SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER:
0-10238
U.S. ENERGY SYSTEMS, INC.
Delaware 52-1216347
(State or Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
515 N. Flagler Drive
Suite 702
West Palm Beach, FL 33401
(Address of Principal Executive Offices)
(561) 820-9779
(Issuer's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after distribution of
securities under a plan confirmed by a court.
Yes [X] No [ ]
State the number of shares outstanding of each of issuer's classes of common
equity, as of December 11, 2000:
Title of Class Number of Shares
-------------- ----------------
Common 7,687,958
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
<S>
<C> <C>
October 31, January 31,
2000 2000
------------ --------
(unaudited) (audited)
ASSETS
Current assets:
Cash....................................................... $ 5,564,000 $ 301,000
Accounts receivable (less allowance for doubtful accounts
$15,000)................................................... 1,112,000 532,000
Notes receivable - current portion......................... 20,000 20,000
Other current assets....................................... 664,000 352,000
Life insurance claims receivable........................... - 1,001,000
------------ ------------
Total current assets..................................... 7,360,000 2,206,000
Property, plant and equipment, net............................ 5,986,000 5,881,000
Notes receivable, less current portion........................ 1,754,000 1,752,000
Accrued interest receivable................................... 459,000 459,000
Investments in joint ventures:
Lehi Independent Power Associates, L.C..................... 847,000 886,000
Plymouth Cogeneration Limited Partnership.................. 429,000 470,000
Marathon Capital, LLC...................................... 1,013,000 -
Castlebridge Partners, LLC................................. 3,097,000 -
Project development costs..................................... 342,000 -
Deferred acquisition costs.................................... 627,000 397,000
Deferred financing costs...................................... 557,000 480,000
Goodwill, net................................................. 1,702,000 1,796,000
Other assets.................................................. 93,000 27,000
------------ ------------
$ 24,266,000 $ 14,354,000
============ ============
LIABILITIES
Current liabilities:
Current portion of long-term debt.......................... $ 188,000 $ 169,000
Notes payable - bank....................................... 282,000 300,000
Accounts payable and accrued expenses...................... 1,040,000 717,000
Payable to estate of former officer........................ 119,000 375,000
Litigation settlement payable.............................. - 900,000
------------ ------------
Total current liabilities................................ 1,629,000 2,461,000
Long-term debt, less current portion.......................... 519,000 384,000
Convertible subordinated secured debentures................... 366,000 366,000
Advances from joint ventures.................................. 102,000 90,000
------------ ------------
Total liabilities........................................ 2,616,000 3,301,000
Minority interests............................................ 559,000 559,000
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 10,000,000
shares:
Series A, cumulative, convertible, issued and outstanding
1,138,888 shares (liquidation value of $10,249,990)........ 11,000 3,000
Series B, cumulative, convertible, issued and outstanding
398 shares................................................. - -
Common stock, $.01 par value, authorized 50,000,000 shares;
issued
7,689,309 shares and 5,364,124 shares, respectively........ 77,000 54,000
Treasury stock, 7,600 shares of common stock at cost.......... (15,000) (15,000)
Stock subscription receivable................................. (7,741,000) -
Additional paid-in capital.................................... 45,628,000 18,425,000
Accumulated deficit........................................... (16,869,000) (7,973,000)
------------ ------------
Total stockholders' equity............................... 21,091,000 10,494,000
------------ ------------
$ 24,266,000 $ 14,354,000
============ ============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C>
Three Months Ended October 31, Nine Months Ended October 31,
2000 1999 2000 1999
------- ------- ---------- ----------
Revenues................................................... $2,115,000 $1,378,000 $5,377,000 $3,241,000
--------- ---------- ---------- ----------
Costs and expenses:
Operating expenses..................................... 1,006,000 868,000 2,794,000 2,121,000
General and administrative expenses.................... 453,000 452,000 1,662,000 1,377,000
Depreciation........................................... 174,000 151,000 512,000 429,000
Loss(gain)from joint ventures.......................... (173,000) 27,000 (129,000) 69,000
--------- ----------- ---------- ----------
Total costs and expenses 1,460,000 1,498,000 4,839,000 3,996,000
--------- ---------- ---------- ----------
Income (loss) from operations 655,000 (120,000) 538,000 (755,000)
Interest income............................................ 246,000 66,000 301,000 204,000
Interest expense........................................... (26,000) (42,000) (89,000) (100,000)
Minority interest.......................................... - (5,000) - (16,000)
-------- ----------- ---------- ----------
Income (loss) before non-recurring items and
extraordinary item..................................... $ 875,000 $ (101,000) $ 750,000 $ (667,000)
========= ========== =========== ===========
Compensation arising from issuance of options to
new management......................................... - - 1,313,000 -
Provision for severance and repositioning of the Company... - - 581,000 -
Litigation settlement costs................................ - - 2,000 1,138,000
--------- ---------- --------- ----------
Income (loss) before extraordinary item.................... 875,000 (101,000) (1,146,000) (1,805,000)
Extraordinary gain on exchange of
debentures to preferred stock.......................... - - - 69,000
--------- ---------- ---------- ----------
Net income (loss).......................................... $ 875,000 $ (101,000) $(1,146,000) $(1,736,000)
======== ========== =========== ===========
Dividends on preferred stock............................... (242,000) (60,000) (377,000) (179,000)
Dividends on beneficial conversion of preferred stock...... - - (7,750,000) -
-------- ---------- ---------- ----------
Net income (loss) applicable to common stock............... $633,000 $ (161,000) $ (9,273,000) $(1,915,000)
======== ========== =========== ===========
Gain (loss) per share of common stock - basic:
Gain (loss) applicable to common stock before
extraordinary item.................................. $ 0.09 $ (0.03) $ (1.46) $ (0.37)
======== =========== =========== ===========
Net gain (loss) applicable to common stock............. $ 0.09 $ (0.03) $ (1.46) $ (0.37)
======== =========== =========== ===========
Gain (loss) per share of common stock - diluted:
Gain (loss) applicable to common stock before
extraordinary item.................................. $ 0.05 $ (0.03) $ (1.46) $ (0.37)
======== =========== =========== ===========
Net gain (loss) applicable to common stock............. $ 0.05 $ (0.03) $ (1.46) $ (0.37)
======== =========== =========== ===========
Weighted average number of common shares outstanding - basic 7,082,039 5,153,005 6,360,615 5,154,141
======== ========== ========== ==========
Weighted average number of common shares outstanding -
diluted................................................. 14,809,249 5,153,005 11,799,913 5,154,141
======== ========== ========== =========
</TABLE>
3
See notes to consolidated financial statements
<PAGE>
U.S. ENERGY SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL
Nine Months Ended October 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C> <C> <C> <C>
Preferred Stock Preferred Stock Treasury Stock
Series A Series B Number of
Number of Number
Subscription
Shares Amount Shares Amount Shares Amount Receivable
------ --------- ------ ------ ------ ------ -------------
BALANCE, JANUARY 31, 2000.............. 277,778 $3,000 509 (*) (7,600) $(15,000) $ -
Cash paid for fractional shares........ (5,000) (12,000)
Shares issued pursuant to anti-dilution
provision of agreement with Energy
Systems Investors, LLC and Lawrence
Schneider...........................
Shares issued for investment in
Marathon Capital, LLC...............
Shares issued in connection with
investment in Castlebridge Partners,
LLC.................................
Shares issued to Cinergy Solutions, Inc.
Shares issued to estate of former
officer.............................
Shares issued for conversion of
Preferred Stock Series B............ (32) (*)
Shares issued for exercised warrants...
Shares issued for exercised options.... 8,000(**)
Shares issued for the exercise of
options on preferred stock.......... 861,110
Compensation arising form issuance of
options to new management team......
Net loss for the nine months ended
October 31, 2000....................
Dividends on Preferred Stock:
Series A............................
Series B............................
Dividends on beneficial conversion of
Preferred Stock Series A..........
Stock subscription receivable on option
exercise............................ (7,741,000)
-------- ------- ------ ------ ------- -------- -----------
BALANCE, OCTOBER 31, 2000.............. 1,138,888 $11,000 398 $ (*) (7,600) $(15,000) $(7,741,000)
========= ======= ======= ======= ====== ======== ===========
</TABLE>
(*) Less than $1,000
(**) Cash received for exercise of options on preferred stock.
See notes to consolidated financial statements
4
<PAGE>
U.S. ENERGY SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL
Nine Months Ended October 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C>
Common Stock
Number Additional
of Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ----------- ------------ -----
BALANCE, JANUARY 31, 2000.............. 5,364,124 $54,000 $18,425,000 $(7,973,000) $10,494,000
Cash paid for fractional shares........ (4) -
Shares issued pursuant to anti-dilution
provision of agreement with Energy
Systems Investors, LLC and Lawrence
Schneider........................... 24,069 (*) (*) -
Shares issued for investment in
Marathon Capital, LLC............... 200,000 2,000 960,000 962,000
Shares issued in connection with
investment in Castlebridge Partners,
LLC................................. 597,917 6,000 2,910,000 2,916,000
Shares issued to Cinergy Solutions..... 583,333 6,000 3,494,000 3,500,000
Shares issued to estate of former
officer............................. 25,000 (*) 125,000 125,000
Shares issued for conversion of
Preferred Stock Series B............ 30,720 (*) -
Shares issued for exercised warrants... 689,448 7,000 2,751,000 2,758,000
Shares issued for exercised options.... 174,500 2,000 536,000 546,000
Shares issued for the exercise of
options on preferred stock.......... 7,741,000 7,741,000
Compensation arising form issuance of
options to new management team...... 1,313,000 1,313,000
Net loss for the nine months ended
October 31, 2000.................... (1,146,000) (1,146,000)
Dividends on Preferred Stock:
Series A............................ (345,000) (345,000)
Series B............................ (32,000) (32,000)
Dividends on beneficial conversion of 7,750,000 (7,750,000) -
Preferred Stock Series A..........
Stock subscription receivable on option
exercise............................ (7,741,000)
-------- ------- ----------- ---------- -----------
BALANCE, OCTOBER 31, 2000.............. 7,689,309 $774,000 $45,628,000 $(16,869,000) $21,091,000
========= ======== =========== ========== ===========
</TABLE>
(*) Less than $1,000
(**) Cash received on preferred stock exercise
See notes to consolidated financial statements
4
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
<S>
<C> <C>
Nine Months Ended October 31,
2000 1999
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................... (1,146,000) (1,736,000)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization.................................. 512,000 429,000
Equity in loss of joint ventures.................................. 105,000 64,000
Minority interest.............................................. - 16,000
Gain from exchange of debentures for preferred stock.............. - (69,000)
Write-down of assets.............................................. 56,000 -
Shares issued to estate of former officer......................... 125,000 -
Compensation recognized for granting of stock options............. 1,313,000 -
Changes in:
Accounts and notes receivable, trade.......................... (580,000) (69,000)
Other current assets........................................... (312,000) 64,000
Other assets................................................... (485,000) (142,000)
Accounts payable and accrued expenses.......................... 198,000 109,000
Litigation settlement payable.................................. (900,000) 1,123,000
Life insurance proceeds, net of costs and expenses............. 870,000 -
-------------- ---------
Net cash used in operating activities............................. (244,000) (211,000)
-------------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans to Reno Energy, LLC............................................ (2,000) (109,000)
Repayments of loan by Reno Energy, LLC............................... - 158,000
Investment in Marathon Capital, LLC.................................. (76,000) -
Investment in Castlebridge Partners, LLC............................. (181,000) -
Acquisition of equipment and leasehold improvements.................. (579,000) (348,000)
Deferred acquisition costs........................................... (230,000) (162,000)
-------------- --------
Net cash used in investing activities............................. (1,068,000) (461,000)
-------------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable............................................ (18,000) -
Payments of long-term debt........................................... (155,000) (99,000)
Proceeds from long-term debt......................................... 309,000 130,000
Proceeds from sale of common stock................................... 3,500,000 -
Proceeds from sale of preferred stock................................ - 234,000
Proceeds from exercise of options and warrants....................... 3,304,000 -
Purchase of treasury shares.......................................... - (12,000)
Dividends on preferred stock......................................... (377,000) (179,000)
Advances from joint ventures......................................... 12,000 17,000
-------------- --------
Net cash provided by financing activities......................... 6,575,000 91,000
-------------- --------
NET INCREASE (DECREASE) IN CASH 5,263,000 (581,000)
Cash - beginning of period................................................ 301,000 776,000
-------------- ---------
CASH - END OF PERIOD................................................. $ 5,564,000 $195,000
============== =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 94,000 $67,000
Supplemental schedule of non-cash operating, investing and financing activities
Stock subscription receivable on option exercised.................... $ 7,741,000 NONE
Conversion of Series B Preferred Stock............................... (*)
Issuance of Common Stock for investment interest in Marathon Capital, LLC. $ 962,000
Issuance of Common Stock for investment interest in Castlebridge
Partners, LLC...................................................... $ 2,916,000
Issuance of Common Stock pursuant to anti-dilution provision......... (*)
Issuance of Common Stock to estate of former officer................. 125,000
Compensation arising from issuance of options to new management team. $ 1,313,000
</TABLE>
*Less than $1,000
See notes to consolidated financial statements
5
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED OCTOBER 31, 2000 AND 1999
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with instructions to Form 10-QSB and, accordingly, do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal accruals) considered necessary
for a fair presentation have been included. The results for the three months and
nine months are not necessarily indicative of results for the full year.
For further information see "Management's Discussion and Analysis or Plan of
Operations", and refer to the consolidated financial statements (including the
notes thereto) in the Company's Annual Report on Form 10-KSB for the fiscal year
ended January 31, 2000.
Note 2 - Net Income (Loss) Per Share
Net Income (Loss) per share has been computed on the basis of the weighted
average number of shares outstanding during the periods. In case of (loss),
common stock equivalents have not been included in the computation since their
inclusion would be anti-dilutive.
Note 3 - Additional Capital
Between February 1, 2000 and October 31, 2000 we received $2,758,000 from
the exercise of 689,650 public warrants. During the same period we also received
a total of $538,000 as a result of the exercise of 174,500 stock options. We
also received $8,000 of cash and a one-year limited recourse promissory note in
principal amount of approximately $7,741,000 in connection with the exercise of
the option to acquire 861,110 shares of Series A Convertible Preferred Stock.
On October 12, 2000, Cinergy Solutions, Inc. invested $3,500,000 in the
Company, for which we issued 583,333 shares of Common Stock. Further details may
be found in Part II, Item 2.
Note 4 - Additional Investments
Acquisition of 30% Interest in Marathon Capital, LLC
In June 2000, we acquired an interest of approximately 30% in the equity of
Marathon Capital, LLC in consideration for which we issued to Marathon 200,000
shares of our common stock. The value of this stock, plus other costs related to
the investment, totaled approximately $1.0 million. Marathon is engaged in
origination, development and financing of energy projects.
Acquisition of 25% Interest in Castlebridge Partners, LLC
On August 23, 2000, our wholly owned subsidiary, U.S. Energy Systems
Castlebridge LLC acquired a 25% membership interest in Castlebridge Partners,
LLC in consideration for the issuance of 568,750 shares of our common stock to
Castlebridge and 29,167 shares to SPARK Energy.com Corporation for facilitating
this transaction. The value of this investment based on market price at closing
date together with the costs associated with the acquisition, totaled
6
<PAGE>
approximately $3.1 million. Castlebridge, which operates from offices in
Chicago, Illinois, is a risk mitigation consulting firm that focuses on energy
and similar markets.
Note 5 - Subsequent Events
On November 28, 2000, our subsidiary USE Acquisition Corp. entered into a
merger agreement with Zahren Alternative Energy Power Corp. ("Zapco"), pursuant
to which Zapco and USE Acquisition Corp. will merge. Further details may be
found in Part II, Item 5.
Item 2 - Management's Discussion and Analysis or Plan of Operation
Results of Operations
Three Months and Nine Months Ended October 31, 2000 Compared to
Three Months and Nine Months Ended October 31, 1999
Revenues for the three and nine month periods were as follows:
<TABLE>
<CAPTION>
<S>
<C> <C>
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Energy Division................... $1,241,000 $ 357,000 $ 2,583,000 $ 899,000
Environmental Division............ 874,000 1,021,000 2,794,000 2,342,000
---------- ----------- ----------- -----------
$2,115,000 $ 1,378,000 $ 5,377,000 $ 3,241,000
========== =========== =========== ===========
</TABLE>
Total revenues increased by $737,000 or 53% in the three month period ended
October 31, 2000 ("Third Quarter 2000"), and $2,136,000 or 66% for the nine
months ended October 31, 2000 ("Nine Months 2000"). Energy Division revenues
increased by $884,000 or 248% during Third Quarter 2000 and $1,684,000 or 187%
for Nine Months 2000 from the corresponding periods in the prior year due to
high electricity prices during the current periods. The prices are anticipated
to remain high during the balance of the year, but no assurance can be given as
to how long such high prices will continue thereafter. In the Environmental
Division the timing of the periods in which specific environmental projects fall
can differ from year to year. As a result, revenues decreased by $147,000 or 14%
during Third Quarter 2000 but expanded operations still resulted in increased
revenues of $452,000 or 19% during Nine Months 2000 from the corresponding
periods in the prior year.
Operating expenses (i.e. costs and royalties directly related to the
production of revenues) increased 16%, or approximately $138,000 to $1,006,000
in Third Quarter 2000 and 32% or approximately $673,000 to $2,794,000 for Nine
Months 2000 from the corresponding periods in the prior year. The following
table provides a breakdown of the Company's operating expenses.
<TABLE>
<CAPTION>
<S>
<C> <C>
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Energy Division................... $ 412,000 $ 218,000 $ 926,000 $ 595,000
Environmental Division............ 594,000 650,000 1,868,000 1,526,000
---------- ----------- ----------- -----------
$1,006,000 $ 868,000 $ 2,794,000 $ 2,121,000
========== =========== =========== ===========
</TABLE>
Operating expenses for the Energy Division, including royalties, increased
$196,000 or approximately 90% in Third Quarter 2000, and for Nine Months 2000
the increase was $331,000 or approximately 56% higher than in the corresponding
periods in the previous year. The increases are attributable to higher royalty
payments on the increased revenue this year, and to extra equipment repairs
required in the 2000 periods. The lower revenues of the Environmental Division
in Third Quarter 2000 were accompanied by a decrease in operating expenses of
$56,000 or 9% when compared with the same periods in 1999. The same division
showed an increase of $342,000 or 22% in operating expenses for Nine Months 2000
as compared to Nine Months 1999, which generally corresponds to the increase in
revenues for the same period.
7
<PAGE>
The components of general and administrative expenses for the three and nine
month periods are as follows:
<TABLE>
<CAPTION>
<S>
<C> <C>
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Salaries and consulting........... $ 208,000 $ 190,000 $ 728,000 $ 589,000
Legal and professional fees....... 100,000 57,000 319,000 197,000
Insurance......................... 62,000 35,000 140,000 123,000
Corporate expenses................ 57,000 60,000 156,000 138,000
Other............................. 26,000 110,000 319,000 330,000
---------- ----------- ----------- -----------
Total.......................... $ 453,000 $ 452,000 $ 1,662,000 $ 1,377,000
========== =========== =========== ===========
</TABLE>
Salaries and consulting costs for Third Quarter 2000 and Nine Months 2000
increased from the corresponding periods in the prior year due to the
installation of the new management and development team in the periods ended
October 31, 2000. Increases in legal and professional fees and corporate
expenses were due to higher costs associated with repositioning of the Company
and new management. The decrease in other general and administrative expenses is
due to the institution of procedures for the allocation of certain corporate
overhead to specific projects.
During the nine months ended October 31, 2000, already reflected in our
financial reports for the quarter ended July 31, 2000, as part of the
installation of a new management and development team, non-qualified stock
options were issued to certain employees of the Company. As of issue date, the
market price of certain of such options granted exceeded the exercise price,
resulting in a non-cash charge of $1,313,000 which is shown as compensation
recognized from issuance of options. In the same period we also provided a total
of $581,000 for estimated severance and other costs associated with the
repositioning of the Company.
Depreciation expense, which includes amortization of goodwill, increased to
$174,000 and $512,000 for the three and nine month periods ending October 31,
2000, respectively, compared to $151,000 and $429,000 respectively, in the same
periods of 1999, due to increased investment in depreciable assets, primarily in
the Environmental Division.
Losses (gains) from Joint Ventures are detailed as follows:
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------------- -------------------------
2000 1999 2000 1999
----------- ---------- ---------- ---------
Lehi Independent Power Associates, L.C..... $ (158,000) $ 13,000 $ (144,000) $ 44,000
Plymouth Cogeneration Limited Partnership.. (38,000) 14,000 (8,000) 25,000
Castlebridge Partners, LLC................. 23,000 -- 23,000 --
---------- ---------- ---------- ----------
$ (173,000) $ 27,000 $ (129,000) $ 69,000
=========== ========== =========== ==========
</TABLE>
The increase in Interest income of $180,000 in the three months and of
$97,000 in the nine months ending October 31, 2000 is primarily due to interest
on the stock subscription note receivable.
Our income for the three months ending October 31 was $875,000, and the
loss for the nine month period ending October 31, 2000 was ($1,146,000), after
the one-time charges totaling $1,894,000 described above (including $1,313,000
of non-cash charges), which were reflected in our financial reports for the
period ending July 31, 2000. Results of operations can be evaluated by
comparing earnings before interest, taxes, depreciation and amortization
(EBITDA) and exclusive of non-recurring charges and dividends. The following
table is presented to show the actual improvement in earnings from operations in
the current reporting periods.
8
<PAGE>
<TABLE>
<CAPTION>
<S>
<C> <C>
Three Months Ended October 31, Nine Months Ended October
31,
-------------------------------------- -----------------------------
2000 1999 2000 1999
------------------- ------------------ -------------- --------------
Net income (loss) reported............. $875,000 $ (101,000) $ (1,146,000) $ (1,805,000)
Compensation arising from issuance of
options to new management team....... -- -- 1,313,000 --
Provision for severance and
repositioning of the Company......... -- -- 581,000 --
Litigation settlement costs............ -- -- 2,000 1,138,000
Extraordinary gain on exchange of
debentures to preferred stock........ -- -- -- (69,000)
------------------ --------------- ------------- --------------
Operating income (loss) exclusive of
non-recurring items.................. 875,000 (101,000) 750,000 (736,000)
Depreciation........................... 174,000 151,000 512,000 429,000
Interest income, net................... (220,000) (24,000) (212,000) (104,000)
------------------- -------------- ------------- --------------
EBITDA (loss) exclusive of
non-recurring and extraordinary
items and before dividends........... $829,000 $ 26,000 $ 1,050,000 $ (411,000)
======== ======== ============= =============
</TABLE>
Dividends paid on preferred stock for the three and nine months ending
October 31, 2000 totaled $242,000 and $377,000, respectively, compared to
$60,000 and $179,000 in the like periods of the previous year. The increase was
due primarily to the additional investment in Series A Preferred Stock of
$250,000 in June 1999 and the exercise, in July 2000, of an option to acquire
additional shares of Series A Convertible Preferred Stock for $7,750,000. Under
the requirements of Emerging Issues Task Force Memo No. 98.5, the difference
between the conversion price of the Preferred Stock and the market price of the
Common Stock at the day of exercise is treated as a non-cash dividend, which is
shown on the Consolidated Statements of Operations as a dividend on beneficial
conversion of Preferred Stock. There is an immediate offset in other equity
accounts, so that there is no net effect on Stockholders' Equity from this
required non-cash and non-recurring adjustment.
Liquidity and Capital Resources
At October 31, 2000, cash and equivalents totaled approximately $5,564,000,
as compared to $301,000 at January 31, 2000, an increase of $5,263,000. During
the nine months ended October 31, 2000, cash flow from financing activities of
$6,575,000, primarily from the private sale of our common stock to Cinergy
Solutions, Inc. and the proceeds of exercise of warrants and options, was used
to fund $244,000 in operating activities and $1,068,000 of investing activities,
and provided the increase in cash and in working capital.
During the first nine months of Fiscal 2000, the Company used $244,000 of
cash in operating activities compared with $211,000 of cash used in operating
activities in the corresponding period in the prior year. Non-recurring items
involving cash included the receipt of life insurance proceeds from a policy on
our former President, which, net of expenses paid during the period, amounted to
$870,000. We also paid the $900,000 litigation settlement note that had been
issued in the previous year.
The $1,068,000 used in investing activities during Nine Months 2000,
compared to $461,000 used in the corresponding period the prior year, included
$230,000 of deferred costs expended on pending acquisitions as compared to
$162,000 in the earlier year. Cash applied to acquisition of equipment, mainly
due to the expansion of the Environmental Division, including its new Tennessee
location, amounted to $579,000 in the current year as compared to $348,000 in
the earlier year. Cash used in connection with the investments in Marathon
Capital, LLC, and Castlebridge Partners, LLC, in the respective amounts of
$76,000 and $181,000, are also reflected in the three months and the nine months
ended October 31, 2000.
Cash provided by financing activities in the Nine Months 2000 totaled
$6,575,000 primarily as a result of the investment of $3,500,000 in our common
stock by Cinergy Solutions, Inc., and the $3,304,000 proceeds from the exercise
of warrants and options. In the same period in 1999 financing activities
provided cash of $91,000. This included proceeds from the sale of Series A
Preferred Stock amounting to $234,000.
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Our working capital increased to $5,731,000 at October 31, 2000, from a
deficit of $255,000 at January 31, 2000. This was due primarily to the
$3,500,000 investment in our common stock by Cinergy Solutions, Inc. and the
receipt of net proceeds of $2,758,000 from the exercise of warrants and $546,000
from the exercise of options. Our cash position and projected cash flow from
operations are sufficient to satisfy our commitments for the next twelve months
and beyond. Cash requirements for the Zapco merger, shown below, will be
provided primarily by Cinergy's investment. It is anticipated that Zapco will be
self-sustaining, but there is no assurance of this.
Cautionary Statement Relating to Forward Looking Statements
This Form 10-QSB contains certain "forward looking statements" which
represent the Company's expectations or beliefs, including, but not limited to,
statements concerning industry performance and the Company's operations,
performance, financial condition, growth and strategies. For this purpose, any
statements contained in this Form 10-QSB that are not statements of historical
fact may be deemed to be forward looking statements. Without limiting the
generality of the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "intend," "could," "estimate" or "continue" or the negative or
other variations thereof or comparable terminology are intended to identify
certain forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, certain of which are beyond the Company's
control, and actual results may differ materially depending on a variety of
important factors which are noted herein, including but not limited to the
potential impact of competition, changes in local or regional economic
conditions, the ability of the Company to continue its growth strategy,
dependence on management and key personnel, supervision and regulation issues
and the ability to find financing on terms suitable to the company.
PART II - OTHER INFORMATION
Item 2 - Changes in Securities
Issuance of Common Stock to Cinergy Solutions, Inc.
On October 12, 2000, we, together with Cinergy Solutions, Inc., entered into
a joint venture to provide cogeneration and energy services. Cinergy Solutions,
Inc. is an affiliate of Cincinnati-based Cinergy Corp. (NYSE: CIN), one of the
nation's leading diversified energy companies. As part of the transaction,
Cinergy Solutions Inc. invested $3,500,000 in our company in return for 583,333
shares of common stock. M. Stephen Harkness, President and Chief Operating
Officer of Cinergy Solutions, Inc., has joined our Board of Directors. This
transaction was exempt from the registration requirements of the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereunder.
Item 5 - Other Events
Merger Agreement
On November 28, 2000, U. S. Energy Systems, Inc. ("US Energy"), USE
Acquisition Corp. ("US Energy Sub"), which is currently a wholly owned
subsidiary of US Energy, and Zahren Alternative Energy Power Corp. ("Zapco")
entered into a merger agreement, amended as of December 11, 2000, pursuant to
which Zapco and US Energy Sub will merge, with Zapco being the surviving
corporation, and becoming owned by US Energy Sub's shareholders. As noted
below, the shareholders of US Energy Sub immediately before the merger will be
US Energy and Cinergy Energy Solutions, Inc. ("Cinergy Energy"), an indirect,
wholly owned subsidiary of Cinergy Corp. ("Cinergy").
In this merger, we will pay Zapco's shareholders the following aggregate
merger consideration for their Zapco shares:
* $12 million in cash,
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* a contingent cash payment of $800,000 payable eighteen (18) months
after the merger,
* 1,666,667 shares of US Energy Common Stock, subject to increase so that
the Zapco stockholders receive $10 million of our common stock if the
average closing price of the US Energy Common Stock is less than $5.75
for the 20 consecutive trading days ending two day prior to the merger,
* 100,000 shares of USE's Series C Convertible Preferred Stock - the
Series C Stock:
is entitled to an aggregate of $3 million upon a liquidation
or other similar event,
provides for annual cash dividends in the aggregate amount of
$270,000 (subject to reduction to an aggregate of $180,000
annually under specified circumstances),
is convertible into an aggregate of 500,000 shares of our
common stock (600,000 shares if 900 days after the merger, the
average closing price of our common stock is less than $4.80)
subject to anti-dilution adjustments,
* five-year warrants to purchase 500,000 shares of our common stock
at an exercise price of $6.00 per share. If additional shares of
our common stock are required to be delivered because the average
closing price of our common stock is less than $5.75, the number
of our shares of common stock issuable upon exercise of these
warrants will be correspondingly reduced.
The merger agreement also provides for a post-closing reduction to the
merger consideration in specified circumstances.
Also on November 28, 2000, Cinergy Energy, US Energy Sub and US Energy
entered into a subscription agreement whereby Cinergy Energy agreed to buy from
US Energy Sub immediately prior to the merger all 4,574 shares of US Energy
Sub's Class B Common Stock for $11,500,000 in cash. These shares will represent
45.74% of US Energy Sub's common stock. US Energy holds all 5,426 shares of
Class A Stock which will represent the remaining 54.26% of US Energy Sub's
common stock. (As a result, following the merger, US Energy and Cinergy Energy
will be the sole shareholders of the surviving corporation.) The Class A Common
Stock and Class B Common Stock are identical except that the Class A Common
Stock has superior voting rights with the result that US Energy can appoint four
of US Energy Sub's five directors and generally holds 80% of the voting power
(with exceptions for, among other things, matters outside of the ordinary course
of business). US Energy has granted Cinergy Energy an option exercisable within
two years after the merger to convert its Class B Common Stock into an aggregate
of 1,967,000 shares of US Energy Common Stock and during that period US Energy
Sub is entitled to redeem the Class B Common Stock for approximately
$14,600,000.
Completion of the merger (and the closing of the transactions contemplated
by the subscription agreement) is subject to the satisfaction of numerous
conditions, including stockholder approval, the consummation of various
transactions by Zapco, the payment of a note issued to US Energy in the
aggregate principal amount of approximately $7.75 million and the consent of
Zapco's principal bank. No assurance can be given that such transactions or the
merger will be completed.
Zapco, which is based in Avon, Connecticut, operates 24 landfill
gas-to-energy projects, and a natural gas-fired cogeneration plant. Cogeneration
plants provide both power and heat to their customers.
The foregoing summary of the terms of the merger agreement is qualified in
its entirety by reference to the merger agreement and related documents, copies
of which are annexed hereto and incorporated herein by this reference. We urge
you to read these documents in their entirety.
Change in Fiscal Year
The fiscal year of our company has been changed from January 31 to December
31. This change will be effective as of December 31, 2000. A report on Form
10-KSB covering the transition period (i.e., the eleven months ending December
31, 2000) will be filed with the SEC by April 2, 2001.
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Item 6 - Exhibits
(a) Exhibits
2.1 Agreement and Plan of Reorganization and Merger dated
as of November 28, 2000, by and among U.S. Energy
Systems, Inc. ("US Energy"), USE Acquisition Corp.
("US Energy Sub"), and Zahren Alternative Power Corp.
("Zapco"), excluding the exhibits and schedules
thereto other than Schedule 2.01 and those exhibits
filed separately herewith (the "Merger Agreement").
2.2 Amendment No 1 dated December 11, 2000 to the Merger
Agreement.
3.1 Amended and Restated By-Laws of US Energy.
3.2 Form of Certificate of Designation for US Energy's
Series C Preferred Stock.
4.1 Form of Series C Redeemable Common Stock Purchase
Warrant of US Energy.
10.1 Stockholders' and Voting Agreement dated as of
November 28, 2000 by and among AJG Financial
Services, Inc., Bernard Zahren, Environmental
Opportunities Fund, Environmental Opportunities
Fund/Cayman, Finova Mezzanine Capital Corp., Frederic
Rose, M & R Associates, Martin F. Laughlin, Michael
J. Carolan and Richard J. Augustine (collectively,
the "Zapco Stockholders"), US Energy, Cinergy
Solutions, Inc. ("Cinergy Solutions") and certain
stockholders of US Energy.
10.2 Termination Fee Agreement dated as of November 28,
2000 by and among US Energy, Zapco and Cinergy Energy
Solutions, Inc. ("Cinergy Energy").
10.3 Indemnification Agreement dated as of November 28,
2000 by and among the Zapco Stockholders, Zapco, US
Energy, US Energy Sub and Cinergy Energy.
10.4 Escrow Agreement dated November 28, 2000 by and among
the Zapco Stockholders, Zapco, US Energy, US Energy
Sub, Cinergy Energy and Tannenbaum Helpern Syracuse &
Hirschtritt LLP as Escrow Agent.
10.5 Registration Rights Agreement dated November 28, 2000
by and among US Energy and the Zapco Stockholders.
10.6 Employment Agreement dated November 28, 2000 by and
between US Energy and Bernard Zahren.
10.7 Form of Stock Option Agreement to be entered into by
and between US Energy and Bernard Zahren.
10.8 Performance Guaranty dated as November 28, 2000 of US
Energy.
10.9 Performance Guaranty of Cinergy Solutions Holding
Company, Inc. dated as of November 28, 2000.
10.10 Subscription Agreement dated as of November 28, 2000
by and among US Energy, US Energy Sub and Cinergy
Energy.
10.11 Stockholders Agreement dated as of November 28, 2000
by and among US Energy, US Energy Sub and Cinergy
Energy.
10.12 Indemnification Agreement dated as of November 28,
2000 by and among US Energy, US Energy Sub and
Cinergy Energy.
27. Financial Data Schedule
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99.1 Press Release of US Energy, Zapco and Cinergy dated
November 28, 2000.
(b) Reports on Form 8-K.
We filed a Current Report on Form 8-K (a "Current Report")
dated August 7, 2000, disclosing under Item 2 the change in our
independent auditor.
We filed a Current Report dated August 23, 2000, disclosing
under Item 2 the acquisition by a subsidiary of ours of a membership
interest in Castlebridge Partners, LLC. This report was amended on or
about September 5, 2000 and amended again on or about November 6, 2000.
We filed a Current Report dated September 22, 2000 disclosing
under Item 8 the change in our fiscal year.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has caused this quarterly report on Form 10-QSB to be signed on its
behalf by the undersigned duly authorized
Dated: December 14, 2000
U. S. Energy Systems, Inc.
By: /s/ LAWRENCE I. SCHNEIDER
-------------------------
Lawrence I. Schneider
Chief Executive Officer
By: /s/ ROBERT C. BENSON
--------------------
Robert C. Benson
Chief Financial and Accounting Officer
