SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSACTION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER:
0-10238
U.S. ENERGY SYSTEMS, INC.
Delaware 52-1216347
(State or Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
515 N. Flagler Drive
Suite 702
West Palm Beach, FL 33401
(Address of Principal Executive Offices)
(561) 820-9779
(Issuer's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after distribution of
securities under a plan confirmed by a court.
Yes [X] No [ ]
State the number of shares outstanding of each of issuer's classes of common
equity, as of September 9, 2000:
Title of Class Number of Shares
-------------- ----------------
Common 7,076,332
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>
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<C> <C>
July 31, January 31,
2000 2000
--------- ----------
(unaudited) (audited)
ASSETS
Current assets:
Cash $ 2,325,000 $ 301,000
Accounts receivable (less allowance for doubtful accounts $15,000) 1,456,000 532,000
Notes receivable - current portion 20,000 20,000
Other current assets 441,000 352,000
Life insurance claims receivable - 1,001,000
---------- ---------
Total current assets 4,242,000 2,206,000
Property, plant and equipment, net 5,947,000 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. 856,000 886,000
Plymouth Cogeneration Limited Partnership 456,000 470,000
Marathon Capital, LLC 1,038,000 -
Deferred acquisition costs 480,000 397,000
Deferred financing costs 615,000 480,000
Goodwill, net 1,724,000 1,796,000
Other assets 76,000 27,000
---------- ----------
$17,647,000 $14,354,000
========== ==========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 188,000 $ 169,000
Notes payable - bank 300,000 300,000
Accounts payable and accrued expenses 1,370,000 717,000
Payable to estate of former officer 290,000 375,000
Litigation settlement payable - 900,000
---------- ---------
Total current liabilities 2,148,000 2,461,000
Long-term debt, less current portion 577,000 384,000
Convertible subordinated secured debentures 366,000 366,000
Advances from joint ventures 102,000 90,000
---------- ---------
Total liabilities 3,193,000 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 $10,307,002) 11,000 3,000
Series B, cumulative, convertible, issued and outstanding 477 shares - -
Common stock, $.01 par value, authorized 50,000,000 shares; issued
6,450,916 shares and 5,364,124 shares, respectively 64,000 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 39,320,000 18,425,000
Accumulated deficit (17,744,000) (7,973,000)
---------- ----------
Total stockholders' equity 13,895,000 10,494,000
---------- -----------
$ 17,647,000 $ 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 July 31, Six Months Ended July 31,
--------------------------- -------------------------
2000 1999 2000 1999
---------- --------- ----------- ---------
Revenues $ 2,154,000 $ 961,000 $ 3,262,000 $ 1,863,000
---------- --------- ----------- ----------
Costs and expenses:
Operating expenses 888,000 642,000 1,629,000 1,236,000
Administrative expenses 877,000 475,000 1,368,000 942,000
Depreciation 173,000 144,000 338,000 278,000
Loss from joint ventures 5,000 18,000 44,000 42,000
--------- --------- --------- ---------
1,943,000 1,279,000 3,379,000 2,498,000
--------- --------- --------- ---------
211,000 (318,000) (117,000) (635,000)
Interest income 40,000 68,000 55,000 138,000
Interest expense (27,000) (23,000) (63,000) (58,000)
Minority interest - (6,000) - (11,000)
Income (loss) before non-recurring and ------- -------- ------- -------
extraordinary items $ 224,000 $(279,000) $ (125,000) $ (566,000)
======= ======== ======= =======
Compensation arising from issuance of options to
new management team 1,313,000 - 1,313,000 -
Provision for severence and repositioning of the Company 581,000 - 581,000 -
Litigation settlement costs - 1,138,000 2,000 1,138,000
========= ========= ========= =========
Income (loss) before extraordinary item (1,670,000) (1,417,000) (2,021,000) (1,704,000)
Extraordinary gain on exchange of
debentures to preferred stock - - - 69,000
========= ========= ========= =========
Net loss $(1,670,000) $(1,417,000) $(2,021,000) $(1,635,000)
========= ========= ========= =========
Dividends on preferred stock (67,000) (64,000) (135,000) (119,000)
Dividends on beneficial conversion of preferred stock (7,750,000) - (7,750,000) -
========= ========= ========= =========
Loss applicable to common stock $(9,487,000) $(1,481,000) $(9,906,000) $(1,754,000)
========== ========= ========= =========
Loss per share of common stock - basic and diluted:
Loss applicable to common stock before
extraordinary item $ (1.50) $ (0.29) $ (1.65) $ (0.35)
========= ========= ========= =========
Net loss applicable to common stock $ (1.50) $ (0.29) $ (1.65) $ (0.34)
========= ========= ========= =========
Weighted average number of common shares outstanding 6,313,317 5,153,005 5,995,940 5,154,718
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
<TABLE>
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Preferred Stock-Series A Preferred Stock-Series B Treasury Stock
------------------------ ------------------------ --------------
Number Number Number
of Shares Amount of Shares Amount of Shares Amount
------------- ------ --------- ------- ---------- ------
BALANCE , JANUARY 31, 2000 277,778 $ 3,000 509 (*) (7,600) $(15,000)
Cash paid for fractional shares
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 for conversion of
Preferred Stock Series B (32) (*)
Shares issued for exercised warrants
Shares issued for excercised options
Shares issued for excercised
preferred option 861,110 $ 8,000
Compensation arising from issuance of
options to new management team
Net Loss for the six months
ended July 31, 2000
Dividends on Preferred Stock:
Series A
Series B
Dividends on beneficial conversion of
Preferred Stock Series A
Stock subscription receivable on option exercised
--------- ------ ----- ---- ----- -------
BALANCE, JULY 31, 2000 1,138,888 $11,000 477 $ - (7,600) $(15,000)
========= ====== ===== ==== ===== ======
(*) Less than $1,000
</TABLE>
<PAGE>
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Common Stock
----------------------------------
Additional
Subscription Number Paid-in Accumulated
Receivable of Shares Amount Capital Deficit Total
------------- --------- ------- ---------- ---------- -----
BALANCE , JANUARY 31, 2000 $ - 5,356,524 $ 54,000 $18,425,000 $(7,973,000)$10,494,000
Cash paid for fractional shares (2) -
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 for conversion of
Preferred Stock Series B 8,777 (*) -
Shares issued for exercised warrants 689,448 7,000 2,751,000 2,758,000
Shares issued for excercised options 164,500 1,000 515,000 516,000
Shares issued for excercised
preferred option 7,741,000 7,749,000
Compensation arising from issuance of
options to new management team 1,313,000 1,313,000
Net Loss for the six months
ended July 31, 2000 (2,021,000) (2,021,000)
Dividends on Preferred Stock:
Series A (113,000) (113,000)
Series B (22,000) (22,000)
Dividends on beneficial conversion of
Preferred Stock Series A 7,750,000 (7,750,000) -
Stock subscription receivable on option exercised (7,741,000) (7,741,000)
---------- --------- ------ ---------- ---------- ----------
BALANCE, JULY 31, 2000 $(7,741,000) 6,443,316 $ 64,000 $ 39,320,000 $(17,744,000) $13,895,000
========== ========= ====== ========== ========== ==========
(*) Less than $1,000
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended July 31,
2000 1999
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,021,000) $ (1,635,000)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 338,000 278,000
Equity in loss of joint ventures 44,000 37,000
Minority interest - 10,000
Gain from exchange of debentures for preferred stock - (69,000)
Write-down of assets 56,000 -
Compensation recognized for granting of stock options 1,313,000 -
Changes in:
Accounts and notes receivable, trade (924,000) 203,000
Other current assets (89,000) 78,000
Other assets (184,000) (107,000)
Accounts payable and accrued expenses 653,000 (75,000)
Litigation settlement payable (900,000) 1,126,000
Life insurance proceeds, net of costs and expenses 916,000 -
-------- ---------
Net cash used in operating activities (798,000) (154,000)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans to Reno Energy, LLC (2,000) (72,000)
Repayments of loan by Reno Energy, LLC - 131,000
Investment in Marathon Capital, LLC (76,000) -
Acquisition of equipment and leasehold improvements (388,000) (190,000)
Deferred acquisition costs (83,000) (108,000)
------- -------
Net cash used in investing activities (549,000) (239,000)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable - (100,000)
Payment of long-term debt (97,000) (76,000)
Proceeds from long-term debt 309,000 82,000
Proceeds from sale of preferred stock - 234,000
Proceeds from exercise of options and warrants 3,282,000 -
Purchase of treasury shares - (12,000)
Dividends on preferred stock (135,000) (119,000)
Advances from joint ventures 12,000 17,000
--------- -------
Net cash provided by financing activities 3,371,000 26,000
---------- --------
NET INCREASE (DECREASE) IN CASH 2,024,000 (367,000)
Cash - beginning of period 301,000 776,000
---------- ---------
CASH - END OF PERIOD $ 2,325,000 $ 409,000
---------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 68,000 $ 38,000
Supplemental schedule of non cash operating, investing and financing activities: None
Stock subscription receivable on option exercised $ 7,741,000 -
Conversion of Series B Preferred Stock (*) -
Issuance of Common Stock for investment interest in Marathon Capital, LLC $ 962,000 -
Issuance of Common Stock pursuant to anti-dilution provision (*) -
Compensation arising from issuance of options to new management team $ 1,313,000 -
(*) Less than $1,000
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JULY 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
six 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 (Loss) Per Share
Net (Loss) per share has been computed on the basis of the weighted average
number of shares outstanding during the periods. 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 July 31, 2000 we received $2,758,000 from the
exercise of 689,448 public warrants. During the same period we also received a
total of $516,000 as a result of the exercise of 164,500 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.
For further details, see Part II, Item 2.
Note 4 - Additional Investment
Acquisition of 30% Interest in Marathon Capital, LLC
In June 2000, we acquired an approximately 30% interest 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 $1,038,000. For further details see Part II, Item 2.
Note 5 - Subsequent Events
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
(valued at $6.00 per share) 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 totaled approximately $2.8
million. Further details may be found in Item II, Note 2.
6
<PAGE>
Item 2 - Management's Discussion and Analysis or Plan of Operation
Results of Operations
Three Months and Six Months Ended July 31, 2000 Compared to Three Months and Six
Months Ended July 31, 1999
Revenues for the three and six month periods were as follows:
<TABLE>
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<C> <C>
Three Months Ended July Six Months Ended July 31,
31,
--------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Energy Division................... $ 966,000 $ 290,000 $ 1,341,000 $ 542,000
Environmental Division............ 1,188,000 671,000 1,921,000 1,321,000
---------- ----------- ----------- -----------
$2,154,000 $ 961,000 $ 3,262,000 $ 1,863,000
========== =========== =========== ===========
</TABLE>
Total revenues increased by $1,193,000 or 124% in the three month period
ended July 31, 2000 ("Second Quarter 2000"), and $1,399,000 or 75% for the six
months ended July 31, 2000 ("Six Months 2000"). Energy Division revenues
increased by $676,000 or 233% during Second Quarter 2000 and $799,000 or 147%
for Six Months 2000 from the corresponding periods in the prior year due to high
electricity prices in the West during the current period. Environmental Division
revenues increased by $517,000 or 77% during Second Quarter 2000 and $600,000 or
45% during Six Months 2000 from the corresponding periods in the prior year as a
result of expanded operations.
Operating expenses, costs directly related to the production of revenues,
increased 38%, or approximately $246,000 to $888,000 in Second Quarter 2000 and
32% or approximately $393,000 for Six Months 2000 from the corresponding periods
in the prior year. The following table provides a breakdown of the Company's
operating expenses.
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Three Months Ended July Six Months Ended July 31,
31,
--------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Energy Division................... $ 171,000 $ 189,000 $ 355,000 $ 360,000
Environmental Division............ 717,000 453,000 1,274,000 876,000
---------- ----------- ----------- -----------
$ 888,000 $ 642,000 $ 1,629,000 $ 1,236,000
========== =========== =========== ===========
</TABLE>
Operating expenses for the Energy Division were $18,000 or approximately 10%
lower in Second Quarter 2000, and for Six Months 2000 the total was $5,000 or
approximately 1% lower than in the corresponding periods in the previous year.
The decreases are attributable to the fact that expenses in the 1999 periods
were higher than usual due to extra equipment repairs required. This situation
has now normalized. The expansion of operations of the Environmental Division
reflected in increased revenues required an increase in operating expenses of
$264,000 or 59% for Second Quarter 2000 and $398,000 or 45% for Six Months 2000
from the corresponding periods in the prior year.
The components of general administrative expenses for the three and six
month periods are as follows:
<TABLE>
<CAPTION>
<S>
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Three Months Ended July Six Months Ended July 31,
31,
--------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Salaries and consulting........... $ 314,000 $ 210,000 $ 521,000 $ 412,000
Steamboat royalties............... 113,000 36,000 161,000 72,000
Legal and professional fees....... 159,000 83,000 218,000 140,000
Insurance......................... 42,000 45,000 79,000 87,000
Corporate expenses................ 63,000 47,000 98,000 78,000
Other............................. 186,000 54,000 291,000 153,000
---------- ----------- ----------- -----------
Total.......................... $ 877,000 $ 475,000 $ 1,368,000 $ 942,000
========== =========== =========== ===========
</TABLE>
Salaries and consulting costs for Second Quarter 2000 and Six Months 2000
increased from the corresponding periods in the prior year due to the
installation of the new management and development team during the three months
ended July 31, 2000. Steamboat royalties increased due to the revenue increases
of the Steamboat power plants. Increases in legal and professional fees,
corporate expenses and other administrative expenses were due to increased
activity and completion of two transactions described in Notes 4 and 5.
7
<PAGE>
During the three months 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. We have 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
$173,000 and $338,000 for the three and six month periods ending July 31, 2000,
respectively, compared to $144,000 and $278,000 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>
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Three Months Ended July Six Months Ended July
31, 31,
--------------------------- -------------------------
2000 1999 2000 1999
----------- ---------- ---------- ---------
Lehi Independent Power Associates, L.C..... $ 16,000 $ 16,000 $ 30,000 $ 31,000
Plymouth Cogeneration Limited Partnership.. (11,000) 2,000 14,000 11,000
---------- ---------- ---------- ----------
$ 5,000 $ 18,000 $ 44,000 $ 42,000
========== ========== ========== ==========
</TABLE>
Primarily as a result of the one-time charges totaling $1,894,000 described
above (including $1,313,000 of non-cash charges) our net loss for the three and
six month periods ending July 31, 2000 was $1,670,000 and $2,021,000
respectively. 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.
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Three Months Ended July 31, Six Months Ended July 31,
-------------------------------------- -----------------------------
2000 1999 2000 1999
------------------- ------------------ -------------- --------------
Net loss reported...................... $(1,670,000) $ (1,417,000) $ (2,021,000) $ (1,635,000)
Compensation arising from issuance of
options to new management team....... 1,313,000 -- 1,313,000 --
Provision for severance and
repositioning of the Company......... 581,000 -- 581,000 --
Litigation settlement costs............ -- 1,138,000 2,000 1,138,000
Loss from joint ventures and
Extraordinary gain on exchange of
debentures to preferred stock........ -- -- -- (69,000)
------------------ ---------------- ------------- --------------
minority interest....................
Operating income (loss) exclusive of
non-recurring items.................. 224,000 (279,000) (125,000) (566,000)
Depreciation........................... 173,000 144,000 338,000 278,000
Interest, net.......................... 13,000 45,000 (8,000) 80,000
------------------ ---------------- ------------- -------------
EBITDA (loss) exclusive of
non-recurring and extraordinary
items and before dividends........... $410,000 $ (90,000) $ 205,000 $ (208,000)
======== ========= ============= =============
</TABLE>
Dividends paid on preferred stock for the three and six months of 2000
totaled $67,000 and $135,000, respectively, compared to $64,000 and $119,000 in
the like periods of the previous year. The increase was due primarily to the
$250,000 additional investment in Series A Preferred Stock in June 1999.
In July 2000, an option to acquire additional shares of Series A Convertible
Preferred Stock for $7,750,000 was exercised. (See Part II, Item 2, for further
details.) 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.
8
<PAGE>
Liquidity and Capital Resources
At July 31, 2000, cash totaled approximately $2,325,000, as compared to
$301,000 at January 31, 2000, an increase of $2,024,000. During the six months
ended July 31, 2000, cash flow from financing activities of $3,371,000,
primarily from proceeds of exercise of warrants and options, was used to fund
$798,000 in operating activities and $549,000 of investing activities, and
provided the increase in cash and in working capital.
During the first six months of Fiscal 2000, the Company used $798,000 of
cash in operating activities compared with $154,000 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 quarter, amounted
to $916,000. We also paid the $900,000 litigation settlement note.
The $549,000 used in investing activities during Six Months 2000 compared to
$239,000 in the corresponding period the prior year included $83,000 of deferred
costs expended on pending acquisitions as compared to $108,000 in the earlier
year. Cash applied to acquisition of equipment, mainly in the Environmental
Division, amounted to $388,000 in the current year as compared to $190,000 in
the earlier year.
Cash provided by financing activities in the Six Months 2000 totaled
$3,371,000 primarily as a result of the $3,282,000 proceeds from the exercise of
warrants and options. In the same period in 1999 financing activities provided
cash of $26,000. This included proceeds from the sale of Series A Preferred
Stock amounting to $234,000.
Our receipt of net proceeds of $2,758,000 from the exercise of warrants and
$516,000 from the exercise of options was the primary reason for our working
capital increasing to $2,094,000 at July 31, 2000 from a deficit of $255,000 at
January 31, 2000.
Our cash position and projected cash flow from operations are sufficient to
satisfy our commitments for the next twelve months.
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
Acquisition of 30% interest in Marathon Capital, LLC
In June 2000, we acquired an approximately 30% interest in the equity of
Marathon Capital, LLC, a company engaged in origination, development and
financing of energy projects, in consideration for which we issued to Marathon
200,000 shares of our common stock. The issuance of these shares was exempt from
the registration requirements of the Act pursuant to Section 4(2) thereunder.
9
<PAGE>
Acquisition of 25% interest in Castlebridge Partners, LLC
On August 23, 2000, U.S. Energy Systems Castlebridge LLC ("USE Sub"), a
wholly-owned subsidiary of the Company, entered into a subscription agreement
with Castlebridge Partners, LLC ("Castlebridge") and its two members, Kemper
Castlebridge, Inc., (a subsidiary of the Kemper Companies), and GKM II
Corporation, (a company owned by the management and employees of
"Castlebridge"), pursuant to which Castlebridge would issue to USE Sub a 25%
Membership Interest (the "Transaction"). Castlebridge, which operates from
offices in Chicago, Illinois, is a risk mitigation consulting firm that focuses
on energy and similar markets. The Transaction was consummated on August 23,
2000. In connection with the consummation of the Transaction, which will be
valued using the equity method of accounting, we issued 568,750 shares of common
stock to Castlebridge (valued at $6.00 per share) and 29,167 shares to SPARK
Energy.com Corporation for facilitating the Transaction. The issuance of these
shares was exempt from the registration requirements of the Act pursuant to
Section 4(2) thereunder.
Issuance of Common Stock to Estate of Richard H. Nelson
In September 2000, we issued 25,000 shares of common stock to the Estate of
Richard H. Nelson as part of an agreement with the Estate. The value of these
shares had previously been charged to earnings as of January 31, 2000. The
issuance of these shares was exempt from the registration requirements of the
Act pursuant to Section 4(2) thereunder.
Exercise of Option to Acquire Preferred Stock
On or about July 31, 2000, Energy Systems Investors, L.L.C ("ESI"), a
Delaware limited liability company, controlled by Lawrence I. Schneider and
Henry Schneider, officers and directors of the Company, exercised its option to
acquire 861,110 shares of the Company's Series A Convertible Preferred Stock
(the "Series A Stock") (ESI and its affiliates having previously acquired an
aggregate of 277,778 shares of Series A Stock) for a purchase price of
$7,749,990 (i.e., $9.00 per share of Series A Stock), of which approximately
$8,611 was paid in cash and the balance of approximately $7,741,379 was paid in
the form of a one year limited recourse promissory note (the "Note") made by ESI
in favor of the Company; the Note bears interest at the rate of 9.25% per annum
and the interest is payable in quarterly installments. The obligations of ESI
under the Note are secured by the Pledged Collateral (as defined) and are
limited to (i) the Pledged Collateral and (ii) not more than $100,000 of ESI's
assets (excluding the Pledged Collateral). The Pledged Collateral consists of
the 861,110 shares of Series A Stock provided that for each $8.99 in principal
amount of Note that is paid, one share of Series A Stock is released from the
Pledged Collateral. ESI has agreed that the shares of Series A Stock included in
the Pledged Collateral will be voted on all matters to be voted on by the
holders of the Company's capital stock in the same proportion as the votes cast
by the holders of the Company's outstanding capital stock. Each share of Series
A Stock is currently convertible into four shares of the Company's Common Stock.
As of July 31, 2000, 1,138,888 shares of Series A Stock were outstanding. The
shares of Common Stock issuable upon conversion of this Series A Stock are
subject to the Registration Rights Agreement dated March 20, 1998 between the
Company and Energy Systems and accordingly, the holders of the shares of Common
Stock underlying the Series A Stock have piggyback registration rights and one
demand registration right with respect to such shares. ESI having represented,
among other things, that it is an "accredited investor" (as such term is defined
in Rule 501 promulgated under the Securities Act of 1933, as amended (the
"Act")), the shares of Series A Stock were issued without registration under the
Act in accordance with the exemption provided by Section 4(2) thereunder. A
certificate of increase was filed with the Delaware Secretary of State
increasing the number of shares designated as Series A Stock from 600,000 shares
to 1,138,888 shares.
Plan of Recapitalization
As of July 31, 2000, the Company and the holders of the outstanding shares
of Series A Stock (i.e., ESI, Lawrence I. Schneider and Henry Schneider
(collectively the "Series A Stockholders")) entered into a plan of
recapitalization (the "Plan of Recapitalization") pursuant to which (i) the
annual dividends payable with respect to the 1,138,888 shares of Series A Stock
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outstanding would be reduced from $0.81 per share to $0.54 per share; (ii) the
interest payable with respect to the Note would be reduced from 9.25% per annum
to 6.25% per annum; (iii) Series B Warrants (the "Warrants") to acquire
1,500,000 shares of the Company's Common Stock at an exercise price of $4.00 per
share were issued to a limited group of persons designated by the Series A
Stockholders; and (iv) a reserve fund (the "Reserve Fund") would be established
to ensure the payment in part of the dividends with respect to all of the
outstanding shares of Series A Stock. The Plan of Recapitalization is effective
upon the waiver or satisfaction of the following conditions:
- A private letter ruling is obtained from the Internal Revenue Service to
the effect that the Plan of Recapitalization will not have an adverse
tax effect on the parties thereto; and
- The issuance of the Warrants has been approved by the stockholders to
the extent required by Nasdaq.
If these conditions have not been waived or satisfied by December 31, 2001,
the Plan of Recapitalization will be terminated.
The Warrants are not exercisable until the Plan of Recapitalization is
effective and are only exercisable to acquire a number of shares equal to the
quotient obtained by dividing the principal amount of the Note that is paid from
time to time by 5.160919269. The Warrants are void if the Plan of
Recapitalization is terminated. The holders of the Warrant Shares are entitled
to certain piggyback and demand registration rights. The Warrants were issued in
a transaction not involving a public offering and thus, the issuance of the
Warrants was exempt from the registration requirements of the Act pursuant to
Section 4(2) thereunder.
The Plan of Recapitalization provides that when it is effective, the Company
will set apart approximately $1.23 million (approximately two years of dividends
at the reduced dividend rate of $0.54 per share) (the "Reserve Fund") to ensure
the payment of dividends on the Series A Stock. The Reserve Fund is to be used
if and to the extent the Company determines that it does not have the funds
available to pay these dividends. The Reserve Fund is to be funded by the
payment of the note at the rate of aggregate $0.158 for each dollar in principal
amount of the Note that is paid. The Company is not required to set apart funds
with respect to dividends payable after March 1, 2004. Furthermore, the Company
is entitled, under certain circumstances, to withdraw from the Reserve Fund such
sums as the Board of Directors of the Company determines in good faith are not
required for payment of dividends on the Series A Stock.
Item 5 - Other Events
The ten year non-qualified stock options (collectively, the "Option")
granted in May 2000 to Lawrence Schneider and Goran Mornhed to acquire up to
3,312,500 shares of Common Stock at exercise prices ranging from $3.00 to $4.00
per share were modified and as a result, these options vested and may be
exercised, subject to stockholder approval of the Company's 2000 Executive
Incentive Compensation Plan.
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Item 6 - Exhibits
(a) Exhibits
3.1 Certificate of Amendment of Amended and Restated
Certificate of Incorporation of the Company
3.2 Certificate of Increase of Series A Convertible
Preferred Stock of the Company
4.1 Plan of Recapitalization dated as of July 31, 2000 by
and between the Company and the parties identified
therein.
4.2 Form of Series B Warrant to Purchase Shares of Common
Stock (issued pursuant to the Plan of
Recapitalization)
10.1 Amended and Restated Stock Option Agreement between
the Company and Lawrence I. Schneider dated May 10,
2000 with respect to 750,000 shares of Company Common
Stock
10.2 Amended and Restated Stock Option Agreement between
the Company and Lawrence I. Schneider dated May 10,
2000 with respect to 1,000,000 shares of Company
Common Stock
10.3 Amended and Restated Stock Option Agreement between
the Company and Goran Mornhed dated May 10, 2000 with
respect to 562,500 shares of Company Common Stock
10.4 Amended and Restated Stock Option Agreement between
the Company and Goran Mornhed dated May 10, 2000 with
respect to 1,000,000 shares of Company Common Stock
10.5 Pledge Agreement dated as of July 31, 2000 by and
between the Company and Energy Systems Investors,
L.L.C.
10.6 Limited Recourse Promissory Note dated July 31, 2000
issued by Energy Systems Investors, L.L.C. in favor
of the Company
27 Financial Data Schedule
(b) Current Report of Form 8-K
On or about July 26, 2000 the Company filed a Current Report
on Form 8-K disclosing under Item 5 the adoption of certain employee
benefit plans.
On or about August 11, 2000 the Company filed a Current Report
on Form 8-K disclosing under Item 4 a change in the Company's
independent auditors.
On or about August 30, 2000 the Company filed a Current Report
on Form 8-K disclosing under Item 5 its acquisition of interests in
Castlebridge (the "Castlebridge 8-K"). On or about September 5, 2000,
the Company filed an amendment to the Castlebridge 8-K.
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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: September 19, 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
