCK AND WARRANTS ONLY IN JURISDICTIONS WHERE OFFERS
AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF
DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK OR WARRANTS.
----------------------
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary................................................................................................2
Risk Factors......................................................................................................6
Note Regarding Forward-Looking Statements........................................................................12
Use of Proceeds..................................................................................................12
Dividend Policy..................................................................................................12
Price Range of Common Stock......................................................................................12
Capitalization...................................................................................................13
Management's Discussion and Analysis of Financial Condition and Plan of Operation................................14
Business.........................................................................................................19
Management.......................................................................................................28
Certain Relationships and Related Transactions...................................................................33
Security Ownership of Certain Beneficial Owners and Management...................................................34
Description of Securities........................................................................................36
Shares Eligible for Future Sale..................................................................................42
Plan of Distribution.............................................................................................43
Legal Matters....................................................................................................43
Experts..........................................................................................................43
</TABLE>
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<PAGE> 4
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are required to file reports, proxy statements and other information
with the Securities and Exchange Commission. You may inspect reports, proxy
statements and other information filed by us with the Commission without charge
and may copy this information at prescribed rates at
o the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street N.W., Washington, D.C. 20549;
o the Commission's regional office located at Seven World Trade Center,
Suite 1300, New York, New York 10048;
o the Commission's regional office located at Suite 1400, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661.
The Commission maintains a world wide web site that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the Commission. The address of this site is
http://www.sec.gov. Our common stock and warrants are listed on the Nasdaq
SmallCap Market and some of our reports, proxy materials and other information
may be available for inspection at the offices of the Nasdaq Stock Market, 1735
K Street, N.W., Washington, D.C. 20006.
We have filed with the Commission a Registration Statement on Form SB-2
under the Securities Act with respect to the securities offered by this
prospectus. This prospectus does not contain all of the information in the
registration statement. For further information with respect to our company and
the securities offered by this prospectus, refer to the registration statement,
including the exhibits and schedules thereto. You may inspect a copy of the
registration statement and the exhibits, without charge, at the Securities and
Exchange Commission's principal office in Washington, D.C. and obtain copies of
all or any part of the registration statement at prescribed rates from the
Public Reference Section of the Commission at the address shown above.
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1
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information about our company and the common stock being sold in this offering
and our financial statements and the notes to those statements included
elsewhere in this prospectus.
U.S. ENERGY SYSTEMS, INC.
Our business is composed of two separate but interrelated divisions:
o the energy division, which develops, owns and operates cogeneration and
independent energy facilities, and
o the environmental division, which furnishes environmental consulting
and remediation services, recovers and recycles used motor and
industrial oil, and processes waste water.
ENERGY DIVISION
We are a project developer, owner and operator of independent power
plants. Independent power plants produce electricity for sale either to direct
end users or to regulated public electric utility companies. Generally,
independent power plants have emerged as a result of federal and state laws
promulgated to eliminate the monopoly previously held by regulated electric
companies over the production and sale of electric power. The laws were passed
to enhance competition, as well as to encourage the production of cleaner and
more environmentally-friendly power in the United States.
Energy projects and facilities which we currently own or operate include:
o STEAMBOAT 1 AND 1A GEOTHERMAL POWER PLANTS. Our 95%-owned subsidiary,
Steamboat Envirosystems, LLC, owns Steamboat 1 and 1A, two geothermal
power plants in Steamboat Hills, Nevada. Steamboat 1 and 1A produce a
combined eight megawatts of electric power which is sold under two
power purchase agreements with Sierra Pacific Power Company.
o STEAMBOAT 2 AND 3 GEOTHERMAL POWER PLANTS. As previously announced, we
reached agreement in principle with Far West Capital, Inc. to acquire
the Steamboat 2 and 3 geothermal power plants. The original letter of
intent has expired but the parties are continuing to work together to
put a final agreement in place. The plants, which produce an
aggregate of 40 megawatts of power, generate approximately $12 million
in annual sales under a long term contract for sale of power to Sierra
Pacific Power Corp.
o PLYMOUTH STATE COLLEGE, NEW HAMPSHIRE. In 1994, we acquired a 50%
interest in Plymouth Cogeneration Limited Partnership which owns and
operates a cogeneration plant producing 2.5 megawatts of electricity
and 25 million BTUs of heat at Plymouth State College, in Plymouth, New
Hampshire. The Plymouth facility provides 100% of the electrical and
heating requirements for the campus, which is a part of the University
of New Hampshire system, under a 20-year contract. The State of New
Hampshire is conducting a study to determine the feasibility of
expanding the existing facility to distribute electric power to two
other state college campuses.
o LEHI COGENERATION PROJECT, UTAH. In January 1994, we purchased a 50%
equity interest in Lehi Independent Power Associates, which owns a
cogeneration facility in Lehi, Utah. The Lehi facility has been dormant
since 1990, and we, together with our partners, have been exploring
alternatives to initiate operations at the Lehi facility.
2
<PAGE> 6
o RENO ENERGY DISTRICT HEATING PROJECT. We have an 89.6% interest in USE
Geothermal, LLC, which provided a loan in the approximate amount of
$1.6 million to Reno Energy LLC. The loan is convertible into a 50%
equity interest in Reno Energy for no additional consideration. The
proceeds of the loan are to be used to provide engineering, design and
financial services in connection with a facility which will use
geothermally-heated fresh water for space heating and cooling, as well
as for process heating, for nearby developments, including an
industrial park in South Meadows, Nevada. The Reno facility is still in
the planning and development stage. We believe that when completed, the
Reno facility will be the largest geothermal district heating facility
in the United States. The Reno facility is scheduled to begin
operations in 2001.
ENVIRONMENTAL DIVISION
Our acquisition of American Enviro-Services, Inc. in August 1997 marked
our expansion into the environmental services field. American Enviro-Services is
a primary supplier of a broad range of environmental services in the mid-western
United States, including:
o environmental assessments,
o oil and waste recycling;
o emergency response, and
o environmental remediation.
We currently have contracts with over 1,100 companies for the recovery,
hauling and recycling of industrial waste oil and water. We also contract with
local, state and federal governmental agencies and commercial businesses for the
cleanup and remediation of oil spills and leaks, Phase I, II and III
environmental assessments, emergency environmental response services,
remediation and other environmental and environmental-related services. At its
facilities in Newburgh, Indiana, American Enviro-Services converts otherwise
hazardous substances into environmentally and ecologically sound fuel and cleans
polluted soil and water. American Enviro-Services has also developed a system
for recovery and reprocessing of oil from spills on inland waterways. We
expanded our environmental division in January 1998 when we acquired
Commonwealth Petroleum Recycling, Inc., a waste oil recycling company located in
Shelbyville, Kentucky.
A large portion of the operations of our environmental division consists
of environmental remediation, clean-up and monitoring. Examples of the projects
currently in progress are the following:
o We continue to work on a three-year contract with the Warrick County
Commission to oversee and manage the closure and monitoring of the
solid waste landfill, along with all substations, in the County of
Warrick, Indiana. The contract, which commenced in March 1998, requires
that we close and monitor the landfill, build a transfer station, and
expand and redesign the substations and the recycling facility for the
County.
o We have expanded our services to provide emergency response on inland
waterways. These services have been approved by the United States Coast
Guard. The waterway response system includes 2,000 feet of containment
booms, a pontoon recovery system, a drum skimmer and a 19 foot support
boat, in addition to the on-shore recovery and handling equipment. All
recovered fluid is transported to the American Enviro-Services
treatment and recycling facilities.
o Our emergency response division has expanded and maintains fully
trained and equipped personnel, including emergency medical
technicians, to perform permitted confined space entry and confined
space rescue. A confined space has limited or restricted means for
entry or exit, and includes tanks, vessels, silos, storage bins,
hoppers, vaults and pits. OSHA guidelines specify that such rescuers
must be adequately equipped and trained to respond effectively to
rescue calls. In our operational areas we are the only company that
meets these requirements.
While separate from our energy operations, the environmental division
serves several complementary needs, including environmental consultation and the
recovery and recycling of waste motor oils which potentially can be used to fuel
our power plants and those of third parties. We plan to use the services of our
environmental division in our energy operations and to expand this area of our
business through internal growth and acquisitions.
3
<PAGE> 7
THE OFFERING
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Common stock offered ................................ 4,185,000 shares of common stock.
Warrants offered..................................... 310,000 common stock purchase warrants.
Common stock to be outstanding after the offering.... 9,549,124 shares (1)
Use of proceeds...................................... For working capital and other general corporate purposes.
Nasdaq SmallCap Market symbol........................ Common stock: USEY
Warrants: USEYW
</TABLE>
- -------------------------------------------
(1) Based on the number of shares of common stock outstanding as of January
28, 2000 and includes 7,600 shares of common stock held in treasury.
Assumes the exercise of all warrants and the purchase option.
4
<PAGE> 8
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes our statement of operations and balance
sheet. See our financial statements and the notes to those statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 31, YEAR ENDED JANUARY 31,
----------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................. $3,241 $3,020 $4,195 $2,233
--------- --------- --------- ---------
Operating and administrative expenses:
Operating expenses................... 2,053 1,565 2,266 1,127
Administrative expenses.............. 1,445 1,484 1,992 1,613
Depreciation and amortization........ 429 371 499 260
Interest (income) expense............ (104) (121) (158) (136)
Other................................ 85 57 118 121
--------- --------- --------- ---------
Loss before litigation settlement and
extraordinary items.................. (667) (336) (522) (752)
Litigation settlement costs............. 1,138 47 47 326
--------- --------- --------- ---------
Loss before extraordinary items......... (1,805) (383) (569) (1,078)
Extraordinary gain on restructuring of
liabilities.......................... 69 -- -- 36
Dividends on preferred stock............ (179) (123) (174) --
--------- --------- --------- ---------
Loss applicable to common stockholders..
(1,915) (506) (743) (1,042)
========= ========= ========= =========
(Loss) per share of common stock --
basic and diluted.................... (.37) (.10) (.14) (.22)
========= ========= ========= =========
Shares used in computing net income per
share of common stock................ 5,154,141 5,160,605 5,158,005 4,654,555
========= ========= ========= =========
</TABLE>
The following table is a summary of our balance sheet as of January 31, 1999 on
an actual basis and as of October 31, 1999 on an actual basis and on an as
adjusted basis to reflect the exercise of the purchase option and the warrants
and issuance of common stock offered by this prospectus. See "Use of Proceeds"
and "Capitalization."
<TABLE>
<CAPTION>
OCTOBER 31, 1999 JANUARY 31, 1999
----------------------------- ----------------
ACTUAL AS ADJUSTED ACTUAL
--------- ------------ ----------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.......................... $1,358 $19,165 $2,090
Investment in joint venture............. 1,378 1,378 1,442
Loan receivable......................... 1,990 1,990 1,883
Property, plant and equipment, net...... 5,859 5,859 5,832
Total assets............................ 13,713 31,520 14,171
Current liabilities..................... 1,636 1,636 1,306
Convertible subordinated secured
debentures........................... 366 366 875
Long-term liabilities................... 1,403 1,403 453
Minority interest in subsidiaries....... 540 540 524
Working capital......................... (278) 17,529 784
Stockholders' equity.................... 9,768 27,572 11,013
</TABLE>
5
<PAGE> 9
RISK FACTORS
You should carefully consider the following risks, together with the other
information contained in this prospectus, before making an investment decision.
We may also face some non-material risks which we have not discussed in the
following description of our risk factors. If any of the following risks occur,
our business, financial condition or results of operations could be materially
adversely affected and the trading price of our common stock and warrants could
decline.
RISKS RELATED TO OUR COMPANY:
WE HAVE HAD A HISTORY OF LOSSES SUBSTANTIALLY THROUGHOUT OUR EXISTENCE.
We have a history of losses. Recent net losses before extraordinary
items, litigation settlement costs and preferred stock dividends are as follows:
For the year ended January 31, 1998........................ $767,000
For the year ended January 31, 1999........................ $562,000
For the nine months ended October 31, 1999................. $667,000
To date, the Lehi facility has not been operational and Reno Energy is
still in development. We believe that there may eventually be revenue, positive
cash flow and profits from Lehi and Reno Energy, but there can be no assurances
that this will occur. Although the Plymouth cogeneration plant has not provided
profits, such profits are expected to begin in the year 2001.
WE HAVE LIMITED AVAILABLE CAPITAL, AND WE MAY NEED ADDITIONAL FINANCING IN THE
FUTURE.
While we believe that our current and anticipated cash flow from
operations will be sufficient to meet our anticipated cash requirements for the
next twelve months, there is no assurance in this regard. Unless we generate
cash flows from operations to fund our working capital needs, we will be
required to obtain additional equity or debt financing to continue to operate
our business. If we should require additional capital, there can be no assurance
that this capital will be available to us, or if available, that it would be on
terms acceptable to us. If additional funds are raised by issuing equity
securities, significant dilution to existing stockholders may result. Any
inability by us to obtain additional financing, if required, will have a
material adverse effect on our operations, including the possible cessation of
operations.
We anticipate that some projects, if undertaken, will require us to
raise additional capital and there can be no assurance that capital will be
available on terms acceptable to us. If additional financing is not available on
acceptable terms, we may have to cancel, decline or defer new projects.
WE MAY FACE SUBSTANTIAL IMPEDIMENTS TO COMPLETING FUTURE ACQUISITIONS.
Our future growth strategy depends on our ability to identify and
acquire appropriate companies or power facilities in our existing lines of
business and companies operating in related lines of business, to integrate the
acquired operations effectively and to increase our market share. A number of
our competitors are better known companies with significantly greater financial
resources. We cannot assure you that we will be able to identify viable
acquisition candidates, that any identified candidates will be acquired, that
acquired companies or power facilities will be effectively integrated to realize
expected efficiencies and economies of scale, or that any acquisitions will
prove to be profitable. Acquisition of companies or power facilities requires
the expenditure of sizeable amounts of capital, and the intense competition
among companies pursuing similar acquisitions may further increase our capital
requirements. In the event that acquisition candidates are not identifiable or
acquisitions are prohibitively costly, we may be forced to alter our future
growth strategy. As we continue to pursue our acquisition strategy in the
future, our stock price, financial condition and results of operations may
fluctuate significantly from period to period.
6
<PAGE> 10
There may be liabilities which we fail or are unable to discover in the
course of performing due diligence investigations on each company or business we
seek to acquire, including liabilities arising from non-compliance with federal,
state or local environmental laws by prior owners, and for which we, as a
successor owner, may be responsible. We generally seek to minimize our exposure
to these liabilities by obtaining indemnification from each former owner, which
may be supported by deferring payment of a portion of the purchase price.
However, we cannot assure you that those indemnifications, even if obtainable,
enforceable and collectible, will be sufficient in amount, scope or duration to
fully offset the possible liabilities arising from the acquisitions.
WE RELY HEAVILY ON OUR EXECUTIVE MANAGEMENT.
We rely heavily upon our executive officers and key employees,
particularly our President and Chief Executive Officer, Lawrence I. Schneider,
who assumed this position at the sudden unexpected death of our former President
and Chief Executive Officer, Richard H. Nelson, on January 24, 2000. We are also
dependent on Howard Nevins, our Executive Vice President, who heads our
environmental division. The loss of either of these persons could have a
detrimental effect on us.
ALTHOUGH WE HAVE INSURANCE, IT MAY NOT COVER EVERY POTENTIAL RISK ASSOCIATED
WITH OUT OPERATIONS.
Although we maintain insurance of various types to cover many of the
risks that apply to our operations, including $2,000,000 of general liability
insurance as well as separate insurance for each project and separate insurance
for the operations of American Enviro-Services, our planned insurance will not
cover every potential risk associated with our operations. The occurrence of a
significant adverse event, the risks of which are not fully covered by
insurance, could have a material adverse effect on our financial condition and
results of operations. Moreover, no assurance can be given that we will be able
to maintain adequate insurance in the future at rates it considers reasonable.
WE HAVE A SIGNIFICANT NUMBER OF OPTIONS AND OTHER CONVERTIBLE SECURITIES
OUTSTANDING WHICH WILL HAVE A DILUTIVE EFFECT ON YOU BY DECREASING YOUR
PERCENTAGE OWNERSHIP OF OUR COMPANY.
We have outstanding options and other convertible securities which
provide for the issuance of an aggregate of 8,753,020 shares of common stock.
For additional information, see "Description of Securities." These exercise and
conversion of these options and convertible securities, and the issuances of
common stock, will have a dilutive effect on our stockholders by decreasing
their percentage ownership in the company. Moreover, the holders of these
securities would be most likely to exercise or convert the securities at a time
when we could obtain capital by a new offering of securities on terms more
favorable than those provided by these securities. Consequently, the terms on
which we could obtain additional capital may be adversely affected.
THERE ARE MANY SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE WHICH MAY
CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR
BUSINESS IS DOING WELL.
The possibility that substantial amounts of our common stock may be
issued or freely resold in the public market may adversely affect prevailing
market prices for our common stock , even if our business is doing well. Based
on the number of our outstanding shares of common stock at January 28, 2000, we
will have 9,549,124 shares outstanding upon the completion of this offering,
including 7,600 shares of common stock held in treasury. We will have an
additional 8,753,020 shares reserved for issuance upon the conversion or
exercise of our outstanding convertible securities, options or warrants. The
market price of our common stock could drop significantly if the holders of
these securities sell the underlying shares of common stock or if the market
perceives that they are intending to sell them. For a more detailed description,
see "Shares Eligible for Future Sale."
ANTI-TAKEOVER PROVISIONS COULD PREVENT OR DELAY A CHANGE IN CONTROL OF OUR
COMPANY.
Provisions of our certificate of incorporation and Delaware law could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. See "Description of Capital Stock."
7
<PAGE> 11
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never declared or paid dividends on our common stock and
currently do not intend to pay dividends in the foreseeable future. The payment
of dividends in the future will be at the discretion of the Board of Directors.
OUR DIRECTORS HAVE LIMITED LIABILITY.
Our Certificate of Incorporation limits the liability of directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be liable to the corporation or its
stockholders for expenses incurred in derivative or third party actions arising
from a breach of their fiduciary duty as directors, except in some limited
circumstances. Accordingly, except in those circumstances, our directors will
not be liable to us or our stockholders for breach of their duty.
YOU MAY EXPERIENCE POTENTIAL ADVERSE EFFECTS OF THE REDEMPTION OF THE WARRANTS.
We may call the warrants for redemption at a redemption price of $.01
per warrant upon not less than 30 business days' prior written notice if the
last sale price of the common stock has been at least $6.00 on all 20 of the
last trading days ending on the third day prior to the date on which notice is
given. Notice of redemption of the warrants could force you to exercise the
warrants and pay the exercise price at a time when it may be disadvantageous for
you to do so, to sell the warrants at the current market price when you may
otherwise wish to hold the warrants, or to accept the redemption price, which
would be substantially less than the market value of the warrants at the time of
redemption.
RISKS RELATED TO OUR ENERGY BUSINESS:
THE ENERGY BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION COULD
ADVERSELY AFFECT US.
In addition to competition from electric utilities in the markets where
our projects are located, our energy division also faces competition from
approximately 150 companies currently involved in the cogeneration and
independent power market throughout the United States. Some of these companies
are larger and better financed than we are. Although we believe that we will be
entering segments of the marketplace where we will not face extensive
competition, we cannot assure you that we will be able to enter these markets or
that there will not be competition in such markets. The entire industry also may
face competition from existing investor-owned utility companies and may be
adversely affected by the prices charged by those companies for conventional
energy sources, which, in turn, are affected by inflation and availability of
fossil fuel.
WE OPERATE IN AN EMERGING INDUSTRY AND HAVE LIMITED MARKETING CAPABILITIES.
Although the cogeneration and independent power plant industries have
been in existence for a number of years, they are still in their development
stages. As is typically the case in an emerging industry, levels of demand and
market acceptance for products and services are highly uncertain. We began
developing new power projects in November 1993, but have not yet commenced
significant marketing activities and currently have limited power marketing
experiences as well as limited financial, personnel and other resources to
undertake extensive marketing activities.
WE MAY EXPERIENCE PROJECT DEVELOPMENT RISKS.
Our ability to develop new projects, including the Reno Energy project,
is dependent on a number of other factors outside our control, including
obtaining power agreements, governmental permits and approvals, fuel supply and
transportation agreements, electrical transmission agreements, site agreements
and construction contracts. We cannot assure you that we will be successful in
obtaining these agreements, permits and appraisals. In particular, the Reno
Energy project is still in the planning and development stage and there are no
contracts with end users nor have we obtained the required governmental
approvals. Project development involves significant environmental, engineering
and construction risks. Further, projects which are successfully developed may
still face risks inherent in start-up businesses, including lack of market
acceptance.
OUR BUSINESS OF OWNING AND OPERATING POWER PLANTS INVOLVES CONSIDERABLE RISKS.
The operation of power generation facilities involves many risks,
including the breakdown or failure of power generation equipment, transmission
lines or other equipment or processes and performance below expected levels of
output or efficiency. Although the facilities in which we are or will be
involved contain some redundancies and back-up mechanisms, we cannot assure you
that those redundancies or back-up mechanisms would allow the affected facility
to perform under applicable power agreements.
8
<PAGE> 12
The development and operation of geothermal energy resources involve
risks and uncertainties similar to those experienced in the development of oil
and gas resources. The successful exploitation of a geothermal energy resource
ultimately depends upon the heat content of the extractable fluids, the geology
of the reservoir, the total amount of recoverable reserves, and operational
factors relating to the extraction of fluids, including operating expenses,
energy price levels, and capital expenditure requirements relating primarily to
the drilling of new wells. In connection with the development of a project, we
estimate the productivity of the geothermal resource and the expected decline in
that productivity. The productivity of a geothermal resource may decline more
than we anticipate, resulting in insufficient recoverable reserves being
available for sustained generation of the electrical power capacity desired.
WE MAY LOSE OUR STATUS AS A QUALIFYING FACILITY.
Under present federal law, we are not and will not be regulated as a
holding company under the Public Utility Holding Company Act of 1935 ("PUHCA")
as long as each power plant in which we have an interest is a qualifying
facility under the Public Utility Regulatory Policies Act of 1978 ("PURPA"). A
qualifying facility that is a cogeneration facility must produce not only
electricity but also thermal energy for use in an industrial or commercial
process or heating or cooling applications in specified proportions to the
facility's total energy output and must meet specified energy efficiency
standards. Under PURPA, a regulated public electric utility company must
purchase electricity at its avoided cost from an independent power plant which
has qualifying facility status. Qualifying facility status is granted to
independent power plants which use fossil fuel in a manner which allows for
recovery and use of a specified percentage of otherwise rejected heat thereby
achieving a higher degree of fuel efficiency. Qualifying facility status is also
granted to independent power plants which use renewable energy sources,
including geothermal, hydro, solar, wind, and waste products, without regard to
heat recovery. An independent power plant using fossil fuel, which loses its
ability to use recovered heat, could fall below the efficiency standards and
thereby lose its qualifying facility status. The regulated public electric
utility company, which may have been required to purchase electricity from the
independent power plant, could thereafter refuse to purchase that electricity.
Independent power plants which have qualifying facility status, and which are
not fossil fuel driven, are not required to meet efficiency standards regarding
qualifying facility status.
WE MAY BE UNABLE TO ACQUIRE OR RENEW THE NUMEROUS PERMITS AND APPROVALS REQUIRED
TO OPERATE POWER FACILITIES.
The construction and operation of power generation facilities require
numerous permits, approvals and certificates from appropriate federal, state and
local governmental agencies, as well as compliance with environmental protection
legislation and other regulations. While we believe that we are in substantial
compliance with all applicable rules and regulations and that the projects in
which we are involved have the requisite approvals for existing operations and
are operated as required by applicable laws, our operations and our projects
require compliance with a varied and complex body of laws and regulations that
both public officials and private individuals may seek to enforce. There can be
no assurance that new or existing laws and regulations which would have a
materially adverse affect would not be adopted or revised, nor can there be any
assurance that we will be able to obtain all necessary licenses, permits,
approvals and certificates for proposed projects or that completed facilities
will comply with all applicable permit conditions, statutes or regulations. In
addition, regulatory compliance for the construction of new facilities is a
costly and time consuming process, and intricate and changing environmental and
other regulatory requirements may necessitate substantial expenditures for
permitting and may create a significant risk of expensive delays or significant
loss of value in a project if the project is unable to function as planned due
to changing requirements or local opposition.
WE MAY FAIL TO COMPLY WITH ENVIRONMENTAL LAWS WHICH COULD RESULT IN SUBSTANTIAL
REMEDIATION COSTS.
As is the case in all power projects, strict environmental regulations
established by federal, state and local authorities involving air and other
emissions must be met. While we take every precaution to ensure that applicable
regulations are met and we do not undertake projects which do not or cannot meet
these regulations, we cannot assure you that we are in continual compliance with
all applicable regulations. Should a condition occur in which emissions
standards at a specific project fall below allowable standards, there could be
costs involved in remediating that conditions. Additionally, as with all
industrial sites, there are standards for the safe handling of fuels and
chemicals which must be met. Again, we take every precaution to insure the
standards are met. However, exigencies may occur -- a fuel spillage for example
- -- which would require remediation with attendant costs.
9
<PAGE> 13
SOME OF OUR FACILITIES ARE LOCATED IN EARTHQUAKE PRONE AREAS.
Areas in which we have acquired geothermal projects experience frequent
low-level seismic disturbances, and more significant seismic disturbances are
possible. While our power generation facilities are built to withstand
relatively significant levels of seismic disturbance, and we believe we will be
able to maintain adequate insurance protection, we cannot assure you that
earthquake, property damage or business interruption insurance will be adequate
to cover all potential losses sustained in the event of serious seismic
disturbances or that our insurance will continue to be available on commercially
reasonable terms.
RISKS RELATED TO OUR ENVIRONMENTAL BUSINESS:
OUR ENVIRONMENTAL DIVISION MUST COMPLY WITH A VARIETY OF LAWS AND REGULATIONS.
CHANGES IN THESE REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Our environmental operations must comply with federal, state,
territorial, provincial and local requirements which regulate health, safety,
environment, zoning and land-use. Operating and other permits are generally
required for transfer and storage facilities, some collection vehicles, storage
tanks and other facilities owned or operated by us, and these permits can be
revoked or modified and must be renewed. Although we believe that our facilities
meet federal, state and local requirements in all material respects, we may be
required to expend considerable time, effort and money to keep our existing or
acquired facilities in compliance with applicable regulatory requirements,
including new regulations, and to maintain existing permits and approvals and to
obtain the permits and approvals necessary to increase our capacity. In
addition, environmental regulatory changes could cause us to spend additional
funds for corrective action for past and current operations at our facilities.
These factors could increase substantially our operating costs and impair our
investment in our facilities. These regulations are administered by the United
States Environmental Protection Agency and various other federal, state and
local environmental and health and safety agencies and authorities, including
the Occupational Safety and Health Administration of the United States
Department of Labor and by the provincial environmental ministries in Canada.
The requirements are enforceable by injunctions and fines or penalties,
including criminal penalties.
We believe that each of our facilities has all necessary operating
permits and that each permit will be renewed at the end of its existing term.
However, the issuance or renewal of any permit could include conditions
requiring further capital expenditures or corrective actions. Although we also
believe that each of our operating facilities complies in all material respects
with the applicable governmental requirements, it may be necessary to expend
considerable time, effort and money to keep existing or acquired facilities in
compliance with applicable requirements, including new regulations, to maintain
existing permits and approvals and to obtain the permits and approvals necessary
to increase their capacity.
The United States Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA") imposes liability for natural resources
damages and the cleanup of sites from which there is a release or threatened
release of a hazardous substance into the environment on, among others, the
current and former owners and operators of the sites. Hundreds of substances are
defined as "hazardous" under CERCLA and the release to the environment of these
substances, even in minute amounts, can result in substantial liability. The
statute provides for the remediation of contaminated facilities and imposes
costs on the responsible parties. The expense of conducting this kind of cleanup
can be significant. Even with our efforts to comply with applicable regulations
and to avoid any unregulated release of hazardous substances to the environment,
releases of these substances may occur as a result of our operations or those of
our predecessors. Given the substantial costs involved in a CERCLA cleanup and
the difficulty of obtaining insurance for environmental impairment liability,
this liability could have a material impact on our business, financial condition
and future prospects.
10
<PAGE> 14
THE ENVIRONMENTAL BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION COULD
ADVERSELY AFFECT US.
The industrial waste industry is highly competitive. Our environmental
division competes with local, regional and national companies of varying sizes,
as well as counties and municipalities that maintain their own waste collection
and disposal operations.
The key competitive factors within the industrial waste industry include:
o the breadth of services offered;
o the price, quality and reliability of service; and
o the technical proficiency in handling waste properly.
Knowledgeable customers are sensitive to the reputation and financial
strength of the companies they use to collect, treat, recycle and dispose of
their industrial waste primarily because customers, as the original generator of
the waste, remain liable under federal and state environmental laws for improper
disposal of waste. We cannot predict whether future competitive conditions will
have a material effect on our business, financial condition or future prospects.
OUR ENVIRONMENTAL BUSINESS IS CYCLICAL AND DOWNTURNS IN THE BUSINESS CYCLE COULD
ADVERSELY AFFECT US.
The industrial waste and environmental response industries are
cyclical. Industrial waste is dependent upon a stream of waste from industries
which are cyclical. If those cyclical industries slow significantly, the
business that we receive from those industries is likely to slow and our
business would slow as a result. Also, our business is somewhat seasonal because
less waste is received in winter months due to difficult working conditions.
11
<PAGE> 15
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934. Such statements are indicated by words or phrases such as
"believe," "anticipate," "expect," "intend," "plan," "will," "may" and other
similar expressions. These forward-looking statements are based on our current
expectations, assumptions, estimates and projections about our company and our
industry and involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of factors more fully described in "Risk Factors" and elsewhere in this
prospectus. All subsequent written and oral forward-looking statements
attributable to our company or persons action on our behalf are expressly
qualified in their entirely by the cautionary statements in this paragraph. The
forward-looking statements made in this prospectus relate only to events as of
the date on which the statements are made. We undertake no obligation to update
publicly any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.
USE OF PROCEEDS
In the event all of the warrants and the purchase option are exercised,
we will receive approximately $17,807,150, after payment of estimated expenses
of this offering. We intend to use the proceeds for working capital and other
general corporate purposes. You should note, however, that the number of
warrants and the portion of the purchase option exercised will depend on several
factors beyond our control, including the market price of our common stock.
Therefore, we cannot estimate with reasonable accuracy the number of warrants or
the portion of the purchase option which may be exercised or the amount of
proceeds which we will receive.
DIVIDEND POLICY
We have not paid cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future.
PRICE RANGE OF COMMON STOCK
Our common stock is listed on the Nasdaq SmallCap Market under the
symbol USEY. The table below lists, for the periods indicated, the high and low
sales prices for the common stock as reported by the Nasdaq SmallCap Market.
SALES PRICE
------------
HIGH LOW
----- -----
FISCAL YEAR ENDED JANUARY 31, 1998:
First Quarter ........................... $ 5.63 $ 3.63
Second Quarter .......................... 4.94 3.50
Third Quarter ........................... 3.88 2.75
Fourth Quarter .......................... 3.31 1.75
FISCAL YEAR ENDED JANUARY 31, 1999:
First Quarter ........................... $ 2.25 $ 1.81
Second Quarter .......................... 2.50 1.00
Third Quarter ........................... 1.50 0.75
Fourth Quarter .......................... 3.31 1.00
FISCAL YEAR ENDED JANUARY 31, 2000:
First Quarter ........................... $ 2.94 $ 2.00
Second Quarter .......................... 3.50 2.44
Third Quarter ........................... 2.94 1.88
Fourth Quarter .......................... 5.69 2.13
12
<PAGE> 16
The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. On February
15, 2000, the last sale price of the common stock as reported on the Nasdaq
SmallCap Market was $6.00. At February 15, 2000, there were approximately 565
holders of record of our common stock, although we believe that the number of
beneficial holders is substantially greater.
CAPITALIZATION
The following table shows our capitalization as of October 31, 1999:
o on an actual basis, and
o on an as-adjusted basis after giving effect to (1) the exercise of
warrants and issuances of 3,565,000 shares of common stock
underlying the warrants at an exercise price of $4.00 per share;
(2) the exercise of the purchase option and the issuance of 310,000
shares of common stock at an exercise price of $6.60 per share and
the issuance of 310,000 common stock purchase warrants at an
exercise price of $.165 per warrant; and (3) the exercise of the
common stock purchase warrants and the issuance of 310,000 shares of
common stock of an exercise price of $5.00 per share.
You should carefully read "Management's Discussion and Analysis of Financial
Condition and Plan of Operation" and the financial statements and notes to those
statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
OCTOBER 31, 1999
---------------------------
PRO FORMA AS
ACTUAL ADJUSTED
----------- -----------
<S> <C> <C>
Current portion of long-term debt .......................................... $ 412,000 $ 412,000
Long-term debt, less current portion ....................................... 1,769,000 1,769,000
------------ ------------
2,181,000 2,181,000
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; Series A,
cumulative, convertible, issued and outstanding - 277,778
shares ................................................................ $ 3,000 $ 3,000
Series B, cumulative, convertible, issued and outstanding - 509
shares ................................................................ -- --
Common stock, $0.01 par value, 50,000,000 shares authorized; issued and
outstanding, 5,160,605 shares; to be issued and outstanding,
9,345,605 shares ...................................................... 51,000 93,000
Treasury stock, 7,600 shares of common stock at cost .................... (15,000) (15,000)
Additional paid-in capital .............................................. 17,970,000 35,735,000
Accumulated (deficit) ................................................... (8,241,000) (8,241,000)
------------ ------------
Total stockholders' equity ................................................. 9,768,000 27,572,000
------------ ------------
Total capitalization ....................................................... $ 11,949,000 $ 29,753,000
============ ============
</TABLE>
13
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION
GENERAL
Our fiscal year ended January 31, 1999 constituted the first full year
of operations to include the environmental division units in Indiana and
Kentucky.
We carry our investments in the Lehi and Plymouth subsidiaries on the
equity method. The revenues and expenses of Lehi and Plymouth are not
consolidated in our statement of operations but are reflected as equity in the
gains or losses of the joint ventures. Condensed financial information on the
Lehi and Plymouth joint ventures may be found in the notes to the financial
statements included elsewhere in this prospectus.
RESULTS OF OPERATIONS
NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
Revenues for the nine month periods were as follows:
NINE MONTHS ENDED OCTOBER 31,
-----------------------------
1999 1998
------------ ------------
Energy division.......................... $ 899,000 $ 1,311,000
Environmental division................... 2,342,000 1,709,000
------------- -------------
$ 3,241,000 $ 3,020,000
============= =============
Revenues from our energy division decreased by approximately $412,000
or 31% in the nine months ended October 31, 1999 as compared to the prior
period, which resulted from a change in the rate basis. During 1998, our
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 as the open market rates paid for electricity are the
lowest of the year. Revenues from our environmental division increased by 37% in
the nine months ended October 31, 1999, or approximately $633,000, as compared
to the prior period, as a result of expanded operations and new contracts in
water treatment and oil recycling.
Operating expenses, costs directly related to the production of
revenues, were as follows:
NINE MONTHS ENDED OCTOBER 31,
-----------------------------
1999 1998
----------- -------------
Energy division........................ $ 527,000 $ 482,000
Environmental division................. 1,526,000 1,083,000
------------- -------------
$ 2,053,000 $ 1,565,000
============= =============
Comparing the October 31, 1999 period to the comparable 1998 period,
operating expenses for our energy division increased 9%, or approximately
$45,000. Necessary equipment repairs made during the first six months of the
year in 1999 primarily accounted for the increase. In line with our
environmental division's enlarged business operations and increased revenue,
operating expenses increased 41%, or approximately $443,000.
Depreciation charges previously reported as part of 1998 operating
expenses in our environmental division have been reclassified to the
depreciation line in the statement of operations.
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<PAGE> 18
Administrative expenses in the nine month periods were $1,445,000 for
the nine months ended October 31, 1999 as compared to $1,484,000 for the nine
months ended October 31, 1998. Material elements of administrative expenses for
the comparative periods were as follows:
NINE MONTHS ENDED OCTOBER 31,
-----------------------------
1999 1998
----------- ------------
Salaries and consulting................. $ 607,000 $ 551,000
Steamboat royalties..................... 121,000 184,000
Legal and professional.................. 198,000 198,000
Insurance............................... 123,000 114,000
Corporate expenses...................... 138,000 166,000
State income taxes...................... 27,000 7,000
Other................................... 231,000 264,000
----------- -------------
$ 1,445,000 $ 1,484,000
=========== =============
In September 1999 we reached an agreement in connection with litigation
in which we have been involved, and, as a consequence, operating results for the
nine months ended October 31, 1999 reflect a charge of $1,138,000.
Depreciation expense, which includes amortization of goodwill,
increased to $429,000 in the nine month period ending October 31, 1999 compared
to $371,000 in the same period of 1998 due to increased investment in
depreciable and amortizable assets.
Losses from our joint ventures, Lehi Independent Power Associates, L.C.
and Plymouth Cogeneration Limited Partnership, are detailed as follows:
NINE MONTHS ENDED OCTOBER 31,
-----------------------------
1999 1998
---------- ------------
Lehi............................... $ 44,000 $ 33,000
Plymouth........................... 25,000 24,000
------------- -------------
$ 69,000 $ 57,000
============= =============
Our net loss for the nine month period ended October 31, 1999 was
$1,736,000 as compared to a net loss of $383,000 for the same period a year
earlier. The nine month 1999 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 relating to a financing transaction in 1996 which
was never consummated. See "--Legal Proceedings" below for additional
information.
The net loss in the nine months ended October 31, 1999 also reflects an
extraordinary gain of $69,000 from the exchange of a portion of our Convertible
Subordinated Debentures for Series B Convertible Preferred Stock.
Dividends paid on preferred stock for the nine months of 1999 totaled
$179,000 compared to $123,000 in the like period 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.
YEAR ENDED JANUARY 31, 1999 AND 1998
Revenues for our 1998 fiscal year, which ended on January 31, 1999,
increased by $1,962,000 or 88% over the revenues for the 1997 fiscal year, which
ended on January 31, 1998, principally as a result of a full year of operations
of our environmental division which generated $2,419,000 in revenue in the
fiscal 1998 year compared to $713,000 in the 1997 fiscal year. Revenues of our
energy division increased from $1,520,000 in the 1997 fiscal year to $1,776,000
in fiscal 1998 mainly due to our successful efforts to obtain increased rates
for the output of the Steamboat 1 plant. On July 20, 1998 Sierra agreed to a
stipulation to pay market rates for power produced by our geothermal plants.
Rates paid for Steamboat 1 power until that point were below market. Steamboat
1A rates had been contractually set until December 1998, at which point they
also changed to market rates, which in this case were the lower winter season
rates.
15
<PAGE> 19
Costs and expenses in the year ended January 31, 1999 increased
$1,478,000 or 44% over the year ended January 31, 1998 principally as a result
of the inclusion of our environmental division for the full year in fiscal 1998.
The expenses for the Steamboat facilities and our environmental division (AES
and Commonwealth) in fiscal 1998 were as follows:
STEAMBOAT AES AND
FACILITIES COMMONWEALTH
---------- -------------
Operating expenses........................... $637,000 $1,629,000
Administrative expenses...................... 365,000 432,000
Depreciation and amortization................ 157,000 319,000
Operating expenses, which are the costs directly relating to revenues,
totaled $2,266,000 for the 1998 fiscal year as compared to $1,127,000 for fiscal
1997. The Steamboat facilities generated operating expenses of $637,000 for the
1998 fiscal year as compared to $674,000 for the previous year. Operating
expenses for the 12 months of fiscal 1998 for AES and Commonwealth totaled
$1,629,000 compared to $453,000 for fiscal 1997, which was for the period from
the dates of their acquisitions in August 1997 and December 1997 to January 31,
1998. The AES operating expenses include development costs associated with the
new marine emergency response system, which were expensed as incurred. This
system has not yet generated revenue.
Administrative expenses totaled $1,992,000 in the 1998 fiscal year
compared to $1,613,000 in the 1997 fiscal year. Major items included in these
totals are:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
----------- -----------
<S> <C> <C>
Payroll costs and consulting fees........................................... $ 721,000 $ 643,000
Legal and professional fees (not connected with litigation)................. 215,000 191,000
Royalty expenses (Steamboat)................................................ 247,000 214,000
Corporate expenses.......................................................... 204,000 128,000
Insurance costs............................................................. 157,000 146,000
Rent and utilities.......................................................... 110,000 82,000
Other....................................................................... 338,000 209,000
----------- -----------
Total....................................................................... $ 1,992,000 $ 1,613,000
=========== ===========
</TABLE>
The increase in corporate expenses was due to greater activity in
pursuing our plans for expansion. Other increases were due primarily to the
inclusion of our environmental division for a full 12 months in fiscal 1998 as
against a shorter period in fiscal 1997.
Litigation costs dropped from $326,000 in fiscal 1997 to $47,000 in
fiscal 1998 because the fiscal 1997 total included costs associated with
settlement of some legal actions, whereas the fiscal 1998 costs arose only from
the single action still pending. See "Legal Proceedings" for additional
information.
Depreciation and amortization expenses increased from $260,000 in
fiscal 1997 to $499,000 in fiscal 1998 primarily due to the inclusion of our
environmental division for a full 12 months in the later year.
Interest income increased to $299,000 in fiscal 1998 from $265,000 in
fiscal 1997. The increase in interest expense from $129,000 in fiscal 1997 to
$141,000 in fiscal 1998, was due primarily to the fact that our environmental
division loan was outstanding for the full year in Fiscal 1998.
As of January 31, 1997, we had pre-reorganization income taxes and
payroll taxes payable amounting to $383,000. During fiscal 1997, we settled
these payables for a total amount of $347,000. As a result, we recognized a gain
of $36,000 in that year.
16
<PAGE> 20
Our net loss before dividends on the Series A Preferred Stock,
decreased by 45% to $569,000 in fiscal 1998, as compared to $1,042,000 in the
previous year. Primarily as a result of this reduction in net loss, cash used in
operating activities was $490,000 in fiscal 1998 as compared to $904,000 in
fiscal 1997.
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, we used $211,000 in operating
activities compared with $564,000 used in operating activities in the same
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.
We 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. In the first nine months
of 1999, we repurchased 5,000 shares of our 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, we entered into an agreement for the settlement
of litigation. The $900,000 settlement payment is due in November 2000, and
bears an interest rate of 9%. At July 31, 1999 we recorded a charge of
$1,138,000 which includes the settlement cost and related legal expenses.
During October 1999, we extended certain outstanding warrants for the
purchase of common stock by one year to October 31, 2000, resulting in a charge
of $15,000.
As of October 31, 1999, we had $366,000 in aggregate principal amount
of our 9% convertible debentures outstanding. For more information, see
"Description of Securities."
As of October 31, 1999, we had $300,000 outstanding under a line of
credit with Old National Bank in Evansville, Indiana. Such credit line bears
interest at 9% per annum.
Our working capital was a negative $278,000 at October 31, 1999
compared to $784,000 at January 31, 1999.
However, during the next twelve months we anticipate positive cash
flows from both the energy and environmental divisions sufficient to meet
working capital needs. In addition, we expect significant proceeds from the
exercise of outstanding warrants and options to acquire shares of common stock
and shares of Series A Convertible Preferred Stock.
IMPACT OF INFLATION
Our contracts include adjustments for changes in inflation indices. The
impact of inflation on Company earnings and cash flows is expected to be
minimal.
YEAR 2000 COMPUTER ISSUE
The "Year 2000 Issue" is the result of computer programs that were
written using two digits rather than four to define the applicable year. If our
computer programs with date-sensitive functions are not Year 2000 compliant,
they may recognize a date "00" as the Year 1900 rather than the Year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including a temporary inability to process transactions, inability
to interchange information with connecting railroads or engage in similar normal
business activities.
17
<PAGE> 21
To date, our Year 2000-related expenses have been insignificant and we
have not experienced any immediate adverse impact on our operations from the
transition to the Year 2000. However, we cannot assure you that our operations
have not been affected in a manner that is not yet apparent or in a manner that
will arise in the future, or that we will not incur additional Year 2000
expenses. In addition, some computer programs that were date sensitive to the
Year 2000 may not have been programmed to process the Year 2000 as a leap year,
and negative effects from this remain unknown. As a result, we will continue to
monitor our Year 2000 compliance and the Year 2000 compliance of our suppliers
and customers. However, we do not anticipate any Year 2000 problems that are
reasonably likely to have a material adverse effect on our operations.
18
<PAGE> 22
BUSINESS
OUR COMPANY
We are composed of two separate but interrelated divisions: (1) the
energy division, which develops, owns and operates cogeneration and independent
energy facilities, and (2) our environmental division, which furnishes
environmental consulting and remediation services, recovers and recycles used
motor and industrial oil, and processes waste water.
ENERGY DIVISION
Our energy division engages in the independent power plant, or IPP,
industry as a project developer, owner and operator. IPPs produce electricity
for sale to either direct end users or to regulated public electric utility
companies. Generally, IPPs emerged as a result of federal and state laws created
to eliminate the monopoly previously held by regulated electric companies over
the production and sale of electric power.
We believe that the power production industry is in the midst of a
twofold change. The first is the movement towards increased competition, thereby
producing savings to the consumer. The second is the effort to produce power
with fewer harmful effects on the environment.
To increase competition, in April 1996, the Federal Energy Regulatory
Commission ordered all regulated electric companies to open their transmission
lines to IPPs, thus allowing the wholesale purchase of power by regulated
electric companies from distant independent producers. This process is known as
wholesale wheeling and generally allows regulated electric companies to purchase
electricity from IPPs more cheaply and efficiently than they might be able to
produce electricity on their own. Often, these savings can be passed on to the
end users. While federal regulation does not mandate that the transmission lines
be opened for sale of power by IPPs directly to retail end users, many states
have adopted these regulations, and others are expected to adopt them in the
near future. This process is known as retail wheeling, which is similar in
concept to competition among long distance telephone service providers.
We believe that efforts to produce power through methods which create
less pollution than traditional fossil fuel-burning engines and boilers, and
which conserve the earth's depleting non-renewable energy sources by using less
fuel, are becoming increasingly important issues. One method of producing power
through environmentally-friendlier means is cogeneration. Cogeneration is the
production of two or more energy forms, typically electricity and heat,
simultaneously from the same fuel source. While producing electricity in a
cogenerating system, heat that is otherwise wasted is recovered from the exhaust
and/or engine coolants. This recovered heat can be used to replace heat which
would otherwise be generated by conventional furnaces and boilers.
Environmentally-friendly power production is also achieved by using
renewable fuel sources, which include geothermal, wind, solar, hydro, and waste
products, including waste oil, waste wood and other biomass, or landfill gas.
Our December 1996 acquisition of the two operating geothermal power plants known
as Steamboat 1 and 1A, in Steamboat Hills, Nevada, provided our initial entry
into this area of "green" power production. The further acquisition of
Steamboats 2 and 3, as discussed below, will enhance this position.
Geothermal power is considered to be one of the most
environmentally-sound methods of producing electricity due to the fact that (1)
there are virtually no atmospheric emissions or pollutants in the process, (2)
the water is constantly returned to the earth thereby avoiding depletion of the
underground aquifer water table, and (3) the heat source is the earth's natural
magma layer rather than the conversion of a depletable fossil fuel. Geothermal
power can be produced only where specific geological formations exist.
We expect to explore further uses of geothermal resources to produce
energy through the development of our Reno Energy Geothermal Heating District
project in Reno, Nevada. Reno Energy will use geothermal steam to heat fresh
water in a contained loop which will be used for space heating and cooling in
the Reno, Nevada area. In its initial phase, which will be completed in 2001,
Reno Energy will pump geothermally-heated hot water to an industrial park
located in South Meadows, Nevada, and to the Damonte Ranch commercial
development, also located in South Meadows, Nevada. These facilities are located
within a three mile radius of Reno, Nevada, and comprise approximately 40
million square feet of indoor heating and cooling requirements. We believe that
Reno Energy, which is scheduled for completion in 2002, will be one of the
largest district heating facilities in the United States.
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ENVIRONMENTAL DIVISION
Our acquisition of American Enviro-Services, Inc. in August 1997 marked
our expansion into the environmental services field. While separate from our
energy operations, our environmental division serves several of our
complementary needs, including environmental consultation and the recovery and
recycling of waste motor oils. Additionally, we are exploring the possibility of
selling waste motor oils, which can be used as fuel in some of our power plants
and third-party power plants. We plan both to use the synergistic services of
our environmental division in our energy operations and to expand this area of
our business through internal growth and acquisitions. We believe that the
environmental services field is an industry with growth potential, and one in
which we can create a profitable market niche. We expect that AES will be the
nucleus for our growth in this area.
AES, from its beginnings as a waste oil recycler, has become a supplier
of a broad range of environmental services in the mid-western United States,
including environmental assessments, emergency response and environmental
remediation. AES currently contracts with over 1,100 companies for the recovery,
hauling and recycling of industrial waste oil and water. AES also contracts with
local, state and federal governmental agencies and commercial businesses for the
cleanup and remediation of oil spills and leaks, Phase I, II and III
environmental assessments, environmental emergency response services, and other
environmental and environmental-related services. At its facilities in Newburgh,
Indiana, AES converts otherwise hazardous substances into environmentally and
ecologically sound fuel and cleans polluted soil and water. AES has also
developed a system for recovery and reprocessing of oil from spills on inland
waterways.
We expanded our environmental division in January 1998, when we
acquired Commonwealth Petroleum Recycling, Inc., a waste oil recycling company
located in Shelbyville, Kentucky. We believe that the acquisition of
Commonwealth gives our environmental division a base in northern Kentucky, and
strengthens its market and operating position in the greater Indiana-Kentucky
area.
OPERATIONS
ENERGY DIVISION
STEAMBOAT 1 AND 1A GEOTHERMAL POWER PLANTS. Our 95%-owned subsidiary,
Steamboat Envirosystems, LLC, owns two geothermal power plants in Steamboat
Hills, Nevada: Steamboat 1 and 1A. The remaining 5% of Steamboat LLC is owned by
Far West Capital, from which we purchased the Steamboat facilities. Steamboat 1
and 1A produce electricity through a binary system in which hot water from the
earth's sub-strata magma is circulated in one closed loop, which heats inert gas
in another closed loop. The heated gas is compressed and is used to drive the
turbines which generate electricity. The geothermal water used in this process
is reinjected into the earth to be re-heated.
Under our agreement with Far West, we receive the first $1.8 million of
annual net income of Steamboat LLC, 45% of net income over $1.8 million until
December 2001, and 95% of annual net income over $1.8 million thereafter. The
Steamboat facilities must make royalty payments for steam extraction rights and
royalty payments equivalent to 30% of the net revenue of Steamboat 1 after
limited deductions.
Steamboat 1 was built in 1986 and Steamboat 1A was built in 1988. Each
was built by Far West and are managed by SB Geo, Inc., a company in which the
principals of Far West own a majority equity interest. We have contracted with
SB Geo for its continued management services at prices which may not exceed
charges for similar services which could be obtained from other sources.
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Steamboat 1 and 1A produce a combined eight megawatts of electric power
which is sold under two power purchase agreements with Sierra Pacific Power
Company. The agreements required price adjustments at the end of the first ten
years of operation to a rate equal to the cost to Sierra's to produce one more
kilowatt of power than it was currently producing, termed the "prevailing short
term avoided cost." Ten years of operation for Steamboat 1 ended in December
1996, and the ten years for Steamboat 1A ended in December 1998. At each
adjustment time, Sierra's short-term avoided cost was substantially lower than
the rate then being paid.
Together with the Nevada Geothermal Industry Council, an industry
association comprised of several geothermal producers in Nevada, we filed an
intervention with the Nevada Public Utilities Commission on hearings to
determine the rates Sierra should pay for the purchase of electricity. We argued
that the revenue we were receiving for Steamboat 1 power could be increased
significantly either through adjustments in the rate from Sierra or,
alternatively, selling our power outside of Sierra's territory under existing
wheeling laws, with the consent of Sierra. On July 20, 1998, Sierra signed a
stipulation committing to the use of market rates under the power purchase
agreements. Market rates vary seasonally, but we believe that the annual average
is more favorable to us than the filed tariff short term rates Sierra had been
paying. This effectively raised the rates being paid for Steamboat 1 power as of
July 1998 and for Steamboat 1A power as of December 1998 above Sierra's
short-term avoided costs.
Under the terms of the stipulation, we have presented a claim for
$210,000 to Sierra for underpayments from December 1996 to July 1998, that arose
from calculations at lower-than-market rates during that period. This claim is
currently being negotiated, but there is no assurance that we will be successful
in these efforts.
STEAMBOAT 2 AND 3 GEOTHERMAL POWER PLANTS. As previously announced, we
reached agreement in principle with Far West Capital, Inc. to acquire Far West's
wholly owned subsidiary, Steamboat Development Corp., which owns the Steamboat 2
and 3 geothermal power plants and rights to the 600 acres of underlying
geothermal resource fields. Steamboat 2 and 3 produce an aggregate of 40
megawatts of power. The original letter of intent has expired but the parties
are continuing to negotiate towards definitive documentation and the completion
of the transaction. The plants, which are adjacent to the smaller Steamboat 1
and 1A power plants, were financed by General Electric Capital Corporation and
produce approximately $12 million in annual sales under a long term contract for
sale of power to Sierra Pacific Power Corp.
PLYMOUTH STATE COLLEGE, NEW HAMPSHIRE. In 1994, we, through our
wholly-owned subsidiary, Plymouth Envirosystems, Inc., acquired a 50% interest
in Plymouth Cogeneration Limited Partnership ("Plymouth Cogeneration") which
owns and operates a cogeneration plant producing 2.5 megawatts of electricity
and 25 million BTUs of heat at Plymouth State College, in Plymouth, New
Hampshire. The Plymouth Facility provides 100% of the electrical and heating
requirements for the campus, which is a part of the University of New Hampshire
system, under a 20-year contract expiring in 2014. The project, which cost $5.9
million to construct, consists of a combination of diesel engine-generators,
heat recovery and supplemental boilers, and the complete civil works tying all
campus buildings into a single heating loop. The project was financed through
$5.1 million in State of New Hampshire tax exempt revenue bonds and $700,000 in
equity before our acquisition of our interest. We paid a total of $636,000 in
cash and 11,400 shares of our common stock in 1994 for our 50% interest.
Our partners in Plymouth Cogeneration are Central Hudson Enterprises
Corporation, a wholly owned subsidiary of Central Hudson Gas & Electric
Corporation of New York, and Independent Energy Corporation, a division of
Equitable Resources, Inc. The project was completed in November 1994 and put
into full commercial service in January 1995. IEC Plymouth, Inc., a wholly-owned
subsidiary of IEC, runs the day-to-day operations of the Plymouth Facility and
the management decisions are made by a committee which is composed of our
representatives, IEC and Central Hudson. The State of New Hampshire is
conducting a study to determine the feasibility of expanding the existing
facility to wheel electric power to two other state college campuses.
LEHI COGENERATION PROJECT, UTAH. In January 1994, we, through our
wholly-owned subsidiary, Lehi Envirosystems, Inc. ("Lehi"), purchased a 50%
equity interest in Lehi Independent Power Associates ("LIPA"), which owns a
cogeneration facility in Lehi, Utah and the underlying real estate, hardware and
permits to operate the Lehi facility. The Lehi facility has been dormant since
1990, and we, together with our partners, have been exploring alternatives by
which the Lehi facility can begin operating.
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The Lehi facility originally had three engine generators capable of
producing in the aggregate 17 megawatts of electrical output. One unit, which
would have required extensive and costly repairs, was sold in December 1995. The
two remaining units, totaling 10 megawatts, are capable of being placed in
operation if a satisfactory purchase agreement for their output can be obtained.
However, we have determined that we would obtain better results if these engines
were replaced with combined cycle gas turbines of larger output and
substantially greater efficiency. We are negotiating a joint venture with third
parties to pursue these plans, however, we cannot assure you that an agreement
with respect to such joint venture will be reached, or if reached, that the
anticipated benefits will be realized.
Under Title V of the Clean Air Act, which became effective in 1995, the
Lehi facility must have an air quality permit from the Utah Division of Air
Quality. It is expected that the one remaining filing for this air quality
permit application will be completed by the mid-2000. Once the application has
been completed, the Utah Division of Air Quality customarily takes 90 to 120
days to issue the permit. We know of no reason why the air quality permit would
not be issued. LIPA would not replace the generators until the air quality
permit is secured and power purchase contracts can be arranged for the output of
the plant. We believe that the industrial and population growth in the Lehi area
will create a large future market for power. In addition, the wheeling rules
make it possible for us to market the power to areas outside the immediate Lehi
area.
RENO ENERGY DISTRICT HEATING PROJECT. We have an 89.6% interest in USE
Geothermal, LLC ("USE Geo"), which has loaned Reno Energy $1.6 million for use
in providing engineering, design and financial services. The services will be
provided in connection with a facility which will use geothermally-heated fresh
water for space heating and cooling, as well as for process heating, for nearby
developments, including an industrial park in South Meadows, Nevada. The Reno
Facility is still in the planning and development stage. The Nevada Public
Utilities Commission issued its Compliance Order approval for the Reno Facility
in November 1997, and the Washoe County Planning Commission issued its Special
Use Permit for the Reno Facility in December 1997.
The loan is evidenced by a convertible note which matures on April 10,
2027. The note accrues interest at a rate of 12% per annum while the Reno
Facility is being developed. However, the interest will be waived if USE Geo
exercises its option to convert the note into an equity interest in Reno Energy,
or if Reno Energy pays all "operating period interest" in a timely manner.
"Operating period interest" is the interest to be paid after the Reno facility
has commenced commercial operations. At that time, Reno Energy will be required
to pay interest on the note based on a percentage , which is currently 50%, of
(1) Reno Energy's net cash flow from operations and (2) net cash proceeds from
specified capital transactions, after payment of distributions to members of
Reno Energy. USE Geo may convert the note for no additional consideration into a
50% equity interest in Reno Energy at any time before the note matures. The
equity percentage will be adjusted proportionately in the event of additional
funding of Reno Energy by USE Geo or Reno Energy's members before the exercise
of the option to convert. The note is secured by a first lien on all of the
assets of Reno Energy and is personally guaranteed by Reno Energy's members.
Such personal guarantees are, in turn, secured by a first lien and pledge of the
respective guarantors' membership interest in Reno Energy.
Final payment has been received on the $300,000 loan made by us to Reno
Energy in December 1996 to fund pre-development expenses associated with the
Reno project. Furthermore, the $275,000 loan made by us to Geo Energy, LLC, in
December 1997 to fund site property acquisition has been repaid.
The industrial park currently being developed in close proximity to the
Reno facility is located on a 1,200 acre parcel and is expected to be developed
within the next four to seven years. We anticipate that the park, which will
contain commercial and industrial facilities, will create demand for space
heating and cooling, as well as process heating. It is expected that all the
buildings in the park, totaling approximately 30 million square feet of floor
space, will be connected to the geothermal grid to meet their heating and
cooling needs. In addition to the commercial park, the Reno Facility may provide
heat for other developments in the area totaling an additional 10 million square
feet.
We currently expect that the Reno facility will have a pipeline with
supply and return lines that would loop through the nearby industrial park. A
binary hot water system with fresh water circulating through the loop will be
used to minimize concerns associated with the direct use of geothermal brine,
including scale build-up in the pipes, corrosion of pipes and equipment, and
possible pollution of the ground in case of a spill. Fresh water will be heated
in heat exchangers at the site where geothermal brine is extracted and
reinjected. The heat thus provided may be sold at a discount from the cost of
producing an equivalent amount of heat from conventional natural gas furnaces.
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We estimate that the construction, procurement and other costs
associated with the commencement of operations of the Reno facility will be
approximately $40 million. Such amount is expected to be financed through
industrial revenue bonds or other conventional financing means. There is no
assurance, however, that this financing can be obtained.
ENVIRONMENTAL DIVISION
In August 1997, we acquired AES and entered the environmental services
field. AES specializes in the recycling of used motor and industrial oils, waste
water treatment, environmental counseling, remediation services and Phase I, II
and III environmental assessments. AES also provides 24-hour emergency response
services throughout the mid-western United States. On January 5, 1998, we
acquired the assets of Commonwealth, which is currently operating as a division
of AES.
ENVIRONMENTAL REMEDIATION. A large portion of the operations of our
environmental division consists of environmental remediation, clean-up and
monitoring. Examples of the projects currently in progress are the following:
o AES is continuing to work on a three-year contract with the Warrick
County Commission to oversee and manage the closure and monitoring
of the solid waste landfill, along with all substations, in the
County of Warrick, Indiana. The contract, which commenced in March
1998, requires that AES close and monitor the landfill, build a
transfer station, and expand and redesign the substations and the
recycling facility for the County.
o AES has expanded its services to provide emergency response on
inland waterways. These services have been approved by the United
States Coast Guard. The waterway response system includes 2,000 feet
of containment booms, a pontoon recovery system, a drum skimmer and
a 19 foot support boat, in addition to the on-shore recovery and
handling equipment. We transport all recovered fluid to the AES
treatment and recycling facilities.
OIL AND WASTE RECOVERY AND RECYCLING. Our environmental division
conducts oil and water recovery for approximately 1,100 clients, which include
service stations, garages, factories and other facilities that collect used
motor and industrial oil and oily or contaminated water. Between its two
facilities in Indiana and Kentucky, AES has eight pump trucks and four tractor
trailers to recover and haul these fluids back to its facilities for recycling
or treatment. Oil is typically cleaned using heat and chemical processes which
separate the elements and allow AES to remove metal deposits and other
contaminants. AES then stores recycled oil in its aboveground tanks and sells it
to industrial users. Contaminated water is also hauled to the AES facility. It
is then chemically treated to remove harmful contaminants and is disposed of in
the municipal sewer. AES' clients typically pay AES to remove and treat their
oily and contaminated water, which is otherwise difficult and costly to discard.
EMERGENCY RESPONSE. AES conducts emergency response operations
throughout the Indiana-Kentucky-Illinois area. Such operations include response
to automobile, truck and waterway accidents which involve spilled fuel or other
hazardous substances, and emergency underground tank spills or rescue
operations. AES contracts with several local fire departments and emergency
response technician teams, as well as insurance companies and trucking companies
to handle these types of emergency situations. Our emergency response division
has expanded and maintains fully trained and equipped personnel, including
emergency medical technicians, to perform permitted confined space entry and
confined space rescue. A confined space has limited or restricted means for
entry or exit, and includes tanks, vessels, silos, storage bins, hoppers,
vaults and pits. OSHA guidelines specify that such rescuers must be adequately
equipped and trained to respond effectively to rescue calls. In our operational
area we are the only company that meets these requirements. In addition, this
division has embarked upon training its personnel in railcar response and
cleanup.
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COMPETITION
ENERGY DIVISION
There are approximately 150 companies nationwide currently involved in
the IPP industry, which is basically divided into three areas, based upon size
or physical placement of facility:
o large power plants, which produce over 50 megawatts of power;
o small to medium-sized power plants, which produce 3 to 50 megawatts
of power; and
o inside-the-fence plants, which can be of varying sizes but usually
under 50 megawatts, are plants which provide power for specific
buildings or developments only.
Many of the large plants are owned and operated by subsidiaries of
regulated electric companies and large industrial companies which have
established these subsidiaries to participate in the IPP industry. Approximately
18 of the 25 largest independent power companies are owned and operated in this
manner. The operations of most of these companies are geared to power plants in
the over 50 megawatt size range due to the need to make significant investments
to achieve returns large enough to have an impact on a public utility's or
industrial company's operating results. Some of these companies have been highly
successful in the development of these large plants. Under federal law, however,
utility subsidiaries may not own more than 50% of non-regulated (i.e., IPP)
projects. Subsidiaries of large industrial companies and other non-utility
companies have no similar restrictions. Additionally, under federal law, a new
category of independent power producer has been created known as exempt
wholesale generators ("EWGs"). EWGs have no ownership limitations nor do they
have requirements with regard to useful thermal output or fuel efficiency and
operating efficiency criteria. To receive qualification as an EWG, the owner
need only demonstrate that the entire output of the facility is sold exclusively
in the wholesale market. EWGs are prohibited from making retail sales and
therefore cannot be developed for inside-the-fence projects.
In the category of small to medium-sized IPPs, the majority of the
developers are either subsidiaries of other non-utility industrial companies,
small privately owned partnerships, or energy funds established to invest in IPP
projects. Inside-the-fence plants are generally owned and operated by the end
user, although a number of the plants are built, owned and operated for the end
user by third parties.
ENVIRONMENTAL DIVISION
Our environmental division competes with several local and national
companies in the areas of environmental services and oil and water recovery.
Many of these companies are better capitalized than we are and have longer
operating histories and larger client basis. Such companies include
Safety-Kleen, Corp., and First Recovery, Inc., a subsidiary of Ashland Oil
Company. Locally, in the Indiana-Kentucky-Illinois area, our environmental
division competes with Koester Corporation, which conducts environmental
services in both Indiana and elsewhere throughout the United States.
EMPLOYEES
At January 25, 2000, we employed approximately 35 full- and part-time
personnel. We consider our relations with our employees to be satisfactory.
GOVERNMENT REGULATION
ENERGY DIVISION
Under present federal law, we are not and will not be regulated as a
holding company under the Public Utility Holding Company Act ("PUHCA") as long
as each power plant in which we have an interest is a qualifying facility, or a
"QF," as the term is defined under the Public Utility Regulatory Policy Act, or
meets the criteria for another exemption. In order to be a QF, a facility must
be not more than 50% owned by an electric utility or electric utility holding
company. A QF that is a cogeneration facility must produce not only electricity
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but also useful thermal energy for use in an industrial or commercial process or
heating or cooling applications in specified proportions to the facility's total
energy output and must meet specified energy efficiency standards. Therefore,
loss of a thermal energy customer could jeopardize a cogeneration facility's QF
status. If one of the power plants in which we have an interest were to lose its
QF status and not receive another PUHCA exemption, the project subsidiary or
partnership could become a public utility company, which could subject us to
various federal, state and local laws, including rate regulation. In addition,
loss of QF status could allow the power purchaser to cease taking and paying for
electricity or to seek refunds of past amounts paid and thus could cause the
loss of some or all contract revenues or otherwise impair the value of a
project. This could trigger defaults under provisions of the applicable project
contracts and financing agreements. There can be no assurance that if a power
purchaser ceased taking and paying for electricity or sought to obtain refunds
of past amounts paid, the costs incurred in connection with the project could be
recovered through sales to other purchasers.
A geothermal plant will be a QF if it meets PURPA's ownership
requirements and other standards. Each of Steamboat 1 and Steamboat 1A meet the
ownership requirements and standards and is, therefore, a QF. However, QF status
does not exempt an IPP from state utility law regulation in those states where
the sale of electricity directly to an industrial or commercial customer is
regulated as a retail sale. Most states currently do not regulate the sale of
electricity from a QF to an inside-the-fence customer.
The construction and operation of power generation facilities require
numerous permits, approvals and certificates from appropriate federal, state and
local governmental agencies, as well as compliance with environmental protection
legislation and other regulations. With the exception of an air operating permit
for the Lehi Facility, we believe that we are in substantial compliance with all
applicable rules and regulations and that the projects in which we are involved
have the requisite approvals for existing operations and are operated as
required by applicable laws. However, our operations and our projects must at
all times comply with a varied and complex body of laws and regulations that
both public officials and private individuals may seek to enforce. There can be
no assurance that new or existing laws and regulations which would have a
materially adverse affect will not be adopted or revised, nor can there be any
assurance that we will be able to obtain all necessary licenses, permits,
approvals and certificates for proposed projects or that completed facilities
will comply with all applicable permit conditions, statutes or regulations. In
addition, regulatory compliance for the construction of new facilities is a
costly and time consuming process, and intricate and changing environmental and
other regulatory requirements may necessitate substantial expenditures for
permitting and may create a significant risk of expensive delays or significant
loss of value in a project if the project is unable to function as planned due
to changing requirements or local opposition.
ENVIRONMENTAL DIVISION
Governmental regulations applicable to our environmental division
govern, among other things:
o the handling of the substances we collect which are classified as
hazardous or special wastes;
o the operation of the facilities at which we store or process the
substances we collect; and
o the ultimate disposal of waste generated by us during processing of
the substances we collect.
An increase in governmental requirements for the treatment of any particular
material generally increases the value of our services to its customers, but may
also increase our costs and risks of noncompliance.
Federal and state environmental agencies require various permits for
our recycling and oil and water processing facilities. Most of these permits
must be renewed periodically and the governmental authorities involved have the
power, under various circumstances, to revoke, modify or deny issuance or
renewal of these permits. Zoning, land use and siting restrictions also apply to
these facilities. Regulations also govern the disposal of residual wastes,
operating procedures, stormwater and wastewater discharges, fire protection,
worker and community right-to-know and emergency response plans. Water pollution
regulations govern some of the operations at our facilities. Safety standards
under the Occupational Safety and Health Act in the United States and similar
laws are also applicable.
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Federal Department of Transportation regulations also apply to our
operation of vehicles to transport the substances we collect, including
licensing requirements for the vehicles and the drivers, vehicle safety
requirements, vehicle weight limitations, shipment manifesting and vehicle
placarding requirements. Governmental authorities have the power to enforce
compliance and violators may face civil and criminal penalties. Private
individuals may also have the right to sue to enforce compliance with some of
the governmental requirements.
The services of our environmental division involve the collection,
transportation, storage, processing, recycling and disposal of automotive and
industrial nonhazardous materials. We are also involved in the transportation
and disposal of hazardous materials. In addition to being regulated as solid
wastes, many of these materials are further regulated as hazardous wastes.
Accordingly, we must comply with federal and state regulations governing solid
wastes and transportation of hazardous wastes. The Resource Conservation and
Recovery Act of 1976 established a national program which classified various
substances as hazardous wastes, established requirements for storage, treatment
and disposal of hazardous wastes, and imposed requirements for facilities used
to store, treat or dispose of these wastes. RCRA was amended in 1984 by the
Hazardous and Solid Waste Amendments which expanded the scope of RCRA to include
businesses which generate smaller quantities of waste materials, expanded the
substances classified as hazardous wastes by RCRA and prohibited direct disposal
of those wastes in landfills, thereby, in effect, requiring that the wastes be
recycled, treated, or destroyed. Hazardous and solid waste regulations impose
requirements which must be met by facilities used to store, treat and dispose of
these wastes.
In September 1992, the United States Environmental Protection Agency
finalized regulations that govern the management of used oils. Although used oil
is not classified as a hazardous waste under federal law, some states do
regulate used oil as hazardous. AES operates its used oil facilities to
standards similar to those required for hazardous waste facilities, and believes
that its oil management standards are more protective of human health and the
environment than current federal standards.
The Comprehensive Environmental Response, Compensation and Liability
Act of 1980 was originally enacted in December 1980, and amended in 1986 by the
Superfund Amendments and Reauthorization Act. CERCLA creates a fund of monies
which can be used by the EPA and state governments to clean up hazardous waste
sites pending recovery of those costs from defined categories of "potentially
responsible parties." Most EPA cleanup efforts are at sites listed or proposed
for listing on the National Priorities List. Various states have also enacted
statutes which contain provisions substantially similar to CERCLA. Generators
and transporters of hazardous substances, as well as past and present owners and
operators of sites where there has been a release of hazardous substances are
strictly, jointly and severally liable for the clean-up costs resulting from
releases and threatened releases of CERCLA-regulated hazardous substances. Under
CERCLA, these responsible parties can be ordered to perform a clean-up, can be
sued for costs associated with private party or public agency clean-up, or can
voluntarily settle with the government concerning their liability for clean-up
costs.
Our environmental division has an internal staff of engineers,
geologists, licensed water treatment plant operators, chemists and other
environmental and safety professionals whose responsibility is to continuously
improve the procedures and practices to be followed by us to comply with various
federal, state and local laws and regulations involving the protection of the
environment and worker health and safety and to monitor compliance.
DESCRIPTION OF PROPERTY
Steamboat 1 and 1A are owned by our 95%-owned subsidiary, Steamboat
LLC, and are located on a geothermal field in Steamboat Hills, Nevada. Steamboat
1 and 1A own buildings and improvements, generators, motors, switchgear and
controls, production and injection wells and associated piping.
The Plymouth facility is owned by Plymouth Cogeneration, a Delaware
partnership, of which we own 50%. Plymouth Cogeneration owns all the plant and
equipment associated with the cogeneration project including the diesel engines,
generators, three auxiliary boilers, switchgear, controls and piping. The New
Hampshire state university system has two contracts with Plymouth Cogeneration:
a 20-year lease on the equipment expiring in 2014 and a 20-year management
contract expiring in 2014. Both contracts have escalation clauses.
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The Lehi facility is owned by LIPA, a Utah limited liability company,
of which we own 50%. The property includes two acres of land in Lehi, Utah, and
all buildings, engine/generators, ancillary generating equipment, heat recovery
equipment, switchgear and controls, storage tanks, spare parts, tools and
permits. All costs associated with LIPA and the operation of the Lehi facility,
and all income which might be derived from sales of electric power, is divided
pro-rata among us and the owners of the remaining 50% of LIPA.
The AES facilities are located in Newburgh, Indiana and Shelbyville,
Kentucky. The Newburgh facility is on a five and one-half acre property, and the
Shelbyville facility is on a two acre property. Both facilities include
buildings, processing equipment, storage tanks, controls and related piping, and
are considered in satisfactory condition. There are mortgages on the buildings
that totaled $277,000 at October 31, 1999.
Our headquarters are in 3,000 square feet under a lease expiring in
October 2005 in a commercial office building in West Palm Beach, Florida. We
also lease from SB GEO regional offices in Reno, Nevada, on the site of the
Steamboat facilities. We have has no separate lease agreement for the Reno
office space, but rental fees are included in the fees we pay to SB GEO for the
operation and management of the Steamboat facilities. All our properties are in
good condition and management believes that they are adequately covered by
insurance.
LEGAL PROCEEDINGS
In September 1999, we settled our suit 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 1997, Enviro Partners, L.P. and Energy
Management Corporation filed a counter suit against us for damages amounting to
$6 million based on breach of contract claims in connection with a 1996
financing transaction that was never consummated. In September 1999 the parties
filed notice of an agreement in principle settling the action with the court,
and we recorded a charge on our books at July 31, 1999 in the amount of
$1,138,000, which included the settlement amount of $900,000 and related legal
costs. The agreement was executed effective September 1, 1999. In spite of the
fact that we believed that our 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.
We are engaged from time to time in other legal proceedings, which at
this time, would not have a material effect on our business if decided against
us.
27
<PAGE> 31
MANAGEMENT
Mr. Richard Nelson, who had been President and Chief Executive Officer
since November 1993, died suddenly on January 24, 2000. Mr. Lawrence I.
Schneider was elected to and has assumed the duties of interim President and
Chief Executive Officer.
Our directors and executive officers are presently as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------- ----- --------------------------------------------------
<S> <C> <C>
Theodore Rosen................................. 74 Chairman of the Board of Directors
Lawrence I. Schneider.......................... 63 President, Chief Executive Officer, Chairman of the
Executive Committee and Director
Howard A. Nevins............................... 44 Executive Vice President and Director
Henry Schneider................................ 34 Vice President and Director
Seymour J. Beder............................... 73 Secretary, Treasurer and Chief Financial Officer
Richard T. Brandt II........................... 43 Director
Evan Evans..................................... 73 Director
Asher E. Fogel................................. 50 Director
Allen J. Rothman............................... 43 Director
</TABLE>
THEODORE ROSEN. Mr. Rosen has been Chairman of the Board of Directors
since November 1993. Since June 1993, Mr. Rosen has been Managing Director of
Burnham Securities. He was Senior Vice President of Oppenheimer & Co. from
January 1991 to June 1993, and was Vice President of Smith Barney & Co. from
1989 to 1991. Mr. Rosen also currently serves as a director of Waterhouse
Investors Cash Management Co., an investment management company engaged in
management of money market mutual funds. Mr. Rosen holds a BA degree from St.
Lawrence University and did graduate work at both Albany Law School and Columbia
University School of Business.
LAWRENCE I. SCHNEIDER. Mr. Schneider has served as President and Chief
Executive Officer of our company since January 24, 2000 and has been a member of
Board of Directors and Chairman of the Executive Committee since March 1998. Mr.
Schneider is also the manager of Energy Systems Investors, LLC and has been
associated with numerous corporations through the years, including Newpark
Resources, Inc., a company involved with oil field environmental remediation,
where he was Chairman of the Executive Committee. Mr. Schneider was also a
partner in Sassower, Jacobs and Schneider, a member firm of the New York Stock
Exchange. He holds his BS degree from New York University. Mr. Schneider is the
father of Henry Schneider.
HOWARD A. NEVINS. Mr. Nevins has been Executive Vice President of our
environmental division and a Director of our company since August 1997. Mr.
Nevins has wide ranging experience in the fields of mineral exploration,
chemical operations and environmental compliance. In 1985, he founded Trey
Explorations, Inc., a land exploration and development drilling company which
presently operates 80 oil and gas wells in the Illinois Basin. In 1990, he
co-founded Midwest Custom Chemicals, Inc., a manufacturer and international
distributor of specialty chemicals used for oil and water demulsification,
specializing in used oil recycling. In 1994, he co-founded both Quality
Environmental Laboratories, Inc. and America Enviro-Services, Inc., the latter
company which was acquired by the Company in August 1997. Mr. Nevins remains on
the boards of Midwest Custom Chemicals and Quality Environmental Laboratories.
Mr. Nevins is a Certified Professional Geologist, past president of the
Indiana-Kentucky Geological Society, past Chairman of the Society of Petroleum
Engineers (Illinois Basin) and is currently on the boards of both the Illinois
Oil & Gas Association and the Independent Oil Producers. He is also on the
Advisory Council of the Indiana Department of Natural Resources. Mr. Nevins
received his BS degree in Geology from Western Michigan University in 1978.
28
<PAGE> 32
HENRY SCHNEIDER. Mr. Schneider, a member of Energy Systems Investors,
LLC, was appointed Vice President for Development in March 1998 and was
appointed a Director of our company in December 1998. From 1986 to 1988, Mr.
Schneider was an associate at Drexel Burnham Lambert specializing in taxable
institutional fixed income products and portfolio strategies. From 1989 to 1994,
Mr. Schneider was an associate with S & S Investments and Wood Gundy,
specializing in mergers, acquisitions and corporate restructuring. From 1994 to
1996, Mr. Schneider was a principal of Global Capital Resources, Inc., a private
merchant bank. Since 1996, Mr. Schneider has been a private investor. He has
been involved in arranging acquisitions and funding for the telecommunications,
energy, apparel, airline, financial and garage industries. Mr. Schneider holds
an Economics degree from Tufts University and a Master of Business
Administration from Boston University. Mr. Schneider is the son of Lawrence I.
Schneider.
SEYMOUR J. BEDER. Mr. Beder has been our Secretary, Treasurer and Chief
Financial Officer since November 1993. From 1970 through 1980 he was Chief
Financial Officer for Lynnwear Corporation, a textile company, and from 1980 to
September 1993, Mr. Beder was president of Executive Timeshare, Inc., a provider
of executive consulting talent. Mr. Beder is a Certified Public Accountant, and
a member of the New York State Society of Certified Public Accountants and the
American Institute of Certified Public Accountants. Mr. Beder received his BA
degree from City College of New York.
RICHARD T. BRANDT II. Richard Brandt is the Chairman and Chief
Executive Officer of Marathon Capital, LLC, a Chicago based, financing company
specializing in the origination, processing and financing of non-conforming
commercial loans and leases. Prior to founding Marathon in 1999, Mr. Brandt
served as the Senior Vice President and General Manager of the Vendor Financial
Services unit of Transamerica Distribution Finance. During his tenure at
Transamerica, Mr. Brandt created a dedicated Energy Financing Group, which
provided capital for energy equipment retrofit projects as well as various other
small and medium energy related project financing situations. Prior to his
employment with Transamerica in 1997, Mr. Brandt held senior positions in
several other niche financing companies including, Prime Capital, Inc., Lessor
Capital Services and Dana Commercial Credit. He holds an undergraduate degree in
economics from Oberlin College and an MBA from The University of Chicago.
EVAN EVANS. Mr. Evans has been a Director since August 1995. Since 1983
he has been chairman of Holvan Properties, Inc. ("Holvan"), a real estate
developer, and was managing director of Easco Marine, Ltd. from 1983 to 1988.
Also, from 1985 to 1986, Mr. Evans was general manager of Belgian Refining
Corporation ("BRC"), under a contract between BRC and Holvan, and from 1992 to
1996, Mr. Evans was a director of BRC. From 1981 to 1983 he was vice president
of Getty Trading and Transportation Company and president of its subsidiary,
Getty Trading International, Inc. From 1970 to 1981 Mr. Evans was vice president
and member of the board of directors of United Refining Corp ("URC"). Mr. Evans
also currently serves as a director of Holvan, and since 1997 has been a
director of URC Mr. Evans received his BS degree in Mathematics from St.
Lawrence University and his BS in Civil Engineering from M.I.T.
ASHER E. FOGEL. Mr. Fogel was appointed to the Board of Directors in
December 1998. From 1985 to 1997, Mr. Fogel held senior positions at Citicorp in
London and New York specializing in corporate finance, capital markets and
investment advice and was a Managing Director of Citicorp Securities, Inc. For
twelve years before joining Citicorp Mr. Fogel held a number of positions in
Bank of America and Samuel Montagu & Co. In June 1997, Mr. Fogel founded
Dovertower Capital, a merchant banking boutique providing corporate finance
services in the United States and international markets. Mr. Fogel holds a BA in
Economics and an MBA from Hebrew University.
ALLEN J. ROTHMAN. Mr. Rothman has been a member of the Board of
Directors since January 1997. Mr. Rothman is a partner with the law firm of
Robinson, Brog, Leinwand, Greene, Genovese & Gluck P.C. in New York with whom he
has been associated since January 1996. Mr. Rothman specializes in corporate,
finance and real estate law. Prior to joining Robinson Brog, he was associated
with several New York law firms. Mr. Rothman received his BA degree from
Columbia University and his JD degree from Harvard University.
29
<PAGE> 33
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our Certificate of Incorporation includes provisions which limit the
liability of our directors. As permitted by applicable provisions of the
Delaware General Corporation Law, directors will not be liable to us for
monetary damages arising from a breach of their fiduciary duty as directors in
some circumstances. This limitation does not affect liability for any breach of
a director's duty to us or our stockholders (1) with respect to approval by the
director of any transaction from which he or she derives an improper personal
benefit, (2) with respect to acts or omissions involving an absence of good
faith, that the director believes to be contrary to our best interests or those
of our stockholders, that involve intentional misconduct or a knowing and
culpable violation of law, that constitute an unexpected pattern or inattention
that amounts to an abdication of his or her duty to our company or our
stockholders, or that show a reckless disregard for duty to our company or our
stockholders in circumstances in which he or she was, or should have been aware,
in the ordinary course of performing his or her duties, of a risk of a serious
injury to us or our stockholders, or (3) based on transactions between our
company and our directors or another corporation with interrelated directors or
on improper distributions, loans or guarantees under applicable sections of
Delaware law. This limitation of directors' liability also does not affect the
availability of equitable remedies, such as injunctive relief or rescission.
Our Bylaws obligate us to indemnify our directors and officers to the
full extent permitted by Delaware law, including circumstances in which
indemnification is otherwise discretionary under Delaware law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons, under
the foregoing provisions or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission this type of indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
EXECUTIVE COMPENSATION
The following table shows the total compensation we paid during the
fiscal years ended January 31, 1999, 1998 and 1997 to Richard Nelson, our former
President and Chief Executive Officer, and during the fiscal year ended January
31, 1999 and 1998 to Mr. Nevins, our Executive Vice President. No other
executives of our company received total compensation in excess of $100,000
during any of these years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------------------- ---------------------------
YEAR
ENDED SECURITIES
JANUARY 31, SALARY BONUS UNDERLYING OPTIONS/SARS(#)
------------ ---------- ------ -------------------------
<S> <C> <C> <C> <C>
Richard H. Nelson......................... 1999 $162,500(1) -- 40,000
Former President and Chief 1998 150,000 -- 50,000
Executive Officer 1997 150,000 -- 100,000
Howard Nevins............................. 1999 100,000 -- 40,000
Executive Vice President 1998 49,457(2) -- 100,000
</TABLE>
- -------------------------
(1) Mr. Nelson's annual base salary was increased from $150,000 to $165,000 on
April 1, 1998.
(2) Mr. Nevins' employment contract with our company commenced as of August
23, 1997, and provides for an annual salary of $100,000.
30
<PAGE> 34
The following table sets forth information with respect to all options
to purchase shares of our common stock granted to the named executive officers
during the fiscal year ended January 31, 1999.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
NUMBER OF SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS OPTIONS EMPLOYEES IN BASE PRICE
NAME (#) FISCAL YEAR ($/SH) EXPIRATION DATE
- --------------------------------- -------------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Richard H. Nelson................ 40,000 13.45% $2.50 August 26, 2008
Howard Nevins.................... 40,000 13.45 2.50 August 26, 2008
</TABLE>
TERMS OF OPTIONS
Stock options to Messrs. Nelson and Nevins were granted in 1998 under
our 1998 Executive Incentive Compensation Plan. All options granted in 1998 to
Messrs. Nelson and Nevins, as well as to the other executive officers and
directors, under the 1998 Plan are qualified, incentive stock options, expire 10
years from the date of grant, and were immediately exercisable upon the date of
grant.
REPRICING OF STOCK OPTIONS
On December 8, 1998, the Board of Directors unanimously approved a plan
to reprice a total of 639,000 stock options held by some of our directors,
executive officers and employees to $2.50 per share, a price equal to
approximately 24% above the average high bid and ask price of our common stock
as reported on the Nasdaq SmallCap Market on December 7, 1998. The Board's
decision to reprice these options was based on the Board's unanimous belief that
it would help retain and provide incentives for the option holders whose
compensation is largely dependent on their option grants. We granted a majority
of these options in 1996 and 1997, and other options were granted in 1995.
The following table shows stock option exercises during the fiscal year
ended January 31, 1999 by the named executive officers. In addition, this table
describes the number of unexercised options and the value of unexercised
in-the-money options at January 31, 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND JANUARY 31, 1999 OPTION/SAR VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES ACQUIRED JANUARY 31, 1999(#) JANUARY 31, 1999($)(1)
NAME ON EXERCISE(#) VALUE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- -------------- ----------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Richard H. Nelson....... 0 0 190,000/0 $42,188/0
Howard Nevins........... 0 0 140,000/0 0/0
</TABLE>
- -------------------------
(1) Represents the difference between market price of our common stock and the
exercise price of the options at January 31, 1999. Such amounts may not
necessarily be realized. Actual values which may be realized, if any, upon
any exercise of these options will be based on the market price of the
common stock at the time of the exercise and thus are dependent upon future
performance of the common stock.
COMPENSATION OF DIRECTORS
Outside directors are compensated at an annual rate of $10,000 plus
travel expenses, and must attend at least four meetings annually. Employee
directors are not compensated for attendance at meetings of the Board, although
some travel expenses relating to attending meetings are reimbursed. No
additional compensation is given to committee members or participants in special
projects.
31
<PAGE> 35
EMPLOYMENT AGREEMENTS
Mr. Rosen entered into an amended employment agreement with us on March
31, 1998, to serve as our Chairman of the Board of Directors until March 31,
2001, which term automatically extends for additional one-year periods beginning
on the second anniversary of the agreement and on each anniversary thereafter.
Mr. Rosen's agreement currently provides for an annual salary of $87,500, plus
benefits. If Mr. Rosen is terminated without cause during the term of his
employment, as defined in the agreement, or if Mr. Rosen resigns because his
salary or benefits are decreased or he is demoted within three years after we
experience a change in control, as defined in the employment agreement, he is
entitled to severance pay equal to approximately three times his base salary.
Under the terms of Mr. Rosen's employment agreement, he may not disclose any
confidential information pertaining to our business nor compete with us during
the term of his employment and for an additional two years thereafter.
Mr. Nevins entered into an employment agreement with us on August 4,
1997, to serve as the Executive Vice President for a term of three years ending
August 4, 2000. Mr. Nevins' contract provides for an annual salary of $100,000
plus benefits, and an initial grant of options to purchase 100,000 shares of our
common stock at $2.50 per share. Provision is also made for incentive
compensation in addition to the base salary and options. Under the terms of Mr.
Nevins' employment agreement, Mr. Nevins agrees that he will not disclose any
confidential information pertaining to our business nor compete with us during
the term of his employment and for an additional two years thereafter, but in no
event, earlier than August 4, 2002.
The employment contract for Richard Nelson, our former Chief Executive
Officer and President, provided that in case of death, his $165,000 salary would
be paid to his survivor, and the health insurance covering his family would be
continued, for a one year period. Such benefits will continue until January
2001.
32
<PAGE> 36
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Lawrence I. Schneider is a manager and member of Energy Systems
Investors, LLC, the entity which was granted an option to purchase up to 888,888
shares of our Series A Preferred Stock at our 1998 annual meeting of
stockholders. Mr. Schneider is a member of our Board of Directors and chairman
of its Executive Committee. Appointment to these positions was a condition of
the Energy Systems Investors' initial purchase of 250,000 shares of our Series A
Preferred Stock. Henry Schneider, our Vice President and a Director, is also a
manager and a member of Energy Systems Investors. His appointment to the
positions as Vice President and Director were made following, but not as a
condition to, this financing.
In addition, the Board of Directors agreed to pay Mr. Lawrence
Schneider a fee of $275,000 for his substantial efforts in connection with the
pending acquisition of Steamboat 2 and 3. Mr. Schneider received 187,234 shares
of our restricted common stock in December 1999 in lieu of such cash payment and
options to acquire 46,800 shares of common stock at an exercise price of $2.9375
per share.
Howard Nevins, Executive Vice President and a Director, was the former
President and Director of American Enviro-Services, Inc., an Indiana corporation
with which we merged in August 1997. As part of this AES merger, Mr. Nevins
received 240,000 shares of our common stock and options to purchase 100,000
shares of our common stock. Mr. Nevins was also appointed to our Board of
Directors in connection with the merger.
The law firm of Robinson, Brog, Leinwand, Green, Genovese & Gluck P.C.,
of which Allen J. Rothman, one of our directors, is a partner, provides us with
legal services from time to time. For the fiscal year ended January 31, 1999,
we paid such firm approximately $167,500 in legal fees and expenses.
All transactions between us and our officers, directors, principal
stockholders or other affiliates have been on terms no less favorable than those
that are generally available from unaffiliated third parties. Any future
affiliate transactions will be on terms no less favorable to us than could be
obtained from an unaffiliated third party on an arm's-length basis and will be
approved by a majority of our independent and disinterested directors.
33
<PAGE> 37
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 28, 2000, the number of
shares of our common stock that were beneficially owned by the following:
o by each director,
o by each of our executive officers,
o by those persons known to us to beneficially own 5% or more of the
outstanding shares of our common stock, and
o by all of our directors and officers as a group.
Beneficial ownership is determined as required by the rules of the SEC.
Except as indicated by footnote, to our knowledge, the persons named in the
table have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. Shares of common stock that are
issuable upon the conversion of convertible securities or exercise of options or
warrants within 60 days of January 28, 2000 are deemed to be beneficially owned
by the person holding the securities for the purpose of computing ownership of
the person, but are not treated as outstanding for the purpose of computing the
ownership of any other person. Unless otherwise indicated, the address of each
of the beneficial owners identified below is c/o U.S. Energy Systems, Inc., 515
North Flagler Drive, Suite 702, West Palm Beach, Florida 33401.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP PERCENT OF CLASS
---------------- -------------------- ----------------
<S> <C> <C>
Theodore Rosen................................................. 396,457(1) 6.93%
Howard A. Nevins............................................... 431,000(2) 7.77%
Seymour J. Beder............................................... 155,917(3) 2.83%
Evan Evans..................................................... 142,500(4) 2.60%
Allen J. Rothman............................................... 166,000(5) 3.02%
Lawrence I. Schneider.......................................... 1,461,745(6) 22.04%
Henry Schneider................................................ 1,118,055(7) 17.28%
Asher Fogel.................................................... 90,000(8) 1.66%
Richard T. Brandt II........................................... 20,000(9) *
Energy Systems Investors, LLC.................................. 1,000,000(10) 15.73%
450 Park Avenue
Suite 1000
New York, New York 10022
Cambridge Investments Limited.................................. 360,000(11) 6.72%
600 Montgomery Street
27th Floor
San Francisco, CA 94111
All officers and directors as a group (9 persons).............. 2,981,674 38.36%
</TABLE>
- -------------------------
* Indicates less than 1%.
(1) Includes 100,425 shares issuable upon exercise of options at an exercise
price of $2.875 per share, 50,000 shares issuable upon exercise of options
at an exercise price of $2.031 per share, 11,357 shares issuable upon
exercise of warrants at an exercise price of $4.00 per share, and 200,250
shares issuable upon exercise of options at an exercise price of $2.50 per
share. Does not include 425 shares of common stock issuable upon the
exercise of options exercisable in May 2000 at an exercise price of $2.875
per share.
(2) Includes 50,000 shares issuable upon exercise of options at an exercise
price of $2.875 per share, and 140,000 shares issuable upon exercise of
options at an exercise price of $2.50 per share.
34
<PAGE> 38
(3) Includes 50,275 shares issuable upon exercise of options at an exercise
price of $2.875 per share, 85,000 shares issuable upon exercise of options
at an exercise price of $2.50 per share, and 15,000 shares issuable upon
exercise of options at an exercise price of $2.031 per share. Does not
include 275 shares of common stock issuable upon the exercise of options
exercisable in May 2000 at an exercise price of $2.875 per share.
(4) Includes 50,000 shares issuable upon exercise of options at an exercise
price of $2.875 per share, 81,250 shares issuable upon exercise of options
at an exercise price of $2.50 per share, and 10,000 shares issuable upon
exercise of options at an exercise price of $2.031 per share.
(5) Includes 75,000 shares issuable upon exercise of options at an exercise
price of $2.875 per share, 80,000 shares issuable upon exercise of options
at an exercise price of $2.50 per share, and 10,000 shares issuable upon
exercise of options at an exercise price of $2.031 per share.
(6) Includes 100,000 shares issuable upon exercise of options at an exercise
price of $2.875 per share, 40,000 shares issuable upon exercise of options
at an exercise price of $2.50 per share, 23,400 shares issuable upon
exercise of options at an exercise price of $2.9375 per share and 250,000
shares of Series A Preferred Stock, currently convertible into 1,000,000
shares of common stock, which is owned by Energy Systems Investors, LLC,
and 27,778 shares of Series A Preferred Stock, currently convertible into
111,112 shares of common stock, which is owned by Mr. Schneider directly.
Lawrence I. Schneider and Henry Schneider are members and managers of
Energy Systems Investors, LLC; Rita Schneider is a member of Energy Systems
Investors, LLC. Henry Schneider is the son of Lawrence Schneider. Does not
include 23,400 shares of common stock issuable upon the exercise of options
exercisable in May 2000 at an exercise price of $2.9375 per share.
(7) Includes 75,350 shares issuable upon exercise of options at an exercise
price of $2.875 per share, and 40,000 shares issuable upon exercise of
options at an exercise price of $2.50 per share and 250,000 shares of
Series A Preferred Stock, currently convertible into 1,000,000 shares of
common stock, which is owned by Energy Systems Investors, LLC. Henry
Schneider and Lawrence Schneider are members and managers of Energy Systems
Investors LLC. Henry Schneider is the son of Lawrence Schneider. Does not
include 350 shares of common stock issuable upon the exercise of options
exercisable in May 2000 at an exercise price of $2.875 per share.
(8) Includes 50,000 shares issuable upon exercise of options at an exercise
price of $2.875 per share, and 40,000 shares issuable upon exercise of
options at an exercise price of $2.50 per share.
(9) Consists of 20,000 shares issuable upon exercise of options at an exercise
price of $2.25 per share. Does not include 20,000 shares issuable upon the
exercise of options exercisable in April 2000.
(10) Comprised of 250,000 shares of Series A Preferred Stock, currently
convertible into 1,000,000 shares of common stock. Lawrence I. Schneider
and Henry Schneider are members and managers of Energy Systems Investors,
LLC.
(11) Based on a Schedule 13-D sent to us in December 1996.
35
<PAGE> 39
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 50,000,000 shares of common
stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par
value $0.01 per share. As of January 28, 2000, we also had
o 1,111,112 shares of common stock reserved for issuance upon
conversion of our Series A Preferred Stock;
o 140,414 shares of common stock reserved for issuance upon conversion
of our Series B Preferred Stock;
o 3,152,300 shares of common stock reserved for issuance upon exercise
of options granted at exercise prices ranging from $2.00 to $8.00;
o 3,565,000 shares of common stock reserved for issuance upon the
exercise of the public warrants at exercise price of $4.00 per
share;
o 310,000 shares of common stock reserved for issuance upon the
exercise of the warrants underlying the purchase option at an
exercise price of $5.00 per share;
o 45,750 shares of common stock reserved for issuance upon conversion
of $366,000 of our 9% Convertible Debentures;
o 3,444,444 shares of common stock reserved for issuance upon
conversion of Series A Preferred Stock issuable upon the exercise of
option to acquire 861,111 shares of our Series A Preferred Stock;
and
o 239,000 shares of common stock reserved for issuance upon conversion
of private warrants at exercise prices of $4.00 and $5.00 per share;
and
o 310,000 shares of common stock reserved for issuance upon the
exercise of the purchase option at an exercise price of $6.60 per
share.
The following is a summary of the terms of our outstanding securities.
It is not a complete description and should be read with the provisions of our
Certificate of Incorporation and bylaws, which are included as exhibits to the
registration statement of which this prospectus is a part.
COMMON STOCK
As of January 28, 2000, we have 5,364,124 shares of common stock
issued and outstanding, including 7,600 shares held in treasury. The holders of
common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares entitled to vote in
any election of directors may elect all of the directors standing for election.
The holders of the common stock are entitled to receive dividends, if
and when declared by the Board of Directors from time to time out of legally
available funds. However, shares of our outstanding preferred stock have
preferences with respect to dividends.
If we liquidate our company, the holders of common stock are entitled
to share ratably in all assets that are legally available for distribution,
after payment of all debts and other liabilities. However, holders of the
preferred stock then outstanding have prior rights to these assets. The holders
of common stock have no preemptive, subscription, redemption or conversion
rights. The rights, preferences and privileges of holders of common stock are
secondary to the rights of the holders of shares of any outstanding series of
preferred stock or any series of preferred stock that we may issue in the
future.
WARRANTS
PUBLIC WARRANTS. Each warrant entitles the holder to purchase one share
of common stock at a price of $4.00 per share during the period until November
29, 2001. The exercise price may be adjusted in some circumstances.
We may redeem the warrants at a price of $.01 per warrant if we give 30
business days' written notice before the redemption and if the last sales price
of the common stock equals or exceeds 150% of the exercise price of the warrants
for the 20 consecutive trading days ending on the third day before the notice of
redemption. The current redemption price is $6.00. We are required to maintain
36
<PAGE> 40
the effectiveness of a current registration statement relating to the exercise
of the warrants. Accordingly, we will be unable to redeem the warrants unless
there is a currently effective prospectus and registration statement under the
Securities Act covering the issuance of the underlying shares of our common
stock. Also, we may be unable to issue securities upon exercise of the warrants
to holders in those states in which we do not qualify or register under
applicable state securities law. This would apply even at the time when the
warrants are called for redemption.
We issued the warrants in registered form under a warrant agreement
between us and American Stock Transfer & Trust Company as warrant agent. We
refer you to the warrant agreement which has been filed as an exhibit to the
registration statement of which this prospectus is a part for a complete
description of the terms and conditions applicable to the warrants.
The exercise price, number of shares of common stock issuable on
exercise of the warrants and redemption threshold may be adjusted in some
circumstances, including in the event of our engaging in a stock dividend,
recapitalization, reorganization, merger or consolidation. However, these terms
will not be adjusted for issuances of our common stock at a price below their
exercise price.
We have the right, in our sole discretion, to decrease the exercise
price of the warrants for a period of not less than 30 days on not less than 30
days' prior written notice to the warrantholders. In addition, we have the
right, in our sole discretion, to extend the expiration date of the warrants on
five business days' prior written notice to the warrantholders. We will comply
with all applicable tender offer rules, including Rule 13e-4 promulgated under
the Securities Exchange Act, in the event we reduce the exercise price for a
limited period of time.
Warrants may be exercised upon surrender of the warrant certificate
representing the warrants on or before the expiration date at the offices of the
warrant agent, with the exercise form on the reverse side of the warrant
certificate completed and executed as indicated. Such certificate and form
should be accompanied by full payment of the exercise price by certified check,
payable to U.S. Energy Systems, Inc., for the number of warrants being
exercised. Warrantholders do not have the rights or privileges of holders of
common stock.
Warrantholders may not exercise the warrants unless at the time of
exercise we have filed with the SEC a current prospectus covering the shares of
common stock issuable upon exercise of the warrants and the shares have been
registered or qualified or are exempt under the securities laws of the state of
residence of the holder of the warrants.
We will not issue fractional shares upon exercise of the warrants.
Instead of the issuance of any fractional share which is otherwise issuable to
the warrantholder, we will pay the warrantholder an amount in cash based on the
market value of the common stock on the last trading day before the exercise
date.
PRIVATE WARRANTS. As of January 28, 2000, a total of 239,000 private
warrants were outstanding. Of such warrants, 114,000 were issued to lenders who
made possible the purchase of our interest in Plymouth Cogeneration Limited
Partnership. These warrants are exercisable at $5.00 and expire on October 30,
2000. The remaining 125,000 warrants were issued to holders of our 9%
convertible debentures in the conversion plan effected in December 1996 whereby
debentures of $500,000 face value were converted to 125,000 shares of common
stock and 125,000 warrants exercisable at $4.00. Such warrants expire on
December 1, 2001.
PREFERRED STOCK
We are authorized to issue 10,000,000 shares of preferred stock, par
value $0.01 per share. Our Board of Directors, without further approval of the
stockholders, is authorized to fix the rights and terms relating to:
o dividends;
o conversion;
o voting;
37
<PAGE> 41
o redemption;
o liquidation preferences;
o sinking funds and any other rights;
o preferences;
o privileges and restrictions applicable to each series of preferred
stock.
The issuance of preferred stock, while providing flexibility in
connection with possible financing, acquisitions and other corporate purposes,
could, among other things, adversely affect the voting power of the holders of
common stock and can be used as a means of discouraging, delaying or preventing
a change in control.
SERIES A CONVERTIBLE PREFERRED STOCK. As of January 28, 2000, we had
277,778 shares of Series A Preferred Stock outstanding. The holders of the
Series A Preferred Stock are entitled to receive, out of our funds which are
legally available for payment, cash dividends payable quarterly in arrears, at
the rate of $0.81 per share per annum, payable in cash, common stock or some
combination of both at the holder's option. No dividends will be declared or
paid or set apart for payment on any common stock during any calendar quarter
unless full dividends on the Series A Preferred Stock for all quarterly dividend
periods ending before or during the calendar quarter have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment of the preferred dividends is set apart for payment.
Each share of Series A Preferred Stock is entitled to a number of votes
in any vote brought before the holders of our common stock equal to the
per-share purchase price of the Series A Preferred Stock , which is $9.00,
divided by the conversion price, as discussed below, determined as of the record
date of the vote of stockholders. Currently, each share of Series A Preferred
Stock is entitled to four votes per share.
Each holder of a share of Series A Preferred Stock has the right at any
time to convert the share of Series A Preferred Stock into that number of fully
paid and non-assessable shares of common stock equal to the per-share purchase
price of the Series A Preferred Stock, which is $9.00, divided by the conversion
price of the share of Series A Preferred Stock, as discussed below. Currently,
each share of Series A Preferred Stock is convertible into four shares of our
common stock.
The conversion price of the Series A Preferred Stock is currently
$2.25. The conversion price will be adjusted upon the happening of specified
events, including stock splits, subdivisions or combinations of the our common
stock. The conversion price also will be adjusted in the event of a dilutive
issuance, i.e., if we issue common stock, or common stock equivalents
convertible into common stock, for consideration per share which is less than
the then-applicable conversion price.
If a dilutive issuance occurs in connection with an issuance of common
stock or common stock equivalents convertible into common stock in a public or
private offering of our securities, the conversion price will be reduced to the
price per share of the shares issued in the dilutive issuance. In this event,
however, the conversion price will not be reduced below $1.00 unless we
consummate any offering of our common stock or common stock equivalents
convertible into common stock at a price, or conversion price, less than an
amount equal to our net book value per share, as determined using the
information provided in our last quarterly or annual report as filed with the
Securities and Exchange Commission.
If there is a dilutive issuance in connection with an issuance of
common stock or common stock equivalents convertible into common stock in an
acquisition or merger, the conversion price will be reduced to the weighted
average of the issue price per share of the common stock outstanding or deemed
to be outstanding before the dilutive issuance and the per share price or
equivalent conversion price of the shares issued in the dilutive issuance. The
conversion price will not be adjusted for issuance of common stock upon the
exercise of options or the issuance of stock options to officers, directors,
employees or consultants of our company.
38
<PAGE> 42
At our option at any time after March 1, 2001, we may redeem the Series
A Preferred Stock in full or in part for cash, plus accrued and unpaid
dividends, at the following prices per share:
$12.15 after March 1, 2001 through February 28, 2002
$11.70 after March 1, 2002 through February 28, 2003
$11.25 after March 1, 2003.
We may force the conversion of the Series A Preferred Stock into shares
of common stock, at the conversion price then in effect, at any time after March
1, 2006.
In the event of any liquidation or winding up of the company, the
holders of the Series A Preferred Stock will be entitled to receive, prior and
in preference to the holders of common stock, $9.00 per share plus accrued and
unpaid dividends. Thereafter, the remaining assets will be distributed ratably
to the holders of the common stock.
As long as any of the shares of Series A Preferred Stock are
outstanding, we may not, without the approval of holders representing a majority
of the Series A Preferred Stock outstanding, take some actions, including,
without limitation: authorizing or issuing any class or series of equity
security having equal or superior rights as to payment upon liquidation,
dissolution or winding up; or redeeming or repurchasing outstanding securities
of the company, except securities issuable upon the exercise of outstanding
options and warrants or issuable upon the exercise of options granted in the
future.
The Series A Preferred Stock has no sinking fund.
SERIES B CONVERTIBLE PREFERRED STOCK. As of January 28, 2000, we had
509 shares of Series B Preferred Stock outstanding. The holders of the Series B
Preferred Stock are entitled to receive out of funds of the company legally
available for payment of cash dividends, payable monthly in arrears, at the rate
of $90 per share per annum, payable in cash. No dividends will be declared or
paid or set apart for payment on any common stock during any month unless full
dividends on the Series B Preferred Stock for all quarterly dividend periods
ending before or during such month have been or contemporaneously are declared
and paid or declared and a sum sufficient for the payment thereof is set apart
for such payment.
The holders of shares of Series B Preferred Stock have no voting
rights.
Each holder of a share of Series B Preferred Stock has the right at any
time to convert such share of Series B Preferred Stock into that number of fully
paid and non-assessable shares of common stock equal to $1,000 divided by the
conversion price of such share of Series B Preferred Stock, as shown below.
Currently, the conversion price for each share of Series B Preferred
Stock is $3.625. The conversion price is subject to adjustment upon the
happening of specified events, including stock splits, subdivisions or
combinations of our common stock. The conversion price also will be subject to
adjustment in the event of a dilutive issuance. If a dilutive issuance occurs in
connection with an issuance of common stock, or common stock equivalents
convertible into common stock, in a public or private offering of our
securities, the conversion price will be reduced to the price per share of the
shares issued in the dilutive issuance. The conversion price will not be
adjusted for issuance of common stock upon the exercise of options or the
issuance of stock options to officers, directors, employees or consultants of
our company.
At our option at any time and from time to time after January 31, 2001,
the Series B Preferred Stock may be redeemed in full or in part for cash, plus
accrued and unpaid dividends, at a price per share equal to 102% of the
liquidation value of shares.
The liquidation value of the Series B Preferred Stock is $1,000 per
share. In the event of any liquidation or winding up of our company, the holders
of the Series B Preferred Stock will be entitled to receive, prior and in
preference to the holders of common stock, but after holders of the Series A
Preferred Stock, $1,000 per share of Series B Preferred Stock plus accrued and
unpaid dividends. Thereafter, the remaining assets will be distributed ratably
to the holders of the common stock.
39
<PAGE> 43
As long as any of the shares of Series B Preferred Stock are
outstanding, we may not, without the approval of holders representing a majority
of the Series B Preferred Stock outstanding, take specified actions, including,
without limitation: authorizing or issuing any class or series of equity
security having equal or superior rights as to payment upon liquidation,
dissolution or winding up; or redeeming or repurchasing outstanding securities
of the company, except securities issuable upon the exercise of outstanding
options and warrants or issuable upon the exercise of options granted in the
future.
The Series B Preferred Stock has no sinking fund.
CONVERTIBLE DEBENTURES
As of January 28, 2000, we had $366,000 in principal amount of the
convertible debentures outstanding. The convertible debentures were issued in
June 1994 and mature on January 25, 2004. In addition to payment of interest at
a rate of 9% per annum, we are required to pay the holders of the convertible
debentures a pro rata portion of 50% of LIPA's share of the net revenue, net of
funds required for the payment of interest, resulting from LIPA's energy sales
(the "Supplemental Participation").
A total of $1,500,000 in debentures was issued in connection with the
acquisition of our interest in LIPA. In December 1996, one-third of the total,
or $500,000, were converted to 125,000 shares of our common stock and 125,000
private warrants. An additional $125,000 of such debentures have been redeemed.
Finally, in 1999, the holders of $509,000 face value of debentures agreed to
exchange such debentures for shares of Series B Preferred Stock.
Original issue....................................... $1,500,000
December 1996 partial conversion or redemption....... (625,000)
March 1999 exchange for Series B Preferred Stock..... (509,000)
----------
Balance.............................................. $ 366,000
==========
Under the terms and conditions of a pledge agreement, payment of
principal and interest on the convertible debentures and, if applicable, any
Supplemental Participation due is secured by a security interest in all of the
issued and outstanding shares of common stock of Lehi, all of which issued and
outstanding shares are owned by us. Until the time as our obligations for the
payment of the principal and interest on the convertible debentures and, if
applicable, any Supplemental Participation due are paid in full, we may not
cause Lehi to issue any additional shares of common stock unless the security
interest granted in Lehi shall be extended to the additional shares.
The convertible debentures are subordinate and subject in right of
payment to the prior payment of all our "Senior Indebtedness." "Senior
Indebtedness" is the principal, premium and interest on, and the other amounts
due or in connection with, any of our indebtedness with a bank, insurance
company, or other financial institution whether outstanding on the date of the
convertible debentures, or any indebtedness subsequently created, incurred,
assumed or guaranteed by us, and, including in each case, all renewals,
extensions, and refundings. Senior indebtedness does not include indebtedness
which is expressly made equal to or subordinate and subject in right of payment
to the payment of principal of an interest on the convertible debentures. Senior
indebtedness also does not include (1) indebtedness representing the repurchase
price of any preferred stock or our other capital stock or any dividend or
distribution with respect thereto; (2) our indebtedness owed directly to any
employee, officer or director; and (3) indebtedness which, by its terms, is
subordinate in right of payment to our indebtedness evidenced by the convertible
debentures.
We may redeem at our option the convertible debentures, in whole or in
part, at a redemption price equal to 102% of the principal amount of each
convertible debenture, plus any unpaid and accrued interest of the Supplemental
Participation. Upon redemption of the convertible debentures, we must issue each
holder whose convertible debentures have been redeemed a warrant to purchase a
number of shares of our common stock equal to the number of shares into which
the principal amount being redeemed is then convertible. The exercise price of
these warrants would be the same as the conversion price at the time of
redemption which is currently $8.00 per share.
40
<PAGE> 44
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE
OF INCORPORATION.
DELAWARE LAW. We are a Delaware corporation and must comply with
Section 203 of Delaware Law. In general, Section 203 prevents an "interested
stockholder" from engaging in a "business combination" with specified Delaware
corporations for three years following the date that person became an interested
stockholder unless:
(1) the corporation has elected in its certificate of incorporation not
to be governed by Section 203, which we have done;
(2) before that person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
(3) upon consummation of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the
interested stockholder owns at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees
with the right to determine confidentially whether shares held under
the plan will be voted or tendered in a tender or exchange offer; or
(4) following the transaction in which that person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of two-thirds of
the outstanding voting stock of the corporation not owned by the
interested stockholder.
An "interested stockholder" is defined generally as a person owning 15%
more of a corporation's outstanding voting stock. The restrictions in Section
203 also do not apply to some business combinations proposed by an interested
stockholder following the announcement or notification of an extraordinary
transaction involving the corporation and a person who had not been an
interested stockholder during the previous three years or a person who became an
interested stockholder with the approval of a majority of the corporation's
directors. The term "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an "interested
stockholder," transactions with an "interested stockholder" involving the assets
or stock of the corporation or its majority-owned subsidiaries and transactions
which increase an interested stockholder's percentage ownership of stock.
AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval. These additional shares may be used for a variety of
corporate purposes, including future public and private offerings to raise
additional capital, corporate acquisitions and employee benefits plans. The
existence of authorized but unissued shares of common and preferred stock could
make it more difficult or discourage an attempt to obtain control of our company
by means of a proxy contest, tender offer, merger or otherwise and, thereby,
preventing stockholders from receiving a premium for their shares over the
then-current market prices.
CLASSIFIED BOARD OF DIRECTORS. Our Board of Directors is divided into
three classes serving staggered three- year terms. As a result, approximately
one-third of the Board of Directors will be elected each year. The staggered
board, when coupled with provisions in our certificate and bylaws, authorizing
the Board of Directors to fill vacant directorships or increase the size of the
board of directors, may deter a stockholder from removing incumbent directors
and simultaneously gaining control of the board of directors by filing the
vacancies created by such removal with its own nominees. Additionally, a
possible acquiror may not proceed with a tender offer because it would be
unable to obtain control of the our Board for a period of at least two years.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock and warrant agent
for the warrants is American Stock Transfer & Trust Company.
41
<PAGE> 45
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market,
or the possibility of the sales occurring, could adversely affect prevailing
market prices of our common stock and our ability to raise equity capital.
Upon completion of this offering and assuming the exercise of all of
the purchase option and the warrants, we will have outstanding 9,549,124 shares
of our common stock, including 7,600 shares of common stock held in treasury,
assuming no exercise of outstanding options or other warrants or conversion of
outstanding convertible debt or Series A or Series B Preferred Stock. Of these
shares, those freely tradable without restriction include:
o 4,185,000 shares offered in this offering, unless sold to our
affiliates, as that term is defined in Rule 144;
o approximately 4,883,268 registered shares of common stock issued
upon the exercise of options, warrants or the conversion of other
convertible securities, unless held by our affiliates. Our
affiliates are people or entities that directly or indirectly
control our company, are controlled by our company or are under
common control with our company. For instance, our directors,
executive officers and principal stockholders are deemed to control
our company, and are thus affiliates.
The remaining 473,256 shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144,
all of which are held by our affiliates. Restricted securities may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rule 144, which rules are summarized below.
RULE 144
In general, under Rule 144 as currently in effect, a person, including
an affiliate, who has beneficially owned shares of our common stock for at least
one year would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of:
(1) 1% of the number of shares of common stock then outstanding,
which will equal approximately 89,291 shares immediately after
this offering; or
(2) the average weekly trading volume of the common stock on the
Nasdaq Smallcap Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to the sale,
which equaled approximately 587,700 shares during the four weeks
before the date of this prospectus.
Sales under Rule 144 also must be sold through brokers or :market
makers" and there must be current public information about our company
available. Shares properly sold in reliance on Rule 144 to persons who are not
affiliates become freely tradable without restriction or registration under the
securities laws.
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately.
42
<PAGE> 46
PLAN OF DISTRIBUTION
The shares of common stock and the common stock purchase warrants
offered hereby will be issued by us upon the exercise of the warrants and the
purchase option. See "Description for Securities - Warrants" for a description
for the terms and manner of exercise of the warrants.
Warrants to acquire 3,565,000 shares of common stock were issued in
December 1996 as part of a public offering of our common stock. The common stock
and warrants were sold by underwriters for whom Gaines Berland & Co. acted as
representative. In connection with the offering, we agreed to sell for nominal
consideration to Gaines Berland an option to purchase up to an aggregate of
310,000 shares of common stock and an aggregate of 310,000 common stock purchase
warrants.
Prior to completion of that public offering, there was no established
market for the warrants. The exercise price and other terms of the warrants
were arbitrarily determined by negotiation between the company and the
representative. In determining the exercise price consideration was given to
the company's then proposed operations, financial condition, estimates of its
business potential and the general condition of the securities market. The
exercise price and other terms of the warrants or the purchase option, however,
should not be considered as any indication of the actual value of our company or
of the common stock, and bear no relationship to the assets or book value of our
company of any generally accepted criteria of economic valuation.
LEGAL MATTERS
The validity of the shares of common stock which will be issued when
the warrants are exercised will be passed upon for us by the firm of Reid &
Priest LLP, New York, New York.
EXPERTS
Our financial statements as of January 31, 1999 and for each of the
years in the two-year period then ended, appearing in the prospectus, have been
audited by Richard A. Eisner & Company, LLP, independent auditors, to the extent
and for the years indicated in their report appearing elsewhere herein and in
the registration statement. The financial statements have been included in
reliance upon this report given upon the authority of that firm as experts in
accounting and auditing.
43
<PAGE> 47
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditor's Report...................................................................... F-2
Consolidated Balance Sheet as of January 31, 1999................................................. F-3
Consolidated Statements of Operations for the years ended January 31, 1999 and January 31, 1998... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended January 31, 1999
and January 31, 1998........................................................................... F-5
Consolidated Statements of Cash Flows for the years ended January 31, 1999 and
January 31, 1998................................................................................ F-6
Notes to Financial Statements..................................................................... F-7 to F-20
Unaudited Financial Statements:
Consolidated Balance Sheet as of October 31, 1999................................................. F-21
Consolidated Statements of Operations for the nine months ended October 31, 1999 and October 31,
1998........................................................................................... F-22
Consolidated Statements of Changes in Stockholders' Equity for the nine months ended
October 31, 1999............................................................................... F-23
Consolidated Statements of Cash Flows for the nine months ended October 31, 1999 and October 31,
1998........................................................................................... F-24
Notes to Financial Statements..................................................................... F-25
</TABLE>
F-1
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
U.S. Energy Systems, Inc.
West Palm Beach, Florida
We have audited the accompanying consolidated balance sheet of U.S. Energy
Systems, Inc. and subsidiaries as of January 31, 1999 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the two-year period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of U.S. Energy Systems,
Inc. and subsidiaries as of January 31, 1999, and the consolidated results of
their operations and their consolidated cash flows for each of the years in the
two-year period then ended in conformity with generally accepted accounting
principles.
Richard A. Eisner & Company, LLP
New York, New York
March 12, 1999
F-2
<PAGE> 49
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JANUARY 31, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash ........................................................................... $ 776,000
Accounts receivable (less allowance for doubtful accounts $15,000) ............. 763,000
Notes receivable - current portion ............................................. 196,000
Other current assets ........................................................... 355,000
------------
Total current assets ........................................................ 2,090,000
Property, plant and equipment, net ................................................ 5,832,000
Notes receivable, less current portion ............................................ 1,883,000
Investments in joint ventures:
Lehi Independent Power Associates, L.C ......................................... 939,000
Plymouth Cogeneration Limited Partnership ...................................... 503,000
Deferred acquisition costs ........................................................ 668,000
Goodwill, net ..................................................................... 1,939,000
Other assets ...................................................................... 317,000
------------
$ 14,171,000
============
LIABILITIES
Current liabilities:
Current portion of long-term debt .............................................. $ 114,000
Note payable - bank ............................................................ 300,000
Accounts payable ............................................................... 838,000
Royalties payable .............................................................. 54,000
------------
Total current liabilities ................................................... 1,306,000
Long-term debt, less current portion .............................................. 396,000
Convertible subordinated debentures (including due to related parties of $80,000) . 875,000
Advances from joint ventures ...................................................... 57,000
------------
Total liabilities ................................................................. 2,634,000
------------
Minority interest ................................................................. 524,000
------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 10,000,000 shares; Series A, 9%
cumulative, convertible, issued and outstanding 250,000 shares (liquidation
value of $2,301,000) (see Note K[1]) ........................................... 3,000
Common stock, $.01 par value, authorized 50,000,000 shares; issued 5,160,605 shares 51,000
Treasury stock, 2,600 shares common stock at cost ................................. (3,000)
Additional paid-in capital ........................................................ 17,467,000
Accumulated deficit ............................................................... (6,505,000)
------------
11,013,000
------------
$ 14,171,000
============
</TABLE>
See notes to financial statements
F-3
<PAGE> 50
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues ..................................................... $ 4,195,000 $ 2,233,000
----------- -----------
Cost and expenses:
Operating expenses ........................................ 2,266,000 1,127,000
Administrative expenses ................................... 1,992,000 1,613,000
Litigation costs .......................................... 47,000 326,000
Depreciation and amortization ............................. 499,000 260,000
----------- -----------
4,804,000 3,326,000
----------- -----------
Loss before other income (expense) and extraordinary item .... (609,000) (1,093,000)
Interest income .............................................. 299,000 265,000
Interest expense ............................................. (141,000) (129,000)
Equity in loss of joint ventures ............................. (98,000) (121,000)
Minority interest ............................................ (20,000)
----------- -----------
Loss before extraordinary item ............................... (569,000) (1,078,000)
Extraordinary gain from restructuring of liabilities ......... 36,000
----------- -----------
NET LOSS ..................................................... (569,000) (1,042,000)
Dividends on preferred stock.................................. (174,000)
----------- -----------
LOSS APPLICABLE TO COMMON STOCK............................... $ (743,000) $(1,042,000)
=========== ===========
LOSS PER SHARE OF COMMON STOCK - BASIC AND DILUTED:
LOSS BEFORE EXTRAORDINARY ITEM ............................ $ (.14) $ (0.23)
EXTRAORDINARY ITEM............................................ .01
----------- -----------
NET LOSS .................................................. $ (.14) $ (0.22)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ................... 5,158,005 4,654,555
=========== ===========
</TABLE>
See notes to financial statements
F-4
<PAGE> 51
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK TREASURY STOCK
------------------ ------------------
NUMBER NUMBER
OF OF
SHARES AMOUNT SHARES AMOUNT
------- ------ ------ ------
<S> <C> <C> <C> <C>
BALANCE - JANUARY 31, 1997
Cash paid for fractional shares
Shares issued in connection with acquisition
of American Enviro-Services, Inc.
Shares issued in connection with acquisition
of Commonwealth Petroleum Recycling, Inc.
Fair value of options issued for consulting
services
Net loss for the year ended January 31, 1998
BALANCE - JANUARY 31, 1998
Cash paid for fractional shares
Shares issued in connection with private
placement offering 250,000 $ 3,000
Shares purchased (2,600) $ (3,000)
Dividends on preferred stock
Net loss for the year ended January 31, 1999
--------- --------- -------- ---------
BALANCE - JANUARY 31, 1999 250,000 $ 3,000 (2,600) $ (3,000)
========= ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------
NUMBER ADDITIONAL
OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE - JANUARY 31, 1997 4,334,193 $ 43,000 $ 12,718,000 $ (4,894,000) $ 7,867,000
Cash paid for fractional shares (14) 0
Shares issued in connection with acquisition
of American Enviro-Services, Inc. 676,430 7,000 2,387,000 2,394,000
Shares issued in connection with acquisition
of Commonwealth Petroleum Recycling, Inc. 150,000 1,000 332,000 333,000
Fair value of options issued for consulting
services 17,000 17,000
Net loss for the year ended January 31, 1998 (1,042,000) (1,042,000)
------------ ---------- ------------- ------------- ------------
BALANCE - JANUARY 31, 1998 5,160,609 51,000 15,454,000 (5,936,000) 9,569,000
Cash paid for fractional shares (4) 0
Shares issued in connection with private
placement offering 2,187,000 2,190,000
Shares purchased (3,000)
Dividends on preferred stock (174,000) (174,000)
Net loss for the year ended January 31, 1999 (569,000) (569,000)
------------ ---------- ------------- ------------- ------------
BALANCE - JANUARY 31, 1999 5,160,605 $ 51,000 $ 17,467,000 $ (6,505,000) $ 11,013,000
============ ========== ============= ============= ============
</TABLE>
See notes to financial statements
F-5
<PAGE> 52
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------------
1999 1998
----------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$ (569,000) $ (1,042,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 499,000 260,000
Equity in loss of joint ventures 98,000 121,000
Minority interest 20,000
Gain from restructuring of liabilities (36,000)
Changes in:
Accounts and notes receivable, trade (83,000) 82,000
Other current assets (79,000) (126,000)
Other assets 90,000 (120,000)
Accounts payable and accrued expenses (92,000) (471,000)
Royalties payable (374,000) 428,000
------------- --------------
Net cash used in operating activities (490,000) (904,000)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired (414,000)
Loans to Reno Energy LLC (198,000) (1,695,000)
Repayments of loan by Reno Energy LLC 100,000 91,000
Acquisition of equipment and leasehold improvements (437,000) (353,000)
(Investment in) distributions from joint ventures (7,000) 11,000
Deferred acquisition costs (668,000)
Deposit 100,000
Other (274,000)
------------- --------------
Net cash used in investing activities (1,210,000) (2,534,000)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 100,000 87,000
Payment of convertible subordinated debentures (150,000)
Payment of pre-reorganization income taxes payable (347,000)
Payment of long-term debt (138,000)
Minority equity investment in subsidiary 170,000
Proceeds from long-term debt 28,000
Proceeds from issuance of preferred stock 2,190,000
Purchase of treasury shares (3,000)
Dividends on preferred stock (174,000)
Advances from joint ventures 16,000 10,000
------------- --------------
Net cash provided by (used in) financing activities 2,157,000 (368,000)
------------- --------------
NET INCREASE (DECREASE) IN CASH 457,000 (3,806,000)
Cash - beginning of year 319,000 4,125,000
------------- --------------
CASH - END OF YEAR $ 776,000 $ 319,000
============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 315,000 $ 188,000
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
Details of acquisitions:
Fair value of assets acquired $ 4,282,000
Liabilities assumed (1,124,000)
Fair value of common stock and options issued (2,744,000)
--------------
Cash paid for acquisitions $ 414,000
==============
</TABLE>
See notes to financial statements
F-6
<PAGE> 53
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE A - THE COMPANY
U.S. Energy Systems, Inc. and subsidiaries (collectively the "Company") is in
the business of owning, developing and operating cogeneration and independent
power plants through a subsidiary and through joint ventures. The Company,
through subsidiaries acquired during the year ended January 31, 1998, also
provides environmental and remedial services which include collecting and
recycling used motor and industrial oils and waters.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the financial
statements are as follows:
[1] CONSOLIDATION:
The consolidated financial statements of the Company include the accounts
of the Company and its wholly-owned and majority owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
the consolidated balance sheet. Income attributable to the minority
interest for the year ended January 31, 1998 was insignificant.
[2] PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over their estimated useful lives ranging from
five to forty years.
[3] INVESTMENTS IN JOINT VENTURES:
Investments in joint ventures are accounted for under the equity method
and are included based on the investees' December 31 year ends.
[4] GOODWILL AND OTHER LONG-LIVED ASSETS:
Goodwill represents the excess of the cost of acquired companies over the
fair value of their tangible net assets acquired and is being amortized
over 15 years using the straight-line method. The periods of amortization
of goodwill and other long-lived assets are evaluated at least annually to
determine whether events and circumstances warrant revised estimates of
useful lives. This evaluation considers, among other factors, expected
cash flows and profits of the businesses to which the goodwill and other
long-lived assets relate. Based upon the periodic analysis, such assets
are written down or written off if it appears that future profits or cash
flows will be insufficient to recover their carrying values.
[5] PER SHARE DATA:
Basic and diluted loss per share are computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding during the years. In arriving at income available to common
stockholders, preferred stock dividends have been deducted. Potential
common shares have not been included due to their anti-dilutive effect
(see Note K).
F-7
<PAGE> 54
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[6] USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
[7] REVENUE RECOGNITION:
Environmental and remedial services - revenue on cost plus fixed fee jobs
is recognized as costs are incurred using the time and material method.
Revenues from jobs that are based on fixed bids are recognized based on
the proportion of cost incurred to date to the total estimated contract
cost. Costs are recognized as incurred.
Cogeneration and independent power plants - revenues are recognized upon
delivery of power to a customer.
[8] FAIR VALUES OF FINANCIAL INSTRUMENTS:
The estimated fair value of financial instruments has been determined
based on available market information and appropriate valuation
methodologies. The carrying amounts of cash, accounts receivable, other
current assets, accounts payable and royalties payable approximate fair
value at January 31, 1999 because of the short maturity of these financial
instruments. The estimated carrying value of the notes receivable, note
payable - bank, mortgage and equipment notes payable and the convertible
subordinated debentures approximate fair value because the interest rates
on these instruments approximate the market rates at January 31, 1999. The
fair value estimates were based on information available to management as
of January 31, 1999.
[9] STOCK-BASED COMPENSATION:
The Company accounts for its stock-based compensation plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion
No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees" and
discloses the pro forma effects on net loss and loss per share had the
fair value of options been expensed. Under the provisions of APB No. 25,
compensation arising from the grant of stock options is measured as the
excess, if any, of the quoted market price of the Company's common stock
at the date of the grant over the amount an employee must pay to acquire
the stock (see Note K).
[10] SEGMENT INFORMATION:
The Company follows the requirements of Statement of Financial Accounting
Standards Board No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information". The adoption of SFAS 131 has not had
a significant effect on the information presented in the financial
statements.
F-8
<PAGE> 55
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE C - SUBSIDIARIES AND AFFILIATES
[1] AMERICAN ENVIRO-SERVICES, INC.:
On August 18, 1997, the Company acquired American Enviro-Services, Inc.
("AES") a provider of environmental and remedial services, for $2,498,000.
The purchase price consisted of $150,000 in cash and 665,000 shares of the
Company's common stock valued at $2,348,000. In addition, the Company
incurred acquisition costs of $276,000, including the issuance of 11,430
common shares valued at $46,000 and options valued at $17,000. The cost of
the acquisition was allocated to the assets acquired and liabilities
assumed based on their fair values as follows:
Assets acquired and liabilities assumed:
Current assets $599,000
Property, plant and equipment 948,000
Goodwill 2,118,000
Current liabilities (891,000)
---------------
$2,774,000
===============
The acquisition was accounted for as a purchase and, accordingly, the
accompanying consolidated financial statements include the accounts of AES
from the date of acquisition.
[2] COMMONWEALTH PETROLEUM RECYCLING, INC.:
On January 5, 1998, the Company, through its subsidiary AES, acquired
Commonwealth Petroleum Recycling, Inc. ("Commonwealth") for $333,000.
Commonwealth also provides environmental and remedial services. The
purchase price consisted of 150,000 shares of the Company's common stock
valued at $333,000. The purchase price, including $51,000 of acquisition
costs, was allocated to the assets acquired and liabilities assumed based
on their fair values as follows:
Assets acquired and liabilities assumed:
Current assets $54,000
Property, plant and equipment 563,000
Current liabilities (233,000)
------------
$384,000
============
The acquisition was accounted for as a purchase and, accordingly, the
accompanying consolidated financial statements include the accounts of
Commonwealth from the date of acquisition.
[3] STEAMBOAT ENVIROSYSTEMS, L.L.C.:
The Company owns a 95% interest in Steamboat Envirosystems, L.L.C.
("Steamboat") which owns and operates two geothermal power plants (the
"Steamboat Facilities").
The first $1,800,000 of Steamboat's annual net income is allocated to the
Company. For net income above $1,800,000, the other owner's interest will
be allocated: (i) 55% through December 2001 and (ii) 5% thereafter, with
the balance going to the Company.
F-9
<PAGE> 56
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE C - SUBSIDIARIES AND AFFILIATES (CONTINUED)
[3] STEAMBOAT ENVIROSYSTEMS, L.L.C.: (CONTINUED)
The Steamboat Facilities produce eight megawatts of electric power which
is sold, at market rates, under two power purchase agreements to Sierra
Pacific Power Company ("Sierra"). The agreements for Steamboat 1 and 1A
expire in December 2006 and December 2008, respectively.
The Steamboat facilities are subject to certain royalty agreements which
include royalty payments for steam extraction rights. In addition, one
facility is required to make royalty payments equivalent to thirty percent
of its' net revenue after certain deductions, starting March 1, 1997. The
Company has been negotiating to acquire such royalty interests. Royalty
expense for the years ended January 31, 1999 and 1998 were $247,000 and
$214,000, respectively.
[4] USE GEOTHERMAL, LLC (FORMERLY NRG COMPANY, LLC):
The Company has invested $1,970,000 in USE Geothermal, LLC ("USE GEO"),
for an 89.57% ownership interest . USE GEO is involved in the development
of a geothermal heating project (the "Reno Project") with Reno Energy LLC
("Reno Energy"), a Nevada limited liability company.
NOTE D - NOTES RECEIVABLE
Notes receivable consist of the following:
Convertible loan (a) $ 1,618,000
First note (b) 109,000
Second note (c) 275,000
Various notes (d) 77,000
-------------
2,079,000
Less current portion 196,000
-------------
$ 1,883,000
=============
(a) A Convertible loan agreement between USE GEO and Reno Energy at an
interest rate of 12% per annum maturing on April 10, 2027. The loan
is convertible into a 50% equity interest in Reno Energy. The
percentage is subject to pro rata adjustment in the event of
additional funding of the Reno Project. The loan is collateralized
by a first lien on all assets of Reno Energy and guaranteed by Reno
Energy's members. Additional advances made on the note have not
effected the 50% conversion feature.
At January 31, 1999, accrued interest on this note amounting to
$184,000 is included in other assets on the balance sheet.
(b) Loan by USE GEO to Reno Energy is repayable in equal quarterly
payments of $28,895 including interest at 9% per annum until final
maturity on December 31, 1999.
F-10
<PAGE> 57
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
(c) Loan granted by the Company to Geo Energy, LLC (a company affiliated
with Reno Energy) payable in quarterly payments of $11,585 including
interest at 15% per annum until final maturity on December 1, 2000
at which time a balloon payment of $258,000 will be due.
(d) Notes receivable from AES customers with terms of three months to
two years. The notes are either noninterest bearing or bear interest
at 18%.
F-11
<PAGE> 58
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at January 31, 1999:
Land ............................................... $ 78,000
Building ........................................... 841,000
Steamboat Springs Thermal Hydroelectric Power Plants 4,244,000
Equipment .......................................... 654,000
Leasehold improvements ............................. 51,000
Office equipment and furnishings ................... 105,000
Vehicles ........................................... 451,000
-----------
6,424,000
Less accumulated depreciation ...................... (592,000)
-----------
$ 5,832,000
===========
NOTE F - INVESTMENTS IN JOINT VENTURES
[1] LEHI INDEPENDENT POWER ASSOCIATES, L.C. ("LIPA"):
Lehi Envirosystems, Inc. ("LEHI"), a wholly owned subsidiary of the
Company, owns a 50% equity interest in LIPA, which owns a cogeneration
project (the "Project") located in Lehi, Utah. From the date of LEHI's
investment through January 31, 1999, the Project has not been in
operation.
The operating agreement of LIPA provides for, among other matters, the
allocation of the net profits and net losses to the owners in proportion
to their ownership interest. The agreement also provides for additional
contributions totaling $875,000 to be divided proportionately by the
owners in the event that any modification, as provided, is required to
bring the Project back to full operational condition. LIPA terminates in
January 2024, unless sooner dissolved by certain conditions as set forth
in the operating agreement.
The Company is exploring two alternatives for realizing its investment in
LEHI. The Company and its partners believe that LIPA can sell its existing
equipment and replace it with new generators that would produce power at a
rate that could be sold profitably. Additionally, the Company has filed an
application to update its air quality permit which allows the plant to
operate with emissions of up to 250 tons of nitrous oxide annually. The
Company believes that there is a market for the permit's tonnage, in
excess of that required for operations.
An owner of a 25% interest in LIPA also owns a 5% interest in Steamboat
Envirosystems, L.L.C. (see Note C[3]).
F-12
<PAGE> 59
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE F - INVESTMENTS IN JOINT VENTURES (CONTINUED)
[2] PLYMOUTH COGENERATION LIMITED PARTNERSHIP ("PCLP"):
The Company, through its wholly owned subsidiary, Plymouth Envirosystems,
Inc. ("Plymouth") owns a 50% interest in PCLP which owns and operates a
cogeneration plant which produces electricity and heat at Plymouth State
College, in Plymouth, New Hampshire. The facility provides 100% of the
electrical and heating requirements for the campus, which is a part of the
University of New Hampshire system, under a contract expiring in 2014. The
project is comprised of a combination of diesel engine-generators, heat
recovery and supplemental boilers, and the complete civil works that link
all campus buildings into a single heating loop.
[3] At acquisition, LEHI's equity in the net assets of LIPA was approximately
$146,000 and Plymouth's equity in the net assets of PCLP was approximately
$668,000. The excess of purchase price over the underlying equities of
LEHI and Plymouth have been allocated to the plants of LIPA and PCLP,
respectively, and is being amortized over the remaining life of such
assets. At January 31, 1999, the estimated remaining life of the plants is
as follows:
LIPA - buildings 26 years
- machinery and equipment 4 years
Plymouth - plant 17 years
[4] The following is summarized financial information of LIPA and PCLP as of
December 31, 1998 and for each of the two-years in the period then ended:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------
LIPA PCLP
----------- ----------
<S> <C> <C>
Current assets .................................. $ 28,000 $ 458,000
Property, plant and equipment at cost (net) ..... 257,000 4,746,000
Other assets .................................... 1,047,000
----------- -----------
Total assets ................................. 285,000 6,251,000
Current liabilities ............................. (18,000) (665,000)
Long-term debt .................................. (4,711,000)
----------- -----------
Equity .......................................... $ 267,000 $ 875,000
=========== ===========
Share of equity in joint ventures ............... $ 133,000 $ 437,000
Investments in joint ventures in excess of equity 806,000 66,000
----------- -----------
Total investments in joint ventures .......... $ 939,000 $ 503,000
=========== ===========
</TABLE>
F-13
<PAGE> 60
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE F - INVESTMENTS IN JOINT VENTURES (CONTINUED)
[4] (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
LIPA PCLP
-------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue...................................... $ 1,219,000 $ 1,198,000
=========== ===========
Net income (loss)............ $ 6,000 $ (31,000) $ (84,000) $ (91,000)
========= ========= =========== ===========
Equity in net income (loss).................. $ 3,000 $ (16,000) $ (42,000) $ (46,000)
Amortization of purchase price over equity... (55,000) (55,000) (4,000) (4,000)
--------- --------- ----------- -----------
Net loss from joint ventures................. $ (52,000) $ (71,000) $ (46,000) $ (50,000)
========= ========= =========== ===========
Distributions received by Company............ $ 20,000
===========
</TABLE>
NOTE G - NOTE PAYABLE - BANK
At January 31, 1999, AES owed the bank $300,000, the full amount of its line of
credit. The line bears interest at prime plus .5%, (8.25%) at December 31, 1998.
The line of credit is collateralized by AES's accounts receivable, inventory and
equipment.
NOTE H - LONG-TERM DEBT
Long-term debt, all incurred by AES, at January 31, 1999 consisted of the
following:
<TABLE>
<CAPTION>
<S> <C>
Mortgage payable, U.S. Small Business Administration, 4%, $447
per month, due November, 2017 (A) ................................... $ 70,000
Mortgage payable, Old National Bank, prime plus .5%, $3,246
per month, due February, 2006 (A) ................................... 226,000
Notes payable, various, 8.0% - 10.5%, $10,411 per month, due
September 1998 to March 2003, collateralized by all the assets of AES 214,000
--------
510,000
Less current portion ................................................... 114,000
--------
$396,000
========
</TABLE>
(A) Collateralized by AES land and building
F-14
<PAGE> 61
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE H - LONG-TERM DEBT (CONTINUED)
As of January 31, 1999, future annual maturities are as follows:
2000 $114,000
2001 93,000
2002 58,000
2003 53,000
2004 and thereafter 192,000
--------
$510,000
========
NOTE I - INCOME TAXES
Deferred taxes at January 31, 1999 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Potential benefit of operating loss carryforward $ 1,482,000
Expenses for financial reporting, not yet deductible for taxes 157,000
--------------
1,639,000
Valuation allowance (1,639,000)
--------------
$ 0
==============
</TABLE>
The Company has fully reserved against the deferred tax asset since the
likelihood of realization cannot be determined.
The difference between the statutory tax rate of 34% and the Company's effective
tax rate of 0% is due to an increase in the valuation allowance of $64,000 in
1999 and $181,000 in 1998 to offset the potential tax benefit attributable to
the increases in operating loss carryforwards, resulting from the losses in each
year.
At January 31, 1999, the Company has net operating loss carryforwards expiring
through 2019. Under Section 382 of the Internal Revenue Code, the Company is
subject to annual limitation on utilization of its net operating loss
carryforwards because of an ownership change of more than 50% that occurred upon
the public offering in December 1996. This annual limitation is approximately
$150,000 plus any built-in gains recognized in the five year period beginning on
the date of the ownership change. After giving recognition to this limitation,
the net operating loss carryforwards available to be utilized by the Company of
approximately $3,706,000, plus any recognized built in gains, expire as follows:
JANUARY 31,
-----------
2002 $750,000
2003 150,000
2004 150,000
2005 150,000
2007 124,000
2009 19,000
2010 607,000
2011 150,000
2012 565,000
2013 545,000
2019 496,000
----------
$3,706,000
==========
F-15
<PAGE> 62
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE J - CONVERTIBLE SUBORDINATED SECURED DEBENTURES
The Convertible Subordinated Debentures (the "Debentures") bear interest at 9%
per annum and are due on January 25, 2004. The Debenture holders are entitled to
50% of the Company's share of net profits of LIPA, as defined. The Debentures
are collateralized by the outstanding shares of LEHI and are subordinated to
senior indebtedness. Commencing January 25, 1998, the Company has the option to
redeem the Debentures at 102% of principal, plus unpaid and accrued interest.
The conversion rate of the Debentures is $8.00 per share (109,375 shares of
common stock).
The Company made an exchange offer to its debenture holders under which the
principal amount of the holders' notes would be exchanged for shares of the
Company's Series B 9% Convertible Preferred Stock ("Series B Preferred").
Holders of 58% of the debentures accepted the offer, and on March 8, 1999, the
Company issued 509 shares of Series B Preferred in exchange for $509,000 of the
Debentures. The Series B Preferred pays an annual dividend at 9% and each share
is convertible into 275 shares of the Company's common stock.
NOTE K - STOCKHOLDERS' EQUITY
[1] PREFERRED STOCK:
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). Each share of preferred stock is 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 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.
Each share of preferred stock is entitled to the number of votes equal to
$9.00 divided by the conversion price as of the record date, currently
four votes per preferred share. The liquidation value of each share of
preferred is equal to $9.00 plus accrued dividends, whether or not
declared. The preferred will have a preference on liquidation equal to the
liquidation value ($2,301,000 at January 31, 1999). Dividends of $51,000
paid on February 1, 1999, are included in accounts payable in the
accompanying balance sheet.
Additionally, the investor has the right to purchase an additional 222,000
shares of the Series A convertible preferred stock prior to August 26,
1999, on the same terms as the original offering.
[2] 1996 STOCK OPTION PLAN:
The 1996 Stock Option Plan (the "1996 Plan") provides for the granting of
nonstatutory options to purchase up to 1,000,000 shares of common stock to
officers, employees, directors and consultants of the Company. The 1996
Plan is administered by a committee appointed by the Board of Directors
which, within the limitation of the 1996 Plan, determines the persons to
whom options will be granted, the number of shares to be covered by each
option, the duration and rate of exercise of each option, the exercise
price and manner of exercise, and the time, manner and form of payment
upon exercise of an option. Options granted under the 1996 Plan may not be
granted at a price less than the fair value of the common stock, as
determined by the committee on the date of grant, and will expire not more
than ten years from the date of grant.
F-16
<PAGE> 63
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE K - STOCKHOLDERS' EQUITY (CONTINUED)
[3] 1997 STOCK OPTION PLAN:
The 1997 Stock Option Plan (the "1997 Plan") provides for the granting of
nonstatutory options to purchase up to 1,000,000 shares of common stock to
officers, employees, directors and consultants of the Company. The 1997
Plan has substantially the same terms and provisions as the 1996 Plan.
[4] 1998 EXECUTIVE INCENTIVE COMPENSATION PLAN:
In August 1998, the Company adopted the 1998 Executive Incentive
Compensation Plan (the "1998 Plan"). The 1998 Plan provides for the
granting of stock options, stock appreciation rights, restricted stock,
deferred stock and other stock related awards and incentive awards that
may be settled in cash, stock or property. The 1998 Plan is intended to
supersede the 1997 Plan and the 1996 Plan (the "Preexisting Plans"). Under
the 1998 Plan, 1,500,000 shares of common stock may be subject to the
granting of awards, plus the number of shares with respect to shares
previously granted under the Preexisting Plans that terminate without
being exercised, and the number of shares that are surrendered in payment
of any awards or tax withholding requirements.
The Plan is to be administered by a committee designated by the Board of
Directors consisting of not less than two outside, nonemployee directors.
The committee is authorized to select to whom awards will be granted,
determine type and number of awards to be granted and the number of shares
of common stock to which awards will relate and specify times at which
awards will be exercisable or settleable.
[5] STOCK OPTIONS AND WARRANTS:
Prior to December 1996, the Company granted 174,100 options to officers,
employees, directors and consultants of the Company under several Stock
Option Agreements. Options granted under these agreements are exercisable
for a period of up to five (5) years from date of grant at an exercise
price as stated in the agreements.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------------------------------
1999 1998
-------------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 1,289,600 $ 4.16 816,600 $4.71
Granted (1) 589,500 2.43 473,000 3.19
Cancelled (50,000) 3.91
--------- ---------
Options outstanding at end of year 1,829,100 3.08 1,289,600 4.16
========= =========
Options exercisable at end of year 1,754,100 3.11 495,350 5.23
========= =========
</TABLE>
(1) Excludes 589,000 options previously outstanding which were repriced to
$2.50 on December 9, 1998.
F-17
<PAGE> 64
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE K - STOCKHOLDERS' EQUITY (CONTINUED)
[5] STOCK OPTIONS AND WARRANTS: (CONTINUED)
The following table presents information relating to stock options
outstanding at January 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------- -----------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
RANGE OF AVERAGE REMAINING AVERAGE
EXERCISE EXERCISE LIFE IN EXERCISE
PRICE SHARES PRICE YEARS SHARES PRICE
--------------- ---------- --------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
$2.00 - $2.50 1,228,500 $2.47 5.65 1,153,500 $ 2.47
3.25 - 3.875 243,000 3.79 3.87 243,000 3.875
4.00 270,000 4.00 4.01 270,000 4.00
8.00 83,750 8.00 1.72 83,750 8.00
10.00 3,850 10.00 .75 3,850 10.00
------------ ------------
1,829,100 3.80 1,754,100
============ ============
</TABLE>
As of January 31, 1999, a total of 1,052,500 options are available for
future grant.
The weighted average fair value of options at date of grant for grants
during 1999 and 1998 was $.90 and $2.16 per option, respectively. Additionally,
the Company repriced 589,000 outstanding stock options. The fair value of the
repriced options was $1.53 per option. The fair value of the options at date of
grant was estimated using the Black-Scholes option-pricing model utilizing the
following weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31,
-----------------------------
1999 1998
------------- -----------
<S> <C> <C>
Risk-free interest rates 4.39 - 5.55% 5.71 - 6.37%
Expected option life in years 5.7 5.10
Expected stock price volatility .70 .70
Expected dividend yield .00% .00%
</TABLE>
Had the Company elected to recognize compensation cost based on the fair value
of the options at the date of grant as prescribed by FASB 123, pro forma net
loss applicable to common stock in 1999 and 1998 would have been ($2,711,000)
and ($1,631,000), respectively, or ($.53) per share and ($0.35) per share,
respectively.
F-18
<PAGE> 65
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE K - STOCKHOLDERS' EQUITY (CONTINUED)
[5] STOCK OPTIONS AND WARRANTS: (CONTINUED)
As of January 31, 1999, the Company has warrants outstanding for the
purchase of its common stock as follows:
<TABLE>
<CAPTION>
EXERCISE EXPIRATION
DESCRIPTION SHARES PRICE DATE
------------------------------------------ ---------- --------- ----------
<S> <C> <C> <C>
Convertible debt 125,000(a) $4.00 December 2001
Debt 114,000 5.00 October 1999
Consulting services 3,750 16.00 October 1999
Public offering 3,565,000(a) 4.00 December 2001
</TABLE>
(a) Redeemable at $.01 per warrant under certain conditions.
NOTE L - COMMITMENTS AND CONTINGENCIES
[1] USE INTERNATIONAL, L.L.C.:
During the year ended January 31, 1998, the Company settled its
arbitration with a former joint venture partner for a payment of $163,000
of which $84,000 was previously accrued and $79,000 was charged to
litigation costs for the year ended January 31, 1998.
[2] U.S ENERGY SYSTEMS, INC. v. ENVIRO PARTNERS, L.P. ET AL.:
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. The Company had intended to close a private placement of its
securities to Enviro concurrent with a public offering of its securities.
The Company was unable to close the private placement because a condition
to the private placement, NASDAQ's approval of listing the Company's
publicly offered securities on the NASDAQ Small Cap Market, would not be
satisfied if the private placement proceeded. NASDAQ refused to approve
the requested listing because it concluded that the private placement was
unfair to potential NASDAQ investors. The Company completed a public
offering without closing the private placement in December 1996.
The Company commenced the action because of threats to sue the Company by
Enviro for damages sustained as a result of not completing the private
placement. On March 28, 1997, Enviro counterclaimed seeking $6,000,000 of
damages. On March 8, 1999 motions by both parties for summary judgements
were denied and the pre-trial process has been scheduled. Management
believes, based on consultation with counsel, that the counterclaim has no
merit and intends to contest vigorously, however, the outcome is presently
indeterminable.
NOTE M - RELATED PARTY TRANSACTIONS
Included in the outstanding debentures are amounts due to a stockholder/director
of $80,000. In connection with the notes payable issued in November 1994 and
paid in December 1996, an affiliate of a director was granted warrants to
purchase 78,000 shares of the Company's common stock at $5.00 per share before
October 31, 1999.
During each of the years ended January 31, 1999 and 1998, the Company paid
interest of $7,000 to the related party.
F-19
<PAGE> 66
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE N - BUSINESS SEGMENTS
The Company's business segments are the developing and operating of cogeneration
and independent power plants and providing environmental and remedial services.
The following is the Company's business segment data:
<TABLE>
<CAPTION>
COGENERATION AND ENVIRONMENTAL
INDEPENDENT POWER AND REMEDIAL
PLANTS SERVICES CORPORATE TOTAL
------------------ ------------- --------- -----
<S> <C> <C> <C>
Year ended January 31, 1999:
Revenues $1,776,000 $ 2,419,000 $ 4,195,000
Operating income (loss) 612,000 52,000 $ (1,273,000) (609,000)
Assets 4,101,000 4,516,000 5,554,000 14,171,000
Significant noncash transactions:
Capital expenditures 6,000 373,000 58,000 437,000
Depreciation and amortization 157,000 319,000 23,000 499,000
Loss from joint ventures
and minority interest 118,000 118,000
Year ended January 31, 1998:
Revenues 1,520,000 713,000 2,233,000
Operating income (loss) 379,000 (12,000) (1,460,000) (1,093,000)
Assets 4,350,000 4,368,000 4,311,000 13,029,000
Significant noncash transactions:
Capital expenditures 126,000 1,655,000 83,000 1,864,000
Depreciation and amortization 148,000 98,000 14,000 260,000
Loss from joint ventures 121,000 121,000
</TABLE>
F-20
<PAGE> 67
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31,
1999
-----------
(unaudited)
<S> <C>
ASSETS
Current assets:
Cash .......................................................... $ 195,000
Accounts receivable (less allowance for doubtful accounts
($15,000) ................................................... 832,000
Notes receivable - current portion ............................ 40,000
Prepaid expenses and other current assets ..................... 291,000
------------
Total current assets ...................................... 1,358,000
Property, plant and equipment, net ............................... 5,859,000
Notes receivable, less current portion ........................... 1,990,000
Investments in joint ventures:
Lehi Independent Power Associates, L.C ........................ 899,000
Plymouth Cogeneration Limited Partnership ..................... 479,000
Goodwill, net .................................................... 1,831,000
Deferred acquisition costs ....................................... 830,000
Other assets ..................................................... 467,000
------------
$ 13,713,000
============
LIABILITIES
Current liabilities:
Current portion of long-term debt ............................. $ 112,000
Notes payable - bank .......................................... 300,000
Accounts payable and accrued expenses ......................... 1,001,000
Accounts payable and accrued expenses for litigation
settlement .................................................. 223,000
------------
Total current liabilities ................................. 1,636,000
Long-term debt, less current portion ............................. 429,000
Litigation settlement liability .................................. 900,000
Convertible subordinated secured debentures ...................... 366,000
Advances from joint ventures ..................................... 74,000
------------
Total liabilities ......................................... 3,405,000
------------
Minority interests ............................................... 540,000
------------
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
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
Treasury stock, 7,600 shares of common stock at cost ............. (15,000)
Additional paid-in capital ....................................... 17,970,000
Accumulated deficit .............................................. (8,241,000)
------------
Total stockholders' equity ................................ 9,768,000
------------
$ 13,713,000
============
</TABLE>
See notes to financial statements
F-21
<PAGE> 68
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31,
----------------------------
1999 1998
------------- ------------
<S> <C> <C>
Revenues .......................................... $ 3,241,000 $ 3,020,000
----------- -----------
Costs and expenses:
Operating expenses ............................. 2,053,000 1,565,000
Administrative expenses ........................ 1,445,000 1,484,000
Depreciation ................................... 429,000 371,000
Loss from joint ventures ....................... 69,000 57,000
----------- -----------
3,996,000 3,477,000
----------- -----------
(755,000) (457,000)
Interest income ................................... 204,000 226,000
Interest expense .................................. (100,000) (105,000)
Minority interest ................................. (16,000) --
----------- -----------
Loss before litigation settlement costs and
extraordinary item............................. (667,000) (336,000)
Litigation settlement costs ....................... 1,138,000 47,000
----------- -----------
Loss before extraordinary item .................... (1,805,000) (383,000)
Extraordinary gain on exchange of debentures to
preferred stock................................. 69,000 --
----------- -----------
NET LOSS .......................................... (1,736,000) (383,000)
Dividends on preferred stock ...................... (179,000) (123,000)
----------- -----------
LOSS APPLICABLE TO COMMON STOCK ................... $(1,915,000) $ (506,000)
=========== ===========
LOSS PER SHARE OF COMMON STOCK - BASIC AND DILUTED:
LOSS APPLICABLE TO COMMON STOCK BEFORE
EXTRAORDINARY ITEM ........................... $ (0.38) $ (0.10)
=========== ===========
NET LOSS APPLICABLE TO COMMON STOCK .......... $ (0.37) $ (0.10)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING..................................... 5,154,141 5,160,605
=========== ===========
</TABLE>
See notes to financial statements
F-22
<PAGE> 69
U.S. ENERGY SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED OCTOBER 31, 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)
Shares issued in connection
with private placement 27,778 (*) -- -- -- --
offering......................
Series B Preferred Stock
issued in exchange for -- -- 509 (*) -- --
debentures....................
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
------------------------
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
F-23
<PAGE> 70
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(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..................... 69,000 57,000
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................ (206,000) (559,000)
-------------- --------------
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............................. 12,000 (5,000)
-------------- --------------
Net cash provided by financing activities............ 86,000 2,091,000
-------------- --------------
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
</TABLE>
See notes to financial statements
F-24
<PAGE> 71
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.
F-25
<PAGE> 72
================================================================================
U.S. ENERGY SYSTEMS, INC.
4,185,000 SHARES OF COMMON STOCK
310,000 COMMON STOCK PURCHASE WARRANTS
---------------------------
PROSPECTUS
---------------------------
================================================================================
<PAGE> 73
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation exculpates directors from
personal liability to the fullest extent permitted by Section 102(b)(7) of the
Delaware General Corporation Law. This provision provides that a corporation may
eliminate or limit the personal liability of a director to the corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that such provision shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit.
The Company's Certificate of Incorporation and Bylaws provide that the
Registrant shall indemnify, to the fullest extent authorized by the Delaware
General Corporation Law, each person who is involved in any litigation or other
proceeding because he or she is or was a director or officer of the Company
against all expense, loss or liability in connection therewith.
Section 145 of the Delaware General Corporation Law permits a
corporation to indemnify any director or officer of the corporation against
expenses (including attorneys' fees), judgements, fines and amounts paid in
settlements actually and reasonably incurred in connection with any action, suit
or proceeding brought by reason of the fact that such person is or was a
director or officer of the corporation, if such person acted in good faith and
in a manner that he or she reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, if he or she had no reason to believe his or her conduct was
unlawful. In a derivative action indemnification may be made only for expenses
actually and reasonably incurred by any director or officer in connection with
the defense or settlement of an action or suit, if such person has acted in good
faith and in a manner that he or she reasonably believed to be in or not opposed
to the best interests of the corporation, except that no indemnification shall
be made if such person shall have been adjudged to be liable to the corporation,
unless and only to the extent that the court in which the action or suit was
brought shall determine upon application that the defendant is reasonably
entitled to indemnification for such expenses despite such adjudication of
liability. The right to indemnification includes the right to be paid expenses
incurred in defending any proceeding in advance of its final disposition upon
the delivery to the corporation of an undertaking, by or on behalf of the
director or officer, to repay all amounts so advanced if it is ultimately
determined that such director or officer is not entitled to indemnification.
The Company has directors' and officers' liability insurance.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of this offering in connection with the issuance
and distribution of the securities being registered, all of which are to be paid
by the Company, are as follows:
Printing fees.............................................. 15,000
Legal fees and expenses.................................... 30,000
Accounting fees and expenses............................... 30,000
Miscellaneous expenses..................................... 25,000
--------
Total................................................. $100,000
========
II-1
<PAGE> 74
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In December 1999, the Company issued 187,234 shares of its common
stock and options to acquire 46,800 shares of common stock at an exercise price
of $2.9375 per share to Lawrence I. Schneider, an officer and director of the
Company, in lieu of a $275,000 fee. The issuance was made in reliance upon the
exemption under Section 4(2) of the Securities Act.
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 and Seymour J.
Beder, all officers of the Company, in lieu of their respective salaries for the
month of November 1999. The shares were issued under 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 the exemption from the registration requirements under
Section 4(2) of the Securities Act.
On August 26, 1998, the Company's stockholders approved a grant to
Energy Systems Investors of 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, Energy Systems Investors exercised
a portion of this option for $250,000 and was issued 27,778 shares of Series A
Preferred Stock. The issuance was made in reliance on the exemption from the
registration requirements under Section 4(2) of the Securities Act.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ -----------
<S> <C> <C>
2.1 -- Merger Agreement by and between the Company, AES Merger Corp., American Enviro-Services, Inc., and the
Shareholders of American Enviro-Services, Dated as of August 4, 1997(4)
3.1 -- Restated Certificate of Incorporation of the Company filed with the Secretary of State of
Delaware(1)
3.2 -- By-Laws of the Company(2)
4.1 -- Specimen Stock Certificate(1)
4.2 -- Form of Warrant(1)
4.3 -- Form of Warrant Agreement(1)
4.4 -- Form of Representative's Purchase Option(1)
4.5 -- Certificate of Designation of Series A Convertible Preferred Stock of the Company as filed
with the Secretary of State of Delaware on March 23, 1998(7)
4.6 -- Certificate of Designation of Series B Convertible Preferred Stock of the Company as filed
with the Secretary of the State of Delaware(9)
5.1 -- Opinion of Reid & Priest LLP*
10.1 -- Plan of Reorganization of Cogenic Energy Systems, Inc.(2)
10.2 -- 9% Convertible Subordinated Debenture due 2004(2)
10.3 -- Employment Agreement, dated as of November 11, 1993, between the Company and Richard
Nelson(2)
10.3(a) -- Amendment to Employment Agreement between the Company and Richard Nelson October 15,
1996(2)
10.4 -- Employment Agreement, dated as of December 11, 1993, between the Company and Theodore
Rosen(2)
10.4(a) -- Amendment to Employment Agreement between the Company and Theodore Rosen dated October 15,
1996(1)
10.5 -- Purchase Agreement, dated as of January 24, 1994, between Lehi Co-Gen Associates, L.C. and
Lehi Envirosystems, Inc.(2)
</TABLE>
II-2
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ -----------
<S> <C> <C>
10.6 -- Operating Agreement among Far West Capital, Inc., Suma Corporation and Lehi Envirosystems,
Inc. dated January 24, 1994(2)
10.7 -- Form of Purchase and Sale Agreement between Far West Capital, Inc., Far West Electric
Energy Fund, L.P., 1-A Enterprises, the Company and Steamboat LLC(1)
10.8 -- Form of Operation and Maintenance Agreement between Steamboat LLC and S.B. Geo, Inc.(1)
10.9 -- Letter Agreement, dated as of November 8, 1994, between the Company, PSC Cogeneration
Limited Partnership, Central Hudson Cogeneration, Inc. and Independent Energy Finance
Corporation(1)
10.10 -- Agreement among the Company, Plymouth Envirosystems, Inc., IEC Plymouth, Inc. and
Independent Energy Finance Corporation dated November 16, 1994(1)
10.11 -- Amended and Restated Agreement of Limited Partnership of Plymouth Cogeneration Limited
Partnership among PSC Cogeneration Limited Partnership, Central Hudson Cogeneration, Inc.
and Plymouth Envirosystems, Inc. dated November 1, 1994(1)
10.12 -- Amended and Restated Agreement of Limited Partnership of PSC Cogeneration Limited
Partnership among IEC Plymouth, Inc., Independent Energy Finance Corporation and Plymouth
Envirosystems, Inc. dated December 28, 1994(1)
10.13 -- Purchase and Sale Agreement, dated as of December 31, 1995, between the Company, Far West Capital,
Inc., Far West Electric Energy Fund, L.P., 1-A Enterprises and Steamboat Enviro systems, LLC(1)
10.13(a) -- Letter Agreement, dated September 25, 1996, between the Company and Far West Capital,
Inc.(1)
10.14 -- Joint Development Memorandum of Intent dated September 20, 1994, between the Company and
Cowen Partnership(1)
10.15 -- Agreement dated May 4, 1995 between the Company and Indus LLC(1)
10.16 -- Security Agreement and Financing Statement among the Company, Lehi Envirosystems, Inc.,
Plymouth Envirosystems, Inc. and Anchor Capital Company, LLC dated June 14, 1995, as
amended(1)
10.17 -- Stock Pledge Agreement among Richard H. Nelson, Theodore Rosen, Anchor Capital Company,
LLC and the Company dated June 14, 1995(1)
10.18 -- Loan Agreement among the Company, Lehi Envirosystems, Inc., Plymouth Envirosystems and
Solvation, Inc. dated as of December 15, 1995, as amended(1)
10.19 -- Pledge Agreement between the Company and Solvation, Inc. dated as of December 15, 1995(1)
10.20 -- Lease dated September 1, 1995 between the Company and Gaedeke Holdings, Ltd.(1)
10.21 -- Documents related to Private Placement(1)
10.21(a) -- Certificate of Designations(1)
10.22 -- Purchase Agreement between the Company and Westinghouse Electric Corporation dated as of
November 6, 1995 and amendments thereof(1)
10.23 -- Letter of intent to the Company from Bluebeard's Castle, Inc. dated August 8, 1996(1)
10.24 -- Form of Joint Venture Agreement among the Company and Bluebeard's Castle, Inc. and
Bluebeard Hilltop Villas dated as of August 6, 1996(1)
10.25(a) -- Long-Term Agreement for the Purchase and Sale of Electricity Between Sierra Pacific Power
Company and Far West Capital, Inc. dated October 29, 1988(1)
10.25(b) -- Assignment of Interest, dated December 10, 1988 by and between Far West Capital, Inc. and
1-A Enterprises(1)
10.25(c) -- Letter dated August 18, 1989 by Gerald W. Canning, Vice President of Electric Resources,
consenting to the Assignment of Interest on behalf of Sierra Pacific Power Company(1)
10.26(a) -- Agreement for the Purchase and Sale of Electricity, dated as of November 18, 1983 between
Geothermal Development Associates and Sierra Pacific Power Company(1)
10.26(b) -- Amendment to Agreement for Purchase and Sale of Electricity, dated March 6, 1987, by and
between Far West Hydroelectric Fund, Ltd. and Sierra Pacific Power Company(1)
</TABLE>
II-3
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ -----------
<S> <C> <C>
10.27 -- Loan and Option Agreement dated August, 1996 by and among NRG Company, LLC and Reno Energy, LLC
and ART, LLC and FWC Energy, LLC, and amendments thereto(1)
10.28 -- Promissory Note dated August 9, 1996 for $300,000 from Reno Energy, LLC to NRG Company,
LLC(1)
10.29 -- Letter of Intent dated July 15, 1996 on behalf of Reno Energy, LLC(1)
10.30 -- Limited Liability Company Operating Agreement of NRG Company, LLC dated as of September 8, 1996, and
amendments thereto(1)
10.31 -- Form of Limited Liability Company Operating Agreement of Steamboat, Envirosystems, L.C.
dated as of October, 1996(1)
10.32 -- Form of Debenture Conversion Agreement(1)
10.33(a) -- First Amended and Restated Loan and Option Agreement, dated April 9, 1997, by and between USE
Geothermal LLC, and Reno Energy LLC, ART, LLC and FWC Energy, LLC(3)
10.33(b) -- Note in the amount of $1,200,000, dated as of April 9, 1997, made by Reno Energy LLC in
favor of USE Geothermal LLC(3)
10.33(c) -- Security Agreement, dated as of April 9, 1997, made by Reno Energy LLC in favor of USE
Geothermal LLC(3)
10.33(d) -- Form of Security Agreement and Collateral Assignment, entered into by and between USE Geothermal LLC
and both FWC Energy LLC and ART LLC(3)
10.33(e) -- Guaranty Agreement, dated as of April 9, 1997, made by FWC Energy LLC and ART LLC in favor
of USE Geothermal LLC(3)
10.34 -- 1996 Stock Option Plan(5)
10.35 -- Employment Agreement, dated as of March 1, 1997, between the Company and Terrence Page(5)
10.36 -- Form of 9% Convertible Subordinated Secured Debenture due 2004(6)
10.37 -- Form of Employment Agreement by and between the Company and Howard Nevins(4)
10.38 -- Subscription Agreement, dated March 20, 1998, between the Company and Energy Systems
Investors, LLC(7)
10.39 -- Registration Rights Agreement, dated March 20, 1998, between the Company and Energy
Systems Investors, LLC(7)
21.1 -- Subsidiaries of the Company(9)
23.1 -- Consent of Richard A. Eisner & Company, LLP, auditors of the Company
23.2 -- Consent of Reid & Priest LLP (contained in Exhibit 5.1)
24.1 -- Power of Attorney (filed with the signature page)
</TABLE>
- --------------
* Previously filed.
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 333-94612).
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended January 31, 1994.
(3) Incorporated by reference to the Company's Current Report on Form 8-K
filed on April 24, 1997.
(4) Incorporated by reference to the Company's Current Report on Form 8-K
dated August 12, 1997.
(5) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended January 31, 1997.
(6) Incorporated by reference to the Company's Current Report on Form 8-K
dated August 18, 1997.
(7) Incorporated by reference to the Company's Current Report on Form 8-K
filed on March 26, 1998.
(8) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended January 31, 1998.
(9) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended January 31, 1999.
II-4
<PAGE> 77
ITEM 28. UNDERTAKINGS
The undersigned Company hereby undertakes to:
(1) file, during any period in which it offers or sells
securities, a post- effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
Calculation of Registration Fee table in the effective registration
statement; and
(iii) include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post- effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Company hereby undertakes to:
(1) For determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company under 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it effective.
(2) For determining any liability under the Securities Act, treat
each post- effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities as the initial bona fide offering of those
securities.
II-5
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
post-effective amendment no. 2 to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of West Palm
Beach, and State of Florida, on the 16th day of February, 2000.
U.S. Energy Systems, Inc.
By: /s/ LAWRENCE I. SCHNEIDER
-------------------------------------
Lawrence I. Schneider
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
post-effective amendment no. 2 to the registration statement has been signed
below by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
** Chairman February 16, 2000
- ---------------------------------------------- of the Board
Theodore Rosen
/s/ Lawrence I. Schneider
- ------------------------------------------------ President and Chief Executive Officer February 16, 2000
Lawrence I. Schneider (Principal Executive Officer)
** Chief Financial Officer February 16, 2000
- ------------------------------------------------ (Principal Financial and
Seymour J. Beder Accounting Officer)
** Executive Vice President and February 16, 2000
- ------------------------------------------------ Director
Howard Nevins
</TABLE>
II-6
<PAGE> 79
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
** Vice President and Director February 16, 2000
- ------------------------------------------------
Henry Schneider
Director
- ------------------------------------------------
Asher E. Fogel
** Director February 16, 2000
- ------------------------------------------------
Allen J. Rothman
Director
- ------------------------------------------------
Evan Evans
Director
- ------------------------------------------------
Richard T. Brandt II
** By /s/ Seymour J. Beder
------------------------------------------
Seymour J. Beder
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 80
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C> <C>
23.1 -- Consent of Richard A. Eisner & Company, LLP, auditors of the Company
24.1 -- Power of Attorney (filed with the signature page)
</TABLE>
II-8
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Post-Effective Amendment No. 2 to the Registration
Statement on Form SB-2 (No. 333-04612) of our report dated March 12, 1999
relating to the consolidated financial statements of U.S. Energy Systems, Inc.
and subsidiaries, which is contained in that Registration Statement. We also
consent to the reference to our firm under the caption "Experts."
/s/ Richard A. Eisner & Company, LLP
New York, New York
February 14, 2000
