-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GdQrxDapknojy2Nnr7gYmSlkr+/SKIOuoM90Bo0N/0NvUoxNYE1Z2gEyYXHp8IAD WMI0+2dI+mA+3n/HCMulCA== 0000950130-96-004567.txt : 19961202 0000950130-96-004567.hdr.sgml : 19961202 ACCESSION NUMBER: 0000950130-96-004567 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19961126 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S ENERGY SYSTEMS INC CENTRAL INDEX KEY: 0000351917 STANDARD INDUSTRIAL CLASSIFICATION: MOTORS & GENERATORS [3621] IRS NUMBER: 521216347 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-04612 FILM NUMBER: 96672940 BUSINESS ADDRESS: STREET 1: 515 NORTH FLAGLER DRIVE STREET 2: SUITE 202 CITY: WEST PALM BEACH STATE: FL ZIP: 33401 BUSINESS PHONE: 2127258383 MAIL ADDRESS: STREET 1: 515 NORTH FLAGLER DRIVE STREET 2: SUITE 202 CITY: WEST PALM BEACH STATE: FL ZIP: 33401 FORMER COMPANY: FORMER CONFORMED NAME: U S ENVIROSYSTEMS INC /DE/ DATE OF NAME CHANGE: 19960607 SB-2/A 1 AMENDMENT #5 OF FORM SB-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 26, 1996 REGISTRATION NO. 333-04612 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 5 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- U.S. ENERGY SYSTEMS, INC. (FORMERLY U.S. ENVIROSYSTEMS, INC.) (EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) ---------------- DELAWARE 4931 52-1216347 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.) OF INCORPORATION OR ORGANIZATION) RICHARD H. NELSON PRESIDENT 515 NORTH FLAGLER DRIVE, U.S. ENERGY SYSTEMS, INC. SUITE 202 515 NORTH FLAGLER DRIVE, SUITE 202 WEST PALM BEACH, FL 33401 WEST PALM BEACH, FL 33401 (561) 820-9779 (561) 820-9779 (ADDRESS AND TELEPHONE NUMBER OF (NAME, ADDRESS AND TELEPHONE PRINCIPAL EXECUTIVE OFFICES AND NUMBER OF AGENT FOR SERVICE) PRINCIPAL PLACE OF BUSINESS) COPIES TO: DAVID ALAN MILLER, ESQ. GREGORY KATZ, ESQ. NOAH SCOOLER, ESQ. REID & PRIEST LLP GRAUBARD MOLLEN & MILLER 40 WEST 57TH STREET 600 THIRD AVENUE NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10016 (212) 603-2000 (212) 818-8800 ---------------- APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. 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. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE FEE - ----------------------------------------------------------------------------------------------------- Common Stock, par value $.01.......... 3,565,000(2) $4.00 $14,260,000 $ 4,321 - ----------------------------------------------------------------------------------------------------- Redeemable Common Stock Purchase War- rants................................ 3,565,000(3)(8) $ .10 $ 356,500 $ 108 - ----------------------------------------------------------------------------------------------------- Common Stock, par value $.01.......... 3,565,000(4)(8) $4.00 $14,260,000 $ 4,321 - ----------------------------------------------------------------------------------------------------- Common Stock, par value $.01.......... 310,000(5)(8) $6.60 $ 2,046,000 $ 620 - ----------------------------------------------------------------------------------------------------- Redeemable Common Stock Purchase War- rants................................ 310,000(6)(8) $.165 $ 51,150 $ 16 - ----------------------------------------------------------------------------------------------------- Common Stock, par value $.01.......... 310,000(7)(8) $5.00 $ 1,550,000 $ 470 - ----------------------------------------------------------------------------------------------------- Common Stock, par value $.01.......... 205,000(9) $4.00 $ 820,000 $ 248 - ----------------------------------------------------------------------------------------------------- TOTAL................................. $10,104 - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457. (2) Includes 465,000 shares which the Underwriters have the option to purchase to cover over-allotments, if any. (3) Includes 465,000 Redeemable Common Stock Purchase Warrants ("Warrants") which the Underwriters have the option to purchase to cover over- allotments, if any. (4) Represents shares issuable upon exercise of the Warrants registered hereunder. (5) Represents shares issuable upon exercise of an option to be issued to the Representative (the "Representative's Purchase Option"). (6) Represents Warrants issuable upon exercise of the Representative's Purchase Option. (7) Represents shares issuable upon exercise of Warrants subject to the Representative's Purchase Option. (8) Pursuant to Rule 416 of the Securities Act of 1933, as amended, the number of Warrants and shares issuable upon exercise of the Warrants are subject to the antidilution provisions of the Warrants and the Representative's Purchase Option. (9) Represents shares issuable in a concurrent secondary offering. 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED NOVEMBER 26, 1996 PROSPECTUS U.S. ENERGY SYSTEMS, INC. 3,100,000 SHARES OF COMMON STOCK AND 3,100,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS U.S. Energy Systems, Inc. (the "Company") hereby offers (the "Offering") 3,100,000 shares of Common Stock (the "Common Stock") and 3,100,000 Redeemable Common Stock Purchase Warrants (the "Warrants" and, together with the Common Stock, the "Securities"). Each Warrant entitles the holder to purchase one share of Common Stock for $4.00 during the four-year period commencing one year from the date of this Prospectus. The Warrants are redeemable at a price of $.01 per Warrant, at any time after the Warrants become exercisable, upon not less than 30 business days' prior written notice, if the last sale price of the Common Stock has been at least 150% (initially $6.00) of the exercise price of the Warrants for the 20 consecutive trading days ending on the third day prior to the date on which the notice of redemption is given. See "Description of Securities." The Company's Common Stock is sporadically traded on the NASD OTC Bulletin Board. Prior to this Offering, there has been no public market for the Warrants nor has there been an established trading market for the Common Stock. There can be no assurance that such a market will develop for the Securities as a result of this Offering. The Company has applied for inclusion of the Common Stock and the Warrants on the Nasdaq SmallCap Market under the proposed symbols USEY and USEYW, respectively. For information regarding the factors considered in determining the initial public offering prices of the Securities and the exercise price of the Warrants, see "Underwriting." ----------- THESE SECURITIES ARE SPECULATIVE IN NATURE, INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 9 AND "DILUTION" ON PAGE 20. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS TO DISCOUNTS AND TO PUBLIC COMMISSIONS(1) COMPANY(2) - -------------------------------------------------------------------------------- Per Share............................... $4.00 $.32 $3.68 - -------------------------------------------------------------------------------- Per Warrant............................. $.10 $.008 $.092 - -------------------------------------------------------------------------------- Total(3)................................ $12,710,000 $1,016,800 $11,693,200
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Does not include a 3% non-accountable expense allowance payable to the Representative. The Company has also agreed to grant to the Representative an option (the "Representative's Purchase Option") to purchase 310,000 shares of Common Stock at $6.60 per share and/or 310,000 Warrants at $.165 per Warrant and to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company, including the Representative's non-accountable expense allowance of $381,300 ($438,495 if the Underwriters' over-allotment option is exercised in full), estimated at $1,031,300. (3) The Company has granted the Underwriters an option, exercisable within 45 days from the date of this Prospectus, to purchase up to an additional 465,000 shares of Common Stock and/or an additional 465,000 Warrants upon the same terms and conditions as set forth above, solely to cover over- allotments, if any. If such over-allotment option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $14,616,500, $1,169,320 and $13,447,180, respectively. See "Underwriting." The Securities are being offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to the approval of certain legal matters by counsel and to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify the Offering and to reject any order in whole or in part. It is expected that delivery of the certificates representing the Securities will be made against payment therefor at the offices of the Representative in New York City on or about , 1996. GAINES, BERLAND INC. The date of this Prospectus is , 1996 AVAILABLE INFORMATION The Company is subject to informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by the Company with the Commission can be inspected without charge and copied at prescribed rates at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549 and at the Commission's regional offices located at Seven World Trade Center, Suite 1300, New York, New York 10048, and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. The Company's Common Stock is quoted on the NASD OTC Bulletin Board and certain of the Company's reports, proxy materials and other information may be available for inspection at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The address of such Web site is http://www.sec.gov. The Company has filed with the Commission a Registration Statement on Form SB-2 under the Securities Act of 1933, as amended ("Securities Act"), with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement, including the exhibits filed as part thereof and otherwise incorporated therein. Copies of the Registration Statement and the exhibits may be inspected, without charge, at the offices of the Commission, or obtained at prescribed rates from the Public Reference Section of the Commission at the address set forth above. ---------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK OR WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. At or prior to the consummation of the Offering, the Company will consummate the following transactions (the "Closing Transactions"): (i) the acquisition of a 95% interest in two geothermal plants known as Steamboat 1 and 1A for $4,741,000 (including $50,000 as a downpayment which was previously paid by the Company) (the "Steamboat Acquisition"), (ii) the acquisition of an 81.5% interest in NRG Company LLC ("NRG") for $265,000, to enable NRG to make a loan of $250,000 to Reno Energy LLC ("Reno Energy"), developer of a district heating project to be fueled by geothermal sources, to secure for NRG an option to obtain a 50% interest in Reno Energy, (iii) the conversion of $500,000 of convertible subordinated debentures (the "Convertible Debentures") into 125,000 shares of Common Stock and 125,000 Warrants ("Private Warrants") having the same terms and conditions as the Warrants (the "Debenture Conversion") and (iv) the exchange of the 57,500 currently outstanding shares of the Company's Series One Preferred Stock for 205,000 shares of Common Stock (the "Preferred Stock Exchange"). The consummation of this Offering is a condition to the consummation of the Closing Transactions and the consummation of the Closing Transactions is a condition to the consummation of this Offering. Accordingly, if any of the Closing Transactions is not consummated, this Offering will be terminated. Except as otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over- allotment option, the Representative's Purchase Option, the Warrants offered hereby or any of the Company's other outstanding options and warrants to purchase Common Stock. All numbers and amounts specified herein reflect a one for forty reverse stock split effective May 6, 1996, unless otherwise indicated. THE COMPANY U.S. Energy Systems, Inc. is engaged in the cogeneration and independent power plant ("IPP") industries as a project developer, owner and operator. Cogeneration is the process of producing two or more energy forms (typically electricity and heat) simultaneously from the same fuel source. A cogeneration facility is a power plant which produces electricity and, simultaneously, recovers waste heat to use in place of heat which would otherwise be made from conventional sources such as furnaces or boilers. An IPP is a power plant which is not owned and operated by a regulated public electric utility company. Frequently, IPPs are cogeneration facilities. Federal and state laws have been promulgated to promote competition in the sale of electric energy and to encourage cogeneration and independent power facilities. The Company's strategy is to seek projects requiring power production or cogeneration and to become an equity participant with the owners, developers or other involved parties in return for the Company's expertise in the structuring, design, management and operation of the projects. Often, at the time of the Company's initial involvement, such projects will have advanced beyond the conceptualization stage to a point where the engineering, management and project coordination skills the Company offers are required to proceed. Projects in which the Company is involved or is negotiating to become involved include (a) acquiring and operating existing IPPs and cogeneration facilities in the United States, (b) developing, constructing, and operating new IPPs and cogeneration facilities in the United States and in certain overseas markets, (c) designing and constructing cogeneration and IPPs for third party owners, and (d) developing, constructing and selling energy-efficient products using cogeneration technology such as non-electric air conditioning. As a major element of its strategy, the Company intends to focus on projects such as shopping malls, healthcare centers, food processing centers, hotels and other facilities where large quantities of electricity, air conditioning and hot water are required on a continuous and simultaneous basis. The Company has signed a letter of intent with the owners of Bluebeard's Castle, a large resort and commercial complex in St. Thomas, United States Virgin Islands ("USVI"), to build and operate a 3 megawatt cogeneration plant and a 120,000 gallon per 3 day water recovery system in the resort's property. Under the letter of intent the Company, the resort manager and the resort owners would own the cogeneration plant and water system and share revenues. The Company has received initial funding from the resort owners and the first of six engine generators was installed during September 1996. The Company has also entered into a joint development agreement with the Cowen Investment Group ("Cowen") to develop, build and operate cogeneration plants at shopping malls. Toward this end, the joint venture has been in discussions with two of the major mall owners in the United States. Under the joint development agreement, savings from the cogeneration systems would be shared equally by the mall owners and the joint development company (in which the Company would have a 40% profit interest). Under the joint development agreement, the Company will perform all project development functions other than securing the financing. See "Business--Current Operations and On-Going Projects." The Company has a history of losses substantially throughout its existence and, except for the distribution of $20,000 from the Plymouth State College project (described below) in August 1996, has not received any cash distributions from its investments since emerging from bankruptcy in 1993. To provide the Company with a source of revenues to enable it to expand its business, concurrently with the Offering, the Company will acquire, for a total investment of $4,741,000 (including $50,000 as a downpayment which was previously paid by the Company), a 95% interest in two geothermal power plants, known as Steamboat 1 and 1A, in Steamboat Hills, Nevada (the "Steamboat Facilities"). Electricity is produced in geothermal plants by extracting ^ heat from the earth to drive turbines, thereby generating the electricity. Geothermal power is considered a highly environmentally sound method of producing electricity, but it can only be produced in areas where specific geological formations exist. A substantial portion of the net proceeds of this Offering will be used for the Steamboat Acquisition. The Company regards the Steamboat Acquisition as a key element toward achieving its objectives in the independent power plant industry. In January 1994, the Company purchased a 50% equity interest in a limited liability company which owns a cogeneration facility in Lehi, Utah. The Company expects the Lehi plant to be operational in the fourth quarter of this fiscal year, provided that it obtains the necessary air quality permits. However, the Company and its partners may decide to sell a portion of the operating machinery and to purchase replacement equipment, thereby increasing the plant's output capacity and efficiency. If such sale and replacement is undertaken, the receipt of operational revenues would be delayed until the second quarter of the next fiscal year. As there are no contracts in effect at this time for the sale of power from this plant, receipt of revenues will also be dependent upon the Company entering into such contracts with customers. See "Business--Current Operations and On-Going Projects--Lehi Cogeneration Project." The Steamboat and Lehi projects enable the Company to participate in what it believes is a growing market for independently produced electricity in the western United States. Additionally, in 1994 the Company acquired a 50% interest in a partnership which owns and operates a cogeneration plant which produces 2.5 megawatts of electricity and 25 million British Thermal Units ("BTUs") for heating at Plymouth State College in Plymouth, New Hampshire. The Plymouth facility provides 100% of the electrical and heating requirements for the campus, which is part of the University of New Hampshire system, under a twenty year contract. The Company also intends to pursue projects which can utilize waste products or other alternative fuels, such as used motor oil and tires, which provide environmental and ecological benefits and also provide potential for earnings because of low fuel costs. In this regard, the Company will invest $265,000 for 81.5% of NRG. NRG will have an option to acquire 50% of Reno Energy LLC ("Reno Energy"), which plans to develop a pipeline to distribute and sell excess heat available from the geothermal resources in Steamboat Hills, Nevada (the "Reno Project"). The Company was incorporated in the State of Delaware on May 6, 1981. The executive offices of the Company are located at 515 North Flagler Drive, Suite 202, West Palm Beach, Florida 33401. Its telephone number is (561) 820-9779. 4 CLOSING TRANSACTIONS Concurrently with the closing of the Offering, the Company will acquire a 95% interest in Steamboat Envirosystems, L.C. ("Steamboat LLC"), which will purchase the Steamboat Facilities from Far West Electric Energy Fund, L.P. (the current owner of Steamboat 1) and 1-A Enterprises (the current owner of Steamboat 1-A). Far West Capital, Inc., a Utah corporation ("Far West Capital"), will own the remaining 5% of Steamboat LLC. The Company will contribute a total of $4,741,000 (including $50,000 as a downpayment which was previously paid by the Company) to Steamboat LLC from the proceeds of the Offering to enable Steamboat LLC to complete the acquisition, to retire a mortgage and, to provide capital for the potential acquisition of certain of the royalty interests to which the Steamboat Facilities are subject and improvements to the plants. See "Use of Proceeds--Steamboat Acquisition" and "Business--Current Operation and On-Going Projects--Steamboat Geothermal Power Plants." The Debenture Conversion and the Preferred Stock Exchange will also occur concurrently with the Closing of the Offering. These transactions, combined with the repayment of debt to be made with a portion of the proceeds of the Offering will result in a substantial reduction of the Company's indebtedness. In December 1994 the holders of the Convertible Debentures agreed to allow the Company to defer one-half of interest payments due thereafter until the consummation of an underwritten offering of the Company's securities, when interest payments so accrued would be paid. See "Use of Proceeds--Repayment of Debt--Accrued Interest on Debentures." In March 1996, the Company offered a conversion plan to the debenture holders (the "Debenture Conversion") whereby the holders could convert on a pro rata basis up to $500,000 in face amount for 125,000 shares of Common Stock and 125,000 Private Warrants, with the 18% rate of interest reduced to 9% on the unconverted balance. Twenty-three of the twenty-six debenture holders representing $1,375,000 face amount of the $1,525,000 total have agreed to the Debenture Conversion. The $150,000 in principal amount held by the holders declining the offer will continue to receive 18% interest, and will not participate in the Debenture Conversion. See "Use of Proceeds" and Pro Forma Financial Statements. 5 THE OFFERING Securities offered.......... 3,100,000 shares of Common Stock and 3,100,000 Warrants. Each Warrant entitles the holder to purchase one share of Common Stock for $4.00 during the four-year period commencing one year from the date of this Prospectus. Each Warrant is redeemable at a price of $.01 per Warrant at any time after the Warrants become exercisable, upon not less than 30 business days prior written notice, if the last sale price of the Common Stock on Nasdaq has been at least 150% (initially $6.00) of the then-exercise price of the Warrants for the 20 consecutive trading days ending on the third day prior to the date on which the notice of redemption is given. See "Description of Securities." Common Stock outstanding prior to the Offering...... 439,650 shares Common Stock to be outstanding after the 3,869,650 shares(1)(2) Offering................... Use of proceeds............. The net proceeds to be received from the sale of the Securities offered hereby are estimated to be approximately $10,662,000 (approximately $12,359,000 if the Underwriters' over-allotment option is exercised in full). Such net proceeds will be used as follows: (i) $4,691,000 for the Steamboat Acquisition, (ii) $265,000 for the investment in NRG, (iii) $2,767,000 to repay indebtedness (including $50,000 which was borrowed to make a downpayment on the Steamboat Acquisition) and (iv) the balance for working capital. See "Use of Proceeds" and "Business." Proposed Nasdaq SmallCap Market Symbols............. Common Stock: USEY Warrants: USEYW RISK FACTORS The securities offered hereby are speculative and involve a high degree of risk and substantial dilution. Among the principal risks to be considered are: (i) the Company has incurred and continues to incur substantial losses, (ii) the Company's profitability will be dependent, to a significant extent, on the continued successful operations of the Steamboat Facilities, (iii) prior to this Offering, the Company has significant working capital and stockholders' equity deficits, and (iv) the Company may require additional capital to undertake future projects. See "Risk Factors" and "Dilution." - -------- (1) Includes (i) 439,650 shares of Common Stock outstanding prior to the Offering, (ii) 3,100,000 shares of Common Stock being issued pursuant to the Offering, (iii) 125,000 shares of Common Stock to be issued in the Debenture Conversion and (iv) 205,000 shares of Common Stock to be issued in the Preferred Stock Exchange. (2) Does not include an aggregate of 4,264,975 shares of Common Stock reserved and to be reserved for issuance following completion of the Offering including (i) 291,850 shares issuable on exercise of currently outstanding options and warrants, (ii) 3,845,000 shares issuable on exercise of the Warrants, the Representative's Purchase Option and the Warrants issuable on exercise of the Representative's Purchase Option and the Private Warrants being issued in the Debenture Conversion, and (iii) 128,125 shares issuable upon conversion of Convertible Debentures which will remain outstanding after the Offering. 6 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The Summary Financial Information set forth below is derived from the historical financial statements appearing elsewhere in this Prospectus and should be read in conjunction with such financial statements, including the notes thereto. The Pro Forma Statements of Operations data for the year ended January 31, 1996 and the six months ended July 31, 1996 give effect to the Closing Transactions including the acquisition of a 95% interest in Steamboat LLC and the 81.5% interest in NRG as if they had occurred at the beginning of the periods. The Pro Forma Balance sheet data as at July 31, 1996 give effect to the Offering and to the Closing Transactions as if such transactions had occurred on such date. See Pro Forma Financial Statements, "Use of Proceeds" and historical financial statements. STATEMENT OF OPERATIONS DATA:
SIX MONTHS YEAR ENDED ENDED YEAR ENDED JANUARY 31, SIX MONTHS ENDED JULY 31, JANUARY 31, 1996 1995 JULY 31, 1996 1995 ---------------------------- ----------- ----------------------- ---------- HISTORICAL PRO FORMA HISTORICAL HISTORICAL PRO FORMA HISTORICAL USE USE/SB (1) USE USE USE/SB (1) USE ---------- --------------- ----------- ---------- ---------- ---------- Revenue $ -- $ 3,404 $ -- $ -- $ 1,919 $ -- ------- --------- ------- ------- --------- ------- Operating and administrative expenses: Depreciation.......... -- 172 -- -- 86 -- Royalty............... -- 528 -- -- 372 -- Other................. 853 1,856 1,006 408 927 421 Interest (2)............ 604 106 319 328 41 223 Loss from Joint Ven- tures.................. 17 17 76 92 92 62 ------- --------- ------- ------- --------- ------- Income (loss) before in- come taxes............. (1,474) 725 (1,401) (828) 401 (706) Income taxes (3)........ -- 244 -- -- 135 -- ------- --------- ------- ------- --------- ------- Income (loss) before ex- traordinary items...... (1,474) 481 (1,401) (828) 266 (706) Preferred dividends..... 21(4) -- -- 29(4) -- -- ------- --------- ------- ------- --------- ------- Income (loss) available for common stockhold- ers*................... $(1,495) $ 481 $(1,401) $ (857) $ 266 $ (706) ======= ========= ======= ======= ========= ======= (Loss) per share of Com- mon Stock *............ $ (3.41) $ (3.38) $ (1.95) $ (1.61) ======= ======= ======= ======= (Loss) per share of Com- mon Stock--Supplemental (5)*................... $ (1.30) $ (0.66) ======= ======= Pro forma net income per share of Common Stock (6)*.................. $ 0.17 $ 0.09 ========= ========= Shares used in computing net income per share of Common Stock (6)....... 438,773 2,797,292 415,022 439,650 3,014,708 438,296 ======= ========= ======= ======= ========= ======= BALANCE SHEET DATA: JULY 31, 1996 ---------------------------- PRO FORMA (7) HISTORICAL AS ADJUSTED ---------- --------------- Current assets.......... $ 21 $2,988 Investment in joint ven- tures.................. 1,834 1,781 Loan receivable......... -- 300(8) Property, plant and equipment.............. -- 5,015 Total assets............ 2,076 10,084 Current liabilities..... 2,815 1,250 Long-term liabilities... 2,818 1,343 Minority interest in subsidiaries........... -- 334 Working capital......... (2,794) 1,738 Stockholders' equity (deficit).............. (3,557) 7,157
7 - -------- * Before extraordinary item. (1) Includes (a) adjusted operating results of the Steamboat Facilities for the year ended December 31, 1995, and the six months ended June 30, 1996; (no provision for the minority interest is made until the annual net income of the Steamboat Facilities exceeds $1,800,000), (b) NRG income of 9% interest on a $300,000 loan to Reno Energy less the 18.5% minority interest in NRG, (c) elimination of deferred note payable discount, elimination of interest payments on notes payable and bridge loans to be repaid from the proceeds of this Offering, and (d) elimination of interest on $500,000 principal amount of Convertible Debentures converted into Common Stock and Private Warrants, with $875,000 of the remainder paying interest at 9% per annum. (2) Adjusted for reduction on $875,000 principal amount of Convertible Debenture interest to 9%, and elimination of interest costs on $500,000 principal amount of Convertible Debentures converted into Common Stock and Private Warrants and on bridge loans and notes payable which will have been paid from the proceeds of this Offering. Also adjusts for the elimination of certain unamortized deferred costs of these notes and loans. Three of the 26 holders of Convertible Debentures, representing $150,000 in principal amount, have not agreed to the interest rate reduction from 18% to 9% per annum. Also includes NRG income of 9% interest on $300,000 loan to Reno Energy less the 18.5% minority interest in NRG. (3) A pro forma provision for income taxes was calculated after providing for a limit on the net operating loss deduction assuming an ownership change had taken place at the beginning of the 1996 fiscal year and the beginning of the six month period ended July 31, 1996. (4) Provision for dividends on Series One Preferred Stock eliminated as a result of the Preferred Stock Conversion. (5) Supplemental loss per share is based on the weighted average number of shares outstanding and 518,895 (at January 31, 1996) and 569,767 (at July 31, 1996) of the shares to be issued in the Offering for the repayment of debt. (6) Pro forma net income per share is based on the weighted average number of shares outstanding, the shares issued in the Debenture Conversion and the Preferred Stock Exchange and shares issued in the Offering to obtain funds required for the acquisition of the Steamboat Facilities, the investment in NRG and the retirement of debt (2,103,779 shares at January 31, 1996 and 2,245,058 shares at July 31, 1996). Assumed exercise of options and warrants have not been reflected as they would be anti-dilutive. (7) Reflects the sale of Securities offered hereby, the Debenture Conversion, the Preferred Stock Exchange and the anticipated use of proceeds for the Steamboat Acquisition, the NRG investment and the repayment of indebtedness, including accrued interest to November 30, 1996, as contemplated in "Use of Proceeds." (8) The NRG loan to Reno Energy includes $50,000 from funds invested by the minority interests and $250,000 from the funds to be invested by the Company. 8 RISK FACTORS Prospective purchasers of the securities offered hereby should carefully consider the following factors, as well as the information contained elsewhere in this Prospectus. NO SIGNIFICANT REVENUES; HISTORY OF LOSSES/UNCERTAIN PROFITABILITY; WORKING CAPITAL, CASH FLOW AND STOCKHOLDERS' EQUITY DEFICITS; AUDITORS' OPINION WITH EXPLANATORY PARAGRAPH The Company has a history of losses substantially throughout its existence and, except for the distribution of $20,000 from the Plymouth State College project in August 1996, has not received any cash distributions from its investments since its reorganization in 1993. To date, the Lehi power plant has not been operational. See "Current Operations and On-Going Projects." Although the Company believes that there may be profit and cash flow from the Lehi power plant starting in the fourth quarter of this fiscal year, there can be no assurances that this will occur. Operations at the plant may be delayed until the second quarter of the next fiscal year if the Company decides to sell certain operating machinery and replace it by purchasing equipment that would ultimately increase output capacity and efficiency. The Plymouth cogeneration plant historically had not provided revenues or cash flow to the Company because of costs related to equipment adjustments and operational reserves required by the terms of its financing, and there can be no assurance that any cash flow will be available in the foreseeable future. The Company received a distribution of $20,000 in August 1996. For the years ended January 31, 1996 and 1995, the Company incurred net losses of $1,391,000 and $1,316,000 respectively, and for the six months ended July 31, 1996, the Company incurred a net loss of $828,000. At July 31, 1996, as a result of these and earlier accumulated losses, the Company had a working capital deficit of $2,794,000 and a stockholders' equity deficit of $3,557,000. There can be no assurance that the Company will ever be able to generate cash flows sufficient to meet its obligations and sustain operations. The independent auditors' report for the fiscal year ended January 31, 1996 states that these factors raise substantial doubt about the Company's ability to continue as a going concern. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Financial Statements. LIMITED AVAILABLE CAPITAL; POSSIBLE NEED FOR ADDITIONAL FINANCING While the Company believes that the proceeds from this Offering together with anticipated cash flow from operations, will be sufficient to meet its anticipated cash requirements for the next twelve months, there is no assurance in this regard. The Company's continued existence will be dependent upon its ability to generate cash flows from its operations sufficient to meet its obligations as they become due. Unless the Company can generate cash flows from operations to fund its working capital needs, the Company will be required to obtain additional equity or debt financing to continue to operate its business. If the Company should require additional capital, there can be no assurance that such capital will be available to the Company, or if available, it would be on terms acceptable to the Company. If additional funds are raised by issuing equity securities, significant dilution to existing stockholders may result. Any inability by the Company to obtain additional financing, if required, will have a material adverse effect on the operations of the Company, including the possible cessation of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Use of Proceeds." PRIOR BANKRUPTCY; DEFERRED TAXES In late 1986, the Company, then called Cogenic Energy Systems, Inc., was impaired by a $2,100,000 judgment resulting from a contractual dispute. Although ultimately settled, the protracted court case caused delays in planned expansion and sales and led to a serious cash shortage. In mid-1989, the Company filed for protection under Chapter 11 of the Bankruptcy Code and a Plan of Reorganization was confirmed by the bankruptcy court in 1993. The Plan required the payment of outstanding taxes. Of those taxes, $110,000 was required to be paid upon the merger of Utility Systems Florida, Inc. ("USF") into the Company (see "Business--The Company"), but has been deferred pursuant to a verbal agreement with the Internal Revenue Service as long as the Company continues to meet its remaining pre-bankruptcy tax obligations ($372,000 at July 31, 1996), 9 which it is amortizing on a monthly basis over a six year period. The Company does not intend to pay this deferred $110,000 amount out of the proceeds of this Offering but to continue the deferral until either the Internal Revenue Service requires payment or the Board of Directors deems cash flow to be satisfactory. EMERGING INDUSTRY; UNCERTAINTY OF MARKET ACCEPTANCE Although the cogeneration and IPP 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, demand and market acceptance for their products and services are subject to a high level of uncertainty. The Company began developing new projects after USF merged with the reorganized Cogenic Energy Systems, Inc. in November 1993, but has not yet commenced significant marketing activities and currently has limited marketing experience as well as limited financial, personnel and other resources to undertake extensive marketing activities. PROJECT DEVELOPMENT AND ACQUISITION RISKS It is anticipated that certain types of projects, if undertaken, will require the Company to raise additional capital and there can be no assurance that such capital will be available on acceptable terms. The Company's ability to develop new projects, including the Reno Project, is also dependent on a number of other factors outside its control, including obtaining power agreements, governmental permits and approvals, fuel supply and transportation agreements, electrical transmission agreements, site agreements and construction contracts, and there can be no assurance that the Company will be successful in doing so. In particular, the Reno Project is still in the planning and development stage and there are no contracts with any end users nor any governmental approvals. Project development is subject to environmental, engineering and construction risks. If additional financing is not available on acceptable terms, the Company may have to cancel, decline or defer new projects. Further, projects which are successfully developed may still face risks inherent in start-up businesses, such as lack of market acceptance. POTENTIAL REDUCTION IN REVENUE FROM STEAMBOAT GEOTHERMAL PROJECTS The current power purchase agreements with Sierra Pacific Power Company ("Sierra") provide for price adjustments in December 1996 for Steamboat 1 and in December 1998 for Steamboat 1A. Under the contracts, Steamboat LLC is required to sell power to Sierra for additional 10-year periods at the then- prevailing short-term avoided costs for electricity for Sierra. If the price adjustments were to be made now, the new prices based on the contract formula would be substantially less than the existing contract rates. Although Management believes that revenues generated will still be in excess of the costs of production, there is no assurance that future prices at which the electricity generated by the Steamboat Facilities may be sold will exceed the cost of production, or that Steamboat LLC will generate adequate cash flow from operations to meet its investing and financing requirements. Although the prices are variable and fluctuate, if, as expected, a substantial reduction in power prices for Steamboat 1 takes place in December 1996, the result would mean a decrease in the amount of net earnings of Steamboat LLC which the Company will receive, which, depending on the extent of the price reductions, could result in the Company reflecting a net loss. However, Management believes that more satisfactory earnings can potentially be obtained for the energy generated in the Steamboat Facilities through negotiations with Sierra, and/or as a result of efforts by the Company to develop other options for sales of both electricity and heat from the facilities.The Company believes it is in a position to obtain a satisfactory price for electricity generated in the Steamboat Facilities because (1) the existing contract with Sierra, which calls for "short term" avoided cost in the second 10 years, is subject to negotiation since no "short term" tariff has been recently published by Sierra with the State of Nevada regulatory authority; (2) even if published, "short term" rates may not be applicable to a 20 year (long term) contract ; and (3) the Company is developing other options for sales of both electricity and heat from the facility, and heat is not subject to the power purchase contract. No assurance can be given that such efforts will be successful. 10 The Company will pay $1,000,000 into Steamboat LLC to provide capital for the potential acquisition of certain royalty interests and to fund certain improvements to the Steamboat Facilities which are expected to result in higher electricity output. While negotiations with certain royalty owners have already begun, no agreements have yet been concluded and no potential savings from royalty reductions are reflected in the pro forma financial statements presented herein. Additional royalty agreements, applying only to Steamboat 1, call for payment of a total of 30% of the net revenue of Steamboat 1 after certain deductions, starting March 1, 1997. The resulting effect on the net income of Steamboat LLC and on the Company's after-tax income will depend on the other elements of power sales revenues outlined above. Assuming the reduction in income from power sales discussed above, and the buyout of no royalty interests, the cost of these net revenue royalties could be in the range of $50,000 to $100,000 annually. The Company expects the Steamboat Facilities to generate sufficient revenues to make any royalty payments required. Negotiations with these interests have also already begun, but no assurance can be given that the negotiations will produce successful results. See "U.S. Energy Systems, Inc. and Subsidiaries Pro Forma Condensed Consolidated Statements of Operations," "Steamboat Facilities Pro Forma Condensed Combined Statement of Operations," "Management's Discussion and Analysis of Financial Condition and Plan of Operation--Plan of Operation" and "Business--Current Operations and On-Going Projects." RELIANCE ON PRESIDENT The Company will be dependent upon its executive officers and key employees, particularly its President, Richard Nelson. The unexpected loss of the services of Mr. Nelson could have a detrimental effect on the Company. Although the Company plans to add additional full-time employees after the Offering, the Company presently has only three current full-time employees and contracts with independent contractors for the conduct of certain engineering, accounting, administrative and legal functions. GENERAL OPERATING 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 the Company is or will be involved contain certain redundancies and back-up mechanisms, there can be no assurance that any such breakdown or failure would not prevent the affected facility from performing under applicable power agreements. The development and operation of geothermal energy resources are subject to 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, the Company estimates the productivity of the geothermal resource and the expected decline in such productivity. The productivity of a geothermal resource may decline more than anticipated, resulting in insufficient recoverable reserves being available for sustained generation of the electrical power capacity desired. See "Business --Current Operations and On-Going Projects." GOVERNMENT REGULATION Under present federal law, the Company is not and will not be subject to regulation as a holding company under the Public Utility Holding Company Act of 1935 ("PUHCA") as long as each power plant in which it has an interest is a qualifying facility ("QF") under the Public Utility Regulatory Policies Act of 1978 ("PURPA"). A QF that is a cogeneration facility must produce not only electricity but also useful thermal energy for use in an industrial or commercial process or heating or cooling applications in certain proportions to the facility's total energy output and must meet certain energy efficiency standards. Under PURPA, a regulated public electric utility company must purchase electricity at its avoided cost from an IPP which has QF status. QF status is granted to IPP's which use fossil fuel in a manner which allows for recovery and use of a certain percentage of otherwise rejected heat thereby achieving a higher degree of fuel efficiency. QF status is also 11 granted to IPP's which use renewable energy sources such as geothermal, hydro, solar, wind, and waste products without regard to heat recovery. An IPP using fossil fuel, which loses its ability to use recovered heat, could fall below the efficiency standards and thereby lose its QF status. The regulated public electric utility company, which may have been required to purchase electricity from the IPP, could thereafter refuse to purchase such electricity. IPP's which have QF status, and which are not fossil fuel driven, are not subject to efficiency standards regarding QF status. See "Business--Government Regulation." 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 the Company believes that it is in substantial compliance with all applicable rules and regulations and that the projects in which it is involved have the requisite approvals for existing operations and are operated in accordance with applicable laws, the operations of the Company and its projects remain subject to 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 the Company 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 RISKS 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 the Company takes every precaution to insure that such regulations are met at all times, and projects are not entered into which do not or cannot meet such regulations, there is no assurance that such regulations can always be met. Should a condition occur in which emissions standards at a specific project fall below allowable standards, there could be costs involved in remediating such conditions. Additionally, as with all industrial sites, there are standards for the safe handling of fuels and chemicals which must be met. Again, the Company takes every precaution to insure such standards are met. Exigencies may occur--a fuel spillage for example--which would require remediation with attendant costs. Areas in which the Company is acquiring geothermal projects are subject to frequent low-level seismic disturbances, and more significant seismic disturbances are possible. While such power generation facilities are built to withstand relatively significant levels of seismic disturbance, and the Company believes it will be able to maintain adequate insurance protection, there can be no assurance 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 such insurance will continue to be available on commercially reasonable terms. UNCERTAINTY OF COMPETITIVE ENVIRONMENT In addition to competition from electric utilities in the markets where the projects are located, the Company also faces competition from approximately 150 companies currently involved in the cogeneration and independent power market. Virtually all of these companies are larger and better financed than the Company. Although the Company believes that it will be entering segments of the marketplace where it will not face extensive competition, there is no assurance that it will be able to do so, and it will thereby be disadvantaged if it has to compete with the larger and better financed companies. The entire industry also may face competition from existing investor owned utility companies and may be adversely affected by the prices charged by such companies for conventional energy sources, which, in turn, are affected by inflation and availability of fossil fuel. 12 INSURANCE Although the Company maintains insurance of various types to cover many of the risks that apply to its operations, including $2,000,000 of general liability insurance as well as separate insurance for each project, the Company's planned insurance will not cover every potential risk associated with its 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 the Company's financial condition and results of operations. Moreover, no assurance can be given that the Company will be able to maintain adequate insurance in the future at rates it considers reasonable. SUBSTANTIAL PORTION OF PROCEEDS TO PAY DEBTS; POTENTIAL CONFLICTS OF INTEREST BETWEEN THE COMPANY AND CERTAIN OF ITS OFFICERS A substantial amount of the net proceeds of this Offering will be used to repay the Company's current indebtedness. A portion of such repayment will benefit directly or indirectly several of the Company's officers, directors and stockholders. In order to induce all holders of Convertible Debentures to convert at least one-third of their Convertible Debentures, the Company agreed to reduce the conversion rate from $16 per share to the same price as that being offered to the public, $4.00 per share. There are 26 holders of Convertible Debentures, all of whom have been afforded the opportunity to obtain the same more favorable conversion rate. The Chairman of the Board, a director, and two principal stockholders of the Company are holders of an aggregate amount of $425,000 of the Company's Convertible Debentures. Accrued interest on such indebtedness, adjusted to November 30, 1996, which will be repaid from the proceeds of the Offering, amounts to $119,000. As part of the Debenture Conversion the conversion rate of the Convertible Debentures held by those holders consenting to participate, which remain outstanding after the Debenture Conversion, will be reduced to $8.00 per share from the present $16.00 per share and the interest rate will be reduced to 9% from the present 18%. See "Use of Proceeds" and "Description of Securities--Convertible Debentures." The President, the Chairman, two directors and two principal stockholders will also benefit by the payment to them of an aggregate of $1,141,000 (including accrued interest to November 30, 1996) for a loan made by them to enable the Company to obtain its interest in the co-generation facility at Plymouth State College in New Hampshire. Additionally, Messrs. Nelson and Rosen have each deferred portions of their salaries and $250,000 and $175,000, respectively, will be owed to them as of November 30, 1996. The deferred salaries will not be paid from net proceeds of this Offering, but from cash flow, if and when, in the opinion of the Board of Directors, cash flow is sufficient. Messrs. Nelson and Rosen will also benefit from the release of their pledges of an aggregate of 97,250 shares of the Company's Common Stock owned by them in connection with certain bridge loans made to the Company by Anchor Capital Company, LLC ("Anchor") and Solvation, Inc. ("Solvation"), which loans are being repaid with a portion of the proceeds. See "Use of Proceeds" and "Certain Transactions." LIMITED MARKET FOR THE COMMON STOCK; OFFERING PRICES DETERMINED BY NEGOTIATION Prior to the Offering, there has been a limited trading market for the Common Stock and no trading market for the Warrants. The Common Stock has been sporadically traded on the OTC Bulletin Board. Although the Company has made an application so that the Common Stock and Warrants will trade on the Nasdaq SmallCap Market upon conclusion of the Offering, there can be no assurance that an active public trading market for the Common Stock or Warrants will develop and continue after the Offering. The initial offering prices of the Securities in the Offering have been determined by negotiations between the Company and the Representative and may bear no relation to the market prices of the Common Stock and Warrants after the Offering. See "Underwriting." EFFECT OF WARRANTS, OPTIONS AND CONVERTIBLE SECURITIES OUTSTANDING AFTER OFFERING The Company has outstanding options and warrants which provide for the purchase of an aggregate of 291,850 shares of Common Stock at prices ranging from $4.00 to $10.00 per share. The Warrants, if exercised, would result in the issuance of 3,100,000 shares of Common Stock. The Underwriters' over- allotment option, if fully exercised, including the related Warrants, would result in the issuance of 930,000 shares of Common Stock. 13 The Representative's Purchase Option, if fully exercised, including the related Warrants, would result in the issuance of 620,000 shares of Common Stock. An additional 128,125 shares of Common Stock are issuable upon conversion of remaining Convertible Debentures. These issuances of Common Stock, totalling 5,069,975 shares, would have a dilutive effect on the Company's stockholders by decreasing their percentage ownership in the Company. Moreover, the holders of such securities would be most likely to exercise or convert such securities at a time when the Company could obtain capital by a new offering of securities on terms more favorable than those provided by such securities. Consequently, the terms on which the Company could obtain additional capital may be adversely affected. See "Capitalization" and "Underwriting." IMMEDIATE AND SUBSTANTIAL DILUTION This Offering involves an immediate dilution of approximately $2.15 per share of Common Stock, (approximately 54% of the offering price of the Common Stock) between the offering price per share of the Common Stock and the pro forma net tangible book value per share of the Common Stock immediately after the completion of this Offering and the Closing Transactions. See "Dilution." REGISTRATION RIGHTS This Registration Statement includes a secondary prospectus (the "Secondary Prospectus") to enable the holders of the 205,000 shares of Common Stock to be issued in the Preferred Stock Exchange to sell their shares. The 125,000 shares of Common Stock to be issued in the Debenture Conversion and the 11,400 shares of Common Stock previously issued in the acquisition of Plymouth Cogeneration Limited Partnership ("Plymouth Cogeneration") are not included in the Secondary Prospectus; however they are available for sale in accordance with Rule 144. The Common Stock to be issued in the Preferred Stock Conversion is subject to an agreement with the Representative regarding restrictions on resale. See "Shares Eligible for Future Sale--Registration Rights." POSSIBLE RULE 144 SALES Upon consummation of the Offering, the Company will have outstanding 3,869,650 shares of Common Stock. All of the 3,100,000 shares sold in the Offering (assuming no exercise of the Underwriters' over-allotment option), will be freely transferable by persons other than affiliates (as defined in regulations under the Securities Act) without restriction or further registration under the Securities Act. Of the 439,650 shares of Common Stock outstanding prior to the Offering, 64,650 are "restricted securities" within the meaning of Rule 144 under the Securities Act and may not be sold in the absence of registration under the Securities Act, unless an exemption from registration is available, including the exemption provided by Rule 144. Under Rule 144 as currently in effect, all of such 64,650 shares are currently eligible for sale, subject to the volume limitations of the Rule. The 205,000 shares of Common Stock to be issued in the Preferred Stock Exchange and the 125,000 shares of Common Stock to be issued upon the Debenture Conversion will be restricted securities. Although registered pursuant to the ^Shelf Registration, Anchor will not sell the 205,000 shares of Common Stock it will receive in the Preferred Stock Exchange without the Representative's prior written approval for a period of 9 months from the date of this Prospectus. The foregoing does not give effect to any shares issuable on exercise of outstanding options and warrants. The effect of the offer and sale of such shares may be to depress the market price for the Company's Common Stock. See "Underwriting" and "Shares Eligible for Future Sale--Possible Rule 144 Sales." POTENTIAL ADVERSE EFFECT OF WARRANT REDEMPTION The Warrants may be called for redemption by the Company once they become exercisable and the Representative has given its prior consent 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 (150% of 14 the exercise price of the Warrants) 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 the holders to exercise the Warrants and pay the exercise price at a time when it may be disadvantageous for them to do so, to sell the Warrants at the current market price when they 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. The Company is required to maintain the effectiveness of a current registration statement relating to the exercise of the Warrants and, accordingly, the Company 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 underlying securities. Also, lack of qualification or registration under applicable state securities laws may mean that the Company would be unable to issue securities upon exercise of the Warrants to holders in certain states, including at the time when the Warrants are called for redemption. See "Description of Securities--Warrants." AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS The Company's Certificate of Incorporation authorizes the issuance of Preferred Stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of holders of the Company's Common Stock. In the event of issuance, the Preferred Stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company, which could have the effect of discouraging bids for the Company and, thereby, preventing stockholders from receiving a premium for their shares over the then-current market prices. See "Description of Securities." The Delaware General Corporation Law includes provisions which are intended to encourage persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with the Company's directors rather than pursue non-negotiated takeover attempts. These existing takeover provisions may have a significant effect on the ability of a stockholder to benefit from certain kinds of transactions that may be opposed by the incumbent directors. See "Description of Securities--Anti-Takeover Provisions." CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE WARRANTS The Company will be able to issue shares of its Common Stock upon exercise of the Warrants only if there is then a current prospectus relating to the issuance of such Common Stock and only if such Common Stock is qualified for sale or exempt from qualification under applicable securities laws of the jurisdictions in which the various holders of the Warrants reside. The Company has undertaken to keep current a prospectus which will permit the purchase and sale of the Common Stock underlying the Warrants, but there can be no assurance that the Company will be able to do so. Although the Company intends to seek to qualify for sale the shares of Common Stock underlying the Warrants in those states in which the securities are to be offered, no assurance can be given that such qualification will be obtained. The Warrants may be deprived of any value and the market for the Warrants may be limited if a current prospectus covering the Common Stock issuable upon the exercise of the Warrants is not kept effective or if such Common Stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the Warrants then reside. See "Description of Securities--Warrants." QUALIFICATION REQUIREMENTS FOR NASDAQ SECURITIES; RISKS OF LOW-PRICED SECURITIES The Company anticipates satisfying the Nasdaq SmallCap listing criteria following the consummation of the Offering, however, there can be no assurance that it will be able to continue to meet the required standards once it is listed. If it should fail to meet one or more of such standards, its securities would be subject to deletion from Nasdaq. If this should occur, trading, if any, in the Common Stock and the Warrants would then continue to be conducted in the over-the-counter market on the OTC Bulletin Board, an NASD-sponsored inter-dealer quotation system, or in what are commonly referred to as "pink sheets." As a result, an investor may find it 15 more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Company's securities. In addition, if the Company's securities cease to be quoted on Nasdaq and the Company fails to meet certain other criteria, they would be subject to Commission rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. The broker- dealer also must provide the customer with current bid and offer quotations for the securities, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each such security held in the customer's account. In addition, prior to effecting a transaction in such a security the broker-dealer must deliver a standardized risk disclosure document prepared by the Commission that provides information about low-priced securities and the nature and level of risks in the market for such securities. Consequently, if the Company's securities were no longer quoted on Nasdaq, these rules may affect the ability of broker- dealers to sell the Company's securities and the ability of purchasers in this Offering to sell their securities in the secondary market. LIMITATIONS ON REPRESENTATIVE'S MARKET MAKING ACTIVITIES The Representative has the right to act as the Company's agent in connection with any future solicitation of warrantholders to exercise their Warrants. Unless granted an exemption by the Commission from Rule 10b-6 promulgated under the Exchange Act, the Representative will be prohibited, during certain periods when the Warrants are exercisable, from engaging in any market-making activities with regard to the Company's securities until the later of the termination of such solicitation activity or the termination (by waiver or otherwise) of any right that the Representative may have to receive a fee for soliciting the exercise of the Warrants. The Warrants are not exercisable until one year after the date of this Prospectus. As a result, the Representative may be unable to continue to provide a market for the Company's securities during certain periods while the Warrants are exercisable. Such limitations could impair the liquidity and market prices of the Common Stock and Warrants. DIVIDENDS UNLIKELY The Company has never declared or paid dividends on its Common Stock and currently does 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. See "Dividend Policy." LIMITED LIABILITY OF DIRECTORS The Company's 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 certain circumstances. Accordingly, except in such circumstances, the Company's directors will not be liable to the Company or its stockholders for breach of such duty. 16 USE OF PROCEEDS The net proceeds to be received from the sale of the securities offered hereby are estimated to be approximately $10,662,000 (approximately $12,359,000 if the Underwriters' over-allotment is exercised in full). The proceeds from the Offering will be used as follows and are more fully described below: Steamboat Acquisition: For purchase of Steamboat Facilities.......... $ 1,575,000 Less deposit already paid..................... (50,000) ----------- 1,525,000 Mortgage purchase and contribution............ 2,166,000 Additional contribution for purchase of royalty interests and capital expenditures to fund improvements to Steamboat Facilities.... 1,000,000 ----------- Total Steamboat Acquisition..................... 4,691,000 44.00% Reno Project Investment......................... 265,000 2.48 Repayment of debt, with interest to October 15, 1996: Plymouth loan................................. $1,232,000 Anchor bridge loan............................ 796,000 Solvation bridge loan......................... 270,000 Other bridge loan............................. 64,000 Accrued interest on debentures................ 405,000 ---------- Total repayment of debt......................... 2,767,000 25.95 ----------- Total proceeds used............................. 7,723,000 Balance to working capital...................... 2,939,000 27.57 ----------- ----- Total proceeds as above......................... $10,662,000 100.0% =========== =====
If the Company determines to exercise the Reno Option, it will use the funds designated for use as working capital, if such funds are available at that time. See "Business--Current Operations and On-Going Projects--Nevada District Heating Project." The foregoing represents Management's best estimate of its allocation of the net proceeds of the Offering based upon the current state of its business operations, its current business plan and the current economic and industry conditions. Future events, including changes in the Company's planned business operations, may result in changes in the allocation of funds. See "Business." Until the net proceeds of the Offering are fully utilized, the Company intends to invest such proceeds in short-term investment grade interest- bearing obligations. STEAMBOAT ACQUISITION A limited liability company, Steamboat LLC, will be formed to acquire two existing, income producing geothermal power projects known as the Steamboat Facilities, located in Steamboat Hills, Nevada. Steamboat LLC will acquire the Steamboat Facilities from Far West Electric Energy Fund L.P. and 1-A Enterprises subject to a mortgage (the "Mortgage") held by an institutional lender and certain net revenue or royalty interests in steam extraction rights. The Company will obtain a 95% interest in Steamboat LLC by contributing to Steamboat LLC the $1,575,000 cash purchase price (less $50,000 down payment previously paid by the Company) for the Steamboat Facilities. The Mortgage, on which the last quarterly principal payment was made October 20, 1996, will have a face value of $3,800,000 at November 30, 1996 net of an escrowed reserve, and will be acquired by the Company for $2,166,000 and contributed to Steamboat LLC. An additional $1,000,000 in cash will be contributed by the Company to Steamboat LLC to provide potential capital for the acquisition of certain of the royalty interests (leaving outstanding a royalty to Sierra of 10% of power revenues of the Steamboat Facilities and such other royalty interests as the Company is unsuccessful in purchasing) and for funding certain improvements to the Steamboat Facilities. The Company will receive the first $1,800,000 of Steamboat LLC annual net income. For net income above $1,800,000, Far West Capital will receive: (i) 55% for the first five years and (ii) 5% thereafter, with the balance going to the Company. See "Business--Current Operations and On-Going Projects." 17 REPAYMENT OF DEBT An aggregate of $2,767,000 of the net proceeds of the Offering will be used to retire the following obligations of the Company (including all interest through November 30, 1996): Plymouth Loan. $1,232,000 will be used to repay a secured loan of $1,000,000 (plus accrued interest of $232,000) made to the Company in October 1994 by certain directors, officers and other affiliates of the Company to provide funds for the Company's purchase of its 50% equity interest in the owner of the Plymouth State College Cogeneration Facility ("Plymouth Cogeneration") in Plymouth, New Hampshire (the "Plymouth Loan"). The Plymouth Loan bears interest at a rate 2.5% per annum above the prime rate and is repayable upon the first to occur of (i) the consummation of an offering by the Company of equity securities providing net proceeds of at least $1,000,000 or of debt securities providing net proceeds of at least $4,000,000 or (ii) October 31, 1997. In consideration for making the Plymouth Loan, the lenders (other than two of the Company's officers) received warrants to purchase an aggregate of 114,000 shares of Common Stock at the rate of 120 warrants per $1,000 loaned, which are exercisable until October 31, 1999 at $5.00 per share. See "Business--Current Operations and On-Going Company Projects--Plymouth State College, New Hampshire" and "Certain Transactions." Anchor Bridge Loan. $796,000 will be used to repay a loan of $660,000 (plus accrued interest of ^ $136,000) made to the Company in June 1995 by Anchor to provide funds for the expenses of this Offering and working capital (the "Anchor Loan"). The Anchor Loan bears interest at the rate of 18% per annum and is repayable upon the first to occur of the consummation of this Offering or November 29, 1996. In consideration for making the Anchor Loan, the lender received 57,500 shares of Series One Preferred Stock, which will be exchanged for 205,000 shares of Common Stock upon the consummation of this Offering. The Anchor Loan is cross-collateralized (together with the Solvation Loan described below) by a first lien on all of the assets of the Company and 97,250 shares of Common Stock owned by officers of the Company. The Anchor Loan is in technical default due to the fact that the Solvation Loan is past due. It is expected that the Anchor Loan will be paid at closing and no action has been taken by Anchor to enforce their rights. See "Certain Transactions." Solvation Bridge Loan. $270,000 will be used to repay a loan of $250,000 (plus $20,000 accrued interest) made to the Company ^commencing December 1995 by Solvation to provide funds for expenses of this Offering and working capital (the "Solvation Loan"). The Solvation Loan, which is past due, bears interest at the rate of 10% per annum and shall be repaid from the proceeds of the Offering. The Solvation Loan is cross-collateralized with the Anchor Loan by a first lien on all of the assets of the Company and 97,250 shares of Common Stock owned by officers of the Company. See "Certain Transactions." Other Bridge Loan. $64,000 will be used to repay a loan of $50,000 (plus accrued interest of $14,000) made to the Company in May 1995 by a non- affiliated individual to provide funds for a down payment on the Steamboat Facilities acquisition. This loan bears interest at the rate of 18% per annum and is repayable upon the consummation of this Offering. Accrued Interest on Debentures. $405,000 will be used to pay interest on the Company's Convertible Debentures^ including $119,000 to certain directors and principal stockholders. In December 1994 the holders of the Convertible Debentures agreed to accept interest payments at a rate one-half of the stated 18% rate and to defer and accrue the remaining one-half until the consummation of an underwritten offering of the Company's securities. Thereafter, the interest rate on $875,000 principal amount of the outstanding Convertible Debentures will be 9% per annum. Pursuant to the Debenture Conversion, an aggregate principal amount of $500,000 of Convertible Debentures will be converted into 125,000 shares of Common Stock and 125,000 Private Warrants. The holders who have agreed to the Debenture Conversion will participate on a pro rata basis. The interest expense shown in this Prospectus reflects the fact that three of the 26 holders of Convertible Debentures, representing $150,000 in principal amount, have not agreed to participate. See "Description of Securities--Convertible Debentures" and "Certain Transactions." 18 PRICE RANGE OF COMMON STOCK The Common Stock has traded on the NASD OTC Bulletin Board under the symbols USEY (until July 1996) and USEE since the second quarter of the 1995 fiscal year. The following table sets forth, for the periods indicated, the high and low closing bid quotations for the Common Stock, as reported by the NASD OTC Bulletin Board. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
BID ------------- HIGH LOW ------ ------ Fiscal Year Ended January 31, 1995: Second Quarter............................................ $ 4.40 $ 3.60 Third Quarter............................................. $10.00 $ 8.40 Fourth Quarter............................................ $10.00 $10.00 Fiscal Year Ended January 31, 1996: First Quarter............................................. $10.00 $10.00 Second Quarter............................................ $10.00 $10.00 Third Quarter............................................. $ 8.40 $ 6.00 Fourth Quarter............................................ $ 4.00 $ 2.40 Fiscal Year Ending January 31, 1997: First Quarter............................................. $ 2.92 $ 2.48 Second Quarter............................................ $ 2.00 $ 1.50 Third Quarter (to October 28, 1996)....................... $ 3.21 $ 2.58
As of October 28, 1996, there were 584 record holders of the Company's Common Stock and approximately 900 beneficial holders of the Company's Common Stock. On October 28, 1996, the high bid price was $3.25 and low bid price was $3.25. DIVIDEND POLICY The Company has not paid cash dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future. 19 DILUTION The difference between the public offering price per share of Common Stock included in the Offering and the pro forma net tangible book value per share of Common Stock after this Offering and the Closing Transactions is referred to herein as the dilution to investors in this Offering. Net tangible book value per share of Common Stock is determined by dividing the net tangible book value (total assets less intangible assets and less total liabilities and minority interest) by the number of outstanding shares of Common Stock. As of July 31, 1996, the Company had a negative net tangible book value of ($4,353,000) or ($9.90) per share of Common Stock. After giving effect to the application of the net proceeds from the sale of the Securities offered hereby and the Closing Transactions including payment of accrued interest and additional bridge loan borrowing to November 30, 1996, the pro forma net tangible book value at that date would be $7,157,000 or $1.85 per share of Common Stock ($8,854,000 ($2.04 per share) if the Underwriters' over-allotment option is exercised). This represents an immediate increase in net tangible book value of $11.75 per share to existing stockholders, and an immediate dilution of $2.15 (54%) per share to new investors ($1.96 (49%) per share if the Underwriters' over-allotment option is exercised). The following table illustrates the dilution per share of Common Stock: Public offering price per share of the Common Stock included in the Offering.............................................. $4.00 Negative net tangible book value per share before the Offering (1).......................................................... $(9.90) ====== Increase to existing common stockholders in net tangible book value due to the Offering and the Closing Transactions (2)... 11.75 ====== Pro forma net tangible book value after the Offering.......... $1.85 ===== Pro forma dilution to new investors........................... $2.15 =====
- -------- (1) Based on 439,650 shares of Common stock issued and outstanding. Net tangible book value is adjusted to provide for the $575,000 liquidation value of the Series One Preferred Stock. (2) Gives effect to the Preferred Stock Exchange, the Debenture Conversion and the issuance of 3,100,000 shares of Common Stock in this Offering. 20 CAPITALIZATION The following table sets forth the historical capitalization of the Company at July 31, 1996 and as adjusted to reflect (i) the sale of the Securities in this Offering, (ii) the consummation by the Company of the Debenture Conversion and the Preferred Stock Exchange, and (iii) the application of the net proceeds from the foregoing, including the completion of the Steamboat Acquisition and the repayment of debt including accrual of interest and additional bridge loan borrowing to November 30, 1996. See "Use of Proceeds." This table should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and the Pro Forma Financial Statements included in this Prospectus.
JULY 31, 1996 ------------------------ PRO FORMA HISTORICAL AS ADJUSTED ----------- ----------- Long-term debt, net of unamortized discount of $30,000.............................................. $ 2,818,000 $1,343,000 Loans payable......................................... 960,000 Pre-reorganization income taxes payable, current...... 192,000 192,000 ----------- ---------- 3,970,000 1,535,000 ----------- ---------- Stockholders' equity: Preferred stock, $0.01 par value, 5,000,000 shares authorized; issued and outstanding, 57,500 shares; to be issued and outstanding, none................. 1,000 Common stock, $0.01 par value, 35,000,000 shares au- thorized; issued and outstanding, 439,650 shares; to be issued and outstanding, 3,869,650 shares(1)(2)....................................... 4,000 38,000 Additional paid-in capital.......................... 112,000 11,020,000 Accumulated (deficit)^(3)........................... (3,674,000) (3,901,000) ----------- ---------- Total ^ stockholders' equity (deficit)................ (3,557,000) 7,157,000 ----------- ---------- Total capitalization.................................. $ 413,000 $8,692,000 =========== ==========
- -------- (1) Includes (i) 439,650 Shares of Common Stock outstanding prior to the Offering, (ii) 3,100,000 shares of Common Stock being issued pursuant to the Offering, (iii) 125,000 shares of Common Stock to be issued in the Debenture Conversion and (iv) 205,000 shares of Common Stock to be issued in the Preferred Stock Exchange. (2) Does not include an aggregate of 4,264,975 shares of Common Stock reserved and to be reserved for issuance following completion of the Offering including (i) 291,850 shares issuable on exercise of currently outstanding options and warrants, (ii) 3,845,000 shares issuable on exercise of the Warrants, the Representative's Purchase Option and the Warrants issuable on exercise of the Representative's Purchase Option and the Private Warrants being issued in the Debenture Conversion and (iii) 128,125 shares issuable upon conversion of Convertible Debentures which will remain outstanding after the Offering. (3) Change in accumulated (deficit) reflects the write off of unamortized debt discount of $25,000 in connection with repayment of certain debt and the accrual of interest to October 31, 1996. 21 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1996 The following Pro Forma Condensed Balance Sheet gives effect to the following transactions as if they had occurred on July 31, 1996: (a) sale of 3,100,000 shares of Common Stock and 3,100,000 Warrants offered by this Prospectus for net proceeds of $10,662,000 (b) acquisition of a 95% interest in two geothermal power plants (the Steamboat Facilities) for an aggregate of $4,741,000 (including $50,000 as a downpayment which was previously paid by the Company), (c) acquisition of an 81.5% interest in NRG for $265,000, (d) repayment of notes payable and other liabilities in the aggregate amount of $2,767,000 adjusting for accrual of interest and additional bridge loan financing to November 30, 1996, (e) conversion of 57,500 shares of Series One Preferred Stock into 205,000 shares of Common Stock, and (f) conversion of $500,000 principal amount of the existing Convertible Debentures to 125,000 shares of Common Stock and 125,000 Private Warrants. The Pro Forma Condensed Balance Sheet should be read in conjunction with Pro Forma Statement of Operations and the historical financial statements of the Company, Lehi Independent Power Associates, L.C. ("LIPA") and Plymouth Cogeneration included in this Prospectus.
STEAMBOAT PRO FORMA ADJUSTMENTS USE 1 AND 1A --------------------------- PRO HISTORICAL PRO FORMA CONSOLIDATED DEBIT CREDIT FORMA ----------- ---------- ------------ ----------- ----------- ----------- A S S E T S Current assets: Cash.................... $ 1,000 $ 1,000 $10,662,000(a) $ 4,691,000(b) $ 2,965,000 25,000(i) 2,767,000(c2) 265,000(h) Inventory............... 19,000 19,000 19,000 Other current assets.... 1,000 $ 3,000 4,000 4,000 ----------- ---------- ---------- ----------- ----------- ----------- Total current assets... 21,000 3,000 24,000 10,687,000 7,723,000 2,988,000 Investments in Joint Ventures--at equity: Lehi Independent Power 1,112,000 1,112,000 1,112,000 Associates, LC........ Plymouth Cogeneration 669,000 669,000 669,000 Limited Partnership... Steamboat 53,000 53,000 4,691,000(b) 4,744,000(g) -- Envirosystems......... NRG Company LLC........ 265,000(h) 265,000(i) -- Loan receivable, Reno 300,000(i) 300,000 Energy................. Property, Plant and 5,015,000 5,015,000 5,015,000 Equipment.............. Deferred costs of regis- 221,000 221,000 221,000(a) -- tration................ ----------- ---------- ---------- ----------- ----------- ----------- TOTAL.................. $ 2,076,000 $5,018,000 $7,094,000 $15,943,000 $12,953,000 $10,084,000 =========== ========== ========== ----------- ----------- =========== L I A B I L I T I E S Loans payable........... $ 960,000 $ 960,000 $ 960,000(c2) $ -- Pre-reorganization in- 192,000 192,000 192,000 come taxes payable..... Other current liabili- 1,663,000 1,663,000 807,000(c2) 202,000(c1) 1,058,000 ties .................. ----------- ---------- ---------- ----------- ----------- ----------- Total current liabili- 2,815,000 2,815,000 1,767,000 202,000 1,250,000 ties.................. Convertible subordinated 1,525,000 1,525,000 500,000(e) 1,025,000 secured debentures .... Notes payable .......... 975,000 975,000 1,000,000(c2) 25,000(f) -- Other liabilities ...... 318,000 318,000 318,000 ----------- ---------- ---------- ----------- ----------- ----------- Total liabilities...... 5,633,000 5,633,000 3,267,000 227,000 2,593,000 ----------- ---------- ----------- ----------- ----------- Minority interests in subsidiaries: Steamboat Envirosystems 274,000(g) 274,000 LLC................... NRG Company LLC........ 60,000(i) 60,000 ----------- ----------- Total Minority Inter- 334,000 334,000 ests.................. ----------- ----------- S T O C K H O L D E R S' E Q U I T Y (C A P I T A L D E F I C I E N C Y): Preferred stock, ($.01 par value issued and outstanding, 57,500 shares; to be issued and outstanding, none). 1,000 1,000 1,000(d) -- Common stock ($.01 par value, issued and out- standing, 439,650 shares; to be issued and outstanding, 3,869,650 shares)...... 4,000 4,000 31,000(a) 38,000 2,000(d) 1,000(e) Additional paid-in capi- 112,000 112,000 221,000(a) 10,631,000(a) 11,020,000 tal.................... 1,000(d) 499,000(e) Accumulated deficit..... (3,674,000) (3,674,000) 25,000(f) (3,901,000) 202,000(c1) Members' equity: U.S. Energy Systems, 4,744,000 4,744,000 4,744,000(g) -- Inc. ................. Far West Capital, Inc.. 274,000 274,000 274,000(g) -- ----------- ---------- ---------- ----------- ----------- ----------- Total stockholders' (3,557,000) 5,018,000 1,461,000 5,468,000 11,164,000 7,157,000 equity (capital deficiency)........... ----------- ---------- ---------- ----------- ----------- ----------- TOTAL.................. $ 2,076,000 $5,018,000 $7,094,000 $24,678,000 $24,678,000 $10,084,000 =========== ========== ========== =========== =========== ===========
22 Notes to Pro Forma Condensed Consolidated Balance Sheet - -------- (a) To reflect sale of 3,100,000 shares of Common Stock and 3,100,000 Warrants for net proceeds of $10,662,000. (b) To reflect purchase of a 95% interest in Steamboat LLC, which is acquiring the Steamboat Facilities. (c1)To reflect accrual of interest from August 1 to November 30, 1996............................................................... $202,000 (c2)To reflect assumed repayment of debt: Note payable.................................................... $1,000,000 Bridge loans.................................................... 960,000 Accrued interest................................................ 807,000 ---------- $2,767,000 ==========
(d) To reflect conversion of existing Series One Preferred Stock into 205,000 shares of Common Stock. (e) To reflect conversion of $500,000 principal amount of the existing Convertible Debentures to 125,000 shares of Common Stock and 125,000 Private Warrants. No value has been assigned to these warrants. (f) To eliminate unamortized debt discount on debt repaid. This charge will be treated as an extraordinary loss in the statement of operations during the period this Offering is consummated. (g) To eliminate Steamboat LLC investment account and set up minority interest. (h) To reflect purchase of an 81.5% interest in NRG Company, LLC for $265,000. (i) To reflect consolidation of accounts of NRG. The only assets of NRG are a loan receivable of $300,000 from Reno Energy and cash of $25,000. The majority interest was paid in during September, 1996. See "Business-- Current Operations and On-going Projects--Nevada District Heating Project." 23 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS The following Pro Forma Condensed Consolidated Statement of Operations consolidates the results of operations of the Company for the year ended January 31, 1996 and the six months ended July 31, 1996 with the pro forma results of operations of the Steamboat Facilities for the year ended December 31, 1995 and the six months ending June 30, 1996 as if the proposed Steamboat Acquisition had taken place at the beginning of the periods in a transaction accounted for as a purchase. The Pro Forma Condensed Consolidated Statement of Operations also gives effect to the following: (a) sale of Common Stock and Warrants to the extent necessary to fund the acquisition of a 95% interest in the Steamboat Facilities and repay debt, (b) conversion of 57,500 shares of Series One Preferred Stock into 205,000 shares of Common Stock, (c) restructure of existing Convertible Debentures by converting $500,000 principal amount to 125,000 shares of Common Stock and 125,000 Private Warrants and reducing the interest rate from 18% to 9% on $875,000 of the remaining balance and (d) the investment in NRG as if the investment was made at the beginning of the periods. This statement should be read in conjunction with the Steamboat Envirosystems, L.C. Pro Forma Condensed Balance Sheet as of June 30, 1996, the Steamboat Envirosystems Power Plants Pro Forma Condensed Combined Statement of Operations and the historical financial statements of the Company, LIPA and Plymouth Cogeneration, Far West Electric Energy Fund, L.P. and 1-A Enterprises, included in this Prospectus. LIPA, Plymouth, Far West Electric Energy Fund, L.P. and 1-A Enterprises each have a fiscal year end of December 31 which differs to the fiscal year end of the Company. No material adjustment is necessary to reconcile the December 31 year end to the Company's January 31 year end. The pro forma results of operations are not necessarily indicative of future results of operations or what the results would have been if the acquisition had taken place at the beginning of the periods.
YEAR ENDED JANUARY 31, 1996 -------------------------------------------------------------------- ADJUSTED USE 1 AND 1a PRO FORMA PRO FORMA HISTORICAL PRO FORMA (1) CONSOLIDATED ADJUSTMENTS CONSOLIDATED ----------- ------------- ------------ ----------- ------------ Revenue: Electric power... $ -- $3,404,000 $3,404,000 $ -- $3,404,000 ----------- ---------- ---------- --------- ---------- Total revenue.... -- 3,404,000 3,404,000 -- 3,404,000 ----------- ---------- ---------- --------- ---------- Expenses: Depreciation.... -- 172,000 172,000 172,000 Royalty......... -- 528,000 528,000 528,000 Administrative and other....... 853,000 1,003,000 1,856,000 1,856,000 Interest expense(5a)/income (5b) ............ 604,000 -- 604,000 (476,000)(2) 106,000 (22,000)(5b) Loss from Joint Ventures......... 17,000 17,000 17,000 ----------- ---------- ---------- --------- ---------- Total expenses.. 1,474,000 1,703,000 3,177,000 2,679,000 ----------- ---------- ---------- --------- ---------- Income (loss) be- fore income tax- es............... (1,474,000) 1,701,000 227,000 725,000 Income taxes..... -- -- (244,000)(3) 244,000 ----------- ---------- ---------- --------- ---------- Net income (loss)........... (1,474,000) 1,701,000 227,000 481,000 Dividends on pre- ferred stock..... 21,000 21,000 21,000(4) -- ----------- ---------- ---------- --------- ---------- Net income (loss) available for common stockhold- ers (6).......... $(1,495,000) $1,701,000 $ 206,000 $ 481,000 ----------- ---------- ---------- --------- ---------- Net income per common share (7). $ (3.41) $ 0.17 ----------- ---------- Shares used in computing net in- come per common share (7)........ 438,773 2,747,292 =========== ========== SIX MONTHS ENDED JULY 31, 1996 ------------------------------------------------------------------- ADJUSTED USE 1 AND 1a PRO FORMA PRO FORMA HISTORICAL PRO FORMA (1) CONSOLIDATED ADJUSTMENTS CONSOLIDATED ----------- ------------- ------------ --------------- ------------ Revenue: Electric power... $ -- $1,919,000 $1,919,000 $ -- $1,919,000 ----------- ------------- ------------ --------------- ------------ Total revenue.... -- 1,919,000 1,919,000 -- 1,919,000 ----------- ------------- ------------ --------------- ------------ Expenses: Depreciation.... -- 86,000 86,000 86,000 Royalty......... -- 372,000 372,000 372,000 Administrative and other....... 408,000 519,000 927,000 927,000 Interest expense(5a)/income (5b) ............ 328,000 -- 328,000 (276,000)(2) 41,000 (11,000)(5b) Loss from Joint Ventures......... 92,000 92,000 92,000 ----------- ------------- ------------ --------------- ------------ Total expenses.. 828,000 977,000 1,805,000 1,518,000 ----------- ------------- ------------ --------------- ------------ Income (loss) be- fore income tax- es............... (828,000) 942,000 114,000 401,000 Income taxes..... -- -- 135,000 (3) 135,000 ----------- ------------- ------------ --------------- ------------ Net income (loss)........... (828,000) 942,000 114,000 266,000 Dividends on pre- ferred stock..... 29,000 29,000 (29,000)(4) -- ----------- ------------- ------------ --------------- ------------ Net income (loss) available for common stockhold- ers (6).......... $(857,000) $ 942,000 $ 85,000 $ 266,000 ----------- ------------- ------------ --------------- ------------ Net income per common share (7). $ (1.95) $ 0.09 ----------- ------------ Shares used in computing net in- come per common share (7)........ 439,650 3,014,708 =========== ============
24 - -------- (1) Reflects the Pro Forma earnings of the Steamboat Facilities as shown on the Pro Forma Condensed Combined Statement of Operations of Steamboat Facilities. The Company is entitled to an annual preferred return of the first $1,800,000 of the net income of Steamboat LLC. No provision for the interest of Far West Capital in the net income of Steamboat Facilities is made until the annual net income of the Steamboat Facilities exceeds $1,800,000. (2) To reflect the reduction in interest expenses as a result of repayment of Notes Payable and Loans Payable, conversion of $500,000 Convertible Subordinated Secured Debentures to 125,000 shares of Common Stock and 125,000 Private Warrants, and reduction of interest rate from 18% to 9% on $875,000 of the remaining balance of the Convertible Debentures. The reduction of the interest rate to 9% will be accounted for prospectively. (3) To reflect provision for federal and state taxes at 38%, while providing for a limit on the net operating loss deduction assuming an ownership change had taken place at the beginning of the fiscal year and the beginning of the six month period ended July 31, 1996. A deferred tax benefit was not provided in the historical financial statements since the likelihood of realization of such benefit cannot be determined. (4) Provision for dividends on Series One Preferred Stock eliminated as a result of the Preferred Stock Conversion. (5a) The historical amounts during the year ended January 31, 1996 and the six months ended July 31, 1996 include approximately $185,000 and $93,000, respectively, of interest on debts owed to related parties. (5b) To reflect NRG income of 9% interest on $300,000 loan to Reno Energy, $27,000 per annum, less the 18.5% minority interest in NRG. (6) The net income (loss) available to common stockholders during the period the 57,500 shares of Series One Preferred Stock are converted into 205,000 shares of Common Stock will be reduced by a nonrecurring amount of approximately $791,000 representing the excess of fair value of the Common Stock transferred to the holders of the Preferred Stock over the carrying amount of the Preferred Stock in the Company's balance sheet. (7) Pro forma net income per share is based on the weighted average number of shares outstanding, the shares issued in the Debenture Conversion and the Preferred Stock Exchange, the shares issued in the Offering to obtain funds required for the acquisition of the Steamboat Facilities, the investment in NRG and the retirement of debt (2,103,779 shares at January 31, 1996 and 2,245,058 shares at July 31, 1996). Assumed exercise of options and warrants have not been reflected as they would be anti- dilutive. 25 STEAMBOAT ENVIROSYSTEMS, L.C. PRO FORMA CONDENSED BALANCE SHEET AS OF JUNE 30, 1996 The following Pro Forma Condensed Balance Sheet gives effect to the acquisition of the Steamboat Facilities accounted for as a purchase by the Company (95% ownership interest) and Far West Capital (5% ownership interest) for an aggregate of $5,015,000 as if such acquisition had taken place on June 30, 1996. The total is made up of $4,741,000 (including $50,000 down payment previously paid by the Company) contributed by the Company and $274,000 contributed by Far West Capital, Inc. The Company's contribution will consist of (1) $1,575,000 to be distributed to the limited partners and owners of the predecessor entities (other than Far West Capital) to obtain a 95% interest in Steamboat LLC, (2) $2,166,000 to be used to pay all outstanding mortgages on the Steamboat Facilities and (3) $1,000,000 in cash to be contributed to the Partnership to allow the potential purchase and cancellation of certain royalty interests and to fund certain improvements to the Steamboat Facilities. Far West Capital is contributing its limited partnership interest in Steamboat 1, valued at $274,000 to Steamboat LLC. Far West Capital has a 5.14% ownership interest in Steamboat 1 and is not participating in the distributions of the purchase price paid by the Company. The Pro Forma Condensed Balance Sheet should be read in conjunction with the Pro Forma Condensed Combined Operations of Steamboat Envirosystems, L.C. and the historical financial statements of the Company, Far West Electric Energy Fund, L.P. and 1-A Enterprises included in this Prospectus.
PRO FORMA ADJUSTMENTS ------------------------ DEBIT CREDIT PRO FORMA ---------- ---------- ---------- ASSETS Cash.................................. $4,741,000(a) $1,575,000(c) 1,000,000(d) 2,166,000(f) Other Assets.......................... 3,000(a) $ 3,000 Property, Plant and Equipment......... 274,000(b) 1,575,000(c) 1,000,000(d) 2,166,000(e) 5,015,000 ---------- ---------- ---------- Total............................... $9,759,000 $4,741,000 $5,018,000 ========== ========== ========== LIABILITIES Notes payable......................... $2,166,000(f) $2,166,000(e) MEMBERS' EQUITY U.S. Energy Systems, Inc.............. 4,744,000(a) $4,744,000 Far West Capital, Inc................. 274,000(b) 274,000 ---------- ---------- ---------- Total............................... $2,166,000 $7,184,000 $5,018,000 ========== ========== ==========
- -------- (a) To reflect cash contribution of the Company including $50,000 deposit previously paid. (b) To reflect contribution of Far West Capital of its 5.14% limited partnership interest in Far West Electric Energy Fund, L.P. (c) To reflect distributions to limited partners of Far West Electric Energy Fund, L.P. and owners of 1-A Enterprises. (d) To reflect the investment to purchase and cancel certain royalty interests and to fund certain improvements to the Steamboat Facilities. (e) To reflect assumption of the Mortgage. (f) To reflect payment of the Mortgage. 26 STEAMBOAT FACILITIES PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS The following Pro Forma Condensed Combined Statement of Operations of the Steamboat Facilities reflects the combined results of operations of the Steamboat Facilities for the year ended December 31, 1995 and the six months ended June 30, 1996, adjusted to eliminate those costs which will no longer exist as a result of the purchase of interests by the Company and Far West Capital. Steamboat LLC will acquire the Steamboat Facilities from Far West Electric Energy Fund L.P. and 1-A Enterprises subject to a mortgage in favor of an institutional lender and certain net revenue or royalty interests in steam extraction rights. The $4,691,000 contributed by the Company to Steamboat LLC will be applied as follows: (1) $1,575,000 cash purchase price (less $50,000 down payment previously paid by the Company) will be used to obtain a 95% interest in Steamboat LLC, (2) a mortgage on the Steamboat Facilities, on which the last quarterly principal payment was made on October 20, 1996, which had a face value of $3,800,000 as at November 30, 1996 net of an escrowed reserve, and will be acquired by the Company for $2,166,000 and contributed to Steamboat LLC, and (3) $1,000,000 in cash will be contributed by the Company to Steamboat LLC to allow the potential purchase and cancellation of certain of the royalty interests and to fund certain improvements to the Steamboat Facilities. This statement is not necessarily indicative of what results of operations would have been had the Company acquired its interest in the Steamboat Facilities at the beginning of the periods or of what future results of operations may be. This statement should be read in conjunction with the historical financial statements of Far West Electric Energy Fund, L.P. (of which Steamboat 1 is a part) and 1-A Enterprises (Steamboat 1-A) included in this Prospectus.
YEAR ENDED DECEMBER 31, 1995 --------------------------------------------------------------- HISTORICAL --------------------------------- FAR WEST ELECTRIC ENERGY 1 AND 1-A FUND, 1-A PRO FORMA L.P.(1) ENTERPRISES COMBINED ADJUSTMENTS ADJUSTED ---------- ----------- ---------- ----------- ---------- Revenue: Electric power.... $2,529,000 $875,000 $3,404,000 $ $3,404,000 Other............. 145,000 145,000 (87,000) (3a,b) (58,000) (4) ---------- -------- ---------- ----------- ---------- Total revenues.. 2,674,000 875,000 3,549,000 (145,000) 3,404,000 ---------- -------- ---------- ----------- ---------- Expenses: Operations: Depreciation..... 631,000 104,000 735,000 (563,000)(2) 172,000 Royalty.......... 405,000 210,000 615,000 (87,000)(3a,b) 528,000 Other............ 824,000 237,000 1,061,000 (58,000)(4) 1,003,000 Interest........... 655,000 161,000 816,000 (816,000)(5) ---------- -------- ---------- ----------- ---------- Total expenses.... 2,515,000 712,000 3,227,000 $(1,524,000) 1,703,000 ---------- -------- ---------- ----------- ---------- Net income(6)..... $ 159,000 $163,000 $ 322,000 $1,701,000 ========== ======== ========== ========== SIX MONTHS ENDED JUNE 30, 1996 ------------------------------------------------------------- HISTORICAL --------------------------------- FAR WEST ELECTRIC ENERGY PRO FORMA FUND, A 1 AND 1-A L.P. ENTERPRISES COMBINED ADJUSTMENTS ADJUSTED ---------- ----------- ---------- ---------------- ---------- Revenue: Electric power.... $1,509,000 $410,000 $1,919,000 $ $1,919,000 Other............. 68,000 68,000 (43,000)(3) (25,000)(4) ---------- ----------- ---------- ---------------- ---------- Total revenues.. 1,577,000 410,000 1,987,000 (68,000) 1,919,000 ---------- ----------- ---------- ---------------- ---------- Expenses: Operations: Depreciation..... 329,000 52,000 381,000 (295,000)(2) 86,000 Royalty.......... 237,000 92,000 329,000 43,000(3a,b) 372,000 Other............ 439,000 105,000 544,000 (25,000)(4) 519,000 Interest........... 330,000 71,000 401,000 (401,000)(5) ---------- ----------- ---------- ---------------- ---------- Total expenses.... 1,335,000 320,000 1,655,000 $(678,000) 977,000 ---------- ----------- ---------- ---------------- ---------- Net income(6)..... $ 242,000 $ 90,000 $ 332,000 $ 942,000 ========== =========== ========== ==========
- ---- (1) Does not include the operations of Crystal Springs Project or the gain on sale of Crystal Springs Project. Crystal Springs Project was sold by Far West Electric Energy Fund, L.P. in February, 1995. (2) To record estimated reduction of depreciation for new basis of assets acquired, based on $5,157,000 total cost, assuming a 30-year depreciation period, from date of acquisition. (3)(a) To eliminate certain royalties paid by 1-A Enterprises to Far West Electric Energy Fund, L.P., which amount to $87,000 in the year ended December 31, 1995 and $43,000 in the six months ended June 30, 1996. (b) Does not include additional savings to be made if negotiations with certain royalty owners, already under way, are successful. (4) To eliminate intercompany charges paid by 1-A Enterprises to Far West Electric Energy Fund, L.P. (5) To eliminate interest expense due to elimination of debt. (6) No provision for the interest of Far West Capital in the net income is required until the annual net income for the Steamboat Facilities exceeds $1,800,000. 27 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND PLAN OF OPERATION RESULTS OF OPERATIONS Year ended January 31, 1996 compared to year ended January 31, 1995 The Company had no revenues during the two fiscal years because (i) the Lehi project acquired during that period was dormant, (ii) in the Plymouth project, depreciation offset all earnings and (iii) efforts to arrange financing were just beginning. In the fiscal year ended January 31, 1996, the Company had a loss from operations of $1,474,000. This was reduced by an extraordinary gain of $83,000 arising from the restructuring of a liability, resulting in a net loss for the fiscal year of $1,391,000. In the earlier fiscal year the loss from operations was $1,401,000 and the net loss was $1,316,000. The elements making up the losses in the two fiscal years were:
1996 1995 ---------- ---------- Operating expenses.................................... $ 27,000 $ 109,000 Selling and administrative expenses................... 826,000 897,000 Interest expense...................................... 604,000 319,000 Loss from Joint Ventures.............................. 17,000 76,000 ---------- ---------- Totals.............................................. $1,474,000 $1,401,000 ========== ==========
Operating expenses of $27,000 and $109,000 in the fiscal years ended January 31, 1996 and 1995 resulted from the adjudication of legal action on a project which had been completed and reported in an earlier year. There will be no further costs associated with this project. Major items in the selling and administrative expenses were:
1996 1995 -------- -------- Salaries and consulting fees.............................. $431,000 $407,000 Corporate expenses........................................ 70,000 85,000 Legal and professional costs.............................. 148,000 202,000
While there was no revenue during the two years, it was nevertheless necessary to expend funds for salaries and consulting fees to evaluate new proposals and structure joint ventures and new projects for planned growth. The Company estimates that $75,000 of the salaries and consulting costs are non-recurring or applicable to specific projects which will absorb future costs. Included in corporate expenses in the fiscal year ended January 31, 1996 is a non-recurring cost of $25,000 for a previously planned public offering that was never consummated. Legal and professional costs were lower in the 1996 fiscal year due to the fact that there were no start-up costs for the Company in this year. Costs already incurred in connection with this Prospectus, approximately $50,000 as of January 31, 1996, have been deferred. Interest expense increased in the 1996 fiscal year due to the additional borrowings in notes payable and bridge loans. The bulk of the increase is accounted for as follows: The $1,000,000 in notes payable were in existence only part of the 1995 fiscal year and the interest on them accrued in that year totaled $28,000, whereas for the full 1996 fiscal year the interest was $137,000. The bridge loans came into being in June, 1995, so did not affect the 1995 fiscal year. The interest expense in the 1996 fiscal year was $169,000. Losses from joint ventures of $17,000 in the 1996 fiscal year and $76,000 in the 1995 fiscal year include $59,000 and $55,000 respectively for amortization of purchase price over net equities in the net assets of LIPA 28 and Plymouth Cogeneration. For the period ended January 31, 1996, the Company's allocated share of income or loss from joint ventures equalled $86,000 gain from LIPA, and $44,000 loss from Plymouth Cogeneration. The Company's gain from LIPA includes $118,000 gain from sale of unused plant equipment. Six months Ended July 31, 1996 Compared to 1995 The Company had no revenues for either of these periods. The losses shown were made up of the following major elements:
1996 1995 -------- -------- (Loss) from joint ventures................................... $ 92,000 $ 62,000 ======== ======== Operating expenses........................................... -- $ 26,000 ======== ======== Selling and administrative expenses: Salaries and consulting fees............................... $239,000 $190,000 Legal and professional fees................................ 77,000 63,000 Corporate expenses......................................... 15,000 48,000 All other.................................................. 77,000 94,000 -------- -------- Total selling and administrative expenses.................... $408,000 $395,000 ======== ======== Interest expenses............................................ $328,000 $223,000 ======== ======== The six-month joint venture losses break down as follows: LIPA......................................................... $ 58,000 $ 40,000 Plymouth Cogeneration........................................ 34,000 22,000 -------- -------- Total (loss) from joint ventures............................. $ 92,000 $ 62,000 ======== ========
Operating expenses in the 1995 period resulted from the adjudication of legal action on a project which had been completed and reported on earlier. There will be no further costs associated with this project. Consulting agreements which began during 1995 and were not in existence during the 1995 period accounted for the increase in salaries and consulting fees. The Company has entered into a consulting agreement with Indus Inc. for assistance in developing both projects and joint development agreements in Asia, with specific emphasis on India. To date, Indus Inc. has been instrumental in bringing in the potential project for the Rajinder Steel Mill in Raijpur, India and for developing the potential for a consortium with Raunaq Industries in New Delhi, India. The Company has also entered into a consulting agreement with Knoll Capital Management relating to specific work being done for the Company to develop projects in Israel and the Middle East. Knoll Capital Management was instrumental in arranging the kibbutz project in Israel which the Company is currently pursuing. See "Certain Transactions." Legal and professional fees were higher in the current quarter due to the additional costs related to the additional bridge loans, amortized over the terms of the loans. Costs incurred in connection with the public and private financing have been deferred. As of July 31, 1996, these amounted to $221,000. The corporate expenses in 1995 included a non-recurring cost of $25,000 for a previously planned public offering that was never consummated. Interest expense increased in the 1996 period due to higher levels of borrowing, including bridge loans which began in June, 1995. LIQUIDITY AND CAPITAL RESOURCES The Company has no contractual commitment for capital expenditures at this time. The Company has employment agreements with two of its officers which expire five years from the date of this Prospectus. The agreements provide for minimum annual payments totaling $210,000. Payments under these agreements will not be made until the working capital of the Company permits. 29 As a result of accumulated losses, the Company had a negative working capital of $1,910,000, and a capital deficiency of $2,729,000 at January 31, 1996, and $2,794,000 and $3,557,000, respectively, at July 31, 1996. The independent auditors' report for the fiscal year ended January 31, 1996 states that these factors raise substantial doubt about the Company's ability to continue as a going concern. As a result of this Offering, the Company's pro forma working capital at July 31, 1996 would be a positive $1,738,000. During the fiscal year ended January 31, 1996, net cash used in operating activities was $641,000. Cash used in investing activities was $29,000, with $53,000 having been used in connection with the Steamboat Acquisition, offset in part by collections of a loan receivable from an officer of the Company. During the 1996 fiscal year, $34,000 was received from the sale of Common Stock and $785,000 was received as proceeds from notes and loans payable. Other adjustments brought the total cash flow provided by financing activities to $664,000. During the fiscal year ended January 31, 1995, net cash used in operating activities was $874,000. Cash used in investing activities totaled $694,000, of which $647,000 was for investment in and advances to joint ventures. Cash provided by financing activities totaled $1,396,000 with $139,000 derived from sale of Common Stock and $1,375,000 from borrowings. During the six months ended July 31, 1996, cash flow was carefully conserved. Salaries were deferred and additional bridge loan borrowings amounting to $175,000 were received. Fifty percent of interest payments to holders of the Convertible Debentures continued to be deferred until paid out of the proceeds of this Offering, by agreement of the holders of the Convertible Debentures. PLAN OF OPERATION The net proceeds of the Offering will be approximately $10,662,000. Of this total, the Company's acquisition of 95% of Steamboat LLC will use $4,691,000 (plus $50,000 that had already been paid as a deposit.) Other liabilities required to be paid have been adjusted to include additional bridge loan borrowings and interest accruals through November 30, 1996. The bridge loans, including interest, total $1,130,000, secured notes payable, including interest, total $1,232,000, and accrued interest on the Convertible Debentures required to be paid as part of the restructuring of these instruments, total $405,000. It is Management's belief that the funds remaining as working capital, together with the income from the projects including the Steamboat Facilities, will be sufficient to meet the requirements of the Company for the next 12 months of operation without having to raise additional funds except on a project finance basis for new projects. The steps taken to reduce the Company's interest costs include (i) the capitalization of $500,000 of the Convertible Debentures and the reduction of the interest rate on $875,000 of the balance after consummation of this Offering from 18% to 9%, (ii) the payment of secured notes in the principal amount of $1,000,000 and interest thereon, and (iii) repayment of all bridge loans. The interest expense reflected in this Prospectus gives effect to the fact that three of the 26 holders of Convertible Debentures, representing $150,000 in principal amount, have not agreed to the interest rate reduction from 18% to 9% per annum. In addition, the Steamboat Acquisition is expected to give the Company a positive cash flow from all joint ventures in the current fiscal year. This will not be impacted by payment of dividends since the shares issued to Anchor for the initial bridge loan are being converted to 205,000 shares of common stock. The current power purchase agreements with Sierra provide for price adjustments in December 1996 for Steamboat 1 and in December 1998 for Steamboat 1A. Under the contracts, Steamboat LLC is required to sell power to Sierra for additional 10-year periods at the then-prevailing short-term avoided costs for electricity for Sierra. However, Sierra has indicated that it would be willing to negotiate a mutual release of the contract. If the price adjustments were to be made now, the new prices based on the contract formula would be substantially less than the existing contract rates. Although Management believes that revenues generated will still be in excess 30 of the costs of production, there is no assurance that future prices at which the electricity generated by the Steamboat Facilities may be sold will exceed the cost of production, or that Steamboat LLC will generate adequate cash flow from operations to meet its investing and financing requirements. Although the prices are variable and fluctuate, if, as expected, a substantial reduction in power prices for Steamboat 1 takes place in December 1996, the result would mean a decrease in the Company's share of the net earnings of Steamboat LLC, which, depending on the extent of the price reduction, could result in the Company reflecting a net loss. If rates offered by Sierra are not satisfactory, the Company and its partners may seek to negotiate termination of the existing contracts. The Company believes that under new regulations it will be able to sell the output of electricity to other electric utility purchasers at more favorable prices. The Company will contribute $1,000,000 to Steamboat LLC for the purpose of buying out certain royalty interests and to fund certain improvements to the Steamboat Facilities which are expected to result in higher electricity output. While negotiations with certain royalty owners have already begun, no agreements have yet been concluded and potential savings from royalty reductions are not reflected in the pro forma financial statements presented herein. Additional royalty agreements, applying only to Steamboat 1, call for payment of a total of 30% of the net revenue of Steamboat 1 after certain deductions, starting March 1, 1997. The resulting effect on the net income of Steamboat LLC and on the Company's after tax income will depend on the other elements of power sales revenues outlined above. Assuming the reduction in income from power sales illustrated above, and the buyout of no royalty interests, the cost of these net revenue royalties could be in the range of $50,000 to $100,000 annually. Negotiations with these interests have also already begun, and Management believes they will be successfully purchased although no assurance can be given that such negotiations will be successful. See "U.S. Energy Systems, Inc. and Subsidiaries Pro Forma Condensed Consolidated Statements of Operations," "Steamboat Facilities Pro Forma Condensed Combined Statement of Operations," and "Business--Current Operations and On-Going Projects." In 1995, the Company and its partners in the Lehi Plant concluded a sale of non-essential engines and parts of the Lehi, Utah plant for a gain of approximately $236,000, with 50% or $118,000 as the Company's share. The partnership is using a portion of the funds from this sale to upgrade the remaining two engines and place them in service. Currently there are no contracts for the sale of the power output of the Lehi Plant. However, negotiations for such contracts will begin as soon as the plant is in operational status, and it is anticipated that cash flow will be generated during the fourth quarter of the fiscal year, provided that it obtains the necessary air quality permits. Alternatively, the Lehi partners may decide to sell two of the engines and to replace them with a larger and more efficient gas turbine. If such sale is made, the Company would benefit through its 50% share of the revenue from the sale; however, operations would be delayed until the second quarter of the next fiscal year. The cost of the new engine is expected to be fully financed directly through the manufacturer without additional investment by the Company. Under Title V of the Clean Air Act, the Lehi Plant must obtain an operating permit from the Utah Division of Air Quality before it can commence operations. The Title V program did not take effect in Utah until July 10, 1995. Therefore, a Title V permit was not a requirement during past operations of the facility, but it will be a requirement for future operations. A permit modification would also be necessary if new engines are installed or if capacity is increased. The Plymouth, NH plant has been operating since January 1995 and historically has not provided revenues or cash flow to the Company because of costs related to equipment adjustments and operational reserves required by the terms of the financing. However, the plant has begun to provide cash flow to the Company. The Company received its first distribution amounting to $20,000 in August 1996. In addition, switching the plant's fuel supply to less expensive waste oil, as is presently being contemplated, could add to cash flow starting during the next fiscal year, as the Partnership has an agreement with the university to share equally in any fuel savings. There are also plans being studied to expand the size of the project to serve other New Hampshire college system campuses through wheeling, as described in "Business," which would take place during fiscal year 1998. 31 The Company also expects revenues from other projects, currently being negotiated, that will be under way during the next twelve months but are not yet under contract. There are five such projects, not including Steamboat, at least four of which the Company believes will be secured and from which revenues are anticipated to commence within the next twelve months. These include two projects for two separate shopping malls in El Paso, TX, a large resort and commercial center in St. Thomas, USVI, a residential and commercial center at a kibbutz in Haifa, Israel, and in the long term a steel mill in Raipur, India. With regard to the shopping malls and the St. Thomas resort, the Company and its joint development partners in each case will own and operate the cogeneration facilities. The Company has signed a letter of intent with the owners of Bluebeard's Castle, a large resort and commercial complex in St. Thomas, USVI, to build and operate a 3 megawatt Cogeneration plant and a 120,000 gallon per day water recovery system in the resort's property. The Company, the resort manager and the resort owners will own the cogeneration plant and water system and share revenues based on capital investment in the project. The resort owners have paid $41,000 for the installation of the first of six engine generators, installed September 1996. While the Company anticipates realizing additional revenues for its engineering and equipment sales to the project immediately upon the start of construction, and anticipates that the main stream of revenue will be the sale of energy to the host facilities over the fifteen year term of the contract, there can be no assurance that this will occur. In the case of the Israeli kibbutz project, the Company would be selling the hardware and providing engineering services for installation to the kibbutz, and the Company's revenues will be derived from these sales. In the case of the Raipur steel mill, the Company will provide consulting services to the steel mill for the acquisition, shipping and installation of the hardware. The consulting fee will be a percentage of total cost. These other projects should not require capital outlays, as they will be self-financed. The working capital remaining after the closing of this Offering, together with the regular income from Steamboat LLC, will be adequate for operational needs during the next twelve months. While the Company does not conduct research and development per se, it will expend funds to investigate and develop new projects. It is anticipated that a total of approximately $100,000 will be spent over the next twelve months on such endeavors, which will come from working capital as available. Although each project which comes on stream has its own project staff which becomes a cost of the specific project, the Company does plan to add at least three more employees to headquarters staff to assist management. Expenses for such staff increase, as well as expenses for outside consultants, have been taken into account in planning for the Company's budget over the coming year. RESTRUCTURING OF DEBT Concurrently with the consummation of this Offering and the other Closing Transactions, the Convertible Debentures, of which an aggregate principal amount of $1,525,000 is outstanding, will be restructured by converting $500,000 principal amount into 125,000 shares of Common Stock and 125,000 Private Warrants and reducing the conversion rate on $875,000 of the remainder to $8.00 per share from the present $16 per share, making the remainder convertible into 128,125 shares of Common Stock. From and after the consummation of the Offering, the interest rate on $875,000 in principal amount will be 9% instead of the present 18%. Three of the 26 holders of Convertible Debentures, representing $150,000 in principal amount, have not agreed to participate in this restructuring. ACCOUNTING STANDARDS During the fiscal year ending January 31, 1997, the Company will be required to adopt Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets," and SFAS 123, "Accounting for Stock-Based Compensation," neither of which is expected to have a material effect in the Company's financial statements. IMPACT OF INFLATION The Company's contracts include adjustments for changes in inflation indices. The impact of inflation on Company earnings and cash flows is expected to be minimal. 32 BUSINESS THE COMPANY The Company, formerly called Cogenic Energy Systems, Inc. and U.S. Envirosystems, Inc., was incorporated under the laws of the State of Delaware in 1981 in order to engage in the design, assembly, turn-key sale and installation of factory built cogeneration systems powered by diesel oil and/or natural gas. Richard H. Nelson, President of the Company, is one of the two founders of the Company and acted as its Chief Executive Officer until 1989. In late 1986, the Company was impaired by a $2,100,000 judgment resulting from a contractual dispute in California. Although ultimately settled, the protracted court case caused serious delays in planned expansion and in sales. Despite extensive restructuring, the increasingly recessionary economic climate during that period led to a serious cash shortage. By mid- 1989, the Company filed for protection under Chapter 11 of the Bankruptcy Code. USF was formed by Mr. Nelson in late 1991 with the objective of entering into the alternative energy industry. USF proposed a Plan of Reorganization for the Company with the intent of merging USF with the reorganized company. The Plan of Reorganization was approved by the creditors and stockholders of the Company, and the U.S. Bankruptcy Court, Southern District New York, confirmed the Plan in March 1993. Pursuant to the Plan, USF was merged into the Company and the Company was renamed U.S. Envirosystems, Inc. Mr. Nelson resumed the positions of President and Chief Executive Officer of the Company when it emerged from bankruptcy. On May 17, 1996, the Company changed its name from U.S. Envirosystems, Inc. to U.S. Energy Systems, Inc. BUSINESS OF THE COMPANY Since its reorganization, the Company has been engaged in the IPP industry as a project developer, owner and operator. IPP's produce electricity for sale to either direct end users or to regulated public electric utility companies. Regulated public electric utility companies have historically produced electricity and have held the exclusive distribution rights of the electricity thus produced to end users in specific geographic territories. The exclusive right to the distribution of electric power within a specific territory is a right granted to the regulated public utility company by the various state public utility commissions where such regulated public utility companies are located. Because the exclusive franchise right is in effect a monopoly, the rates charged for electric power and other services, as well as overall operations, are regulated by the state public utility commissions. In recent years, however, federal and state laws have been promulgated to reduce and/or eliminate the regulated public electric utility industry's monopoly over the production and sale of electric power in order to enhance competition among electricity providers, hence, the emergence of IPP's. In addition to conserving natural resources and reducing atmospheric pollution by encouraging more efficient production of electric power, competition should result in lower consumer costs for energy. "Independent power plants" and "cogeneration plants" are frequently used interchangeably to describe the power industry which is an alternative to the regulated power industry. IPP's generally, but not always, produce power utilizing a process known as "cogeneration." Cogeneration is defined as the production of two or more energy forms (typically electricity and heat) simultaneously from the same fuel source. While producing electricity, otherwise wasted heat is recovered from the exhaust and/or engine cooling water. This recovered heat can be used to replace heat which would otherwise be made from conventional furnaces and boilers. Other IPP's may not technically be "cogenerators" but rather utilize renewable fuel sources such as geothermal, wind, solar, hydro, and waste products such as waste oil, waste wood and other bio-mass waste, or landfill gas. The favorable economics of cogeneration or innovative and inexpensive renewable fuel sources allow IPP's to compete with the longer established regulated power industry. The Company's strategy is to seek projects requiring power production or cogeneration and to become an equity participant with the owners, developers or other involved parties in return for the Company's expertise in the structuring, design, management and operation of the projects. Often, at the time of the Company's initial 33 involvement, such projects will have advanced beyond the conceptualization stage to a point where the engineering, management and project coordination skills the Company offers are required to proceed. Although the Company has only begun to develop new projects since USF merged with the reorganized Cogenic Energy Systems, Inc. in November 1993, the president and key consultants of the Company have been involved in the power generation industry for over twenty years and the alternative energy business for over fifteen years and have been involved in the building of over 200 power projects in the United States and abroad ranging in size from 100 kilowatts to 50 megawatts. Innovative power projects developed by the principal executive include cogeneration systems for ocean-going U.S. Coast Guard and Navy vessels. In furtherance of its strategy, the Company is opportunistically pursuing: (i) existing IPPs and cogeneration facilities which can be bought at favorable prices; (ii) IPP and cogeneration projects not yet built but for which another developer has successfully negotiated the basic requirements for a plant including power purchase agreements, environmental permits, etc., and (iii) special market opportunities for cogeneration and energy savings projects (such as large shopping malls, resorts, etc.) where such energy applications are not presently in common use and where the Company can enter into joint development agreements with the property owners to own and operate such facilities. With regard to the latter, the Company possesses designs for, and will continue to seek out or develop, special energy-efficient products such as natural gas powered air conditioning with emphasis on the health care, food processing, shopping mall and hotel markets where large quantities of electricity, air conditioning and hot water are required on a continuous and simultaneous basis. The Company believes the greatest future potential for the Company in the independent power plant/cogeneration market within the United States is in facilities in the 3 to 50 megawatt size range. Additionally, the Company believes that the largest potential for "inside-the-fence" facilities (where all the energy forms produced are consumed at the power plant location) falls into this size category. This range is advantageous because, within this range, and depending on geographic location, these plants usually fall below thresholds requiring prolonged environmental and air quality permit procedure and may achieve more favorable pricing for its electricity from either the utility grids or local customers. The reasons for more favorable pricing are that plants of this size can be located in specific areas of power capacity shortages. Regulated utility companies purchasing such power to assist in meeting shortages are frequently willing to pay more than "avoided cost" (i.e., their cost to produce an incremental kilowatt), and local end users are frequently willing to pay full retail prices which is more cost effective than interruptions of service due to shortage induced brown-outs. Also, the air quality permitting process for the size range contemplated by the Company is generally faster, easier and more assured than in the larger projects. The basis for granting air quality permits varies from location to location, but permits are always required before commencement of operations. In applying for such permits, the facility developers present a computer model of emissions of carbon monoxide and nitrous oxides which would be expected to issue from the facility over a one year period. This model is based on the fuel used, the anticipated annual hours of operation, the engine manufacturer's specifications for emissions, and the reduction of such emissions from application of catalytic converters or other devices. The emissions are then expressed in weight, e.g., "100 tons per year." The local air quality authority will then determine if this is acceptable for the area. The local air quality authority may or may not require continuous emissions monitoring to insure that the level of emissions granted in the permit are not exceeded. If the facility is recovering waste heat and utilizing that heat to displace heat which would otherwise be made from burning fuels in conventional furnaces or boilers, and if the emissions from the facility are actually less than the emissions which would be forthcoming from the conventional furnaces or boilers so displaced, there is said to be a "net reduction" in emissions for the area, and the permitting authorities will normally act promptly and favorably to grant the permit. If the facility is not using recovered waste heat to displace other heat source emissions, e.g., a large, stand-alone generating plant with no cogeneration, there would be a "net increase" in emissions in that geographic area. Under such circumstances, the permitting process could be prolonged and made difficult by public hearings, public interventions, and the considerably more careful determinations which the local air quality authority must make in order to decide whether or not such net increase in emissions can be allowed. 34 In the smaller size range, so-called "inside-the-fence" projects, nearly all of the electrical and thermal output can be utilized by the host site. The thermal output of the cogeneration system replaces conventional thermal output from the host's boilers and furnaces with substantially less atmospheric emissions of nitrous oxide (NOX) and carbon monoxide (CO) because of the emission control technology available to cogeneration engines which is not available to boilers and furnaces. Since the cogeneration system results in a net reduction in emissions for the specific site, air quality permitting authorities will generally respond quickly and favorably. In contrast, while the larger projects (over 50 megawatts) usually have no problems in placing the electrical output, there is a problem in finding suitable thermal hosts who can use the vast quantities of heat produced. Under such circumstances, even if all of the host's thermal requirements are offset, there is still an increase in net emissions in the area of the power plant. A prolonged and difficult permitting process is frequently the result. The Company has begun to develop several projects in the 3 to 50 megawatt size range with emphasis on "inside the fence" applications. Although natural gas has proven to be a superior and economical fuel choice for many sites, the Company also intends to emphasize projects which can utilize alternative and/or renewable fuels, since such projects not only serve the interests of the public from an environmental and ecological standpoint but also have the greatest potential for earnings because of the low fuel costs. In addition to potential within the United States, there are substantial opportunities overseas for such projects, especially in Latin America and Asia. The Company believes that energy shortages, combined with national policies to privatize power production in many developing countries, are creating an increasing potential for U.S. companies in the independent power industry. In addition to international agencies such as the World Bank and the Inter-American Development Bank, there are a growing number of private institutional lenders who provide project financing for such developments. The Company has commenced an effort to create consortiums with both foreign companies and other U.S. companies to pursue this market since the Company does not presently have the financial resources or personnel to pursue such projects by itself. For example, the Company has entered into a memorandum of understanding with Raunaq Industries in India to pursue the creation of a consortium to build one or more large coal fired power plants. In Panama, while no definitive consortium agreement has been signed, the Company and its Panamanian partners have created a Panamanian corporation (Panavisa), which has applied to the Panamanian government for pre-qualification to bid on several projects. COGENERATION AND INDEPENDENT POWER PRODUCTION Cogeneration is the process of producing two or more energy forms (typically electricity and heat) simultaneously from the same fuel source. In order to encourage the conservation of natural resources such as fossil fuels and to foster development of non-fossil fuel energy sources, the federal government enacted PURPA, which mandated that all state public utility commissions require public electric utility companies to cooperate with privately owned cogeneration facilities, both by purchasing electricity from such facilities at the utility company's "avoided cost" (i.e., the utility company's incremental cost for generating such electricity itself) and by providing standby power to such privately owned facilities. When electricity is produced, whether in a small cogeneration facility or in a large central utility power plant, the energy efficiency of the fuel used (the electrical output expressed in BTUs divided by the amount of BTU input to the engines) does not exceed 35%. The remaining 65% of available energy efficiency from the fuel is waste heat, either expelled from the exhaust or removed from the engine's jacket water by radiators. By recovering substantial portions of this otherwise wasted heat, and by converting this heat into useful thermal purposes, the fuel efficiency of a cogeneration facility can approach 75%. This converted waste heat replaces heat that would otherwise have to be made using yet another fuel. Central utility power plants have the ability to recover such heat, but the long distances of such plants from customers who could utilize thermal energy makes recovery and transport impractical. In April 1996 the Federal Energy Regulatory Commission ("FERC") promulgated a regulation which orders all electric utility companies to open their transmission lines to independent power producers thus allowing wholesale purchase of power by the utilities from distant independent producers. While the federal regulation does not mandate that the transmission lines be opened for direct sale of power by independent producers to retail end users, many states are expected to phase in such regulations in the future. See "Business--Government Regulation." 35 CURRENT OPERATIONS AND ON-GOING PROJECTS Steamboat Geothermal Power Plants. The Company has signed an agreement to form Steamboat LLC, a limited liability company which will acquire two geothermal power plants, referred to as the Steamboat Facilities, in Steamboat Hills, Nevada. Electricity is produced in these geothermal plants through the use of heat in the form of hot water from the earth. The electricity is produced through a "binary system" in which geothermal hot water is circulated in one closed loop and, in another closed loop, inert gas is compressed and heated. The compressed inert gas drives turbines to generate the electricity. The geothermal water is reinjected into the earth to be re-heated again through the earth's sub strata magma formation. Because there are virtually no atmospheric emissions or pollutants in the process, because the natural resource (water) is constantly returned to the earth to avoid depletion of the underground aquifer water table, and because the heat source is the earth's natural magma layer, geothermal power is considered one of the most environmentally sound methods of producing electricity. However, it can only be produced in locations where specific geological formations exist. Steamboat LLC will acquire the Steamboat Facilities from FWEEF and I-A Enterprises subject to the Mortgage in favor of an institutional lender and certain net revenue or royalty interests in steam extraction rights. Far West Capital is the general partner and a limited partner in FWEEF. The Company will obtain a 95% interest in Steamboat LLC by contributing to Steamboat LLC the $1,575,000 cash purchase price (less $50,000 down payment previously paid by the Company) for the Steamboat Facilities. Far West Capital will own the remaining 5%. The Mortgage, on which the last quarterly principal payment was made on October 20, 1996, will have a face value of $3,800,000 at November 30, 1996 net of an escrowed reserve, and will be acquired by the Company for $2,166,000 and contributed to Steamboat LLC. While the Mortgage is in technical default, the holder of the Mortgage has waived its rights and has negotiated with the Company the payment for the Mortgage. An additional $1,000,000 in cash will be contributed by the Company to Steamboat LLC to provide capital for the potential acquisition of certain of the royalty interests and for funding certain improvements to the Steamboat Facilities. While negotiations with certain royalty owners have already begun, and the Company and its partners believe that these interests can be bought out, no agreements have yet been concluded and no potential savings from royalty reductions are reflected in the pro forma financial statements presented herein. Additional royalty agreements, applying only to Steamboat 1, call for payment of a total of 30% of the net revenue of Steamboat 1 after certain deductions, starting March 1, 1997. The resulting effect on the net income of Steamboat LLC and on the Company's after tax income will depend on the other elements of power sales revenues outlined above. Assuming the reduction in income from power sales illustrated above, and the buyout of no royalty interests, the cost of these net revenue royalties could be in the range of $50,000 to $100,000 annually. Negotiations with these interests have also already begun, and Management believes they will be successfully purchased, although no assurance can be given. See "U.S. Energy Systems, Inc. and Subsidiaries Pro Forma Condensed Consolidated Statements of Operations," "Steamboat Facilities Pro Forma Condensed Combined Statement of Operations" and "Management's Discussion and Analysis of Financial Condition and Plan of Operation--Plan of Operation." Far West Capital has a 5.14% ownership interest in FWEEF and is contributing to Steamboat LLC the debt owed to it by FWEEF. Far West Capital will not receive any portion of the purchase price paid by the Company. The Company will receive the first $1,800,000 of Steamboat LLC annual net income. For net income above $1,800,000, Far West Capital will receive: (i) 55% for the first five years and (ii) 5% thereafter, with the Company to receive the balance. Far West Capital was established in 1983 and has been a developer and operator of cogeneration and independent power projects, principally hydroelectric and geothermal, in the western United States and is the Company's current partner in LIPA. The two Steamboat geothermal plants were built in 1986 and 1988, respectively, by Far West Capital. A substantial portion of the net proceeds of this Offering and the Private Placement will be used for this acquisition, which will generate immediate cash flow for the Company, thereby allowing it to pursue and launch additional projects, none of which is the subject of a binding or definite agreement. The Steamboat Facilities are currently managed by the professional operations staff of SB Geo, Inc. The principals of Far West Capital own the majority interest in SB Geo, Inc. After the Company has purchased its equity interest in Steamboat LLC, SB Geo, Inc. will continue to manage the day-to-day operations of the 36 Steamboat Facilities. Charges by SB Geo, Inc. for services rendered will be negotiated at arms length, and may not exceed charges for similar services which could be obtained from other sources. The two geothermal plants produce 8 megawatts of electric power which is sold under two power purchase agreements to Sierra. The plants have operated at 99% capacity since inception. The current power purchase agreements have price adjustments in December 1996 for Steamboat 1 and in December 1998 for Steamboat 1-A, which require Sierra to purchase and Steamboat LLC to provide electricity at Sierra's then-prevailing short-term avoided cost. If the price adjustments were to be made now, the new prices based on the contract formula would be substantially less than the existing contract rates. Although Management believes that revenues generated will still be in excess of the costs of production, there is no assurance that future prices at which the electricity generated by the Steamboat Facilities may be sold will exceed the cost of production, or that Steamboat LLC will generate adequate cash flow from operations to meet its investing and financing requirements. Although the prices are variable and fluctuate, if, as expected, a substantial reduction in power prices for Steamboat 1 takes place in December 1996, the result would mean a decrease in the Company's share of the net earnings of Steamboat LLC, which, depending on the extent of the price reduction, could result in the Company reflecting a net after tax loss. However, Management believes that a more satisfactory price is likely to be obtained for the electricity generated in the Steamboat Facilities through negotiations with Sierra or otherwise, although no assurance can be given that such efforts will be successful. In addition, if Sierra were to consent to releasing the Company from the existing power purchase agreements, the Company would be free to sell the power to other utilities. While under the power purchase agreements, Sierra has an obligation to buy the electricity generated and the plants have an obligation to sell the same to Sierra, negotiations relating to the price adjustments may result in a mutual cancellation of the agreement if such is favorable to both sides. Sierra has indicated it would be willing to negotiate a mutual cancellation. There are currently five geothermal power projects operating in Steamboat Hills, Nevada, totalling approximately 62 megawatts of output. In addition to the 8 megawatt Steamboat 1 and 1-A projects which came on line in 1986 and 1988, respectively, the 35 megawatt Steamboat 2 and 3 projects were developed and built by Far West Capital in 1992 and remain owned by Far West Capital. In addition, Caithness Power, Inc. brought a 12 megawatt project on line in 1995. There is currently a total of approximately 170 megawatts of geothermal power being produced in Nevada with production from the Steamboat Hills area accounting for approximately 36%. Plymouth State College, New Hampshire. In 1994 the Company, through its subsidiary, Plymouth Envirosystems, Inc., acquired a 50% interest in Plymouth Cogeneration which owns and operates a cogeneration plant which produces 2.5 megawatts of electricity and 25 million BTUs for 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 twenty year contract. The project, which cost $5.9 million to construct, is comprised 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 prior to the Company's acquisition of a 50% interest through $5,110,000 in State of New Hampshire tax exempt revenue bonds and $700,000 in equity. The Company paid a total of $636,000 in cash and 11,400 shares of Common Stock for its 50% interest. The Company's partners in Plymouth Cogeneration are Central Hudson Cogeneration, Inc., a wholly owned subsidiary of Central Hudson Gas & Electric Corporation of New York, and Independent Energy Finance Corporation of Connecticut ("IEFC"). The project was completed in November 1994 and put into full commercial service in January 1995. IEC Plymouth, Inc. ("IEC Plymouth"), a wholly-owned subsidiary of IEFC, runs the day-to-day operations of the plant and the management decisions are resolved by a management committee which is composed of representatives of the Company, IEFC and Central Hudson Cogeneration, Inc. The State of New Hampshire has initiated a study to determine the feasibility of expanding the existing facility to wheel electric power to two other state college campuses. Also, plans are currently being developed by Plymouth Cogeneration to install special fuel treatment equipment which will allow the existing engines to 37 burn less costly and more efficient fuels. Fuel cost savings would be shared equally between the college and the partnership. There can be no assurance that such fuel treatment equipment will be installed or that such fuel cost savings will be realized. Lehi Cogeneration Project. In January 1994, the Company, through its subsidiary, Lehi Envirosystems, Inc. ("LEI"), purchased a 50% equity interest in LIPA, which owns a 17 megawatt cogeneration facility in Lehi, Utah and the underlying real estate, hardware and permits to operate. Although the facility has been dormant since 1990, work is underway to commence operations at the facility and the Company believes it is capable of future operations. The Company estimates that it will cost $30,000 to commence operations. The successful operation of the plant also requires the negotiation of an agreement with a utility company to purchase the electrical output. LIPA has been negotiating with the municipal authority and the town of Lehi. No agreements are yet in place and there can be no assurance that the Company will be able to successfully negotiate any contracts. The Company and its partners, who own the remaining 50% of LIPA, share on a pro-rata basis the ownership, retrofitting costs, annual expenses, and revenues associated with the project. The Company financed its acquisition cost of $1,225,000 for this interest through the issuance of Convertible Debentures. In addition to payment of interest, the Company is obligated 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. See "Description of Securities--Convertible Debentures" and "Certain Transactions." The Company's partners in the Lehi project are Far West Capital and Suma Corporation ("Suma"), a Utah company with interests in waste-to-energy projects. The Lehi facility is managed by a management committee which is composed of representatives of Far West Capital, Suma and the Company. Lehi originally had three engine generators totaling 17 megawatts. One unit which would have required extensive and costly repairs was sold in December 1995, resulting in a gain of approximately $236,000. The two remaining units totaling 10 megawatts are currently being prepared to start commissioning in order to allow them to be put in operation during the fourth quarter. Concurrently with readying these engines for operational status, the LIPA partnership has received an offer to purchase these engines and is evaluating this option. If a satisfactory sales price is obtained, LIPA would thereafter begin plans to acquire and install a 35 megawatt gas turbine, which would have substantially greater efficiency. If the engines were sold, commencement of operations would be delayed from the fourth quarter of the current fiscal year until the second quarter of the next fiscal year. The proceeds from the sale of these engines would provide sufficient operating capital for the partnership until the larger gas turbine was operational. Financing for the gas turbine, if this option is selected, would be provided by the engine manufacturer. Under Title V of the Clean Air Act, the Lehi Plant must obtain an operating permit from the Utah Division of Air Quality before it can commence operations. The Title V program did not take effect in Utah until July 10, 1995. Therefore, a Title V permit was not a requirement during past operations of the facility, but it will be a requirement for future operations. A permit modification would also be necessary if new engines are installed or if capacity is increased. Because all existing facilities were required to submit operating permit applications in 1995, the Division of Air Quality has had a significant backlog. Shortly after the Company's interest in the project was purchased, Micron Technologies, Inc. ("Micron") announced it intended to build a $1.5 billion manufacturing facility in the town of Lehi on property one mile from the Lehi Cogeneration Facility. The town announced that it would supply power to Micron through its municipal power authority. The town does not have a power generation capability, but acquires power through the Utah Association of Municipal Power Systems ("UAMPS"). Over one year was spent in discussions with Micron, the town of Lehi, and UAMPS as to the feasibility of increasing the capacity from the facility to serve the 35 megawatt requirements of Micron. As a result of these discussions, the Company and its partners decided to sell one seven megawatt engine which was non-functional in order to make room in the plant for a larger and more efficient engine. It was also decided during this period that it was premature to put the plant in operation before its full intended utilization was determined. Management had been negotiating with Micron to provide direct sale of 35 megawatts from the Lehi facility. During these prolonged negotiations, and up until Micron's decision in April 1995 to suspend construction of their new plant, Management was constrained by local political 38 sensitivity from seeking sale of electricity from the Lehi facility to other potential purchasers. Management believes, however, that the substantial population and industrial growth being experienced in the area is creating a large, future market for power. Management further believes that it should plan to increase the Lehi facility's size to 35 megawatts using high efficiency gas turbines since a market is rapidly developing. Even in the absence of Micron, 35 megawatts is the size under discussion because the plant's air quality permit allows for 249.9 tons of emissions annually, which fits the profile of a 35 megawatt combined cycle gas turbine. The Lehi cogeneration plant was originally built in 1987 at a cost in excess of $20,000,000. The plant operated successfully as a small power production facility under "qualifying facility" status granted by FERC from date of commissioning until 1990, selling its electric output to Utah Power and Light and its recovered heat to a large adjacent greenhouse operation. In 1990 the original developer, which suffered financial problems not associated with this project, filed for protection under the bankruptcy laws. The Lehi plant, along with a number of other assets, were sold by the bankruptcy court in April 1993. The Lehi plant was purchased by a Salt Lake City group, Lehi Co-Gen Associates, L.C., with the intention of either reselling the component equipment contained within the plant or re-establishing the cogeneration operation in partnership with interested parties. Extensive engineering and economic due diligence studies were conducted on the project by Southern Electric International, a subsidiary of the Southern Company, one of the largest electric utility companies in the United States, in conjunction with the Company, resulting in a decision to restore the plant to full operational status. The studies estimated that the salvage value of the hardware and parts alone should be in excess of $3,000,000. LIPA purchased the facility from Lehi Co-Gen Associates, L.C. in early 1994 for approximately $292,000. The Lehi plant uses dual fuel configuration reciprocating engines. These engines can run on either diesel fuel or natural gas, or a combination thereof. The plant can be operated on 5% diesel fuel and 95% natural gas, for optimum environmental and economic efficiency. The plant is totally self- contained, with state-of-the-art switchgear and computerized electronic controls. Full environmental assessments have been conducted which indicate that no environmental hazards are present or likely to occur. One of the most important features of the plant is its extant air quality permit, allowing the plant to operate with emissions of up to 249.9 tons of nitrous oxide ("NOX") annually. With expanded and upgraded hardware, this permit will allow the plant to increase operational output substantially. Shopping Malls. The Company has entered into a joint development agreement with the Cowen Investment Group to develop, build and operate cogeneration plants in the United States. Cowen is a financier of real estate projects. Under the joint development agreement, Cowen will provide the customers and the cogeneration project financing. Cowen will retain 60% of the profit interests in the projects and the Company will retain 40%. The Company's responsibility is to provide the technical expertise, design, equipment selection and installation services. The joint venture is negotiating with a major real estate company which owns and operates approximately 200 shopping malls throughout the United States. Three of the malls have been considered for initial test sites and engineering has begun for the first site. The Company is carrying the cost of preliminary engineering which will be reimbursed from the project if it is undertaken. The Company and Cowen have also begun discussions with a second major owner and operator of over 40 malls and has begun feasibility studies to determine the best initial sites. The targeted shopping malls are all enclosed structures with an average interior space of 500,000 square feet. Such malls have substantial electric demand, with 18 hours of daily power plant operation, seven days per week, and with almost year-round air conditioning requirements without regard to geographic location. The average cogeneration system configuration for such malls would consist of 4 megawatts in electric generation, with recovered heat utilized for absorption air conditioning (in which the recovered heat causes inert gases to expand and compress to produce chilled air, as opposed to conventional compression powered by electric motors.) The systems would also require up to 1000 tons of supplemental non-electric air conditioning. The supplemental non-electric air conditioning, in most cases, would be provided by engine driven chillers ("EDC"). An EDC produces chilled water by utilizing conventional compressors, but powering the compressors with natural gas fueled engines as opposed to electric motors. The EDC units would be manufactured by sub-contractors from designs developed and owned by the Company. While initial plans have been drawn and reviewed with the mall owners, there can be no assurance that the joint effort with Cowen will lead to any contracts being signed with mall owners or cogeneration systems being installed. 39 Under the plan discussed with the mall owners, the joint development company would engineer, build and operate the cogeneration facilities, with financing arranged by Cowen. The joint development company and the mall owner would share energy savings for a fifteen year period, after which time the cogeneration plant ownership would revert to the mall owners. A proposed agreement with one of the mall owners calls for at least ten such installations. The mall owners have indicated, however, that installations of cogeneration systems would be contemplated at all malls where certain basic economic criteria for cogeneration exists. The Company and Cowen believe that approximately one-third of the malls can meet the economic criteria of a minimum of twenty-five percent annual energy savings. Since all of the malls are of similar configuration and have similar energy patterns, there would be an economy of scale: project design could be replicated at multiple locations with only modest configuration changes. A contract for the first mall is expected to be signed in the third fiscal quarter of 1996 with construction commencing shortly thereafter, although there can be no assurance that this will occur. U.S. Virgin Islands. The Company has signed a letter of intent and is currently in final contract preparation with Bluebeard Holding Company to build a 3 megawatt cogeneration project for Bluebeard's Castle, a major resort in St. Thomas, U.S. Virgin Islands. Utility services for the Islands, like many other areas of the Caribbean, were severely impacted during the 1995 hurricane season, and the Company believes that many public and private buildings are presently considering "inside-the-fence" cogeneration facilities in order to assure reliability of electric and hot water services as well as to reduce present high costs of utility-provided services. It is contemplated that the Company, the resort manager and the resort owner will form a limited liability entity, which will own and operate the cogeneration facility, selling discounted power to the hotel and adjacent commercial buildings. The profits and cash shall be distributed pro rata on the basis of the capital contributions of the parties to the contract. The Company will be credited for its capital contributions as a result of the services it will provide to the joint venture. It is also contemplated that the cogeneration facility will include a 120 thousand gallon per day reverse osmosis water purification system to convert sea water to potable water. Supplies of fresh water, which are always in short supply in the Islands, were even further reduced as a result of the storms. It is contemplated that the resort's holding company will arrange twenty-percent equity for the project, with the balance being financed through local banks. The Company will provide design, equipment selection and installation services for the project. The holding company is also in the planning stage for a large, new resort, apartment and shopping complex on the eastern end of St. Thomas for which a cogeneration facility is planned. It is contemplated that the limited liability entity to be formed by the Company and Bluebeard Holding Company will own and operate this future facility and will seek additional resort facilities for cogeneration throughout the Virgin Islands and other islands in the Caribbean. While final contracts are in preparation, the project has already begun with the receipt of initial funding from Bluebeard and the scheduled installation of the first of six engine generators to be used in the project. Waste Motor Oil Project. In November 1992, the Company was engaged to design and build a three megawatt cogeneration plant in Virginia for a private energy investment fund under a turn-key contract for $1,600,000. The plant was built and put into commercial service in July 1993, eight months after commencement of the project. The private energy fund had signed a long term contract with Virginia Electric Power Company ("VEPCO") to provide 3 megawatts of demand capacity to the VEPCO grid, and contracted with the Company to provide an operational system both rapidly and cost effectively. The Company created a distinct design utilizing rebuilt, very low RPM internal combustion engines, which have the capability of utilizing waste motor oil as fuel. The use of waste motor oil not only reduces the fuel costs for the project, but also solves a local environmental problem of disposing of over 800,000 gallons annually. The Company will employ the techniques developed on this job in future projects. The Company has no ongoing equity interest in this project. Nevada District Heating Project. Concurrently with the closing of the Offering, the Company will be acquiring an 81.5% interest in NRG for $265,000. NRG was recently formed and funded at $70,000 by several investors in the Company, including Messrs. Rosen and Nelson (see "Certain Transactions--Reno Project"). From these funds NRG made a loan of $50,000 to Reno Energy LLC $250,000 from the Company's capital contribution to NRG will be loaned to Reno Energy to bring the total loan to $300,000. The purpose will be to 40 fund pre-development expenses associated with the proposed development of a geothermal district heating project. The loan is to be repaid over three years with interest at 9% per annum, or with the proceeds from any financing transaction. There is a large industrial park being developed in Reno on a 1200 acre area in close proximity to the district heating plant. The first phase of the park is already sold out, and the entire park is expected to be developed within the next four to seven years. An examination of the current property owners of the park indicates that the park will house mostly commercial buildings with some industrial facilities. Also, a 200-bed hospital and 300-room hotel are planned to be built in the park, with many more prospective tenants. Therefore, the industrial park will create a huge demand for space heating and cooling as well as process heating. It is expected that the total buildings, adding up to 30,000,000 square feet of floor space, will be connected to the geothermal grid to meet their heating and cooling needs. Additionally, there is a high school located nearby and a college campus is planned in addition to other development in the area. Each of these is likely to be a major consumer of geothermal energy. Reno Energy plans to construct and operate a plant which will use geothermally heated fresh water for space heating and cooling and for process heating in the industrial park and the other nearby development. To meet the requirements of these commercial and industrial facilities, a pipeline with supply and return lines would be built that would loop through the industrial park. A binary hot water system with fresh water circulating through the loop will be used to avoid any concerns associated with the direct use of geothermal brine such as scale build-up in the pipes, corrosion on 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; only fresh water will be circulated in the loop. The heat thus provided will be sold at a discount from the cost of producing an equivalent amount of heat from conventional natural gas furnaces. Under the terms of the agreements between NRG and Reno Energy, NRG will have an option to acquire a 50% interest in Reno Energy (subject to certain preferential distribution interests of the founders of Reno Energy) (the "Reno Option"). The Reno Option, which would be paid for out of working capital, will be exercisable for $1 million until December 31, 1996 but extendable, upon payment of $100,000, until March 1, 1997 at an exercise price of $1,200,000. If the Company determines to exercise the Reno Option, it will use funds designated for use as working capital, if such funds are available at that time. It is estimated that approximately $35,000,000 is required for construction, procurement and other costs associated with the commencement of operations at Reno Energy. Such amount is expected to be financed through industrial revenue bonds and/or vendor financing, in addition to other types of tax-exempt debt financing. Efforts begun on the Reno Project include retention of an international engineering firm to provide preliminary engineering and design services to support Reno Energy's application to the Nevada Public Service Commission for authorization, as well as retention of a financial consultant to assist in securing debt financing for the Reno Project. Under the terms of the agreements governing NRG, the Company, which will own 81.5% of NRG, will have decision making authority on all matters. If the Reno Option is exercised, each of the investors in NRG will be given an opportunity to fund its pro rata share of the option price in order to maintain its interest in NRG. The project is still in the planning and development stage. As yet there are no contracts with any end users, nor are there approvals from local and state authorities. The Company will have to satisfy itself as to these and other factors before NRG's option would be exercised. OTHER POTENTIAL PROJECTS FOR THE COMPANY ALTHOUGH PRELIMINARY EFFORTS HAVE BEEN UNDERTAKEN IN CONNECTION WITH THE FOLLOWING PROJECTS, THERE IS NO ASSURANCE THAT ANY OF THEM WILL BE DEVELOPED. India. The Company, through its 50% owned subsidiary, USE International, LLC, has proposed a 52 megawatt combined cycle cogeneration project for a major steel mill in Raipur, M.P., India. The project would 41 utilize naphtha as a fuel source to power a General Electric 40 megawatt gas turbine which will also provide sufficient steam recovery to power a 12 megawatt steam turbine. The use of recovered heat in the form of steam to power a second form of electric production is known as a "combined cycle system." The steel mill intends to purchase the system on a turnkey basis, and the Company would act as project manager and coordinator being compensated on a percentage-of-cost basis. The steel mill is presently awaiting funding from its financial institutions in order to proceed. Inside-the-fence projects of this size are growing in popularity in India because no central or local government permissions are required and financing is easier since it is based entirely on the credit-worthiness of the customer. The remaining 50% of USE International, LLC is owned by Indus, LLC. Ravi Singh, a consultant to the Company, is the President and principal of Indus, LLC. Panama. The Company has formed a company, Panavisa Envirosystems, S.A. ("Panavisa"), in order to qualify and bid on several potential power projects in Panama. Panavisa, a wholly-owned subsidiary of the Company, is the corporate vehicle which would be the joint venture partner with others when specific projects are developed. While there is no definitive agreement in place, the Company is working with a Panamanian financial group to form a consortium to design, build, and operate barge-mounted power plants for Institucion de Recursos Hidraulicos y Electrificacion, the Panamanian national electric company, which would purchase electricity from the consortium under a negotiated long-term contract. If such project is ultimately undertaken, it is likely that the Panamanian financial group involved in such project would become a partner in Panavisa. The Company's role would be to act as consortium manager. Percentages of ownership among the various potential consortium partners have not yet been negotiated. The barge-mounted power plant design would utilize very low speed diesel engines capable of burning Orimulsion, an emulsified tar recovered from reserves under the Orinoco River in Venezuela. The Company would be working with Bitor USA, a wholly owned subsidiary of Petrolanos Venezuela, which holds the patents on the Orimulsion process. Specific opportunities for such power plants presently exist in Panama as well as other Central American countries, which are facing severe power shortages as a result of aging thermal power plants and reductions in available hydroelectricity. Advantages of barge mounted systems are quick delivery and total fabrication in the United States. Israel. The Company submitted bids to a kibbutz to provide a three megawatt cogeneration facility with 800 tons of absorption cooling using Israeli technology for the absorbers. The Company was advised that it was low bidder. The next procedure requires the kibbutz authority to authorize a purchase contract and to arrange financing. If the contract is ultimately awarded, as management believes it will be, the Company will do final design work, acquire all hardware, have the system fabricated in the United States by qualified sub-contractors, ship the entire system in four containers to Israel, and send engineers to oversee installation by local mechanical and electrical contractors. The Company is working in association with Coolingtec Ltd., of Israel, which is the patent holder and manufacturer of a new design absorption chilling unit, which is capable of delivering substantially lower temperatures than other absorbers currently on the market. Absorption chillers utilize recovered heat from the cogeneration engines as their power source. Native American Reservation. The Company is in discussions with an East Coast Native American nation to assist it in developing an infrastructure industry on its reservation involving independent power production. The Company has recommended, and the Tribal Council has preliminarily approved, a plan whereby the Company and the Native American nation would form a joint development company to build, own and operate an independent power plant of from 50 to 100 megawatts on the reservation. Output from the plant would be sold to the grid and to neighboring municipalities. U.S. Plastics Manufacturer. The Company has been asked to evaluate the potential for an inside-the-fence cogeneration project of approximately 5 megawatts for a large U.S. manufacturer of plastic products in Illinois. Recovered heat from the engine generators would be used in the plastics extrusion operation. If the project proves economically feasible, the Company would design and build the facility on a turn-key basis for the plastics manufacturer. Locating New Projects. The President and consultants of the Company communicate frequently with numerous individuals and companies in the industry. Most of the projects in which the Company is now involved 42 have come from these contacts. The Company has established several informal and non-exclusive relationships with other cogeneration developers and with non-regulated subsidiaries of utility companies to pursue other business opportunities in areas of interest to the Company. In certain special markets that the Company seeks to develop, the Company identifies specific potential customers and makes direct approaches to those customers. COMPETITION There are approximately 150 companies nationwide currently involved with independent power plants. The Company currently occupies a relatively minor position in the industry. The independent power plant industry is basically divided into three areas: (1) very large power plants (over 50 megawatts); (2) standard power plants (under 50 megawatts); and (3) "inside-the-fence" plants, which can be of varying sizes, and so called because they are built especially to serve the electrical and thermal needs of a specific building or group of buildings rather than to sell the power to the utility grid and are located literally "inside-the-fence" of the end user's property. Many of the very large plants are owned and operated by subsidiaries of public utility 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 subsidiaries of public utilities or large industrial companies. The operations of most of these companies are geared to the largest sized power plants because of the need to place significant investment to achieve returns large enough to have an impact on a large public utility's or industrial company's balance sheet. Some of these companies have been highly successful in the development of larger plants; but under federal law, utility subsidiaries may not own more than 50% of QF projects. However, subsidiaries of large industrial companies and other non- utility companies have no similar restrictions. Additionally, under federal law enacted in 1992, a new category of independent power producer was created known as exempt wholesale generators ("EWG"). EWG's have no ownership limitations nor do they have similar requirements to QF's with regard to useful thermal output or fuel efficiency and operating efficiency criteria. To receive qualification as an EWG, the owner of an IPP need only demonstrate that the entire output of the facility is sold exclusively in the wholesale market. EWG's are prohibited from making retail sales and therefore cannot be developed for inside-the-fence projects. In many instances, subsidiaries of public utilities and large industrial companies make ideal partners for projects and the Company intends to work with such companies when it locates a specific project fitting their investment parameters. In the category of standard sized independent power plants (under 50 megawatts), the vast majority of the developers so involved are either subsidiaries of other non-utility industrial companies, small privately owned partnerships, or energy funds established to invest in such projects. "Inside- the-fence" plants are generally owned and operated by the end user, although a number of such plants are built, owned and operated for the end user by third parties. EMPLOYEES At present the Company has three full time employees and five contract staff members. The Company will retain outside contract staff as required for engineering, fabrication, construction and maintenance services. Management believes present staffing is adequate, although it expects that the number of full time employees will expand over the next year as new projects come on stream. Partnership projects such as Lehi, Plymouth, and the Steamboat Facilities have their own professional staffs. These staffs report to a Management Group in each of the individual partnerships, and a senior Company officer is an active member of each of the Management Groups. DESCRIPTION OF PROPERTY The Lehi project is owned by LIPA, a Utah limited liability company. The Company owns 50% of LIPA. 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 to operate a cogeneration facility with emissions of up to 249.9 tons of NOX annually. All costs associated with LIPA and the operation of the plants, and all income derived therefrom, are divided pro-rata among the Company 43 and the owners of the remaining 50% of LIPA. Other than the Company's obligations to its debenture holders and bridge lenders, there are no other encumbrances or debt associated with LIPA or the Lehi cogeneration project. Management believes the plant is adequately covered by insurance. The Plymouth State College Cogeneration project is owned by Plymouth Cogeneration, a Delaware partnership. The Company owns 50% of Plymouth Cogeneration, which, in turn, owns all the plant and equipment associated with the cogeneration project including the diesel engines, generators, three auxiliary boilers, switchgear, controls and piping. The state university system has two contracts with Plymouth Cogeneration: (1) a 20 year lease on the above equipment, and (2) a 20 year management contract. Both contracts have escalation clauses. Management believes the equipment is adequately covered by insurance. The Company leases, on a year to year basis, 1,100 square feet of office space in a commercial office building in West Palm Beach, Florida where its executive offices are located. Contract employees work out of their own offices. Management believes that the current space will remain adequate through the current lease period, which expires in September 1997. GOVERNMENT REGULATION Under present federal law, the Company is not and will not be subject to regulation as a holding company under PUHCA as long as each power plant in which it has an interest is a QF under PURPA or is subject to 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 but also useful thermal energy for use in an industrial or commercial process or heating or cooling applications in certain proportions to the facility's total energy output and must meet certain 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 the Company has an interest were to lose its QF status and not receive another PUHCA exemption, the project subsidiary or partnership in which the Company has an interest that owns or leases that plant could become a public utility company, which could subject the Company 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 and 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 certain other standards. Each of Steamboat 1 and Steamboat 1- A meet such ownership requirements and standards and is therefore a QF. QF status exempts the owner of an IPP from regulation under various federal laws including PUHCA and the regulation of the rates for sale from the IPP as well as certain state laws. However, QF status does not exempt in 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, the Company believes that it is in substantial compliance with all applicable rules and regulations and that the projects in which it is involved have the requisite approvals for existing operations and are operated in accordance with applicable laws. However, the operations of the Company and its projects remain subject to 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 the Company 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 44 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. LEGAL PROCEEDINGS There are no legal proceedings currently pending or threatened against the Company. The owner of a farm adjacent to the LIPA facility in Lehi, Utah, has sued LIPA for "nuisance, trespass, and negligence" alleging that in May 1995 diesel fuel from the power plant invaded the drainage ditch dividing the two properties. The drainage ditch feeds a watering hole on the farmer's property. The plaintiff's suit alleges that one bull died and five calves were aborted as a result of petroleum toxosis from ingestion of the fuel in the ditch and the watering hole. The suit, filed in Utah state court on January 25, 1996, seeks damages "in excess of $20,000." Depositions of both sides have been completed. Although there was a spill of several hundred gallons of fuel on the LIPA property in 1991, prior to ownership by either the Company or its partners, the 1991 spill was remediated. Prior to the Company's purchase of its interest in the power plant in 1994, Phase I and Phase II Environmental Assessments were conducted which did not identify any environmental problems. There is no pathology evidence that the bull died of petroleum toxosis, or that the calves were aborted as a result of petroleum toxosis in the mother cows. No other cattle drinking from the same water hole appeared to be affected. While neither the Company nor its partners believe the plaintiff has a strong case, LIPA is exploring settlement options with the plaintiff which would be less costly than the further extensive testing, expert analyses and litigation. 45 MANAGEMENT The directors and executive officers of the Company are presently as follows:
AGE POSITION(S) --- ----------- Theodore Rosen.............. 71 Chairman of the Board of Directors Richard H. Nelson........... 56 President, Chief Executive Officer and Director Fred Knoll.................. 40 Director Ronald Moody................ 62 Director Evan Evans.................. 71 Director Seymour J. Beder............ 69 Treasurer and Chief Financial Officer
At the conclusion of this Offering, Messrs. Knoll and Moody will resign. The remaining directors intend to elect two outside directors to fill the vacancies. These persons have not yet been identified by the Company. Theodore Rosen. Mr. Rosen has been a Director of the Company and 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. Richard H. Nelson. Mr. Nelson has been President, Chief Executive Officer and Director of the Company since November 1993. Mr. Nelson has been engaged in the power plant industry for more than twenty years and has been involved with over 200 power projects throughout the world, 125 of which have been cogeneration projects. In 1973, Mr. Nelson formed Sartex Corp., which was merged into the Company, then called Cogenic Energy Systems, Inc. ("Cogenic"), in 1981. Mr. Nelson served as president of Cogenic until 1989. Cogenic filed for reorganization under Chapter 11 of the Bankruptcy Code in 1989. From January 1989 until January 1991, Mr. Nelson was president of Utility Systems Corp., a subsidiary of Cogenic which was not party to the Chapter 11 filing. In January 1991 Mr. Nelson formed USF where he served as president until November 1993. A Plan of Reorganization was confirmed for Cogenic in March 1993, after which USF and Cogenic merged, with Cogenic being the surviving corporation and changing its name to U.S. Envirosystems, Inc. Mr. Nelson was Special Assistant to the Director of the Peace Corps from 1961 to 1962; thereafter he served as Military Aide to the Vice President of the United States from 1962 to 1963 and Assistant to the President of the United States from 1963 to 1967. From 1967 to 1969, Mr. Nelson was Vice President of American International Bank, and from 1969 to 1973 he was Vice President of Studebaker-Worthington Corp. Mr. Nelson received his BA degree from Princeton University. Ronald Moody. Mr. Moody has been a Director of the Company since January 1994. Mr. Moody entered the investment community in 1967 as a senior partner of a Canadian investment house until 1976, and since that time has been a private investor for his own account. After several years with the Royal Bank of Canada, Mr. Moody joined the Montreal Trust Company in 1962 as a manager of pension fund and individual trust accounts. Mr. Moody received his BA from the University of Western Ontario. Fred Knoll. Mr. Knoll has been a Director of the Company since August 1994. During the last five years, Mr. Knoll has been chairman and CEO of Knoll Capital Management, an investment and cash management firm, in New York. Mr. Knoll is the Chairman of the Board of Thinking Tools and of Lamar Signal Processing and a Director of Spradling Holdings, Raphael Glass and the Columbus Fund. From 1989 until 1993, Mr. Knoll was Chairman of the Board of Directors of C3/Telos Corporation, a computer systems company. Mr. Knoll received 46 his B.S. degree in Computer Sciences from M.I.T. and also a B.S. degree in Management from the Sloan School at M.I.T. He received his MBA from Columbia University. Evan Evans. Mr. Evans has been a Director of the Company 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"), pursuant to a contract between BRC and Holvan. 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. He is currently on the board of directors of Holvan and BRC. Mr. Evans received his BS degree in Mathematics from St. Lawrence University and his BS in Civil Engineering from M.I.T. Seymour J. Beder has been Secretary, Treasurer, Controller and Chief Financial Officer of the Company 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. In addition, the following persons, who are not officers or directors, are affiliated with the operations of the Company as consultants: Donald A. Warner. Mr. Warner has acted as director of development and a consultant to the Company since 1993. For over 20 years, Mr. Warner has been closely involved with the energy and environmental industries, and has been consultant and attorney to numerous environmental and energy project developments in both the public and private sector. The Company expects Mr. Warner to work for the Company full-time after the completion of this Offering. Mr. Warner holds his BA degree from Rochester University and his JD degree from Syracuse University. He also holds an LLM degree from Washington University. Patrick McGovern. Mr. McGovern has been a consultant to the Company since 1993. From 1973 to 1981, Mr. McGovern was Engine Sales Manager for Virginia Tractor Company (Caterpillar). From 1981 to 1984, he was Vice President Engineering for the Company. From 1984 to present, he has been president of Power Management Corp. Mr. McGovern holds both his BSEE and MBA degrees from Louisiana State University. Ravi Singh. Mr. Singh has been President of USE International, LLC, 50% of which is owned by the Company, since 1995. Mr. Singh is president of Indus LLC, a company he formed in 1994 to develop new investment opportunities throughout southeast Asia and Oceania regions. From 1988 until 1994 he was a partner and Managing Director for International Investment Banking at Cowen & Company. Prior to his time at Cowen & Company, Mr. Singh had been affiliated with Coopers & Lybrand LLP with advisory responsibilities for cross-border mergers and acquisitions, notably in Japan. Mr. Singh was also affiliated with Komatsu Ltd. of Japan where he was responsible for business development in India. Mr. Singh received his BS in Engineering from the University of Delhi and his MBA from Columbia University. Nils A. Kindwall. Mr. Kindwall was Vice Chairman of Freeport McMoran, Inc. from 1975 until his retirement in 1993. At Freeport McMoran, he was principally responsible for developing and financing major natural resource projects throughout the world. He has served on the National Advisory Board of Chemical Bank, and is on the board of John Wiley & Sons, Inc. and Metall Mining Corporation. Mr. Kindwall received his BA degree in Economics from Princeton University and his MBA from Columbia University. 47 LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Certificate of Incorporation includes provisions which limit the liability of its Directors. As permitted by applicable provisions of the Delaware General Corporation Law (the "Delaware Law"), Directors will not be liable to the Company for monetary damages arising from a breach of their fiduciary duty as Directors in certain circumstances. This limitation does not affect liability for any breach of a Director's duty to the Company or its stockholders (i) with respect to approval by the Director of any transaction from which he or she derives an improper personal benefit, (ii) with respect to acts or omissions involving an absence of good faith, that the Director believes to be contrary to the best interests of the Company or its 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 the Company or its stockholders, or that show a reckless disregard for duty to the Company or its 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 the Company or its stockholders, or (iii) based on transactions between the Company and its 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. The Company's Bylaws obligate the Company to indemnify its 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 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 Securities Act and is, therefore, unenforceable. EXECUTIVE COMPENSATION The following table shows the total compensation paid by the Company during the fiscal years ended January 31, 1996, 1995 and 1994, and during the six months ended July 31, 1996 to Mr. Richard H. Nelson, the Company's President and Chief Executive Officer. There were no other executives of the Company who received total compensation in excess of $100,000 during any of such years.
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS LONG TERM COMPENSATION - --------------------------- ------------------ -------- ----- ---------------------- Richard H. Nelson, 1997 President and Chief (to July 31, 1996) $ 75,000(1) -- -- Executive Officer..... 1996 150,000(2) -- -- 1995 $149,850 -- -- 1994 $24,500 -- --
- -------- (1) This entire amount has been deferred and will be paid by the Company when working capital is adequate, which shall be determined by the Board of Directors. (2) Includes $125,500 at January 31, 1996, which has been deferred and will be paid by the Company when working capital is adequate, which shall be determined by the Board of Directors. For a period of three years from the date of this Prospectus, all compensation and other arrangements between the Company and its officers, directors and affiliates are to be approved by a Compensation Committee of the Board of Directors, a majority of whom are to have no affiliation or other relationship with the Company other than as directors. Compensation of Directors. Directors are not compensated for attendance at meetings of the Board, although certain travel expenses relating to attending meetings are reimbursed. 48 Employment Contracts. Mr. Nelson has an employment contract with the Company to serve as its Chief Executive Officer for a term of five years from the date of this Prospectus. Mr. Nelson's contract commenced November 11, 1993 and provides for an annual salary of $150,000 plus normal benefits. Mr. Nelson has volunteered to defer 50% of this salary until the Company's cash flow is, in the opinion of the Board of Directors, sufficient. Under the terms of Mr. Nelson's employment agreement, he may not compete with the Company during the term of his employment with the Company or for two years thereafter, or, at any time, disclose any confidential information pertaining to the Company. Mr. Nelson works for the Company full-time. As of November 30, 1996, the amount of deferred compensation owed to Mr. Nelson will be $250,000. Mr. Rosen has an employment contract with the Company to serve as its Chairman of the Board for a term of five years from the date of this Prospectus. Mr. Rosen's contract commenced December 1, 1993 and provides for an annual salary of $60,000 which is being deferred until the Company's cash flow is, in the opinion of the Board of Directors, sufficient. Mr. Rosen devotes a minimum of 40 hours per week to the Company. Under the terms of Mr. Rosen's employment agreement, he may not compete with the Company during the term of his employment with the Company or for two years thereafter, or, at any time, disclose any confidential information pertaining to the Company. As of November 30, 1996, the amount of deferred compensation owed to Mr. Rosen will be $175,000. Stock Options. The Board of Directors has reserved 400,000 shares of the Company's Common Stock for the issuance of non-qualified options to existing and future directors, executives and employees of the Company. CERTAIN TRANSACTIONS The Plan of Reorganization of Cogenic Energy Systems, Inc. (the "Plan") was originally filed and financed by Richard Nelson, who was then the sole shareholder and sole director of USF. The Plan was confirmed by the bankruptcy court in March 1993. Under the Plan, 100,000 shares of the reorganized debtor were issued to Richard Nelson as the proponent and financier of the Plan. An additional 125,000 shares (the "merger shares") were issued to USF upon consummation of the Plan and upon the merger of the reorganized debtor with USF. These merger shares were distributed to individuals and companies who purchased shares of USF for purposes of providing USF with the financing to acquire the Company and to allow the Company to continue as the surviving corporation. Messrs. Nelson, the President, Theodore Rosen, the Chairman, Ronald Moody, a director, Fred Knoll, a director, and S. Marcus Finkle, a principal stockholder of the Company, are participants in the Plymouth Loan (having loaned $25,000, $25,000, $75,000, $650,000 and $150,000 respectively), which bears interest at the rate of 2.5% per annum above the prime rate, and in which the lenders, other than Messrs. Nelson and Rosen, received five-year warrants to purchase 120 shares of the Company's Common Stock for each $1,000 loaned, which warrants are exercisable at $5.00 per share. Messrs. Nelson, Rosen, Moody, Knoll and Finkle will benefit by the payment to them from the net proceeds of the Offering of $30,900, $30,900, $92,500, $801,200 and $185,300, respectively (including accrued interest to November 30, 1996) in connection with the repayment of the Plymouth Loan. Mr. Rosen, Mr. Knoll and Mr. Finkle and Guernroy Ltd. a principal Stockholder, are also holders of the Company's Convertible Debentures in the amounts of $125,000, $200,000, $50,000 and $50,000 respectively. Accrued interest, adjusted to November 30, 1996, which will be repaid from the proceeds of the Offering, amount to $32,600, $59,000, $13,800 and $13,100 respectively. As part of the Debenture Conversion, the conversion rate on $875,000 of the Convertible Debentures, which remain outstanding after the Debenture Conversion, will be reduced to $8.00 per share from the present $16.00 per share and the interest rate thereon will be reduced to 9% from the present 18%. In addition to payment of interest, the Company is obligated 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. Three of the 26 holders of Convertible Debentures, representing $150,000 in principal amount, have not agreed to the interest rate reduction from 18% to 9% per annum. See "Use of Proceeds" and "Description of Securities--Convertible Debentures." 49 In June 1995, the Company issued 57,500 shares of Series One Preferred Stock to Anchor under the terms of the Anchor Loan by which Anchor loaned the Company the sum of $660,000 bearing interest at the rate of 18% per annum. The Anchor Loan is cross-collateralized (together with the Solvation Loan described below) by a first lien on all of the assets of the Company and 97,250 shares of Common Stock owned by Messrs. Nelson and Rosen. The purpose of the Anchor Loan was to finance the costs and expenses of the proposed public offering and provide other funding to the Company for various costs and expenses. The maturity of the Anchor Loan has been extended from March 11, 1996 to November 29, 1996. The Anchor Loan is to be repaid at the date of closing of the Offering or at the date of closing of any public or private offering of debt or equity securities in the gross amount of $5,000,000 or more and/or the sale of any of the Company's assets or any part thereof. $796,000 of the proceeds of the Offering will be used to repay the Anchor Loan and $136,000 of accrued interest on such loan. The 57,500 shares of Series One Preferred Stock will be exchanged for 205,000 shares of Common Stock in the Preferred Stock Exchange. See "Use of Proceeds--Anchor Bridge Loan" and "Description of Securities--Preferred Stock--Series One Preferred Stock." The Company and its partners, who each own 50% of LIPA, share on a pro-rata basis the ownership, retrofitting costs, annual expenses, and revenues associated with the Lehi Cogeneration Project. The Company financed its acquisition cost of $1,225,000 for this interest through the issuance of Convertible Debentures. In addition to payment of interest, the Company is obligated 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. See "Business-- Current Operations and On-Going Projects." The Company has also entered into a consulting agreement with Knoll Capital Management relating to specific work being done for the Company to develop projects in Israel and the Middle East. The contract is for a term of one year, expiring in October 1996, and provides for a consulting fee of $5,000 per month. Fred Knoll, a director and principal stockholder of the Company is the Chairman and Chief Executive Officer of Knoll Capital Management. Knoll Capital Management was instrumental in arranging the kibbutz project in Israel which the Company is currently pursuing and continues to be instrumental in assisting the Company in negotiations in other parts of the world, including Panama. See "Management's Discussion and Analysis of Financial Condition and Plan of Operations--Results of Operations." In December 1995, Solvation loaned the Company $200,000, which carries an interest rate of 10% per annum and which has matured and will be paid when the Offering is closed. A further $50,000 was loaned to the Company in May 1996 on the same terms and conditions. The Solvation Loan is cross-collateralized with the Anchor Loan by a first lien on all of the assets of the Company and 97,250 shares of Common Stock owned by Messrs. Nelson and Rosen. See "Use of Proceeds--Solvation Loan." In connection with the Anchor Loan, Richard Nelson and Theodore Rosen, the Company's President and Chairman of the Board, respectively, pledged an aggregate of 97,250 shares of the Company's Common Stock to Anchor. (The pledge was later extended to secure the Solvation Loan.) These shares will be released from such pledge upon repayment of the Anchor Loan and the Solvation Loan. See "Use of Proceeds." Reno Project. In order to participate in the Reno Project and eliminate any potential conflict of interest, the Company will be acquiring the interests of Messrs. Rosen and Nelson in NRG. Of the $265,000 to be paid by the Company for its 81.5% interest in NRG, $10,000 will be used to purchase those interests, for which Messrs. Rosen and Nelson had paid that amount. See "Business-- Current Operations and On-Going Projects--Nevada District Heating Project." Messrs. Moody and Knoll, directors of the Company until their resignation upon the consummation of this Offering, will each continue to own $10,000 (3.08%) interests in NRG. All transactions between the Company and its officers, directors, principal shareholders or other affiliates have been on terms no less favorable than those that are generally available from unaffiliated third parties. Any such future transactions will be on terms no less favorable to the Company than could be obtained from an unaffiliated third party on an arm's-length basis and will be approved by a majority of the Company's independent and disinterested directors. 50 PRINCIPAL STOCKHOLDERS The following table lists the number of shares of Common Stock owned as of October 31, 1996 by (i) persons known to hold more than five percent of the shares of outstanding Common Stock, (ii) each director of the Company, (iii) any executive officers named in the Summary Compensation Table, (iv) all officers and directors of the Company as a group. Each person named in the table has sole investment power and sole voting power with respect to the shares of the Common Stock set forth opposite his or its name, except as otherwise indicated.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING(1) AFTER OFFERING(1) ------------------------------ ------------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES PERCENTAGE SHARES PERCENTAGE ------------------- ----------- ------------ ----------- ------------ Richard Nelson.......... 82,446 18.7% 82,446 2.1% Theodore Rosen.......... 88,333(2) 17.4% 100,833(2a) 2.6% Ronald Moody............ 21,500(3) 4.8% 21,500(3) 0.6% Fred Knoll.............. 171,333(4) 28.6% 191,334(4a) 4.8% Evan Evans.............. 2,500(5) 0.6% 2,500(5) 0.1% S. Marcus Finkle........ 63,833(6) 13.9% 68,833(6a) 1.8% 117 AABC Aspen, CO Guernroy, Ltd........... 38,158(7) 8.6% 43,158(7a) 1.1% c/o Royal Bank of Can- ada Channel Isles, UK Anchor Capital Company, 205,000(8) 31.8% 205,000(8) 5.3% LLC.................... 1140 Avenue of the Americas New York, NY 10036 All officers and direc- tors as a group (6 per- sons).................. 381,113(2) 55.2% 413,613(2)(2a) 10.0% (3)(4) (3)(4) (5) (4a)(5)
- -------- (1) The tabular information gives effect to the exercise of warrants or options exercisable within 60 days of the date of this table owned in each case by the person or group whose percentage ownership is set forth opposite the respective percentage and is based on the assumption that no other person or group exercises its option. The address of each of the officers and directors is 515 North Flagler Drive, Suite 202, West Palm Beach, Florida 33401. (2) Includes 8,333 shares issuable upon conversion of Convertible Debentures, and 60,250 shares issuable upon exercise of non-qualified options at an exercise price of $8 per share which became exercisable on December 1, 1995. (2a) Includes 10,417 shares issuable upon conversion of Convertible Debentures, and 60,250 shares issuable upon exercise of non-qualified options at an exercise price of $8 per share which became exercisable on December 1, 1995. Excludes 10,417 shares issuable upon exercise of Private Warrants which are not exercisable until one year after the closing of the Debenture Conversion. (3) Includes 9,000 shares issuable on exercise of warrants at an exercise price of $5 per share which became exercisable on October 31, 1994. (4) Includes (i) 67,500 shares issuable upon exercise of non-qualified options at an exercise price of $8 per share which became exercisable on December 1, 1995 and (ii) 91,333 shares owned by Europa International Inc. ("Europa"), including 13,333 shares issuable to Europa upon conversion of Convertible Debentures and 78,000 shares issuable to Europa on exercise of warrants at an exercise price of $5 per share which became exercisable on October 31, 1994. Knoll Capital Management has the sole voting power of the shares owned by Europa. Mr. Knoll is the President and sole shareholder of Knoll Capital Management. (4a) Includes Europa holdings of 16,667 shares issuable upon conversion of Convertible Debentures and 78,000 shares issuable on exercise of warrants at an exercise price of $5 per share which became exercisable on 51 October 31, 1994. Knoll Capital Management has the sole voting power of the shares owned by Europa. Mr. Knoll is the President and sole shareholder of Knoll Capital Management. Excludes 16,667 shares issuable upon exercise of Private Warrants which are not exercisable until one year after the closing of the Debenture Conversion. (5) Includes 1,250 shares issuable upon exercise of non-qualified options at an exercise price of $4 per share which became exercisable on January 25, 1995. (6) Includes 3,333 shares issuable upon conversion of Convertible Debentures and 18,000 shares issuable on exercise of warrants at an exercise price of $5 per share which became exercisable on October 31, 1994. (6a) Includes 4,167 shares issuable upon conversion of Convertible Debentures and 18,000 shares issuable on exercise of warrants at an exercise price of $5 per share which became exercisable on October 31, 1994. Excludes 4,167 shares issuable upon exercise of Private Warrants which are not exercisable until one year after the Debenture Conversion. (7) Includes 3,333 shares issuable upon conversion of Convertible Debentures. (7a) Includes 4,167 shares issuable upon conversion of Convertible Debentures. Excludes 4,167 shares issuable upon exercise of warrants which are not exercisable until one year after the Debenture Conversion. (8) Represents shares issuable upon conversion of 57,500 shares of Series One Preferred Stock. 52 DESCRIPTION OF SECURITIES The Company's authorized capital stock consists of 35,000,000 shares of Common Stock, par value $.01 per share (the "Common Stock"), and 5,000,000 shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"). The following summary of certain terms of the Common Stock and Preferred Stock does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Company's Certificate of Incorporation and By-laws, which are included as exhibits to the Registration Statement of which this Prospectus is a part. COMMON STOCK The Company has 439,650 shares of Common Stock issued and outstanding. 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. Subject to preferences that may be applicable to any then outstanding Preferred Stock, the holders of the Common Stock are entitled to receive such dividends, if any, as may be declared by the Board of Directors from time to time out of legally available funds. Upon liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets of the Company that are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of holders of the Preferred Stock then outstanding. The holders of Common Stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of Common Stock are subject to the rights of the holders of shares of any series of Preferred Stock that the Company will issue in the future. WARRANTS Each Warrant entitles the registered holder to purchase one share of Common Stock at a price of $4.00 per share, subject to adjustments in certain circumstances, during the period commencing one year and ending five years from the date of this Prospectus. The Warrants are redeemable by the Company, at the option of the Company, with the prior consent of the Representative, at a price of $.01 per Warrant at any time after the Warrants become exercisable, upon not less than 30 business days' written notice, provided that the last sales price of the Common Stock equals or exceeds 150% (initially $6.00) of the then-exercise price of the Warrants (the "Redemption Threshold") for the 20 consecutive trading days ending on the third day prior to the notice of redemption to warrantholders. The warrantholders shall have the right to exercise the Warrants until the close of business on the date fixed for redemption. The Company is required to maintain the effectiveness of a current registration statement relating to the exercise of the Warrants and, accordingly, the Company 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 underlying securities. Also, lack of qualification or registration under applicable state securities laws may mean that the Company would be unable to issue securities upon exercise of the Warrants to holders in certain states, including at the time when the Warrants are called for redemption. The Warrants will be issued in registered form under a Warrant Agreement between the Company and American Stock Transfer & Trust Company as Warrant Agent. Reference is made to such 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 description herein contained being qualified in its entirety by reference to such Warrant Agreement). The exercise price, number of shares of Common Stock issuable on exercise of the Warrants and Redemption Threshold are subject to adjustment in certain circumstances, including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation of the Company. However, the Warrants are not subject to adjustment for issuances of Common Stock at a price below their exercise price. 53 The Company has the right, in its 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, the Company has the right, in its sole discretion, to extend the expiration date of the Warrants on five business days' prior written notice to the warrantholders. The Company will comply with all applicable tender offer rules, including Rule 13e-4, in the event the Company reduces the exercise price for a limited period of time. The Warrants may be exercised upon surrender of the Warrant Certificate representing the Warrants on or prior to 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, accompanied by full payment of the exercise price (by certified check, payable to the Company) for the number of Warrants being exercised. The warrantholders do not have the rights or privileges of holders of Common Stock. No Warrants will be exercisable unless at the time of exercise the Company has filed with the Commission a current prospectus covering the shares of Common Stock issuable upon exercise of such Warrants and such shares have been registered or qualified or are exempt under the securities laws of the state of residence of the holder of such Warrants. No fractional shares will be issued upon exercise of the Warrants. The Company will pay to such warrantholder, in lieu of the issuance of any fractional share which is otherwise issuable to such warrantholder, an amount in cash based on the market value of the Common Stock on the last trading day prior to the exercise date. Private Warrants. 125,000 Private Warrants are being issued in connection with the Debenture Conversion. The terms of the Private Warrants were negotiated at arms-length. PREFERRED STOCK The Company is authorized to issue 5,000,000 shares of Preferred Stock, par value $0.01 per share, in one or more series. The Board of Directors, without further approval of the stockholders, is authorized to fix the rights and terms relating to dividends, conversion, voting, redemption, liquidation preferences, sinking funds and any other rights, preferences, privileges and restrictions applicable to each such 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, under certain circumstances, be used as a means of discouraging, delaying or preventing a change in control of the Company. Other than the Series One Preferred Stock, the Company has no shares of Preferred Stock outstanding and has no plans to issue any shares. Series One Preferred Stock. In June 1995, the Board of Directors designated 100,000 of the Company's Preferred Stock as "Series One Exchangeable and Convertible Preferred Stock" (the "Series One Preferred Stock"). The Company issued 57,500 shares of the Series One Preferred Stock to Anchor under the terms of the Anchor Loan. See "Certain Transactions." Under the terms of the Anchor Loan, upon the consummation of this Offering and the other Closing Transactions, the 57,500 shares of Series One Preferred Stock will be exchanged for 205,000 shares of Common Stock. The holders are also entitled to receive cumulative dividends equal to $1.00 per share and have a liquidation preference of $10.00 per share plus any dividends accrued and unpaid. The holders of Series One Preferred Stock have no voting rights except for certain corporate actions. The Series One Preferred Stock is redeemable at the option of the Company at a price of $10.00 per share, plus accrued and unpaid dividends, under certain conditions, commencing January 1, 1999. CONVERTIBLE DEBENTURES Concurrently with the consummation of this Offering and the other Closing Transactions, the Convertible Debentures, of which an aggregate principal amount of $1,525,000 is outstanding, will be restructured by 54 converting, at a price of $4.00 per share, $500,000 principal amount into 125,000 shares of Common Stock and 125,000 Private Warrants and reducing the conversion rate on $875,000 of the remainder to $8.00 per share from the present $16 per share, making the remainder convertible into 128,125 shares of Common Stock. From and after the consummation of the Offering, the interest rate on $875,000 in principal amount will be 9% instead of the present 18%. Three of the 26 holders of Convertible Debentures, representing $150,000 in principal amount, have not agreed to the conversion. These changes were negotiated with the holders of the Convertible Debentures. The Convertible Debentures were issued in June 1994 and mature on January 25, 2004. In addition to payment of interest, the Company is 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"). As a result of the Debenture Conversion, the Supplemental Participation will be reduced by one- third in view of the conversion of $500,000 in principal amount of Convertible Debentures. See "Business--Current Operations and On-Going Projects--Lehi Cogeneration Project." Pursuant to the terms and conditions of a pledge agreement between the Company and Richard Nelson and Theodore Rosen, acting jointly as pledge agent for all of the holders of the Convertible Debentures, 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 LEI, all of which issued and outstanding shares are owned by the Company. Until such time as the Company's obligations for the payment of the principal and interest on the Convertible Debentures and, if applicable, any Supplemental Participation due are paid in full, the Company shall not cause LEI to issue any additional shares of common stock unless the security interest granted in LEI shall be extended to such additional shares. The Convertible Debentures are subordinate and subject in right of payment to the prior payment of all "Senior Indebtedness" of the Company. "Senior Indebtedness" is the principal of, premium, if any, and interest (including any interest accruing after the filing of a petition in bankruptcy) on and other amounts due or in connection with any indebtedness of the Company including, without limitation, the liabilities as defined in and arising under any loan or security agreement with a bank, insurance company, or other financial institution or affiliate of any thereof whether outstanding on the date of the Convertible Debentures, or any indebtedness thereafter created, incurred, assumed or guaranteed by the Company, and, in each case, all renewals, extensions, and refundings thereof, except indebtedness which by the terms of the instrument creating or evidencing such indebtedness created, incurred, assumed, or guaranteed after the date of the Convertible Debentures 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. Notwithstanding anything herein to the contrary, Senior Indebtedness shall not include (i) indebtedness representing the repurchase price of any preferred stock or other capital stock of the Company or any dividend or distribution with respect thereto; (ii) indebtedness of the Company owed directly to any employee, officer or director thereof; and (iii) indebtedness which, by its terms, is subordinate in right of payment to the indebtedness of the Company evidenced by the Convertible Debentures. To the extent the Company shall have funds legally available for such payment, commencing January 25, 1998, the Company may redeem at its 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 any such redemption, the Company must issue each holder whose Convertible Debenture(s) have been redeemed a warrant to purchase a number of shares of the Company's 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 (currently $8.00 per share). ANTI-TAKEOVER PROVISIONS The Company is governed by the provisions of Section 203 of the General Corporation Law of Delaware, an anti-takeover law. In general, this statute prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the 55 transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the Company's voting stock. The Delaware Statute may discourage certain types of transactions involving an actual or potential change in control of the Company. 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. 56 SHARES ELIGIBLE FOR FUTURE SALE Possible Rule 144 Sales. Upon completion of the Offering by the Company described in this Prospectus, the Company will have outstanding 3,869,650 shares of Common Stock. All of the 3,100,000 shares sold in the Offering (assuming no exercise of the Underwriters' over-allotment option) will be freely transferable by persons other than affiliates (as defined in regulations under the Securities Act) without restriction or further registration under the Securities Act. Of the 439,650 shares of Common Stock outstanding prior to the Offering, 64,650 shares of Common Stock outstanding are "restricted securities" within the meaning of Rule 144 under the Securities Act and may not be sold in the absence of registration under the Securities Act, unless an exemption from registration is available, including the exemption provided by Rule 144. Under Rule 144 as currently in effect, all of such 64,650 shares are currently eligible for sale (none of which are subject to the agreements described below restricting their sale), subject to the volume limitations of the Rule. The holders of record of 114,279 of these shares have agreed with the Representative not to sell their shares until thirteen months from the date of this Prospectus without the prior written approval of the Representative. The 205,000 shares of Common Stock to be issued in the Preferred Stock Exchange and the 125,000 shares of Common Stock to be issued upon the Debenture Conversion will be restricted securities. Although registered pursuant to the Shelf Registration, Anchor has agreed not to sell the 205,000 shares of Common Stock it will receive in the Preferred Stock Exchange without the Representative's prior written approval, for a period of nine months following the consummation of the Offering. The foregoing does not give effect to any shares issuable on exercise of outstanding options and warrants. The effect of the offer and sale of such shares may be to depress the market price for the Company's Common Stock. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated for purposes of Rule 144) who beneficially owns Restricted Securities with respect to which at least two years have elapsed since the later of the date the shares were acquired from the Company or from an affiliate of the Company, is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock of the Company, or (ii) the average weekly trading volume in Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain manner-of-sale provisions and notice requirements, and to the availability of current public information about the Company. A person who is not an affiliate, has not been an affiliate within 90 days' prior to sale and who beneficially owns Restricted Securities with respect to which at least three years have elapsed since the later of the date the shares were acquired from the Company or from an affiliate of the Company, is entitled to sell such shares under Rule 144(k) without regard to any of the volume limitations or other requirements described above. Registration Rights. This Registration Statement includes a Secondary Prospectus to enable the holders of the 205,000 shares of Common Stock to be issued in the Preferred Stock Exchange to sell their shares. The 125,000 shares of Common Stock to be issued in the Debenture Conversion and the 11,400 shares of Common Stock previously issued in the acquisition of Plymouth Cogeneration are not included in the Secondary Prospectus, however they are available for sale in accordance with Rule 144. The Common Stock to be issued in the Preferred Stock Exchange is subject to a nine month restriction on resale subject to earlier waiver of such restriction by the Representative in its sole discretion. 57 UNDERWRITING The Underwriters named herein, for whom Gaines, Berland Inc. is acting as representative ("Representative"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase a total of 3,100,000 shares of Common Stock and 3,100,000 Warrants. The number of shares of Common Stock and Warrants which each Underwriter has agreed to purchase is set forth opposite its name:
NUMBER OF SHARES NUMBER OF UNDERWRITER OF COMMON STOCK WARRANTS ----------- ---------------- --------- Gaines, Berland Inc.................................. --------- --------- Total.............................................. 3,100,000 3,100,000 ========= =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to approval of certain legal matters by counsel to the Underwriters, the consummation of the Closing Transactions and various other conditions precedent, and that the Underwriters are obligated to purchase all the Securities offered hereby (other than the Securities covered by the over- allotment option described below) if any are purchased. The Representative has advised that the Underwriters propose to offer the Securities to the public at the initial public offering prices set forth on the cover page of this Prospectus and that they may allow to certain dealers a concession not in excess of $ per share of Common Stock and $ per Warrant, of which amount a sum not in excess of $ per share of Common Stock and $ per Warrant may, in turn, be reallowed by such dealers to other dealers. The Company has granted to the Underwriters an option, exercisable during the 45-day period after the date of this Prospectus, to purchase from the Company at the offering price set forth on the cover page of this Prospectus, less underwriting discounts and commissions, up to 465,000 additional shares of Common Stock and/or an additional 465,000 Warrants for the sole purpose of covering over-allotments, if any. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The Company also has agreed to pay the Representative an expense allowance on a non-accountable basis equal to 3% of the gross proceeds derived from the sale of the Securities underwritten (including the sale of any Securities subject to the Underwriters' over-allotment option), $50,000 of which has been paid to date. The Company also has agreed to pay all expenses in connection with qualifying the shares offered hereby for sale under the laws of such states as the Representative may designate and filing this Offering with the NASD, including fees and expenses of counsel retained for such purposes by the Underwriters, and the costs of investigatory searches of the Company's executive officers. In connection with the Offering, the Company has agreed to sell to the Representative, for nominal consideration, the right to purchase up to an aggregate of 310,000 shares of Common Stock and/or an aggregate of 310,000 Warrants (the "Representative's Purchase Option"). The Representative's Purchase Option is exercisable at a price of $6.60 per share of Common Stock and $.169 per Warrant for a period of four years commencing one year from the date of this Prospectus. The Securities purchasable upon the exercise of the Representative's Purchase Option are identical to those offered hereby, except that the exercise price of the Warrants issuable upon the exercise of the Representative's Purchase Option is $5.00. The Representative's Purchase Option grants to the holders thereof certain "piggyback" rights and one demand right for a period of seven and five years, respectively, from the date of this Prospectus with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the Representative's Purchase 58 Option. The Representative's Purchase Option cannot be transferred, sold, assigned or hypothecated during the one year period following the date of this Prospectus, except to officers of the Representative and to the Underwriters and selected dealers and their officers or partners. Prior to this Offering, there has been only a limited public market for the Company's Common Stock, and no public market for the Warrants. Accordingly, the offering price of the Securities and the terms of the Warrants included therein have been arbitrarily determined by negotiation between the Company and the Representative, and do not necessarily bear any relation to established valuation criteria. Factors considered in determining such prices and terms, in addition to prevailing market conditions and the market price of the Common Stock immediately prior to the date of this Prospectus, include an assessment of the prospects for the industry in which the Company competes, the Company's management and the Company's capital structure. Pursuant to the Underwriting Agreement, all of the Company's present officers and directors and certain other stockholders of the Company, who own of record in the aggregate 130,946 shares of Common Stock ("Principals"), have entered into agreements with the Company and the Representative not to sell such shares of Common Stock without the prior written consent of the Representative other than in a private sale in which the transferee agrees to be bound by the provisions of such agreement until thirteen months. Anchor has agreed not to sell the 205,000 shares of Common Stock to be acquired by it in the Preferred Stock Exchange without the consent of the Representative for a period of 9 months following the date of this Prospectus, although such shares are registered pursuant to the Shelf Registration. In addition, during the five years following the date of the consummation of the Offering, the Representative has the right to purchase for its account or sell for the account of the Principals any securities sold by them pursuant to Rule 144 under the Act. The Underwriting Agreement provides that, for a period of five years from the date of this Prospectus, the Company will permit the Representative to designate a nominee for election to the Board of Directors or to send an individual to observe meetings of the Board of Directors. Such observer will not be a member of the Board of Directors and will not be entitled to vote on any matters before the Board but will be entitled to the same notices and communications sent by the Company to its Directors and to be reimbursed for his expenses in attending the meetings. No designation has been made as of the date hereof. The Company has engaged the Representative, on a non-exclusive basis, as its agent for the solicitation of the exercise of the Warrants. Other NASD members may be engaged by the Representative in its solicitation efforts. To the extent not inconsistent with the guidelines of the NASD and the rules and regulations of the Commission, the Company has agreed to pay the Representative for bona fide services rendered a commission equal to 5% of the exercise price for each Warrant exercised more than one year from the date of this Prospectus if the exercise was solicited by the Representative. In addition to soliciting, either orally or in writing, the exercise of the Warrants, such services may also include disseminating information, either orally or in writing, to warrantholders about the Company in the market for the Company's securities, and assisting in the processing of the exercise of the Warrants. No compensation will be paid to the Representative in connection with the exercise of the Warrants if the market price of the underlying shares of Common Stock is lower than the exercise price, the holder of the Warrants has not confirmed in writing that the Representative solicited such exercise, the Warrants are held in a discretionary account, the Warrants are exercised in an unsolicited transaction or the arrangement to pay the commission is not disclosed in the prospectus provided to warrantholders in connection with such exercise. In addition, unless granted an exemption by the Commission from Rule 10b-6 under the Exchange Act, while it is soliciting exercise of Warrants, the Representative will be prohibited from engaging in any market-making activities or solicited brokerage activities with regard to the Company's securities unless the Representative has waived its right to receive a fee for the exercise of the Warrants. 59 LEGAL MATTERS The legality of the securities offered hereby will be passed upon for the Company by the firm of Reid & Priest LLP, New York, New York. Graubard Mollen & Miller, New York, New York, has served as counsel to the Underwriters in connection with this Offering. EXPERTS The financial statements of the Company as at January 31, 1996 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. Such financial statements have been included in reliance upon such report given upon the authority of that firm as experts in accounting and auditing. The financial statements of Lehi Independent Power Associates, L.C. as of December 31, 1995 and 1994 for the year then ended and the period January 24, 1994 (date of inception) through December 31, 1994, appearing in this Prospectus, have been audited by Traveller Winn & Mower, PC, independent auditors, to the extent and for the years indicated in their report appearing elsewhere herein and in the Registration Statement. Such financial statements have been included in reliance upon such report and upon the authority of that firm as experts in accounting and auditing. The financial statements of Far West Electric Energy Fund, L.P. as of December 31, 1994 and 1995 and for the years then ended, appearing in this Prospectus, have been audited by Robison, Hill & Co., PC, independent auditors, to the extent and for the years indicated in their report appearing elsewhere herein and in the Registration Statement. Such financial statements have been included in reliance upon such report and upon the authority of that firm as experts in accounting and auditing. The financial statements of 1-A Enterprises as of December 31, 1994 and 1995 and for the two-year period then ended, appearing in this Prospectus, have been audited by Robison, Hill & Co., PC, independent auditors, to the extent and for the years indicated in their report appearing elsewhere herein and in the Registration Statement. Such financial statements have been included in reliance upon such report and upon the authority of that firm as experts in accounting and auditing. The financial statements of Plymouth Cogeneration Limited Partnership as of December 31, 1994 and 1995 and for the year ended December 31, 1995, appearing in this Prospectus, have been so included in the reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 60 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) INDEX TO FINANCIAL STATEMENTS
PAGE ---- U.S. ENERGY SYSTEMS, INC. Report of Independent Auditor............................................. F-2 Consolidated Balance Sheet as at January 31, 1996 and July 31, 1996 (Unau- dited)................................................................... F-3 Consolidated Statements of Operations for the years ended January 31, 1996 and January 31, 1995 and for the Six Months ended July 31, 1996 and July 31, 1995 (Unaudited). F-4 Consolidated Statements of Changes in Capital Deficiency for the years ended January 31, 1996 and January 31, 1995 and for the Six Months ended July 31, 1996 and July 31, 1995 (Unaudited)..................................................... F-5 Consolidated Statements of Cash Flows for the years ended January 31, 1996 and January 31, 1995 and for the Six Months ended July 31, 1996 and July 31, 1995 (Unaudited). F-6 Notes to Financial Statements............................................. F-7 FAR WEST ELECTRIC ENERGY FUND, L.P. Independent Auditor's Report.............................................. F-16 Balance Sheets, December 31, 1995 and 1994 and June 30, 1996.............. F-17 Statements of Income, for the years ended December 31, 1995, 1994, and 1993 and the Nine Months ended September 30, 1996............................. F-18 Statements of Partners' Capital, for the years ended December 31, 1995, and 1994, and 1993 and the Nine Months ended September 30, 1996............................. F-19 Statements of Cash Flows, for the years ended December 31, 1995, 1994 and 1993 and the Nine Months ended September 30, 1996............................. F-20 Notes to Financial Statements............................................. F-21 1-A ENTERPRISES Independent Auditor's Report.............................................. F-29 Balance Sheet, December 31, 1995 and 1994 and June 30, 1996............... F-30 Statements of Income, for the years ended December 31, 1995 and 1994...... F-31 Statements of Partners' Capital, for the years ended December 31, 1995 and 1994 and the Nine Months ended September 30, 1996............................. F-32 Statements of Cash Flows, for the years ended December 31, 1995 and 1994 and the Nine Months ended September 30, 1996............................. F-33 Notes to Financial Statements December 31, 1995 and 1994 and the Six Months ended June 30, 1996............................................... F-34 LEHI INDEPENDENT POWER ASSOCIATES, L.C. Report of Independent Auditors............................................ F-38 Balance Sheets, December 31, 1995 and 1994 and June 30, 1996.............. F-39 Statements of Operations for the year ended December 31, 1995, the Period ended December 31, 1994 and the Six Months ended June 30, 1996........... F-40 Statement of Changes in Members' Equity for the year ended December 31, 1995, the Period ended December 31, 1994 and the Six Months ended June 30, 1996..................................................................... F-41 Statements of Cash Flows for the year ended December 31, 1995, the Period ended December 31, 1994 and the Six Months ended June 30, 1996........... F-42 Notes to Financial Statements............................................. F-43 PLYMOUTH COGENERATION LIMITED PARTNERSHIP Report of Independent Accountants......................................... F-45 Balance Sheets, December 31, 1995 and 1994 and June 30, 1996.............. F-46 Statement of Operations for the year ended December 31, 1995 and the Six Months ended June 30, 1996................................... F-47 Statement of Changes in Partners' Capital for the year ended December 31, 1995 and the Six Months ended June 30, 1996................................... F-48 Statement of Cash Flows for the year ended December 31, 1995 and the Six Months ended June 30, 1996................................... F-49 Notes to Financial Statements............................................. F-50
F-1 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders U.S. Energy Systems, Inc. (formerly U.S. Envirosystems, Inc.) We have audited the accompanying consolidated balance sheet of U.S. Energy Systems, Inc. (formerly U.S. Envirosystems, Inc.) and subsidiaries as at January 31, 1996 and the related consolidated statements of operations, changes in capital deficiency and cash flows for each of the years in the two- year period then ended. These 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 consolidated financial statements enumerated above present fairly, in all material respects, the financial position of U.S. Energy Systems, Inc. and subsidiaries at January 31, 1996, and the results of its operations and its cash flows for each of the years in the two-year period then ended in accordance with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has incurred significant losses and as at January 31, 1996, has a working capital deficiency of approximately $1,910,000 and a capital deficiency of $2,729,000 which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Richard A. Eisner & Company, LLP New York, New York March 1, 1996 With respect to Note J[4] May 6, 1996 With respect to Note A (change of name to U.S. Energy Systems, Inc.) May 17, 1996 F-2 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) CONSOLIDATED BALANCE SHEETS
JANUARY 31, JULY 31, ASSETS 1996 1996 (NOTE G) ----------- ----------- (UNAUDITED) Current assets: Cash.................................................. $ 2,000 $ 1,000 Other current assets.................................. 16,000 20,000 ---------- ---------- Total current assets................................. 18,000 21,000 Investments in Joint Ventures--at equity: Lehi Independent Power Associates, L.C. (Note C[1])... 1,170,000 1,112,000 Plymouth Cogeneration Limited Partnership (Note C[2]). 703,000 669,000 Other assets........................................... 103,000 274,000 ---------- ---------- TOTAL................................................ $1,994,000 $2,076,000 ========== ========== LIABILITIES Current liabilities: Accrued expenses and other current liabilities (in- cluding due to related parties of $467,000 and $707,000, respectively) (Notes D and L).............. $ 990,000 $1,663,000 Pre-reorganization income taxes payable and accrued interest-- current (Note E)..................................... 172,000 192,000 Loans payable (Note G)................................ 766,000 960,000 ---------- ---------- Total current liabilities............................ 1,928,000 2,815,000 Convertible subordinated secured debentures (including due to related parties of $325,000) (Notes H and L)... 1,525,000 1,525,000 Notes payable (including due to related parties of $775,000) (Notes I and L)............................. 965,000 975,000 Deferred interest (including due to related parties of $12,000) (Notes H and L).............................. 114,000 114,000 Pre-reorganization income taxes payable and accrued in- terest (Note E)....................................... 176,000 180,000 Advances from Joint Ventures (Note C[2])............... 15,000 24,000 ---------- ---------- Total liabilities.................................... 4,723,000 5,633,000 ---------- ---------- Commitments and contingencies (Note K) CAPITAL DEFICIENCY (NOTES A AND J) Preferred stock, $.01 par value, authorized 5,000,000 shares; issued and outstanding 57,500 (liquidating preference $575,000)..................... 1,000 1,000 Common stock, $.01 par value, authorized 35,000,000 shares; issued and outstanding 439,650..... 4,000 4,000 Additional paid-in capital............................. 112,000 112,000 Accumulated deficit.................................... (2,846,000) (3,674,000) ---------- ---------- Total capital deficiency............................. (2,729,000) (3,557,000) ---------- ---------- TOTAL................................................ $1,994,000 $2,076,000 ========== ==========
The accompanying notes to financial statements are an integral part hereof. F-3 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED YEAR ENDED JANUARY 31, JULY 31, ------------------------ ----------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cost and expenses: Operating expenses.......... $ 27,000 $ 109,000 $ $ 26,000 Administrative expenses..... 826,000 897,000 408,000 395,000 Interest expense............ 604,000 319,000 328,000 223,000 Loss from Joint Ventures.... 17,000 76,000 92,000 62,000 ----------- ----------- --------- --------- Total cost and expenses.... 1,474,000 1,401,000 828,000 706,000 ----------- ----------- --------- --------- (Loss) before extraordinary item....................... (1,474,000) (1,401,000) (828,000) (706,000) Extraordinary gain from re- structuring of liabilities.. 83,000 85,000 83,000 ----------- ----------- --------- --------- Net (Loss)................... (1,391,000) $(1,316,000) (828,000) $(623,000) =========== ========= Dividends on preferred stock. (21,000) (29,000) ----------- --------- (Loss) applicable to common stock....................... $(1,412,000) $(857,000) =========== ========= (Loss) per share before ex- traordinary item............ $ (3.41) $ (3.38) $ (1.95) $ (1.61) =========== =========== ========= ========= Net (loss) per share......... $ (3.22) $ (3.17) $ (1.95) $ (1.42) =========== =========== ========= ========= Weighted average shares out- standing.................... 438,773 415,022 439,650 438,296 =========== =========== ========= =========
The accompanying notes to financial statements are an integral part hereof. F-4 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY (NOTES A AND J)
PREFERRED STOCK COMMON STOCK --------------- ------------------------- NUMBER NUMBER ADDITIONAL OF OF PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL ------- ------- ------- ------ ---------- ----------- ----------- Balance--January 31, 1994................... 391,250 $4,000 $(306,000) $ (139,000) $ (441,000) Sale of common stock.... 32,000 139,000 139,000 Compensation attributable to options and warrants........... 48,000 48,000 Shares issued for inter- est in Joint Ventures.. 11,400 114,000 114,000 Value assigned to warrants issued in connection with notes payable................ 46,000 46,000 Net (loss) for the year ended January 31, 1995....... (1,316,000) (1,316,000) ------- ------- ------- ------ --------- ----------- ----------- Balance--January 31, 1995................... 434,650 4,000 41,000 (1,455,000) (1,410,000) Sale of common stock.... 5,000 34,000 34,000 Value assigned to preferred stock issued in connection with loans payable.......... 57,500 $ 1,000 28,000 29,000 Value assigned to additional warrants issued in connection with notes payable..... 9,000 9,000 Net (loss) for the year ended January 31, 1996....... (1,391,000) (1,391,000) ------- ------- ------- ------ --------- ----------- ----------- Balance--January 31, 1996................... 57,500 1,000 439,650 4,000 112,000 (2,846,000) (2,729,000) Net (loss) for the six months ended July 31, 1996.......... (828,000) (828,000) ------- ------- ------- ------ --------- ----------- ----------- Balance--July 31, 1996 (Unaudited)............ 57,500 $ 1,000 439,650 $4,000 $ 112,000 $(3,674,000) $(3,557,000) ======= ======= ======= ====== ========= =========== ===========
The accompanying notes to financial statements are an integral part hereof. F-5 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEAR ENDED JANUARY 31, JULY 31, ------------------------ ----------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating ac- tivities: Net (loss).................. $(1,391,000) $(1,316,000) $(828,000) $(623,000) Adjustments to reconcile net (loss) to net cash (used in) operating activities: Amortization of debt dis- count...................... 42,000 3,000 10,000 7,000 Amortization of purchase price in excess of equity in Joint Ventures.......... 59,000 55,000 26,000 28,000 Amortization of deferred fi- nancing and registration costs...................... 72,000 39,000 14,000 Value assigned to options and warrants............... 48,000 Gain from restructuring of liabilities................ (83,000) (85,000) (83,000) Equity in (income)/loss of Joint Ventures, net of dis- tributions................. (13,000) 21,000 66,000 34,000 Loss from legal proceedings. 102,000 Deferred interest........... 114,000 61,000 Accrued interest on pre-re- organization income taxes payable.................... 39,000 24,000 Changes in operating assets and liabilities: (Increase) decrease in other assets.............. 2,000 (1,000) (19,000) (11,000) Increase in accounts pay- able and accrued expenses. 671,000 146,000 673,000 134,000 ----------- ----------- --------- --------- Net cash (used in) operat- ing activities............ (641,000) (874,000) (9,000) (439,000) ----------- ----------- --------- --------- Cash flows from investing ac- tivities: Security deposit on proposed acquisition................ (50,000) Cost incurred in connection with the Proposed Acquisi- tions...................... (3,000) Investment in Joint Ven- tures...................... (636,000) Advances to Joint Ventures.. (9,000) (11,000) Loans (to) from officers.... (47,000) Collections of loans receiv- able--officer.............. 33,000 59,000 ----------- ----------- --------- --------- Net cash provided by (used in) investing activities.. (29,000) (694,000) 59,000 ----------- ----------- --------- --------- Cash flows from financing ac- tivities: Proceeds from issuance of convertible subordinated debt....................... 400,000 25,000 Proceeds from issuance of common stock............... 34,000 139,000 63,000 Proceeds from issuance of notes payable.............. 25,000 975,000 Proceeds from loans payable and preferred stocks....... 785,000 175,000 570,000 Payment of deferred financ- ing costs.................. (102,000) (85,000) Payment of pre-reorganiza- tion payroll taxes payable. (34,000) (105,000) (109,000) Payment of pre-reorganiza- tion income taxes payable.. (9,000) (13,000) (11,000) Advances from Joint Ven- tures...................... 15,000 9,000 3,000 Deferred registration costs. (50,000) (176,000) ----------- ----------- --------- --------- Net cash provided by fi- nancing activities........ 664,000 1,396,000 8,000 456,000 ----------- ----------- --------- --------- NET INCREASE (DECREASE) IN CASH........................ (6,000) (172,000) (1,000) 76,000 Cash--beginning of the peri- od.......................... 8,000 180,000 2,000 8,000 ----------- ----------- --------- --------- CASH--END OF THE PERIOD...... $ 2,000 $ 8,000 $ 1,000 $ 84,000 =========== =========== ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest...... $ 93,000 $ 163,000 $ 154,000 $ 60,000 Supplemental schedule of noncash investing activity: Fair market value of common stock issued and contrib- uted to investment in Joint Ventures................... $ 114,000 Supplemental schedule of noncash financing activity: Valuation of preferred stock in connection with bridge loan....................... $ 29,000
The accompanying notes to financial statements are an integral part hereof. F-6 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) (NOTE A)--THE COMPANY: U.S. Energy Systems, Inc. ("USE") and subsidiaries (collectively, the "Company") are the successors to Cogenic Energy Systems, Inc. ("Cogenic"). Cogenic emerged from Chapter 11 Bankruptcy Proceedings on March 22, 1993. The Plan of Reorganization, as amended, provided that Cogenic merge with Utilities Systems Florida, Inc. ("USF") and change the name of the reorganized Cogenic to U.S. Envirosystems, Inc. On May 17, 1996, the Company amended its Certificate of Incorporation to change the name of the Company to U.S. Energy Systems, Inc. The Company is in the business of owning, developing and operating cogeneration and independent power plants through Joint Ventures. The Company has incurred significant losses since its reorganization in 1993 and, as at January 31, 1996 has a working capital deficiency of approximately $1,910,000 and a capital deficiency of approximately $2,729,000. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans for which it has letters of intent or agreements include the following: a) Obtain net proceeds of approximately $10,662,000 through the sale of 3,100,000 shares of common stock and warrants in a public offering (the "Proposed Public Offering"). b) Convert the existing preferred stock into 205,000 shares of common stock. c) Convert $500,000 of the existing Debentures into 125,000 shares of common stock and warrants. d) Acquire an interest in two operating geothermal power plants ("Steamboat 1 and 1A") for an aggregate of $5,400,000 in cash consideration (the "Proposed Acquisitions"). e) Repay notes payable and other liabilities of approximately $2,139,000. All of the above are dependent upon the successful completion of the proposed public offering referred to in (b) above and to certain other conditions including the completion of all of the above. There is no assurance that the above plans can be accomplished. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The financial information presented as of July 31, 1996 and for the six- month periods ended July 31, 1996 and July 31, 1995 is unaudited, but in the opinion of management contains all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of such financial information. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years. (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 subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated balance sheet. F-7 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) [2]Investments in Joint Ventures: Investments in Joint Ventures are accounted for under the equity method. LIPA and Plymouth each have a fiscal year end December 31 which differs to the fiscal year end of the Company. No material adjustment is necessary to reconcile the December 31 year end to the Company's January 31 year end. [3]Net (loss) per share: Net (loss) per share is computed using the weighted average number of common shares outstanding during the period and, when dilutive, common stock equivalents. [4]Recent pronouncements: The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company will adopt the disclosure requirements of SFAS 123 during the Company's fiscal year ending January 31, 1997 but will continue to account for its stock option plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" as permitted under FAS 123. In addition, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 121 is also effective for the Company's fiscal year ending January 31, 1997. The Company believes adoption of SFAS No. 121 will not have a material impact on its financial statements. [5]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 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. (NOTE C)--INVESTMENT IN JOINT VENTURES: [1]Lehi Independent Power Associates, L.C.: In January 1994, Lehi Envirosystems, Inc. ("LEHI"), a subsidiary of the Company, purchased a 50% equity interest in a limited liability company called Lehi Independent Power Associates, L.C. ("LIPA"), which wholly owns a cogeneration project (the "Project") located in Lehi, Utah. 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 totalling $875,000 to be shared by the owners in the event that any modification, as defined, 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. During the two-year period ended January 31, 1996 and the six-month period ended July 31, 1996, the Project was not in operation. In the Proposed Acquisitions, Far West Capital Inc., the other 50% owner of LIPA, will own an interest in Steamboats in the event the Proposed Acquisitions are consummated. F-8 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) [2]Plymouth Cogeneration Limited Partnership ("PCLP"): In November 1994, Plymouth Envirosystems, Inc. ("Plymouth"), a subsidiary of the Company, acquired a 5% general partner interest and a 35% limited partner interest in PCLP for cash contributions of $636,000. The amended and restated agreement of limited partnership (the "Agreement") provides for, among other matters, the allocation of net profits and net losses in accordance with the respective ownership interests of the partners. The terms, conditions and provisions of the Agreement expire in November 2024 or until its termination or dissolution in accordance with the provisions of the Agreement. The partnership is engaged in the business of owning and operating a cogeneration facility designed, developed, and constructed for the production of electricity and steam (the "Plymouth Project"). The management, supervision and control of, and the determination of all matters relating to the ownership and operation of the Plymouth Project and the operations of PCLP are delegated to PSC, the managing partner. In December 1994, Plymouth acquired a 36.4% limited partner ownership interest in PSC, the managing partner of PCLP, for a contribution of 11,400 shares of the Company's common stock with a fair market value of approximately $114,000. With this transaction, the Company's combined ownership interest in PCLP is effectively 50%. In November 1994, the Company entered into an agreement with IEC, a general partner of PSC. The agreement provides for advances by IEC to the Company equal to 50% of the development commissions, as defined, received by IEC from PSC for a period of five years commencing in 1995. During the fiscal year ended January 31, 1996, the Company received advances from IEC of $15,000. The advances will be repaid by the Company from the proceeds of capital distributions received from PSC. The Company is required to repay the advances in five equal annual installments commencing July 1, 2004. [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, 1996, the estimated remaining life of the plants is as follows: LIPA--Buildings.......................... 28 years Machinery and equipment............... 6 years Plymouth--Plant.......................... 19 years
F-9 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) [4]The following is summarized financial information of LIPA and PCLP:
DECEMBER 31, 1995 JUNE 30, 1996 ---------------------- ---------------------- LIPA PCLP LIPA PCLP ---------- ---------- ---------- ---------- Current Assets................. $ 158,000 $ 158,000 $ 122,000 $ 188,000 Property, plant and equipment at cost (net)................. 257,000 5,593,000 251,000 5,450,000 Other assets................... 828,000 876,000 ---------- ---------- ---------- ---------- Total assets................. 415,000 6,579,000 373,000 6,514,000 Current liabilities............ (9,000) (343,000) (35,000) (339,000) Long-term debt................. (4,987,000) (4,990,000) ---------- ---------- ---------- ---------- Equity......................... $ 406,000 $1,249,000 $ 338,000 $1,185,000 ========== ========== ========== ========== Equity in Joint Ventures....... $ 203,000 $ 625,000 $ 169,000 $ 593,000 Investments in Joint Ventures in excess of equity........... 967,000 78,000 943,000 76,000 ---------- ---------- ---------- ---------- Total investments in Joint Ventures.................... $1,170,000 $ 703,000 $1,112,000 $ 669,000 ========== ========== ========== ==========
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------------ -------------------------------------- LIPA PCLP LIPA PCLP ------------------ ---------- ------------------ ------------------ 1995 1994 1995 1996 1995 1996 1995 -------- -------- ---------- -------- -------- -------- -------- Revenue................. $1,150,000 $596,000 $570,000 ========== ======== ======== Gain on sale of fixed assets................. $236,000 ======== Net income (loss)....... $172,000 $(41,000) $ (87,000) $(68,000) $(24,000) $(64,000) $(44,000) ======== ======== ========== ======== ======== ======== ======== Equity in net income (loss)................. $ 86,000 $(21,000) $ (44,000) $(34,000) $(12,000) $(32,000) $(22,000) Amortization of purchase price over equity...... (55,000) (55,000) (4,000) (24,000) (28,000) (2,000) -------- -------- ---------- -------- -------- -------- -------- Net income (loss) from Joint Ventures......... $ 31,000 $(76,000) $ (48,000) $(58,000) $(40,000) $(34,000) $(22,000) ======== ======== ========== ======== ======== ======== ========
Plymouth Project commenced operations on January 1, 1995. (NOTE D)--ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accrued expenses and other current liabilities are comprised of the following:
JANUARY 31, JULY 31, 1996 1996 ----------- ---------- Professional fees.................................... $293,000 $ 501,000 Accrued interest..................................... 417,000 591,000 Accrued payroll and related taxes.................... 238,000 411,000 Other................................................ 42,000 160,000 -------- ---------- Total.............................................. $990,000 $1,663,000 ======== ==========
F-10 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) (NOTE E)--PRE-REORGANIZATION INCOME TAXES PAYABLE: Pursuant to the Plan of Reorganization of Cogenic, the pre-reorganization income taxes payable were to be paid in full, plus interest at the rate set by applicable statute, by making a payment of $110,000 upon the merger with USF and by making equal monthly installments, commencing one year after the merger, over a period not exceeding six years after the date of assessment of such pre-reorganization income taxes payable. The $110,000 payment has not been made since the effective date of the merger. The remaining payments of pre-reorganization income taxes and accrued interest are as follows:
JANUARY 31, JULY 31, 1996 1996 ----------- -------- 1997.................................................... $172,000 $192,000 1998.................................................... 41,000 46,000 1999.................................................... 43,000 44,000 2000.................................................... 46,000 47,000 2001.................................................... 46,000 43,000 -------- -------- Total................................................. $348,000 $372,000 ======== ========
During the two-year period ended January 31, 1996, the Company reached settlements with the tax authorities resulting in extraordinary gains from restructuring of liabilities of $83,000 and $85,000 during the years ended January 31, 1996 and January 31, 1995, respectively. (NOTE F)--INCOME TAXES: The deferred tax asset is as follows:
JANUARY 31, JULY 31, 1996 1996 ----------- ---------- Benefit of post-reorganization operating loss carryforward....................................... $801,000 $1,022,000 Expenses for financial reporting, not yet deductible for taxes.......................................... 132,000 110,000 Valuation allowance................................. (933,000) (1,132,000) -------- ---------- $-- 0 -- $ -- 0 -- ======== ==========
The Company has fully reserved against the deferred tax asset since the likelihood of realization cannot be determined. During the years ended January 31, 1996 and 1995, and the six-month period ended July 31, 1996, 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 $410,000, $503,000 and $199,000, respectively. Prior to the reorganization, Cogenic had available a net operating loss carryforward, which expires through 2008, of approximately $19,000,000 for tax purposes and tax credit carryforwards of $216,000 expiring from 1997 to 2000. Utilization of the acquired net operating loss and tax credit carryforwards may be subject to limitations as a result of the reorganization, or in the event of other significant changes in ownership. Accordingly, the Company has not recognized the deferred tax asset attributable to the acquired net operating loss and tax credit carryforwards. F-11 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) (NOTE G)--LOANS PAYABLE (THE "LOANS"): Loans payable consist of the following:
JANUARY 31, JULY 31, 1996 1996 ----------- -------- 18% loan, payable on the earlier of May 31, 1996 or closing of the proposed public offering, net of debt discount of $19,000 at January 31, 1996 (effective rate 39.68%) (a)........................... $616,000 $660,000 10% loan, payable on the earlier of May 31, 1996 or closing of the proposed public offering (b).......................... 100,000 250,000 18% unsecured loan payable upon closing of the proposed public offering....................................... 50,000 50,000 -------- -------- $766,000 $960,000 ======== ========
(a) Collateralized by first lien on all the assets of the Company and by 97,250 shares of the Company's common stock owned by officers. (b) Collateralized by the Company's interest in LIPA and PCLP Joint Ventures, subject to prior lien. (NOTE H)--CONVERTIBLE SUBORDINATED SECURED DEBENTURES: The Company's Convertible Subordinated Debentures (the "Debentures") bear interest at 18% and are due on January 25, 2004. In addition to the interest payments, the Debenture holders are entitled to 50% of the Company's share of net profits (net of provision for the 18% interest on the Debentures) of LIPA ("Supplemental Participation"). The Debentures are collateralized by a security interest in the outstanding shares of Lehi and are subject to subordination to senior indebtedness. Commencing January 25, 1998, the Company has the option to redeem the Debentures at 102, plus unpaid and accrued interest and Supplemental Participation. Commencing January 25, 1996, each Debenture may be converted at any time, at the option of the Debenture holders, into the Company's common stock. Subject to certain adjustments, each $1,000 principal amount of Debentures is initially convertible into 62 shares of the Company's common stock. Commencing January 25, 1997, the Company will have the right to convert all the then outstanding Debentures into common stock at the then current conversion number if the market price, as defined, of the common stock equals or exceeds $40.00 for more than twenty (20) consecutive days prior to the date fixed for conversion by the Company. In December 1994, the Company requested from its Debenture holders that one- half of the 18% interest be deferred commencing with the December 25, 1994 interest payment until the earlier to occur of completion of new financing or commencement of cash flow from LIPA (see Note C[1]). In the event of default, the Debenture holders have the right to demand immediate payment of all or any portion of the outstanding principal amount and any unpaid interest, if the default is not remedied within 120 days after it has occurred. As of May 15, 1995, the Debenture holders have agreed to the terms of the partial deferment. In connection with the 9% deferment, the Company increased the number of shares that each Debenture can be converted into from 62 shares for each $1,000 principal amount to 66 shares for each $1,000 principal amount. At January 31, 1996 and July 31, 1996, the 9% interest deferred, included in accrued expenses and other current liabilities, was $160,000 and $229,000, respectively. F-12 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) (NOTE I)--NOTES PAYABLE: In connection with the acquisition of PCLP (see Note C[2]), the Company borrowed $1,000,000 from a group comprised principally of officers, directors and affiliates of the Company. The interest on the Secured Promissory Notes (the "Notes") is the prime rate plus 2.5% (11% at January 31, 1996 and 10.75% at July 31, 1996) adjusted quarterly during the term of the Notes. The interest on the Notes is payable quarterly but only to the extent that the net after tax cash flow of Plymouth is sufficient to make such interest payment. The Company has not paid interest on these Notes since the inception of the Notes. At January 31, 1996 and July 31, 1996, the unpaid interest on these Notes was $141,000 and $209,000, respectively, included in accrued expenses and other current liabilities. The Notes are collateralized by the shares of common stock of Plymouth. The Notes and unpaid interest, are to be paid on the earlier of: (1) USE's receipt of not less than $1,000,000 in net proceeds from the Company's next public offering of equity securities, or (2) USE's receipt of an aggregate of not less than $4,000,000 in net proceeds from a private debt financing of USE, or (3) October 31, 1997. In conjunction with the issuance of these Notes, the Company granted to the investors warrants to purchase 95,000 shares of the Company's common stock at $16.00 per share before October 31, 1999. The Company, based on an independent appraisal, valued the warrants issued at $46,000, which is being accounted for as debt discount. In connection with the Company's Loans (Note G), the Company was required to grant certain security interests in the Company's assets including its ownership interest in Plymouth. In June 1995, in return for granting the security interests, the Company granted the noteholders additional warrants to purchase 19,000 shares of the Company's common stock (the "Additional Warrants"). The Additional Warrants have the same terms as those warrants initially granted to the noteholders. The Company, based on the appraisal referred to above, valued the Additional Warrants issued at $9,500, which is being accounted for as additional debt discount. In March 1996, as a result of continuing negotiations between the parties that commenced when the additional warrants were issued, the Company reduced the exercise price of the warrants, including the additional warrants, from $16.00 per share to $5.00 per share. At that time, the market price of the Common Stock was $2.50 per share. The effective interest rates at January 31, 1996 and January 31, 1995 are 13.60% and 10.72%, respectively. (NOTE J)--STOCKHOLDERS' EQUITY: [1]Preferred stock: In June 1995, the Board of Directors designated 100,000 shares of preferred stock as Series One Exchangeable and Convertible Preferred Stock ("Series One Preferred Stock"). The holders of Series One Preferred Stock are entitled to (i) convert to common stock equal to $10.00 per share of Series One Preferred Stock divided by the conversion price, as defined, and subject to adjustments for changes in capital stock, (ii) no voting rights except for certain corporate actions, (iii) receive cumulative dividends equal to $1.00 per share, (iv) liquidation preference of $10.00 per share plus any dividends accrued and unpaid. The Series One Preferred Stock is redeemable at the option of the Company at a price of $10.00 per share, plus accrued and unpaid dividends, under certain conditions, commencing the earlier of: (i) 3 years after the effective date of the Proposed Public Offering or (ii) January 1, 1999. The Series One Preferred Stock rank senior to all other equity securities of the Company including any other series or classes of preferred stock with respect to dividend rights and rights upon liquidation, winding up and dissolution. In connection with the Company's Loans, the Company issued 57,500 shares of Series One Preferred Stock which are convertible into 205,000 shares of common stock. The Company estimated the fair value of these shares of Series One Preferred Stock at approximately $29,000 and this amount is treated as a loan discount which is being amortized over the life of the loan. F-13 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) In calculating the net income per share, the net income (loss) available for common stockholders during the period the 57,500 shares of Series One Preferred Stock are converted into 205,000 shares of common stock will be reduced by a nonrecurring amount of approximately $791,000 which represents the excess of the fair value of the common stock transferred to the holders of the preferred stock over the carrying amount of the preferred stock. [2]Stock options: Stock option activity is summarized as follows:
SHARES OPTION PRICE EXPIRATION DATE ------- -------------- --------------- (PER SHARE) Granted--year ended January 31, 1995. 20,100 $4.00 - $10.00 April 1999 - January 2000 Granted--year ended January 31, 1996. 154,000 $4.00 - $ 8.00 January 2000 - ------- December 2000 Balance at January 31, 1996 and July 31, 1996 (174,100 exercisable at option prices $4.00 to $10.00)............. 174,100
During the year ended January 31, 1995 the Company recorded a compensation charge of $46,000 in connection with the issuance of certain options in that year. [3]Common stock reserved: The Company has reserved shares of common stock for issuance upon conversion of the Debentures and exercise of warrants and options as follows: (i) Convertible subordinated secured debentures (Note H)............ 100,000 (ii) Warrants issued in conjunction with notes payable (Note I)..... 114,000 (iii) Warrants issued in connection with consulting services. Exercisable at $16.00 per share, expires October 31, 1999. In connection therewith, the Company recorded a noncash charge of $2,000, in 1995.............................................. 3,750 (iv) Stock options outstanding (Note J[2]).......................... 174,100 (v) Series One Preferred Stock (Note J[1]).......................... 205,000 In connection with the proposed transactions referred to in Note A, the Company anticipates issuing warrants to purchase approximately 2,125,000 shares of common stock. [4]Reorganization: In February 1996, the shareholders approved a 1 for 40 reverse stock split, effective May 6, 1996, which has been given retroactive effect in the accompanying financial statements. All reference to shares and per share amounts in the notes to financial statements have been adjusted to reflect the reverse split. (NOTE K)--COMMITMENTS AND CONTINGENCIES: [1]The Company has employment agreements which expire through November 30, 1998 with two of its officers. The agreements provide for minimum annual payments of $210,000 subject to upward adjustment at the discretion of the Board of Directors. F-14 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) [2]In October 1995, the Company entered into a consulting agreement with one of the members of its Board of Directors for an unspecified period. The consulting agreement provides for a $5,000 monthly consulting fee. The term of the consulting agreement is subject to the approval of the Board of Directors. [3]USE International, L.L.C. ("USE International"): In May 1995, the Company entered into a Joint Venture agreement to form a limited liability company, USE International, L.L.C. ("USE International"). USE International is owned 50% by the Company and 50% by Indus, LLC ("Indus"). USE International is managed by Indus. In connection with the agreement, the Company sold 2,500 shares of its common stock, at market price, to Indus and issued options to purchase 16,250 shares of the Company's common stock with an exercise price of $8.00 per share and expiring five years after date of issuance. The agreement also provides for the issuance of options to purchase up to an additional 25,000 shares of the Company's common stock at a price per share of $8.00. These options will be granted to Indus upon the signing of an initial transaction, as defined, by USE International. The Company has agreed to pay Indus a consulting fee of $6,000 per month. The consulting arrangement has an initial term of one year and expires in May 1996. The Company has also agreed to indemnify, defend and hold Indus harmless from all claims, losses, causes of action, liabilities, costs and expenses (including attorney's fees) which may arise in connection with the business of USE International. The Company accounts for the investment in USE International under the equity method. USE International was inactive during the year ended January 31, 1996 and the six-month period ended July 31, 1996. (NOTE L)--RELATED PARTY TRANSACTIONS: The Company borrowed from officers and an affiliate of a director (collectively, the "Related Parties") $325,000 under the Debentures and $775,000 under the Notes. In connection with the Notes, an affiliate of a director was granted warrants to purchase 78,000 shares of the Company's common stock at $16.00 per share before October 31, 1999. Included in deferred interest at January 31, 1996 and July 31, 1996 is $12,000 due to the Related Parties. In addition, at January 31, 1996 and July 31, 1996, $467,000 and $707,000, respectively, of accrued expenses and other current liabilities is due to the Related Parties. During the year ended January 31, 1996 and 1995 and the six months ended July 31, 1996 and 1995, the Company paid interest of $15,000, $22,000, $13,000 and $17,000, respectively, to the Related Parties. F-15 INDEPENDENT AUDITOR'S REPORT General Partner Far West Electric Energy Fund, L.P. Salt Lake City, Utah We have audited the balance sheet of Far West Electric Energy Fund, L.P. as of December 31, 1995 and 1994, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Far West Electric Energy Fund, L.P. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Respectfully submitted, /s/ ROBISON, HILL & CO. ---------------------------------- Certified Public Accountants Salt Lake City, Utah February 29, 1996 F-16 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP BALANCE SHEETS
DECEMBER 31, ------------------------ SEPTEMBER 30, 1995 1994 1996 ----------- ----------- ------------- (UNAUDITED) ASSETS Utility Plant: Plant in Service...................... $15,999,000 $18,716,000 $15,999,000 Equipment............................. 588,000 335,000 629,000 Construction in Progress.............. 118,000 118,000 118,000 Accumulated Depreciation.............. (5,377,000) (6,010,000) (5,859,000) ----------- ----------- ----------- Net Utility Plant.................... 11,328,000 13,159,000 10,887,000 Restricted Cash........................ 1,026,000 1,145,000 1,067,000 Other Assets........................... 106,000 124,000 93,000 Current Assets: Cash and Cash Equivalents............. 263,000 278,000 207,000 Receivables--Trade.................... 399,000 437,000 271,000 Receivables--Other.................... 6,000 6,000 0 Receivable--Related Party............. 238,000 159,000 0 Prepaid Expenses...................... 4,000 12,000 16,000 ----------- ----------- ----------- Total Current Assets................. 910,000 892,000 494,000 ----------- ----------- ----------- Total Assets......................... $13,370,000 $15,320,000 $12,541,000 =========== =========== =========== PARTNERS' CAPITAL AND LIABILITIES Partners' Capital: Limited Partners--10,306 units........ $ 5,148,000 $ 4,868,000 $ 5,340,000 General Partner--1 Percent............ (8,000) (11,000) (6,000) ----------- ----------- ----------- Total Partners' Capital.............. 5,140,000 4,857,000 $ 5,334,000 Other Liabilities...................... -- 150,000 Long-term Debt: Notes Payable--Related Party.......... 188,000 230,000 152,000 Notes Payable......................... 537,000 -- 537,000 ----------- ----------- ----------- Partners' Capital and Long-Term Liabil- ities................................. 5,865,000 5,237,000 6,023,000 Current Liabilities: Current Portion--Long-term Debt....... 4,563,000 7,140,000 3,911,000 Note Payable--Related Party........... 1,159,000 1,043,000 1,246,000 Payable-Related Party................. 671,000 573,000 274,000 Accrued Liabilities Operations............................ 402,000 495,000 295,000 Royalties............................. 96,000 220,000 78,000 Interest.............................. 614,000 612,000 714,000 ----------- ----------- ----------- Total Current Liabilities............ 7,505,000 10,083,000 6,518,000 ----------- ----------- ----------- Total Partners' Capital and Liabili- ties................................ $13,370,000 $15,320,000 $12,541,000 =========== =========== ===========
See accompanying notes to the financial statements. F-17 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP STATEMENTS OF INCOME
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------- ------------------------ 1995 1994 1993 1996 1995 ---------- ---------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues: Electric Power Reve- nues.................. $2,529,000 $2,728,000 $3,162,000 $2,043,000 $1,794,000 Other Revenues......... 145,000 151,000 622,000 111,000 110,000 ---------- ---------- ---------- ---------- ---------- Total Revenues....... 2,674,000 2,879,000 3,784,000 2,154,000 1,904,000 ---------- ---------- ---------- ---------- ---------- Expenses: Operations............. 1,755,000 1,779,000 2,163,000 1,281,000 1,271,000 Bad Debt Expense....... -- -- 31,000 -- -- General and Administra- tive: Professional Services. 55,000 54,000 72,000 100,000 42,000 General Partners--Re- lated Party.......... 98,000 123,000 223,000 78,000 95,000 ---------- ---------- ---------- ---------- ---------- Total General and Ad- ministrative........ 153,000 177,000 295,000 178,000 137,000 ---------- ---------- ---------- ---------- ---------- Total Expenses....... 1,908,000 1,956,000 2,489,000 1,459,000 1,408,000 ---------- ---------- ---------- ---------- ---------- Income From Opera- tions............... 766,000 923,000 1,295,000 695,000 496,000 Other Income (Expense): Interest Income........ 73,000 52,000 38,000 43,000 50,000 Interest Expense....... (744,000) (902,000) (806,000) (544,000) (924,000) Loss on Sale of Proper- ty.................... (170,000) -- -- -- (170,000) ---------- ---------- ---------- ---------- ---------- Net Other Expense.... (841,000) (850,000) (768,000) (501,000) (1,044,000) ---------- ---------- ---------- ---------- ---------- Net Income (Loss) Before Extraordinary Item............... (75,000) 73,000 527,000 194,000 (548,000) Extraordinary Item-- Early Extinguishment of Debt................ 358,000 -- 175,000 -- 358,000 ---------- ---------- ---------- ---------- ---------- Net Income........... $ 283,000 $ 73,000 $ 702,000 $ 194,000 $ (190,000) ========== ========== ========== ========== ========== Net Income Per Lim- ited Partnership Unit: Income Before Ex- traordinary Item... $ (7.28) $ 7.08 $ 51.14 $ 18.82 $ (53.17) Extraordinary Item.. 34.74 -- 16.98 -- 34.74 ---------- ---------- ---------- ---------- ---------- Net Income........... $ 27.46 $ 7.08 $ 68.12 $ 18.82 $ (18.43) ========== ========== ========== ========== ==========
See accompanying notes to the financial statements. F-18 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP STATEMENT OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
GENERAL PARTNER LIMITED PARTNERS ------------------- ------------------- % INCOME NUMBER TOTAL ALLOCATION AMOUNT OF UNITS AMOUNT AMOUNT ---------- -------- -------- ---------- ---------- Balances at December 31, 1992................... 1 $(18,573) 10,306 $4,100,573 $4,082,000 Net Income.............. -- 7,020 -- 694,980 702,000 --- -------- ------ ---------- ---------- Balances at December 31, 1993................... 1 (11,553) 10,306 4,795,553 4,784,000 Net Income.............. -- 730 -- 72,270 73,000 --- -------- ------ ---------- ---------- Balances at December 31, 1994................... 1 $(10,823) 10,306 4,867,823 4,857,000 Net Income.............. -- 2,830 -- 280,170 283,000 --- -------- ------ ---------- ---------- Balances at December 31, 1995................... 1 $ (7,993) 10,306 $5,147,993 $5,140,000 Net Income (Unaudited).. -- 1,940 -- 192,060 194,000 --- -------- ------ ---------- ---------- Balances at September 30, 1996 (Unaudited)... 1 $ (6,053) 10,306 $5,340,053 $5,334,000 === ======== ====== ========== ==========
See accompanying notes to the financial statements. F-19 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ ----------------------- 1995 1994 1993 1996 1995 -------- -------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERAT- ING ACTIVITIES: Net Income (Loss)...... $283,000 $ 73,000 $ 702,000 $194,000 $(190,000) Adjustments to Net In- come (Loss): Depreciation and Amor- tization.............. 613,000 661,000 716,000 494,000 475,000 Loss on Sale of Proper- ty.................... 170,000 -- -- -- 170,000 Extraordinary Item-- Early Extinguishment of Debt............... (358,000) -- (175,000) -- (358,000) (Increase) Decrease in Receivables........... (41,000) (124,000) (59,000) 134,000 183,000 (Increase) Decrease in Prepaid Insurance..... (1,000) -- (9,000) (12,000) (4,000) (Increase) Decrease in Other Assets.......... 18,000 18,000 18,000 13,000 14,000 Accrued Income Re- stricted Cash......... (63,000) (43,000) (31,000) -- (49,000) Increase (Decrease) in Accrued Liabilities... 41,000 120,000 (234,000) (25,000) (24,000) Increase (Decrease) in Amount Due to General Partner....... 98,000 100,000 214,000 (246,000) 369,000 -------- -------- ---------- -------- --------- Total Adjustments..... 477,000 732,000 440,000 359,000 776,000 -------- -------- ---------- -------- --------- Net Cash Provided by Operating Activities.. 760,000 805,000 1,142,000 553,000 586,000 -------- -------- ---------- -------- --------- CASH FLOWS FROM INVEST- ING ACTIVITIES: Cash Draws Restricted Cash.................. 181,000 -- 207,000 119,000 182,000 Transfers to Restricted Cash.................. -- -- (205,000) -- -- Capital Expenditures... (253,000) (139,000) (222,000) (41,000) (253,000) Disposal of Plant and Equipment............. -- -- -- -- -- -------- -------- ---------- -------- --------- Net Cash Provided by (Used) in Investing Ac- tivities............... (72,000) (139,000) (220,000) 78,000 (71,000) -------- -------- ---------- -------- --------- CASH FLOWS FROM FINANC- ING ACTIVITIES: Principal Payments on Long-Term Debt........ (815,000) (751,000) (1,109,000) (687,000) (600,000) Proceeds From the Issu- ance of Debt.......... 112,000 83,000 171,000 -- -- -------- -------- ---------- -------- --------- Net Cash Provided by (Used) in Financing Activities............ (703,000) (668,000) (938,000) (687,000) (600,000) -------- -------- ---------- -------- --------- Increase (Decrease) in Cash and Cash Equiva- lents.................. (15,000) (2,000) (16,000) (56,000) (85,000) Cash and Cash Equiva- lents at Beginning of Period................. 278,000 280,000 296,000 263,000 278,000 -------- -------- ---------- -------- --------- Cash and Cash Equiva- lents at End of Period. $263,000 $278,000 $ 280,000 $207,000 $ 193,000 ======== ======== ========== ======== ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash Paid During the Period for Interest... $743,000 $727,000 $ 755,000 $411,000 $ 205,000 ======== ======== ========== ======== =========
NON-CASH ACTIVITIES: The Partnership reduced a contract payable for the year ended December 31, 1993 by $13,000, and recognized income relating to option payments not made. An extraordinary gain of $175,000 for the year ended December 31, 1993, was recognized relating to the extinguishment and restructuring of debt and accrued interest; see Note 4. Notes payable and accrued interest were reduced and other income recognized for the year ended December 31, 1993 in the amount of $424,000, relating to offsets allowed under the performance guaranty on the Steamboat Springs project; see Note 7. The Partnership sold the Crystal Springs Project for $1,100,000 which was paid directly to First Security Bank to pay down the note secured by the Crystal Springs Project in accordance with the sales agreement dated February 28, 1995. In addition, the note referred to above was restructured as described in Note 13. A net loss on the sale of $170,000 has been reported in net income for December 31, 1995 as other income, and gain on early extinguishment of debt of $358,000 has been reported as an extraordinary item for December 31, 1995. See accompanying notes to the financial statements. F-20 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies are followed by Far West Electric Energy Fund, L.P. in preparing and presenting the financial statements, and are to assist the users in understanding the financial statements. ORGANIZATION Far West electric Energy Fund L.P., a Delaware limited partnership (the "Partnership"), was originally organized in September 1984 under the Uniform Limited Partnership Act of Utah as Far West Hydroelectric Fund, Ltd. On December 20, 1988, the Partnership changed its name to Far West Electric Energy Fund, L.P. and changed its domicile to Delaware. The Partnership owns a geothermal power plant, (the "Steamboat Springs Plant") located in Nevada, and until March 16, 1995, owned a hydroelectric plant located in Idaho (the "Crystal Springs Plant") which was sold to Crystal Springs Hydroelectric, L.P., a Washington limited partnership pursuant to a Purchase and Sale Agreement dated February 28, 1995. UTILITY PLANT AND EQUIPMENT Utility plants and equipment are carried at cost or adjusted cost (see Note 2). Fixed assets are depreciated over their estimated useful life (utility plants--thirty years, equipment--five to ten years). CASH EQUIVALENTS For purposes of the statement of cash flows, the Partnership's policy is that all investments with maturities of three months or less are considered cash equivalents. INCOME TAXES No provision for income taxes has been made since the Partnership files partnership return under provisions for federal and state tax laws. The assets and liabilities of the Partnership for tax purposes are lower than the financial statements for 1995 by $8,066,000 and $552,000; and for 1994 by $11,154,000 and $2,208,000, respectively. INCOME PER LIMITED PARTNERSHIP UNIT The income per partnership unit on income before extraordinary item and on net income is calculated on the weighted average units outstanding during the year. The weighted average of units outstanding during 1995, 1994, and 1993 were 10,306. RECLASSIFICATIONS Certain amounts in 1994 and 1993 have been reclassified to conform with financial statement presentations adopted in 1995. UNAUDITED INTERIM PERIODS The financial information presented as of June 30, 1996 and for the six- month periods ended June 30, 1996 and 1995 is unaudited, but in the opinion of Management contains all adjustments (consisting only of normal recurring adjustments) necessary for a fair representation of such financial information. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years. F-21 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 2--UTILITY PLANT Plant in service consists of the following at December 31, 1995 and 1994:
ESTIMATED 1995 1994 USEFUL LIVES ----------- ----------- ------------ Steamboat Springs Thermal Hydroelec- tric Power Plant.................... $15,599,000 $15,599,000 30 Years Expansion Pipeline................... 400,000 400,000 5 to 7 Years Crystal Springs Hydroelectric Power Plant............................... -- 4,738,000 30 Years Valuation Allowance.................. -- (2,021,000) ----------- ----------- $15,999,000 $18,716,000 =========== ===========
The valuation allowance relates to the Crystal Springs Hydroelectric Power Project. The valuation allowance is a result of the rights to a purchase option being waived and a decline in the value of the project. NOTE 3--OTHER ASSETS Other assets consist of the following at December 31, 1995 and 1994:
1995 1994 -------- -------- Loan Origination Fees.................................... $183,000 $183,000 Organization Costs....................................... 65,000 65,000 Other Assets............................................. 35,000 35,000 Accumulated Amortization................................. (177,000) (159,000) -------- -------- Total Other Assets..................................... $106,000 $124,000 ======== ========
The loan origination fees are being amortized on a straight-line basis over the respective lives of the loans. Organization costs are amortized over a five year period on a straight-line basis. Amortization was $18,000, $18,000, $18,000 for the years ended December 31, 1995, 1994, and 1993, respectively. NOTE 4--LONG-TERM DEBT--NOTES PAYABLE Long-term debt as of December 31, 1995 and 1994 consists of the following:
1995 1994 ---------- ---------- Note Payable to Westinghouse Credit Corp. is in default as of 10/23/92 and is immediately due and payable. Note is secured by the Steamboat Springs Project and all associated rights. Interest rate is 11.5%............................................... $4,563,000 $5,340,000 Note Payable to a bank was due and payable in full originally on December 1, 1993, extended to September 30, 1994 and has been modified due to the sale of the Crystal Springs Project. The principal amount owing after the modification is $537,000. Interest is due in semiannual installments. With all remaining principal and interest due 3/2/2000. Interest rate is prime which was 8.75% at year end (See Note 13--Sale of Crystal Springs Project)...... 537,000 1,800,000 ---------- ---------- 5,100,000 7,140,000 Less Current Installments Due........................ 4,563,000 7,140,000 ---------- ---------- $ 537,000 $ -- ========== ==========
F-22 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 1995 are as follows:
YEAR ENDING DECEMBER 31, ----------- 1996......................................................... $ 4,563,000 1997......................................................... -- 1998......................................................... -- 1999......................................................... -- 2000......................................................... 537,000 Thereafter................................................... -- ----------- $ 5,100,000 ===========
A note payable to Ormat, Inc. was extinguished in the amount of $175,000 in December 1993. The extinguishment was a result of negotiations to settle litigation on the performance guaranty. The principal note amount and related accrued interest are shown as an extraordinary item in the statement of operations for the year ended December 31, 1993. During December 1992, a note payable to a bank was restructured resulting in a reduction of principal amount, accrued interest, and a renegotiation of terms. Interest payments relating to the reduced note were offset to accrued interest payable. The total amount offset against accrued interest payable in 1994 was $26,000. NOTE 5--RESTRICTED CASH The Partnership is required to maintain an escrowed bank account as security under the terms of the note payable to Westinghouse Credit Corp. with the note payable balance as of December 31, 1995 of $4,563,000. The reserve account was drawn down to $1,026,000 due to insufficient operating funds needed for plant repairs of $188,000. The note is in default due to the reserve account being drawn below required amounts. The reserve includes the initial deposit of $1,000,000 and requires an additional $70,000 annually for the first seven years, interest income is also retained in the reserve account. Disbursements from the reserve account for principal and interest payments on the note are allowed to the extent that there are insufficient funds in the Partnership's operating accounts. NOTE 6--NOTE PAYABLE-RELATED PARTY The Partnership had notes payable to related parties for the years ended December 31, 1995, and 1994 as follows:
1995 1994 ---------- ---------- Notes Payable to General Partner payable on demand, unsecured. Interest rate is 13%...................... $1,117,000 $1,005,000 Note Payable to 1-A Enterprises, a partnership, due in quarterly installments, including interest; commencing April 16, 1990, remaining principal due January 16, 2000; unsecured. Interest rate is 11%.... 230,000 268,000 ---------- ---------- 1,347,000 1,273,000 Less Current Installments Due......................... 1,159,000 1,043,000 ---------- ---------- $ 188,000 $ 230,000 ========== ==========
F-23 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 7--PURCHASE AND OPERATING AGREEMENTS Steamboat Springs Thermal Hydroelectric Power Plant (Steamboat Springs) Under the terms of the Steamboat Springs purchase agreement (the Agreement), the Partnership is required to pay royalties to non-affiliated parties aggregating 14.05 percent of annual gross revenues for the life of the project plus an annual lump sum of $50,000 for the first ten years. As of December 31, 1995 all royalty obligations were current. For the years ended December 31, 1995, 1994, and 1993, royalty expense related to these commitments is as follows:
1995 1994 1993 -------- -------- -------- Sierra Pacific Power Company (10%)................ $253,000 $257,000 $263,000 Benson Schwarzhoff & Helzel (3.888%).............. 98,000 99,000 102,000 Geothermal Development Associates ($50,000)....... 50,000 50,000 50,000 G. Martin Booth (.081%)........................... 2,000 2,000 2,000 Richard W. Harris (.081%)......................... 2,000 2,000 2,000 -------- -------- -------- Total............................................ $405,000 $410,000 $419,000 ======== ======== ========
As part of the Agreement, the original developer of Steamboat Springs (the Developer) guaranteed annual net operating revenues, as defined (Net Operating Revenues) of $2,000,000 for a period of ten years following the date of commissioning, March 31, 1987 (the Guarantee). In 1993, the debt and related performance guarantee with the original developer was extinguished. Pursuant to the Guarantee and included in other revenues in the statements of income for the years ended December 31, 1993, and 1992 are $424,000, and $387,000, respectively. Pursuant to the contract and in accordance with FIN-39, amounts due to the Partnership under the Guarantee are offset annually against a note payable to the Developer, and the Bonneville corporation which subsequently sold the project to the Partnership. The note payable to the developer and Bonneville have been fully offset as of December 31, 1993. The following Table summarizes these transactions:
1993 ---------- Guaranteed Net Operating Revenues............................ $2,000,000 Net Operating Revenues....................................... 1,288,000 ---------- Offset Available............................................. 712,000 Gross Debt Subject to Offset................................. 424,000 ---------- Debt to be Offset in Future.................................. $ -- ==========
The Partnership is also required to pay the Developer annual royalties equal to 50 percent of the first $100,000 over the guaranteed Net Operating Revenues and 75 percent of amounts in excess of the $100,000 each year for the first ten years following the date of commissioning. For years 11 through 20 after commissioning, the royalty equals 30 percent of Net Operating Revenues; principal debt service payments incurred to finance construction or operations are not deducted in determining the revised net operating revenues (Revised Net Operating Revenues). For years 21 inclusive and thereafter, the royalty is equal to 50 percent of Revised Net Operating Revenues. As revenues have not exceeded the guaranteed net operating revenues, no royalties have been earned and no royalties have been paid pursuant with this commitment. NOTE 8--RELATED PARTY TRANSACTIONS Under the terms of the Partnership agreement, the general partner (Far West Capital, Inc.) is allowed various fees and reimbursements of expenses incurred to manage the Partnership. For each of the years in the three-year F-24 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) period ended December 31, 1995, the Partnership expensed the following amounts as cost reimbursements to the general partner:
1995 1994 1993 ------- -------- -------- General and Administrative Expenses............... $98,000 $123,000 $223,000
In addition, during the year ended December 31, 1993, the Partnership paid $3,300 to a Utah partnership for private air transportation, in the ordinary course of business, in lieu of commercial airfare. The general partners are partners of the Utah Partnership. As a term of the amended and restated Partnership agreement, the General Partner is entitled to 5 percent of the limited partnership units (Units) as compensation. Limited Partnership units for each of the three-year period ended December 31, 1995 are as follows:
1995 1994 1993 ------ ------ ------ General Partner......................................... 530 530 530 Limited Partners........................................ 9,776 9,776 9,776 ------ ------ ------ Total................................................. 10,306 10,306 10,306 ====== ====== ======
During 1988, the Partnership assigned its rights to build an expansion unit to Steamboat Springs to a Nevada general partnership owned mostly by Alan O. Melchior and Thomas A. Quinn, officers and owners of the General Partner of the Partnership. As consideration for the rights, the Nevada general partnership deeded the Partnership rights and title to piping and valves installed from Steamboat Springs to the expansion unit and agreed to pay the Partnership royalties equaling 10 percent of net operating income from the expansion for the years ended December 31, 1988 through 1992, 15 percent for 1993 through 1998, 40 percent for 1999 through 2010, 45 percent thereafter, and an annual pumping charge. Included in other revenues in the statement of operations for the years ended December 31, 1995, 1994 and 1993, are $145,000, $144,000 and $135,000, respectively related to this agreement. As of December 31, 1994 and 1993, two of the general partners held a 75 percent ownership in the Nevada general partnership. During 1991, the Partnership assigned its 77% ownership in SB Geo, Inc. a Utah Corporation, to Alan O. Melchior and Thomas A. Quinn, two of the officers and owners of the General Partner of the Partnership. SB Geo, Inc. operates the Partnership's Steamboat Springs Thermal Hydroelectric Power Plant and a related expansion unit. At the time of the transfer, SB Geo, Inc. had no assets and operated on a cost reimbursement basis. No gain or loss was recognized as a result of the assignment. NOTE 9--MAJOR CUSTOMER The Partnership has contracted with Sierra Pacific Power Company to sell electric energy from Steamboat Springs for a term of 20 years. The contract entitles the Partnership to a rate of 71.7 mills per kilowatt hour for the first 10 years and a variable amount related to the short-term cost of power to Sierra Pacific Power Company for the second 10 years. Sales to Sierra Pacific Power Company account for 100 percent of electric power sales. The Partnership is dependent upon this customer for the purchase of all electricity generated from this power plant. F-25 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 10--LITIGATION ORMAT ARBITRATION The arbitrators during 1993 made their award regarding the lawsuit against Ormat alleging breach of contract on the Steamboat Springs project and Ormat's counter-suit regarding the cancellation of the operating agreement. The Partnership was awarded $188,000 in damages including a portion of previously restricted cash. Ormat was awarded $255,000 for past fixed operating fees of which the majority had been held in an escrow account. Subsequent to the arbitrators award the Partnership and Ormat reached an additional agreement which cancels the note payable to Ormat which was previously offset by the performance guaranty. BONNEVILLE PACIFIC CORPORATION BANKRUPTCY The Partnership has filed a claim in the Chapter 11 filing of Bonneville Pacific Corporation. The claim relates to fraud claims and other transactions on the Crystal Springs project. This claim is a general unsecured claim; it is unliquidated and contingent, meaning that the amount of the claim has yet to be fixed in the bankruptcy forum. It is estimated that the claim is no more than $100,000.00. There is no economy for the partnership in attempting to resolve the amount of the claim at this juncture, without certainty that Bonneville Pacific Corporation will succeed in confirming a plan of reorganization, since general unsecured claims cannot receive payment absent confirmation of a plan of reorganization. If and when a plan of reorganization is confirmed, it is expected that, post- confirmation, there will be a claims liquidation and resolution process, during which the claim of the partnership will be fixed by the bankruptcy court. The Chapter 11 reorganization proceeding of the Bonneville Pacific Corporation has been ongoing for some years. It is a large and complex proceeding. The success of the reorganization effort will turn in major part upon complex litigation which the trustee in the case, Roger Segal, has commenced against various parties in interest. Counsel for Mr. Segal, Vernon Hopkinson, estimates at the present time that this litigation may be concluded and a plan of reorganization proposed no earlier than year-end, 1997. As noted above, payment on account of general unsecured claims cannot occur unless and until a plan of reorganization is confirmed by the bankruptcy court. Mr. Hopkinson estimates at the present time that the size of the dividend to general unsecured creditors could be anywhere from 20 percent to payment in full, depending upon the outcome of the aforementioned litigation. NEVADA DEPARTMENT OF TRANSPORTATION The Department of Transportation of the State of Nevada ("NDOT") commenced action on 12/10/93 in the Second Judicial District Court of the State of nevada in and for the County of Washoe against the Partnership and others to obtain, for highway purposes, ownership of approximately 2.79 acres of the property owned by Sierra Pacific Power Company ("SPPC") at the extreme north of the land upon which the Steamboat Springs Plant is located pursuant to the SPPC lease. The Court entered an Order for occupancy of the condemned property on 12/29/93. The NDOT deposited the sum of $273,500 on 12/29/93; which remains on deposit as of 12/31/95. The Partnership is defending the action insofar as is necessary to protect a stand-by injection well located on the lease in the proximity of the land being taken and a monitoring well in an adjacent area which is being taken. It is presently negotiating a settlement which will leave the stand-by injection well and the Partnership's rights in and use thereof intact and available. The Partnership has constructed a new monitoring well and is attempting to recover the cost thereof from the State. The Partnership has an agreement in principle with the State relative to this reimbursement, the cost of which is approximately $5,000. That sum will likely be disbursed in May or June of 1996. The Partnership is also attempting to obtain a portion of the $273,500 F-26 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) offered and deposited into Court by NDOT on 12/29/93 as compensation for the taking. SPPC is claiming all of such funds as the owner of the land. The Court has granted NDOT the right to possess and occupy the property while the amount of compensation to be finally awarded is being contested. WCC, the Partnership's principal creditor, has claimed that under the financing agreements with respect to the Steamboat Springs and 1-A Plants, all funds recovered from NDOT must be applied to reduce the principal balance of the loans outstanding. The funds will not likely be disbursed until the fourth quarter of 1996 or the first quarter of 1997, unless the Partnership, SPPC, and WCC reach some settlement before that time. NOTE 11--NOTE DEFAULTS Due to insufficient funds being in restricted cash, the Partnership received a notice of default as of 10/23/92 on a note to Westinghouse Credit Corp. The balance as of December 31, 1995 and 1994 was $4,563,000 and $5,340,000, respectively. Under the terms of the note all principal and interest is immediately due and payable. The note is secured by the Steamboat Springs project and related revenues and other assets. The Partnership was in default on a note payable to a bank as of 9/30/94. The balance as of December 31, 1994 and 1993 was $1,800,000. Due to the sale of the Crystal Springs Project subsequent to December 31, 1994, this note has been reduced to $537,000 (see Note 13) and is no longer in default. NOTE 12--LIQUIDITY As shown in the accompanying financial statements for the year ended December 31, 1995, current liabilities exceeded current assets by $6,595,000. Of this amount $4,563,000 relates to the note defaults described in Note 11. NOTE 13--SALE OF CRYSTAL SPRINGS PROJECT The Partnership signed an agreement dated February 28, 1995 to sell the Crystal Springs project. The sale included all the assets and liabilities associated with the Crystal Springs Project except the note payable to First Security Bank which has been modified as follows: Upon receipt of First Security (Lender) of a principal payment on the loan in the amount of $1,100,000, the note was modified to provide that the remaining principal balance owed shall be $537,000 and interest and costs on the loan shall be deemed current. If the note is paid in full within two years after the payment of $1,100,000, the Lender will discount the principal amount owing by $100,000 (requiring a principal payment of only $437,000), and if paid within three years, the Lender will discount the amount of the principal due by $50,000 (requiring a principal payment of only $487,000). There will be no discount if paid after the third anniversary. The modification has resulted in a gain on early extinguishment of debt of $358,000. The net loss on sale of the Crystal Springs Project of $170,000 has been reported on the Statement of Income for the year ended December 31, 1995 as Other Income. At February 28, 1995, no amount was due on the $50,000 line of credit acquired in 1992 for use in repair of certain items of equipment for the Crystal springs Plant for start up operations in 1993. F-27 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following pro forma statement of operations give effect to the above events as if they had occurred on January 1, 1995: PRO FORMA STATEMENT OF OPERATIONS
PRO FORMA AS REPORTED IN ADJUSTMENTS PRO FORMA ACCOMPANYING FOR STATEMENT FINANCIAL SUBSEQUENT OF STATEMENTS EVENTS OPERATIONS -------------- ----------- ---------- REVENUES Electric Power Sales................. $2,529,000 $ -- $2,529,000 Other Revenues....................... 145,000 -- 145,000 ---------- ------- ---------- Total Revenues...................... 2,674,000 -- 2,674,000 ---------- ------- ---------- EXPENSES Interest, Net........................ 671,000 (16,000) (A) 655,000 Depreciation......................... 613,000 -- 613,000 Royalty.............................. 405,000 -- 405,000 Professional Services................ 54,000 (4,000) (A) 50,000 Administrative Services--General Partner............................. 98,000 (38,000) (A) 60,000 Amortization......................... 18,000 -- 18,000 Insurance............................ 47,000 -- 47,000 Maintenance.......................... 583,000 (5,000) (A) 578,000 Taxes................................ 31,000 -- 31,000 Other................................ 59,000 (1,000) (A) 58,000 ---------- ------- ---------- Total Expenses...................... 2,579,000 (64,000) 2,515,000 ---------- ------- ---------- Net Income (Loss)................... $ 95,000 $64,000 $ 159,000 ---------- ------- ---------- Net Income (Loss) Per Limited Part- nership Unit....................... $ 9.22 $ 6.21 $ 15.43 ========== ======= ==========
A--Operating expenses attributable to Crystal Springs Project. B--Accrued interest and expenses from January 1, 1995 through date of sale of Crystal Springs Project. NONRECURRING TRANSACTIONS The same of the Crystal Springs Project has resulted in a loss of $170,000 and a gain on early extinguishment of debt of $358,000. These amounts are reported in the statement of Income for December 31, 1995. NOTE 14--SUBSEQUENT EVENTS STEAMBOAT SPRINGS PROJECT The Fund has received a cash offer to sell substantially all of the assets of the Fund to U.S. Envirosystems, Inc. for $1,250,000. The sale would result in the termination of the Fund and distribution of the proceeds to limited partners of approximately $33 per limited partnership unit. F-28 INDEPENDENT AUDITOR'S REPORT Partners 1-A Enterprises Salt Lake City, Utah We have audited the balance sheet of 1-A Enterprises as of December 31, 1995 and 1994, and the related statements of income, partners' capital and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 1-A Enterprises as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Respectfully submitted, /s/ ROBISON, HILL & CO. ---------------------------------- Certified Public Accountants Salt Lake City, Utah March 5, 1996 F-29 1-A ENTERPRISES A NEVADA GENERAL PARTNERSHIP BALANCE SHEETS
DECEMBER 31, ---------------------- SEPTEMBER 30, 1995 1994 1996 ---------- ---------- ------------- (UNAUDITED) ASSETS Utility Plant: Plant................................... $2,431,222 $2,431,222 $2,431,222 Development Costs....................... 450,000 450,000 450,000 Accumulated Depreciation................ (676,289) (580,248) (748,320) ---------- ---------- ---------- Net Utility Plant..................... 2,204,933 2,300,974 2,132,902 Restricted Assets: Cash.................................... 80,626 76,157 82,367 Certificate of Deposit.................. 73,189 70,000 77,644 ---------- ---------- ---------- Total Restricted Assets............... 153,815 146,157 160,011 Other Assets:............................ 32,145 40,181 26,118 Current Assets: Cash and Cash Equivalents............... 80,428 98,642 83,063 Receivables--Trade...................... 98,539 98,600 145,215 Receivables--Other...................... 7,139 6,358 4,714 Receivable--Related Party............... 229,810 267,705 198,498 Prepaid Expenses........................ 1,679 1,348 4,164 ---------- ---------- ---------- Total Current Assets.................. 417,595 472,653 435,654 ---------- ---------- ---------- Total Assets.......................... $2,808,488 $2,959,965 $2,754,685 ========== ========== ========== PARTNERS' CAPITAL AND LIABILITIES Partners' Capital........................ $ (293,083) $ (464,613) $ 127,407 Current Liabilities: Note Payable--See Note 4................ 1,670,995 1,960,732 1,431,593 Note Payable--Related Party............. 728,970 728,970 503,970 Payable--Related Party.................. 358,574 435,193 319,932 Accrued Liabilities: Operations............................. 3,120 5,767 4,820 Royalties.............................. 302,315 249,799 335,453 Interest............................... 37,597 44,117 31,510 ---------- ---------- ---------- Total Current Liabilities............. 3,101,571 3,424,578 2,627,278 ---------- ---------- ---------- Total Partners' Capital and Liabili- ties................................. $2,808,488 $2,959,965 $2,754,685 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-30 1-A ENTERPRISES A NEVADA GENERAL PARTNERSHIP STATEMENTS OF INCOME
YEARS ENDED NINE MONTHS, DECEMBER 31, ENDED SEPTEMBER 30, ------------------ ----------------------- 1995 1994 1996 1995 -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) REVENUES: Electric Power Revenues............ $875,356 $798,722 $711,178 $688,890 -------- -------- -------- -------- EXPENSES: Operations......................... 536,756 545,336 409,075 454,914 General and Administrative: Professional Services............. -- 1,481 3,057 8,232 Related party..................... 14,500 14,500 -- -- -------- -------- -------- -------- Total Expenses................... 551,256 561,317 412,132 463,146 -------- -------- -------- -------- Income From Operations........... 324,100 237,405 299,046 225,744 -------- -------- -------- -------- OTHER INCOME (EXPENSE): Interest Income.................... 41,037 38,315 24,874 25,226 Interest Expense................... (202,477) (233,513) (128,606) (115,755) -------- -------- -------- -------- Net other Expense................. (161,440) (195,198) (103,732) (90,529) -------- -------- -------- -------- Net Income........................ $162,660 $ 42,207 $195,314 $135,215 ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-31 1-A ENTERPRISES A NEVADA GENERAL PARTNERSHIP STATEMENT OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1995, AND 1994 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) Balances at December 31, 1993....................................... $(510,835) Contributions....................................................... 4,015 Net Income.......................................................... 42,207 --------- Balances at December 31, 1994....................................... (464,613) Contributions....................................................... 8,870 Net Income.......................................................... 162,660 --------- Balances at December 31, 1995....................................... (293,083) Contributions (Unaudited)........................................... 225,176 Net Income (Unaudited).............................................. 195,314 --------- Balances at September 30, 1996 (Unaudited).......................... $ 127,407 =========
The accompanying notes are an integral part of these financial statements. F-32 1-A ENTERPRISES A NEVADA GENERAL PARTNERSHIP STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEARS ENDED NINE MONTHS DECEMBER 31, ENDED SEPTEMBER 30, ------------------ ----------------------- 1995 1994 1996 1995 -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVI- TIES: Net Income (Loss).................. $162,660 $ 42,207 $195,314 $135,215 -------- -------- -------- -------- Adjustments to Net Income (Loss): Depreciation and Amortization..... 104,078 104,078 78,058 78,058 (Increase) Decrease in Receiv- ables............................ (721) (18,339) (44,254) (34,567) (Increase) Decrease in Prepaid In- surance.......................... (331) (678) (2,484) (2,850) Accrued Interest Income Restricted Assets........................... (7,658) (2,859) (6,196) (6,528) Increase (Decrease) in Accrued Li- abilities........................ 43,349 48,764 28,752 (32,968) Increase (Decrease) in Amount Due to Related Party................. (76,619) 147,519 (263,641) 26,376 -------- -------- -------- -------- Total Adjustments................ 62,098 278,486 (209,765) 27,521 -------- -------- -------- -------- Net Cash Provided by Operating Ac- tivities......................... 224,758 320,693 (14,451) 162,736 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVI- TIES: Principle Payments From Note Re- ceivable Related Party........... 37,895 33,916 31,312 28,024 Investment in Certificate of De- posit--Restricted................ -- (70,000) -- -- -------- -------- -------- -------- Net Cash Provided by (Used) in In- vesting Activities............... 37,895 (36,084) 31,312 28,024 -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVI- TIES: Principal payments on Long-term Debt.............................. (289,737) (259,310) (239,402) (214,262) Proceeds from Partner Contribu- tions............................. 8,870 4,015 225,176 7,941 -------- -------- -------- -------- Net Cash Provided by (Used) in Fi- nancing Activities................ (280,867) (255,295) (14,226) (206,321) -------- -------- -------- -------- Increase (Decrease) in Cash and Cash Equivalents.................. (18,214) 29,314 2,635 (15,561) Cash and Cash Equivalents at Begin- ning of Year...................... 98,642 69,328 80,428 98,642 -------- -------- -------- -------- Cash and Cash Equivalents at End of Year.............................. $ 80,428 $ 98,642 $ 83,063 $ 83,081 ======== ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash Paid During the Year for In- terest............................ $208,997 $239,346 $ 97,096 $115,755 ======== ======== ======== ========
The accompanying notes are an integral part of these statements. F-33 1-A ENTERPRISES A NEVADA GENERAL PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies are followed by 1-A Enterprises in preparing and presenting the financial statements, and are to assist the users in understanding the financial statements. ORGANIZATION 1-A Enterprises, a Nevada General partnership (the Partnership) was organized in 1988 to acquire and operate electric generating plants. UTILITY PLANT AND DEVELOPMENT COSTS Utility plant and Development costs are carried at cost. Fixed assets are depreciated over their estimated useful life (thirty years). CASH EQUIVALENTS For purposes of the statement of cash flows, the Partnership's policy is that all investments with maturities of three months or less are considered cash equivalents. INCOME TAXES No provision for income taxes has been made since the Partnership files partnership return under provisions for federal and state tax laws. The assets of the Partnership for tax purposes are lower than the financial statements for 1995 and 1994 by $2,204,933 and $2,300,974 respectively. UNAUDITED INTERIM PERIODS The financial information presented as of June 30, 1996 and for the six- month periods ended June 30, 1996 and 1995 is unaudited, but in the opinion of Management contains all adjustments (consisting only of normal recurring adjustments) necessary for a fair representation of such financial information. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years. NOTE 2--RECEIVABLE RELATED PARTY The Partnership had a note receivable from a related party for the year ended December 31, 1995 and 1994 as follows:
1995 1994 -------- -------- Note Receivable From Far West Electric Energy Fund, L.P., a Delaware Limited partnership, due in quarterly installments, including interest; commencing April 16, 1990, remaining principle due January 16, 2000; unsecured. Interest rate is 11%......................... $229,810 $267,705 ======== ========
NOTE 3--OTHER ASSETS Other assets consist of the following at December 31, 1995 and 1994:
1995 1994 -------- -------- Loan Origination Fees.................................... $ 80,363 $ 80,363 Accumulated Amortization................................. (48,218) (40,182) -------- -------- Total Other Assets....................................... $ 32,145 $ 40,181 ======== ========
The loan origination fees are being amortized on a straight-line basis over the life of the loan (ten years). Amortization was $8,036 and $8,036 for the years ended December 31, 1995 and 1994, respectively. F-34 1-A ENTERPRISES A NEVADA GENERAL PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 4--LONG-TERM DEBT Long-term debt as of December 31, 1995 and 1994 consists of the following:
1995 1994 ---------- ---------- Note Payable to a corporation is payable in quar- terly installments, including interest, beginning January 20, 1990. Note is secured by the Steamboat 1-A Project and all associated rights. Interest rate is 11.25%..................................... $1,670,995 $1,960,732 Less Current Installments Due....................... 1,670,995 1,960,732 ---------- ---------- $ -- $ -- ========== ==========
The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 1995 are as follows:
YEAR ENDING DECEMBER 31, ------------------------ 1996........................................................ $1,670,995 1997........................................................ -- 1998........................................................ -- 1999........................................................ -- 2000........................................................ -- Thereafter.................................................. -- ---------- $1,670,995 ==========
NOTE 5--NOTE PAYABLE-RELATED PARTY The Partnership had notes payable to related parties for the years ended December 31, 1995 and 1994, as follows:
1995 1994 -------- -------- Notes Payable to Far West Capital* payable on demand, unsecured. No interest accrued to date.............................. $728,970 $728,970 Less Current Installments Due............................. 728,970 728,970 -------- -------- $ -- $ -- ======== ========
*Two of the general partners of the Company are majority owners of Far West Capital, Inc. F-35 1-A ENTERPRISES A NEVADA GENERAL PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 6--PURCHASE AND OPERATING AGREEMENTS Under the terms of the amended purchase agreement (the Agreement), the Partnership is required to pay royalties aggregating 29.05 percent of annual gross revenues. For the years ended December 31, 1995, and 1994, royalty expense related to these commitments is as follows:
1995 1994 -------- -------- Sierra Pacific Power Company (10%)........................ $ 87,536 $ 79,872 Benson Schwarzhoff & Helzel (3.888%)...................... 34,034 31,054 Far West Electrical Energy Fund, L.P.(15%)................ 86,904 86,654 G. Martin Booth (.081%)................................... 709 647 Richard W. Harris (.081%)................................. 709 647 -------- -------- Total.................................................... $209,892 $198,874 ======== ========
NOTE 7--RESTRICTED ASSETS The Partnership is required to maintain an escrowed bank account as security under the terms of the note payable to a corporation with the notepayable balance as of December 31, 1995 and 1994 of $1,670,995 and $1,960,732 respectively. The reserve required an initial deposit of $150,000 plus interest income to be maintained in the account. The reserve was drawn down due to insufficient operating funds to meet obligations. The balance in the reserve as of December 31, 1995 and 1994 is $80,626 and $76,157 respectively. Disbursements from the reserve account for obligations are allowed to the extent that there are insufficient funds in the Partnership's operating accounts. Funds are to be deposited into the reserve account as necessary to replenish any disbursements for obligations as provided above. The note is in default due to the reserve account being drawn down below required amounts. The Company is required to pay a 10% royalty to Sierra Pacific Power Company (SPPC). Under the agreement with SPPC, 4% is paid and 6% is accrued during the first 6 years of operation. The date of initial operation was 10/29/88. During the seventh and eighth years, the amount paid increases to 6% and 8% while the amount accrued decreases to 4% and 2%, respectively. Beginning in years nine through thirty, the full 10% is paid with no accrual. The accumulation of accrued royalties pursuant to this agreement shall be paid in the eleventh year of operation plus interest accrued monthly at an annual rate of 11.9%. The Partnership is required to maintain an irrevocable letter of credit for the benefit of SPPC in the amount of $70,000. The provisions of the letter of credit provide that in the event of default by the Company, SPPC shall have the right to draw upon the letter of credit to satisfy any amounts or portions os such amounts owed to SPPC for the eleventh year payment amount and interest accrued as of the date of default. The $70,000 has been invested by the company in a certificate of deposit which had a balance of $73,189 and $70,000 as of December 31, 1995 and 1994, respectively. NOTE 8--RELATED PARTY TRANSACTIONS Amounts have been accrued for various fees and reimbursements of expenses incurred by an affiliated company to manage the Partnership. For each of the years in the two-year period ended December 31, 1995, the Partnership expensed the following amounts as cost reimbursements to the affiliated company:
1995 1994 ------- ------- General and Administrative Expenses......................... $14,500 $14,500
F-36 1-A ENTERPRISES A NEVADA GENERAL PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 AND 1994 During 1988, Far West Electric Energy Fund, L.P. assigned their rights to build an expansion unit to Steamboat Springs to 1-A Enterprises. As consideration for the rights, 1-A Enterprises deeded Far West Electric Energy Fund, L.P., rights and title to piping and valves installed from Steamboat Springs to the expansion unit and agreed to pay Far West Electric EnergyFund, L.P. royalties equaling 10 percent of net operating income from the expansion for the years ended December 31, 1988 through 1992, 15 percent for 1993 through 1998, 40 percent for 1999 through 2010, 45 percent thereafter, and an annual pumping charge. Included in Operations Expense in the statement of operations for the years ended December 31, 1995 and 1994, are $145,096, and $144,000, respectively related to this agreement. As of December 31, 1995 and 1994, two of the general partners of Far West Electric Energy Fund, L.P. held a 74 percent (1995) and 75 percent (1994) ownership in 1-A Enterprises. The Partnership has entered into an Operating and Maintenance Agreement with a related corporation to act as the operator of the project. This agreement provides for operator to perform the duties of the operator including operating and regular maintenance of the plant for a monthly fee and additional fees for variable maintenance. The Partnership paid $142,745 for the year ended December 31, 1995 and $169,120 for the year ended December 31, 1994. NOTE 9--MAJOR CUSTOMER The Partnership has contracted with Sierra Pacific Power Company to sell electric energy from Steamboat Springs for a term of 20 years. The contract entitles the Partnership to a rate of 71.7 mills per kilowatt hour for the first 10 years and a variable amount related to the short-term cost of power to Sierra Pacific Power Company for the second 10 years. Sales to Sierra Pacific Power Company account for 100 percent of electric power sales. The Partnership is dependent upon this customer for the purchase of all electricity generated from this power plant. NOTE 10--NOTE DEFAULTS The Partnership is in default on a note payable to a corporation as of October 1990 for reasons described in Note 4. The balance as of December 31, 1995 and 1994 is $1,670,995 and $1,960,732 respectively. Under the terms of the note all principal and interest is immediately due and payable upon request of the Lender. The note is secured by the 1-A project and related revenued and other assets. NOTE 11--LIQUIDITY As shown in the accompanying financial statements for the year ended December 31, 1995, current liabilities exceeded current assets by $2,683,976. Of this amount $1,670,995 relates to the note defaults described in Note 9. F-37 REPORT OF INDEPENDENT AUDITORS The Board of Directors Lehi Independent Power Associates, L.C. We have audited the accompanying balance sheets of Lehi Independent Power Associates, L.C. as of December 31, 1995 and 1994 and the related statements of operations, changes in members' equity and cash flows for the year ended December 31, 1995 and the period January 24, 1994 (date of inception) through December 31, 1994. 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 audit. We have conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lehi Independent Power Associates, L.C., as of December 31, 1995 and 1994, and the results of its operations and its cash flows for year ended December 31, 1995 and the period January 24, 1994 (date of inception) through December 31, 1994 in conformity with generally accepted accounting principles. March 19, 1996 /s/ Traveller Winn & Mower, P.C. Salt Lake City, Utah F-38 LEHI INDEPENDENT POWER ASSOCIATES, L.C. BALANCE SHEETS
DECEMBER 31, ----------------- JUNE 30, 1995 1994 1996 -------- -------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents....................... $ 41,460 $ 2,113 $ 7,305 Due from member................................. -- 3,335 -- Note receivable................................. 115,750 -- 113,750 Prepaid insurance............................... 853 -- 1,117 -------- -------- -------- Total current assets........................... 158,063 5,448 122,172 Property, plant and equipment, net............... 257,125 278,921 250,464 -------- -------- -------- Total assets................................... $415,188 $284,369 $372,636 ======== ======== ======== LIABILITIES AND MEMBERS' EQUITY Current liabilities: Accounts payable................................ $ 4,873 $ 951 $ 34,329 Accrued expenses................................ 4,373 -- 373 Related party note payable...................... -- 3,440 -- -------- -------- -------- Total current liabilities...................... 9,246 4,391 34,702 Members' equity: Member contributions............................ 292,662 292,662 292,662 Additional capital contributions................ 42,104 28,149 42,105 Retained earnings (deficit)..................... 71,176 (40,833) 3,167 -------- -------- -------- Total members' equity.......................... 405,942 279,978 337,934 -------- -------- -------- Total liabilities and members' equity............ $415,188 $284,369 $372,636 ======== ======== ========
See accompanying notes to financial statements. F-39 LEHI INDEPENDENT POWER ASSOCIATES, L.C. STATEMENTS OF OPERATIONS
FOR THE PERIOD FOR THE JANUARY 24 FOR THE SIX MONTHS YEAR ENDED THROUGH ENDED JUNE 30 DECEMBER 31, DECEMBER 31, ----------------------- 1995 1994 1996 1995 ------------ -------------- ----------- ----------- (UNAUDITED) (UNAUDITED) INCOME: Gain on sale of fixed asset................. $236,194 $ -- $ -- $ -- EXPENSES: General and administra- tive.................. 49,195 27,092 61,347 16,925 Write-down of property, plant and equipment... 14,990 13,741 6,661 7,495 -------- -------- -------- -------- Total expenses........ 64,185 40,833 68,008 24,420 -------- -------- -------- -------- Net income (loss)....... $172,009 $(40,833) $(68,008) $(24,420) ======== ======== ======== ========
See accompanying notes to financial statements. F-40 LEHI INDEPENDENT POWER ASSOCIATES, L.C. STATEMENT OF CHANGES IN MEMBERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD JANUARY 24, 1994 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1994
ADDITIONAL RETAINED TOTAL MEMBER CAPITAL EARNINGS MEMBERS' CONTRIBUTIONS CONTRIBUTIONS (DEFICIT) EQUITY ------------- ------------- --------- -------- Balance January 24, 1995....... $ -- $ -- $ -- $ -- Members contributions.......... 292,662 28,149 -- 320,811 Net loss....................... -- -- (40,833) (40,833) -------- ------- ------- -------- Balance December 31, 1994...... 292,662 28,149 (40,833) 279,978 Members contributions--Suma, Corp.......................... -- 3,489 -- 3,489 Members contributions--Far West Capital, Inc.................. -- 3,489 -- 3,489 Members contributions--Lehi Envirosystems, Inc............ -- 6,977 -- 6,977 Members distribution--Suma Corp.......................... -- -- (15,000) (15,000) Members distribution--Far West Capital, Inc.................. -- -- (15,000) (15,000) Members distribution--Lehi Envirosystems, Inc............ -- -- (30,000) (30,000) Net income..................... -- -- 172,009 172,009 -------- ------- ------- -------- Balance December 31, 1995...... 292,662 42,104 71,176 405,942 -------- ------- Net (Loss) (Unaudited)......... (68,008) (68,008) ------- -------- Balance June 30, 1996 (Unau- dited)........................ $292,662 $42,104 $ 3,168 $337,934 ======== ======= ======= ========
See accompanying notes to financial statements. F-41 LEHI INDEPENDENT POWER ASSOCIATES, L.C. STATEMENTS OF CASH FLOWS
FOR THE YEAR FOR THE PERIOD FOR THE SIX MONTHS ENDED ENDED ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ----------------------- 1995 1994 1996 1995 ------------ -------------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......... $172,009 $(40,833) $(68,008) $(24,240) Adjustment to reconcile net income to net cash provided by operating activities: Write-down of property, plant and equipment...... 14,990 13,741 6,661 7,495 Gain on sale of equipment. (236,194) -- -- -- Changes in assets and lia- bilities................. -- -- -- -- Prepaid insurance......... (853) -- (264) 1,036 Note Receivable........... -- -- 2,000 -- Accounts payable.......... 3,922 951 29,456 9,943 Accrued expenses.......... 4,373 -- (4,000) -- -------- -------- -------- -------- Net cash (used) by operat- ing activities........... (41,753) (26,141) (34,155) (8,018) Cash flows from investing activities: Proceeds from sale of equipment................ 127,250 -- -- -- Cash flows from financing activities: Net payment and proceeds from collection of due from member............. 3,335 (3,335) -- 1,245 Net payment and proceeds of related party note payable................. (3,440) 3,440 -- (3,440) Additional capital con- tributions.............. 13,955 28,149 -- 10,705 Members' distribution.... (60,000) -- -- -- -------- -------- -------- -------- Net cash provided (used) by financing activities.. (46,150) 28,254 -- 8,510 -------- -------- -------- -------- Net increase in cash and cash equivalents......... 39,347 2,113 (34,155) 492 Cash and cash equivalents at beginning of period... 2,113 -- 41,460 2,113 -------- -------- -------- -------- Cash and cash equivalents at end of period......... $ 41,460 $ 2,113 $ 7,305 $ 2,605 ======== ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION Interest paid by the Company during 1995 was $415. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES During the period ended December 31, 1994, the members of the Company contributed property and equipment with a cost of $292,662. During the year ended December 31, 1995, the Company sold equipment for $243,000. The Company received $127,250 in proceeds and a note receivable for $115,750. See accompanying notes to financial statements. F-42 LEHI INDEPENDENT POWER ASSOCIATES, L.C. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Lehi Independent Power Associates, L.C.(the Company) is a Utah based company organized on January 24, 1994. The Company's principal business is to purchase, develop, own, operate and/or sell all or a portion of a power generation facility which produces electrical energy located in Lehi, Utah. The members and their respective ownership percentages are as follows: Lehi Envirosystems, Inc., 50 %; Far West Capital, Inc., 25%; and Suma Corp., 25%. All revenues and expenses are shared in the same proportion as each members' ownership percentage. CASH AND CASH EQUIVALENTS The Company considers all cash on deposit and short-term liquid investments with original maturities of three months or less to be cash equivalents. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of land, a power generation plant and plant equipment and is recorded at cost. The plant is currently not in operation. The plant and plant equipment are depreciated on the straight-line method over useful lives of 29 and 6 years, respectively. INCOME TAXES No provision for federal income tax is made since the Company is treated as a partnership for tax purposes and as such is not a taxable entity under the federal income tax provisions. The individual members are taxed on their proportionate share of members' income or loss. NOTE 2--DUE FROM MEMBER At December 31, 1994, the Company had capital contributions receivable from Lehi Envirosystems, Inc., for $3,335. This represents required contributions to maintain the proportionate sharing of expenses as stipulated in the operating agreement. This amount was received in 1995. NOTE 3--PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost and consisted of the following at December 31:
1995 1994 -------- -------- Land..................................................... $ 13,000 $ 13,000 Building................................................. 239,216 239,216 Plant equipment.......................................... 30,446 40,446 -------- -------- 282,662 292,662 Write-down of property, plant and equipment............. (25,537) (13,741) -------- -------- $257,125 $278,921 ======== ========
F-43 LEHI INDEPENDENT POWER ASSOCIATES, L.C. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 AND 1994 During the periods in which the property, plant and equipment is not in operation, management has reviewed the assets to determine their realization. Based on this review, management has written-down the property, plant and equipment for the year and period ended December 31, 1995 and 1994, $14,990 and $13,741, respectively. NOTE 4--RELATED PARTY TRANSACTIONS The Company receives accounting services from a related company's accounting department. The services provided are billed at $40 an hour and average approximately $160 a month. The related party note payable is due on demand and carries no interest rate. NOTE 5--COMMITMENTS AND CONTINGENCIES The Company is in communication with the Utah State Department of Water Quality with respect to traces of petroleum products found in a ground water discharge ditch which exits the plant property. Based on those communications, the State is reviewing what, if any, additional action may be required. Also, the United States Environmental Protection Agency (EPA) has reviewed the data on the discharge and has concluded that no violation of EPA Rules and Laws have occurred. In Management's opinion, the potential impact to the financial statements would not exceed $45,000. NOTE 6--GOING CONCERN The Company's primary asset consists of a power generation facility that is currently idle. Consistent with its preference to operate the facility, the Company has thus far declined to accept several offers to liquidate the facility for amounts significantly in excess of the facility's recorded net book value. The Company continues to pursue a financially feasible power purchase contract which when executed would result in the commencement of operations. The members of the Company have committed to continue to fund necessary costs associated with holding and maintaining the power plant through December 31, 1996 in the event that the power plant does not begin operations or is otherwise unable to generate revenues sufficient to fund operating and holding costs. F-44 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Plymouth Cogeneration Limited Partnership In our opinion, the accompanying balance sheets and the related statements of operations, changes in partners' capital and cash flows present fairly, in all material respects, the financial position of Plymouth Cogeneration Limited Partnership at December 31, 1995 and 1994, and the results of their operations and their cash flows for the year ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICE WATERHOUSE LLP February 27, 1996 Hartford, Connecticut F-45 PLYMOUTH COGENERATION LIMITED PARTNERSHIP BALANCE SHEETS
DECEMBER 31, --------------------- JUNE 30, 1995 1994 1996 ---------- ---------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................... $ 15,944 $ 8,233 $ 65,481 Accounts receivable......................... 90,865 76,881 89,394 Prepaid expenses............................ 18,087 14,198 47 Restricted cash............................. 33,773 619,820 33,707 ---------- ---------- ---------- Total current assets....................... 158,669 719,132 188,629 ---------- ---------- ---------- Plant, at cost............................... 5,888,172 5,882,464 5,893,333 Less: accumulated depreciation............... 295,411 -- 443,289 ---------- ---------- ---------- 5,592,761 5,882,464 5,450,044 ---------- ---------- ---------- Debt service reserve......................... 497,085 500,020 496,717 Deferred financing costs, less accumulated amortization of $8,141 in 1995.............................. 154,683 162,824 150,613 Rent receivable.............................. 176,184 -- 228,468 ---------- ---------- ---------- Total assets............................... $6,579,382 $7,264,440 $6,514,471 ========== ========== ========== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Note payable--general contractor (Note 2)... $ -- $ 586,000 $ -- Accounts payable and accrued expenses....... 262,013 286,917 257,600 Deferred revenue............................ 81,127 74,806 81,127 ---------- ---------- ---------- Total current liabilities.................. 343,140 947,723 338,727 ---------- ---------- ---------- Long-term debt, net of discount (Note 3)..... 4,987,181 4,980,717 4,990,413 ---------- ---------- ---------- Partners capital: General partners............................ 180,599 193,639 171,039 Limited partners............................ 1,068,462 1,142,361 1,014,292 ---------- ---------- ---------- Total partners' capital.................... 1,249,061 1,336,000 1,185,331 ---------- ---------- ---------- Total liabilities and partners' capital.... $6,579,382 $7,264,440 $6,514,471 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-46 PLYMOUTH COGENERATION LIMITED PARTNERSHIP STATEMENT OF OPERATIONS
FOR THE SIX MONTHS FOR THE YEAR ENDED ENDED JUNE 30, DECEMBER 31, ----------------------- 1995 1996 1995 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) REVENUES Facility lease............................ $ 598,968 $ 299,484 $ 299,484 Management services....................... 551,461 278,642 270,979 ---------- --------- --------- Total revenues.......................... 1,150,429 578,126 570,463 ---------- --------- --------- OPERATING EXPENSES Operating and maintenance................. 426,948 222,310 212,298 Depreciation and amortization............. 303,552 151,948 152,575 General and administrative................ 149,830 85,111 75,045 ---------- --------- --------- Total operating expenses................ 880,330 459,369 439,918 ---------- --------- --------- Income before interest income and ex- pense.................................. 270,099 118,757 130,545 ---------- --------- --------- INTEREST INCOME AND EXPENSE Interest expense.......................... (403,736) (201,919) (201,110) Interest income........................... 46,698 19,432 26,893 ---------- --------- --------- (357,038) (182,487) (174,217) ---------- --------- --------- Net loss................................ $ (86,939) $ (63,730) $ (43,672) ========== ========= =========
The accompanying notes are an integral part of these financial statements. F-47 PLYMOUTH COGENERATION LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL
PARTNERS' CAPITAL PARTNERS' CAPITAL PARTNERS' CAPITAL DECEMBER 31, DECEMBER 31, JUNE 30, 1994 NET LOSS 1995 NET LOSS 1996 ----------------- -------- ----------------- ----------- ----------------- (UNAUDITED) (UNAUDITED) General Partners........ $ 193,639 $(13,040) $ 180,599 $ (9,560) $ 171,039 Limited Partners........ 1,142,361 (73,899) 1,068,462 (54,170) 1,014,292 ---------- -------- ---------- -------- ---------- $1,336,000 $(86,939) $1,249,061 $(63,730) $1,185,331 ========== ======== ========== ======== ==========
The accompanying notes are an integral part of these financial statements. F-48 PLYMOUTH COGENERATION LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS
FOR THE FOR THE YEAR SIX MONTHS ENDED ENDED JUNE 30, DECEMBER 31, ---------------------- 1995 1996 1995 ------------ ---------- ---------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net loss................................. $(86,939) $(63,730) $ (43,672) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization........... 303,552 151,948 152,575 Bond discount amortization.............. 6,464 3,232 3,232 Changes in assets and liabilities: Accounts receivable..................... (13,984) 1,471 (6,909) Prepaid expenses........................ (3,889) 18,040 1,458 Transfer from restricted cash........... 47 66 -- Rent receivable......................... (176,184) (52,284) (88,092) Accounts payable and accrued expenses... (24,904) (4,413) (19,983) Deferred revenue........................ 6,321 -- -- -------- -------- --------- Net cash provided (used) by operating activities............................ 10,484 54,330 (1,391) -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for plant................... (5,708) (5,161) -- Use of restricted cash................... 586,000 -- 226,241 -------- -------- --------- Net cash provided (used) by investing ac- tivities................................ 580,292 (5,161) 226,241 -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Payment out of debt service reserve...... 2,935 368 10 Payment of note payable.................. (586,000) -- (230,959) -------- -------- --------- Net cash (used) provided by financing activities............................ (583,065) 368 (230,949) -------- -------- --------- Net increase (decrease) in cash and cash equivalents...................... 7,711 49,537 (6,099) Cash and cash equivalents, beginning...... 8,233 15,944 8,233 -------- -------- --------- Cash and cash equivalents, ending......... $ 15,944 $ 65,481 $ 2,134 ======== ======== ========= SUPPLEMENTAL DISCLOSURES Interest paid............................ $421,305 $198,012 $ 198,013 ======== ======== =========
The accompanying notes are an integral part of these financial statements. F-49 PLYMOUTH COGENERATION LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION On June 25, 1992, IEC Plymouth, Inc. ("IEC" or "General Partner"), a Connecticut Corporation, and Central Hudson Cogeneration Incorporated, a New York Corporation ("Cencogen"), a wholly-owned subsidiary of Central Hudson Gas & Electric Corporation, a New York Corporation, formed a limited partnership under the State of New Hampshire Statutes, Plymouth Cogeneration Limited Partnership (the "Partnership"), to construct, own and operate a 1.25 MW cogeneration facility (the "Facility") and provide electricity and steam to Plymouth State College (the "Site") in Plymouth, New Hampshire. On May 11, 1993, IEC and Cencogen agreed to admit PSC Cogeneration Limited Partnership ("PSC" or "General Partner"), a Connecticut limited partnership and IEC affiliate, replacing IEC. On November 1, 1994, PSC and Cencogen agreed to admit Plymouth Envirosystems, Inc. ("Envirosystems" or "General Partner"), a Delaware corporation, a wholly-owned subsidiary of U.S. Envirosystems, Inc., a Delaware corporation. The Limited Partnership Agreement, as amended, expires November 2024. The Limited Partnership Agreement provides that profits, losses and distributable cash for financial reporting and income tax purposes are allocated in accordance with the ownership interests of the partners. At December 31, 1995 and 1994, PSC's ownership consisted of a 10% managing general partner and 17.5% limited partner interest, Cencogen's ownership consisted of a 32.5% limited partner interest and Envirosystems ownership consisted of a 5% general partner and 35% limited partner interest. On June 1, 1993, the Partnership entered into an Agreement of Site Lease ("Site Lease") with the University System of New Hampshire (the "University System"). The Site Lease provides that the University System will lease to the Partnership a parcel of land at the Site on which to construct the Facility. The Site Lease expires upon expiration of the Management Services Agreement (2015). REVENUES On June 1, 1993, the Partnership entered into an Agreement of Facility Lease ("Facility Lease") with the University System. The Facility Lease provides that the Partnership will lease the Facility to the University System for the supply of thermal and electric energy to the Site for a defined rental stream which escalates over the life of the lease, or 20 years. Upon expiration of the Facility Lease (2015), the Partnership must convey title and all personal property at the Facility to the University System, free and clear of encumbrances. The Facility Lease includes an escape clause which provides for the University System to terminate the agreement without penalty in the event that the State of New Hampshire does not appropriate funds for the payment of the Facility Lease. On June 1, 1993, the Partnership entered into a Management Services Agreement ("MSA") with the University System. The MSA provides that the Partnership will operate and maintain the Facility for the benefit of the University System during the term of the MSA for a defined monthly management service fee, and a 1.1 cent per kwh operation and maintenance fee over the life of the MSA (20 years). The MSA commenced on the in-service date of the Facility and expires in the year 2015. The Facility was deemed in-service January 1, 1995. Under the terms of Facility Lease and MSA, the Partnership is required to provide significant services through-out the life of the agreements. As a result, the Facility Lease is being accounted for as an operating lease. Lease revenues are recognized in accordance with Financial Accounting Standards Board Technical Bulletin No. 85-3, which requires that operating lease revenues be recognized on the straight-line basis over the life of the lease. Accordingly, while annual rent receipts escalate each year, approximately 598,968 of facility F-50 PLYMOUTH COGENERATION LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) lease revenue will be recognized by the Partnership annually. Management service fees and operation and maintenance fees are recognized as earned over the life of the MSA. Since Facility Lease revenues are being recognized on a straight-line basis, the Partnership has recognized as a long-term asset, Rent receivable, at December 31, 1995, which represents the excess of revenues recognized over cash payments received. At December 31, 1995 and 1994, the Partnership had deferred revenues of $81,127 and $74,806 which represents management service fees and lease revenues billed in advance. RESULTS OF OPERATIONS AND MANAGEMENT PLANS While the Partnership incurred a net loss in 1995, management believes that its cash flows, including scheduled escalating rent receipts under the Facility Lease, will be sufficient to meet both its future operating expenses and debt service requirements, including sinking fund installments. PLANT Plant represents cost of the Facility which is being leased to the University System under the Facility Lease. The Partnership placed the Facility in-service January 1, 1995. During 1994, the University System's operating permits necessary to operate its existing boilerhouse expired, at which time the Partnership agreed to operate the Facility, while still under construction. As of December 31, 1994, lease revenues of $210,636, management service fees of $217,939, and operation and maintenance fees of $40,945 were earned during the construction period; as a result of Facility start-up prior to substantial completion and in-service date. The above revenues earned during construction and related operating and start-up expenses ($417,743) were netted against Plant ($51,777). In accordance with the facility lease, the Partnership is responsible for all maintenance and equipment repair. DEPRECIATION Depreciation is provided on a straight-line basis. The useful life of the plant is estimated to be twenty years. INCOME TAXES The Partnership is not subject to federal or state income taxes. Each partner is required to report on its federal and, as required, state income tax return its distributive share of the Partnership's income, gains, losses, deductions and credits for the taxable year of the Partnership ending within or with its taxable year. Accordingly, there is no provision for income taxes in the accompanying financial statements. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reflected in the balance sheet for cash and cash equivalents, accounts receivable, restricted cash, debt service reserve, accounts payable and accrued expenses approximate their respective fair values because of the short maturity of these items. It was not practicable to estimate the fair value of the $5.11 million, 7.75% State of New Hampshire Electric Facility Revenue Bonds without the Partnership incurring excessive costs. The note is secured by a first mortgage in the Facility with a maturity date of June 1, 2014. F-51 PLYMOUTH COGENERATION LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) STATEMENT OF CASH FLOWS For purposes of the Statement of Cash Flows, the Partnership considers highly liquid investments with an original maturity of three months or less to be cash equivalents. Restricted cash consists of cash held in trust for payment of semi-annual long-term interest payments of the Partnership. Debt service reserve consists of cash held in trust until maturity of the Partnership's long-term debt. 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. UNAUDITED INTERIM FINANCIAL INFORMATION The financial information presented as of June 30, 1996 and for the six month periods ended June 30, 1996 and June 30, 1995 is unaudited, but in the opinion of management contains all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of such financial information. Results of operation for interim periods are not necessarily indicative of those to be achieved for full fiscal years. NOTE 2--NOTE PAYABLE--GENERAL CONTRACTOR During May 1994, the Partnership entered into an amendment to the Turnkey Construction Contract ("Construction Contract") with the general contractor of the Facility. The amendment provided for an additional payment in the amount of $636,000 from the Partnership to the general contractor for additional construction costs. In connection with the amendment, the Partnership executed a $636,000 promissory note for payment of these costs. The note bears interest at Citibank's prime lending rate plus 2%. Interest and principal were payable on maturity of the note in November 1994. During November 1994, the Partnership funded an escrow, the funds of which were available under the terms of the escrow agreement to settle the Partnership's obligations to the general contractor. At December 31, 1994, the balance due to the general contractor on the note and the funds escrowed for payment amounted to $586,000. Accrued interest on the note at December 31, 1994 amounted to $25,142. The escrowed funds were included in restricted cash. During 1995, the Partnership settled all obligations with the general contractor. NOTE 3--LONG-TERM DEBT On June 30, 1993, the Partnership obtained $5,110,000 of financing from the Business Finance Authority of the State of New Hampshire to construct the Facility. The financing was obtained through issuance of 7.75% State of New Hampshire Electric Facility Revenue Bonds (the "Bonds"), a tax-exempt financing, which matures on June 1, 2014. The Bonds were issued at a discount of $129,283, which is being amortized over the life of the bonds using the bonds outstanding method. This Leasehold Mortgage and Trust Agreement (the "Agreement") contains certain business covenants including, among other items, that the Partnership provides timely financial and business information. In connection with the financing, the Partnership paid $162,824 of financing related costs. These deferred financing costs will be amortized on the bonds outstanding method over the life of the bonds. F-52 PLYMOUTH COGENERATION LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The Bondholder has a first mortgage security interest in the Facility, pledge of the Partnership interests, and a collateral assignment of all facility operating agreements. Interest is payable semi-annually on June 1 and December 1. The Bonds are subject to redemption from sinking fund installments, without premium, plus accrued interest on June 1, 1997 and each June 1 thereafter at their principal amounts, through maturity of June 1, 2014. The Bonds are also subject to redemption at the option of the Partnership on or after: June 1, 2003 at 102%; June 1, 2004 at 101%; and June 1, 2005 at 100%. Aggregate annual sinking fund installments for the next five years and thereafter are as follows: 1996.......................... $ -- 1997.......................... 70,000 1998.......................... 100,000 1999.......................... 125,000 2000.......................... 175,000 Thereafter.................... 4,640,000 ---------- $5,110,000 ==========
NOTE 4--RELATED PARTY TRANSACTIONS DEVELOPMENT EXPENSES The managing general partner and affiliates were reimbursed for development expenses during the development and construction phases. In 1994, total reimbursements of $275,000 were incurred and capitalized to Plant during the development and construction phases. ADMINISTRATION SERVICE FEES On January 13, 1994, the Partnership entered into and Administrative Services Agreement with an affiliate of PSC. The agreement provides that commencing on January 1, 1995, the Partnership will pay a fee in the amount of $40,000, annually, adjusted for CPI, for administrative services to be provided by the affiliate on behalf of the Partnership. The Partnership incurred an administrative fee of $42,000 during 1995, which is included in general and administrative expenses. DEVELOPMENT COMMISSIONS Development Commissions are payable to PSC and Cencogen commencing on the in-service date of the Facility (January 1, 1995). Development commissions are fixed annual amounts, payable quarterly which escalate over the life of the agreement, or 20 years, and are subordinate to the payment of debt service and general partners fees. The Partnership incurred development commissions of $44,388 during 1995, which are included in general and administrative expenses. GENERAL PARTNER'S FEE General Partner's Fee is payable to PSC commencing on the in-service date of the Facility (January 1, 1995). The general partner's fee is a fixed annual amount payable quarterly which escalates over the life of the agreement, or 20 years, and is subordinate to the payment of debt service. The Partnership incurred $14,796 during 1995, which is included in general and administrative expenses. F-53 PLYMOUTH COGENERATION LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) OTHER The Partnership incurred the following expenses with affiliates of the General Partner for the years ended December 31, 1995 and 1994. The 1994 costs were capitalized into Plant during the development and construction phases.
1995 1994 ------ ------- Employee group health insurance and office related........... $ -- $37,703 Interest expense on advances................................. 1,108 --
Amounts due to affiliates of the General Partner included in accounts payable and accrued expenses of the Partnership at December 31, 1995 and 1994:
1995 1994 ------- ---- Interest bearing advances at prime.............................. $28,520 $-- Accrued interest on advances.................................... 1,108 --
The Partnership has elected for its employees to participate in a 401(k) plan sponsored by an affiliate of the General Partner. The 401(k) plan calls for employee only contributions. NOTE 5--SUBSEQUENT EVENT (UNAUDITED) In 1996, three of the Partnership's operating permits expired. The Partnership filed for renewal of these permits prior to their expiration but has yet to receive approval from the State of New Hampshire. Management anticipates the permits to be approved. F-54 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU- THORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURI- TIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SO- LICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB- SEQUENT TO THE DATE HEREOF. --------------- TABLE OF CONTENTS
PAGE ---- AVAILABLE INFORMATION..................................................... 2 PROSPECTUS SUMMARY........................................................ 3 RISK FACTORS.............................................................. 9 USE OF PROCEEDS........................................................... 17 PRICE RANGE OF COMMON STOCK............................................... 19 DIVIDEND POLICY .......................................................... 19 DILUTION ................................................................. 20 CAPITALIZATION ........................................................... 21 PRO FORMA FINANCIAL INFORMATION........................................... 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATION ............................................................... 28 BUSINESS ................................................................. 33 MANAGEMENT ............................................................... 46 CERTAIN TRANSACTIONS ..................................................... 49 PRINCIPAL STOCKHOLDERS ................................................... 51 DESCRIPTION OF SECURITIES ................................................ 53 SHARES ELIGIBLE FOR FUTURE SALE .......................................... 57 UNDERWRITING ............................................................. 58 LEGAL MATTERS ............................................................ 60 EXPERTS .................................................................. 60 FINANCIAL STATEMENTS...................................................... F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- U.S. ENERGY SYSTEMS, INC. 3,100,000 SHARES OF COMMON STOCK AND 3,100,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS --------------- PROSPECTUS --------------- GAINES, BERLAND INC. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED NOVEMBER 26, 1996 PROSPECTUS U.S. ENERGY SYSTEMS, INC. 205,000 SHARES OF COMMON STOCK ----------- This Prospectus relates to the offering ("Secondary Offering") by Anchor Capital Company LLC ("Anchor") of 205,000 shares of Common Stock of the Company, such shares of Common Stock (collectively, the "Securities") to be sold from time to time by Anchor (the "Selling Securityholders") following completion of the Primary Offering (as defined below). Concurrently with this Secondary Offering, the Company is offering for sale to the public, by means of a separate prospectus, 3,100,000 shares of Common Stock and 3,100,000 Warrants (the "Primary Offering"). Anchor has agreed that it will not sell its 205,000 shares of Common Stock without the consent of Gaines, Berland Inc. (the "Representative") for a period of nine months from the date of consummation of the Primary Offering. The Company's Common Stock is sporadically traded on the NASD OTC Bulletin Board. Prior to this Secondary Offering, there has been no public market for the Warrants nor has there been an established trading market for the Common Stock. There can be no assurance that such a market will develop for the Securities as a result of this Secondary Offering. The Company has applied for inclusion of the Common Stock and the Warrants on the Nasdaq SmallCap Market under the proposed symbols USEY and USEYW, respectively. ----------- THESE SECURITIES ARE SPECULATIVE IN NATURE, INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 9. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS , 1996 AVAILABLE INFORMATION The Company is subject to informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by the Company with the Commission can be inspected without charge and copied at prescribed rates at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549 and at the Commission's regional offices located at Seven World Trade Center, Suite 1300, New York, New York 10048, and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. The Company's Common Stock is quoted on the NASD OTC Bulletin Board and certain of the Company's reports, proxy materials and other information may be available for inspection at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Commission maintains a web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The address of such web site is http://www.sec.gov. The Company has filed with the Commission a Registration Statement on Form SB-2 under the Securities Act of 1933, as amended ("Securities Act"), with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement, including the exhibits filed as part thereof and otherwise incorporated therein. Copies of the Registration Statement and the exhibits may be inspected, without charge, at the offices of the Commission, or obtained at prescribed rates from the Public Reference Section of the Commission at the address set forth above. ---------------- 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. At or prior to the consummation of the Primary Offering, the Company will consummate the following transactions (the "Closing Transactions"): (i) the acquisition of a 95% interest in two geothermal plants known as Steamboat 1 and 1A for $4,741,000 (including $50,000 as a downpayment which was previously paid by the Company) (the "Steamboat Acquisition"), (ii) the acquisition of an 81.5% interest in NRG Company LLC ("NRG") for $265,000, to enable NRG to make a loan of $250,000 to Reno Energy LLC ("Reno Energy"), developer of a district heating project to be fueled by geothermal sources, to secure for NRG an option to obtain a 50% interest in Reno Energy, (iii) the conversion of $500,000 of convertible subordinated debentures (the "Convertible Debentures") into 125,000 shares of Common Stock and 125,000 Warrants (the "Private Warrants") having the same terms and conditions as the Warrants (the "Debenture Conversion") and (iv) the exchange of the 57,500 currently outstanding shares of the Company's Series One Preferred Stock for 205,000 shares of Common Stock (the "Preferred Stock Exchange"). The consummation of the Primary Offering is a condition to the consummation of the Closing Transactions and the consummation of the Closing Transactions is a condition to the consummation of each of the Primary Offering and this Secondary Offering. Accordingly, if any of the Closing Transactions is not consummated, each of the Primary Offering and this Secondary Offering will be terminated. Except as otherwise indicated, all information in this Prospectus assumes no exercise of the Warrants offered hereby or any of the Company's other outstanding options and warrants to purchase Common Stock. Although this Prospectus is written as though the Secondary Offering is concurrent with the Primary Offering, the Secondary Offering will not commence until the Primary Offering has been consummated. All numbers and amounts specified herein reflect a one for forty reverse stock split effective May 6, 1996, unless otherwise indicated. THE COMPANY U.S. Energy Systems, Inc. is engaged in the cogeneration and independent power plant ("IPP") industries as a project developer, owner and operator. Cogeneration is the process of producing two or more energy forms (typically electricity and heat) simultaneously from the same fuel source. A cogeneration facility is a power plant which produces electricity and, simultaneously, recovers waste heat to use in place of heat which would otherwise be made from conventional sources such as furnaces or boilers. An IPP is a power plant which is not owned and operated by a regulated public electric utility company. Frequently, IPPs are cogeneration facilities. Federal and state laws have been promulgated to promote competition in the sale of electric energy and to encourage cogeneration and independent power facilities. The Company's strategy is to seek projects requiring power production or cogeneration and to become an equity participant with the owners, developers or other involved parties in return for the Company's expertise in the structuring, design, management and operation of the projects. Often, at the time of the Company's initial involvement, such projects will have advanced beyond the conceptualization stage to a point where the engineering, management and project coordination skills the Company offers are required to proceed. Projects in which the Company is involved or is negotiating to become involved include (a) acquiring and operating existing IPPs and cogeneration facilities in the United States, (b) developing, constructing, and operating new IPPs and cogeneration facilities in the United States and in certain overseas markets, (c) designing and constructing cogeneration and IPPs for third party owners, and (d) developing, constructing and selling energy-efficient products using cogeneration technology such as non-electric air conditioning. As a major element of its strategy, the Company intends to focus on projects such as shopping malls, healthcare centers, food processing centers, hotels and other facilities where large quantities of electricity, air 3 conditioning and hot water are required on a continuous and simultaneous basis. The Company has signed a letter of intent with the owners of Bluebeard's Castle, a large resort and commercial complex in St. Thomas, United States Virgin Islands ("USVI"), to build and operate a 3 megawatt cogeneration plant and a 120,000 gallon per day water recovery system in the resort's property. Under the letter of intent the Company, the resort manager and the resort owners would own the cogeneration plant and water system and share revenues. The Company has received initial funding from the resort owners and the first of six engine generators was installed during September 1996. The Company has also entered into a joint development agreement with the Cowen Investment Group ("Cowen") to develop, build and operate cogeneration plants at shopping malls. Toward this end, the joint venture has been in discussions with two of the major mall owners in the United States. Under the joint development agreement, savings from the cogeneration systems would be shared equally by the mall owners and the joint development company (in which the Company would have a 40% profit interest). Under the joint development agreement, the Company will perform all project development functions other than securing the financing. See "Business--Current Operations and On-Going Projects." The Company has a history of losses substantially throughout its existence and, except for the distribution of $20,000 from the Plymouth State College project (described below) in August 1996, has not received any cash distributions from its investments since emerging from bankruptcy in 1993. To provide the Company with a source of revenues to enable it to expand its business, concurrently with the Primary Offering, the Company will acquire, for a total investment of $4,741,000 (including $50,000 as a downpayment which was previously paid by the Company), a 95% interest in two geothermal power plants, known as Steamboat 1 and 1A, in Steamboat Hills, Nevada (the "Steamboat Facilities"). Electricity is produced in geothermal plants by extracting ^ heat from the earth to drive turbines, thereby generating the electricity. Geothermal power is considered a highly environmentally sound method of producing electricity, but it can only be produced in areas where specific geological formations exist. A substantial portion of the net proceeds of the Primary Offering will be used for the Steamboat Acquisition. The Company regards the Steamboat Acquisition as a key element toward achieving its objectives in the independent power plant industry. In January 1994, the Company purchased a 50% equity interest in a limited liability company which owns a cogeneration facility in Lehi, Utah. The Company expects the Lehi plant to be operational in the fourth quarter of this fiscal year, provided that it obtains the necessary air quality permits. However, the Company and its partners may decide to sell a portion of the operating machinery and to purchase replacement equipment, thereby increasing the plant's output capacity and efficiency. If such sale and replacement is undertaken, the receipt of operational revenues would be delayed until the second quarter of the next fiscal year. As there are no contracts in effect at this time for the sale of power from this plant, receipt of revenues will also be dependent upon the Company entering into such contracts with customers. See "Business--Current Operations and On-Going Projects--Lehi Cogeneration Project." The Steamboat and Lehi projects enable the Company to participate in what it believes is a growing market for independently produced electricity in the western United States. Additionally, in 1994 the Company acquired a 50% interest in a partnership which owns and operates a cogeneration plant which produces 2.5 megawatts of electricity and 25 million British Thermal Units ("BTUs") for heating at Plymouth State College in Plymouth, New Hampshire. The Plymouth facility provides 100% of the electrical and heating requirements for the campus, which is part of the University of New Hampshire system, under a twenty year contract. The Company also intends to pursue projects which can utilize waste products or other alternative fuels, such as used motor oil and tires, which provide environmental and ecological benefits and also provide potential for earnings because of low fuel costs. In this regard, the Company will invest $265,000 for 81.5% of NRG. NRG will have an option to acquire 50% of Reno Energy, which plans to develop a pipeline to distribute and sell excess heat available from the geothermal resources in Steamboat Hills, Nevada (the "Reno Project"). The Company was incorporated in the State of Delaware on May 6, 1981. The executive offices of the Company are located at 515 North Flagler Drive, Suite 202, West Palm Beach, Florida 33401. Its telephone number is (561) 820-9779. 4 CLOSING TRANSACTIONS Concurrently with the closing of the Primary Offering, the Company will acquire a 95% interest in Steamboat Envirosystems, L.C. ("Steamboat LLC"), which will purchase the Steamboat Facilities from Far West Electric Energy Fund, L.P. (the current owner of Steamboat 1) and 1-A Enterprises (the current owner of Steamboat 1-A). Far West Capital, Inc., a Utah corporation ("Far West Capital"), will own the remaining 5% of Steamboat LLC. The Company will contribute a total of $4,741,000 (including $50,000 as a downpayment which was previously paid by the Company) to Steamboat LLC from the proceeds of the Primary Offering to enable Steamboat LLC to complete the acquisition, to retire a mortgage and to provide capital for the potential acquisition of certain of the royalty interests to which the Steamboat Facilities are subject and improvements to the plants. See "Business--Current Operation and On-Going Projects--Steamboat Geothermal Power Plants." The Debenture Conversion and the Preferred Stock Exchange will also occur concurrently with the Closing of the Primary Offering. These transactions, combined with the repayment of debt to be made with a portion of the proceeds of the Primary Offering, will result in a substantial reduction of the Company's indebtedness. In December 1994 the holders of the Convertible Debentures agreed to allow the Company to defer one-half of interest payments due thereafter until the consummation of an underwritten offering of the Company's securities, when interest payments so accrued would be paid. In March 1996, the Company offered a conversion plan to the debenture holders (the "Debenture Conversion") whereby the holders could convert on a pro rata basis up to $500,000 in face amount for 125,000 shares of Common Stock and 125,000 Private Warrants, with the 18% rate of interest reduced to 9% on the unconverted balance. Twenty-three of the twenty-six debenture holders representing $1,375,000 face amount of the $1,525,000 total have agreed to the Debenture Conversion. The $150,000 in principal amount held by the holders declining the Offer will continue to receive 18% interest, and will not participate in the Debenture Conversion. See "Description of Securities-- Convertible Debentures," "Certain Transaction" and Pro Forma Financial Statements. 5 THE OFFERING Securities offered.......... 205,000 shares of Common Stock. See "Description of Securities." Common Stock outstanding prior to the Primary 439,650 shares Offering................... Common Stock to be outstanding after the 3,869,650 shares(1)(2) Primary Offering........... Use of proceeds............. The Company will receive no proceeds from the sale of the Securities offered hereby. Proposed Nasdaq SmallCap Market Symbols............. Common Stock: USEY Warrants: USEYW RISK FACTORS The securities offered hereby are speculative and involve a high degree of risk and substantial dilution. Among the principal risks to be considered are: (i) the Company has incurred and continues to incur substantial losses, (ii) the Company's profitability will be dependent, to a significant extent, on the continued successful operations of the Steamboat Facilities, (iii) prior to the Primary Offering, the Company has significant working capital and stockholders' equity deficits, and (iv) the Company may require additional capital to undertake future projects. See "Risk Factors." - -------- (1) Includes (i) 439,650 shares of Common Stock outstanding prior to the Primary Offering, (ii) 3,100,000 shares of Common Stock being issued pursuant to the Primary Offering, (iii) 125,000 shares of Common Stock to be issued in the Debenture Conversion and (iv) 205,000 shares of Common Stock to be issued in the Preferred Stock Exchange. (2) Does not include an aggregate of 4,264,975 shares of Common Stock reserved and to be reserved for issuance following completion of the Primary Offering including (i) 291,850 shares issuable on exercise of currently outstanding options and warrants, (ii) 3,845,000 shares issuable on exercise of the Warrants, the Representative's Purchase Option and the Warrants issuable on exercise of the Representative's Purchase Option and the Private Warrants being issued in the Private Placement and the Debenture Conversion and (iii) 128,125 shares issuable upon conversion of Convertible Debentures which will remain outstanding after the Primary Offering. 6 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The Summary Financial Information set forth below is derived from the historical financial statements appearing elsewhere in this Prospectus and should be read in conjunction with such financial statements, including the notes thereto. The Pro Forma Statements of Operations data for the year ended January 31, 1996 and the six months ended July 31, 1996 give effect to the Closing Transactions including the acquisition of a 95% interest in Steamboat LLC and the 81.5% interest in NRG as if they had occurred at the beginning of the periods. The Pro Forma Balance sheet data as at July 31, 1996 give effect to the Offering and to the Closing Transactions as if such transactions had occurred on such date. See Pro Forma Financial Statements, and historical financial statements. STATEMENT OF OPERATIONS DATA:
SIX MONTHS YEAR ENDED ENDED YEAR ENDED JANUARY 31, SIX MONTHS ENDED JULY 31, JANUARY 31, 1996 1995 JULY 31, 1996 1995 ---------------------------- ----------- ----------------------- ---------- HISTORICAL PRO FORMA HISTORICAL HISTORICAL PRO FORMA HISTORICAL USE USE/SB (1) USE USE USE/SB (1) USE ---------- --------------- ----------- ---------- ---------- ---------- Revenue $ -- $ 3,404 $ -- $ -- $ 1,919 $ -- ------- --------- ------- ------- --------- ------- Operating and administrative expenses: Depreciation.......... -- 172 -- -- 86 -- Royalty............... -- 528 -- -- 372 -- Other................. 853 1,856 1,006 408 927 421 Interest (2)............ 604 106 319 328 41 223 Loss from Joint Ven- tures.................. 17 17 76 92 92 62 ------- --------- ------- ------- --------- ------- Income (loss) before in- come taxes............. (1,474) 725 (1,401) (828) 401 (706) Income taxes (3)........ -- 244 -- -- 135 -- ------- --------- ------- ------- --------- ------- Income (loss) before ex- traordinary items...... (1,474) 481 (1,401) (828) 266 (706) Preferred dividends..... 21(4) -- -- 29(4) -- -- ------- --------- ------- ------- --------- ------- Income (loss) available for common stockhold- ers*................... $(1,495) $ 481 $(1,401) $ (857) $ 266 $ (706) ======= ========= ======= ======= ========= ======= (Loss) per share of Com- mon Stock *............ $ (3.41) $ (3.38) $ (1.95) $ (1.61) ======= ======= ======= ======= (Loss) per share of Com- mon Stock--Supplemental (5)*................... $ (1.30) $ (0.66) ======= ======= Pro forma net income per share of Common Stock (6)*................... $ 0.17 $ 0.09 ========= ========= Shares used in computing net income per share of Common Stock (6)....... 438,773 2,797,292 415,022 439,650 3,014,708 438,296 ======= ========= ======= ======= ========= ======= BALANCE SHEET DATA: JULY 31, 1996 ---------------------------- HISTORICAL PRO FORMA (7) ---------- --------------- AS ADJUSTED Current assets.......... $ 21 $2,988 Investment in joint ven- tures.................. 1,834 1,781 Loan receivable......... -- 300(8) Property, plant and equipment.............. -- 5,015 Total assets............ 2,076 10,084 Current liabilities..... 2,815 1,250 Long-term liabilities... 2,818 1,343 Minority interest in subsidiaries........... -- 334 Working capital......... (2,794) 1,738 Stockholders' equity (deficit).............. (3,557) 7,157
7 - -------- * Before extraordinary item. (1) Includes (a) adjusted operating results of the Steamboat Facilities for the year ended December 31, 1995, and the six months ended June 30, 1996; (no provision for the minority interest is made until the annual net income of the Steamboat Facilities exceeds $1,800,000), (b) NRG income of 9% interest on a $300,000 loan to Reno Energy less the 18.5% minority interest in NRG, (c) elimination of deferred note payable discount, elimination of interest payments on notes payable and bridge loans to be repaid from the proceeds of this Offering, and (d) elimination of interest on $500,000 principal amount of Convertible Debentures converted into Common Stock and Private Warrants, with $875,000 of the remainder paying interest at 9% per annum. (2) Adjusted for reduction on $875,000 principal amount of Convertible Debenture interest to 9%, and elimination of interest costs on $500,000 principal amount of Convertible Debentures converted into Common Stock and Private Warrants and on bridge loans and notes payable which will have been paid from the proceeds of the Primary Offering. Also adjusts for the elimination of certain unamortized deferred costs of these notes and loans. Three of the 26 holders of Convertible Debentures, representing $150,000 in principal amount, have not agreed to the interest rate reduction from 18% to 9% per annum. Also includes NRG income of 9% interest on $300,000 loan to Reno Energy less the 18.5% minority interest in NRG. (3) A pro forma provision for income taxes was calculated after providing for a limit on the net operating loss deduction assuming an ownership change had taken place at the beginning of the 1996 fiscal year and the beginning of the six month period ended July 31, 1996. (4) Provision for dividends on Series One Preferred Stock eliminated as a result of the Preferred Stock Conversion. (5) Supplemental loss per share is based on the weighted average number of shares outstanding and 518,895 (at January 31, 1996) and 569,767 (at July 31, 1996) of the shares to be issued in the Primary Offering for the repayment of debt. (6) Pro forma net income per share is based on the weighted average number of shares outstanding, the shares issued in the Debenture Conversion and the Preferred Stock Exchange and shares issued in the Primary Offering to obtain funds required for the acquisition of the Steamboat Facilities, the investment in NRG and the retirement of debt (2,103,779 shares at January 31, 1996 and 2,245,058 shares at July 31, 1996). Assumed exercise of options and warrants have not been reflected as they would be anti- dilutive. (7) Reflects the sale of Securities offered hereby, the Debenture Conversion, the Preferred Stock Exchange and the anticipated use of proceeds for the Steamboat Acquisition, the NRG investment and the repayment of indebtedness, including accrued interest to November 30, 1996. (8) The NRG loan to Reno Energy includes $50,000 from funds invested by the minority interests and $250,000 from the funds to be invested by the Company. 8 RISK FACTORS Prospective purchasers of the securities offered hereby should carefully consider the following factors, as well as the information contained elsewhere in this Prospectus. NO SIGNIFICANT REVENUES; HISTORY OF LOSSES/UNCERTAIN PROFITABILITY; WORKING CAPITAL, CASH FLOW AND SECURITYHOLDERS' EQUITY DEFICITS; AUDITORS' OPINION WITH EXPLANATORY PARAGRAPH The Company has a history of losses substantially throughout its existence and, except for the distribution of $20,000 from the Plymouth State College project in August 1996, has not received any cash distributions from its investments since its reorganization in 1993. To date, the Lehi power plant has not been operational. See "Current Operations and On-Going Projects." Although the Company believes that there may be profit and cash flow from the Lehi power plant starting in the fourth quarter of this fiscal year, there can be no assurances that this will occur. Operations at the plant may be delayed until the second quarter of the next fiscal year if the Company decides to sell certain operating machinery and replace it by purchasing equipment that would ultimately increase output capacity and efficiency. The Plymouth cogeneration plant historically had not provided revenues or cash flow to the Company because of costs related to equipment adjustments and operational reserves required by the terms of its financing, and there can be no assurance that any cash flow will be available in the foreseeable future. The Company received a distribution of $20,000 in August 1996. For the years ended January 31, 1996 and 1995, the Company incurred net losses of $1,391,000 and $1,316,000 respectively, and for the six months ended July 31, 1996, the Company incurred a net loss of $828,000. At July 31, 1996, as a result of these and earlier accumulated losses, the Company had a working capital deficit of $2,794,000 and a stockholders' equity deficit of $3,557,000. There can be no assurance that the Company will ever be able to generate cash flows sufficient to meet its obligations and sustain operations. The independent auditors' report for the fiscal year ended January 31, 1996 states that these factors raise substantial doubt about the Company's ability to continue as a going concern. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Financial Statements. LIMITED AVAILABLE CAPITAL; POSSIBLE NEED FOR ADDITIONAL FINANCING While the Company believes that the proceeds from the Primary Offering, together with anticipated cash flow from operations, will be sufficient to meet its anticipated cash requirements for the next twelve months, there is no assurance in this regard. The Company's continued existence will be dependent upon its ability to generate cash flows from its operations sufficient to meet its obligations as they become due. Unless the Company can generate cash flows from operations to fund its working capital needs, the Company will be required to obtain additional equity or debt financing to continue to operate its business. If the Company should require additional capital, there can be no assurance that such capital will be available to the Company, or if available, it would be on terms acceptable to the Company. If additional funds are raised by issuing equity securities, significant dilution to existing stockholders may result. Any inability by the Company to obtain additional financing, if required, will have a material adverse effect on the operations of the Company, including the possible cessation of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." PRIOR BANKRUPTCY; DEFERRED TAXES In late 1986, the Company, then called Cogenic Energy Systems, Inc., was impaired by a $2,100,000 judgment resulting from a contractual dispute. Although ultimately settled, the protracted court case caused delays in planned expansion and sales and led to a serious cash shortage. In mid-1989, the Company filed for protection under Chapter 11 of the Bankruptcy Code and a Plan of Reorganization was confirmed by the bankruptcy court in 1993. The Plan required the payment of outstanding taxes. Of those taxes, $110,000 was required to be paid upon the merger of Utility Systems Florida, Inc. ("USF") into the Company (see "Business--The Company"), but has been deferred pursuant to a verbal agreement with the Internal Revenue Service as long as the Company continues to meet its remaining pre-bankruptcy tax obligations ($372,000 at July 31, 1996), 9 which it is amortizing on a monthly basis over a six year period. The Company does not intend to pay this deferred $110,000 amount out of the proceeds of the Primary Offering but to continue the deferral until either the Internal Revenue Service requires payment or the Board of Directors deems cash flow to be satisfactory. EMERGING INDUSTRY; UNCERTAINTY OF MARKET ACCEPTANCE Although the cogeneration and IPP 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, demand and market acceptance for their products and services are subject to a high level of uncertainty. The Company began developing new projects after USF merged with the reorganized Cogenic Energy Systems, Inc. in November 1993, but has not yet commenced significant marketing activities and currently has limited marketing experience as well as limited financial, personnel and other resources to undertake extensive marketing activities. PROJECT DEVELOPMENT AND ACQUISITION RISKS It is anticipated that certain types of projects, if undertaken, will require the Company to raise additional capital and there can be no assurance that such capital will be available on acceptable terms. The Company's ability to develop new projects, including the Reno Project, is also dependent on a number of other factors outside its control, including obtaining power agreements, governmental permits and approvals, fuel supply and transportation agreements, electrical transmission agreements, site agreements and construction contracts, and there can be no assurance that the Company will be successful in doing so. In particular, the Reno Project is still in the planning and development stage and there are no contracts with any end users nor any governmental approvals. Project development is subject to environmental, engineering and construction risks. If additional financing is not available on acceptable terms, the Company may have to cancel, decline or defer new projects. Further, projects which are successfully developed may still face risks inherent in start-up businesses, such as lack of market acceptance. POTENTIAL REDUCTION IN REVENUE FROM STEAMBOAT GEOTHERMAL PROJECTS The current power purchase agreements with Sierra Pacific Power Company ("Sierra") provide for price adjustments in December 1996 for Steamboat 1 and in December 1998 for Steamboat 1A. Under the contracts, Steamboat LLC is required to sell power to Sierra for additional 10-year periods at the then- prevailing short-term avoided costs for electricity for Sierra. If the price adjustments were to be made now, the new prices based on the contract formula would be substantially less than the existing contract rates. Although Management believes that revenues generated will still be in excess of the costs of production, there is no assurance that future prices at which the electricity generated by the Steamboat Facilities may be sold will exceed the cost of production, or that Steamboat LLC will generate adequate cash flow from operations to meet its investing and financing requirements. Although the prices are variable and fluctuate, if, as expected, a substantial reduction in power prices for Steamboat 1 takes place in December 1996, the result would mean a decrease in the amount of net earnings of Steamboat LLC which the Company will receive, which, depending on the extent of the price reductions, could result in the Company reflecting a net loss. However, Management believes that more satisfactory earnings can potentially be obtained for the energy generated in the Steamboat Facilities through negotiations with Sierra and/or as a result of efforts by the Company to develop other options for sales of both electricity and heat from the facility. The Company believes it is in a position to obtain a satisfactory price for electricity generated in the Steamboat Facilities because (i) the existing contract with Sierra, which calls for "short term" avoided cost in the second 10 years, is subject to negotiation since no "short term" tariff has been recently published by Sierra with the state of Nevada regulatory authority; (2) even if published, "short term" rates may not be applicable to a 20 year (long term) contract; and (3) the Company is developing other options for sales of both electricity and heat from the facility, and heat is not subject to the power purchase contract. No assurance can be given that such efforts will be successful. 10 The Company will pay $1,000,000 into Steamboat LLC to provide capital for the potential acquisition of certain royalty interests and to fund certain improvements to the Steamboat Facilities which are expected to result in higher electricity output. While negotiations with certain royalty owners have already begun, no agreements have yet been concluded and no potential savings from royalty reductions are reflected in the pro forma financial statements presented herein. Additional royalty agreements, applying only to Steamboat 1, call for payment of a total of 30% of the net revenue of Steamboat 1 after certain deductions, starting March 1, 1997. The resulting effect on the net income of Steamboat LLC and on the Company's after-tax income will depend on the other elements of power sales revenues outlined above. Assuming the reduction in income from power sales discussed above, and the buyout of no royalty interests, the cost of these net revenue royalties could be in the range of $50,000 to $100,000 annually. The Company expects the Steamboat Facilities to generate sufficient revenues to make any royalty payments required. Negotiations with these interests have also already begun, but no assurance can be given that the negotiations will produce successful results. See "U.S. Energy Systems, Inc. and Subsidiaries Pro Forma Condensed Consolidated Statements of Operations," "Steamboat Facilities Pro Forma Condensed Combined Statement of Operations," "Management's Discussion and Analysis of Financial Condition and Plan of Operation--Plan of Operation" and "Business--Current Operations and On-Going Projects." RELIANCE ON PRESIDENT The Company will be dependent upon its executive officers and key employees, particularly its President, Richard Nelson. The unexpected loss of the services of Mr. Nelson could have a detrimental effect on the Company. Although the Company plans to add additional full-time employees after the Primary Offering, the Company presently has only three current full-time employees and contracts with independent contractors for the conduct of certain engineering, accounting, administrative and legal functions. The Company plans to obtain $1,000,000 of key man insurance on Mr. Nelson upon completion of this offering. GENERAL OPERATING 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 the Company is or will be involved contain certain redundancies and back-up mechanisms, there can be no assurance that any such breakdown or failure would not prevent the affected facility from performing under applicable power agreements. The development and operation of geothermal energy resources are subject to 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, the Company estimates the productivity of the geothermal resource and the expected decline in such productivity. The productivity of a geothermal resource may decline more than anticipated, resulting in insufficient recoverable reserves being available for sustained generation of the electrical power capacity desired. See "Business --Current Operations and On-Going Projects." GOVERNMENT REGULATION Under present federal law, the Company is not and will not be subject to regulation as a holding company under the Public Utility Holding Company Act of 1935 ("PUHCA") as long as each power plant in which it has an interest is a qualifying facility ("QF") under the Public Utility Regulatory Policies Act of 1978 ("PURPA"). A QF that is a cogeneration facility must produce not only electricity but also useful thermal energy for use in an industrial or commercial process or heating or cooling applications in certain proportions to the facility's total energy output and must meet certain energy efficiency standards. Under PURPA, a regulated public electric utility company must purchase electricity at its avoided cost from an IPP which has QF status. QF status is granted to IPP's which use fossil fuel in a manner which allows for recovery and use of a certain percentage of otherwise rejected heat thereby achieving a higher degree of fuel efficiency. QF status is also 11 granted to IPP's which use renewable energy sources such as geothermal, hydro, solar, wind, and waste products without regard to heat recovery. An IPP using fossil fuel, which loses its ability to use recovered heat, could fall below the efficiency standards and thereby lose its QF status. The regulated public electric utility company, which may have been required to purchase electricity from the IPP, could thereafter refuse to purchase such electricity. IPP's which have QF status, and which are not fossil fuel driven, are not subject to efficiency standards regarding QF status. See "Business--Government Regulation." 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 the Company believes that it is in substantial compliance with all applicable rules and regulations and that the projects in which it is involved have the requisite approvals for existing operations and are operated in accordance with applicable laws, the operations of the Company and its projects remain subject to 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 the Company 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 RISKS 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 the Company takes every precaution to insure that such regulations are met at all times, and projects are not entered into which do not or cannot meet such regulations, there is no assurance that such regulations can always be met. Should a condition occur in which emissions standards at a specific project fall below allowable standards, there could be costs involved in remediating such conditions. Additionally, as with all industrial sites, there are standards for the safe handling of fuels and chemicals which must be met. Again, the Company takes every precaution to insure such standards are met. Exigencies may occur--a fuel spillage for example--which would require remediation with attendant costs. Areas in which the Company is acquiring geothermal projects are subject to frequent low-level seismic disturbances, and more significant seismic disturbances are possible. While such power generation facilities are built to withstand relatively significant levels of seismic disturbance, and the Company believes it will be able to maintain adequate insurance protection, there can be no assurance 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 such insurance will continue to be available on commercially reasonable terms. UNCERTAINTY OF COMPETITIVE ENVIRONMENT In addition to competition from electric utilities in the markets where the projects are located, the Company also faces competition from approximately 150 companies currently involved in the cogeneration and independent power market. Virtually all of these companies are larger and better financed than the Company. Although the Company believes that it will be entering segments of the marketplace where it will not face extensive competition, there is no assurance that it will be able to do so, and it will thereby be disadvantaged if it has to compete with the larger and better financed companies. The entire industry also may face competition from existing investor owned utility companies and may be adversely affected by the prices charged by such companies for conventional energy sources, which, in turn, are affected by inflation and availability of fossil fuel. 12 INSURANCE Although the Company maintains insurance of various types to cover many of the risks that apply to its operations, including $2,000,000 of general liability insurance as well as separate insurance for each project, the Company's planned insurance will not cover every potential risk associated with its 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 the Company's financial condition and results of operations. Moreover, no assurance can be given that the Company will be able to maintain adequate insurance in the future at rates it considers reasonable. SUBSTANTIAL PORTION OF PROCEEDS TO PAY DEBTS; POTENTIAL CONFLICTS OF INTEREST BETWEEN THE COMPANY AND CERTAIN OF ITS OFFICERS A substantial amount of the net proceeds of the Primary Offering and will be used to repay the Company's current indebtedness. A portion of such repayment will benefit directly or indirectly several of the Company's officers, directors and stockholders. In order to induce all holders of Convertible Debentures to convert at least one-third of their Convertible Debentures, the Company agreed to reduce the conversion rate from $16 per share to the same price as that being offered to the public, $4.00 per share. There are 26 holders of Convertible Debentures, all of whom have been afforded the opportunity to obtain the same more favorable conversion rate. The Chairman of the Board, a director, and two principal stockholders of the Company are holders of an aggregate amount of $425,000 of the Company's Convertible Debentures. Accrued interest on such indebtedness, adjusted to November 30, 1996, which will be repaid from the proceeds of the Primary Offering, amounts to $119,000. As part of the Debenture Conversion the conversion rate of the Convertible Debentures held by those holders consenting to participate, which remain outstanding after the Debenture Conversion, will be reduced to $8.00 per share from the present $16.00 per share and the interest rate will be reduced to 9% from the present 18%. See "Closing Transactions" and "Description of Securities--Convertible Debentures." The President, the Chairman, two directors and two principal stockholders will also benefit by the payment to them of an aggregate of $1,141,000 (including accrued interest to November 30, 1996) for a loan made by them to enable the Company to obtain its interest in the co-generation facility at Plymouth State College in New Hampshire. Additionally, Messrs. Nelson and Rosen have each deferred portions of their salaries and $250,000 and $175,000, respectively, will be owed to them as of November 30, 1996. The deferred salaries will not be paid from net proceeds of the Primary Offering, but from cash flow, if and when, in the opinion of the Board of Directors, cash flow is sufficient. Messrs. Nelson and Rosen will also benefit from the release of their pledges of an aggregate of 97,250 shares of the Company's Common Stock owned by them in connection with certain bridge loans made to the Company by Anchor Capital Company, LLC ("Anchor") and Solvation, Inc. ("Solvation"), which loans are being repaid with a portion of the proceeds. See "Certain Transactions." LIMITED MARKET FOR THE COMMON STOCK; OFFERING PRICES DETERMINED BY NEGOTIATION Prior to the Primary Offering, there has been a limited trading market for the Common Stock and no trading market for the Warrants. The Common Stock has been sporadically traded on the OTC Bulletin Board. Although the Company has made an application so that the Common Stock and Warrants will trade on the Nasdaq SmallCap Market upon conclusion of the Primary Offering, there can be no assurance that an active public trading market for the Common Stock or Warrants will develop and continue after the Primary Offering. The initial offering prices of the Securities in the Primary Offering were determined by negotiations between the Company and the Representative and may bear no relation to the market prices of the Common Stock and Warrants after the Primary Offering. EFFECT OF WARRANTS, OPTIONS AND CONVERTIBLE SECURITIES OUTSTANDING AFTER OFFERING The Company has outstanding options and warrants which provide for the purchase of an aggregate of 291,850 shares of Common Stock at prices ranging from $4.00 to $10.00 per share. The Warrants, if exercised, would result in the issuance of 3,100,000 shares of Common Stock. In the Primary Offering, the Underwriters' 13 over-allotment option, if fully exercised, including the related Warrants, would result in the issuance of 930,000 shares of Common Stock. The Representative's Purchase Option, if fully exercised, including the related Warrants, would result in the issuance of 620,000 shares of Common Stock. An additional 128,125 shares of Common Stock are issuable upon conversion of remaining Convertible Debentures. These issuances of Common Stock, totalling 5,069,975 shares, would have a dilutive effect on the Company's stockholders by decreasing their percentage ownership in the Company. Moreover, the holders of such securities would be most likely to exercise or convert such securities at a time when the Company could obtain capital by a new offering of securities on terms more favorable than those provided by such securities. Consequently, the terms on which the Company could obtain additional capital may be adversely affected. See "Capitalization." IMMEDIATE AND SUBSTANTIAL DILUTION The Primary Offering involves an immediate dilution of approximately $2.15 per share of Common Stock, (approximately 54% of the offering price of the Common Stock) between the offering price per share of the Common Stock and the pro forma net tangible book value per share of the Common Stock immediately after the completion of the Primary Offering and the Closing Transactions. POSSIBLE RULE 144 SALES Upon consummation of the Primary Offering, the Company will have outstanding 3,869,650 shares of Common Stock. All of the 3,100,000 shares sold in the Primary Offering (assuming no exercise of the Underwriters' over-allotment option in the Primary Offering), will be freely transferable by persons other than affiliates (as defined in regulations under the Securities Act) without restriction or further registration under the Securities Act. Of the 439,650 shares of Common Stock outstanding prior to the Primary Offering, 64,650 are "restricted securities" within the meaning of Rule 144 under the Securities Act and may not be sold in the absence of registration under the Securities Act, unless an exemption from registration is available, including the exemption provided by Rule 144. Under Rule 144 as currently in effect, all of such 64,650 shares are currently eligible for sale, subject in each instance to the volume limitations of the Rule. The 205,000 shares of Common Stock to be issued in the Preferred Stock Exchange and the 125,000 shares of Common Stock to be issued upon the Debenture Conversion will be restricted securities. Although registered pursuant to the ^Shelf Registration, Anchor will not sell the 205,000 shares of Common Stock it will receive in the Preferred Stock Exchange without the Representative's prior written approval for a period of 9 months from the date of this Prospectus. The foregoing does not give effect to any shares issuable on exercise of outstanding options and warrants. The effect of the offer and sale of such shares may be to depress the market price for the Company's Common Stock. See "Shares Eligible for Future Sale--Possible Rule 144 Sales." POTENTIAL ADVERSE EFFECT OF WARRANT REDEMPTION The Warrants may be called for redemption by the Company once they become exercisable and the Representative has given its prior consent 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 (150% of the exercise price of the Warrants) 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 the holders to exercise the Warrants and pay the exercise price at a time when it may be disadvantageous for them to do so, to sell the Warrants at the current market price when they 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. The Company is required to maintain the effectiveness of a current registration statement relating to the exercise of the Warrants and, accordingly, the Company 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 underlying securities. Also, lack of qualification or registration under applicable state securities laws may mean that the Company 14 would be unable to issue securities upon exercise of the Warrants to holders in certain states, including at the time when the Warrants are called for redemption. See "Description of Securities--Warrants." AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS The Company's Certificate of Incorporation authorizes the issuance of Preferred Stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of holders of the Company's Common Stock. In the event of issuance, the Preferred Stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company, which could have the effect of discouraging bids for the Company and, thereby, preventing stockholders from receiving a premium for their shares over the then-current market prices. See "Description of Securities." The Delaware General Corporation Law includes provisions which are intended to encourage persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with the Company's directors rather than pursue non-negotiated takeover attempts. These existing takeover provisions may have a significant effect on the ability of a stockholder to benefit from certain kinds of transactions that may be opposed by the incumbent directors. See "Description of Securities--Anti-Takeover Provisions." CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE WARRANTS The Company will be able to issue shares of its Common Stock upon exercise of the Warrants only if there is then a current prospectus relating to the issuance of such Common Stock and only if such Common Stock is qualified for sale or exempt from qualification under applicable securities laws of the jurisdictions in which the various holders of the Warrants reside. The Company has undertaken to keep current a prospectus which will permit the purchase and sale of the Common Stock underlying the Warrants, but there can be no assurance that the Company will be able to do so. Although the Company intends to seek to qualify for sale the shares of Common Stock underlying the Warrants in those states in which the securities are to be offered, no assurance can be given that such qualification will be obtained. The Warrants may be deprived of any value and the market for the Warrants may be limited if a current prospectus covering the Common Stock issuable upon the exercise of the Warrants is not kept effective or if such Common Stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the Warrants then reside. See "Description of Securities--Warrants." QUALIFICATION REQUIREMENTS FOR NASDAQ SECURITIES; RISKS OF LOW-PRICED SECURITIES The Company anticipates satisfying the Nasdaq SmallCap listing criteria following the consummation of the Primary Offering, however, there can be no assurance that it will be able to continue to meet the required standards once it is listed. If it should fail to meet one or more of such standards, its securities would be subject to deletion from Nasdaq. If this should occur, trading, if any, in the Common Stock and the Warrants would then continue to be conducted in the over-the-counter market on the OTC Bulletin Board, an NASD-sponsored inter-dealer quotation system, or in what are commonly referred to as "pink sheets." As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Company's securities. In addition, if the Company's securities cease to be quoted on Nasdaq and the Company fails to meet certain other criteria, they would be subject to Commission rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. The broker-dealer also must provide the customer with current bid and offer quotations for the securities, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each such security held in the customer's account. In addition, prior to effecting a transaction in such a security the broker-dealer must deliver a standardized risk disclosure document prepared by 15 the Commission that provides information about low-priced securities and the nature and level of risks in the market for such securities. Consequently, if the Company's securities were no longer quoted on Nasdaq, these rules may affect the ability of broker-dealers to sell the Company's securities and the ability of purchasers in each of the Primary and Secondary Offering to sell their securities in the secondary market. LIMITATIONS ON REPRESENTATIVE'S MARKET MAKING ACTIVITIES The Representative has the right to act as the Company's agent in connection with any future solicitation of warrantholders to exercise their Warrants. Unless granted an exemption by the Commission from Rule 10b-6 promulgated under the Exchange Act, the Representative will be prohibited, during certain periods when the Warrants are exercisable, from engaging in any market-making activities with regard to the Company's securities until the later of the termination of such solicitation activity or the termination (by waiver or otherwise) of any right that the Representative may have to receive a fee for soliciting the exercise of the Warrants. The Warrants are not exercisable until one year after the date of this Prospectus. As a result, the Representative may be unable to continue to provide a market for the Company's securities during certain periods while the Warrants are exercisable. Such limitations could impair the liquidity and market prices of the Common Stock and Warrants. DIVIDENDS UNLIKELY The Company has never declared or paid dividends on its Common Stock and currently does 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. See "Dividend Policy." LIMITED LIABILITY OF DIRECTORS The Company's 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 certain circumstances. Accordingly, except in such circumstances, the Company's directors will not be liable to the Company or its stockholders for breach of such duty. 16 USE OF PROCEEDS The Company will receive no proceeds from the sale of Securities offered hereby. PRICE RANGE OF COMMON STOCK The Common Stock has traded on the NASD OTC Bulletin Board under the symbols USEY (until July 1996) and USEE since the second quarter of the 1995 fiscal year. The following table sets forth, for the periods indicated, the high and low closing bid quotations for the Common Stock, as reported by the NASD OTC Bulletin Board. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
BID ------------- HIGH LOW ------ ------ Fiscal Year Ended January 31, 1995: Second Quarter............................................ $ 4.40 $ 3.60 Third Quarter............................................. $10.00 $ 8.40 Fourth Quarter............................................ $10.00 $10.00 Fiscal Year Ended January 31, 1996: First Quarter............................................. $10.00 $10.00 Second Quarter............................................ $10.00 $10.00 Third Quarter............................................. $ 8.40 $ 6.00 Fourth Quarter............................................ $ 4.00 $ 2.40 Fiscal Year Ending January 31, 1997: First Quarter............................................. $ 2.92 $ 2.48 Second Quarter............................................ $ 2.00 $ 1.50 Third Quarter (to October 28, 1996)....................... $ 3.21 $ 2.58
As of October 28, 1996, there were 584 record holders of the Company's Common Stock and approximately 900 beneficial holders of the Company's Common Stock. On October 28, 1996, the high bid price was $3.25 and low bid price was $3.25. DIVIDEND POLICY The Company has not paid cash dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future. 17 CAPITALIZATION The following table sets forth the historical capitalization of the Company at July 31, 1996 and as adjusted to reflect (i) the sale of the Securities in the Primary Offering, (ii) the consummation by the Company of the Debenture Conversion and the Preferred Stock Exchange, and (iii) the application of the net proceeds from the foregoing, including the completion of the Steamboat Acquisition and the repayment of debt including accrual of interest and additional bridge loan borrowing to November 30, 1996. See "Closing Transactions" and "Certain Transactions." This table should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and the Pro Forma Financial Statements included in this Prospectus.
JULY 31, 1996 ------------------------ PRO FORMA HISTORICAL AS ADJUSTED ----------- ----------- Long-term debt, net of unamortized discount of $30,000............................................. $ 2,818,000 $ 1,343,000 Loans payable........................................ 960,000 Pre-reorganization income taxes payable, current..... 192,000 192,000 ----------- ----------- 3,970,000 1,535,000 ----------- ----------- Stockholders' equity: Preferred stock, $0.01 par value, 5,000,000 shares authorized; issued and outstanding, 57,500 shares; to be issued and outstanding, none................ 1,000 Common stock, $0.01 par value, 35,000,000 shares authorized; issued and outstanding, 439,650 shares; to be issued and outstanding, 3,869,650 shares(1)(2)...................................... 4,000 38,000 Additional paid-in capital......................... 112,000 11,020,000 Accumulated (deficit)^(3).......................... (3,674,000) (3,901,000) ----------- ----------- Total ^ stockholders' equity (deficit)............... (3,557,000) 7,157,000 ----------- ----------- Total capitalization................................. $ 413,000 $ 8,692,000 =========== ===========
- -------- (1) Includes (i) 439,650 Shares of Common Stock outstanding prior to the Primary Offering, (ii) 3,100,000 shares of Common Stock being issued pursuant to the Primary Offering, (iii) 125,000 shares of Common Stock to be issued in the Debenture Conversion and (iv) 205,000 shares of Common Stock to be issued in the Preferred Stock Exchange. (2) Does not include an aggregate of 4,264,975 shares of Common Stock reserved and to be reserved for issuance following completion of the Primary Offering including (i) 291,850 shares issuable on exercise of currently outstanding options and warrants, (ii) 3,845,000 shares issuable on exercise of the Warrants, the Representative's Purchase Option and the Warrants issuable on exercise of the Representative's Purchase Option and the Private Warrants being issued in the Private Placement and the Debenture Conversion and (iii) 128,125 shares issuable upon conversion of Convertible Debentures which will remain outstanding after the Primary Offering. (3) Change in accumulated (deficit) reflects the write off of unamortized debt discount of $25,000 in connection with repayment of certain debt and the accrual of interest to October 31, 1996. 18 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1996 The following Pro Forma Condensed Balance Sheet gives effect to the following transactions as if they had occurred on July 31, 1996: (a) sale of 3,100,000 shares of Common Stock and 3,100,000 Warrants offered by this Prospectus for net proceeds of $10,662,000, (b) acquisition of a 95% interest in two geothermal power plants (the Steamboat Facilities) for an aggregate of $4,741,000 (including $50,000 as a downpayment which was previously paid by the Company), (c) acquisition of an 81.5% interest in NRG for $265,000, (d) repayment of notes payable and other liabilities in the aggregate amount of $2,767,000 adjusting for accrual of interest and additional bridge loan financing to November 30, 1996, (e) conversion of 57,500 shares of Series One Preferred Stock into 205,000 shares of Common Stock, and (f) conversion of $500,000 principal amount of the existing Convertible Debentures to 125,000 shares of Common Stock and 125,000 Private Warrants. The Pro Forma Condensed Balance Sheet should be read in conjunction with Pro Forma Statement of Operations and the historical financial statements of the Company, Lehi Independent Power Associates, L.C. ("LIPA") and Plymouth Cogeneration included in this Prospectus.
STEAMBOAT PRO FORMA ADJUSTMENTS USE 1 AND 1A --------------------------- PRO HISTORICAL PRO FORMA CONSOLIDATED DEBIT CREDIT FORMA ----------- ---------- ------------ ----------- ----------- ----------- A S S E T S Current assets: Cash.................... $ 1,000 $ 1,000 $10,662,000(a) $ 4,691,000(b) $ 2,965,000 25,000(i) 2,767,000(c2) 265,000(h) Inventory............... 19,000 19,000 19,000 Other current assets.... 1,000 $ 3,000 4,000 4,000 ----------- ---------- ---------- ----------- ----------- ----------- Total current assets... 21,000 3,000 24,000 10,687,000 7,723,000 2,988,000 Investments in Joint Ventures--at equity: Lehi Independent Power 1,112,000 1,112,000 1,112,000 Associates, LC........ Plymouth Cogeneration 669,000 669,000 669,000 Limited Partnership... Steamboat 53,000 53,000 4,691,000(b) 4,744,000(g) -- Envirosystems......... NRG Company LLC........ 265,000(h) 265,000(i) -- Loan receivable, Reno 300,000(i) 300,000 Energy................. Property, Plant and 5,015,000 5,015,000 5,015,000 Equipment.............. Deferred costs of regis- 221,000 221,000 221,000(a) -- tration................ ----------- ---------- ---------- ----------- ----------- ----------- TOTAL.................. $ 2,076,000 $5,018,000 $7,094,000 $15,943,000 $12,953,000 $10,084,000 =========== ========== ========== ----------- ----------- =========== L I A B I L I T I E S Loans payable........... $ 960,000 $ 960,000 $ 960,000(c2) $ -- Pre-reorganization in- 192,000 192,000 192,000 come taxes payable..... Other current liabili- 1,663,000 1,663,000 807,000(c2) 202,000(c1) 1,058,000 ties .................. ----------- ---------- ---------- ----------- ----------- ----------- Total current liabili- 2,815,000 2,815,000 1,767,000 202,000 1,250,000 ties.................. Convertible subordinated 1,525,000 1,525,000 500,000(e) 1,025,000 secured debentures .... Notes payable .......... 975,000 975,000 1,000,000(c2) 25,000(f) -- Other liabilities ...... 318,000 318,000 318,000 ----------- ---------- ---------- ----------- ----------- ----------- Total liabilities...... 5,633,000 5,633,000 3,267,000 227,000 2,593,000 ----------- ---------- ----------- ----------- ----------- Minority interests in subsidiaries: Steamboat Envirosystems 274,000(g) 274,000 LLC................... NRG Company LLC........ 60,000(i) 60,000 ----------- ----------- Total Minority Inter- 334,000 334,000 ests.................. ----------- ----------- S T O C K H O L D E R S' E Q U I T Y (C A P I T A L D E F I C I E N C Y): Preferred stock, ($.01 par value issued and outstanding, 57,500 shares; to be issued and outstanding, none). 1,000 1,000 1,000(d) -- Common stock ($.01 par value, issued and out- standing, 439,650 shares; to be issued and outstanding, 3,869,650 shares)...... 4,000 4,000 31,000(a) 38,000 2,000(d) 1,000(e) Additional paid-in capi- 112,000 112,000 221,000(a) 10,631,000(a) 11,020,000 tal.................... 1,000(d) 499,000(e) Accumulated deficit..... (3,674,000) (3,674,000) 25,000(f) (3,901,000) 202,000(c1) Members' equity: U.S. Energy Systems, 4,744,000 4,744,000 4,744,000(g) -- Inc. ................. Far West Capital, Inc.. 274,000 274,000 274,000(g) -- ----------- ---------- ---------- ----------- ----------- ----------- Total stockholders' (3,557,000) 5,018,000 1,461,000 5,468,000 11,164,000 7,157,000 equity (capital deficiency)........... ----------- ---------- ---------- ----------- ----------- ----------- TOTAL.................. $ 2,076,000 $5,018,000 $7,094,000 $24,678,000 $24,678,000 $10,084,000 =========== ========== ========== =========== =========== ===========
19 Notes to Pro Forma Condensed Consolidated Balance Sheet - -------- (a) To reflect sale of 3,100,000 shares of Common Stock and 3,100,000 Warrants for net proceeds of $10,662,000. (b) To reflect purchase of a 95% interest in Steamboat LLC, which is acquiring the Steamboat Facilities. (c1)To reflect accrual of interest from August 1 to November 30, 1996............................................................... $202,000 (c2)To reflect assumed repayment of debt: Note payable.................................................... $1,000,000 Bridge loans.................................................... 960,000 Accrued interest................................................ 807,000 ---------- $2,767,000 ==========
(d) To reflect conversion of existing Series One Preferred Stock into 205,000 shares of Common Stock. (e) To reflect conversion of $500,000 principal amount of the existing Convertible Debentures to 125,000 shares of Common Stock and 125,000 Private Warrants. No value has been assigned to these warrants. (f) To eliminate unamortized debt discount on debt repaid. This charge will be treated as an extraordinary loss in the statement of operations during the period this Offering is consummated. (g) To eliminate Steamboat LLC investment account and set up minority interest. (h) To reflect purchase of an 81.5% interest in NRG Company, LLC for $265,000. (i) To reflect consolidation of accounts of NRG. The only assets of NRG are a loan receivable of $300,000 from Reno Energy and cash of $25,000. The majority interest was paid in during September, 1996. See "Business-- Current Operations and On-going Projects--Nevada District Heating Project." 20 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS The following Pro Forma Condensed Consolidated Statement of Operations consolidates the results of operations of the Company for the year ended January 31, 1996 and the six months ended July 31, 1996 with the pro forma results of operations of the Steamboat Facilities for the year ended December 31, 1995 and the six months ending June 30, 1996 as if the proposed Steamboat Acquisition had taken place at the beginning of the periods in a transaction accounted for as a purchase. The Pro Forma Condensed Consolidated Statement of Operations also gives effect to the following: (a) sale of Common Stock and Warrants to the extent necessary to fund the acquisition of a 95% interest in the Steamboat Facilities and repay debt, (b) conversion of 57,500 shares of Series One Preferred Stock into 205,000 shares of Common Stock, (c) restructure of existing Convertible Debentures by converting $500,000 principal amount to 125,000 shares of Common Stock and 125,000 Private Warrants and reducing the interest rate from 18% to 9% on $875,000 of the remaining balance and (d) the investment in NRG as if the investment was made at the beginning of the periods. This statement should be read in conjunction with the Steamboat Envirosystems, L.C. Pro Forma Condensed Balance Sheet as of June 30, 1996, the Steamboat Envirosystems Power Plants Pro Forma Condensed Combined Statement of Operations and the historical financial statements of the Company, LIPA and Plymouth Cogeneration, Far West Electric Energy Fund, L.P. and 1-A Enterprises, included in this Prospectus. LIPA, Plymouth, Far West Electric Energy Fund, L.P. and 1-A Enterprises each have a fiscal year end of December 31 which differs to the fiscal year end of the Company. No material adjustment is necessary to reconcile the December 31 year end to the Company's January 31 year end. The pro forma results of operations are not necessarily indicative of future results of operations or what the results would have been if the acquisition had taken place at the beginning of the periods.
YEAR ENDED JANUARY 31, 1996 -------------------------------------------------------------------- ADJUSTED USE 1 AND 1A PRO FORMA PRO FORMA HISTORICAL PRO FORMA (1) CONSOLIDATED ADJUSTMENTS CONSOLIDATED ----------- ------------- ------------ ----------- ------------ Revenue: Electric power... $ -- $3,404,000 $3,404,000 $ -- $3,404,000 ----------- ---------- ---------- --------- ---------- Total revenue.... -- 3,404,000 3,404,000 -- 3,404,000 ----------- ---------- ---------- --------- ---------- Expenses: Depreciation.... -- 172,000 172,000 172,000 Royalty......... -- 528,000 528,000 528,000 Administrative and other....... 853,000 1,003,000 1,856,000 1,856,000 Interest expense(5a)/income (5b) ............ 604,000 -- 604,000 (476,000)(2) 106,000 (22,000)(5b) Loss from Joint Ventures......... 17,000 17,000 17,000 ----------- ---------- ---------- --------- ---------- Total expenses.. 1,474,000 1,703,000 3,177,000 2,679,000 ----------- ---------- ---------- --------- ---------- Income (loss) be- fore income tax- es............... (1,474,000) 1,701,000 227,000 725,000 Income taxes..... -- -- (244,000)(3) 244,000 ----------- ---------- ---------- --------- ---------- Net income (loss)........... (1,474,000) 1,701,000 227,000 481,000 Dividends on pre- ferred stock..... 21,000 21,000 21,000(4) -- ----------- ---------- ---------- --------- ---------- Net income (loss) available for common stockhold- ers (6).......... $(1,495,000) $1,701,000 $ 206,000 $ 481,000 ----------- ---------- ---------- --------- ---------- Net income per common share (7). $ (3.41) $ 0.17 ----------- ---------- Shares used in computing net in- come per common share (7)........ 438,773 2,797,292 =========== ========== SIX MONTHS ENDED JULY 31, 1996 ------------------------------------------------------------------- ADJUSTED USE 1 AND 1A PRO FORMA PRO FORMA HISTORICAL PRO FORMA (1) CONSOLIDATED ADJUSTMENTS CONSOLIDATED ----------- ------------- ------------ --------------- ------------ Revenue: Electric power... $ -- $1,919,000 $1,919,000 $ -- $1,919,000 ----------- ------------- ------------ --------------- ------------ Total revenue.... -- 1,919,000 1,919,000 -- 1,919,000 ----------- ------------- ------------ --------------- ------------ Expenses: Depreciation.... -- 86,000 86,000 86,000 Royalty......... -- 372,000 372,000 372,000 Administrative and other....... 408,000 519,000 927,000 927,000 Interest expense(5a)/income (5b) ............ 328,000 -- 328,000 (276,000)(2) 41,000 (11,000)(5b) Loss from Joint Ventures......... 92,000 92,000 92,000 ----------- ------------- ------------ --------------- ------------ Total expenses.. 828,000 977,000 1,805,000 1,518,000 ----------- ------------- ------------ --------------- ------------ Income (loss) be- fore income tax- es............... (828,000) 942,000 114,000 401,000 Income taxes..... -- -- 135,000 (3) 135,000 ----------- ------------- ------------ --------------- ------------ Net income (loss)........... (828,000) 942,000 114,000 266,000 Dividends on pre- ferred stock..... 29,000 29,000 (29,000)(4) -- ----------- ------------- ------------ --------------- ------------ Net income (loss) available for common stockhold- ers (6).......... $(857,000) $ 942,000 $ 85,000 $ 266,000 ----------- ------------- ------------ --------------- ------------ Net income per common share (7). $ (1.95) $ 0.08 ----------- ------------ Shares used in computing net in- come per common share (7)........ 439,650 3,014,708 =========== ============
21 - -------- (1) Reflects the Pro Forma earnings of the Steamboat Facilities as shown on the Pro Forma Condensed Combined Statement of Operations of Steamboat Facilities. The Company is entitled to an annual preferred return of the first $1,800,000 of the net income of Steamboat LLC. No provision for the interest of Far West Capital in the net income of Steamboat Facilities is made until the annual net income of the Steamboat Facilities exceeds $1,800,000. (2) To reflect the reduction in interest expenses as a result of repayment of Notes Payable and Loans Payable, conversion of $500,000 Convertible Subordinated Secured Debentures to 125,000 shares of Common Stock and 125,000 Private Warrants, and reduction of interest rate from 18% to 9% on $875,000 of the remaining balance of the Convertible Debentures. The reduction of the interest rate to 9% will be accounted for prospectively. (3) To reflect provision for federal and state taxes at 38%, while providing for a limit on the net operating loss deduction assuming an ownership change had taken place at the beginning of the fiscal year and the beginning of the six month period ended July 31, 1996. A deferred tax benefit was not provided in the historical financial statements since the likelihood of realization of such benefit cannot be determined. (4) Provision for dividends on Series One Preferred Stock eliminated as a result of the Preferred Stock Conversion. (5a) The historical amounts during the year ended January 31, 1996 and the six months ended July 31, 1996 include approximately $185,000 and $93,000, respectively, of interest on debts owed to related parties. (5b) To reflect NRG income of 9% interest on $300,000 loan to Reno Energy, $27,000 per annum, less the 18.5% minority interest in NRG. (6) The net income (loss) available to common stockholders during the period the 57,500 shares of Series One Preferred Stock are converted into 205,000 shares of Common Stock will be reduced by a nonrecurring amount of approximately $791,000 representing the excess of fair value of the Common Stock transferred to the holders of the Preferred Stock over the carrying amount of the Preferred Stock in the Company's balance sheet. (7) Pro forma net income per share is based on the weighted average number of shares outstanding, the shares issued in the Debenture Conversion and the Preferred Stock Exchange, the dividend on the 11% Preferred Stock and shares issued in the Primary Offering to obtain funds required for the acquisition of the Steamboat Facilities, the investment in NRG and the retirement of debt (2,103,779 shares at January 31, 1996 and 2,245,058 shares at July 31, 1996). Assumed exercise of options and warrants have not been reflected as they would be anti-dilutive. 22 STEAMBOAT ENVIROSYSTEMS, L.C. PRO FORMA CONDENSED BALANCE SHEET AS OF JUNE 30, 1996 The following Pro Forma Condensed Balance Sheet gives effect to the acquisition of two geothermal plants (the "Steamboat Facilities") accounted for as a purchase by the Company (95% ownership interest) and Far West Capital (5% ownership interest) for an aggregate of $5,015,000 as if such acquisition had taken place on June 30, 1996. The total is made up of $4,741,000 (including $50,000 down payment previously paid by the Company) contributed by the Company and $274,000 contributed by Far West Capital, Inc. The Company's contribution will consist of (1) $1,575,000 to be distributed to the limited partners and owners of the predecessor entities (other than Far West Capital, Inc.) to obtain a 95% interest in Steamboat Envirosystems, L.C., (2) $2,166,000 to be used to pay all outstanding mortgages on the Steamboat Facilities and (3) $1,000,000 in cash to be contributed to the Partnership to allow the potential purchase and cancellation of certain royalty interests and to fund certain improvements to the Steamboat Facilities. Far West Capital is contributing its limited partnership interest in Steamboat 1, valued at $274,000 to Steamboat LLC. Far West Capital has a 5.14% ownership interest in Steamboat 1 and is not participating in the distributions of the purchase price paid by the Company. The Pro Forma Condensed Balance Sheet should be read in conjunction with the Pro Forma Condensed Combined Operations of Steamboat Envirosystems, L.C. and the historical financial statements of the Company, Far West Electric Energy Fund, L.P. and 1-A Enterprises included in this Prospectus.
PRO FORMA ADJUSTMENTS ------------------------ DEBIT CREDIT PRO FORMA ---------- ---------- ---------- ASSETS Cash.................................. $4,741,000(a) $1,575,000(c) 1,000,000(d) 2,166,000(f) Other Assets.......................... 3,000(a) $ 3,000 Property, Plant and Equipment......... 274,000(b) 1,575,000(c) 1,000,000(d) 2,166,000(e) 5,015,000 ---------- ---------- ---------- Total............................... $9,759,000 $4,741,000 $5,018,000 ========== ========== ========== LIABILITIES Notes payable......................... $2,166,000(f) $2,166,000(e) MEMBERS' EQUITY U.S. Energy Systems, Inc.............. 4,744,000(a) $4,744,000 Far West Capital, Inc................. 274,000(b) 274,000 ---------- ---------- ---------- Total............................... $2,166,000 $7,184,000 $5,018,000 ========== ========== ==========
- -------- (a) To reflect cash contribution of U.S. Energy Systems, Inc. including $50,000 deposit previously paid. (b) To reflect contribution of Far West Capital Inc. of its 5.14% limited partnership interest in Far West Electric Energy Fund, L.P. (c) To reflect distributions to limited partners of Far West Electric Energy Fund, L.P. and owners of 1-A Enterprises. (d) To reflect the investment to purchase and cancel certain royalty interests and to fund certain improvements to the Steamboat Facilities. (e) To reflect assumption of the mortgage to acquire the Steamboat Facilities from Far West Electric Energy Fund, L.P. and 1-A Enterprises (the "Mortgage"). (f) To reflect payment of the Mortgage. 23 STEAMBOAT FACILITIES PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS The following Pro Forma Condensed Combined Statement of Operations of the Steamboat Facilities reflects the combined results of operations of the Steamboat Facilities for the year ended December 31, 1995 and the six months ended June 30, 1996, adjusted to eliminate those costs which will no longer exist as a result of the purchase of interests by the Company and Far West Capital. Steamboat LLC will acquire the Steamboat Facilities from Far West Electric Energy Fund L.P. and 1-A Enterprises subject to a mortgage in favor of an institutional lender and certain net revenue or royalty interests in steam extraction rights. The $4,691,000 contributed by the Company to Steamboat LLC will be applied as follows: (1) $1,575,000 cash purchase price (less $50,000 down payment previously paid by the Company) will be used to obtain a 95% interest in Steamboat LLC, (2) a mortgage on the Steamboat Facilities, on which the last quarterly principal payment was made on October 20, 1996, which had a face value of $3,800,000 as at November 30, 1996 net of an escrowed reserve, and will be acquired by the Company for $2,166,000 and contributed to Steamboat LLC, and (3) $1,000,000 in cash will be contributed by the Company to Steamboat LLC to allow the potential purchase and cancellation of certain of the royalty interests and to fund certain improvements to the Steamboat Facilities. This statement is not necessarily indicative of what results of operations would have been had the Company acquired its interest in the Steamboat Facilities at the beginning of the periods or of what future results of operations may be. This statement should be read in conjunction with the historical financial statements of Far West Electric Energy Fund, L.P. (of which Steamboat 1 is a part) and 1-A Enterprises (Steamboat 1-A) included in this Prospectus.
YEAR ENDED DECEMBER 31, 1995 --------------------------------------------------------------- HISTORICAL --------------------------------- FAR WEST ELECTRIC ENERGY 1 AND 1-A FUND, 1-A PRO FORMA L.P.(1) ENTERPRISES COMBINED ADJUSTMENTS ADJUSTED ---------- ----------- ---------- ----------- ---------- Revenue: Electric power.... $2,529,000 $875,000 $3,404,000 $ $3,404,000 Other............. 145,000 145,000 (87,000) (3a,b) (58,000) (4) ---------- -------- ---------- ----------- ---------- Total revenues.. 2,674,000 875,000 3,549,000 (145,000) 3,404,000 ---------- -------- ---------- ----------- ---------- Expenses: Operations: Depreciation..... 631,000 104,000 735,000 (563,000)(2) 172,000 Royalty.......... 405,000 210,000 615,000 (87,000)(3a,b) 528,000 Other............ 824,000 237,000 1,061,000 (58,000)(4) 1,003,000 Interest........... 655,000 161,000 816,000 (816,000)(5) ---------- -------- ---------- ----------- ---------- Total expenses.... 2,515,000 712,000 3,227,000 $(1,524,000) 1,703,000 ---------- -------- ---------- ----------- ---------- Net income........ $ 159,000 $163,000 $ 322,000 $1,701,000 ========== ======== ========== ========== SIX MONTHS ENDED JUNE 30, 1996 -------------------------------------------------------------- HISTORICAL --------------------------------- FAR WEST ELECTRIC ENERGY PRO FORMA FUND, A 1 AND 1-A L.P. ENTERPRISES COMBINED ADJUSTMENTS ADJUSTED ---------- ----------- ---------- ----------------- ---------- Revenue: Electric power.... $1,509,000 $410,000 $1,919,000 $ $1,919,000 Other............. 68,000 68,000 (43,000)(3) (25,000)(4) ---------- ----------- ---------- ----------------- ---------- Total revenues.. 1,577,000 410,000 1,987,000 (68,000) 1,919,000 ---------- ----------- ---------- ----------------- ---------- Expenses: Operations: Depreciation..... 329,000 52,000 381,000 (295,000)(2) 86,000 Royalty.......... 237,000 92,000 329,000 43,000 (3a,b) 372,000 Other............ 439,000 105,000 544,000 (25,000)(4) 519,000 Interest........... 330,000 71,000 401,000 (401,000)(5) ---------- ----------- ---------- ----------------- ---------- Total expenses.... 1,335,000 320,000 1,655,000 $(678,000) 977,000 ---------- ----------- ---------- ----------------- ---------- Net income........ $ 242,000 $ 90,000 $ 332,000 $ 942,000 ========== =========== ========== ==========
- ---- (1) Does not include the operations of Crystal Springs Project or the gain on sale of Crystal Springs Project. Crystal Springs Project was sold by Far West Electric Energy Fund, L.P. in February, 1995. (2) To record estimated reduction of depreciation for new basis of assets acquired, based on $5,157,000 total cost, assuming a 30-year depreciation period, from date of acquisition. (3)(a) To eliminate certain royalties paid by 1-A Enterprises to Far West Electric Energy Fund, L.P., which amount to $87,000 in the year ended December 31, 1995 and $43,000 in the six months ended June 30, 1996. (b) Does not include additional savings to be made if negotiations with certain royalty owners, already under way, are successful. (4) To eliminate intercompany charges paid by 1-A Enterprises to Far West Electric Energy Fund, L.P. (5) To eliminate interest expense due to elimination of debt. (6) No provision for the interest of Far West Capital in the net income is required until the annual net income for the Steamboat Facilities exceeds $1,800,000. 24 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND PLAN OF OPERATION RESULTS OF OPERATIONS Year ended January 31, 1996 compared to year ended January 31, 1995 The Company had no revenues during the two fiscal years because (i) the Lehi project acquired during that period was dormant, (ii) in the Plymouth project, depreciation offset all earnings and (iii) efforts to arrange financing were just beginning. In the fiscal year ended January 31, 1996, the Company had a loss from operations of $1,474,000. This was reduced by an extraordinary gain of $83,000 arising from the restructuring of a liability, resulting in a net loss for the fiscal year of $1,391,000. In the earlier fiscal year the loss from operations was $1,401,000 and the net loss was $1,316,000. The elements making up the losses in the two fiscal years were:
1996 1995 ---------- ---------- Operating expenses.................................... $ 27,000 $ 109,000 Selling and administrative expenses................... 826,000 897,000 Interest expense...................................... 604,000 319,000 Loss from Joint Ventures.............................. 17,000 76,000 ---------- ---------- Totals.............................................. $1,474,000 $1,401,000 ========== ==========
Operating expenses of $27,000 and $109,000 in the fiscal years ended January 31, 1996 and 1995 resulted from the adjudication of legal action on a project which had been completed and reported in an earlier year. There will be no further costs associated with this project. Major items in the selling and administrative expenses were:
1996 1995 -------- -------- Salaries and consulting fees.............................. $431,000 $407,000 Corporate expenses........................................ 70,000 85,000 Legal and professional costs.............................. 148,000 202,000
While there was no revenue during the two years, it was nevertheless necessary to expend funds for salaries and consulting fees to evaluate new proposals and structure joint ventures and new projects for planned growth. The Company estimates that $75,000 of the salaries and consulting costs are non-recurring or applicable to specific projects which will absorb future costs. Included in corporate expenses in the fiscal year ended January 31, 1996 is a non-recurring cost of $25,000 for a previously planned public offering that was never consummated. Legal and professional costs were lower in the 1996 fiscal year due to the fact that there were no start-up costs for the Company in this year. Costs already incurred in connection with this Prospectus, approximately $50,000 as of January 31, 1996, have been deferred. Interest expense increased in the 1996 fiscal year due to the additional borrowings in notes payable and bridge loans. The bulk of the increase is accounted for as follows: The $1,000,000 in notes payable were in existence only part of the 1995 fiscal year and the interest on them accrued in that year totaled $28,000, whereas for the full 1996 fiscal year the interest was $137,000. The bridge loans came into being in June, 1995, so did not affect the 1995 fiscal year. The interest expense in the 1996 fiscal year was $169,000. Losses from joint ventures of $17,000 in the 1996 fiscal year and $76,000 in the 1995 fiscal year include $59,000 and $55,000 respectively for amortization of purchase price over net equities in the net assets of LIPA 25 and Plymouth Cogeneration. For the period ended January 31, 1996, the Company's allocated share of income or loss from joint ventures equalled $86,000 gain from LIPA, and $44,000 loss from Plymouth Cogeneration. The Company's gain from LIPA includes $118,000 gain from sale of unused plant equipment. Six months Ended July 31, 1996 Compared to 1995 The Company had no revenues for either of these periods. The losses shown were made up of the following major elements:
1996 1995 -------- -------- (Loss) from joint ventures................................... $ 92,000 $ 62,000 ======== ======== Operating expenses........................................... -- $ 26,000 ======== ======== Selling and administrative expenses: Salaries and consulting fees............................... $239,000 $190,000 Legal and professional fees................................ 77,000 63,000 Corporate expenses......................................... 15,000 48,000 All other.................................................. 77,000 94,000 -------- -------- Total selling and administrative expenses.................... $408,000 $395,000 ======== ======== Interest expenses............................................ $328,000 $223,000 ======== ======== The six-month joint venture losses break down as follows: Lehi Independent Power Associates, L.C. ("Lehi")............. $ 58,000 $ 40,000 Plymouth Cogeneration Limited Partnership ("Plymouth")....... 34,000 22,000 -------- -------- Total (loss) from joint ventures............................. $ 92,000 $ 62,000 ======== ========
Operating expenses in the 1995 period resulted from the adjudication of legal action on a project which had been completed and reported on earlier. There will be no further costs associated with this project. Consulting agreements which began during 1995 and were not in existence during the 1995 period accounted for the increase in salaries and consulting fees. The Company has entered into a consulting agreement with Indus Inc. for assistance in developing both projects and joint development agreements in Asia, with specific emphasis on India. To date, Indus Inc. has been instrumental in bringing in the potential project for the Rajinder Steel Mill in Raijpur, India and for developing the potential for a consortium with Raunaq Industries in New Delhi, India. The Company has also entered into a consulting agreement with Knoll Capital Management relating to specific work being done for the Company to develop projects in Israel and the Middle East. Knoll Capital Management was instrumental in arranging the kibbutz project in Israel which the Company is currently pursuing. See "Certain Transactions." Legal and professional fees were higher in the current quarter due to the additional costs related to the additional bridge loans, amortized over the terms of the loans. Costs incurred in connection with the public and private financing have been deferred. As of July 31, 1996, these amounted to $221,000. The corporate expenses in 1995 included a non-recurring cost of $25,000 for a previously planned public offering that was never consummated. Interest expense increased in the 1996 period due to higher levels of borrowing, including bridge loans which began in June, 1995. LIQUIDITY AND CAPITAL RESOURCES The Company has no contractual commitment for capital expenditures at this time. The Company has employment agreements with two of its officers which expire five years from the date of this Prospectus. The agreements provide for minimum annual payments totaling $210,000. Payments under these agreements will not be made until the working capital of the Company permits. 26 As a result of accumulated losses, the Company had a negative working capital of $1,910,000, and a capital deficiency of $2,729,000 at January 31, 1996, and $2,794,000 and $3,557,000, respectively, at July 31, 1996. The independent auditors' report for the fiscal year ended January 31, 1996 states that these factors raise substantial doubt about the Company's ability to continue as a going concern. As a result of the Primary Offering, the Company's pro forma working capital at July 31, 1996 would be a positive $1,738,000. During the fiscal year ended January 31, 1996, net cash used in operating activities was $641,000. Cash used in investing activities was $29,000, with $53,000 having been used in connection with the Steamboat Acquisition, offset in part by collections of a loan receivable from an officer of the Company. During the 1996 fiscal year, $34,000 was received from the sale of Common Stock and $785,000 was received as proceeds from notes and loans payable. Other adjustments brought the total cash flow provided by financing activities to $664,000. During the fiscal year ended January 31, 1995, net cash used in operating activities was $874,000. Cash used in investing activities totaled $694,000, of which $647,000 was for investment in and advances to joint ventures. Cash provided by financing activities totaled $1,396,000 with $139,000 derived from sale of Common Stock and $1,375,000 from borrowings. During the six months ended July 31, 1996, cash flow was carefully conserved. Salaries were deferred and additional bridge loan borrowings amounting to $175,000 were received. Fifty percent of interest payments to holders of the Convertible Debentures continued to be deferred until paid out of the proceeds of the Primary Offering, by agreement of the holders of the Convertible Debentures. PLAN OF OPERATION The net proceeds of the Primary Offering will be approximately $10,662,000. Of this total, the Company's acquisition of 95% of Steamboat LLC will use $4,691,000 (plus $50,000 that had already been paid as a deposit.) Other liabilities required to be paid have been adjusted to include additional bridge loan borrowings and interest accruals through November 30, 1996. The bridge loans, including interest, total $1,130,000, secured notes payable, including interest, total $1,232,000, and accrued interest on the Convertible Debentures required to be paid as part of the restructuring of these instruments, total $405,000. It is Management's belief that the funds remaining as working capital, together with the income from the projects including the Steamboat Facilities, will be sufficient to meet the requirements of the Company for the next 12 months of operation without having to raise additional funds except on a project finance basis for new projects. The steps taken to reduce the Company's interest costs include (i) the capitalization of $500,000 of the Convertible Debentures and the reduction of the interest rate on $875,000 of the balance after consummation of the Primary Offering from 18% to 9%, (ii) the payment of secured notes in the principal amount of $1,000,000 and interest thereon, and (iii) repayment of all bridge loans. The interest expense reflected in this Prospectus gives effect to the fact that three of the 26 holders of Convertible Debentures, representing $150,000 in principal amount, have not agreed to the interest rate reduction from 18% to 9% per annum. Accordingly, the Company's annual interest expense will be $13,500 greater than the Pro Forma amounts shown in this Prospectus. In addition, the Steamboat Acquisition is expected to give the Company a positive cash flow from all joint ventures in the current fiscal year. This will not be impacted by payment of dividends since the shares issued to Anchor for the initial bridge loan are being converted to 205,000 shares of common stock. The current power purchase agreements with Sierra Pacific Power Company ("Sierra") provide for price adjustments in December 1996 for Steamboat 1 and in December 1998 for Steamboat 1A. Under the contracts, Steamboat LLC is required to sell power to Sierra for additional 10-year periods at the then- prevailing short-term avoided costs for electricity for Sierra. However, Sierra has indicated that it would be willing to negotiate a 27 mutual release of the contract. If the price adjustments were to be made now, the new prices based on the contract formula would be substantially less than the existing contract rates. Although Management believes that revenues generated will still be in excess of the costs of production, there is no assurance that future prices at which the electricity generated by the Steamboat Facilities may be sold will exceed the cost of production, or that Steamboat LLC will generate adequate cash flow from operations to meet its investing and financing requirements. Although the prices are variable and fluctuate, if, as expected, a substantial reduction in power prices for Steamboat 1 takes place in December 1996, the result would mean a decrease in the Company's share of the net earnings of Steamboat LLC, which, depending on the extent of the price reduction, could result in the Company reflecting a net loss. If rates offered by Sierra are not satisfactory, the Company and its partners may seek to negotiate termination of the existing contracts. The Company believes that under new regulations it will be able to sell the output of electricity to other electric utility purchasers at more favorable prices. The Company will contribute $1,000,000 to Steamboat LLC for the purpose of buying out certain royalty interests and to fund certain improvements to the Steamboat Facilities which are expected to result in higher electricity output. While negotiations with certain royalty owners have already begun, no agreements have yet been concluded and potential savings from royalty reductions are not reflected in the pro forma financial statements presented herein. Additional royalty agreements, applying only to Steamboat 1, call for payment of a total of 30% of the net revenue of Steamboat 1 after certain deductions, starting March 1, 1997. The resulting effect on the net income of Steamboat LLC and on the Company's after tax income will depend on the other elements of power sales revenues outlined above. Assuming the reduction in income from power sales illustrated above, and the buyout of no royalty interests, the cost of these net revenue royalties could be in the range of $50,000 to $100,000 annually. Negotiations with these interests have also already begun, and Management believes they will be successfully purchased although no assurance can be given that such negotiations will be successful. See "U.S. Energy Systems, Inc. and Subsidiaries Pro Forma Condensed Consolidated Statements of Operations," "Steamboat Facilities Pro Forma Condensed Combined Statement of Operations," and "Business--Current Operations and On-Going Projects." In 1995, the Company and its partners in the Lehi Plant concluded a sale of non-essential engines and parts of the Lehi, Utah plant for a gain of approximately $236,000, with 50% or $118,000 as the Company's share. The partnership is using a portion of the funds from this sale to upgrade the remaining two engines and place them in service. Currently there are no contracts for the sale of the power output of the Lehi Plant. However, negotiations for such contracts will begin as soon as the plant is in operational status, and it is anticipated that cash flow will be generated during the fourth quarter of the fiscal year, provided that it obtains the necessary air quality permits. Alternatively, the Lehi partners may decide to sell two of the engines and to replace them with a larger and more efficient gas turbine. If such sale is made, the Company would benefit through its 50% share of the revenue from the sale; however, operations would be delayed until the second quarter of the next fiscal year. The cost of the new engine is expected to be fully financed directly through the manufacturer without additional investment by the Company. Under Title V of the Clean Air Act, the Lehi Plant must obtain an operating permit from the Utah Division of Air Quality before it can commence operations. The Title V program did not take effect in Utah until July 10, 1995. Therefore, a Title V permit was not a requirement during past operations of the facility, but it will be a requirement for future operations. A permit modification would also be necessary if new engines are installed or if capacity is increased. The Plymouth, NH plant has been operating since January 1995 and historically has not provided revenues or cash flow to the Company because of costs related to equipment adjustments and operational reserves required by the terms of the financing. However, the plant has begun to provide cash flow to the Company. The Company received its first distribution amounting to $20,000 in August 1996. In addition, switching the plant's fuel supply to less expensive waste oil, as is presently being contemplated, could add to cash flow starting during the next fiscal year, as the Partnership has an agreement with the university to share equally in any fuel savings. There are also plans being studied to expand the size of the project to serve other New Hampshire college system campuses through wheeling, as described in "Business," which would take place during fiscal year 1998. 28 The Company also expects revenues from other projects, currently being negotiated, that will be under way during the next twelve months but are not yet under contract. There are five such projects, not including Steamboat, at least four of which the Company believes will be secured and from which revenues are anticipated to commence within the next twelve months. These include two projects for two separate shopping malls in El Paso, TX, a large resort and commercial center in St. Thomas, USVI, a residential and commercial center at a kibbutz in Haifa, Israel, and in the long term a steel mill in Raipur, India. With regard to the shopping malls and the St. Thomas resort, the Company and its joint development partners in each case will own and operate the cogeneration facilities. The Company has signed a letter of intent with the owners of Bluebeard's Castle, a large resort and commercial complex in St. Thomas, USVI, to build and operate a 3 megawatt Cogeneration plant and a 120,000 gallon per day water recovery system in the resort's property. The Company, the resort manager and the resort owners will own the cogeneration plant and water system and share revenues based on capital investment in the project. The resort owners have paid approximately $41,000 for the installation of the first of six engine generators, installed September 1996. While the Company anticipates realizing additional revenues for its engineering and equipment sales to the project immediately upon the start of construction, and anticipates that the main stream of revenue will be the sale of energy to the host facilities over the fifteen year term of the contract, there can be no assurance that this will occur. In the case of the Israeli kibbutz project, the Company would be selling the hardware and providing engineering services for installation to the kibbutz, and the Company's revenues will be derived from these sales. In the case of the Raipur steel mill, the Company will provide consulting services to the steel mill for the acquisition, shipping and installation of the hardware. The consulting fee will be a percentage of total cost. These other projects should not require capital outlays, as they will be self-financed. The working capital remaining after the closing of the Primary Offering, together with the regular income from Steamboat LLC, will be adequate for operational needs during the next twelve months. While the Company does not conduct research and development per se, it will expend funds to investigate and develop new projects. It is anticipated that a total of approximately $100,000 will be spent over the next twelve months on such endeavors, which will come from working capital as available. Although each project which comes on stream has its own project staff which becomes a cost of the specific project, the Company does plan to add at least three more employees to headquarters staff to assist management. Expenses for such staff increase, as well as expenses for outside consultants, have been taken into account in planning for the Company's budget over the coming year. RESTRUCTURING OF DEBT Concurrently with the consummation the Primary Offering and the other Closing Transactions, the Convertible Debentures, of which an aggregate principal amount of $1,525,000 is outstanding, will be restructured by converting $500,000 principal amount into 125,000 shares of Common Stock and 125,000 Private Warrants and reducing the conversion rate on $875,000 of the remainder to $8.00 per share from the present $16 per share, making the remainder convertible into 128,125 shares of Common Stock. From and after the consummation of the Primary Offering, the interest rate on $875,000 in principal amount will be 9% instead of the present 18%. Three of the 26 holders of Convertible Debentures, representing $150,000 in principal amount, have not agreed to participate in this restructuring. ACCOUNTING STANDARDS During the fiscal year ending January 31, 1997, the Company will be required to adopt Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets," and SFAS 123, "Accounting for Stock-Based Compensation," neither of which is expected to have a material effect in the Company's financial statements. IMPACT OF INFLATION The Company's contracts include adjustments for changes in inflation indices. The impact of inflation on Company earnings and cash flows is expected to be minimal. 29 BUSINESS THE COMPANY The Company, formerly called Cogenic Energy Systems, Inc. and U.S. Envirosystems, Inc., was incorporated under the laws of the State of Delaware in 1981 in order to engage in the design, assembly, turn-key sale and installation of factory built cogeneration systems powered by diesel oil and/or natural gas. Richard H. Nelson, President of the Company, is one of the two founders of the Company and acted as its Chief Executive Officer until 1989. In late 1986, the Company was impaired by a $2,100,000 judgment resulting from a contractual dispute in California. Although ultimately settled, the protracted court case caused serious delays in planned expansion and in sales. Despite extensive restructuring, the increasingly recessionary economic climate during that period led to a serious cash shortage. By mid- 1989, the Company filed for protection under Chapter 11 of the Bankruptcy Code. Utility Systems Florida, Inc. ("USF") was formed by Mr. Nelson in late 1991 with the objective of entering into the alternative energy industry. USF proposed a Plan of Reorganization for the Company with the intent of merging USF with the reorganized company. The Plan of Reorganization was approved by the creditors and stockholders of the Company, and the U.S. Bankruptcy Court, Southern District New York, confirmed the Plan in March 1993. Pursuant to the Plan, USF was merged into the Company and the Company was renamed U.S. Envirosystems, Inc. Mr. Nelson resumed the positions of President and Chief Executive Officer of the Company when it emerged from bankruptcy. On May 17, 1996, the Company changed its name from U.S. Envirosystems, Inc. to U.S. Energy Systems, Inc. BUSINESS OF THE COMPANY Since its reorganization, the Company has been engaged in the independent power plant ("IPP") industry as a project developer, owner and operator. IPP's produce electricity for sale to either direct end users or to regulated public electric utility companies. Regulated public electric utility companies have historically produced electricity and have held the exclusive distribution rights of the electricity thus produced to end users in specific geographic territories. The exclusive right to the distribution of electric power within a specific territory is a right granted to the regulated public utility company by the various state public utility commissions where such regulated public utility companies are located. Because the exclusive franchise right is in effect a monopoly, the rates charged for electric power and other services, as well as overall operations, are regulated by the state public utility commissions. In recent years, however, federal and state laws have been promulgated to reduce and/or eliminate the regulated public electric utility industry's monopoly over the production and sale of electric power in order to enhance competition among electricity providers, hence, the emergence of IPP's. In addition to conserving natural resources and reducing atmospheric pollution by encouraging more efficient production of electric power, competition should result in lower consumer costs for energy. "Independent power plants" and "cogeneration plants" are frequently used interchangeably to describe the power industry which is an alternative to the regulated power industry. IPP's generally, but not always, produce power utilizing a process known as "cogeneration." Cogeneration is defined as the production of two or more energy forms (typically electricity and heat) simultaneously from the same fuel source. While producing electricity, otherwise wasted heat is recovered from the exhaust and/or engine cooling water. This recovered heat can be used to replace heat which would otherwise be made from conventional furnaces and boilers. Other IPP's may not technically be "cogenerators" but rather utilize renewable fuel sources such as geothermal, wind, solar, hydro, and waste products such as waste oil, waste wood and other bio-mass waste, or landfill gas. The favorable economics of cogeneration or innovative and inexpensive renewable fuel sources allow IPP's to compete with the longer established regulated power industry. The Company's strategy is to seek projects requiring power production or cogeneration and to become an equity participant with the owners, developers or other involved parties in return for the Company's expertise in the structuring, design, management and operation of the projects. Often, at the time of the Company's initial involvement, such projects will have advanced beyond the conceptualization stage to a point where the 30 engineering, management and project coordination skills the Company offers are required to proceed. Although the Company has only begun to develop new projects since USF merged with the reorganized Cogenic Energy Systems, Inc. in November 1993, the president and key consultants of the Company have been involved in the power generation industry for over twenty years and the alternative energy business for over fifteen years and have been involved in the building of over 200 power projects in the United States and abroad ranging in size from 100 kilowatts to 50 megawatts. Innovative power projects developed by the principal executive include cogeneration systems for ocean- going U.S. Coast Guard and Navy vessels. In furtherance of its strategy, the Company is opportunistically pursuing: (i) existing IPPs and cogeneration facilities which can be bought at favorable prices; (ii) IPP and cogeneration projects not yet built but for which another developer has successfully negotiated the basic requirements for a plant including power purchase agreements, environmental permits, etc., and (iii) special market opportunities for cogeneration and energy savings projects (such as large shopping malls, resorts, etc.) where such energy applications are not presently in common use and where the Company can enter into joint development agreements with the property owners to own and operate such facilities. With regard to the latter, the Company possesses designs for, and will continue to seek out or develop, special energy-efficient products such as natural gas powered air conditioning with emphasis on the health care, food processing, shopping mall and hotel markets where large quantities of electricity, air conditioning and hot water are required on a continuous and simultaneous basis. The Company believes the greatest future potential for the Company in the independent power plant/cogeneration market within the United States is in facilities in the 3 to 50 megawatt size range. Additionally, the Company believes that the largest potential for "inside-the-fence" facilities (where all the energy forms produced are consumed at the power plant location) falls into this size category. This range is advantageous because, within this range, and depending on geographic location, these plants usually fall below thresholds requiring prolonged environmental and air quality permit procedure and may achieve more favorable pricing for its electricity from either the utility grids or local customers. The reasons for more favorable pricing are that plants of this size can be located in specific areas of power capacity shortages. Regulated utility companies purchasing such power to assist in meeting shortages are frequently willing to pay more than "avoided cost" (i.e., their cost to produce an incremental kilowatt), and local end users are frequently willing to pay full retail prices which is more cost effective than interruptions of service due to shortage induced brown-outs. Also, the air quality permitting process for the size range contemplated by the Company is generally faster, easier and more assured than in the larger projects. The basis for granting air quality permits varies from location to location, but permits are always required before commencement of operations. In applying for such permits, the facility developers present a computer model of emissions of carbon monoxide and nitrous oxides which would be expected to issue from the facility over a one year period. This model is based on the fuel used, the anticipated annual hours of operation, the engine manufacturer's specifications for emissions, and the reduction of such emissions from application of catalytic converters or other devices. The emissions are then expressed in weight, e.g., "100 tons per year." The local air quality authority will then determine if this is acceptable for the area. The local air quality authority may or may not require continuous emissions monitoring to insure that the level of emissions granted in the permit are not exceeded. If the facility is recovering waste heat and utilizing that heat to displace heat which would otherwise be made from burning fuels in conventional furnaces or boilers, and if the emissions from the facility are actually less than the emissions which would be forthcoming from the conventional furnaces or boilers so displaced, there is said to be a "net reduction" in emissions for the area, and the permitting authorities will normally act promptly and favorably to grant the permit. If the facility is not using recovered waste heat to displace other heat source emissions, e.g., a large, stand-alone generating plant with no cogeneration, there would be a "net increase" in emissions in that geographic area. Under such circumstances, the permitting process could be prolonged and made difficult by public hearings, public interventions, and the considerably more careful determinations which the local air quality authority must make in order to decide whether or not such net increase in emissions can be allowed. 31 In the smaller size range, so-called "inside-the-fence" projects, nearly all of the electrical and thermal output can be utilized by the host site. The thermal output of the cogeneration system replaces conventional thermal output from the host's boilers and furnaces with substantially less atmospheric emissions of nitrous oxide (NOX) and carbon monoxide (CO) because of the emission control technology available to cogeneration engines which is not available to boilers and furnaces. Since the cogeneration system results in a net reduction in emissions for the specific site, air quality permitting authorities will generally respond quickly and favorably. In contrast, while the larger projects (over 50 megawatts) usually have no problems in placing the electrical output, there is a problem in finding suitable thermal hosts who can use the vast quantities of heat produced. Under such circumstances, even if all of the host's thermal requirements are offset, there is still an increase in net emissions in the area of the power plant. A prolonged and difficult permitting process is frequently the result. The Company has begun to develop several projects in the 3 to 50 megawatt size range with emphasis on "inside the fence" applications. Although natural gas has proven to be a superior and economical fuel choice for many sites, the Company also intends to emphasize projects which can utilize alternative and/or renewable fuels, since such projects not only serve the interests of the public from an environmental and ecological standpoint but also have the greatest potential for earnings because of the low fuel costs. In addition to potential within the United States, there are substantial opportunities overseas for such projects, especially in Latin America and Asia. The Company believes that energy shortages, combined with national policies to privatize power production in many developing countries, are creating an increasing potential for U.S. companies in the independent power industry. In addition to international agencies such as the World Bank and the Inter-American Development Bank, there are a growing number of private institutional lenders who provide project financing for such developments. The Company has commenced an effort to create consortiums with both foreign companies and other U.S. companies to pursue this market since the Company does not presently have the financial resources or personnel to pursue such projects by itself. For example, the Company has entered into a memorandum of understanding with Raunaq Industries in India to pursue the creation of a consortium to build one or more large coal fired power plants. In Panama, while no definitive consortium agreement has been signed, the Company and its Panamanian partners have created a Panamanian corporation (Panavisa), which has applied to the Panamanian government for pre-qualification to bid on several projects. COGENERATION AND INDEPENDENT POWER PRODUCTION Cogeneration is the process of producing two or more energy forms (typically electricity and heat) simultaneously from the same fuel source. In order to encourage the conservation of natural resources such as fossil fuels and to foster development of non-fossil fuel energy sources, the federal government enacted PURPA, which mandated that all state public utility commissions require public electric utility companies to cooperate with privately owned cogeneration facilities, both by purchasing electricity from such facilities at the utility company's "avoided cost" (i.e., the utility company's incremental cost for generating such electricity itself) and by providing standby power to such privately owned facilities. When electricity is produced, whether in a small cogeneration facility or in a large central utility power plant, the energy efficiency of the fuel used (the electrical output expressed in BTUs divided by the amount of BTU input to the engines) does not exceed 35%. The remaining 65% of available energy efficiency from the fuel is waste heat, either expelled from the exhaust or removed from the engine's jacket water by radiators. By recovering substantial portions of this otherwise wasted heat, and by converting this heat into useful thermal purposes, the fuel efficiency of a cogeneration facility can approach 75%. This converted waste heat replaces heat that would otherwise have to be made using yet another fuel. Central utility power plants have the ability to recover such heat, but the long distances of such plants from customers who could utilize thermal energy makes recovery and transport impractical. In April 1996 the Federal Energy Regulatory Commission ("FERC") promulgated a regulation which orders all electric utility companies to open their transmission lines to independent power producers thus allowing wholesale purchase of power by the utilities from distant independent producers. While the federal regulation does not mandate that the transmission lines be opened for direct sale of power by independent producers to retail end users, many states are expected to phase in such regulations in the future. See "Business--Government Regulation." 32 CURRENT OPERATIONS AND ON-GOING PROJECTS Steamboat Geothermal Power Plants. The Company has signed an agreement to form Steamboat LLC, a limited liability company which will acquire two geothermal power plants, referred to as the Steamboat Facilities, in Steamboat Hills, Nevada. Electricity is produced in these geothermal plants through the use of heat in the form of hot water from the earth. The electricity is produced through a "binary system" in which geothermal hot water is circulated in one closed loop and, in another closed loop, inert gas is compressed and heated. The compressed inert gas drives turbines to generate the electricity. The geothermal water is reinjected into the earth to be re-heated again through the earth's sub strata magma formation. Because there are virtually no atmospheric emissions or pollutants in the process, because the natural resource (water) is constantly returned to the earth to avoid depletion of the underground aquifer water table, and because the heat source is the earth's natural magma layer, geothermal power is considered one of the most environmentally sound methods of producing electricity. However, it can only be produced in locations where specific geological formations exist. Steamboat LLC will acquire the Steamboat Facilities from Far West Electric Energy Fund L.P. ("FWEEF") and I-A Enterprises subject to a mortgage (the "Mortgage") in favor of an institutional lender and certain net revenue or royalty interests in steam extraction rights. Far West Capital is the general partner and a limited partner in FWEEF. The Company will obtain a 95% interest in Steamboat LLC by contributing to Steamboat LLC the $1,575,000 cash purchase price (less $50,000 down payment previously paid by the Company) for the Steamboat Facilities. Far West Capital will own the remaining 5%. The Mortgage, on which the last quarterly principal payment was made on October 20, 1996, will have a face value of $3,800,000 at November 30, 1996 net of an escrowed reserve, and will be acquired by the Company for $2,166,000 and contributed to Steamboat LLC. While the Mortgage is in technical default, the holder of the Mortgage has waived its rights and has negotiated with the Company the payment for the Mortgage. An additional $1,000,000 in cash will be contributed by the Company to Steamboat LLC to provide capital for the potential acquisition of certain of the royalty interests and for funding certain improvements to the Steamboat Facilities. While negotiations with certain royalty owners have already begun, and the Company and its partners believe that these interests can be bought out, no agreements have yet been concluded and no potential savings from royalty reductions are reflected in the pro forma financial statements presented herein. Additional royalty agreements, applying only to Steamboat 1, call for payment of a total of 30% of the net revenue of Steamboat 1 after certain deductions, starting March 1, 1997. The resulting effect on the net income of Steamboat LLC and on the Company's after tax income will depend on the other elements of power sales revenues outlined above. Assuming the reduction in income from power sales illustrated above, and the buyout of no royalty interests, the cost of these net revenue royalties could be in the range of $50,000 to $100,000 annually. Negotiations with these interests have also already begun, and Management believes they will be successfully purchased, although no assurance can be given. See "U.S. Energy Systems, Inc. and Subsidiaries Pro Forma Condensed Consolidated Statements of Operations," "Steamboat Facilities Pro Forma Condensed Combined Statement of Operations" and "Management's Discussion and Analysis of Financial Condition and Plan of Operation--Plan of Operation." Far West Capital has a 5.14% ownership interest in FWEEF and is contributing to Steamboat LLC the debt owed to it by FWEEF. Far West Capital will not receive any portion of the purchase price paid by the Company. The Company will receive the first $1,800,000 of Steamboat LLC annual net income. For net income above $1,800,000, Far West Capital will receive: (i) 55% for the first five years and (ii) 5% thereafter, with the Company to receive the balance. Far West Capital was established in 1983 and has been a developer and operator of cogeneration and independent power projects, principally hydroelectric and geothermal, in the western United States and is the Company's current partner in LIPA. The two Steamboat geothermal plants were built in 1986 and 1988, respectively, by Far West Capital. A substantial portion of the net proceeds of the Primary Offering and the Private Placement will be used for this acquisition, which will generate immediate cash flow for the Company, thereby allowing it to pursue and launch additional projects, none of which is the subject of a binding or definite agreement. The Steamboat Facilities are currently managed by the professional operations staff of SB Geo, Inc. The principals of Far West Capital own the majority interest in SB Geo, Inc. After the Company has purchased its 33 equity interest in Steamboat LLC, SB Geo, Inc. will continue to manage the day-to-day operations of the Steamboat Facilities. Charges by SB Geo, Inc. for services rendered will be negotiated at arms length, and may not exceed charges for similar services which could be obtained from other sources. The two geothermal plants produce 8 megawatts of electric power which is sold under two power purchase agreements to Sierra. The plants have operated at 99% capacity since inception. The current power purchase agreements have price adjustments in December 1996 for Steamboat 1 and in December 1998 for Steamboat 1-A, which require Sierra to purchase and Steamboat LLC to provide electricity at Sierra's then-prevailing short-term avoided cost. If the price adjustments were to be made now, the new prices based on the contract formula would be substantially less than the existing contract rates. Although Management believes that revenues generated will still be in excess of the costs of production, there is no assurance that future prices at which the electricity generated by the Steamboat Facilities may be sold will exceed the cost of production, or that Steamboat LLC will generate adequate cash flow from operations to meet its investing and financing requirements. Although the prices are variable and fluctuate, if, as expected, a substantial reduction in power prices for Steamboat 1 takes place in December 1996, the result would mean a decrease in the Company's share of the net earnings of Steamboat LLC, which, depending on the extent of the price reduction, could result in the Company reflecting a net after tax loss. However, Management believes that a more satisfactory price is likely to be obtained for the electricity generated in the Steamboat Facilities through negotiations with Sierra or otherwise, although no assurance can be given that such efforts will be successful. In addition, if Sierra were to consent to releasing the Company from the existing power purchase agreements, the Company would be free to sell the power to other utilities. While under the power purchase agreements, Sierra has an obligation to buy the electricity generated and the plants have an obligation to sell the same to Sierra, negotiations relating to the price adjustments may result in a mutual cancellation of the agreement if such is favorable to both sides. Sierra has indicated it would be willing to negotiate a mutual cancellation. There are currently five geothermal power projects operating in Steamboat Hills, Nevada, totalling approximately 62 megawatts of output. In addition to the 8 megawatt Steamboat 1 and 1-A projects which came on line in 1986 and 1988, respectively, the 35 megawatt Steamboat 2 and 3 projects were developed and built by Far West Capital in 1992 and remain owned by Far West Capital. In addition, Caithness Power, Inc. brought a 12 megawatt project on line in 1995. There is currently a total of approximately 170 megawatts of geothermal power being produced in Nevada with production from the Steamboat Hills area accounting for approximately 36%. Plymouth State College, New Hampshire. In 1994 the Company, through its subsidiary, Plymouth Envirosystems, Inc., acquired a 50% interest in Plymouth Cogeneration which owns and operates a cogeneration plant which produces 2.5 megawatts of electricity and 25 million BTUs for 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 twenty year contract. The project, which cost $5.9 million to construct, is comprised 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 prior to the Company's acquisition of a 50% interest through $5,110,000 in State of New Hampshire tax exempt revenue bonds and $700,000 in equity. The Company paid a total of $636,000 in cash and 11,400 shares of Common Stock for its 50% interest. The Company's partners in Plymouth Cogeneration are Central Hudson Cogeneration, Inc., a wholly owned subsidiary of Central Hudson Gas & Electric Corporation of New York, and Independent Energy Finance Corporation of Connecticut ("IEFC"). The project was completed in November 1994 and put into full commercial service in January 1995. IEC Plymouth, Inc. ("IEC Plymouth"), a wholly-owned subsidiary of IEFC, runs the day-to-day operations of the plant and the management decisions are resolved by a management committee which is composed of representatives of the Company, IEFC and Central Hudson Cogeneration, Inc. 34 The State of New Hampshire has initiated a study to determine the feasibility of expanding the existing facility to wheel electric power to two other state college campuses. Also, plans are currently being developed by Plymouth Cogeneration to install special fuel treatment equipment which will allow the existing engines to burn less costly and more efficient fuels. Fuel cost savings would be shared equally between the college and the partnership. There can be no assurance that such fuel treatment equipment will be installed or that such fuel cost savings will be realized. Lehi Cogeneration Project. In January 1994, the Company, through its subsidiary, Lehi Envirosystems, Inc. ("LEI"), purchased a 50% equity interest in LIPA, which owns a 17 megawatt cogeneration facility in Lehi, Utah and the underlying real estate, hardware and permits to operate. Although the facility has been dormant since 1990, work is underway to commence operations at the facility and the Company believes it is capable of future operations. The Company estimates that it will cost $30,000 to commence operations. The successful operation of the plant also requires the negotiation of an agreement with a utility company to purchase the electrical output. LIPA has been negotiating with the municipal authority and the town of Lehi. No agreements are yet in place and there can be no assurance that the Company will be able to successfully negotiate any contracts. The Company and its partners, who own the remaining 50% of LIPA, share on a pro-rata basis the ownership, retrofitting costs, annual expenses, and revenues associated with the project. The Company financed its acquisition cost of $1,225,000 for this interest through the issuance of Convertible Debentures. In addition to payment of interest, the Company is obligated 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. See "Description of Securities--Convertible Debentures" and "Certain Transactions." The Company's partners in the Lehi project are Far West Capital and Suma Corporation ("Suma"), a Utah company with interests in waste-to-energy projects. The Lehi facility is managed by a management committee which is composed of representatives of Far West Capital, Suma and the Company. Lehi originally had three engine generators totaling 17 megawatts. One unit which would have required extensive and costly repairs was sold in December 1995, resulting in a gain of approximately $236,000. The two remaining units totaling 10 megawatts are currently being prepared to start commissioning in order to allow them to be put in operation during the fourth quarter. Concurrently with readying these engines for operational status, the LIPA partnership has received an offer to purchase these engines and is evaluating this option. If a satisfactory sales price is obtained, LIPA would thereafter begin plans to acquire and install a 35 megawatt gas turbine, which would have substantially greater efficiency. If the engines were sold, commencement of operations would be delayed from the fourth quarter of the current fiscal year until the second quarter of the next fiscal year. The proceeds from the sale of these engines would provide sufficient operating capital for the partnership until the larger gas turbine was operational. Financing for the gas turbine, if this option is selected, would be provided by the engine manufacturer. Under Title V of the Clean Air Act, the Lehi Plant must obtain an operating permit from the Utah Division of Air Quality before it can commence operations. The Title V program did not take effect in Utah until July 10, 1995. Therefore, a Title V permit was not a requirement during past operations of the facility, but it will be a requirement for future operations. A permit modification would also be necessary if new engines are installed or if capacity is increased. Because all existing facilities were required to submit operating permit applications in 1995, the Division of Air Quality has had a significant backlog. Shortly after the Company's interest in the project was purchased, Micron Technologies, Inc. ("Micron") announced it intended to build a $1.5 billion manufacturing facility in the town of Lehi on property one mile from the Lehi Cogeneration Facility. The town announced that it would supply power to Micron through its municipal power authority. The town does not have a power generation capability, but acquires power through the Utah Association of Municipal Power Systems ("UAMPS"). Over one year was spent in discussions with Micron, the town of Lehi, and UAMPS as to the feasibility of increasing the capacity from the facility to serve the 35 megawatt requirements of Micron. As a result of these discussions, the Company and its partners decided to sell one seven megawatt engine which was non-functional in order to make room in the plant for a larger and more efficient engine. It was also decided during this period that it was premature to put the plant in operation 35 before its full intended utilization was determined. Management had been negotiating with Micron to provide direct sale of 35 megawatts from the Lehi facility. During these prolonged negotiations, and up until Micron's decision in April 1995 to suspend construction of their new plant, Management was constrained by local political sensitivity from seeking sale of electricity from the Lehi facility to other potential purchasers. Management believes, however, that the substantial population and industrial growth being experienced in the area is creating a large, future market for power. Management further believes that it should plan to increase the Lehi facility's size to 35 megawatts using high efficiency gas turbines since a market is rapidly developing. Even in the absence of Micron, 35 megawatts is the size under discussion because the plant's air quality permit allows for 249.9 tons of emissions annually, which fits the profile of a 35 megawatt combined cycle gas turbine. The Lehi cogeneration plant was originally built in 1987 at a cost in excess of $20,000,000. The plant operated successfully as a small power production facility under "qualifying facility" status granted by FERC from date of commissioning until 1990, selling its electric output to Utah Power and Light and its recovered heat to a large adjacent greenhouse operation. In 1990 the original developer, which suffered financial problems not associated with this project, filed for protection under the bankruptcy laws. The Lehi plant, along with a number of other assets, were sold by the bankruptcy court in April 1993. The Lehi plant was purchased by a Salt Lake City group, Lehi Co-Gen Associates, L.C., with the intention of either reselling the component equipment contained within the plant or re-establishing the cogeneration operation in partnership with interested parties. Extensive engineering and economic due diligence studies were conducted on the project by Southern Electric International, a subsidiary of the Southern Company, one of the largest electric utility companies in the United States, in conjunction with the Company, resulting in a decision to restore the plant to full operational status. The studies estimated that the salvage value of the hardware and parts alone should be in excess of $3,000,000. LIPA purchased the facility from Lehi Co-Gen Associates, L.C. in early 1994 for approximately $292,000. The Lehi plant uses dual fuel configuration reciprocating engines. These engines can run on either diesel fuel or natural gas, or a combination thereof. The plant can be operated on 5% diesel fuel and 95% natural gas, for optimum environmental and economic efficiency. The plant is totally self- contained, with state-of-the-art switchgear and computerized electronic controls. Full environmental assessments have been conducted which indicate that no environmental hazards are present or likely to occur. One of the most important features of the plant is its extant air quality permit, allowing the plant to operate with emissions of up to 249.9 tons of nitrous oxide ("NOX") annually. With expanded and upgraded hardware, this permit will allow the plant to increase operational output substantially. Shopping Malls. The Company has entered into a joint development agreement with the Cowen Investment Group to develop, build and operate cogeneration plants in the United States. Cowen is a financier of real estate projects. Under the joint development agreement, Cowen will provide the customers and the cogeneration project financing. Cowen will retain 60% of the profit interests in the projects and the Company will retain 40%. The Company's responsibility is to provide the technical expertise, design, equipment selection and installation services. The joint venture is negotiating with a major real estate company which owns and operates approximately 200 shopping malls throughout the United States. Three of the malls have been considered for initial test sites and engineering has begun for the first site. The Company is carrying the cost of preliminary engineering which will be reimbursed from the project if it is undertaken. The Company and Cowen have also begun discussions with a second major owner and operator of over 40 malls and has begun feasibility studies to determine the best initial sites. The targeted shopping malls are all enclosed structures with an average interior space of 500,000 square feet. Such malls have substantial electric demand, with 18 hours of daily power plant operation, seven days per week, and with almost year-round air conditioning requirements without regard to geographic location. The average cogeneration system configuration for such malls would consist of 4 megawatts in electric generation, with recovered heat utilized for absorption air conditioning (in which the recovered heat causes inert gases to expand and compress to produce chilled air, as opposed to conventional compression powered by electric motors.) The systems would also require up to 1000 tons of supplemental non-electric air conditioning. The supplemental non-electric air conditioning, in most cases, would be provided by engine driven chillers ("EDC"). An EDC produces chilled water by utilizing conventional compressors, but powering the 36 compressors with natural gas fueled engines as opposed to electric motors. The EDC units would be manufactured by sub-contractors from designs developed and owned by the Company. While initial plans have been drawn and reviewed with the mall owners, there can be no assurance that the joint effort with Cowen will lead to any contracts being signed with mall owners or cogeneration systems being installed. Under the plan discussed with the mall owners, the joint development company would engineer, build and operate the cogeneration facilities, with financing arranged by Cowen. The joint development company and the mall owner would share energy savings for a fifteen year period, after which time the cogeneration plant ownership would revert to the mall owners. A proposed agreement with one of the mall owners calls for at least ten such installations. The mall owners have indicated, however, that installations of cogeneration systems would be contemplated at all malls where certain basic economic criteria for cogeneration exists. The Company and Cowen believe that approximately one-third of the malls can meet the economic criteria of a minimum of twenty-five percent annual energy savings. Since all of the malls are of similar configuration and have similar energy patterns, there would be an economy of scale: project design could be replicated at multiple locations with only modest configuration changes. A contract for the first mall is expected to be signed in the third fiscal quarter of 1996 with construction commencing shortly thereafter, although there can be no assurance that this will occur. U.S. Virgin Islands. The Company has signed a letter of intent and is currently in final contract preparation with Bluebeard Holding Company to build a 3 megawatt cogeneration project for Bluebeard's Castle, a major resort in St. Thomas, U.S. Virgin Islands. Utility services for the Islands, like many other areas of the Caribbean, were severely impacted during the 1995 hurricane season, and the Company believes that many public and private buildings are presently considering "inside-the-fence" cogeneration facilities in order to assure reliability of electric and hot water services as well as to reduce present high costs of utility-provided services. It is contemplated that the Company, the resort manager and the resort owner will form a limited liability entity, which will own and operate the cogeneration facility, selling discounted power to the hotel and adjacent commercial buildings. The profits and cash shall be distributed pro rata on the basis of the capital contributions of the parties to the contract. The Company will be credited for its capital contributions as a result of the services it will provide to the joint venture. It is also contemplated that the cogeneration facility will include a 120 thousand gallon per day reverse osmosis water purification system to convert sea water to potable water. Supplies of fresh water, which are always in short supply in the Islands, were even further reduced as a result of the storms. It is contemplated that the resort's holding company will arrange twenty-percent equity for the project, with the balance being financed through local banks. The Company will provide design, equipment selection and installation services for the project. The holding company is also in the planning stage for a large, new resort, apartment and shopping complex on the eastern end of St. Thomas for which a cogeneration facility is planned. It is contemplated that the limited liability entity to be formed by the Company and Bluebeard Holding Company will own and operate this future facility and will seek additional resort facilities for cogeneration throughout the Virgin Islands and other islands in the Caribbean. While final contracts are in preparation, the project has already begun with the receipt of initial funding from Bluebeard and the scheduled installation of the first of six engine generators to be used in the project. Waste Motor Oil Project. In November 1992, the Company was engaged to design and build a three megawatt cogeneration plant in Virginia for a private energy investment fund under a turn-key contract for $1,600,000. The plant was built and put into commercial service in July 1993, eight months after commencement of the project. The private energy fund had signed a long term contract with Virginia Electric Power Company ("VEPCO") to provide 3 megawatts of demand capacity to the VEPCO grid, and contracted with the Company to provide an operational system both rapidly and cost effectively. The Company created a distinct design utilizing rebuilt, very low RPM internal combustion engines, which have the capability of utilizing waste motor oil as fuel. The use of waste motor oil not only reduces the fuel costs for the project, but also solves a local environmental problem of disposing of over 800,000 gallons annually. The Company will employ the techniques developed on this job in future projects. The Company has no ongoing equity interest in this project. 37 Nevada District Heating Project. Concurrently with the closing of the Primary Offering, the Company will be acquiring an 81.5% interest in NRG Company LLC ("NRG") for $265,000. NRG was recently formed and funded at $70,000 by several investors in the Company, including Messrs. Rosen and Nelson (see "Certain Transactions--Reno Project"). From these funds NRG made a loan of $50,000 to Reno Energy LLC ("Reno Energy"). $250,000 from the Company's capital contribution to NRG will be loaned to Reno Energy to bring the total loan to $300,000. The purpose will be to fund pre-development expenses associated with the proposed development of a geothermal district heating project. The loan is to be repaid over three years with interest at 9% per annum, or with the proceeds from any financing transaction. There is a large industrial park being developed in Reno on a 1200 acre area in close proximity to the district heating plant. The first phase of the park is already sold out, and the entire park is expected to be developed within the next four to seven years. An examination of the current property owners of the park indicates that the park will house mostly commercial buildings with some industrial facilities. Also, a 200-bed hospital and 300-room hotel are planned to be built in the park, with many more prospective tenants. Therefore, the industrial park will create a huge demand for space heating and cooling as well as process heating. It is expected that the total buildings, adding up to 30,000,000 square feet of floor space, will be connected to the geothermal grid to meet their heating and cooling needs. Additionally, there is a high school located nearby and a college campus is planned in addition to other development in the area. Each of these is likely to be a major consumer of geothermal energy. Reno Energy plans to construct and operate a plant which will use geothermally heated fresh water for space heating and cooling and for process heating in the industrial park and the other nearby development. To meet the requirements of these commercial and industrial facilities, a pipeline with supply and return lines would be built that would loop through the industrial park. A binary hot water system with fresh water circulating through the loop will be used to avoid any concerns associated with the direct use of geothermal brine such as scale build-up in the pipes, corrosion on 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; only fresh water will be circulated in the loop. The heat thus provided will be sold at a discount from the cost of producing an equivalent amount of heat from conventional natural gas furnaces. Under the terms of the agreements between NRG and Reno Energy, NRG will have an option to acquire a 50% interest in Reno Energy (subject to certain preferential distribution interests of the founders of Reno Energy) (the "Reno Option"). The Reno Option, which would be paid for out of working capital, will be exercisable for $1 million until December 31, 1996 but extendable, upon payment of $100,000, until March 1, 1997 at an exercise price of $1,200,000. If the Company determines to exercise the Reno Option, it will use the funds designated for use as working capital, if such funds are available at that time. It is estimated that approximately $35,000,000 is required for construction, procurement and other costs associated with the commencement of operations at Reno Energy. Such amount is expected to be financed through industrial revenue bonds and/or vendor financing, in addition to other types of tax-exempt debt financing. Efforts begun on the Reno Project include retention of an international engineering firm to provide preliminary engineering and design services to support Reno Energy's application to the Nevada Public Service Commission for authorization, as well as retention of a financial consultant to assist in securing debt financing for the Reno Project. Under the terms of the agreements governing NRG, the Company, which will own 81.5% of NRG, will have decision making authority on all matters. If the Reno Option is exercised, each of the investors in NRG will be given an opportunity to fund its pro rata share of the option price in order to maintain its interest in NRG. The project is still in the planning and development stage. As yet there are no contracts with any end users, nor are there approvals from local and state authorities. The Company will have to satisfy itself as to these and other factors before NRG's option would be exercised. 38 OTHER POTENTIAL PROJECTS FOR THE COMPANY ALTHOUGH PRELIMINARY EFFORTS HAVE BEEN UNDERTAKEN IN CONNECTION WITH THE FOLLOWING PROJECTS, THERE IS NO ASSURANCE THAT ANY OF THEM WILL BE DEVELOPED. India. The Company, through its 50% owned subsidiary, USE International, LLC, has proposed a 52 megawatt combined cycle cogeneration project for a major steel mill in Raipur, M.P., India. The project would utilize naphtha as a fuel source to power a General Electric 40 megawatt gas turbine which will also provide sufficient steam recovery to power a 12 megawatt steam turbine. The use of recovered heat in the form of steam to power a second form of electric production is known as a "combined cycle system." The steel mill intends to purchase the system on a turnkey basis, and the Company would act as project manager and coordinator being compensated on a percentage-of-cost basis. The steel mill is presently awaiting funding from its financial institutions in order to proceed. Inside-the-fence projects of this size are growing in popularity in India because no central or local government permissions are required and financing is easier since it is based entirely on the credit-worthiness of the customer. The remaining 50% of USE International, LLC is owned by Indus, LLC. Ravi Singh, a consultant to the Company, is the President and principal shareholder of Indus, LLC. Panama. The Company has formed a company, Panavisa Envirosystems, S.A. ("Panavisa"), in order to qualify and bid on several potential power projects in Panama. Panavisa, a wholly-owned subsidiary of the Company, is the corporate vehicle which would be the joint venture partner with others when specific projects are developed. While there is no definitive agreement in place, the Company is working with a Panamanian financial group to form a consortium to design, build, and operate barge-mounted power plants for Institucion de Recursos Hidraulicos y Electrificacion, the Panamanian national electric company, which would purchase electricity from the consortium under a negotiated long-term contract. If such project is ultimately undertaken, it is likely that the Panamanian financial group involved in such project would become a partner in Panavisa. The Company's role would be to act as consortium manager. Percentages of ownership among the various potential consortium partners have not yet been negotiated. The barge-mounted power plant design would utilize very low speed diesel engines capable of burning Orimulsion, an emulsified tar recovered from reserves under the Orinoco River in Venezuela. The Company would be working with Bitor USA, a wholly owned subsidiary of Petrolanos Venezuela, which holds the patents on the Orimulsion process. Specific opportunities for such power plants presently exist in Panama as well as other Central American countries, which are facing severe power shortages as a result of aging thermal power plants and reductions in available hydroelectricity. Advantages of barge mounted systems are quick delivery and total fabrication in the United States. Israel. The Company submitted bids to a kibbutz to provide a three megawatt cogeneration facility with 800 tons of absorption cooling using Israeli technology for the absorbers. The Company was advised that it was low bidder. The next procedure requires the kibbutz authority to authorize a purchase contract and to arrange financing. If the contract is ultimately awarded, as management believes it will be, the Company will do final design work, acquire all hardware, have the system fabricated in the United States by qualified sub-contractors, ship the entire system in four containers to Israel, and send engineers to oversee installation by local mechanical and electrical contractors. The Company is working in association with Coolingtec Ltd., of Israel, which is the patent holder and manufacturer of a new design absorption chilling unit, which is capable of delivering substantially lower temperatures than other absorbers currently on the market. Absorption chillers utilize recovered heat from the cogeneration engines as their power source. Native American Reservation. The Company is in discussions with an East Coast Native American nation to assist it in developing an infrastructure industry on its reservation involving independent power production. The Company has recommended, and the Tribal Council has preliminarily approved, a plan whereby the Company and the Native American nation would form a joint development company to build, own and operate an independent power plant of from 50 to 100 megawatts on the reservation. Output from the plant would be sold to the grid and to neighboring municipalities. 39 U.S. Plastics Manufacturer. The Company has been asked to evaluate the potential for an inside-the-fence cogeneration project of approximately 5 megawatts for a large U.S. manufacturer of plastic products in Illinois. Recovered heat from the engine generators would be used in the plastics extrusion operation. If the project proves economically feasible, the Company would design and build the facility on a turn-key basis for the plastics manufacturer. Locating New Projects. The President and consultants of the Company communicate frequently with numerous individuals and companies in the industry. Most of the projects in which the Company is now involved have come from these contacts. The Company has established several informal and non- exclusive relationships with other cogeneration developers and with non- regulated subsidiaries of utility companies to pursue other business opportunities in areas of interest to the Company. In certain special markets that the Company seeks to develop, the Company identifies specific potential customers and makes direct approaches to those customers. COMPETITION There are approximately 150 companies nationwide currently involved with independent power plants. The Company currently occupies a relatively minor position in the industry. The independent power plant industry is basically divided into three areas: (1) very large power plants (over 50 megawatts); (2) standard power plants (under 50 megawatts); and (3) "inside-the-fence" plants, which can be of varying sizes, and so called because they are built especially to serve the electrical and thermal needs of a specific building or group of buildings rather than to sell the power to the utility grid and are located literally "inside-the-fence" of the end user's property. Many of the very large plants are owned and operated by subsidiaries of public utility 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 subsidiaries of public utilities or large industrial companies. The operations of most of these companies are geared to the largest sized power plants because of the need to place significant investment to achieve returns large enough to have an impact on a large public utility's or industrial company's balance sheet. Some of these companies have been highly successful in the development of larger plants; but under federal law, utility subsidiaries may not own more than 50% of QF projects. However, subsidiaries of large industrial companies and other non- utility companies have no similar restrictions. Additionally, under federal law enacted in 1992, a new category of independent power producer was created known as exempt wholesale generators ("EWG"). EWG's have no ownership limitations nor do they have similar requirements to QF's with regard to useful thermal output or fuel efficiency and operating efficiency criteria. To receive qualification as an EWG, the owner of an IPP need only demonstrate that the entire output of the facility is sold exclusively in the wholesale market. EWG's are prohibited from making retail sales and therefore cannot be developed for inside-the-fence projects. In many instances, subsidiaries of public utilities and large industrial companies make ideal partners for projects and the Company intends to work with such companies when it locates a specific project fitting their investment parameters. In the category of standard sized independent power plants (under 50 megawatts), the vast majority of the developers so involved are either subsidiaries of other non-utility industrial companies, small privately owned partnerships, or energy funds established to invest in such projects. "Inside- the-fence" plants are generally owned and operated by the end user, although a number of such plants are built, owned and operated for the end user by third parties. EMPLOYEES At present the Company has three full time employees and five contract staff members. The Company will retain outside contract staff as required for engineering, fabrication, construction and maintenance services. Management believes present staffing is adequate, although it expects that the number of full time employees will expand over the next year as new projects come on stream. Partnership projects such as Lehi, Plymouth, and the Steamboat Facilities have their own professional staffs. These staffs report to a Management Group in each of the individual partnerships, and a senior Company officer is an active member of each of the Management Groups. 40 DESCRIPTION OF PROPERTY The Lehi project is owned by LIPA, a Utah limited liability company. The Company owns 50% of LIPA. 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 to operate a cogeneration facility with emissions of up to 249.9 tons of NOX annually. All costs associated with LIPA and the operation of the plants, and all income derived therefrom, are divided pro-rata among the Company and the owners of the remaining 50% of LIPA. Other than the Company's obligations to its debenture holders and bridge lenders, there are no other encumbrances or debt associated with LIPA or the Lehi cogeneration project. Management believes the plant is adequately covered by insurance. The Plymouth State College Cogeneration project is owned by Plymouth Cogeneration, a Delaware partnership. The Company owns 50% of Plymouth Cogeneration, which, in turn, owns all the plant and equipment associated with the cogeneration project including the diesel engines, generators, three auxiliary boilers, switchgear, controls and piping. The state university system has two contracts with Plymouth Cogeneration: (1) a 20 year lease on the above equipment, and (2) a 20 year management contract. Both contracts have escalation clauses. Management believes the equipment is adequately covered by insurance. The Company leases, on a year to year basis, 1,100 square feet of office space in a commercial office building in West Palm Beach, Florida where its executive offices are located. Contract employees work out of their own offices. Management believes that the current space will remain adequate through the current lease period, which expires in September 1997. GOVERNMENT REGULATION Under present federal law, the Company is not and will not be subject to regulation as a holding company under PUHCA as long as each power plant in which it has an interest is a QF under PURPA or is subject to 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 but also useful thermal energy for use in an industrial or commercial process or heating or cooling applications in certain proportions to the facility's total energy output and must meet certain 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 the Company has an interest were to lose its QF status and not receive another PUHCA exemption, the project subsidiary or partnership in which the Company has an interest that owns or leases that plant could become a public utility company, which could subject the Company 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 and 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 certain other standards. Each of Steamboat 1 and Steamboat 1- A meet such ownership requirements and standards and is therefore a QF. QF status exempts the owner of an IPP from regulation under various federal laws including PUHCA and the regulation of the rates for sale from the IPP as well as certain state laws. 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, the Company believes that it is in substantial compliance with all applicable rules and regulations and that the projects in which it is involved have the requisite approvals for existing operations and are operated 41 in accordance with applicable laws. However, the operations of the Company and its projects remain subject to 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 the Company 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. LEGAL PROCEEDINGS There are no legal proceedings currently pending or threatened against the Company. The owner of a farm adjacent to the LIPA facility in Lehi, Utah, has sued LIPA for "nuisance, trespass, and negligence" alleging that in May 1995 diesel fuel from the power plant invaded the drainage ditch dividing the two properties. The drainage ditch feeds a watering hole on the farmer's property. The plaintiff's suit alleges that one bull died and five calves were aborted as a result of petroleum toxosis from ingestion of the fuel in the ditch and the watering hole. The suit, filed in Utah state court on January 25, 1996, seeks damages "in excess of $20,000." Depositions of both sides have been completed. Although there was a spill of several hundred gallons of fuel on the LIPA property in 1991, prior to ownership by either the Company or its partners, the 1991 spill was remediated. Prior to the Company's purchase of its interest in the power plant in 1994, Phase I and Phase II Environmental Assessments were conducted which did not identify any environmental problems. There is no pathology evidence that the bull died of petroleum toxosis, or that the calves were aborted as a result of petroleum toxosis in the mother cows. No other cattle drinking from the same water hole appeared to be affected. While neither the Company nor its partners believe the plaintiff has a strong case, LIPA is exploring settlement options with the plaintiff which would be less costly than the further extensive testing, expert analyses and litigation. 42 MANAGEMENT The directors and executive officers of the Company are presently as follows:
AGE POSITION(S) --- ----------- Theodore Rosen.............. 71 Chairman of the Board of Directors Richard H. Nelson........... 56 President, Chief Executive Officer and Director Fred Knoll.................. 40 Director Ronald Moody................ 62 Director Evan Evans.................. 71 Director Seymour J. Beder............ 69 Treasurer and Chief Financial Officer
At the conclusion of the Primary Offering, Messrs. Knoll and Moody will resign. The remaining directors intend to elect two outside directors to fill the vacancies. These persons have not yet been identified by the Company. Theodore Rosen. Mr. Rosen has been a Director of the Company and 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. Richard H. Nelson. Mr. Nelson has been President, Chief Executive Officer and Director of the Company since November 1993. Mr. Nelson has been engaged in the power plant industry for more than twenty years and has been involved with over 200 power projects throughout the world, 125 of which have been cogeneration projects. In 1973, Mr. Nelson formed Sartex Corp., which was merged into the Company, then called Cogenic Energy Systems, Inc. ("Cogenic"), in 1981. Mr. Nelson served as president of Cogenic until 1989. Cogenic filed for reorganization under Chapter 11 of the Bankruptcy Code in 1989. From January 1989 until January 1991, Mr. Nelson was president of Utility Systems Corp., a subsidiary of Cogenic which was not party to the Chapter 11 filing. In January 1991 Mr. Nelson formed USF where he served as president until November 1993. A Plan of Reorganization was confirmed for Cogenic in March 1993, after which USF and Cogenic merged, with Cogenic being the surviving corporation and changing its name to U.S. Envirosystems, Inc. Mr. Nelson was Special Assistant to the Director of the Peace Corps from 1961 to 1962; thereafter he served as Military Aide to the Vice President of the United States from 1962 to 1963 and Assistant to the President of the United States from 1963 to 1967. From 1967 to 1969, Mr. Nelson was Vice President of American International Bank, and from 1969 to 1973 he was Vice President of Studebaker-Worthington Corp. Mr. Nelson received his BA degree from Princeton University. Ronald Moody. Mr. Moody has been a Director of the Company since January 1994. Mr. Moody entered the investment community in 1967 as a senior partner of a Canadian investment house until 1976, and since that time has been a private investor for his own account. After several years with the Royal Bank of Canada, Mr. Moody joined the Montreal Trust Company in 1962 as a manager of pension fund and individual trust accounts. Mr. Moody received his BA from the University of Western Ontario. Fred Knoll. Mr. Knoll has been a Director of the Company since August 1994. During the last five years, Mr. Knoll has been chairman and CEO of Knoll Capital Management, an investment and cash management firm, in New York. Mr. Knoll is the Chairman of the Board of Thinking Tools and of Lamar Signal Processing and a Director of Spradling Holdings, Raphael Glass and the Columbus Fund. From 1989 until 1993, Mr. Knoll was Chairman of the Board of Directors of C3/Telos Corporation, a computer systems company. Mr. Knoll received 43 his B.S. degree in Computer Sciences from M.I.T. and also a B.S. degree in Management from the Sloan School at M.I.T. He received his MBA from Columbia University. Evan Evans. Mr. Evans has been a Director of the Company 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"), pursuant to a contract between BRC and Holvan. 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. He is currently on the board of directors of Holvan and BRC. Mr. Evans received his BS degree in Mathematics from St. Lawrence University and his BS in Civil Engineering from M.I.T. Seymour J. Beder has been Secretary, Treasurer, Controller and Chief Financial Officer of the Company 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. In addition, the following persons, who are not officers or directors, are affiliated with the operations of the Company as consultants: Donald A. Warner. Mr. Warner has acted as director of development and a consultant to the Company since 1993. For over 20 years, Mr. Warner has been closely involved with the energy and environmental industries, and has been consultant and attorney to numerous environmental and energy project developments in both the public and private sector. The Company expects Mr. Warner to work for the Company full-time after the completion of the Primary Offering. Mr. Warner holds his BA degree from Rochester University and his JD degree from Syracuse University. He also holds an LLM degree from Washington University. Patrick McGovern. Mr. McGovern has been a consultant to the Company since 1993. From 1973 to 1981, Mr. McGovern was Engine Sales Manager for Virginia Tractor Company (Caterpillar). From 1981 to 1984, he was Vice President Engineering for the Company. From 1984 to present, he has been president of Power Management Corp. Mr. McGovern holds both his BSEE and MBA degrees from Louisiana State University. Ravi Singh. Mr. Singh has been President of USE International, LLC, 50% of which is owned by the Company, since 1995. Mr. Singh is president of Indus LLC, a company he formed in 1994 to develop new investment opportunities throughout southeast Asia and Oceania regions. From 1988 until 1994 he was a partner and Managing Director for International Investment Banking at Cowen & Company. Prior to his time at Cowen & Company, Mr. Singh had been affiliated with Coopers & Lybrand LLP with advisory responsibilities for cross-border mergers and acquisitions, notably in Japan. Mr. Singh was also affiliated with Komatsu Ltd. of Japan where he was responsible for business development in India. Mr. Singh received his BS in Engineering from the University of Delhi and his MBA from Columbia University. Nils A. Kindwall. Mr. Kindwall was Vice Chairman of Freeport McMoran, Inc. from 1975 until his retirement in 1993. At Freeport McMoran, he was principally responsible for developing and financing major natural resource projects throughout the world. He has served on the National Advisory Board of Chemical Bank, and is on the board of John Wiley & Sons, Inc. and Metall Mining Corporation. Mr. Kindwall received his BA degree in Economics from Princeton University and his MBA from Columbia University. LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Certificate of Incorporation includes provisions which limit the liability of its Directors. As permitted by applicable provisions of the Delaware General Corporation Law (the "Delaware Law"), Directors 44 will not be liable to the Company for monetary damages arising from a breach of their fiduciary duty as Directors in certain circumstances. This limitation does not affect liability for any breach of a Director's duty to the Company or its stockholders (i) with respect to approval by the Director of any transaction from which he or she derives an improper personal benefit, (ii) with respect to acts or omissions involving an absence of good faith, that the Director believes to be contrary to the best interests of the Company or its 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 the Company or its stockholders, or that show a reckless disregard for duty to the Company or its 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 the Company or its stockholders, or (iii) based on transactions between the Company and its 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. The Company's Bylaws obligate the Company to indemnify its 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 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 Securities Act and is, therefore, unenforceable. EXECUTIVE COMPENSATION The following table shows the total compensation paid by the Company during the fiscal years ended January 31, 1996, 1995 and 1994, and during the six months ended July 31, 1996 to Mr. Richard H. Nelson, the Company's President and Chief Executive Officer. There were no other executives of the Company who received total compensation in excess of $100,000 during any of such years.
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS LONG TERM COMPENSATION - --------------------------- ------------------ -------- ----- ---------------------- Richard H. Nelson, 1997 President and Chief (to July 31, 1996) $ 75,000(1) Executive Officer..... 1996 150,000(2) -- -- 1995 $149,850 -- -- 1994 $ 24,500 -- --
- -------- (1) This entire amount has been deferred and will be paid by the Company when working capital is adequate, which shall be determined by the Board of Directors. (2)Includes $125,500 at January 31, 1996, which has been deferred and will be paid by the Company when working capital is adequate, which shall be determined by the Board of Directors. - -------- For a period of three years from the date of this Prospectus, all compensation and other arrangements between the Company and its officers, directors and affiliates is to be approved by a Compensation Committee of the Board of Directors, a majority of whom are to have no affiliation or other relationship with the Company other than as directors. Compensation of Directors. Directors are not compensated for attendance at meetings of the Board, although certain travel expenses relating to attending meetings are reimbursed. Employment Contracts. Mr. Nelson has an employment contract with the Company to serve as its Chief Executive Officer for a term of five years from the date of this Prospectus. Mr. Nelson's contract commenced November 11, 1993 and provides for an annual salary of $150,000 plus normal benefits. Mr. Nelson has volunteered to defer 50% of this salary until the Company's cash flow is, in the opinion of the Board of Directors, sufficient. Under the terms of Mr. Nelson's employment agreement, he may not compete with the Company 45 during the term of his employment with the Company or for two years thereafter, or, at any time, disclose any confidential information pertaining to the Company. Mr. Nelson works for the Company full-time. As of November 30, 1996, the amount of deferred compensation owed to Mr. Nelson was $250,000. Mr. Rosen has an employment contract with the Company to serve as its Chairman of the Board for a term of five years from the date of this Prospectus. Mr. Rosen's contract commenced December 1, 1993 and provides for an annual salary of $60,000 which is being deferred until the Company's cash flow is, in the opinion of the Board of Directors, sufficient. Mr. Rosen devotes a minimum of 40 hours per week to the Company. Under the terms of Mr. Rosen's employment agreement, he may not compete with the Company during the term of his employment with the Company or for two years thereafter, or, at any time, disclose any confidential information pertaining to the Company. As of November 30, 1996, the amount of deferred compensation owed to Mr. Rosen was $175,000. Stock Options. The Board of Directors has reserved 400,000 shares of the Company's Common Stock for the issuance of non-qualified options to existing and future directors, executives and employees of the Company. CERTAIN TRANSACTIONS The Plan of Reorganization of Cogenic Energy Systems, Inc. (the "Plan") was originally filed and financed by Richard Nelson, who was then the sole shareholder and sole director of USF. The Plan was confirmed by the bankruptcy court in March 1993. Under the Plan, 100,000 shares of the reorganized debtor were issued to Richard Nelson as the proponent and financier of the Plan. An additional 125,000 shares (the "merger shares") were issued to USF upon consummation of the Plan and upon the merger of the reorganized debtor with USF. These merger shares were distributed to individuals and companies who purchased shares of USF for purposes of providing USF with the financing to acquire the Company and to allow the Company to continue as the surviving corporation. Messrs. Nelson, the President, Theodore Rosen, the Chairman, Ronald Moody, a director, Fred Knoll, a director, and S. Marcus Finkle, a principal stockholder of the Company, are participants in the Plymouth Loan (having loaned $25,000, $25,000, $75,000, $650,000 and $150,000 respectively), which bears interest at the rate of 2.5% per annum above the prime rate, and in which the lenders, other than Messrs. Nelson and Rosen, received five-year warrants to purchase 120 shares of the Company's Common Stock for each $1,000 loaned, which warrants are exercisable at $5.00 per share. Messrs. Nelson, Rosen, Moody, Knoll and Finkle will benefit by the payment to them from the net proceeds of the Primary Offering of $30,900, $30,900, $92,500, $801,200 and $185,300, respectively (including accrued interest to November 30, 1996) in connection with the repayment of the Plymouth Loan. Mr. Rosen, Mr. Knoll and Mr. Finkle and Guernroy Ltd. a principal Stockholder, are also holders of the Company's Convertible Debentures in the amounts of $125,000, $200,000, $50,000 and $50,000 respectively. Accrued interest, adjusted to November 30, 1996, which will be repaid from the proceeds of the Primary Offering, amount to $32,600, $59,000, $13,800 and $13,100 respectively. As part of the Debenture Conversion, the conversion rate on $875,000 of the Convertible Debentures, which remain outstanding after the Debenture Conversion, will be reduced to $8.00 per share from the present $16.00 per share and the interest rate thereon will be reduced to 9% from the present 18%. In addition to payment of interest, the Company is obligated 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. Three of the 26 holders of Convertible Debentures, representing $150,000 in principal amount, have not agreed to the interest rate reduction from 18% to 9% per annum. See "Closing Transactions," and "Description of Securities--Convertible Debentures." In June 1995, the Company issued 57,500 shares of Series One Preferred Stock to Anchor under the terms of the Anchor Loan by which Anchor loaned the Company the sum of $660,000 bearing interest at the rate of 18% per annum. The Anchor Loan is cross-collateralized (together with the Solvation Loan described below) by a first lien on all of the assets of the Company and 97,250 shares of Common Stock owned by Messrs. Nelson 46 and Rosen. The purpose of the Anchor Loan was to finance the costs and expenses of the proposed public offering and provide other funding to the Company for various costs and expenses. The maturity of the Anchor Loan has been extended from March 11, 1996 to November 29, 1996. The Anchor Loan is to be repaid at the date of closing of the Primary Offering or at the date of closing of any public or private offering of debt or equity securities in the gross amount of $5,000,000 or more and/or the sale of any of the Company's assets or any part thereof. $796,000 of the proceeds of the Primary Offering and the Private Placement will be used to repay the Anchor Loan and $136,000 of accrued interest on such loan. The 57,500 shares of Series One Preferred Stock will be exchanged for 205,000 shares of Common Stock in the Preferred Stock Exchange. See "Description of Securities--Preferred Stock--Series One Preferred Stock." The Company and its partners, who each own 50% of LIPA, share on a pro-rata basis the ownership, retrofitting costs, annual expenses, and revenues associated with the Lehi Cogeneration Project. The Company financed its acquisition cost of $1,225,000 for this interest through the issuance of Convertible Debentures. In addition to payment of interest, the Company is obligated 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. See "Business-- Current Operations and On-Going Projects." The Company has also entered into a consulting agreement with Knoll Capital Management relating to specific work being done for the Company to develop projects in Israel and the Middle East. The contract is for a term of one year, expiring in October 1996, and provides for a consulting fee of $5,000 per month. Fred Knoll, a director and principal stockholder of the Company is the Chairman and Chief Executive Officer of Knoll Capital Management. Knoll Capital Management was instrumental in arranging the kibbutz project in Israel which the Company is currently pursuing and continues to be instrumental in assisting the Company in negotiations in other parts of the world, including Panama. See "Management's Discussion and Analysis of Financial Condition and Plan of Operations--Results of Operations." In December 1995, Solvation loaned the Company $200,000, which carries an interest rate of 10% per annum and which has matured and will be paid when the Offering is closed, but no later than November 15, 1996. A further $50,000 was loaned to the Company in May 1996 on the same terms and conditions. The Solvation Loan is cross-collateralized with the Anchor Loan by a first lien on all of the assets of the Company and 97,250 shares of Common Stock owned by Messrs. Nelson and Rosen. In connection with the Anchor Loan, Richard Nelson and Theodore Rosen, the Company's President and Chairman of the Board, respectively, pledged an aggregate of 97,250 shares of the Company's Common Stock to Anchor. (The pledge was later extended to secure the Solvation Loan.) These shares will be released from such pledge upon repayment of the Anchor Loan and the Solvation Loan. Reno Project. In order to participate in the Reno Project and eliminate any potential conflict of interest, the Company will be acquiring the interests of Messrs. Rosen and Nelson in NRG. Of the $265,000 to be paid by the Company for its 81.5% interest in NRG, $10,000 will be used to purchase those interests, for which Messrs. Rosen and Nelson had paid that amount. See "Business-- Current Operations and On-Going Projects--Nevada District Heating Project." Messrs. Moody and Knoll, directors of the Company until their resignation upon the consummation of the Primary Offering, will each continue to own $10,000 (3.08%) interests in NRG. 47 PRINCIPAL AND SELLING SECURITYHOLDERS The following table lists the number of shares of Common Stock owned as of October 31, 1996 by (i) persons known to hold more than five percent of the shares of outstanding Common Stock, (ii) each director of the Company, (iii) any executive officers named in the Summary Compensation Table, (iv) all officers and directors of the Company as a group. The following table also includes relevant information regarding the securityholders for whose account securities are being offered pursuant to this Prospectus. Each person named in the table has sole investment power and sole voting power with respect to the shares of the Common Stock set forth opposite his or its name, except as otherwise indicated.
BENEFICIAL OWNERSHIP SHARES TO WARRANTS BENEFICIAL OWNERSHIP PRIOR TO OFFERING(1) BE SOLD TO BE SOLD AFTER OFFERING(1) -------------------- --------- ---------- ----------------------------- Richard Nelson.......... 82,446 18.7% 0 82,446 2.1% Theodore Rosen.......... 88,333(2) 17.4% 0 100,833(2a) 2.6% Ronald Moody............ 21,500(3) 4.8% 0 21,500(3) 0.6% Fred Knoll.............. 171,333(3) 28.6% 0 191,334(a) 4.8% Evan Evans.............. 2,500 0.6% 0 2,500 0.1% S. Marcus Finkle........ 63,833 13.9% 0 68,833(a) 1.8% 117 AABC Aspen, CO Guernroy, Ltd........... 38,158 8.6% 0 43,158(a) 1.1% c/o Royal Bank of Canada Channel Isles, UK Anchor Capital Company, 205,000 31.8% 205,000(8) 0 0% LLC.................... 1140 Avenue of the Americas New York, NY 10036 All officers and 381,113(2)(2a) 55.2% 413,613(2)(2a) 10.0% directors.............. as a group (6 persons) (3)(4) (3) (4)
- -------- (1) The tabular information gives effect to the exercise of warrants or options exercisable within 60 days of the date of this table owned in each case by the person or group whose percentage ownership is set forth opposite the respective percentage and is based on the assumption that no other person or group exercises its option. The address of each of the officers and directors is 515 North Flagler Drive, Suite 202, West Palm Beach, Florida 33401. (2) Includes 8,333 shares issuable upon conversion of Convertible Debentures, and 60,250 shares issuable upon exercise of non-qualified options at an exercise price of $8 per share which became exercisable on December 1, 1995. (2a) Includes 10,417 shares issuable upon conversion of Convertible Debentures, and 60,250 shares issuable upon exercise of non-qualified options at an exercise price of $8 per share which became exercisable on December 1, 1995. Excludes 10,417 shares issuable upon exercise of Private Warrants which are not exercisable until one year after the closing of the Debenture Conversion. (3) Includes 9,000 shares issuable on exercise of warrants at an exercise price of $5 per share which became exercisable on October 31, 1994. (4) Includes (i) 67,500 shares issuable upon exercise of non-qualified options at an exercise price of $8 per share which became exercisable on December 1, 1995 and (ii) 91,333 shares owned by Europa International Inc. ("Europa"), including 13,333 shares issuable to Europa upon conversion of Convertible Debentures and 78,000 shares issuable to Europa on exercise of warrants at an exercise price of $5 per share which became exercisable on October 31, 1994. Knoll Capital Management has the sole voting power of the shares owned by Europa. Mr. Knoll is the President and sole shareholder of Knoll Capital an Management. 48 (4a) Includes Europa holdings of 16,667 shares issuable upon conversion of Convertible Debentures and 78,000 shares issuable on exercise of warrants at an exercise price of $5 per share which became exercisable on October 31, 1994. Knoll Capital Management has the sole voting power of the shares owned by Europa. Mr. Knoll is the President and sole shareholder of Knoll Capital Management. Excludes 16,667 shares issuable upon exercise of Private Warrants which are not exercisable until one year after the closing of the Debenture Conversion. (5) Includes 1,250 shares issuable upon exercise of non-qualified options at an exercise price of $4 per share which became exercisable on January 25, 1995. (6) Includes 3,333 shares issuable upon conversion of Convertible Debentures and 18,000 shares issuable on exercise of warrants at an exercise price of $5 per share which became exercisable on October 31, 1994. (6a) Includes 4,167 shares issuable upon conversion of Convertible Debentures and 18,000 shares issuable on exercise of warrants at an exercise price of $5 per share which became exercisable on October 31, 1994. Excludes 4,167 shares issuable upon exercise of Private Warrants which are not exercisable until one year after the Debenture Conversion. (7) Includes 3,333 shares issuable upon conversion of Convertible Debentures. (7a) Includes 4,167 shares issuable upon conversion of Convertible Debentures. Excludes 4,167 shares issuable upon exercise of warrants which are not exercisable until one year after the Debenture Conversion. (8) Represents shares issuable upon conversion of 57,500 shares of Series One Preferred Stock. 49 DESCRIPTION OF SECURITIES The Company's authorized capital stock consists of 35,000,000 shares of Common Stock, par value $.01 per share (the "Common Stock"), and 5,000,000 shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"). The following summary of certain terms of the Common Stock and Preferred Stock does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Company's Certificate of Incorporation and By-laws, which are included as exhibits to the Registration Statement of which this Prospectus is a part. COMMON STOCK The Company has 439,650 shares of Common Stock issued and outstanding. 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. Subject to preferences that may be applicable to any then outstanding Preferred Stock, the holders of the Common Stock are entitled to receive such dividends, if any, as may be declared by the Board of Directors from time to time out of legally available funds. Upon liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets of the Company that are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of holders of the Preferred Stock then outstanding. The holders of Common Stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of Common Stock are subject to the rights of the holders of shares of any series of Preferred Stock that the Company will issue in the future. WARRANTS Each Warrant offered in the Primary Offering entitles the registered holder to purchase one share of Common Stock at a price of $4.00 per share, subject to adjustments in certain circumstances, during the period commencing one year and ending five years from the date of this Prospectus. The Warrants are redeemable by the Company, at the option of the Company, with the prior consent of the Representative, at a price of $.01 per Warrant at any time after the Warrants become exercisable, upon not less than 30 business days' written notice, provided that the last sales price of the Common Stock equals or exceeds 150% (initially $6.00) of the then-exercise price of the Warrants (the "Redemption Threshold") for the 20 consecutive trading days ending on the third day prior to the notice of redemption to warrantholders. The warrantholders shall have the right to exercise the Warrants until the close of business on the date fixed for redemption. The Company is required to maintain the effectiveness of a current registration statement relating to the exercise of the Warrants and, accordingly, the Company 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 underlying securities. Also, lack of qualification or registration under applicable state securities laws may mean that the Company would be unable to issue securities upon exercise of the Warrants to holders in certain states, including at the time when the Warrants are called for redemption. The Warrants will be issued in registered form under a Warrant Agreement between the Company and American Stock Transfer & Trust Company as Warrant Agent. Reference is made to such 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 description herein contained being qualified in its entirety by reference to such Warrant Agreement). The exercise price, number of shares of Common Stock issuable on exercise of the Warrants and Redemption Threshold are subject to adjustment in certain circumstances, including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation of the Company. However, the Warrants are not subject to adjustment for issuances of Common Stock at a price below their exercise price. 50 The Company has the right, in its 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, the Company has the right, in its sole discretion, to extend the expiration date of the Warrants on five business days' prior written notice to the warrantholders. The Company will comply with all applicable tender offer rules, including Rule 13e-4, in the event the Company reduces the exercise price for a limited period of time. The Warrants may be exercised upon surrender of the Warrant Certificate representing the Warrants on or prior to 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, accompanied by full payment of the exercise price (by certified check, payable to the Company) for the number of Warrants being exercised. The warrantholders do not have the rights or privileges of holders of Common Stock. No Warrants will be exercisable unless at the time of exercise the Company has filed with the Commission a current prospectus covering the shares of Common Stock issuable upon exercise of such Warrants and such shares have been registered or qualified or are exempt under the securities laws of the state of residence of the holder of such Warrants. No fractional shares will be issued upon exercise of the Warrants. The Company will pay to such warrantholder, in lieu of the issuance of any fractional share which is otherwise issuable to such warrantholder, an amount in cash based on the market value of the Common Stock on the last trading day prior to the exercise date. Private Warrants. 125,000 Private Warrants are also being issued in connection with the Debenture Conversion. The terms of the Private Warrants were negotiated at arms-length. PREFERRED STOCK The Company is authorized to issue 5,000,000 shares of Preferred Stock, par value $0.01 per share, in one or more series. The Board of Directors, without further approval of the stockholders, is authorized to fix the rights and terms relating to dividends, conversion, voting, redemption, liquidation preferences, sinking funds and any other rights, preferences, privileges and restrictions applicable to each such 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, under certain circumstances, be used as a means of discouraging, delaying or preventing a change in control of the Company. Other than the Series One Preferred Stock, the Company has no shares of Preferred Stock outstanding and has no plans to issue any shares. Series One Preferred Stock. In June 1995, the Board of Directors designated 100,000 of the Company's Preferred Stock as "Series One Exchangeable and Convertible Preferred Stock" (the "Series One Preferred Stock"). The Company issued 57,500 shares of the Series One Preferred Stock to Anchor under the terms of the Anchor Loan. See "Certain Transactions." Under the terms of the Anchor Loan, upon the consummation of the Primary Offering and the other Closing Transactions, the 57,500 shares of Series One Preferred Stock will be exchanged for 205,000 shares of Common Stock. The holders are also entitled to receive cumulative dividends equal to $1.00 per share and have a liquidation preference of $10.00 per share plus any dividends accrued and unpaid. The holders of Series One Preferred Stock have no voting rights except for certain corporate actions. The Series One Preferred Stock is redeemable at the option of the Company at a price of $10.00 per share, plus accrued and unpaid dividends, under certain conditions, commencing January 1, 1999. CONVERTIBLE DEBENTURES Concurrently with the consummation of the Primary Offering and the other Closing Transactions, the Convertible Debentures, of which an aggregate principal amount of $1,525,000 is outstanding, will be restructured by converting, at a price of $4.00 per share, $500,000 principal amount into 125,000 shares of 51 Common Stock and 125,000 Private Warrants and reducing the conversion rate on $875,000 of the remainder to $8.00 per share from the present $16 per share, making the remainder convertible into 128,125 shares of Common Stock. From and after the consummation of the Primary Offering, the interest rate on $875,000 in principal amount will be 9% instead of the present 18%. Three of the 26 holders of Convertible Debentures, representing $150,000 in principal amount, have not agreed to the conversion. These changes were negotiated with the holders of the Convertible Debentures. The Convertible Debentures were issued in June 1994 and mature on January 25, 2004. In addition to payment of interest, the Company is 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"). As a result of the Debenture Conversion, the Supplemental Participation will be reduced by one-third in view of the Conversion of $500,000 in principal amount of Convertible Debentures. See "Business--Current Operations and On-Going Projects--Lehi Cogeneration Project." Pursuant to the terms and conditions of a pledge agreement between the Company and Richard Nelson and Theodore Rosen, acting jointly as pledge agent for all of the holders of the Convertible Debentures, 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 LEI, all of which issued and outstanding shares are owned by the Company. Until such time as the Company's obligations for the payment of the principal and interest on the Convertible Debentures and, if applicable, any Supplemental Participation due are paid in full, the Company shall not cause LEI to issue any additional shares of common stock unless the security interest granted in LEI shall be extended to such additional shares. The Convertible Debentures are subordinate and subject in right of payment to the prior payment of all "Senior Indebtedness" of the Company. "Senior Indebtedness" is the principal of, premium, if any, and interest (including any interest accruing after the filing of a petition in bankruptcy) on and other amounts due or in connection with any indebtedness of the Company including, without limitation, the liabilities as defined in and arising under any loan or security agreement with a bank, insurance company, or other financial institution or affiliate of any thereof whether outstanding on the date of the Convertible Debentures, or any indebtedness thereafter created, incurred, assumed or guaranteed by the Company, and, in each case, all renewals, extensions, and refundings thereof, except indebtedness which by the terms of the instrument creating or evidencing such indebtedness created, incurred, assumed, or guaranteed after the date of the Convertible Debentures 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. Notwithstanding anything herein to the contrary, Senior Indebtedness shall not include (i) indebtedness representing the repurchase price of any preferred stock or other capital stock of the Company or any dividend or distribution with respect thereto; (ii) indebtedness of the Company owed directly to any employee, officer or director thereof; and (iii) indebtedness which, by its terms, is subordinate in right of payment to the indebtedness of the Company evidenced by the Convertible Debentures. To the extent the Company shall have funds legally available for such payment, commencing January 25, 1998, the Company may redeem at its 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 any such redemption, the Company must issue each holder whose Convertible Debenture(s) have been redeemed a warrant to purchase a number of shares of the Company's 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 (currently $8.00 per share). ANTI-TAKEOVER PROVISIONS The Company is governed by the provisions of Section 203 of the General Corporation Law of Delaware, an anti-takeover law. In general, this statute prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved 52 in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the Company's voting stock. The Delaware Statute may discourage certain types of transactions involving an actual or potential change in control of the Company. 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. 53 SHARES ELIGIBLE FOR FUTURE SALE Possible Rule 144 Sales. Upon completion of the Primary Offering by the Company described in this Prospectus, the Company will have outstanding 3,869,650 shares of Common Stock. All of the 3,100,000 shares sold in the Primary Offering (assuming no exercise of the Underwriters' over-allotment option in the Primary Offering) will be freely transferable by persons other than affiliates (as defined in regulations under the Securities Act) without restriction or further registration under the Securities Act. Of the 439,650 shares of Common Stock outstanding prior to the Primary Offering, 64,650 shares of Common Stock outstanding are "restricted securities" within the meaning of Rule 144 under the Securities Act and may not be sold in the absence of registration under the Securities Act, unless an exemption from registration is available, including the exemption provided by Rule 144. Under Rule 144 as currently in effect, all of such 64,650 shares are currently eligible for sale (none of which are subject to the agreements described below restricting their sale), subject in each instance to the volume limitations of the Rule. The holders of record of 114,279 of these shares have agreed with the Representative not to sell their shares until thirteen months from the date of this Prospectus without the prior written approval of the Representative. The 205,000 shares of Common Stock to be issued in the Preferred Stock Exchange and the 125,000 shares of Common Stock to be issued upon the Debenture Conversion will be restricted securities. Although registered pursuant to the Shelf Registration, Anchor has agreed not to sell the 205,000 shares of Common Stock it will receive in the Preferred Stock Exchange without the Representative's prior written approval, for a period of nine months following the consummation of the Offering. The foregoing does not give effect to any shares issuable on exercise of outstanding options and warrants. The effect of the offer and sale of such shares may be to depress the market price for the Company's Common Stock. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated for purposes of Rule 144) who beneficially owns Restricted Securities with respect to which at least two years have elapsed since the later of the date the shares were acquired from the Company or from an affiliate of the Company, is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock of the Company, or (ii) the average weekly trading volume in Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain manner-of-sale provisions and notice requirements, and to the availability of current public information about the Company. A person who is not an affiliate, has not been an affiliate within 90 days' prior to sale and who beneficially owns Restricted Securities with respect to which at least three years have elapsed since the later of the date the shares were acquired from the Company or from an affiliate of the Company, is entitled to sell such shares under Rule 144(k) without regard to any of the volume limitations or other requirements described above. 54 PLAN OF DISTRIBUTION The Securities are being registered to permit public secondary trading of the 205,000 shares of Common Stock by the holders thereof from time to time after the date of this Prospectus. The Company has agreed, among other things, to bear all expenses other than underwriting discounts and selling commissions and fees in connection with the registration and sale of the Securities covered by this Prospectus. The Company will not receive any of the proceeds from this Secondary Offering by the Selling Securityholders. The Company has been advised by the Selling Securityholders that the Selling Securityholders may sell all or a portion of the Securities beneficially owned by them and offered hereby from time to time on the Nasdaq SmallCap Market, the NASD OTC Bulletin Board or any exchange on which the Securities may trade on terms to be determined at the times of such sales. The Selling Securityholders may also make sales of the Securities directly or through a broker or brokers. Alternatively, any of the Selling Securityholders may from time to time offer any of the Securities beneficially owned by them through underwriters, dealers or agents, who may receive compensation in the form of underwriting discounts, commissions or concessions from the Selling Securityholders and from the purchasers of the Securities for whom they may act as agent. Any sales pursuant to this Prospectus by holders of any of the Securities offered hereby will require the delivery of a current Prospectus to the purchaser. The Securities may be sold from time to time in one or more transactions at fixed offering prices, which may be changed, or at varying prices determined at the time of sale or at negotiated prices. Such prices will be determined by the holders of such Securities or by agreement between such holders and underwriters or dealers who may receive fees or commissions in connection therewith. The aggregate proceeds to the Selling Securityholders from the sale of the Securities offered hereby will be the purchase price of such Securities less discounts and commissions, if any. No underwriting arrangements exist as of the date of this Prospectus for sales by any Selling Securityholders. Upon being advised of any underwriting arrangements, the Company will supplement this Prospectus to disclose such arrangements. The Company may suspend the use of this Prospectus at any time under certain circumstances relating to pending corporate developments, public filings with the Commission and similar events. In order to comply with the securities laws of certain states, if applicable, the Securities will be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states the Securities may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with. The Selling Securityholders and any broker-dealers, agents or underwriters that participate with the Selling Securityholders in the distribution of the Securities may be deemed to be "underwriters" within the meaning of the Securities Act, in which event any commissions received by such broker- dealers, agents or underwriters and any profit on the resale of the Securities purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. LEGAL MATTERS The legality of the Securities offered hereby will be passed upon for the Company by the firm of Reid & Priest LLP, New York, New York. 55 EXPERTS The financial statements of the Company as at January 31, 1996 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. Such financial statements have been included in reliance upon such report given upon the authority of that firm as experts in accounting and auditing. The financial statements of Lehi Independent Power Associates, L.C. as of December 31, 1995 and 1994 for the year then ended and the period January 24, 1994 (date of inception) through December 31, 1994, appearing in this Prospectus, have been audited by Traveller Winn & Mower, PC, independent auditors, to the extent and for the years indicated in their report appearing elsewhere herein and in the Registration Statement. Such financial statements have been included in reliance upon such report and upon the authority of that firm as experts in accounting and auditing. The financial statements of Far West Electric Energy Fund, L.P. as of December 31, 1994 and 1995 and for the years then ended, appearing in this Prospectus, have been audited by Robison, Hill & Co., PC, independent auditors, to the extent and for the years indicated in their report appearing elsewhere herein and in the Registration Statement. Such financial statements have been included in reliance upon such report and upon the authority of that firm as experts in accounting and auditing. The financial statements of 1-A Enterprises as of December 31, 1994 and 1995 and for the two-year period then ended, appearing in this Prospectus, have been audited by Robison, Hill & Co., PC, independent auditors, to the extent and for the years indicated in their report appearing elsewhere herein and in the Registration Statement. Such financial statements have been included in reliance upon such report and upon the authority of that firm as experts in accounting and auditing. The financial statements of Plymouth Cogeneration Limited Partnership as of December 31, 1994 and 1995 and for the year ended December 31, 1995, appearing in this Prospectus, have been so included in the reliance on the report on Price Waterhouse LLP, independent accountants given on the authority of said firm as experts in auditing and accounting. 56 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) INDEX TO FINANCIAL STATEMENTS
PAGE ---- U.S. ENERGY SYSTEMS, INC. Report of Independent Auditor............................................. F-2 Consolidated Balance Sheet as at January 31, 1996 and July 31, 1996 (Unau- dited)................................................................... F-3 Consolidated Statements of Operations for the years ended January 31, 1996 and January 31, 1995 and for the Six Months ended July 31, 1996 and July 31, 1995 (Unaudited). F-4 Consolidated Statements of Changes in Capital Deficiency for the years ended January 31, 1996 and January 31, 1995 and for the Six Months ended July 31, 1996 and July 31, 1995 (Unaudited)..................................................... F-5 Consolidated Statements of Cash Flows for the years ended January 31, 1996 and January 31, 1995 and for the Six Months ended July 31, 1996 and July 31, 1995 (Unaudited). F-6 Notes to Financial Statements............................................. F-7 FAR WEST ELECTRIC ENERGY FUND, L.P. Independent Auditor's Report.............................................. F-16 Balance Sheets, December 31, 1995 and 1994 and June 30, 1996.............. F-17 Statements of Income, for the years ended December 31, 1995, 1994, and 1993 and the Nine Months ended September 30, 1996............................. F-18 Statements of Partners' Capital, for the years ended December 31, 1995, and 1994, and 1993 and the Nine Months ended September 30, 1996............................. F-19 Statements of Cash Flows, for the years ended December 31, 1995, 1994 and 1993 and the Nine Months ended September 30, 1996............................. F-20 Notes to Financial Statements............................................. F-21 1-A ENTERPRISES Independent Auditor's Report.............................................. F-29 Balance Sheet, December 31, 1995 and 1994 and June 30, 1996............... F-30 Statements of Income, for the years ended December 31, 1995 and 1994...... F-31 Statements of Partners' Capital, for the years ended December 31, 1995 and 1994 and the Nine Months ended September 30, 1996............................. F-32 Statements of Cash Flows, for the years ended December 31, 1995 and 1994 and the Nine Months ended September 30, 1996............................. F-33 Notes to Financial Statements December 31, 1995 and 1994 and the Six Months ended June 30, 1996............................................... F-34 LEHI INDEPENDENT POWER ASSOCIATES, L.C. Report of Independent Auditors............................................ F-38 Balance Sheets, December 31, 1995 and 1994 and June 30, 1996.............. F-39 Statements of Operations for the year ended December 31, 1995, the Period ended December 31, 1994 and the Six Months ended June 30, 1996........... F-40 Statement of Changes in Members' Equity for the year ended December 31, 1995, the Period ended December 31, 1994 and the Six Months ended June 30, 1996..................................................................... F-41 Statements of Cash Flows for the year ended December 31, 1995, the Period ended December 31, 1994 and the Six Months ended June 30, 1996........... F-42 Notes to Financial Statements............................................. F-43 PLYMOUTH COGENERATION LIMITED PARTNERSHIP Report of Independent Accountants......................................... F-45 Balance Sheets, December 31, 1995 and 1994 and June 30, 1996.............. F-46 Statement of Operations for the year ended December 31, 1995 and the Six Months ended June 30, 1996................................... F-47 Statement of Changes in Partners' Capital for the year ended December 31, 1995 and the Six Months ended June 30, 1996................................... F-48 Statement of Cash Flows for the year ended December 31, 1995 and the Six Months ended June 30, 1996................................... F-49 Notes to Financial Statements............................................. F-50
F-1 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders U.S. Energy Systems, Inc. (formerly U.S. Envirosystems, Inc.) We have audited the accompanying consolidated balance sheet of U.S. Energy Systems, Inc. (formerly U.S. Envirosystems, Inc.) and subsidiaries as at January 31, 1996 and the related consolidated statements of operations, changes in capital deficiency and cash flows for each of the years in the two- year period then ended. These 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 consolidated financial statements enumerated above present fairly, in all material respects, the financial position of U.S. Energy Systems, Inc. and subsidiaries at January 31, 1996, and the results of its operations and its cash flows for each of the years in the two-year period then ended in accordance with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has incurred significant losses and as at January 31, 1996, has a working capital deficiency of approximately $1,910,000 and a capital deficiency of $2,729,000 which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Richard A. Eisner & Company, LLP New York, New York March 1, 1996 With respect to Note J[4] May 6, 1996 With respect to Note A (change of name to U.S. Energy Systems, Inc.) May 17, 1996 F-2 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) CONSOLIDATED BALANCE SHEETS
JANUARY 31, JULY 31, ASSETS 1996 1996 (NOTE G) ----------- ----------- (UNAUDITED) Current assets: Cash.................................................. $ 2,000 $ 1,000 Other current assets.................................. 16,000 20,000 ---------- ---------- Total current assets................................. 18,000 21,000 Investments in Joint Ventures--at equity: Lehi Independent Power Associates, L.C. (Note C[1])... 1,170,000 1,112,000 Plymouth Cogeneration Limited Partnership (Note C[2]). 703,000 669,000 Other assets........................................... 103,000 274,000 ---------- ---------- TOTAL................................................ $1,994,000 $2,076,000 ========== ========== LIABILITIES Current liabilities: Accrued expenses and other current liabilities (in- cluding due to related parties of $467,000 and $707,000, respectively) (Notes D and L).............. $ 990,000 $1,663,000 Pre-reorganization income taxes payable and accrued interest-- current (Note E)..................................... 172,000 192,000 Loans payable (Note G)................................ 766,000 960,000 ---------- ---------- Total current liabilities............................ 1,928,000 2,815,000 Convertible subordinated secured debentures (including due to related parties of $325,000) (Notes H and L)... 1,525,000 1,525,000 Notes payable (including due to related parties of $775,000) (Notes I and L)............................. 965,000 975,000 Deferred interest (including due to related parties of $12,000) (Notes H and L).............................. 114,000 114,000 Pre-reorganization income taxes payable and accrued in- terest (Note E)....................................... 176,000 180,000 Advances from Joint Ventures (Note C[2])............... 15,000 24,000 ---------- ---------- Total liabilities.................................... 4,723,000 5,633,000 ---------- ---------- Commitments and contingencies (Note K) CAPITAL DEFICIENCY (NOTES A AND J) Preferred stock, $.01 par value, authorized 5,000,000 shares; issued and outstanding 57,500 (liquidating preference $575,000)..................... 1,000 1,000 Common stock, $.01 par value, authorized 35,000,000 shares; issued and outstanding 439,650..... 4,000 4,000 Additional paid-in capital............................. 112,000 112,000 Accumulated deficit.................................... (2,846,000) (3,674,000) ---------- ---------- Total capital deficiency............................. (2,729,000) (3,557,000) ---------- ---------- TOTAL................................................ $1,994,000 $2,076,000 ========== ==========
The accompanying notes to financial statements are an integral part hereof. F-3 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED YEAR ENDED JANUARY 31, JULY 31, ------------------------ ----------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cost and expenses: Operating expenses.......... $ 27,000 $ 109,000 $ $ 26,000 Administrative expenses..... 826,000 897,000 408,000 395,000 Interest expense............ 604,000 319,000 328,000 223,000 Loss from Joint Ventures.... 17,000 76,000 92,000 62,000 ----------- ----------- --------- --------- Total cost and expenses.... 1,474,000 1,401,000 828,000 706,000 ----------- ----------- --------- --------- (Loss) before extraordinary item....................... (1,474,000) (1,401,000) (828,000) (706,000) Extraordinary gain from re- structuring of liabilities.. 83,000 85,000 83,000 ----------- ----------- --------- --------- Net (Loss)................... (1,391,000) $(1,316,000) (828,000) $(623,000) =========== ========= Dividends on preferred stock. (21,000) (29,000) ----------- --------- (Loss) applicable to common stock....................... $(1,412,000) $(857,000) =========== ========= (Loss) per share before ex- traordinary item............ $ (3.41) $ (3.38) $ (1.95) $ (1.61) =========== =========== ========= ========= Net (loss) per share......... $ (3.22) $ (3.17) $ (1.95) $ (1.42) =========== =========== ========= ========= Weighted average shares out- standing.................... 438,773 415,022 439,650 438,296 =========== =========== ========= =========
The accompanying notes to financial statements are an integral part hereof. F-4 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY (NOTES A AND J)
PREFERRED STOCK COMMON STOCK --------------- ------------------------- NUMBER NUMBER ADDITIONAL OF OF PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL ------- ------- ------- ------ ---------- ----------- ----------- Balance--January 31, 1994................... 391,250 $4,000 $(306,000) $ (139,000) $ (441,000) Sale of common stock.... 32,000 139,000 139,000 Compensation attributable to options and warrants........... 48,000 48,000 Shares issued for inter- est in Joint Ventures.. 11,400 114,000 114,000 Value assigned to warrants issued in connection with notes payable................ 46,000 46,000 Net (loss) for the year ended January 31, 1995....... (1,316,000) (1,316,000) ------- ------- ------- ------ --------- ----------- ----------- Balance--January 31, 1995................... 434,650 4,000 41,000 (1,455,000) (1,410,000) Sale of common stock.... 5,000 34,000 34,000 Value assigned to preferred stock issued in connection with loans payable.......... 57,500 $ 1,000 28,000 29,000 Value assigned to additional warrants issued in connection with notes payable..... 9,000 9,000 Net (loss) for the year ended January 31, 1996....... (1,391,000) (1,391,000) ------- ------- ------- ------ --------- ----------- ----------- Balance--January 31, 1996................... 57,500 1,000 439,650 4,000 112,000 (2,846,000) (2,729,000) Net (loss) for the six months ended July 31, 1996.......... (828,000) (828,000) ------- ------- ------- ------ --------- ----------- ----------- Balance--July 31, 1996 (Unaudited)............ 57,500 $ 1,000 439,650 $4,000 $ 112,000 $(3,674,000) $(3,557,000) ======= ======= ======= ====== ========= =========== ===========
The accompanying notes to financial statements are an integral part hereof. F-5 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEAR ENDED JANUARY 31, JULY 31, ------------------------ ----------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating ac- tivities: Net (loss).................. $(1,391,000) $(1,316,000) $(828,000) $(623,000) Adjustments to reconcile net (loss) to net cash (used in) operating activities: Amortization of debt dis- count...................... 42,000 3,000 10,000 7,000 Amortization of purchase price in excess of equity in Joint Ventures.......... 59,000 55,000 26,000 28,000 Amortization of deferred fi- nancing and registration costs...................... 72,000 39,000 14,000 Value assigned to options and warrants............... 48,000 Gain from restructuring of liabilities................ (83,000) (85,000) (83,000) Equity in (income)/loss of Joint Ventures, net of dis- tributions................. (13,000) 21,000 66,000 34,000 Loss from legal proceedings. 102,000 Deferred interest........... 114,000 61,000 Accrued interest on pre-re- organization income taxes payable.................... 39,000 24,000 Changes in operating assets and liabilities: (Increase) decrease in other assets.............. 2,000 (1,000) (19,000) (11,000) Increase in accounts pay- able and accrued expenses. 671,000 146,000 673,000 134,000 ----------- ----------- --------- --------- Net cash (used in) operat- ing activities............ (641,000) (874,000) (9,000) (439,000) ----------- ----------- --------- --------- Cash flows from investing ac- tivities: Security deposit on proposed acquisition................ (50,000) Cost incurred in connection with the Proposed Acquisi- tions...................... (3,000) Investment in Joint Ven- tures...................... (636,000) Advances to Joint Ventures.. (9,000) (11,000) Loans (to) from officers.... (47,000) Collections of loans receiv- able--officer.............. 33,000 59,000 ----------- ----------- --------- --------- Net cash provided by (used in) investing activities.. (29,000) (694,000) 59,000 ----------- ----------- --------- --------- Cash flows from financing ac- tivities: Proceeds from issuance of convertible subordinated debt....................... 400,000 25,000 Proceeds from issuance of common stock............... 34,000 139,000 63,000 Proceeds from issuance of notes payable.............. 25,000 975,000 Proceeds from loans payable and preferred stocks....... 785,000 175,000 570,000 Payment of deferred financ- ing costs.................. (102,000) (85,000) Payment of pre-reorganiza- tion payroll taxes payable. (34,000) (105,000) (109,000) Payment of pre-reorganiza- tion income taxes payable.. (9,000) (13,000) (11,000) Advances from Joint Ven- tures...................... 15,000 9,000 3,000 Deferred registration costs. (50,000) (176,000) ----------- ----------- --------- --------- Net cash provided by fi- nancing activities........ 664,000 1,396,000 8,000 456,000 ----------- ----------- --------- --------- NET INCREASE (DECREASE) IN CASH........................ (6,000) (172,000) (1,000) 76,000 Cash--beginning of the peri- od.......................... 8,000 180,000 2,000 8,000 ----------- ----------- --------- --------- CASH--END OF THE PERIOD...... $ 2,000 $ 8,000 $ 1,000 $ 84,000 =========== =========== ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest...... $ 93,000 $ 163,000 $ 154,000 $ 60,000 Supplemental schedule of noncash investing activity: Fair market value of common stock issued and contrib- uted to investment in Joint Ventures................... $ 114,000 Supplemental schedule of noncash financing activity: Valuation of preferred stock in connection with bridge loan....................... $ 29,000
The accompanying notes to financial statements are an integral part hereof. F-6 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) (NOTE A)--THE COMPANY: U.S. Energy Systems, Inc. ("USE") and subsidiaries (collectively, the "Company") are the successors to Cogenic Energy Systems, Inc. ("Cogenic"). Cogenic emerged from Chapter 11 Bankruptcy Proceedings on March 22, 1993. The Plan of Reorganization, as amended, provided that Cogenic merge with Utilities Systems Florida, Inc. ("USF") and change the name of the reorganized Cogenic to U.S. Envirosystems, Inc. On May 17, 1996, the Company amended its Certificate of Incorporation to change the name of the Company to U.S. Energy Systems, Inc. The Company is in the business of owning, developing and operating cogeneration and independent power plants through Joint Ventures. The Company has incurred significant losses since its reorganization in 1993 and, as at January 31, 1996 has a working capital deficiency of approximately $1,910,000 and a capital deficiency of approximately $2,729,000. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans for which it has letters of intent or agreements include the following: a) Obtain net proceeds of approximately $10,662,000 through the sale of 3,100,000 shares of common stock and warrants in a public offering (the "Proposed Public Offering"). b) Convert the existing preferred stock into 205,000 shares of common stock. c) Convert $500,000 of the existing Debentures into 125,000 shares of common stock and warrants. d) Acquire an interest in two operating geothermal power plants ("Steamboat 1 and 1A") for an aggregate of $5,400,000 in cash consideration (the "Proposed Acquisitions"). e) Repay notes payable and other liabilities of approximately $2,139,000. All of the above are dependent upon the successful completion of the proposed public offering referred to in (b) above and to certain other conditions including the completion of all of the above. There is no assurance that the above plans can be accomplished. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The financial information presented as of July 31, 1996 and for the six- month periods ended July 31, 1996 and July 31, 1995 is unaudited, but in the opinion of management contains all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of such financial information. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years. (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 subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated balance sheet. F-7 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) [2]Investments in Joint Ventures: Investments in Joint Ventures are accounted for under the equity method. LIPA and Plymouth each have a fiscal year end December 31 which differs to the fiscal year end of the Company. No material adjustment is necessary to reconcile the December 31 year end to the Company's January 31 year end. [3]Net (loss) per share: Net (loss) per share is computed using the weighted average number of common shares outstanding during the period and, when dilutive, common stock equivalents. [4]Recent pronouncements: The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company will adopt the disclosure requirements of SFAS 123 during the Company's fiscal year ending January 31, 1997 but will continue to account for its stock option plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" as permitted under FAS 123. In addition, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 121 is also effective for the Company's fiscal year ending January 31, 1997. The Company believes adoption of SFAS No. 121 will not have a material impact on its financial statements. [5]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 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. (NOTE C)--INVESTMENT IN JOINT VENTURES: [1]Lehi Independent Power Associates, L.C.: In January 1994, Lehi Envirosystems, Inc. ("LEHI"), a subsidiary of the Company, purchased a 50% equity interest in a limited liability company called Lehi Independent Power Associates, L.C. ("LIPA"), which wholly owns a cogeneration project (the "Project") located in Lehi, Utah. 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 totalling $875,000 to be shared by the owners in the event that any modification, as defined, 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. During the two-year period ended January 31, 1996 and the six-month period ended July 31, 1996, the Project was not in operation. In the Proposed Acquisitions, Far West Capital Inc., the other 50% owner of LIPA, will own an interest in Steamboats in the event the Proposed Acquisitions are consummated. F-8 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) [2]Plymouth Cogeneration Limited Partnership ("PCLP"): In November 1994, Plymouth Envirosystems, Inc. ("Plymouth"), a subsidiary of the Company, acquired a 5% general partner interest and a 35% limited partner interest in PCLP for cash contributions of $636,000. The amended and restated agreement of limited partnership (the "Agreement") provides for, among other matters, the allocation of net profits and net losses in accordance with the respective ownership interests of the partners. The terms, conditions and provisions of the Agreement expire in November 2024 or until its termination or dissolution in accordance with the provisions of the Agreement. The partnership is engaged in the business of owning and operating a cogeneration facility designed, developed, and constructed for the production of electricity and steam (the "Plymouth Project"). The management, supervision and control of, and the determination of all matters relating to the ownership and operation of the Plymouth Project and the operations of PCLP are delegated to PSC, the managing partner. In December 1994, Plymouth acquired a 36.4% limited partner ownership interest in PSC, the managing partner of PCLP, for a contribution of 11,400 shares of the Company's common stock with a fair market value of approximately $114,000. With this transaction, the Company's combined ownership interest in PCLP is effectively 50%. In November 1994, the Company entered into an agreement with IEC, a general partner of PSC. The agreement provides for advances by IEC to the Company equal to 50% of the development commissions, as defined, received by IEC from PSC for a period of five years commencing in 1995. During the fiscal year ended January 31, 1996, the Company received advances from IEC of $15,000. The advances will be repaid by the Company from the proceeds of capital distributions received from PSC. The Company is required to repay the advances in five equal annual installments commencing July 1, 2004. [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, 1996, the estimated remaining life of the plants is as follows: LIPA--Buildings.......................... 28 years Machinery and equipment............... 6 years Plymouth--Plant.......................... 19 years
F-9 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) [4]The following is summarized financial information of LIPA and PCLP:
DECEMBER 31, 1995 JUNE 30, 1996 ---------------------- ---------------------- LIPA PCLP LIPA PCLP ---------- ---------- ---------- ---------- Current Assets................. $ 158,000 $ 158,000 $ 122,000 $ 188,000 Property, plant and equipment at cost (net)................. 257,000 5,593,000 251,000 5,450,000 Other assets................... 828,000 876,000 ---------- ---------- ---------- ---------- Total assets................. 415,000 6,579,000 373,000 6,514,000 Current liabilities............ (9,000) (343,000) (35,000) (339,000) Long-term debt................. (4,987,000) (4,990,000) ---------- ---------- ---------- ---------- Equity......................... $ 406,000 $1,249,000 $ 338,000 $1,185,000 ========== ========== ========== ========== Equity in Joint Ventures....... $ 203,000 $ 625,000 $ 169,000 $ 593,000 Investments in Joint Ventures in excess of equity........... 967,000 78,000 943,000 76,000 ---------- ---------- ---------- ---------- Total investments in Joint Ventures.................... $1,170,000 $ 703,000 $1,112,000 $ 669,000 ========== ========== ========== ==========
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------------ -------------------------------------- LIPA PCLP LIPA PCLP ------------------ ---------- ------------------ ------------------ 1995 1994 1995 1996 1995 1996 1995 -------- -------- ---------- -------- -------- -------- -------- Revenue................. $1,150,000 $596,000 $570,000 ========== ======== ======== Gain on sale of fixed assets................. $236,000 ======== Net income (loss)....... $172,000 $(41,000) $ (87,000) $(68,000) $(24,000) $(64,000) $(44,000) ======== ======== ========== ======== ======== ======== ======== Equity in net income (loss)................. $ 86,000 $(21,000) $ (44,000) $(34,000) $(12,000) $(32,000) $(22,000) Amortization of purchase price over equity...... (55,000) (55,000) (4,000) (24,000) (28,000) (2,000) -------- -------- ---------- -------- -------- -------- -------- Net income (loss) from Joint Ventures......... $ 31,000 $(76,000) $ (48,000) $(58,000) $(40,000) $(34,000) $(22,000) ======== ======== ========== ======== ======== ======== ========
Plymouth Project commenced operations on January 1, 1995. (NOTE D)--ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accrued expenses and other current liabilities are comprised of the following:
JANUARY 31, JULY 31, 1996 1996 ----------- ---------- Professional fees.................................... $293,000 $ 501,000 Accrued interest..................................... 417,000 591,000 Accrued payroll and related taxes.................... 238,000 411,000 Other................................................ 42,000 160,000 -------- ---------- Total.............................................. $990,000 $1,663,000 ======== ==========
F-10 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) (NOTE E)--PRE-REORGANIZATION INCOME TAXES PAYABLE: Pursuant to the Plan of Reorganization of Cogenic, the pre-reorganization income taxes payable were to be paid in full, plus interest at the rate set by applicable statute, by making a payment of $110,000 upon the merger with USF and by making equal monthly installments, commencing one year after the merger, over a period not exceeding six years after the date of assessment of such pre-reorganization income taxes payable. The $110,000 payment has not been made since the effective date of the merger. The remaining payments of pre-reorganization income taxes and accrued interest are as follows:
JANUARY 31, JULY 31, 1996 1996 ----------- -------- 1997.................................................... $172,000 $192,000 1998.................................................... 41,000 46,000 1999.................................................... 43,000 44,000 2000.................................................... 46,000 47,000 2001.................................................... 46,000 43,000 -------- -------- Total................................................. $348,000 $372,000 ======== ========
During the two-year period ended January 31, 1996, the Company reached settlements with the tax authorities resulting in extraordinary gains from restructuring of liabilities of $83,000 and $85,000 during the years ended January 31, 1996 and January 31, 1995, respectively. (NOTE F)--INCOME TAXES: The deferred tax asset is as follows:
JANUARY 31, JULY 31, 1996 1996 ----------- ---------- Benefit of post-reorganization operating loss carryforward....................................... $801,000 $1,022,000 Expenses for financial reporting, not yet deductible for taxes.......................................... 132,000 110,000 Valuation allowance................................. (933,000) (1,132,000) -------- ---------- $-- 0 -- $ -- 0 -- ======== ==========
The Company has fully reserved against the deferred tax asset since the likelihood of realization cannot be determined. During the years ended January 31, 1996 and 1995, and the six-month period ended July 31, 1996, 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 $410,000, $503,000 and $199,000, respectively. Prior to the reorganization, Cogenic had available a net operating loss carryforward, which expires through 2008, of approximately $19,000,000 for tax purposes and tax credit carryforwards of $216,000 expiring from 1997 to 2000. Utilization of the acquired net operating loss and tax credit carryforwards may be subject to limitations as a result of the reorganization, or in the event of other significant changes in ownership. Accordingly, the Company has not recognized the deferred tax asset attributable to the acquired net operating loss and tax credit carryforwards. F-11 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) (NOTE G)--LOANS PAYABLE (THE "LOANS"): Loans payable consist of the following:
JANUARY 31, JULY 31, 1996 1996 ----------- -------- 18% loan, payable on the earlier of May 31, 1996 or closing of the proposed public offering, net of debt discount of $19,000 at January 31, 1996 (effective rate 39.68%) (a)........................... $616,000 $660,000 10% loan, payable on the earlier of May 31, 1996 or closing of the proposed public offering (b).......................... 100,000 250,000 18% unsecured loan payable upon closing of the proposed public offering....................................... 50,000 50,000 -------- -------- $766,000 $960,000 ======== ========
(a) Collateralized by first lien on all the assets of the Company and by 97,250 shares of the Company's common stock owned by officers. (b) Collateralized by the Company's interest in LIPA and PCLP Joint Ventures, subject to prior lien. (NOTE H)--CONVERTIBLE SUBORDINATED SECURED DEBENTURES: The Company's Convertible Subordinated Debentures (the "Debentures") bear interest at 18% and are due on January 25, 2004. In addition to the interest payments, the Debenture holders are entitled to 50% of the Company's share of net profits (net of provision for the 18% interest on the Debentures) of LIPA ("Supplemental Participation"). The Debentures are collateralized by a security interest in the outstanding shares of Lehi and are subject to subordination to senior indebtedness. Commencing January 25, 1998, the Company has the option to redeem the Debentures at 102, plus unpaid and accrued interest and Supplemental Participation. Commencing January 25, 1996, each Debenture may be converted at any time, at the option of the Debenture holders, into the Company's common stock. Subject to certain adjustments, each $1,000 principal amount of Debentures is initially convertible into 62 shares of the Company's common stock. Commencing January 25, 1997, the Company will have the right to convert all the then outstanding Debentures into common stock at the then current conversion number if the market price, as defined, of the common stock equals or exceeds $40.00 for more than twenty (20) consecutive days prior to the date fixed for conversion by the Company. In December 1994, the Company requested from its Debenture holders that one- half of the 18% interest be deferred commencing with the December 25, 1994 interest payment until the earlier to occur of completion of new financing or commencement of cash flow from LIPA (see Note C[1]). In the event of default, the Debenture holders have the right to demand immediate payment of all or any portion of the outstanding principal amount and any unpaid interest, if the default is not remedied within 120 days after it has occurred. As of May 15, 1995, the Debenture holders have agreed to the terms of the partial deferment. In connection with the 9% deferment, the Company increased the number of shares that each Debenture can be converted into from 62 shares for each $1,000 principal amount to 66 shares for each $1,000 principal amount. At January 31, 1996 and July 31, 1996, the 9% interest deferred, included in accrued expenses and other current liabilities, was $160,000 and $229,000, respectively. F-12 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) (NOTE I)--NOTES PAYABLE: In connection with the acquisition of PCLP (see Note C[2]), the Company borrowed $1,000,000 from a group comprised principally of officers, directors and affiliates of the Company. The interest on the Secured Promissory Notes (the "Notes") is the prime rate plus 2.5% (11% at January 31, 1996 and 10.75% at July 31, 1996) adjusted quarterly during the term of the Notes. The interest on the Notes is payable quarterly but only to the extent that the net after tax cash flow of Plymouth is sufficient to make such interest payment. The Company has not paid interest on these Notes since the inception of the Notes. At January 31, 1996 and July 31, 1996, the unpaid interest on these Notes was $141,000 and $209,000, respectively, included in accrued expenses and other current liabilities. The Notes are collateralized by the shares of common stock of Plymouth. The Notes and unpaid interest, are to be paid on the earlier of: (1) USE's receipt of not less than $1,000,000 in net proceeds from the Company's next public offering of equity securities, or (2) USE's receipt of an aggregate of not less than $4,000,000 in net proceeds from a private debt financing of USE, or (3) October 31, 1997. In conjunction with the issuance of these Notes, the Company granted to the investors warrants to purchase 95,000 shares of the Company's common stock at $16.00 per share before October 31, 1999. The Company, based on an independent appraisal, valued the warrants issued at $46,000, which is being accounted for as debt discount. In connection with the Company's Loans (Note G), the Company was required to grant certain security interests in the Company's assets including its ownership interest in Plymouth. In June 1995, in return for granting the security interests, the Company granted the noteholders additional warrants to purchase 19,000 shares of the Company's common stock (the "Additional Warrants"). The Additional Warrants have the same terms as those warrants initially granted to the noteholders. The Company, based on the appraisal referred to above, valued the Additional Warrants issued at $9,500, which is being accounted for as additional debt discount. In March 1996, as a result of continuing negotiations between the parties that commenced when the additional warrants were issued, the Company reduced the exercise price of the warrants, including the additional warrants, from $16.00 per share to $5.00 per share. At that time, the market price of the Common Stock was $2.50 per share. The effective interest rates at January 31, 1996 and January 31, 1995 are 13.60% and 10.72%, respectively. (NOTE J)--STOCKHOLDERS' EQUITY: [1]Preferred stock: In June 1995, the Board of Directors designated 100,000 shares of preferred stock as Series One Exchangeable and Convertible Preferred Stock ("Series One Preferred Stock"). The holders of Series One Preferred Stock are entitled to (i) convert to common stock equal to $10.00 per share of Series One Preferred Stock divided by the conversion price, as defined, and subject to adjustments for changes in capital stock, (ii) no voting rights except for certain corporate actions, (iii) receive cumulative dividends equal to $1.00 per share, (iv) liquidation preference of $10.00 per share plus any dividends accrued and unpaid. The Series One Preferred Stock is redeemable at the option of the Company at a price of $10.00 per share, plus accrued and unpaid dividends, under certain conditions, commencing the earlier of: (i) 3 years after the effective date of the Proposed Public Offering or (ii) January 1, 1999. The Series One Preferred Stock rank senior to all other equity securities of the Company including any other series or classes of preferred stock with respect to dividend rights and rights upon liquidation, winding up and dissolution. In connection with the Company's Loans, the Company issued 57,500 shares of Series One Preferred Stock which are convertible into 205,000 shares of common stock. The Company estimated the fair value of these shares of Series One Preferred Stock at approximately $29,000 and this amount is treated as a loan discount which is being amortized over the life of the loan. F-13 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) In calculating the net income per share, the net income (loss) available for common stockholders during the period the 57,500 shares of Series One Preferred Stock are converted into 205,000 shares of common stock will be reduced by a nonrecurring amount of approximately $791,000 which represents the excess of the fair value of the common stock transferred to the holders of the preferred stock over the carrying amount of the preferred stock. [2]Stock options: Stock option activity is summarized as follows:
SHARES OPTION PRICE EXPIRATION DATE ------- -------------- --------------- (PER SHARE) Granted--year ended January 31, 1995. 20,100 $4.00 - $10.00 April 1999 - January 2000 Granted--year ended January 31, 1996. 154,000 $4.00 - $ 8.00 January 2000 - ------- December 2000 Balance at January 31, 1996 and July 31, 1996 (174,100 exercisable at option prices $4.00 to $10.00)............. 174,100
During the year ended January 31, 1995 the Company recorded a compensation charge of $46,000 in connection with the issuance of certain options in that year. [3]Common stock reserved: The Company has reserved shares of common stock for issuance upon conversion of the Debentures and exercise of warrants and options as follows: (i) Convertible subordinated secured debentures (Note H)............ 100,000 (ii) Warrants issued in conjunction with notes payable (Note I)..... 114,000 (iii) Warrants issued in connection with consulting services. Exercisable at $16.00 per share, expires October 31, 1999. In connection therewith, the Company recorded a noncash charge of $2,000, in 1995.............................................. 3,750 (iv) Stock options outstanding (Note J[2]).......................... 174,100 (v) Series One Preferred Stock (Note J[1]).......................... 205,000 In connection with the proposed transactions referred to in Note A, the Company anticipates issuing warrants to purchase approximately 2,125,000 shares of common stock. [4]Reorganization: In February 1996, the shareholders approved a 1 for 40 reverse stock split, effective May 6, 1996, which has been given retroactive effect in the accompanying financial statements. All reference to shares and per share amounts in the notes to financial statements have been adjusted to reflect the reverse split. (NOTE K)--COMMITMENTS AND CONTINGENCIES: [1]The Company has employment agreements which expire through November 30, 1998 with two of its officers. The agreements provide for minimum annual payments of $210,000 subject to upward adjustment at the discretion of the Board of Directors. F-14 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY U.S. ENVIROSYSTEMS, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO JULY 31, 1996 AND JULY 31, 1995) [2]In October 1995, the Company entered into a consulting agreement with one of the members of its Board of Directors for an unspecified period. The consulting agreement provides for a $5,000 monthly consulting fee. The term of the consulting agreement is subject to the approval of the Board of Directors. [3]USE International, L.L.C. ("USE International"): In May 1995, the Company entered into a Joint Venture agreement to form a limited liability company, USE International, L.L.C. ("USE International"). USE International is owned 50% by the Company and 50% by Indus, LLC ("Indus"). USE International is managed by Indus. In connection with the agreement, the Company sold 2,500 shares of its common stock, at market price, to Indus and issued options to purchase 16,250 shares of the Company's common stock with an exercise price of $8.00 per share and expiring five years after date of issuance. The agreement also provides for the issuance of options to purchase up to an additional 25,000 shares of the Company's common stock at a price per share of $8.00. These options will be granted to Indus upon the signing of an initial transaction, as defined, by USE International. The Company has agreed to pay Indus a consulting fee of $6,000 per month. The consulting arrangement has an initial term of one year and expires in May 1996. The Company has also agreed to indemnify, defend and hold Indus harmless from all claims, losses, causes of action, liabilities, costs and expenses (including attorney's fees) which may arise in connection with the business of USE International. The Company accounts for the investment in USE International under the equity method. USE International was inactive during the year ended January 31, 1996 and the six-month period ended July 31, 1996. (NOTE L)--RELATED PARTY TRANSACTIONS: The Company borrowed from officers and an affiliate of a director (collectively, the "Related Parties") $325,000 under the Debentures and $775,000 under the Notes. In connection with the Notes, an affiliate of a director was granted warrants to purchase 78,000 shares of the Company's common stock at $16.00 per share before October 31, 1999. Included in deferred interest at January 31, 1996 and July 31, 1996 is $12,000 due to the Related Parties. In addition, at January 31, 1996 and July 31, 1996, $467,000 and $707,000, respectively, of accrued expenses and other current liabilities is due to the Related Parties. During the year ended January 31, 1996 and 1995 and the six months ended July 31, 1996 and 1995, the Company paid interest of $15,000, $22,000, $13,000 and $17,000, respectively, to the Related Parties. F-15 INDEPENDENT AUDITOR'S REPORT General Partner Far West Electric Energy Fund, L.P. Salt Lake City, Utah We have audited the balance sheet of Far West Electric Energy Fund, L.P. as of December 31, 1995 and 1994, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Far West Electric Energy Fund, L.P. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Respectfully submitted, /s/ ROBISON, HILL & CO. ---------------------------------- Certified Public Accountants Salt Lake City, Utah February 29, 1996 F-16 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP BALANCE SHEETS
DECEMBER 31, ------------------------ SEPTEMBER 30, 1995 1994 1996 ----------- ----------- ------------- (UNAUDITED) ASSETS Utility Plant: Plant in Service...................... $15,999,000 $18,716,000 $15,999,000 Equipment............................. 588,000 335,000 629,000 Construction in Progress.............. 118,000 118,000 118,000 Accumulated Depreciation.............. (5,377,000) (6,010,000) (5,859,000) ----------- ----------- ----------- Net Utility Plant.................... 11,328,000 13,159,000 10,887,000 Restricted Cash........................ 1,026,000 1,145,000 1,067,000 Other Assets........................... 106,000 124,000 93,000 Current Assets: Cash and Cash Equivalents............. 263,000 278,000 207,000 Receivables--Trade.................... 399,000 437,000 271,000 Receivables--Other.................... 6,000 6,000 0 Receivable--Related Party............. 238,000 159,000 0 Prepaid Expenses...................... 4,000 12,000 16,000 ----------- ----------- ----------- Total Current Assets................. 910,000 892,000 494,000 ----------- ----------- ----------- Total Assets......................... $13,370,000 $15,320,000 $12,541,000 =========== =========== =========== PARTNERS' CAPITAL AND LIABILITIES Partners' Capital: Limited Partners--10,306 units........ $ 5,148,000 $ 4,868,000 $ 5,340,000 General Partner--1 Percent............ (8,000) (11,000) (6,000) ----------- ----------- ----------- Total Partners' Capital.............. 5,140,000 4,857,000 $ 5,334,000 Other Liabilities...................... -- 150,000 Long-term Debt: Notes Payable--Related Party.......... 188,000 230,000 152,000 Notes Payable......................... 537,000 -- 537,000 ----------- ----------- ----------- Partners' Capital and Long-Term Liabil- ities................................. 5,865,000 5,237,000 6,023,000 Current Liabilities: Current Portion--Long-term Debt....... 4,563,000 7,140,000 3,911,000 Note Payable--Related Party........... 1,159,000 1,043,000 1,246,000 Payable-Related Party................. 671,000 573,000 274,000 Accrued Liabilities Operations............................ 402,000 495,000 295,000 Royalties............................. 96,000 220,000 78,000 Interest.............................. 614,000 612,000 714,000 ----------- ----------- ----------- Total Current Liabilities............ 7,505,000 10,083,000 6,518,000 ----------- ----------- ----------- Total Partners' Capital and Liabili- ties................................ $13,370,000 $15,320,000 $12,541,000 =========== =========== ===========
See accompanying notes to the financial statements. F-17 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP STATEMENTS OF INCOME
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------- ------------------------ 1995 1994 1993 1996 1995 ---------- ---------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues: Electric Power Reve- nues.................. $2,529,000 $2,728,000 $3,162,000 $2,043,000 $1,794,000 Other Revenues......... 145,000 151,000 622,000 111,000 110,000 ---------- ---------- ---------- ---------- ---------- Total Revenues....... 2,674,000 2,879,000 3,784,000 2,154,000 1,904,000 ---------- ---------- ---------- ---------- ---------- Expenses: Operations............. 1,755,000 1,779,000 2,163,000 1,281,000 1,271,000 Bad Debt Expense....... -- -- 31,000 -- -- General and Administra- tive: Professional Services. 55,000 54,000 72,000 100,000 42,000 General Partners--Re- lated Party.......... 98,000 123,000 223,000 78,000 95,000 ---------- ---------- ---------- ---------- ---------- Total General and Ad- ministrative........ 153,000 177,000 295,000 178,000 137,000 ---------- ---------- ---------- ---------- ---------- Total Expenses....... 1,908,000 1,956,000 2,489,000 1,459,000 1,408,000 ---------- ---------- ---------- ---------- ---------- Income From Opera- tions............... 766,000 923,000 1,295,000 695,000 496,000 Other Income (Expense): Interest Income........ 73,000 52,000 38,000 43,000 50,000 Interest Expense....... (744,000) (902,000) (806,000) (544,000) (924,000) Loss on Sale of Proper- ty.................... (170,000) -- -- -- (170,000) ---------- ---------- ---------- ---------- ---------- Net Other Expense.... (841,000) (850,000) (768,000) (501,000) (1,044,000) ---------- ---------- ---------- ---------- ---------- Net Income (Loss) Before Extraordinary Item............... (75,000) 73,000 527,000 194,000 (548,000) Extraordinary Item-- Early Extinguishment of Debt................ 358,000 -- 175,000 -- 358,000 ---------- ---------- ---------- ---------- ---------- Net Income........... $ 283,000 $ 73,000 $ 702,000 $ 194,000 $ (190,000) ========== ========== ========== ========== ========== Net Income Per Lim- ited Partnership Unit: Income Before Ex- traordinary Item... $ (7.28) $ 7.08 $ 51.14 $ 18.82 $ (53.17) Extraordinary Item.. 34.74 -- 16.98 -- 34.74 ---------- ---------- ---------- ---------- ---------- Net Income........... $ 27.46 $ 7.08 $ 68.12 $ 18.82 $ (18.43) ========== ========== ========== ========== ==========
See accompanying notes to the financial statements. F-18 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP STATEMENT OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
GENERAL PARTNER LIMITED PARTNERS ------------------- ------------------- % INCOME NUMBER TOTAL ALLOCATION AMOUNT OF UNITS AMOUNT AMOUNT ---------- -------- -------- ---------- ---------- Balances at December 31, 1992................... 1 $(18,573) 10,306 $4,100,573 $4,082,000 Net Income.............. -- 7,020 -- 694,980 702,000 --- -------- ------ ---------- ---------- Balances at December 31, 1993................... 1 (11,553) 10,306 4,795,553 4,784,000 Net Income.............. -- 730 -- 72,270 73,000 --- -------- ------ ---------- ---------- Balances at December 31, 1994................... 1 $(10,823) 10,306 4,867,823 4,857,000 Net Income.............. -- 2,830 -- 280,170 283,000 --- -------- ------ ---------- ---------- Balances at December 31, 1995................... 1 $ (7,993) 10,306 $5,147,993 $5,140,000 Net Income (Unaudited).. -- 1,940 -- 192,060 194,000 --- -------- ------ ---------- ---------- Balances at September 30, 1996 (Unaudited)... 1 $ (6,053) 10,306 $5,340,053 $5,334,000 === ======== ====== ========== ==========
See accompanying notes to the financial statements. F-19 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ ----------------------- 1995 1994 1993 1996 1995 -------- -------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERAT- ING ACTIVITIES: Net Income (Loss)...... $283,000 $ 73,000 $ 702,000 $194,000 $(190,000) Adjustments to Net In- come (Loss): Depreciation and Amor- tization.............. 613,000 661,000 716,000 494,000 475,000 Loss on Sale of Proper- ty.................... 170,000 -- -- -- 170,000 Extraordinary Item-- Early Extinguishment of Debt............... (358,000) -- (175,000) -- (358,000) (Increase) Decrease in Receivables........... (41,000) (124,000) (59,000) 134,000 183,000 (Increase) Decrease in Prepaid Insurance..... (1,000) -- (9,000) (12,000) (4,000) (Increase) Decrease in Other Assets.......... 18,000 18,000 18,000 13,000 14,000 Accrued Income Re- stricted Cash......... (63,000) (43,000) (31,000) -- (49,000) Increase (Decrease) in Accrued Liabilities... 41,000 120,000 (234,000) (25,000) (24,000) Increase (Decrease) in Amount Due to General Partner....... 98,000 100,000 214,000 (246,000) 369,000 -------- -------- ---------- -------- --------- Total Adjustments..... 477,000 732,000 440,000 359,000 776,000 -------- -------- ---------- -------- --------- Net Cash Provided by Operating Activities.. 760,000 805,000 1,142,000 553,000 586,000 -------- -------- ---------- -------- --------- CASH FLOWS FROM INVEST- ING ACTIVITIES: Cash Draws Restricted Cash.................. 181,000 -- 207,000 119,000 182,000 Transfers to Restricted Cash.................. -- -- (205,000) -- -- Capital Expenditures... (253,000) (139,000) (222,000) (41,000) (253,000) Disposal of Plant and Equipment............. -- -- -- -- -- -------- -------- ---------- -------- --------- Net Cash Provided by (Used) in Investing Ac- tivities............... (72,000) (139,000) (220,000) 78,000 (71,000) -------- -------- ---------- -------- --------- CASH FLOWS FROM FINANC- ING ACTIVITIES: Principal Payments on Long-Term Debt........ (815,000) (751,000) (1,109,000) (687,000) (600,000) Proceeds From the Issu- ance of Debt.......... 112,000 83,000 171,000 -- -- -------- -------- ---------- -------- --------- Net Cash Provided by (Used) in Financing Activities............ (703,000) (668,000) (938,000) (687,000) (600,000) -------- -------- ---------- -------- --------- Increase (Decrease) in Cash and Cash Equiva- lents.................. (15,000) (2,000) (16,000) (56,000) (85,000) Cash and Cash Equiva- lents at Beginning of Period................. 278,000 280,000 296,000 263,000 278,000 -------- -------- ---------- -------- --------- Cash and Cash Equiva- lents at End of Period. $263,000 $278,000 $ 280,000 $207,000 $ 193,000 ======== ======== ========== ======== ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash Paid During the Period for Interest... $743,000 $727,000 $ 755,000 $411,000 $ 205,000 ======== ======== ========== ======== =========
NON-CASH ACTIVITIES: The Partnership reduced a contract payable for the year ended December 31, 1993 by $13,000, and recognized income relating to option payments not made. An extraordinary gain of $175,000 for the year ended December 31, 1993, was recognized relating to the extinguishment and restructuring of debt and accrued interest; see Note 4. Notes payable and accrued interest were reduced and other income recognized for the year ended December 31, 1993 in the amount of $424,000, relating to offsets allowed under the performance guaranty on the Steamboat Springs project; see Note 7. The Partnership sold the Crystal Springs Project for $1,100,000 which was paid directly to First Security Bank to pay down the note secured by the Crystal Springs Project in accordance with the sales agreement dated February 28, 1995. In addition, the note referred to above was restructured as described in Note 13. A net loss on the sale of $170,000 has been reported in net income for December 31, 1995 as other income, and gain on early extinguishment of debt of $358,000 has been reported as an extraordinary item for December 31, 1995. See accompanying notes to the financial statements. F-20 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies are followed by Far West Electric Energy Fund, L.P. in preparing and presenting the financial statements, and are to assist the users in understanding the financial statements. ORGANIZATION Far West electric Energy Fund L.P., a Delaware limited partnership (the "Partnership"), was originally organized in September 1984 under the Uniform Limited Partnership Act of Utah as Far West Hydroelectric Fund, Ltd. On December 20, 1988, the Partnership changed its name to Far West Electric Energy Fund, L.P. and changed its domicile to Delaware. The Partnership owns a geothermal power plant, (the "Steamboat Springs Plant") located in Nevada, and until March 16, 1995, owned a hydroelectric plant located in Idaho (the "Crystal Springs Plant") which was sold to Crystal Springs Hydroelectric, L.P., a Washington limited partnership pursuant to a Purchase and Sale Agreement dated February 28, 1995. UTILITY PLANT AND EQUIPMENT Utility plants and equipment are carried at cost or adjusted cost (see Note 2). Fixed assets are depreciated over their estimated useful life (utility plants--thirty years, equipment--five to ten years). CASH EQUIVALENTS For purposes of the statement of cash flows, the Partnership's policy is that all investments with maturities of three months or less are considered cash equivalents. INCOME TAXES No provision for income taxes has been made since the Partnership files partnership return under provisions for federal and state tax laws. The assets and liabilities of the Partnership for tax purposes are lower than the financial statements for 1995 by $8,066,000 and $552,000; and for 1994 by $11,154,000 and $2,208,000, respectively. INCOME PER LIMITED PARTNERSHIP UNIT The income per partnership unit on income before extraordinary item and on net income is calculated on the weighted average units outstanding during the year. The weighted average of units outstanding during 1995, 1994, and 1993 were 10,306. RECLASSIFICATIONS Certain amounts in 1994 and 1993 have been reclassified to conform with financial statement presentations adopted in 1995. UNAUDITED INTERIM PERIODS The financial information presented as of June 30, 1996 and for the six- month periods ended June 30, 1996 and 1995 is unaudited, but in the opinion of Management contains all adjustments (consisting only of normal recurring adjustments) necessary for a fair representation of such financial information. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years. F-21 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 2--UTILITY PLANT Plant in service consists of the following at December 31, 1995 and 1994:
ESTIMATED 1995 1994 USEFUL LIVES ----------- ----------- ------------ Steamboat Springs Thermal Hydroelec- tric Power Plant.................... $15,599,000 $15,599,000 30 Years Expansion Pipeline................... 400,000 400,000 5 to 7 Years Crystal Springs Hydroelectric Power Plant............................... -- 4,738,000 30 Years Valuation Allowance.................. -- (2,021,000) ----------- ----------- $15,999,000 $18,716,000 =========== ===========
The valuation allowance relates to the Crystal Springs Hydroelectric Power Project. The valuation allowance is a result of the rights to a purchase option being waived and a decline in the value of the project. NOTE 3--OTHER ASSETS Other assets consist of the following at December 31, 1995 and 1994:
1995 1994 -------- -------- Loan Origination Fees.................................... $183,000 $183,000 Organization Costs....................................... 65,000 65,000 Other Assets............................................. 35,000 35,000 Accumulated Amortization................................. (177,000) (159,000) -------- -------- Total Other Assets..................................... $106,000 $124,000 ======== ========
The loan origination fees are being amortized on a straight-line basis over the respective lives of the loans. Organization costs are amortized over a five year period on a straight-line basis. Amortization was $18,000, $18,000, $18,000 for the years ended December 31, 1995, 1994, and 1993, respectively. NOTE 4--LONG-TERM DEBT--NOTES PAYABLE Long-term debt as of December 31, 1995 and 1994 consists of the following:
1995 1994 ---------- ---------- Note Payable to Westinghouse Credit Corp. is in default as of 10/23/92 and is immediately due and payable. Note is secured by the Steamboat Springs Project and all associated rights. Interest rate is 11.5%............................................... $4,563,000 $5,340,000 Note Payable to a bank was due and payable in full originally on December 1, 1993, extended to September 30, 1994 and has been modified due to the sale of the Crystal Springs Project. The principal amount owing after the modification is $537,000. Interest is due in semiannual installments. With all remaining principal and interest due 3/2/2000. Interest rate is prime which was 8.75% at year end (See Note 13--Sale of Crystal Springs Project)...... 537,000 1,800,000 ---------- ---------- 5,100,000 7,140,000 Less Current Installments Due........................ 4,563,000 7,140,000 ---------- ---------- $ 537,000 $ -- ========== ==========
F-22 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 1995 are as follows:
YEAR ENDING DECEMBER 31, ----------- 1996......................................................... $ 4,563,000 1997......................................................... -- 1998......................................................... -- 1999......................................................... -- 2000......................................................... 537,000 Thereafter................................................... -- ----------- $ 5,100,000 ===========
A note payable to Ormat, Inc. was extinguished in the amount of $175,000 in December 1993. The extinguishment was a result of negotiations to settle litigation on the performance guaranty. The principal note amount and related accrued interest are shown as an extraordinary item in the statement of operations for the year ended December 31, 1993. During December 1992, a note payable to a bank was restructured resulting in a reduction of principal amount, accrued interest, and a renegotiation of terms. Interest payments relating to the reduced note were offset to accrued interest payable. The total amount offset against accrued interest payable in 1994 was $26,000. NOTE 5--RESTRICTED CASH The Partnership is required to maintain an escrowed bank account as security under the terms of the note payable to Westinghouse Credit Corp. with the note payable balance as of December 31, 1995 of $4,563,000. The reserve account was drawn down to $1,026,000 due to insufficient operating funds needed for plant repairs of $188,000. The note is in default due to the reserve account being drawn below required amounts. The reserve includes the initial deposit of $1,000,000 and requires an additional $70,000 annually for the first seven years, interest income is also retained in the reserve account. Disbursements from the reserve account for principal and interest payments on the note are allowed to the extent that there are insufficient funds in the Partnership's operating accounts. NOTE 6--NOTE PAYABLE-RELATED PARTY The Partnership had notes payable to related parties for the years ended December 31, 1995, and 1994 as follows:
1995 1994 ---------- ---------- Notes Payable to General Partner payable on demand, unsecured. Interest rate is 13%...................... $1,117,000 $1,005,000 Note Payable to 1-A Enterprises, a partnership, due in quarterly installments, including interest; commencing April 16, 1990, remaining principal due January 16, 2000; unsecured. Interest rate is 11%.... 230,000 268,000 ---------- ---------- 1,347,000 1,273,000 Less Current Installments Due......................... 1,159,000 1,043,000 ---------- ---------- $ 188,000 $ 230,000 ========== ==========
F-23 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 7--PURCHASE AND OPERATING AGREEMENTS Steamboat Springs Thermal Hydroelectric Power Plant (Steamboat Springs) Under the terms of the Steamboat Springs purchase agreement (the Agreement), the Partnership is required to pay royalties to non-affiliated parties aggregating 14.05 percent of annual gross revenues for the life of the project plus an annual lump sum of $50,000 for the first ten years. As of December 31, 1995 all royalty obligations were current. For the years ended December 31, 1995, 1994, and 1993, royalty expense related to these commitments is as follows:
1995 1994 1993 -------- -------- -------- Sierra Pacific Power Company (10%)................ $253,000 $257,000 $263,000 Benson Schwarzhoff & Helzel (3.888%).............. 98,000 99,000 102,000 Geothermal Development Associates ($50,000)....... 50,000 50,000 50,000 G. Martin Booth (.081%)........................... 2,000 2,000 2,000 Richard W. Harris (.081%)......................... 2,000 2,000 2,000 -------- -------- -------- Total............................................ $405,000 $410,000 $419,000 ======== ======== ========
As part of the Agreement, the original developer of Steamboat Springs (the Developer) guaranteed annual net operating revenues, as defined (Net Operating Revenues) of $2,000,000 for a period of ten years following the date of commissioning, March 31, 1987 (the Guarantee). In 1993, the debt and related performance guarantee with the original developer was extinguished. Pursuant to the Guarantee and included in other revenues in the statements of income for the years ended December 31, 1993, and 1992 are $424,000, and $387,000, respectively. Pursuant to the contract and in accordance with FIN-39, amounts due to the Partnership under the Guarantee are offset annually against a note payable to the Developer, and the Bonneville corporation which subsequently sold the project to the Partnership. The note payable to the developer and Bonneville have been fully offset as of December 31, 1993. The following Table summarizes these transactions:
1993 ---------- Guaranteed Net Operating Revenues............................ $2,000,000 Net Operating Revenues....................................... 1,288,000 ---------- Offset Available............................................. 712,000 Gross Debt Subject to Offset................................. 424,000 ---------- Debt to be Offset in Future.................................. $ -- ==========
The Partnership is also required to pay the Developer annual royalties equal to 50 percent of the first $100,000 over the guaranteed Net Operating Revenues and 75 percent of amounts in excess of the $100,000 each year for the first ten years following the date of commissioning. For years 11 through 20 after commissioning, the royalty equals 30 percent of Net Operating Revenues; principal debt service payments incurred to finance construction or operations are not deducted in determining the revised net operating revenues (Revised Net Operating Revenues). For years 21 inclusive and thereafter, the royalty is equal to 50 percent of Revised Net Operating Revenues. As revenues have not exceeded the guaranteed net operating revenues, no royalties have been earned and no royalties have been paid pursuant with this commitment. NOTE 8--RELATED PARTY TRANSACTIONS Under the terms of the Partnership agreement, the general partner (Far West Capital, Inc.) is allowed various fees and reimbursements of expenses incurred to manage the Partnership. For each of the years in the three-year F-24 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) period ended December 31, 1995, the Partnership expensed the following amounts as cost reimbursements to the general partner:
1995 1994 1993 ------- -------- -------- General and Administrative Expenses............... $98,000 $123,000 $223,000
In addition, during the year ended December 31, 1993, the Partnership paid $3,300 to a Utah partnership for private air transportation, in the ordinary course of business, in lieu of commercial airfare. The general partners are partners of the Utah Partnership. As a term of the amended and restated Partnership agreement, the General Partner is entitled to 5 percent of the limited partnership units (Units) as compensation. Limited Partnership units for each of the three-year period ended December 31, 1995 are as follows:
1995 1994 1993 ------ ------ ------ General Partner......................................... 530 530 530 Limited Partners........................................ 9,776 9,776 9,776 ------ ------ ------ Total................................................. 10,306 10,306 10,306 ====== ====== ======
During 1988, the Partnership assigned its rights to build an expansion unit to Steamboat Springs to a Nevada general partnership owned mostly by Alan O. Melchior and Thomas A. Quinn, officers and owners of the General Partner of the Partnership. As consideration for the rights, the Nevada general partnership deeded the Partnership rights and title to piping and valves installed from Steamboat Springs to the expansion unit and agreed to pay the Partnership royalties equaling 10 percent of net operating income from the expansion for the years ended December 31, 1988 through 1992, 15 percent for 1993 through 1998, 40 percent for 1999 through 2010, 45 percent thereafter, and an annual pumping charge. Included in other revenues in the statement of operations for the years ended December 31, 1995, 1994 and 1993, are $145,000, $144,000 and $135,000, respectively related to this agreement. As of December 31, 1994 and 1993, two of the general partners held a 75 percent ownership in the Nevada general partnership. During 1991, the Partnership assigned its 77% ownership in SB Geo, Inc. a Utah Corporation, to Alan O. Melchior and Thomas A. Quinn, two of the officers and owners of the General Partner of the Partnership. SB Geo, Inc. operates the Partnership's Steamboat Springs Thermal Hydroelectric Power Plant and a related expansion unit. At the time of the transfer, SB Geo, Inc. had no assets and operated on a cost reimbursement basis. No gain or loss was recognized as a result of the assignment. NOTE 9--MAJOR CUSTOMER The Partnership has contracted with Sierra Pacific Power Company to sell electric energy from Steamboat Springs for a term of 20 years. The contract entitles the Partnership to a rate of 71.7 mills per kilowatt hour for the first 10 years and a variable amount related to the short-term cost of power to Sierra Pacific Power Company for the second 10 years. Sales to Sierra Pacific Power Company account for 100 percent of electric power sales. The Partnership is dependent upon this customer for the purchase of all electricity generated from this power plant. F-25 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 10--LITIGATION ORMAT ARBITRATION The arbitrators during 1993 made their award regarding the lawsuit against Ormat alleging breach of contract on the Steamboat Springs project and Ormat's counter-suit regarding the cancellation of the operating agreement. The Partnership was awarded $188,000 in damages including a portion of previously restricted cash. Ormat was awarded $255,000 for past fixed operating fees of which the majority had been held in an escrow account. Subsequent to the arbitrators award the Partnership and Ormat reached an additional agreement which cancels the note payable to Ormat which was previously offset by the performance guaranty. BONNEVILLE PACIFIC CORPORATION BANKRUPTCY The Partnership has filed a claim in the Chapter 11 filing of Bonneville Pacific Corporation. The claim relates to fraud claims and other transactions on the Crystal Springs project. This claim is a general unsecured claim; it is unliquidated and contingent, meaning that the amount of the claim has yet to be fixed in the bankruptcy forum. It is estimated that the claim is no more than $100,000.00. There is no economy for the partnership in attempting to resolve the amount of the claim at this juncture, without certainty that Bonneville Pacific Corporation will succeed in confirming a plan of reorganization, since general unsecured claims cannot receive payment absent confirmation of a plan of reorganization. If and when a plan of reorganization is confirmed, it is expected that, post- confirmation, there will be a claims liquidation and resolution process, during which the claim of the partnership will be fixed by the bankruptcy court. The Chapter 11 reorganization proceeding of the Bonneville Pacific Corporation has been ongoing for some years. It is a large and complex proceeding. The success of the reorganization effort will turn in major part upon complex litigation which the trustee in the case, Roger Segal, has commenced against various parties in interest. Counsel for Mr. Segal, Vernon Hopkinson, estimates at the present time that this litigation may be concluded and a plan of reorganization proposed no earlier than year-end, 1997. As noted above, payment on account of general unsecured claims cannot occur unless and until a plan of reorganization is confirmed by the bankruptcy court. Mr. Hopkinson estimates at the present time that the size of the dividend to general unsecured creditors could be anywhere from 20 percent to payment in full, depending upon the outcome of the aforementioned litigation. NEVADA DEPARTMENT OF TRANSPORTATION The Department of Transportation of the State of Nevada ("NDOT") commenced action on 12/10/93 in the Second Judicial District Court of the State of nevada in and for the County of Washoe against the Partnership and others to obtain, for highway purposes, ownership of approximately 2.79 acres of the property owned by Sierra Pacific Power Company ("SPPC") at the extreme north of the land upon which the Steamboat Springs Plant is located pursuant to the SPPC lease. The Court entered an Order for occupancy of the condemned property on 12/29/93. The NDOT deposited the sum of $273,500 on 12/29/93; which remains on deposit as of 12/31/95. The Partnership is defending the action insofar as is necessary to protect a stand-by injection well located on the lease in the proximity of the land being taken and a monitoring well in an adjacent area which is being taken. It is presently negotiating a settlement which will leave the stand-by injection well and the Partnership's rights in and use thereof intact and available. The Partnership has constructed a new monitoring well and is attempting to recover the cost thereof from the State. The Partnership has an agreement in principle with the State relative to this reimbursement, the cost of which is approximately $5,000. That sum will likely be disbursed in May or June of 1996. The Partnership is also attempting to obtain a portion of the $273,500 F-26 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) offered and deposited into Court by NDOT on 12/29/93 as compensation for the taking. SPPC is claiming all of such funds as the owner of the land. The Court has granted NDOT the right to possess and occupy the property while the amount of compensation to be finally awarded is being contested. WCC, the Partnership's principal creditor, has claimed that under the financing agreements with respect to the Steamboat Springs and 1-A Plants, all funds recovered from NDOT must be applied to reduce the principal balance of the loans outstanding. The funds will not likely be disbursed until the fourth quarter of 1996 or the first quarter of 1997, unless the Partnership, SPPC, and WCC reach some settlement before that time. NOTE 11--NOTE DEFAULTS Due to insufficient funds being in restricted cash, the Partnership received a notice of default as of 10/23/92 on a note to Westinghouse Credit Corp. The balance as of December 31, 1995 and 1994 was $4,563,000 and $5,340,000, respectively. Under the terms of the note all principal and interest is immediately due and payable. The note is secured by the Steamboat Springs project and related revenues and other assets. The Partnership was in default on a note payable to a bank as of 9/30/94. The balance as of December 31, 1994 and 1993 was $1,800,000. Due to the sale of the Crystal Springs Project subsequent to December 31, 1994, this note has been reduced to $537,000 (see Note 13) and is no longer in default. NOTE 12--LIQUIDITY As shown in the accompanying financial statements for the year ended December 31, 1995, current liabilities exceeded current assets by $6,595,000. Of this amount $4,563,000 relates to the note defaults described in Note 11. NOTE 13--SALE OF CRYSTAL SPRINGS PROJECT The Partnership signed an agreement dated February 28, 1995 to sell the Crystal Springs project. The sale included all the assets and liabilities associated with the Crystal Springs Project except the note payable to First Security Bank which has been modified as follows: Upon receipt of First Security (Lender) of a principal payment on the loan in the amount of $1,100,000, the note was modified to provide that the remaining principal balance owed shall be $537,000 and interest and costs on the loan shall be deemed current. If the note is paid in full within two years after the payment of $1,100,000, the Lender will discount the principal amount owing by $100,000 (requiring a principal payment of only $437,000), and if paid within three years, the Lender will discount the amount of the principal due by $50,000 (requiring a principal payment of only $487,000). There will be no discount if paid after the third anniversary. The modification has resulted in a gain on early extinguishment of debt of $358,000. The net loss on sale of the Crystal Springs Project of $170,000 has been reported on the Statement of Income for the year ended December 31, 1995 as Other Income. At February 28, 1995, no amount was due on the $50,000 line of credit acquired in 1992 for use in repair of certain items of equipment for the Crystal springs Plant for start up operations in 1993. F-27 FAR WEST ELECTRIC ENERGY FUND, L.P. A DELAWARE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following pro forma statement of operations give effect to the above events as if they had occurred on January 1, 1995: PRO FORMA STATEMENT OF OPERATIONS
PRO FORMA AS REPORTED IN ADJUSTMENTS PRO FORMA ACCOMPANYING FOR STATEMENT FINANCIAL SUBSEQUENT OF STATEMENTS EVENTS OPERATIONS -------------- ----------- ---------- REVENUES Electric Power Sales................. $2,529,000 $ -- $2,529,000 Other Revenues....................... 145,000 -- 145,000 ---------- ------- ---------- Total Revenues...................... 2,674,000 -- 2,674,000 ---------- ------- ---------- EXPENSES Interest, Net........................ 671,000 (16,000) (A) 655,000 Depreciation......................... 613,000 -- 613,000 Royalty.............................. 405,000 -- 405,000 Professional Services................ 54,000 (4,000) (A) 50,000 Administrative Services--General Partner............................. 98,000 (38,000) (A) 60,000 Amortization......................... 18,000 -- 18,000 Insurance............................ 47,000 -- 47,000 Maintenance.......................... 583,000 (5,000) (A) 578,000 Taxes................................ 31,000 -- 31,000 Other................................ 59,000 (1,000) (A) 58,000 ---------- ------- ---------- Total Expenses...................... 2,579,000 (64,000) 2,515,000 ---------- ------- ---------- Net Income (Loss)................... $ 95,000 $64,000 $ 159,000 ---------- ------- ---------- Net Income (Loss) Per Limited Part- nership Unit....................... $ 9.22 $ 6.21 $ 15.43 ========== ======= ==========
A--Operating expenses attributable to Crystal Springs Project. B--Accrued interest and expenses from January 1, 1995 through date of sale of Crystal Springs Project. NONRECURRING TRANSACTIONS The same of the Crystal Springs Project has resulted in a loss of $170,000 and a gain on early extinguishment of debt of $358,000. These amounts are reported in the statement of Income for December 31, 1995. NOTE 14--SUBSEQUENT EVENTS STEAMBOAT SPRINGS PROJECT The Fund has received a cash offer to sell substantially all of the assets of the Fund to U.S. Envirosystems, Inc. for $1,250,000. The sale would result in the termination of the Fund and distribution of the proceeds to limited partners of approximately $33 per limited partnership unit. F-28 INDEPENDENT AUDITOR'S REPORT Partners 1-A Enterprises Salt Lake City, Utah We have audited the balance sheet of 1-A Enterprises as of December 31, 1995 and 1994, and the related statements of income, partners' capital and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 1-A Enterprises as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Respectfully submitted, /s/ ROBISON, HILL & CO. ---------------------------------- Certified Public Accountants Salt Lake City, Utah March 5, 1996 F-29 1-A ENTERPRISES A NEVADA GENERAL PARTNERSHIP BALANCE SHEETS
DECEMBER 31, ---------------------- SEPTEMBER 30, 1995 1994 1996 ---------- ---------- ------------- (UNAUDITED) ASSETS Utility Plant: Plant................................... $2,431,222 $2,431,222 $2,431,222 Development Costs....................... 450,000 450,000 450,000 Accumulated Depreciation................ (676,289) (580,248) (748,320) ---------- ---------- ---------- Net Utility Plant..................... 2,204,933 2,300,974 2,132,902 Restricted Assets: Cash.................................... 80,626 76,157 82,367 Certificate of Deposit.................. 73,189 70,000 77,644 ---------- ---------- ---------- Total Restricted Assets............... 153,815 146,157 160,011 Other Assets:............................ 32,145 40,181 26,118 Current Assets: Cash and Cash Equivalents............... 80,428 98,642 83,063 Receivables--Trade...................... 98,539 98,600 145,215 Receivables--Other...................... 7,139 6,358 4,714 Receivable--Related Party............... 229,810 267,705 198,498 Prepaid Expenses........................ 1,679 1,348 4,164 ---------- ---------- ---------- Total Current Assets.................. 417,595 472,653 435,654 ---------- ---------- ---------- Total Assets.......................... $2,808,488 $2,959,965 $2,754,685 ========== ========== ========== PARTNERS' CAPITAL AND LIABILITIES Partners' Capital........................ $ (293,083) $ (464,613) $ 127,407 Current Liabilities: Note Payable--See Note 4................ 1,670,995 1,960,732 1,431,593 Note Payable--Related Party............. 728,970 728,970 503,970 Payable--Related Party.................. 358,574 435,193 319,932 Accrued Liabilities: Operations............................. 3,120 5,767 4,820 Royalties.............................. 302,315 249,799 335,453 Interest............................... 37,597 44,117 31,510 ---------- ---------- ---------- Total Current Liabilities............. 3,101,571 3,424,578 2,627,278 ---------- ---------- ---------- Total Partners' Capital and Liabili- ties................................. $2,808,488 $2,959,965 $2,754,685 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-30 1-A ENTERPRISES A NEVADA GENERAL PARTNERSHIP STATEMENTS OF INCOME
YEARS ENDED NINE MONTHS, DECEMBER 31, ENDED SEPTEMBER 30, ------------------ ----------------------- 1995 1994 1996 1995 -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) REVENUES: Electric Power Revenues............ $875,356 $798,722 $711,178 $688,890 -------- -------- -------- -------- EXPENSES: Operations......................... 536,756 545,336 409,075 454,914 General and Administrative: Professional Services............. -- 1,481 3,057 8,232 Related party..................... 14,500 14,500 -- -- -------- -------- -------- -------- Total Expenses................... 551,256 561,317 412,132 463,146 -------- -------- -------- -------- Income From Operations........... 324,100 237,405 299,046 225,744 -------- -------- -------- -------- OTHER INCOME (EXPENSE): Interest Income.................... 41,037 38,315 24,874 25,226 Interest Expense................... (202,477) (233,513) (128,606) (115,755) -------- -------- -------- -------- Net other Expense................. (161,440) (195,198) (103,732) (90,529) -------- -------- -------- -------- Net Income........................ $162,660 $ 42,207 $195,314 $135,215 ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-31 1-A ENTERPRISES A NEVADA GENERAL PARTNERSHIP STATEMENT OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1995, AND 1994 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) Balances at December 31, 1993....................................... $(510,835) Contributions....................................................... 4,015 Net Income.......................................................... 42,207 --------- Balances at December 31, 1994....................................... (464,613) Contributions....................................................... 8,870 Net Income.......................................................... 162,660 --------- Balances at December 31, 1995....................................... (293,083) Contributions (Unaudited)........................................... 225,176 Net Income (Unaudited).............................................. 195,314 --------- Balances at September 30, 1996 (Unaudited).......................... $ 127,407 =========
The accompanying notes are an integral part of these financial statements. F-32 1-A ENTERPRISES A NEVADA GENERAL PARTNERSHIP STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEARS ENDED NINE MONTHS DECEMBER 31, ENDED SEPTEMBER 30, ------------------ ----------------------- 1995 1994 1996 1995 -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVI- TIES: Net Income (Loss).................. $162,660 $ 42,207 $195,314 $135,215 -------- -------- -------- -------- Adjustments to Net Income (Loss): Depreciation and Amortization..... 104,078 104,078 78,058 78,058 (Increase) Decrease in Receiv- ables............................ (721) (18,339) (44,254) (34,567) (Increase) Decrease in Prepaid In- surance.......................... (331) (678) (2,484) (2,850) Accrued Interest Income Restricted Assets........................... (7,658) (2,859) (6,196) (6,528) Increase (Decrease) in Accrued Li- abilities........................ 43,349 48,764 28,752 (32,968) Increase (Decrease) in Amount Due to Related Party................. (76,619) 147,519 (263,641) 26,376 -------- -------- -------- -------- Total Adjustments................ 62,098 278,486 (209,765) 27,521 -------- -------- -------- -------- Net Cash Provided by Operating Ac- tivities......................... 224,758 320,693 (14,451) 162,736 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVI- TIES: Principle Payments From Note Re- ceivable Related Party........... 37,895 33,916 31,312 28,024 Investment in Certificate of De- posit--Restricted................ -- (70,000) -- -- -------- -------- -------- -------- Net Cash Provided by (Used) in In- vesting Activities............... 37,895 (36,084) 31,312 28,024 -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVI- TIES: Principal payments on Long-term Debt.............................. (289,737) (259,310) (239,402) (214,262) Proceeds from Partner Contribu- tions............................. 8,870 4,015 225,176 7,941 -------- -------- -------- -------- Net Cash Provided by (Used) in Fi- nancing Activities................ (280,867) (255,295) (14,226) (206,321) -------- -------- -------- -------- Increase (Decrease) in Cash and Cash Equivalents.................. (18,214) 29,314 2,635 (15,561) Cash and Cash Equivalents at Begin- ning of Year...................... 98,642 69,328 80,428 98,642 -------- -------- -------- -------- Cash and Cash Equivalents at End of Year.............................. $ 80,428 $ 98,642 $ 83,063 $ 83,081 ======== ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash Paid During the Year for In- terest............................ $208,997 $239,346 $ 97,096 $115,755 ======== ======== ======== ========
The accompanying notes are an integral part of these statements. F-33 1-A ENTERPRISES A NEVADA GENERAL PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies are followed by 1-A Enterprises in preparing and presenting the financial statements, and are to assist the users in understanding the financial statements. ORGANIZATION 1-A Enterprises, a Nevada General partnership (the Partnership) was organized in 1988 to acquire and operate electric generating plants. UTILITY PLANT AND DEVELOPMENT COSTS Utility plant and Development costs are carried at cost. Fixed assets are depreciated over their estimated useful life (thirty years). CASH EQUIVALENTS For purposes of the statement of cash flows, the Partnership's policy is that all investments with maturities of three months or less are considered cash equivalents. INCOME TAXES No provision for income taxes has been made since the Partnership files partnership return under provisions for federal and state tax laws. The assets of the Partnership for tax purposes are lower than the financial statements for 1995 and 1994 by $2,204,933 and $2,300,974 respectively. UNAUDITED INTERIM PERIODS The financial information presented as of June 30, 1996 and for the six- month periods ended June 30, 1996 and 1995 is unaudited, but in the opinion of Management contains all adjustments (consisting only of normal recurring adjustments) necessary for a fair representation of such financial information. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years. NOTE 2--RECEIVABLE RELATED PARTY The Partnership had a note receivable from a related party for the year ended December 31, 1995 and 1994 as follows:
1995 1994 -------- -------- Note Receivable From Far West Electric Energy Fund, L.P., a Delaware Limited partnership, due in quarterly installments, including interest; commencing April 16, 1990, remaining principle due January 16, 2000; unsecured. Interest rate is 11%......................... $229,810 $267,705 ======== ========
NOTE 3--OTHER ASSETS Other assets consist of the following at December 31, 1995 and 1994:
1995 1994 -------- -------- Loan Origination Fees.................................... $ 80,363 $ 80,363 Accumulated Amortization................................. (48,218) (40,182) -------- -------- Total Other Assets....................................... $ 32,145 $ 40,181 ======== ========
The loan origination fees are being amortized on a straight-line basis over the life of the loan (ten years). Amortization was $8,036 and $8,036 for the years ended December 31, 1995 and 1994, respectively. F-34 1-A ENTERPRISES A NEVADA GENERAL PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 4--LONG-TERM DEBT Long-term debt as of December 31, 1995 and 1994 consists of the following:
1995 1994 ---------- ---------- Note Payable to a corporation is payable in quar- terly installments, including interest, beginning January 20, 1990. Note is secured by the Steamboat 1-A Project and all associated rights. Interest rate is 11.25%..................................... $1,670,995 $1,960,732 Less Current Installments Due....................... 1,670,995 1,960,732 ---------- ---------- $ -- $ -- ========== ==========
The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 1995 are as follows:
YEAR ENDING DECEMBER 31, ------------------------ 1996........................................................ $1,670,995 1997........................................................ -- 1998........................................................ -- 1999........................................................ -- 2000........................................................ -- Thereafter.................................................. -- ---------- $1,670,995 ==========
NOTE 5--NOTE PAYABLE-RELATED PARTY The Partnership had notes payable to related parties for the years ended December 31, 1995 and 1994, as follows:
1995 1994 -------- -------- Notes Payable to Far West Capital* payable on demand, unsecured. No interest accrued to date.............................. $728,970 $728,970 Less Current Installments Due............................. 728,970 728,970 -------- -------- $ -- $ -- ======== ========
*Two of the general partners of the Company are majority owners of Far West Capital, Inc. F-35 1-A ENTERPRISES A NEVADA GENERAL PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 6--PURCHASE AND OPERATING AGREEMENTS Under the terms of the amended purchase agreement (the Agreement), the Partnership is required to pay royalties aggregating 29.05 percent of annual gross revenues. For the years ended December 31, 1995, and 1994, royalty expense related to these commitments is as follows:
1995 1994 -------- -------- Sierra Pacific Power Company (10%)........................ $ 87,536 $ 79,872 Benson Schwarzhoff & Helzel (3.888%)...................... 34,034 31,054 Far West Electrical Energy Fund, L.P.(15%)................ 86,904 86,654 G. Martin Booth (.081%)................................... 709 647 Richard W. Harris (.081%)................................. 709 647 -------- -------- Total.................................................... $209,892 $198,874 ======== ========
NOTE 7--RESTRICTED ASSETS The Partnership is required to maintain an escrowed bank account as security under the terms of the note payable to a corporation with the notepayable balance as of December 31, 1995 and 1994 of $1,670,995 and $1,960,732 respectively. The reserve required an initial deposit of $150,000 plus interest income to be maintained in the account. The reserve was drawn down due to insufficient operating funds to meet obligations. The balance in the reserve as of December 31, 1995 and 1994 is $80,626 and $76,157 respectively. Disbursements from the reserve account for obligations are allowed to the extent that there are insufficient funds in the Partnership's operating accounts. Funds are to be deposited into the reserve account as necessary to replenish any disbursements for obligations as provided above. The note is in default due to the reserve account being drawn down below required amounts. The Company is required to pay a 10% royalty to Sierra Pacific Power Company (SPPC). Under the agreement with SPPC, 4% is paid and 6% is accrued during the first 6 years of operation. The date of initial operation was 10/29/88. During the seventh and eighth years, the amount paid increases to 6% and 8% while the amount accrued decreases to 4% and 2%, respectively. Beginning in years nine through thirty, the full 10% is paid with no accrual. The accumulation of accrued royalties pursuant to this agreement shall be paid in the eleventh year of operation plus interest accrued monthly at an annual rate of 11.9%. The Partnership is required to maintain an irrevocable letter of credit for the benefit of SPPC in the amount of $70,000. The provisions of the letter of credit provide that in the event of default by the Company, SPPC shall have the right to draw upon the letter of credit to satisfy any amounts or portions os such amounts owed to SPPC for the eleventh year payment amount and interest accrued as of the date of default. The $70,000 has been invested by the company in a certificate of deposit which had a balance of $73,189 and $70,000 as of December 31, 1995 and 1994, respectively. NOTE 8--RELATED PARTY TRANSACTIONS Amounts have been accrued for various fees and reimbursements of expenses incurred by an affiliated company to manage the Partnership. For each of the years in the two-year period ended December 31, 1995, the Partnership expensed the following amounts as cost reimbursements to the affiliated company:
1995 1994 ------- ------- General and Administrative Expenses......................... $14,500 $14,500
F-36 1-A ENTERPRISES A NEVADA GENERAL PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 AND 1994 During 1988, Far West Electric Energy Fund, L.P. assigned their rights to build an expansion unit to Steamboat Springs to 1-A Enterprises. As consideration for the rights, 1-A Enterprises deeded Far West Electric Energy Fund, L.P., rights and title to piping and valves installed from Steamboat Springs to the expansion unit and agreed to pay Far West Electric EnergyFund, L.P. royalties equaling 10 percent of net operating income from the expansion for the years ended December 31, 1988 through 1992, 15 percent for 1993 through 1998, 40 percent for 1999 through 2010, 45 percent thereafter, and an annual pumping charge. Included in Operations Expense in the statement of operations for the years ended December 31, 1995 and 1994, are $145,096, and $144,000, respectively related to this agreement. As of December 31, 1995 and 1994, two of the general partners of Far West Electric Energy Fund, L.P. held a 74 percent (1995) and 75 percent (1994) ownership in 1-A Enterprises. The Partnership has entered into an Operating and Maintenance Agreement with a related corporation to act as the operator of the project. This agreement provides for operator to perform the duties of the operator including operating and regular maintenance of the plant for a monthly fee and additional fees for variable maintenance. The Partnership paid $142,745 for the year ended December 31, 1995 and $169,120 for the year ended December 31, 1994. NOTE 9--MAJOR CUSTOMER The Partnership has contracted with Sierra Pacific Power Company to sell electric energy from Steamboat Springs for a term of 20 years. The contract entitles the Partnership to a rate of 71.7 mills per kilowatt hour for the first 10 years and a variable amount related to the short-term cost of power to Sierra Pacific Power Company for the second 10 years. Sales to Sierra Pacific Power Company account for 100 percent of electric power sales. The Partnership is dependent upon this customer for the purchase of all electricity generated from this power plant. NOTE 10--NOTE DEFAULTS The Partnership is in default on a note payable to a corporation as of October 1990 for reasons described in Note 4. The balance as of December 31, 1995 and 1994 is $1,670,995 and $1,960,732 respectively. Under the terms of the note all principal and interest is immediately due and payable upon request of the Lender. The note is secured by the 1-A project and related revenued and other assets. NOTE 11--LIQUIDITY As shown in the accompanying financial statements for the year ended December 31, 1995, current liabilities exceeded current assets by $2,683,976. Of this amount $1,670,995 relates to the note defaults described in Note 9. F-37 REPORT OF INDEPENDENT AUDITORS The Board of Directors Lehi Independent Power Associates, L.C. We have audited the accompanying balance sheets of Lehi Independent Power Associates, L.C. as of December 31, 1995 and 1994 and the related statements of operations, changes in members' equity and cash flows for the year ended December 31, 1995 and the period January 24, 1994 (date of inception) through December 31, 1994. 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 audit. We have conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lehi Independent Power Associates, L.C., as of December 31, 1995 and 1994, and the results of its operations and its cash flows for year ended December 31, 1995 and the period January 24, 1994 (date of inception) through December 31, 1994 in conformity with generally accepted accounting principles. March 19, 1996 /s/ Traveller Winn & Mower, P.C. Salt Lake City, Utah F-38 LEHI INDEPENDENT POWER ASSOCIATES, L.C. BALANCE SHEETS
DECEMBER 31, ----------------- JUNE 30, 1995 1994 1996 -------- -------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents....................... $ 41,460 $ 2,113 $ 7,305 Due from member................................. -- 3,335 -- Note receivable................................. 115,750 -- 113,750 Prepaid insurance............................... 853 -- 1,117 -------- -------- -------- Total current assets........................... 158,063 5,448 122,172 Property, plant and equipment, net............... 257,125 278,921 250,464 -------- -------- -------- Total assets................................... $415,188 $284,369 $372,636 ======== ======== ======== LIABILITIES AND MEMBERS' EQUITY Current liabilities: Accounts payable................................ $ 4,873 $ 951 $ 34,329 Accrued expenses................................ 4,373 -- 373 Related party note payable...................... -- 3,440 -- -------- -------- -------- Total current liabilities...................... 9,246 4,391 34,702 Members' equity: Member contributions............................ 292,662 292,662 292,662 Additional capital contributions................ 42,104 28,149 42,105 Retained earnings (deficit)..................... 71,176 (40,833) 3,167 -------- -------- -------- Total members' equity.......................... 405,942 279,978 337,934 -------- -------- -------- Total liabilities and members' equity............ $415,188 $284,369 $372,636 ======== ======== ========
See accompanying notes to financial statements. F-39 LEHI INDEPENDENT POWER ASSOCIATES, L.C. STATEMENTS OF OPERATIONS
FOR THE PERIOD FOR THE JANUARY 24 FOR THE SIX MONTHS YEAR ENDED THROUGH ENDED JUNE 30 DECEMBER 31, DECEMBER 31, ----------------------- 1995 1994 1996 1995 ------------ -------------- ----------- ----------- (UNAUDITED) (UNAUDITED) INCOME: Gain on sale of fixed asset................. $236,194 $ -- $ -- $ -- EXPENSES: General and administra- tive.................. 49,195 27,092 61,347 16,925 Write-down of property, plant and equipment... 14,990 13,741 6,661 7,495 -------- -------- -------- -------- Total expenses........ 64,185 40,833 68,008 24,420 -------- -------- -------- -------- Net income (loss)....... $172,009 $(40,833) $(68,008) $(24,420) ======== ======== ======== ========
See accompanying notes to financial statements. F-40 LEHI INDEPENDENT POWER ASSOCIATES, L.C. STATEMENT OF CHANGES IN MEMBERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD JANUARY 24, 1994 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1994
ADDITIONAL RETAINED TOTAL MEMBER CAPITAL EARNINGS MEMBERS' CONTRIBUTIONS CONTRIBUTIONS (DEFICIT) EQUITY ------------- ------------- --------- -------- Balance January 24, 1995....... $ -- $ -- $ -- $ -- Members contributions.......... 292,662 28,149 -- 320,811 Net loss....................... -- -- (40,833) (40,833) -------- ------- ------- -------- Balance December 31, 1994...... 292,662 28,149 (40,833) 279,978 Members contributions--Suma, Corp.......................... -- 3,489 -- 3,489 Members contributions--Far West Capital, Inc.................. -- 3,489 -- 3,489 Members contributions--Lehi Envirosystems, Inc............ -- 6,977 -- 6,977 Members distribution--Suma Corp.......................... -- -- (15,000) (15,000) Members distribution--Far West Capital, Inc.................. -- -- (15,000) (15,000) Members distribution--Lehi Envirosystems, Inc............ -- -- (30,000) (30,000) Net income..................... -- -- 172,009 172,009 -------- ------- ------- -------- Balance December 31, 1995...... 292,662 42,104 71,176 405,942 -------- ------- Net (Loss) (Unaudited)......... (68,008) (68,008) ------- -------- Balance June 30, 1996 (Unau- dited)........................ $292,662 $42,104 $ 3,168 $337,934 ======== ======= ======= ========
See accompanying notes to financial statements. F-41 LEHI INDEPENDENT POWER ASSOCIATES, L.C. STATEMENTS OF CASH FLOWS
FOR THE YEAR FOR THE PERIOD FOR THE SIX MONTHS ENDED ENDED ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ----------------------- 1995 1994 1996 1995 ------------ -------------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......... $172,009 $(40,833) $(68,008) $(24,240) Adjustment to reconcile net income to net cash provided by operating activities: Write-down of property, plant and equipment...... 14,990 13,741 6,661 7,495 Gain on sale of equipment. (236,194) -- -- -- Changes in assets and lia- bilities................. -- -- -- -- Prepaid insurance......... (853) -- (264) 1,036 Note Receivable........... -- -- 2,000 -- Accounts payable.......... 3,922 951 29,456 9,943 Accrued expenses.......... 4,373 -- (4,000) -- -------- -------- -------- -------- Net cash (used) by operat- ing activities........... (41,753) (26,141) (34,155) (8,018) Cash flows from investing activities: Proceeds from sale of equipment................ 127,250 -- -- -- Cash flows from financing activities: Net payment and proceeds from collection of due from member............. 3,335 (3,335) -- 1,245 Net payment and proceeds of related party note payable................. (3,440) 3,440 -- (3,440) Additional capital con- tributions.............. 13,955 28,149 -- 10,705 Members' distribution.... (60,000) -- -- -- -------- -------- -------- -------- Net cash provided (used) by financing activities.. (46,150) 28,254 -- 8,510 -------- -------- -------- -------- Net increase in cash and cash equivalents......... 39,347 2,113 (34,155) 492 Cash and cash equivalents at beginning of period... 2,113 -- 41,460 2,113 -------- -------- -------- -------- Cash and cash equivalents at end of period......... $ 41,460 $ 2,113 $ 7,305 $ 2,605 ======== ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION Interest paid by the Company during 1995 was $415. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES During the period ended December 31, 1994, the members of the Company contributed property and equipment with a cost of $292,662. During the year ended December 31, 1995, the Company sold equipment for $243,000. The Company received $127,250 in proceeds and a note receivable for $115,750. See accompanying notes to financial statements. F-42 LEHI INDEPENDENT POWER ASSOCIATES, L.C. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Lehi Independent Power Associates, L.C.(the Company) is a Utah based company organized on January 24, 1994. The Company's principal business is to purchase, develop, own, operate and/or sell all or a portion of a power generation facility which produces electrical energy located in Lehi, Utah. The members and their respective ownership percentages are as follows: Lehi Envirosystems, Inc., 50 %; Far West Capital, Inc., 25%; and Suma Corp., 25%. All revenues and expenses are shared in the same proportion as each members' ownership percentage. CASH AND CASH EQUIVALENTS The Company considers all cash on deposit and short-term liquid investments with original maturities of three months or less to be cash equivalents. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of land, a power generation plant and plant equipment and is recorded at cost. The plant is currently not in operation. The plant and plant equipment are depreciated on the straight-line method over useful lives of 29 and 6 years, respectively. INCOME TAXES No provision for federal income tax is made since the Company is treated as a partnership for tax purposes and as such is not a taxable entity under the federal income tax provisions. The individual members are taxed on their proportionate share of members' income or loss. NOTE 2--DUE FROM MEMBER At December 31, 1994, the Company had capital contributions receivable from Lehi Envirosystems, Inc., for $3,335. This represents required contributions to maintain the proportionate sharing of expenses as stipulated in the operating agreement. This amount was received in 1995. NOTE 3--PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost and consisted of the following at December 31:
1995 1994 -------- -------- Land..................................................... $ 13,000 $ 13,000 Building................................................. 239,216 239,216 Plant equipment.......................................... 30,446 40,446 -------- -------- 282,662 292,662 Write-down of property, plant and equipment............. (25,537) (13,741) -------- -------- $257,125 $278,921 ======== ========
F-43 LEHI INDEPENDENT POWER ASSOCIATES, L.C. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 AND 1994 During the periods in which the property, plant and equipment is not in operation, management has reviewed the assets to determine their realization. Based on this review, management has written-down the property, plant and equipment for the year and period ended December 31, 1995 and 1994, $14,990 and $13,741, respectively. NOTE 4--RELATED PARTY TRANSACTIONS The Company receives accounting services from a related company's accounting department. The services provided are billed at $40 an hour and average approximately $160 a month. The related party note payable is due on demand and carries no interest rate. NOTE 5--COMMITMENTS AND CONTINGENCIES The Company is in communication with the Utah State Department of Water Quality with respect to traces of petroleum products found in a ground water discharge ditch which exits the plant property. Based on those communications, the State is reviewing what, if any, additional action may be required. Also, the United States Environmental Protection Agency (EPA) has reviewed the data on the discharge and has concluded that no violation of EPA Rules and Laws have occurred. In Management's opinion, the potential impact to the financial statements would not exceed $45,000. NOTE 6--GOING CONCERN The Company's primary asset consists of a power generation facility that is currently idle. Consistent with its preference to operate the facility, the Company has thus far declined to accept several offers to liquidate the facility for amounts significantly in excess of the facility's recorded net book value. The Company continues to pursue a financially feasible power purchase contract which when executed would result in the commencement of operations. The members of the Company have committed to continue to fund necessary costs associated with holding and maintaining the power plant through December 31, 1996 in the event that the power plant does not begin operations or is otherwise unable to generate revenues sufficient to fund operating and holding costs. F-44 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Plymouth Cogeneration Limited Partnership In our opinion, the accompanying balance sheets and the related statements of operations, changes in partners' capital and cash flows present fairly, in all material respects, the financial position of Plymouth Cogeneration Limited Partnership at December 31, 1995 and 1994, and the results of their operations and their cash flows for the year ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICE WATERHOUSE LLP February 27, 1996 Hartford, Connecticut F-45 PLYMOUTH COGENERATION LIMITED PARTNERSHIP BALANCE SHEETS
DECEMBER 31, --------------------- JUNE 30, 1995 1994 1996 ---------- ---------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................... $ 15,944 $ 8,233 $ 65,481 Accounts receivable......................... 90,865 76,881 89,394 Prepaid expenses............................ 18,087 14,198 47 Restricted cash............................. 33,773 619,820 33,707 ---------- ---------- ---------- Total current assets....................... 158,669 719,132 188,629 ---------- ---------- ---------- Plant, at cost............................... 5,888,172 5,882,464 5,893,333 Less: accumulated depreciation............... 295,411 -- 443,289 ---------- ---------- ---------- 5,592,761 5,882,464 5,450,044 ---------- ---------- ---------- Debt service reserve......................... 497,085 500,020 496,717 Deferred financing costs, less accumulated amortization of $8,141 in 1995.............................. 154,683 162,824 150,613 Rent receivable.............................. 176,184 -- 228,468 ---------- ---------- ---------- Total assets............................... $6,579,382 $7,264,440 $6,514,471 ========== ========== ========== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Note payable--general contractor (Note 2)... $ -- $ 586,000 $ -- Accounts payable and accrued expenses....... 262,013 286,917 257,600 Deferred revenue............................ 81,127 74,806 81,127 ---------- ---------- ---------- Total current liabilities.................. 343,140 947,723 338,727 ---------- ---------- ---------- Long-term debt, net of discount (Note 3)..... 4,987,181 4,980,717 4,990,413 ---------- ---------- ---------- Partners capital: General partners............................ 180,599 193,639 171,039 Limited partners............................ 1,068,462 1,142,361 1,014,292 ---------- ---------- ---------- Total partners' capital.................... 1,249,061 1,336,000 1,185,331 ---------- ---------- ---------- Total liabilities and partners' capital.... $6,579,382 $7,264,440 $6,514,471 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-46 PLYMOUTH COGENERATION LIMITED PARTNERSHIP STATEMENT OF OPERATIONS
FOR THE SIX MONTHS FOR THE YEAR ENDED ENDED JUNE 30, DECEMBER 31, ----------------------- 1995 1996 1995 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) REVENUES Facility lease............................ $ 598,968 $ 299,484 $ 299,484 Management services....................... 551,461 278,642 270,979 ---------- --------- --------- Total revenues.......................... 1,150,429 578,126 570,463 ---------- --------- --------- OPERATING EXPENSES Operating and maintenance................. 426,948 222,310 212,298 Depreciation and amortization............. 303,552 151,948 152,575 General and administrative................ 149,830 85,111 75,045 ---------- --------- --------- Total operating expenses................ 880,330 459,369 439,918 ---------- --------- --------- Income before interest income and ex- pense.................................. 270,099 118,757 130,545 ---------- --------- --------- INTEREST INCOME AND EXPENSE Interest expense.......................... (403,736) (201,919) (201,110) Interest income........................... 46,698 19,432 26,893 ---------- --------- --------- (357,038) (182,487) (174,217) ---------- --------- --------- Net loss................................ $ (86,939) $ (63,730) $ (43,672) ========== ========= =========
The accompanying notes are an integral part of these financial statements. F-47 PLYMOUTH COGENERATION LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL
PARTNERS' CAPITAL PARTNERS' CAPITAL PARTNERS' CAPITAL DECEMBER 31, DECEMBER 31, JUNE 30, 1994 NET LOSS 1995 NET LOSS 1996 ----------------- -------- ----------------- ----------- ----------------- (UNAUDITED) (UNAUDITED) General Partners........ $ 193,639 $(13,040) $ 180,599 $ (9,560) $ 171,039 Limited Partners........ 1,142,361 (73,899) 1,068,462 (54,170) 1,014,292 ---------- -------- ---------- -------- ---------- $1,336,000 $(86,939) $1,249,061 $(63,730) $1,185,331 ========== ======== ========== ======== ==========
The accompanying notes are an integral part of these financial statements. F-48 PLYMOUTH COGENERATION LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS
FOR THE FOR THE YEAR SIX MONTHS ENDED ENDED JUNE 30, DECEMBER 31, ---------------------- 1995 1996 1995 ------------ ---------- ---------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net loss................................. $(86,939) $(63,730) $ (43,672) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization........... 303,552 151,948 152,575 Bond discount amortization.............. 6,464 3,232 3,232 Changes in assets and liabilities: Accounts receivable..................... (13,984) 1,471 (6,909) Prepaid expenses........................ (3,889) 18,040 1,458 Transfer from restricted cash........... 47 66 -- Rent receivable......................... (176,184) (52,284) (88,092) Accounts payable and accrued expenses... (24,904) (4,413) (19,983) Deferred revenue........................ 6,321 -- -- -------- -------- --------- Net cash provided (used) by operating activities............................ 10,484 54,330 (1,391) -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for plant................... (5,708) (5,161) -- Use of restricted cash................... 586,000 -- 226,241 -------- -------- --------- Net cash provided (used) by investing ac- tivities................................ 580,292 (5,161) 226,241 -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Payment out of debt service reserve...... 2,935 368 10 Payment of note payable.................. (586,000) -- (230,959) -------- -------- --------- Net cash (used) provided by financing activities............................ (583,065) 368 (230,949) -------- -------- --------- Net increase (decrease) in cash and cash equivalents...................... 7,711 49,537 (6,099) Cash and cash equivalents, beginning...... 8,233 15,944 8,233 -------- -------- --------- Cash and cash equivalents, ending......... $ 15,944 $ 65,481 $ 2,134 ======== ======== ========= SUPPLEMENTAL DISCLOSURES Interest paid............................ $421,305 $198,012 $ 198,013 ======== ======== =========
The accompanying notes are an integral part of these financial statements. F-49 PLYMOUTH COGENERATION LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION On June 25, 1992, IEC Plymouth, Inc. ("IEC" or "General Partner"), a Connecticut Corporation, and Central Hudson Cogeneration Incorporated, a New York Corporation ("Cencogen"), a wholly-owned subsidiary of Central Hudson Gas & Electric Corporation, a New York Corporation, formed a limited partnership under the State of New Hampshire Statutes, Plymouth Cogeneration Limited Partnership (the "Partnership"), to construct, own and operate a 1.25 MW cogeneration facility (the "Facility") and provide electricity and steam to Plymouth State College (the "Site") in Plymouth, New Hampshire. On May 11, 1993, IEC and Cencogen agreed to admit PSC Cogeneration Limited Partnership ("PSC" or "General Partner"), a Connecticut limited partnership and IEC affiliate, replacing IEC. On November 1, 1994, PSC and Cencogen agreed to admit Plymouth Envirosystems, Inc. ("Envirosystems" or "General Partner"), a Delaware corporation, a wholly-owned subsidiary of U.S. Envirosystems, Inc., a Delaware corporation. The Limited Partnership Agreement, as amended, expires November 2024. The Limited Partnership Agreement provides that profits, losses and distributable cash for financial reporting and income tax purposes are allocated in accordance with the ownership interests of the partners. At December 31, 1995 and 1994, PSC's ownership consisted of a 10% managing general partner and 17.5% limited partner interest, Cencogen's ownership consisted of a 32.5% limited partner interest and Envirosystems ownership consisted of a 5% general partner and 35% limited partner interest. On June 1, 1993, the Partnership entered into an Agreement of Site Lease ("Site Lease") with the University System of New Hampshire (the "University System"). The Site Lease provides that the University System will lease to the Partnership a parcel of land at the Site on which to construct the Facility. The Site Lease expires upon expiration of the Management Services Agreement (2015). REVENUES On June 1, 1993, the Partnership entered into an Agreement of Facility Lease ("Facility Lease") with the University System. The Facility Lease provides that the Partnership will lease the Facility to the University System for the supply of thermal and electric energy to the Site for a defined rental stream which escalates over the life of the lease, or 20 years. Upon expiration of the Facility Lease (2015), the Partnership must convey title and all personal property at the Facility to the University System, free and clear of encumbrances. The Facility Lease includes an escape clause which provides for the University System to terminate the agreement without penalty in the event that the State of New Hampshire does not appropriate funds for the payment of the Facility Lease. On June 1, 1993, the Partnership entered into a Management Services Agreement ("MSA") with the University System. The MSA provides that the Partnership will operate and maintain the Facility for the benefit of the University System during the term of the MSA for a defined monthly management service fee, and a 1.1 cent per kwh operation and maintenance fee over the life of the MSA (20 years). The MSA commenced on the in-service date of the Facility and expires in the year 2015. The Facility was deemed in-service January 1, 1995. Under the terms of Facility Lease and MSA, the Partnership is required to provide significant services through-out the life of the agreements. As a result, the Facility Lease is being accounted for as an operating lease. Lease revenues are recognized in accordance with Financial Accounting Standards Board Technical Bulletin No. 85-3, which requires that operating lease revenues be recognized on the straight-line basis over the life of the lease. Accordingly, while annual rent receipts escalate each year, approximately 598,968 of facility F-50 PLYMOUTH COGENERATION LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) lease revenue will be recognized by the Partnership annually. Management service fees and operation and maintenance fees are recognized as earned over the life of the MSA. Since Facility Lease revenues are being recognized on a straight-line basis, the Partnership has recognized as a long-term asset, Rent receivable, at December 31, 1995, which represents the excess of revenues recognized over cash payments received. At December 31, 1995 and 1994, the Partnership had deferred revenues of $81,127 and $74,806 which represents management service fees and lease revenues billed in advance. RESULTS OF OPERATIONS AND MANAGEMENT PLANS While the Partnership incurred a net loss in 1995, management believes that its cash flows, including scheduled escalating rent receipts under the Facility Lease, will be sufficient to meet both its future operating expenses and debt service requirements, including sinking fund installments. PLANT Plant represents cost of the Facility which is being leased to the University System under the Facility Lease. The Partnership placed the Facility in-service January 1, 1995. During 1994, the University System's operating permits necessary to operate its existing boilerhouse expired, at which time the Partnership agreed to operate the Facility, while still under construction. As of December 31, 1994, lease revenues of $210,636, management service fees of $217,939, and operation and maintenance fees of $40,945 were earned during the construction period; as a result of Facility start-up prior to substantial completion and in-service date. The above revenues earned during construction and related operating and start-up expenses ($417,743) were netted against Plant ($51,777). In accordance with the facility lease, the Partnership is responsible for all maintenance and equipment repair. DEPRECIATION Depreciation is provided on a straight-line basis. The useful life of the plant is estimated to be twenty years. INCOME TAXES The Partnership is not subject to federal or state income taxes. Each partner is required to report on its federal and, as required, state income tax return its distributive share of the Partnership's income, gains, losses, deductions and credits for the taxable year of the Partnership ending within or with its taxable year. Accordingly, there is no provision for income taxes in the accompanying financial statements. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reflected in the balance sheet for cash and cash equivalents, accounts receivable, restricted cash, debt service reserve, accounts payable and accrued expenses approximate their respective fair values because of the short maturity of these items. It was not practicable to estimate the fair value of the $5.11 million, 7.75% State of New Hampshire Electric Facility Revenue Bonds without the Partnership incurring excessive costs. The note is secured by a first mortgage in the Facility with a maturity date of June 1, 2014. F-51 PLYMOUTH COGENERATION LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) STATEMENT OF CASH FLOWS For purposes of the Statement of Cash Flows, the Partnership considers highly liquid investments with an original maturity of three months or less to be cash equivalents. Restricted cash consists of cash held in trust for payment of semi-annual long-term interest payments of the Partnership. Debt service reserve consists of cash held in trust until maturity of the Partnership's long-term debt. 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. UNAUDITED INTERIM FINANCIAL INFORMATION The financial information presented as of June 30, 1996 and for the six month periods ended June 30, 1996 and June 30, 1995 is unaudited, but in the opinion of management contains all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of such financial information. Results of operation for interim periods are not necessarily indicative of those to be achieved for full fiscal years. NOTE 2--NOTE PAYABLE--GENERAL CONTRACTOR During May 1994, the Partnership entered into an amendment to the Turnkey Construction Contract ("Construction Contract") with the general contractor of the Facility. The amendment provided for an additional payment in the amount of $636,000 from the Partnership to the general contractor for additional construction costs. In connection with the amendment, the Partnership executed a $636,000 promissory note for payment of these costs. The note bears interest at Citibank's prime lending rate plus 2%. Interest and principal were payable on maturity of the note in November 1994. During November 1994, the Partnership funded an escrow, the funds of which were available under the terms of the escrow agreement to settle the Partnership's obligations to the general contractor. At December 31, 1994, the balance due to the general contractor on the note and the funds escrowed for payment amounted to $586,000. Accrued interest on the note at December 31, 1994 amounted to $25,142. The escrowed funds were included in restricted cash. During 1995, the Partnership settled all obligations with the general contractor. NOTE 3--LONG-TERM DEBT On June 30, 1993, the Partnership obtained $5,110,000 of financing from the Business Finance Authority of the State of New Hampshire to construct the Facility. The financing was obtained through issuance of 7.75% State of New Hampshire Electric Facility Revenue Bonds (the "Bonds"), a tax-exempt financing, which matures on June 1, 2014. The Bonds were issued at a discount of $129,283, which is being amortized over the life of the bonds using the bonds outstanding method. This Leasehold Mortgage and Trust Agreement (the "Agreement") contains certain business covenants including, among other items, that the Partnership provides timely financial and business information. In connection with the financing, the Partnership paid $162,824 of financing related costs. These deferred financing costs will be amortized on the bonds outstanding method over the life of the bonds. F-52 PLYMOUTH COGENERATION LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The Bondholder has a first mortgage security interest in the Facility, pledge of the Partnership interests, and a collateral assignment of all facility operating agreements. Interest is payable semi-annually on June 1 and December 1. The Bonds are subject to redemption from sinking fund installments, without premium, plus accrued interest on June 1, 1997 and each June 1 thereafter at their principal amounts, through maturity of June 1, 2014. The Bonds are also subject to redemption at the option of the Partnership on or after: June 1, 2003 at 102%; June 1, 2004 at 101%; and June 1, 2005 at 100%. Aggregate annual sinking fund installments for the next five years and thereafter are as follows: 1996.......................... $ -- 1997.......................... 70,000 1998.......................... 100,000 1999.......................... 125,000 2000.......................... 175,000 Thereafter.................... 4,640,000 ---------- $5,110,000 ==========
NOTE 4--RELATED PARTY TRANSACTIONS DEVELOPMENT EXPENSES The managing general partner and affiliates were reimbursed for development expenses during the development and construction phases. In 1994, total reimbursements of $275,000 were incurred and capitalized to Plant during the development and construction phases. ADMINISTRATION SERVICE FEES On January 13, 1994, the Partnership entered into and Administrative Services Agreement with an affiliate of PSC. The agreement provides that commencing on January 1, 1995, the Partnership will pay a fee in the amount of $40,000, annually, adjusted for CPI, for administrative services to be provided by the affiliate on behalf of the Partnership. The Partnership incurred an administrative fee of $42,000 during 1995, which is included in general and administrative expenses. DEVELOPMENT COMMISSIONS Development Commissions are payable to PSC and Cencogen commencing on the in-service date of the Facility (January 1, 1995). Development commissions are fixed annual amounts, payable quarterly which escalate over the life of the agreement, or 20 years, and are subordinate to the payment of debt service and general partners fees. The Partnership incurred development commissions of $44,388 during 1995, which are included in general and administrative expenses. GENERAL PARTNER'S FEE General Partner's Fee is payable to PSC commencing on the in-service date of the Facility (January 1, 1995). The general partner's fee is a fixed annual amount payable quarterly which escalates over the life of the agreement, or 20 years, and is subordinate to the payment of debt service. The Partnership incurred $14,796 during 1995, which is included in general and administrative expenses. F-53 PLYMOUTH COGENERATION LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) OTHER The Partnership incurred the following expenses with affiliates of the General Partner for the years ended December 31, 1995 and 1994. The 1994 costs were capitalized into Plant during the development and construction phases.
1995 1994 ------ ------- Employee group health insurance and office related........... $ -- $37,703 Interest expense on advances................................. 1,108 --
Amounts due to affiliates of the General Partner included in accounts payable and accrued expenses of the Partnership at December 31, 1995 and 1994:
1995 1994 ------- ---- Interest bearing advances at prime.............................. $28,520 $-- Accrued interest on advances.................................... 1,108 --
The Partnership has elected for its employees to participate in a 401(k) plan sponsored by an affiliate of the General Partner. The 401(k) plan calls for employee only contributions. NOTE 5--SUBSEQUENT EVENT (UNAUDITED) In 1996, three of the Partnership's operating permits expired. The Partnership filed for renewal of these permits prior to their expiration but has yet to receive approval from the State of New Hampshire. Management anticipates the permits to be approved. F-54 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU- THORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PER- SON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN- DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CON- TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ---------------- TABLE OF CONTENTS
PAGE ---- AVAILABLE INFORMATION..................................................... 2 PROSPECTUS SUMMARY........................................................ 3 RISK FACTORS.............................................................. 9 USE OF PROCEEDS........................................................... 17 PRICE RANGE OF COMMON STOCK............................................... 17 DIVIDEND POLICY .......................................................... 17 CAPITALIZATION ........................................................... 18 PRO FORMA FINANCIAL INFORMATION........................................... 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATION ............................................................... 25 BUSINESS ................................................................. 30 MANAGEMENT ............................................................... 43 CERTAIN TRANSACTIONS ..................................................... 46 PRINCIPAL AND SELLING SECURITYHOLDERS .................................... 48 DESCRIPTION OF SECURITIES ................................................ 50 SHARES ELIGIBLE FOR FUTURE SALE .......................................... 54 PLAN OF DISTRIBUTION ..................................................... 55 LEGAL MATTERS ............................................................ 55 EXPERTS .................................................................. 56 FINANCIAL STATEMENTS...................................................... F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- U.S. ENERGY SYSTEMS, INC. 205,000 SHARES OF COMMON STOCK ---------------- PROSPECTUS ---------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 By-Laws and Certificate of Incorporation 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 applied for 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: SEC Registration Fee.......................................... $ 10,104 NASD Fee...................................................... 3,802 Nasdaq Fee.................................................... 14,156 Transfer Agent's Fee.......................................... 3,000 Printing and Engraving Fees................................... 75,000 Legal Fees and Expenses....................................... 250,000 Blue Sky Fees and Expenses.................................... 50,000 Accounting Fees and Expenses.................................. 200,000 Representative's Non-Accountable Expense Allowance............ 381,300 Miscellaneous Expenses........................................ 43,938 ---------- Total....................................................... $1,031,300 ==========
II-1 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES The following is a description of all unregistered sales of securities by the Company within the past three years, including the name of the purchaser, the date of purchase and the consideration paid. Each of the securities were offered in private placements, exempt from registration pursuant to Section 4(2) of the Securities Act. 1. In March 1994, the Company issued an aggregate of 18,250 shares of Common Stock to the 8 individuals listed below in connection with raising capital . The total proceeds of the sale were $52,750.
NUMBER OF NAME OF PURCHASER SHARES PURCHASED PURCHASE PRICE ----------------- ----------------- -------------- 1. Ronald Moody.......................... 3,125 $1,250 2. Seneca Ltd............................ 2,500 10,000 3. Wm. A. Buik........................... 2,500 10,000 4. Dana Pitt............................. 2,500 10,000 5. Tracey Pitt........................... 2,500 10,000 6. Lindsay Pitt.......................... 2,500 10,000 7. Theo Smith............................ 125 500 8. Donald Warner......................... 2,500 1,000
2. Between January and April 1994, the Company issued 18% Convertible Debentures in the principal amount of $1,525,000 to 26 accredited investors. 3. On May 4, 1994, the Company issued a total of 1,250 shares of Common Stock to SDZ Venture Partners. The total proceeds of the sale were $5,000. 4. On July 13, 1994, the Company issued 7,500 shares of Common Stock to Fred Knoll. The total proceeds of the sale were $30,000. 5. In November 1994, the Company issued secured notes in the principal amount of $100,000,000 with warrants attached to eight accredited investors. 6. In November 1994, the Company issued a total of 11,400 shares of Common Stock to Plymouth Cogeneration in partial payment of the $750,000 purchase price for an interest of the Plymouth project described in the prospectus. The total proceeds of the sale were $114,000. 7. In 1995, the Company issued an aggregate of 10,000 shares of Common Stock to the persons listed below. The total proceeds of the sale were $72,000.
NUMBER OF AMOUNT OF NAME OF PURCHASER SHARES PURCHASED CONSIDERATION PAID DATE OF PURCHASE ----------------- ----------------- ------------------- ---------------- Richard Barrett...... 1,250 $ 5,000 January 1995 Nils Kindwall........ 2,500 $22,000 January 1995 Evan Evans........... 1,250 $10,000 January 1995 Bruce Galloway....... 2,500 $10,000 February 1995 Indus, LLC........... 2,500 $25,000 July 1995
II-2 ITEM 27. EXHIBITS
INCORPORATED EXHIBIT EXHIBIT BY REFERENCE NO. IN NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT ------- ----------- -------------- --------- 1.1 Form of Underwriting Agreement X 3.1 Restated Certificate of Incorporation of X the Company filed with the Secretary of State of Delaware 3.2 By-Laws of the Company A 3(ii) 3.3 Articles of Organization of Steamboat B Envirosystems, L.C. 4.1 Specimen Stock Certificate B 4.2 Form of Warrant X 4.3 Form of Warrant Agreement B 4.4 Form of Representative's Purchase Option B 5.1 Opinion of Reid & Priest LLP B 10.1 Plan of Reorganization of Cogenic Energy A 2 Systems, Inc. 10.2 18% Convertible Subordinated Debenture due A 4 2004 10.3 Employment Agreement, dated as of November A 10(i) 11, 1993, between the Company and Richard Nelson 10.3(a) Amendment to Employment Agreement between B the Company and Richard Nelson, dated 10.4 Employment Agreement, dated as of December A 10(ii) 11, 1993, between the Company and Theodore Rosen 10.4(a) Amendment to Employment Agreement between B the Company and Theodore Rosen dated 10.5 Purchase Agreement, dated as of January 24, A 10(iii) 1994, between Lehi Co-Gen Associates, L.C. and Lehi Envirosystems, Inc. 10.6 Operating Agreement among Far West Capital, B Inc., Suma Corporation and Lehi Envirosystems, Inc. dated January 24, 1994 10.7 Form of Purchase and Sale Agreement between B Far West Capital, Inc., Far West Electric Energy Fund, L.P., 1-A Enterprises, the Company and Steamboat LLC 10.8 Form of Operation and Maintenance Agreement B between Steamboat LLC and S.B. Geo, Inc. 10.9 Letter Agreement, dated as of November 8, B 1994, between the Company, PSC Cogeneration Limited Partnership, Central Hudson Cogeneration, Inc. and Independent Energy Finance Corporation 10.10 Agreement among the Company, Plymouth B Envirosystems, Inc., IEC Plymouth, Inc. and Independent Energy Finance Corporation dated November 16, 1994 10.11 Amended and Restated Agreement of Limited B Partnership of Plymouth Cogeneration Limited Partnership among PSC Cogeneration Limited Partnership, Central Hudson Cogeneration, Inc. and Plymouth Envirosystems, Inc. dated November 1, 1994
II-3
INCORPORATED EXHIBIT EXHIBIT BY REFERENCE NO. IN NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT ------- ----------- -------------- --------- 10.12 Amended and Restated Agreement of Limited B Partnership of PSC Cogeneration Limited Partnership among IEC Plymouth, Inc. Independent Energy Finance Corporation and Plymouth Envirosystems, Inc. dated December 28, 1994 10.13 Purchase and Sale Agreement, dated as of B December 31, 1995, between the Company, Far West Capital, Inc., Far West Electric Energy Fund, L.P., 1-A Enterprises and Steamboat Envirosystems, LLC 10.13(a) Letter Agreement, dated September 25, B 1996, between the Company and Far West Capital, Inc. 10.14 Joint Development Memorandum of Intent B dated September 20, 1994, between the Company and Cowen Partnership 10.15 Agreement dated May 4, 1995 between the B Company and Indus LLC 10.16 Security Agreement and Financing Statement X among The Company, Lehi Envirosystems, Inc., Plymouth Envirosystems, Inc. and Anchor Capital Company, LLC dated June 14, 1995, as amended 10.17 Stock Pledge Agreement among Richard H. B Nelson, Theodore Rosen, Anchor Capital Company, LLC and the Company dated June 14, 1995 10.18 Loan Agreement among the Company, Lehi X Envirosystems, Inc., Plymouth Envirosystems and Solvation, Inc. dated as of December 15, 1995, as amended 10.19 Pledge Agreement between the Company and X Solvation, Inc. dated as of December 15, 1995 10.20 Lease dated September 1, 1995 between the B Company and Gaedeke Holdings, Ltd. 10.21 Documents related to Private Placement deleted 10.21(a) Certificate of Designations deleted 10.22 Purchase Agreement between the Company and B Westinghouse Electric Corporation dated as of November 6, 1995 and amendments thereto 10.23 Letter of intent to the Company from B Bluebeard's Castle, Inc. dated August 6, 1996. 10.24 Form of Joint Venture Agreement among the B Company and Bluebeard's Castle, Inc. and Bluebeard Hilltop Villas dated as of . 10.25(a) Long-Term Agreement for the Purchase and B Sale of Electricity Between Sierra Pacific Power Company and Far West Capital Inc., dated October 29, 1988 10.25(b) Assignment of Interest, dated December 10, B 1988 by and between Far West Capital Inc. and 1-A Enterprises 10.25(c) Letter dated August 18, 1989 by Gerald W. B Canning, Vice President of Electric Resources, consenting to the Assignment of Interest on behalf of Sierra Pacific Power Company 10.26(a) Agreement for the Purchase and Sale of B Electricity, dated as of November 18, 1983 between Geothermal Development Associates and Sierra Pacific Power Company 10.26(b) Amendment to Agreement for Purchase and B Sale of Electricity, dated March 6, 1987, by and between Far West Hydroelectric Fund, Ltd. and Sierra Pacific Power Company
II-4
INCORPORATED EXHIBIT EXHIBIT BY REFERENCE NO. IN NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT ------- ----------- -------------- -------- 10.27 Loan and Option Agreement dated August , B 1996 by and among NRG Company, LLC and Reno Energy, LLC and ART, LLC and FWC Energy, LLC, and amendments thereto 10.28 Promissory Note dated August 9, 1996 for B $300,000 from Reno Energy, LLC to NRG Company, LLC 10.29 Letter of Intent dated July 15, 1996 on B behalf of Reno Energy, LLC 10.30 Limited Liability Company Operating B Agreement of NRG Company, LLC dated as of September 8, 1996, and amendments thereto 10.31 Form of Limited Liability Company Operating B Agreement of Steamboat Envirosystems, L.C. dated as of October , 1996 10.32 Form of Debenture Conversion Agreement X 11.1 Earnings Per Share Calculations--Historical B January 31, 1996 11.2 Earnings Per Share Calculations--Historical B July 31, 1996 11.3 Pro Forma Earnings Per Share Calculation X January 31, 1996 (herewith amended) 11.4 Pro Forma Earnings Per Share Calculation X July 31, 1996 (herewith amended) 11.5 Supplemental Historical Earnings Per Share X Calculations--January 31 1996 and July 31, 1996 11.6 Earnings Per Share Calculations--Historical B January 31, 1995 13.1 Annual Report of the Company on Form 10-KSB B for the year ended January 31, 1996 13.2 Quarterly Report of the Company on Form 10- B QSB for the quarter ended October 31, 1995 13.3 Quarterly Report of the Company on Form 10- C QSB for the quarter ended July 31, 1996 21.1 Subsidiaries of the Company B 23.1 Consent of Reid & Priest LLP (included in B Exhibit 5.1) 23.2 Consent of Richard A. Eisner & Company, LLP X 23.3 Consent of Robison, Hill & Co., P.C. (Far X West) 23.4 Consent of Robison, Hill & Co., P.C. (1-A X Enterprises) 23.5 Consent of Traveller Winn & Mower, PC X 23.6 Consent of Price Waterhouse LLP (Primary X Prospectus) 23.7 Consent of Price Waterhouse LLP (Secondary X Prospectus) 24.1 Power of Attorney B 27 Financial Data Schedule X
- -------- A Annual Report of the Company on Form 10-KSB for the year ended January 31, 1994 (File No. 0-10238). B Previously filed. C Quarterly Report of the Company on Form 10-QSB for the quarter ended July 31, 1996 (File No. 0-10238). X Filed herewith. II-5 ITEM 28. UNDERTAKINGS Undertakings Required by Regulation S-B Item 512(a): The Company will: (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. Undertakings Required by Regulation S-B Item 512(e): 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. Undertakings Required by Regulation S-B Item 512(f) The Company will: (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-6 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 REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, AND STATE OF NEW YORK, ON THE 25TH DAY OF NOVEMBER, 1996. U.S. Energy Systems, Inc. /s/ Richard Nelson By: _________________________________ Richard Nelson President and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below under the heading "Signatures" constitutes and appoints Richard Nelson and Theodore Rosen, or either of them his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection with the above premises, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE /s/ Theodore Rosen Chairman of the - ------------------------------------- Board November 25, (THEODORE ROSEN) 1996 /s/ Richard Nelson President and Chief - ------------------------------------- Executive Officer November 25, (RICHARD NELSON) (Principal 1996 Executive Officer) /s/ Seymour J. Beder Chief Accounting - ------------------------------------- Officer and November 25, (SEYMOUR J. BEDER) Controller 1996 (Principal Financial and Accounting Officer) /s/ Ronald Moody Director - ------------------------------------- November 25, (RONALD MOODY) 1996 Director - ------------------------------------- November 25, (FRED KNOLL) 1996 /s/ Evan Evans Director - ------------------------------------- November 25, (EVAN EVANS) 1996 II-7 EXHIBIT INDEX
INCORPORATED EXHIBIT EXHIBIT BY REFERENCE NO. IN NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT ------- ----------- -------------- --------- 1.1 Form of Underwriting Agreement X 3.1 Restated Certificate of Incorporation of X the Company filed with the Secretary of State of Delaware 3.2 By-Laws of the Company A 3(ii) 3.3 Articles of Organization of Steamboat B Envirosystems, L.C. 4.1 Specimen Stock Certificate B 4.2 Form of Warrant X 4.3 Form of Warrant Agreement B 4.4 Form of Representative's Purchase Option B 5.1 Opinion of Reid & Priest LLP B 10.1 Plan of Reorganization of Cogenic Energy A 2 Systems, Inc. 10.2 18% Convertible Subordinated Debenture due A 4 2004 10.3 Employment Agreement, dated as of November A 10(i) 11, 1993, between the Company and Richard Nelson 10.3(a) Amendment to Employment Agreement between B the Company and Richard Nelson, dated October 15, 1996 10.4 Employment Agreement, dated as of December A 10(ii) 11, 1993, between the Company and Theodore Rosen 10.4(a) Amendment to Employment Agreement between B the Company and Theodore Rosen dated October 15, 1996 10.5 Purchase Agreement, dated as of January 24, A 10(iii) 1994, between Lehi Co-Gen Associates, L.C. and Lehi Envirosystems, Inc. 10.6 Operating Agreement among Far West Capital, B Inc., Suma Corporation and Lehi Envirosystems, Inc. dated January 24, 1994 10.7 Form of Purchase and Sale Agreement between B Far West Capital, Inc., Far West Electric Energy Fund, L.P., 1-A Enterprises, the Company and Steamboat LLC 10.8 Form of Operation and Maintenance Agreement B between Steamboat LLC and S.B. Geo, Inc. 10.9 Letter Agreement, dated as of November 8, B 1994, between the Company, PSC Cogeneration Limited Partnership, Central Hudson Cogeneration, Inc. and Independent Energy Finance Corporation 10.10 Agreement among the Company, Plymouth B Envirosystems, Inc., IEC Plymouth, Inc. and Independent Energy Finance Corporation dated November 16, 1994 10.11 Amended and Restated Agreement of Limited B Partnership of Plymouth Cogeneration Limited Partnership among PSC Cogeneration Limited Partnership, Central Hudson Cogeneration, Inc. and Plymouth Envirosystems, Inc. dated November 1, 1994
INCORPORATED EXHIBIT EXHIBIT BY REFERENCE NO. IN NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT ------- ----------- -------------- --------- 10.12 Amended and Restated Agreement of Limited B Partnership of PSC Cogeneration Limited Partnership among IEC Plymouth, Inc. Independent Energy Finance Corporation and Plymouth Envirosystems, Inc. dated December 28, 1994 10.13 Purchase and Sale Agreement, dated as of B December 31, 1995, between the Company, Far West Capital, Inc., Far West Electric Energy Fund, L.P., 1-A Enterprises and Steamboat Envirosystems, LLC 10.13(a) Letter Agreement, dated September 25, B 1996, between the Company and Far West Capital, Inc. 10.14 Joint Development Memorandum of Intent B dated September 20, 1994, between the Company and Cowen Partnership 10.15 Agreement dated May 4, 1995 between the B Company and Indus LLC 10.16 Security Agreement and Financing Statement X among The Company, Lehi Envirosystems, Inc., Plymouth Envirosystems, Inc. and Anchor Capital Company, LLC dated June 14, 1995, as amended 10.17 Stock Pledge Agreement among Richard H. B Nelson, Theodore Rosen, Anchor Capital Company, LLC and the Company dated June 14, 1995 10.18 Loan Agreement among the Company, Lehi X Envirosystems, Inc., Plymouth Envirosystems and Solvation, Inc. dated as of December 15, 1995, as amended 10.19 Pledge Agreement between the Company and X Solvation, Inc. dated as of December 15, 1995 10.20 Lease dated September 1, 1995 between the B Company and Gaedeke Holdings, Ltd. 10.21 Documents related to Private Placement 10.21(a) Certificate of Designations 10.22 Purchase Agreement between the Company and B Westinghouse Electric Corporation dated as of November 6, 1995 and amendments thereto 10.23 Letter of intent to the Company from B Bluebeard's Castle, Inc. dated August 6, 1996. 10.24 Form of Joint Venture Agreement among the B Company and Bluebeard's Castle, Inc. and Bluebeard Hilltop Villas dated as of . 10.25(a) Long-Term Agreement for the Purchase and B Sale of Electricity Between Sierra Pacific Power Company and Far West Capital Inc., dated October 29, 1988 10.25(b) Assignment of Interest, dated December 10, B 1988 by and between Far West Capital Inc. and 1-A Enterprises 10.25(c) Letter dated August 18, 1989 by Gerald W. B Canning, Vice President of Electric Resources, consenting to the Assignment of Interest on behalf of Sierra Pacific Power Company 10.26(a) Agreement for the Purchase and Sale of B Electricity, dated as of November 18, 1983 between Geothermal Development Associates and Sierra Pacific Power Company 10.26(b) Amendment to Agreement for Purchase and B Sale of Electricity, dated March 6, 1987, by and between Far West Hydroelectric Fund, Ltd. and Sierra Pacific Power Company
INCORPORATED EXHIBIT EXHIBIT BY REFERENCE NO. IN NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT ------- ----------- -------------- -------- 10.27 Loan and Option Agreement dated August , B 1996 by and among NRG Company, LLC and Reno Energy, LLC and ART, LLC and FWC Energy, LLC, and amendments thereto 10.28 Promissory Note dated August 9, 1996 for B $300,000 from Reno Energy, LLC to NRG Company, LLC 10.29 Letter of Intent dated July 15, 1996 on B behalf of Reno Energy, LLC 10.30 Limited Liability Company Operating B Agreement of NRG Company, LLC dated as of September 8, 1996, and amendments thereto 10.31 Form of Limited Liability Company Operating B Agreement of Steamboat, Envirosystems, L.C. dated as of October , 1996 10.32 Form of Debenture Conversion Agreement X 11.1 Earnings Per Share Calculations--Historical B January 31, 1996 (herewith amended) 11.2 Earnings Per Share Calculations--Historical B July 31, 1996 11.3 Pro Forma Earnings Per Share Calculation X January 31, 1996 11.4 Pro Forma Earnings Per Share Calculation X July 31, 1996 (herewith amended) 11.5 Supplemental Historical Earnings Per Share X Calculation January 31, 1996 and July 31, 1996 11.6 Earnings Per Share Calculations--Historical B January 31, 1995 13.1 Annual Report of the Company on Form 10-KSB B for the year ended January 31, 1996 13.2 Quarterly Report of the Company on Form 10- B QSB for the quarter ended October 31, 1995 13.3 Quarterly Report of the Company on Form 10- C QSB for the quarter ended July 31, 1996 21.1 Subsidiaries of the Company B 23.1 Consent of Reid & Priest LLP (included in B Exhibit 5.1) 23.2 Consent of Richard A. Eisner & Company, LLP X 23.3 Consent of Robison, Hill & Co., P.C. (Far X West) 23.4 Consent of Robison, Hill & Co., P.C. (1-A X Enterprises) 23.5 Consent of Traveller Winn & Mower, PC X 23.6 Consent of Price Waterhouse LLP (Primary X Prospectus) 23.7 Consent of Price Waterhouse LLP (Secondary X Prospectus) 24.1 Power of Attorney B 27 Financial Data Schedule X
- -------- A Annual Report of the Company on Form 10-KSB for the year ended January 31, 1994 (File No. 0-10238). B Previously filed. C Quarterly Report of the Company on Form 10-QSB for the quarter ended July 31, 1996 (File No. 0-10238). X Filed herewith. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT Exhibit 1.1 DRAFT 112096 UNDERWRITING AGREEMENT BETWEEN U.S. ENERGY SYSTEMS, INC. AND GAINES, BERLAND INC. DATED: __________, 1996
TABLE OF CONTENTS ----------------- Page ---- INDEX OF DEFINITIONS................................................................................................v 1. Purchase and Sale of Securities............................................................................1 1.1 Firm Units........................................................................................1 1.1.1 Purchase of Firm Securities..............................................................1 1.1.2 Payment and Delivery.....................................................................1 1.2 Over-allotment Option.............................................................................2 1.2.1 Option Securities........................................................................2 1.2.2 Exercise of Over-allotment Option........................................................2 1.2.3 Payment and Delivery.....................................................................3 1.3 Representative's Purchase Option..................................................................3 1.3.1 Purchase Option..........................................................................3 1.3.2 Payment and Delivery.....................................................................3 2. Representations and Warranties of the Company..............................................................3 2.1 Filing of Registration Statement..................................................................3 2.1.1 Pursuant to the Act......................................................................3 2.1.2 Pursuant to the Exchange Act.............................................................4 2.2 No Stop Orders, Etc...............................................................................4 2.3 Disclosures in Registration Statement.............................................................4 2.3.1 Securities Act and 10b-5 Representation..................................................4 2.3.2 Disclosure of Contracts..................................................................5 2.3.3 Prior Securities Transactions............................................................5 2.4 Changes After Dates in Registration Statement.....................................................5 2.4.1 No Material Adverse Change...............................................................5 2.4.2 Recent Securities Transactions, Etc......................................................6 2.5 Independent Accountants...........................................................................6 2.6 Financial Statements..............................................................................6 2.7 Authorized Capital; Options; Etc..................................................................6 2.8 Valid Issuance of Securities; Etc.................................................................6 2.8.1 Outstanding Securities...................................................................6 2.8.2 Securities Sold Pursuant to this Agreement...............................................7 2.9 Registration Rights of Third Parties..............................................................7 2.10 Validity and Binding Effect of Agreements.........................................................7 2.11 No Conflicts, Etc.................................................................................8 2.12 No Defaults; Violations...........................................................................8 2.13 Corporate Power; Licenses; Consents...............................................................8 2.13.1 Conduct of Business......................................................................8 2.13.2 Transactions Contemplated Herein.........................................................9 2.14 Title to Property; Insurance......................................................................9 2.15 Litigation; Governmental Proceedings..............................................................9
i
Page ---- 2.16 Good Standing....................................................................................10 2.17 Taxes............................................................................................10 2.18 Employee Options. ..............................................................................10 2.19 Transactions Affecting Disclosure to NASD........................................................10 2.19.1 Finder's Fees...........................................................................11 2.19.2 Payments Within Twelve Months...........................................................11 2.19.3 Use of Proceeds.........................................................................11 2.19.4 Insiders' NASD Affiliation..............................................................11 2.20 Foreign Corrupt Practices Act....................................................................11 2.21 Nasdaq Eligibility...............................................................................12 2.22 Intangibles......................................................................................12 2.23 Relations With Employees.........................................................................12 2.23.1 Employee Matters........................................................................12 2.23.2 Employee Benefit Plans..................................................................12 2.24 Officers' Certificate............................................................................13 2.25 Warrant Agreement................................................................................13 2.26 Lock-Up Agreements...............................................................................13 2.27 Subsidiaries.....................................................................................13 2.28 Certain Definitions..............................................................................13 2.29 Conditions to Obligations Under Other Agreements.................................................14 3. Covenants of the Company..................................................................................14 3.1 Amendments to Registration Statement.............................................................14 3.2 Federal Securities Laws..........................................................................14 3.2.1 Compliance..............................................................................14 3.2.2 Filing of Final Prospectus..............................................................14 3.2.3 Exchange Act Registration...............................................................14 3.3 Blue Sky Filing..................................................................................15 3.4 Delivery to Underwriters of Prospectuses.........................................................15 3.5 Events Requiring Notice to the Representative....................................................15 3.6 Review of Financial Statements...................................................................15 3.7 Unaudited Financials.............................................................................15 3.8 Secondary Market Trading and Standard & Poor's...................................................16 3.9 Nasdaq Maintenance...............................................................................16 3.10 Warrant Solicitation and Warrant Solicitation Fees...............................................16 3.11 Registration of Common Stock.....................................................................16 3.12 Reports to the Representative....................................................................17 3.12.1 Periodic Reports, Etc...................................................................17 3.12.2 Transfer Sheets and Weekly Position Listings............................................17 3.12.3 Secondary Market Trading Memorandum.....................................................17 3.13 Agreements between the Representative and the Company............................................17 3.13.1 [Intentionally Omitted.]................................................................17 3.13.2 [Intentionally Omitted.]................................................................17
ii
Page ---- 3.13.3 Representative's Purchase Option........................................................17 3.14 Disqualification of Form S-1 (or other appropriate form).........................................18 3.15 Payment of Expenses..............................................................................18 3.15.1 General Expenses........................................................................18 3.15.2 Non-Accountable Expenses................................................................19 3.16 Application of Net Proceeds......................................................................19 3.17 Delivery of Earnings Statements to Security Holders..............................................19 3.18 Key Person Life Insurance........................................................................19 3.19 Stabilization....................................................................................19 3.20 Internal Controls................................................................................19 3.21 Accountants and Lawyers..........................................................................20 3.22 Transfer Agent...................................................................................20 3.23 Sale of Securities...............................................................................20 3.24 Other Transactions...............................................................................20 3.25 Secondary Offering...............................................................................20 4. Conditions of Underwriters' Obligations...................................................................21 4.1 Regulatory Matters...............................................................................21 4.1.1 Effectiveness of Registration Statement.................................................21 4.1.2 NASD Clearance..........................................................................21 4.1.3 No Blue Sky Stop Orders.................................................................21 4.2 Company Counsel Matters..........................................................................21 4.2.1 (a) Effective Date Opinion of Counsel..............................................21 (b) Other Counsel's Opinion........................................................26 4.2.2 Closing Date and Option Closing Date Opinions of Counsel................................27 4.2.3 Reliance................................................................................27 4.2.4 Secondary Market Trading Memorandum.....................................................28 4.3 Cold Comfort Letters.............................................................................28 4.4 Officers' Certificates...........................................................................29 4.4.1 Officers' Certificate...................................................................29 4.4.2 Secretary's Certificate.................................................................30 4.5 No Material Changes..............................................................................30 4.6 Delivery of Agreements...........................................................................31 4.7 Opinion of Counsel for the Underwriters..........................................................31 4.8 Other Transactions...............................................................................31 5. Indemnification...........................................................................................31 5.1 Indemnification of the Underwriters..............................................................31 5.1.1 General.................................................................................31 5.1.2 Procedure...............................................................................32 5.2 Indemnification of the Company...................................................................32 5.3 Contribution.....................................................................................33 5.3.1 Contribution Rights.....................................................................33
iii
Page ---- 5.3.2 Contribution Procedure..................................................................33 6. Default by an Underwriter.................................................................................34 6.1 Default Not Exceeding 10% of Firm Securities or Option Securities................................34 6.2 Default Exceeding 10% of Firm Securities or Option Securities....................................34 6.3 Postponement of Closing Date.....................................................................34 7. Additional Covenants......................................................................................34 7.1 Board Designee...................................................................................34 7.2 [Intentionally Omitted.].........................................................................35 7.3 Rule 144 Sales...................................................................................35 7.4 Press Releases...................................................................................35 7.5 Form S-8 or any Similar Form.....................................................................35 7.6 Employment Agreements............................................................................35 7.7 Compensation and Other Arrangements..............................................................36 8. Representations and Agreements to Survive Delivery........................................................36 9. Effective Date of This Agreement and Termination Thereof..................................................36 9.1 Effective Date...................................................................................36 9.2 Termination......................................................................................36 9.3 Notice...........................................................................................37 9.4 Expenses.........................................................................................37 9.5 Indemnification..................................................................................37 10. Miscellaneous.............................................................................................37 10.1 Notices..........................................................................................37 10.2 Headings.........................................................................................38 10.3 Amendment........................................................................................38 10.4 Entire Agreement.................................................................................38 10.5 Binding Effect...................................................................................38 10.6 Governing Law; Jurisdiction......................................................................38 10.7 Execution in Counterparts........................................................................38 10.8 Waiver, Etc......................................................................................39
iv
INDEX OF DEFINITIONS -------------------- Term Section - ---- ------- Acquisition Agreement............................................................................................2.28 Acquisition Transactions........................................................................................2.3.2 Act............................................................................................................ 2.1.1 AICPA....................................................................................................... 4.3(iii) Anchor...........................................................................................................3.25 BSE.............................................................................................................2.2.1 Closing Date....................................................................................................1.1.2 Comfort Letter Subject.........................................................................................4.3(i) Code...........................................................................................................2.23.2 Commission......................................................................................................2.1.1 Common Stock....................................................................................................1.1.1 Company........................................................................................Introductory Paragraph Conversion Agreement.............................................................................................2.28 Department.......................................................................................................3.25 Effective Date..................................................................................................1.1.1 ERISA..........................................................................................................2.23.2 ERISA Plans....................................................................................................2.23.2 Exchange Act....................................................................................................2.1.2 Far West..........................................................................................................2.6 Filing Date ...................................................................................................2.19.2 Firm Securities.................................................................................................1.1.1 Insiders.........................................................................................................2.26 Intangibles......................................................................................................2.22 Lehi............................................................................................................2.3.2 NASD...........................................................................................................2.19.1 NRG.............................................................................................................2.3.2 NRG Acquisition Agreement........................................................................................2.28 1-A...............................................................................................................2.6 Opinion Subject..............................................................................................4.2.1(b) Option Closing Date.............................................................................................1.2.2 Option Securities...............................................................................................1.2.1 Other Counsel................................................................................................4.2.1(b) Over-allotment Option...........................................................................................1.2.1 Plymouth........................................................................................................2.3.2 Preferred Stock Exchange Agreement...............................................................................2.28 Preliminary Prospectus..........................................................................................2.1.1 Pro Forma Financial Statements................................................................................4.3(iv) Proposed Financing................................................................................................7.8 Prospectus......................................................................................................2.1.1 Public Securities...............................................................................................1.2.1 Registration Statement..........................................................................................2.1.1 Regulations.....................................................................................................2.1.1 Representative.................................................................................Introductory Paragraph Representative's Purchase Option................................................................................1.3.1 Representative's Securities.....................................................................................1.3.1 Representative's Shares.........................................................................................1.3.1 Representative's Warrants.......................................................................................1.3.1
v Secondary Market Trading Memorandum............................................................................3.12.3
Term Section - ---- ------- Securities.................................................................................................... .1.3.1 Steamboat Acquisition Agreement..................................................................................2.28 Steamboat Facilities.............................................................................................2.28 Steamboat L.L.C.................................................................................................2.3.2 Subsidiary(ies)................................................................................................. 2.27 Transfer Agent...................................................................................................3.22 Unaudited Financials..............................................................................................3.7 Underwriter....................................................................................Introductory Paragraph Underwriters...................................................................................Introductory Paragraph Warrants........................................................................................................1.1.1 Warrant Agreement................................................................................................2.25
vi U.S. ENERGY SYSTEMS, INC. 3,100,000 SHARES OF COMMON STOCK 3,100,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS UNDERWRITING AGREEMENT ---------------------- New York, New York __________, 1996 Gaines, Berland Inc. 712 Fifth Avenue 21st Floor New York, New York 10022 Dear Sirs: The undersigned, U.S. ENERGY SYSTEMS, INC., a Delaware corporation ("Company"), hereby confirms its agreement with Gaines, Berland Inc. (being referred to herein variously as "you" or the "Representative"), and the other underwriters named on Schedule 1 hereto (the Representative and the other underwriters being collectively referred to as the "Underwriters" or individually as "Underwriter"), as follows: 1. Purchase and Sale of Securities. ------------------------------- 1.1 Firm Units. ---------- 1.1.1 Purchase of Firm Securities. On the basis of the --------------------------- representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the several Underwriters, 3,100,000 shares of the Company's Common Stock, par value $0.01 ("Common Stock"), and 3,100,000 Redeemable Common Stock Purchase Warrants ("Warrants"), and the Underwriters, severally and not jointly, agree to purchase from the Company, the numbers of shares of Common Stock and Warrants set forth opposite their respective names on Schedule 1 hereto for purchase prices of $3.68 per share of Common Stock and $0.08 per Warrant (net of commissions in each instance). Such shares of Common Stock and Warrants are hereinafter referred to as the "Firm Securities." Each Warrant entitles its holder to purchase one share of Common Stock at an initial exercise price of $4.00 per share commencing on the first anniversary of the effective date of the Registration Statement (as hereinafter defined) ("Effective Date") and ending on the fifth anniversary of the Effective Date. 1.1.2 Payment and Delivery. Delivery and payment for the Firm -------------------- Securities shall be made at 10:00 A.M., New York time, on or before the third business day following the date the Firm Securities commence trading or at such other time as the Representative shall determine, at the offices of the Representative or at such other place as shall be agreed upon by the Representative and the Company. The hour and date of delivery and payment for the Firm Securities are called the "Closing Date." Payment for the Firm Securities shall be made on the Closing Date, at the Representative's election, by wire transfer of funds or by certified or bank cashier's check(s) in New York Clearing House funds, in accordance with the instructions of the Company upon delivery to you of certificates (in form and substance satisfactory to the Representative) representing the Common Stock and Warrants comprising the Firm Securities for the respective accounts of the Underwriters. The Firm Securities shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two full business days prior to the Closing Date. The Company will permit the Representative to examine and package the Firm Securities for delivery at least one full business day prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Securities except upon tender of payment by the Underwriters for all the Firm Securities. 1.2 Over-allotment Option. --------------------- 1.2.1 Option Securities. For the purposes of covering any over- ----------------- allotments in connection with the distribution and sale of the Firm Securities, the Underwriters are hereby granted an option to purchase up to an additional 465,000 shares of Common Stock and/or 465,000 Warrants from the Company ("Over-allotment Option"). Such additional securities are hereinafter referred to as the "Option Securities." The Firm Securities and the Option Securities, together with the shares of Common Stock issuable upon exercise of the Warrants, are hereinafter referred to collectively as the "Public Securities." The purchase price to be paid for the Option Securities will be the same price per Option Security as the price per Firm Security set forth in Section 1.1.1 hereof. 1.2.2 Exercise of Over-allotment Option. The Over-allotment Option --------------------------------- granted pursuant to Section 1.2.1 hereof may be exercised by the Representative on behalf of the Underwriters as to all or any part of the Option Securities at any time, from time to time, within forty-five days after the Effective Date. The Underwriters will not be under any obligation to purchase any Option Securities prior to the exercise of the Over-allotment Option. The Over- allotment Option granted hereby may be exercised by the giving of oral notice to the Company from the Representative, which must be confirmed by a letter or telecopy setting forth the number of Option Securities to be purchased, the date and time for delivery of and payment for the Option Securities and stating that the Option Securities referred to therein are to be used for the purpose of covering over-allotments in connection with the distribution and sale of the Firm Securities. If such notice is given at least two full business days prior to the Closing Date, the date set forth therein for such delivery and payment will be the Closing Date. If such notice is given thereafter, the date set forth therein for such delivery and payment will not be earlier than five full business days after the date of the notice. If such delivery and payment for the Option Securities does not occur on the Closing Date, the date and time of the closing for such Option Securities will be as set forth in the notice (hereinafter the "Option Closing Date"). Upon exercise of the Over-allotment Option, the Company will become obligated to convey to the Underwriters, and, subject to the terms and conditions set forth herein, the Underwriters will become obligated to purchase, the number of Option Securities specified in such notice. 2 1.2.3 Payment and Delivery. Payment for the Option Securities will -------------------- be at the Representative's election by wire-transfer or by certified or bank cashier's check(s) in New York Clearing House funds, payable to the order of the Company at the offices of the Representative or at such other place as shall be agreed upon by the Representative and the Company upon delivery to you of certificates representing such securities for the respective accounts of the Underwriters. The certificates representing the Option Securities to be delivered will be in such denominations and registered in such names as the Representative requests not less than two full business days prior to the Closing Date or the Option Closing Date, as the case may be, and will be made available to the Representative for inspection, checking and packaging at the aforesaid office of the Company's transfer agent or correspondent not less than one full business day prior to such Closing Date. 1.3 Representative's Purchase Option. -------------------------------- 1.3.1 Purchase Option. The Company hereby agrees to issue and sell --------------- to the Representative (and/or its designees) on the Closing Date, for an aggregate purchase price of $100, an option ("Representative's Purchase Option") for the purchase of an aggregate of 310,000 shares of Common Stock ("Representative's Shares") at an initial exercise price of $6.60 per share and/or 310,000 Warrants ("Representative's Warrants") at an initial exercise price of $0.165 for the purchase of each of the Representative's Warrants. The Representative's Shares and the Representative's Warrants are identical to the securities comprising the Firm Securities except that the exercise price of the Representative's Warrants is $5.00 per share. The Representative's Purchase Option, the Representative's Shares, the Representative's Warrants and the shares of Common Stock issuable upon exercise of the Representative's Warrants are hereinafter referred to collectively as the "Representative's Securities." The Public Securities and the Representative's Securities are hereinafter referred to collectively as the "Securities". 1.3.2 Payment and Delivery. Delivery and payment for the -------------------- Representative's Purchase Option shall be made on the Closing Date. The Company shall deliver to the Representative, upon payment therefor, certificates for the Representative's Purchase Option in the name or names and in such authorized denominations as the Representative may request. The Representative's Purchase Option shall be exercisable for a period of four years commencing one year from the Effective Date. 2. Representations and Warranties of the Company. The Company represents and --------------------------------------------- warrants to the Representative as follows: 2.1 Filing of Registration Statement. -------------------------------- 2.1.1 Pursuant to the Act. The Company has filed with the Securities ------------------- and Exchange Commission ("Commission") a registration statement and an amendment or amendments thereto, on Form SB-2 (Registration No. 333-04612), including any related preliminary prospectus ("Preliminary Prospectus"), for the registration of the Securities under the Securities Act of 1933, as amended ("Act"), which registration statement and amendment or amendments have been prepared by the Company in conformity with the requirements of the Act and the rules and regulations ("Regulations") of the Commission under the Act. Except as the context may otherwise 3 require, such registration statement, as amended, on file with the Commission at the time the registration statement becomes effective (including the prospectus, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein and all information deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule 430A of the Regulations) is hereinafter called the "Registration Statement," and the form of the final prospectus dated the Effective Date (or, if applicable, the form of final prospectus filed with the Commission pursuant to Rule 424 of the Regulations) is hereinafter called the "Prospectus." The Registration Statement has been declared effective by the Commission on the date hereof. 2.1.2 Pursuant to the Exchange Act. The Company has filed with the ---------------------------- Commission a registration statement on Form 8-A providing for the registration under the Securities Exchange Act of 1934, as amended ("Exchange Act"), of the Warrants included in the Securities. Such registration has been declared effective by the Commission on the date hereof. The Common Stock is registered under the Exchange Act under registration statement on Form 8-A, declared effective on ________________. 2.2 No Stop Orders, Etc. Neither the Commission nor, to the best of the -------------------- Company's knowledge, any state regulatory authority has issued any order preventing or suspending the use of any Preliminary Prospectus or has instituted or, to the best of the Company's knowledge, threatened to institute any proceedings with respect to such an order. 2.3 Disclosures in Registration Statement. ------------------------------------- 2.3.1 Securities Act and 10b-5 Representation. At the time the --------------------------------------- Registration Statement becomes or became effective and at all times subsequent thereto up to the Closing Date and the Option Closing Date, if any, the Registration Statement and the Prospectus contained and will contain with respect to the Company and the Steamboat Facilities (as defined in Section 2.28) all material statements which are required to be stated therein in accordance with the Act and the Regulations, and conformed and will in all material respects conform to the requirements of the Act and the Regulations; neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, on such dates, contained or will contain any untrue statement of a material fact or omitted or will omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. When any Preliminary Prospectus was first filed with the Commission (whether filed as part of the Registration Statement for the registration of the Securities or any amendment thereto or pursuant to Rule 424(a) of the Regulations) and when any amendment thereof or supplement thereto was first filed with the Commission, such Preliminary Prospectus and any amendments thereof and supplements thereto complied or will comply in all material respects with the applicable provisions of the Act and the Regulations and did not and will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The representation and warranty made in this Section 2.3.1 does not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by the Representative expressly for use in the Registration Statement or Prospectus or any amendment thereof or supplement thereto. 4 2.3.2 Disclosure of Contracts. The description in the Registration ----------------------- Statement and the Prospectus of contracts and other documents is accurate and presents fairly the information required to be disclosed and there are no contracts or other documents required to be described in the Registration Statement or the Prospectus or to be filed with the Commission as exhibits to the Registration Statement which have not been so described or filed. Each contract or other instrument (however characterized or described) to which the Company, Lehi Independent Power Associates, L.C. ("Lehi"), Plymouth Cogeneration Limited Partnership ("Plymouth") or NRG Company L.L.C. ("NRG") is a party or by which the property or business of the Company or the Steamboat Facilities is or may be bound or affected and (i) which is referred to in the Pro spectus, or (ii) is material to the business of Lehi, Plymouth, NRG or the Company as it will exist after the acquisition by the Company of a 81.5% equity interest in NRG and of a 95% equity interest in Steamboat Envirosystems, L.C., a Utah limited liability company ("Steamboat L.L.C."), and the acquisition by Steamboat L.L.C. of the Steamboat Facilities (collectively, the "Acquisition Transactions") has been duly and validly executed, is in full force and effect in all material respects and is enforceable against the parties thereto in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and that the remedy of specific performance and injunctive relief and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. None of such contracts or instruments has been assigned by the Company, Lehi, Plymouth or Steamboat L.L.C., and none of the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. or, to the best of the Company's knowledge, any other party is in default thereunder and, to the best of the Company's knowledge, no event has occurred which, with the lapse of time or the giving of notice, or both, would constitute a default thereunder. None of the material provisions of such contracts or instruments violates or will result in a violation of any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court having jurisdiction over the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. or any of their respective assets or businesses, including, without limitation, those relating to environmental laws and regulations. 2.3.3 Prior Securities Transactions. No securities of the Company ----------------------------- have been sold by the Company within the three years prior to the date hereof, except as disclosed in the Registration Statement. 2.4 Changes After Dates in Registration Statement. --------------------------------------------- 2.4.1 No Material Adverse Change. Since the respective dates as of -------------------------- which information is given in the Registration Statement and the Prospectus, except as otherwise specifically stated therein, (i) there has been no material adverse change in the condition, financial or otherwise, or in the results of operations, business or business prospects of the Company, Lehi, Plymouth, NRG and Steamboat L.L.C., as they will exist after the Acquisition Transactions, including, but not limited to, a material loss or interference with its business from fire, storm, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, whether or not arising in the ordinary course of business, and (ii) there have been no transactions entered into by the Company, Lehi, Plymouth, NRG or Steamboat L.L.C., other than those in the ordinary course of business, which are material with respect to the condition, financial or otherwise, or to the results of operations, business or 5 business prospects of the Company, Lehi, Plymouth, NRG and Steamboat L.L.C. as they will exist after the Acquisition Transactions. 2.4.2 Recent Securities Transactions, Etc. Subsequent to the ------------------------------------ respective dates as of which information is given in the Registration Statement and the Prospectus, and, except as may otherwise be indicated or contemplated herein or therein, the Company has not (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) declared or paid any dividend or made any other distribution on or in respect to its capital stock. 2.5 Independent Accountants. Richard A. Eisner & Company, LLP, Traveller ----------------------- Winn & Mower, PC, and Robison, Hill & Co., P.C. and Price Waterhouse LLP, whose reports are filed with the Commission as part of the Registration Statement, are or were independent accountants as required by the Act and the Regulations as of the dates of their respective reports. 2.6 Financial Statements. The financial statements, including the notes -------------------- thereto and supporting schedules included in the Registration Statement and Prospectus, fairly present the financial position and the results of operations of the Company, Lehi, Plymouth, Far West Capital Electric Energy Fund, L.P. ("Far West") and 1-A Enterprises ("1-A") at the dates and for the periods to which they apply; and such financial statements have been prepared in conformity with generally accepted accounting principles, consistently applied throughout the periods involved; and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein. The pro forma consolidated financial information set forth in the Registration Statement reflects all significant assumptions and adjustments relating to the business and operations of the Company, Lehi, Plymouth, NRG and Steamboat L.L.C. in connection with the Acquisition Transactions and the operations of the Steamboat Facilities as described in the Registration Statement. 2.7 Authorized Capital; Options; Etc. The Company had at the date or --------------------------------- dates indicated in the Prospectus duly authorized, issued and outstanding capitalization as set forth in the Registration Statement and the Prospectus. Based on the assumptions and adjustments stated in the Registration Statement and the Prospectus, the Company will have on the Closing Date the adjusted stock capitalization set forth therein. Except as set forth in the Registration Statement and the Prospectus, on the Effective Date and on the Closing Date there will be no options, warrants, or other rights to purchase or otherwise acquire any authorized but unissued shares of Common Stock of the Company, including any obligations to issue any shares pursuant to anti-dilution provisions, or any security convertible into shares of Common Stock of the Company, or any contracts or commitments to issue or sell shares of Common Stock or any such options, warrants, rights or convertible securities. 2.8 Valid Issuance of Securities; Etc. ---------------------------------- 2.8.1 Outstanding Securities. All issued and outstanding securities ---------------------- of the Company have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission with respect thereto and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights 6 granted by the Company. The outstanding options and warrants to purchase shares of Common Stock constitute the valid and binding obligations of the Company, enforceable in accordance with their terms, except (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (ii) as enforceability of any indemnification provision may be limited under federal and state securities laws, and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. The authorized Common Stock and outstanding options and warrants to purchase shares of Common Stock conform to all statements relating thereto contained in the Registration Statement and the Prospectus. The offers and sales by the Company of the outstanding Common Stock, options and warrants to purchase shares of Common Stock were at all relevant times either registered under the Act and registered or qualified under the applicable state securities or Blue Sky Laws or exempt from such registration or qualification requirements and the holders thereof have no rights of rescission with respect thereto. 2.8.2 Securities Sold Pursuant to this Agreement. The Securities ------------------------------------------ have been duly authorized and, when issued and paid for, will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; the Securities are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company; and all corporate action required to be taken for the authorization, issuance and sale of the Securities has been duly and validly taken. When issued, the Representative's Purchase Option, the Representative's Warrants and the Warrants will constitute valid and binding obligations of the Company to issue and sell, upon exercise thereof and payment therefor, the number and type of securities of the Company called for thereby and the Representative's Purchase Option, the Representative's Warrants and the Warrants will be enforceable against the Company in accordance with their respective terms, except (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (ii) as enforceability of any indemnification provision may be limited under federal and state securities laws, and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 2.9 Registration Rights of Third Parties. Except as set forth in the ------------------------------------ Prospectus, no holders of any securities of the Company or of any options, warrants or other rights of the Company exercisable for or convertible or exchangeable into securities of the Company have the right to require the Company to register any such securities under the Act or to include any such securities in a registration statement to be filed by the Company. 2.10 Validity and Binding Effect of Agreements. To the extent that each ----------------------------------------- thereof is a party thereto, this Agreement, the Warrant Agreement, the Representative's Purchase Option, the NRG Acquisition Agreement, the Steamboat Acquisition Agreement, the Conversion Agreement and the Preferred Stock Exchange Agreement (as each such agreement is hereinafter defined) have been duly and validly authorized by the Company or Steamboat L.L.C., as the case may be, and constitute, or when executed and delivered will constitute, the valid and binding agreements of the Company or Steamboat L.L.C., enforceable against the Company and Steamboat L.L.C. in accordance with their respective terms, except (i) as such enforceability may be limited by bank- 7 ruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (ii) as enforceability of any indemnification provision may be limited under federal and state securities laws, and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 2.11 No Conflicts, Etc. To the extent that each thereof is a party ------------------ thereto, the execution, delivery, and performance by the Company and Steamboat L.L.C. of this Agreement, the Warrant Agreement, the NRG Acquisition Agreement, the Steamboat Acquisition Agreement, the Conversion Agreement and the Preferred Stock Exchange Agreement, the consummation by the Company and Steamboat L.L.C. of the transactions herein and therein contemplated and the compliance by the Company and Steamboat L.L.C. with the terms hereof and thereof do not and will not, with or without the giving of notice or the lapse of time or both, (i) result in a breach of, or conflict with any of the terms and provisions of, or constitute a default under, or result in the creation, modification, termination or imposition of any lien, charge or encumbrance upon any property or assets of the Company or Steamboat L.L.C. pursuant to the terms of, any indenture, mortgage, deed of trust, note, loan or credit agreement or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company or Steamboat L.L.C. is a party or by which the Company or Steamboat L.L.C. may be bound or to which any of the property or assets of the Company or Steamboat L.L.C. is subject; (ii) result in any violation of the provisions of the Certificate of Incorporation or the By-Laws of the Company or Steamboat L.L.C.; (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or Steamboat L.L.C. or any of their properties or business; or (iv) have a material adverse effect on any permit, license, certificate, registration, approval, consent, license or franchise concerning the Company or Steamboat L.L.C. 2.12 No Defaults; Violations. Except as described in the Prospectus, no ----------------------- default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. is a party or by which any of them may be bound or to which any of their properties or assets is subject. None of the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. is in violation of any term or provision of its Certificate of Incorporation or By- Laws or Certificate of Formation or Operating Agreement or other similar document or instrument, as the case may be, or in violation of any material franchise, license, permit, applicable law, rule, regulation, judgment or decree of any governmental agency or court, domestic or foreign, having jurisdiction over any of them or any of their properties or business. 2.13 Corporate Power; Licenses; Consents. ----------------------------------- 2.13.1 Conduct of Business. Each of the Company, Lehi, Plymouth, NRG ------------------- and Steamboat L.L.C. has all requisite corporate or limited liability company power and authority, and has all necessary material authorizations, approvals, orders, licenses, certificates and permits of and from all governmental regulatory officials and bodies, to own or lease its properties and 8 conduct its business as described in the Prospectus, and each of the Company, Lehi, Plymouth, NRG and Steamboat L.L.C. is and has been doing business in compliance with all such material authorizations, approvals, orders, licenses, certificates and permits and all federal, state and local rules and regulations. The disclosures in the Registration Statement concerning the effects of federal, state and local regulation on the business of each of the Company, Lehi, Plymouth, NRG and Steamboat L.L.C. as currently contemplated are correct in all material respects and do not omit to state a material fact. 2.13.2 Transactions Contemplated Herein. The Company has all -------------------------------- corporate power and authority to enter into this Agreement and to carry out the provisions and conditions hereof, and all consents, authorizations, approvals and orders required in connection therewith have been obtained. No consent, authorization or order of, and no filing with, any court, government agency or other body is required for the valid issuance, sale and delivery, of the Securities pursuant to this Agreement, the Warrant Agreement and the Representative's Purchase Option, and as contemplated by the Prospectus, except with respect to applicable federal and state securities laws. Each of the Company and Steamboat L.L.C. has all corporate power and authority to enter into those of the Acquisition Agreement, the Conversion Agreement and the Preferred Stock Exchange Agreement to which it is a party and to carry out the provisions and conditions thereof and all consents, authorizations, approvals and orders required in connection therewith have been obtained. 2.14 Title to Property; Insurance. Each of the Company, Steamboat ---------------------------- L.L.C., Lehi, NRG and Plymouth has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property (tangible and intangible) owned or leased by it, free and clear of all liens, encumbrances, claims, security interests, defects and restrictions of any material nature whatsoever, other than those referred to in the Prospectus and liens for taxes not yet due and payable or arising by law. The properties in which each of the Company, Steamboat L.L.C., Lehi, NRG and Plymouth has an interest are adequately insured against loss or damage by fire or other casualty. The Company, Steamboat L.L.C., Lehi, NRG and Plymouth each maintains, in adequate amounts, such other insurance as is usually maintained by companies engaged in the same or similar business. 2.15 Litigation; Governmental Proceedings. Except as set forth in the ------------------------------------ Prospectus, there is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding pending or, to the best of the Company's knowledge, threatened against, or involving the properties or business of, the Company, Steamboat L.L.C., Lehi, NRG or Plymouth which might materially and adversely affect the financial position, prospects, value or the operation or the properties or the business of the Company, Steamboat L.L.C., Lehi, NRG or Plymouth, or which questions the validity of the capital stock or membership interests of the Company, Steamboat L.L.C., Lehi, NRG or Plymouth or this Agreement or the Steamboat Acquisition Agreement or any action taken or to be taken by the Company or Steamboat L.L.C. pursuant to, or in connection with, this Agreement, the NRG Acquisition Agreement or the Steamboat Acquisition Agreement. There are no outstanding orders, judgments or decrees of any court, governmental agency or other tribunal, domestic or foreign, naming the Company, Steamboat L.L.C., Lehi, NRG or Plymouth and enjoining the Company, Steamboat L.L.C., Lehi, NRG or Plymouth from taking, or requiring the Company, Steamboat L.L.C., Lehi, NRG or Plymouth to take, any action, or to which the Company, 9 Steamboat L.L.C., Lehi, NRG or Plymouth or their respective properties or business is bound or subject. 2.16 Good Standing. ------------- (a) The Company has been duly organized and is validly existing as a corporation and is in good standing under the laws of the state of its incorporation and is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which ownership or leasing of any properties or the character of its operations requires such qualification or licensing, except where the failure to qualify would not have a material adverse effect on it or its properties or business. (b) Each of Steamboat L.L.C., Lehi, NRG and Plymouth has been duly organized and is validly existing as a limited liability company or limited partnership and is in good standing under the laws of the state of its formation and is duly qualified and licensed and in good standing as a foreign limited liability company or limited partnership in each jurisdiction in which ownership or leasing of any properties or the character of its operations requires such qualification or licensing, except where the failure to qualify would not have a material adverse effect on it or its properties or business. 2.17 Taxes. Each of the Company, Steamboat L.L.C., Lehi, ----- NRG and Plymouth has filed all returns (as hereinafter defined) required to be filed with taxing authorities prior to the date hereof or has duly obtained extensions of time for the filing thereof. Each of the Company, Steamboat L.L.C., Lehi, NRG and Plymouth has paid all taxes (as hereinafter defined) shown as due on such returns that were filed and has paid all taxes imposed on or assessed against it. The provisions for taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. Except as disclosed in writing to the Representative, (i) no issues have been raised (and are currently pending) by any taxing authority in connection with any of the returns or taxes asserted as due from the Company or Steamboat L.L.C., Lehi, NRG or Plymouth, and (ii) no waivers of statutes of limitation with respect to the returns or collection of taxes have been given by or requested from the Company, Steamboat L.L.C., Lehi, NRG and Plymouth. The term "taxes" mean all federal, state, local, foreign, and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments, or charges of any kind whatever, together with any interest and any penalties, additions to tax, or additional amounts with respect thereto. The term "returns" means all returns, declarations, reports, statements, and other documents required to be filed in respect to taxes. 2.18 Employee Options. No shares of Common Stock are eligible for sale ---------------- pursuant to Rule 701 promulgated under the Act in the 12 month period following the Effective Date. 2.19 Transactions Affecting Disclosure to NASD. ----------------------------------------- 10 2.19.1 Finder's Fees. Except as described in the Prospectus, there ------------- are no claims, payments, issuances, arrangements or understandings for services in the nature of a finder's, consulting or origination fee with respect to the introduction of the Company to the Representa tive or the sale of the Securities hereunder or any other arrangements, agreements, understand ings, payments or issuance with respect to the Company that may affect the Representative's compensation, as determined by the National Association of Securities Dealers, Inc. ("NASD"). 2.19.2 Payments Within Twelve Months. The Company has not made any ------------------------------ direct or indirect payments (in cash, securities or otherwise) to (i) any person, as a finder's fee, investing fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who provided capital to the Company, (ii) to any NASD member, (iii) to any person or entity that has any direct or indirect affiliation or association with any NASD member within the twelve month period prior to the date on which the Registration Statement was filed with the Commission ("Filing Date") or thereafter, other than payments to (iv) the Representative, (v) Theodore Rosen, Chairman of the Board of the Company, and (vi) Wharton Capital Corp. in the amount of $12,500. 2.19.3 Use of Proceeds. None of the net proceeds of the offering --------------- will be paid by the Company to any NASD member or any affiliate or associate of any NASD member, except as specifically authorized herein. 2.19.4 Insiders' NASD Affiliation. Other than Theodore Rosen (a) no -------------------------- officer, director or five percent or greater stockholder of the Company has any direct or indirect affiliation or association with any NASD member, and (b) no beneficial owner of the Company's unregistered securities issued within the 12 month period prior to the Filing Date or thereafter has any direct or indirect affiliation or association with any NASD member. The Company will advise the Representative and the NASD if any other five percent or greater stockholder becomes, directly or indirectly, an affiliate or associated person of an NASD member participating in the distribution. 2.20 Foreign Corrupt Practices Act. Neither the Company nor any of its ----------------------------- officers, directors, employees or agents or any other person acting on its behalf has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) which (i) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (ii) if not given in the past, might have had a materially adverse effect on the assets, business or operations of the Company as reflected in any of the financial statements contained in the Prospectus or (iii) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company. The internal accounting controls and procedures of the Company are sufficient to cause the Company to comply with the Foreign Corrupt Practices Act of 1977, as amended. 11 2.21 Nasdaq Eligibility. As of the Effective Date, the Securities have ------------------ been approved for quotation upon notice of issuance on the Nasdaq SmallCap Market. 2.22 Intangibles. Each of the Company, Steamboat L.L.C., Lehi, NRG and ----------- Plymouth owns or possesses the requisite licenses or rights to use all trademarks, service marks, service names, trade names, patents and patent applications, copyrights and other rights (collectively, "Intangibles") described as being licensed to or owned by it in the Registration Statement. The Intangibles which have been registered in the United States Patent and Trademark Office have been fully maintained and are in full force and effect. There is no claim or action by any person pertaining to, or proceeding pending or threatened and none of the Company, Steamboat L.L.C., Lehi, NRG or Plymouth has received any notice of conflict with the asserted rights of others which challenges the exclusive right of such company with respect to any Intangibles used in the conduct of its business except as described in the Prospectus. The Intangibles and the current products, services and processes of each of the Company, Steamboat L.L.C., Lehi, NRG and Plymouth do not infringe on any Intangibles held by any third party. To the best of the Company's knowledge, no others have infringed upon the Intangibles of the Company, Steamboat L.L.C., Lehi, NRG or Plymouth. 2.23 Relations With Employees. ------------------------ 2.23.1 Employee Matters. Each of the Company, Steamboat L.L.C., ---------------- Lehi, NRG and Plymouth has generally enjoyed a satisfactory employer-employee relationship with its employees and is in compliance in all material respects with all federal, state and local laws and regulations respecting the employment of its employees and employment practices, terms and conditions of employment and wages and hours relating thereto. To the best of the Company's knowledge, there are no pending investigations involving the Company, Steamboat L.L.C., Lehi, NRG or Plymouth by the U.S. Department of Labor or any other governmental agency, responsible for the enforcement of such federal, state and local laws and regulations. There is no unfair labor practice charge or complaint against the Company, Steamboat L.L.C., Lehi, NRG or Plymouth pending before the National Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending or threatened against or involving the Company, Steamboat L.L.C., Lehi, NRG or Plymouth or any predecessor entity, and none has ever occurred. No question concerning representation exists respecting the employees of the Company, Steamboat L.L.C., Lehi, NRG or Plymouth and no collective bargaining agreement or modification thereof is currently being negotiated by the Company, Steamboat L.L.C., Lehi, NRG or Plymouth. No grievance or arbitration proceeding is pending under any expired or existing collective bargaining agreements of the Company, Steamboat L.L.C., Lehi, NRG or Plymouth, if any. 2.23.2 Employee Benefit Plans. Other than as set forth in the ---------------------- Registration Statement, neither the Company, Steamboat L.L.C., Lehi, NRG or Plymouth maintains, sponsors nor contributes to, nor is it required to contribute to, any program or arrangement that is an "employee pension benefit plan," an "employee welfare benefit plan," or a, "multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company and Steamboat L.L.C., Plymouth, NRG and Lehi do not maintain or contribute to, and have at no time maintained or contributed to, a defined benefit plan, as defined in Section 3(35) of ERISA. If 12 the Company, Steamboat L.L.C., Lehi, NRG and Plymouth do maintain or contribute to a defined benefit plan, any termination of the plan on the date hereof would not give rise to liability under Title IV of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), which could subject the Company, Steamboat L.L.C., Lehi or Plymouth to any tax penalty for prohibited transactions and which has not adequately been corrected. Each ERISA Plan is in compliance with all material reporting, disclosure and other requirements of the Code and ERISA as they relate to any such ERISA Plan. Determination letters have been received from the Internal Revenue Service with respect to each ERISA Plan which is intended to comply with Code Section 401(a), stating that such ERISA Plan and the attendant trust are qualified thereunder. None of the Company, Steamboat L.L.C., Lehi and Plymouth has ever completely or partially withdrawn from a "multi-employer plan." 2.24 Officers' Certificate. Any certificate signed by any duly --------------------- authorized officer of the Company or Steamboat L.L.C., Lehi, NRG or Plymouth and delivered to you or to your counsel shall be deemed a representation and warranty by the Company to the Representative as to the matters covered thereby. 2.25 Warrant Agreement. The Company has entered into a warrant agreement ----------------- with respect to the Warrants and the Representative's Warrants substantially in the form filed as an exhibit to the Registration Statement ("Warrant Agreement") with American Stock Transfer & Trust Company, in form and substance satisfactory to the Representative, providing for among other things (i) no redemption of the Warrants without the consent of the Representative and (ii) the payment of a warrant solicitation fee as contemplated by Section 3.10 hereof. 2.26 Lock-Up Agreements. The Company has caused to be duly executed ------------------ legally binding and enforceable agreements pursuant to which all of the officers and directors of the Company (including their family members and affiliates) and the persons listed on Schedule 2 (collectively, "Insiders") agree not to sell any shares of Common Stock owned by them (either pursuant to Rule 144 of the Regulations or otherwise) for a period of thirteen months following the Effective Date other than as set forth therein except with the consent of the Representative and, if applicable, a state securities commission. 2.27 Subsidiaries. The representations and warranties made by the ------------ Company in this Agreement shall, in the event that the Company has one or more subsidiaries (a "subsid iary(ies)"), also apply and be true with respect to each subsidiary as if each representation and warranty contained herein made specific reference to the subsidiary each time the term "Company" was used. 2.28 Certain Definitions. As used herein: ------------------- (i) the term "Conversion Agreement" means the [TO FOLLOW]; (ii) the term "NRG Acquisition Agreement" means that certain [TO FOLLOW]; 13 (iii) the term "Preferred Stock Exchange Agreement" means the [TO FOLLOW]; (iv) the term "Steamboat Acquisition Agreement" means the [TO FOLLOW]; and (v) the term "Steamboat Facilities" means the [TO FOLLOW]. 2.29 Conditions to Obligations Under Other Agreements. As of the ------------------------------------------------ Effective Date, the obligations of the Company and Steamboat L.L.C. which are conditions to the consummation of the transactions contemplated by the NRC Acquisition Agreement and the Steamboat Acquisition Agreement, the Conversion Agreement and the Preferred Stock Exchange Agreement have been fulfilled by the Company other than the closing of the offering contemplated by the Registration Statement and those conditions which cannot be satisfied until the closing of such offering. 3. Covenants of the Company. The Company covenants and agrees as follows: ------------------------ 3.1 Amendments to Registration Statement. The Company will deliver to ------------------------------------ the Representative, prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be filed after the Effective Date and not file any such amendment or supplement to which the Representative shall reasonably object. 3.2 Federal Securities Laws. ----------------------- 3.2.1 Compliance. During the time when a Prospectus is required to ---------- be delivered under the Act, the Company will use all reasonable efforts to comply with all require ments imposed upon it by the Act, the Regulations and the Exchange Act and by the regulations under the Exchange Act, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Public Securities in accordance with the provisions hereof and the Prospectus. If at any time when a Prospectus relating to the Securities is required to be delivered under the Act, any event shall have occurred as a result of which, in the opinion of counsel for the Company or counsel for the Underwriters, the Prospectus, as then amended or supplemented, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will notify the Representative promptly and prepare and file with the Commission, subject to Section 3.1 hereof, an appropriate amendment or supplement in accordance with Section 10 of the Act. 3.2.2 Filing of Final Prospectus. The Company will file the -------------------------- Prospectus (in form and substance satisfactory to the Representative) with the Commission pursuant to the requirements of Rule 424 of the Regulations. 3.2.3 Exchange Act Registration. For a period of five years from the ------------------------- Effective Date, the Company will use its best efforts to maintain the registration of the Common Stock and the Warrants under the provisions of Section 12 of the Exchange Act. 14 3.3 Blue Sky Filing. The Company will endeavor in good faith, in --------------- cooperation with the Representative, at or prior to the time the Registration Statement becomes effective to qualify the Public Securities for offering and sale under the securities laws of such jurisdictions as the Representative may reasonably designate, provided that no such qualification shall be required in any jurisdiction where, as a result thereof, the Company would be subject to service of general process or to taxation as a foreign corporation doing business in such jurisdiction. In each jurisdiction where such qualification shall be effected, the Company will, unless the Representa tive agrees that such action is not at the time necessary or advisable, use all reasonable efforts to file and make such statements or reports at such times as are or may be required by the laws of such jurisdiction. 3.4 Delivery to Underwriters of Prospectuses. The Company will deliver ---------------------------------------- to the several Underwriters, without charge, from time to time during the period when the Prospectus is required to be delivered under the Act or the Exchange Act such number of copies of each Preliminary Prospectus and the Prospectus as such Underwriters may reasonably request and, as soon as the Registration Statement or any amendment or supplement thereto becomes effective, deliver to you two original executed Registration Statements, including exhibits, and all post-effective amendments thereto and copies of all exhibits filed therewith or incorporated therein by reference and all original executed consents of certified experts. 3.5 Events Requiring Notice to the Representative. The Company will --------------------------------------------- notify the Representative immediately and confirm the notice in writing (i) of the effectiveness of the Registration Statement and any amendment thereto, (ii) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceeding for that purpose, (iii) of the issuance by any state securities commission of any proceedings for the suspension of the qualification of the Public Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose, (iv) of the mailing and delivery to the Commission for filing of any amendment or supplement to the Registration Statement or Prospectus, (v) of the receipt of any comments or request for any additional information from the Commission, and (vi) of the happening of any event during the period described in Section 3.4 hereof which, in the judgment of the Company, makes any statement of a material fact made in the Registration Statement or the Prospectus untrue or which requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Commission or any state securities commission shall enter a stop order or suspend such qualification at any time, the Company will make every reasonable effort to obtain promptly the lifting of such order. 3.6 Review of Financial Statements. For a period of five years from the ------------------------------ Effective Date, the Company, at its expense, shall cause its regularly engaged independent accountants to read (but not audit) the Company's financial statements for each of the first three fiscal quarters prior to the announcement of quarterly financial information, the filing of the Company's Form 10-Q quarterly reports and the mailing of quarterly financial information to stockholders. 3.7 Unaudited Financials. The Company will furnish to the Representative -------------------- as early as practicable subsequent to the date hereof, but at least three full business days prior to the Closing Date, a copy of the latest available unaudited interim financial statements ("Unaudited Financials") 15 of the Company (which shall be as of a month-end date no more than thirty days prior to the Effective Date) which have been read by the Company's independent accountants, as stated in their letter to be furnished pursuant to Section 4.3 hereof. 3.8 Secondary Market Trading and Standard & Poor's. The Company will ---------------------------------------------- take all necessary and appropriate actions to achieve accelerated publication in Standard and Poor's Corporation Records Corporate Descriptions (within thirty (30) days after the Effective Date) and to maintain such publication with updated quarterly information for a period of five years from the Effective Date, including the payment of any necessary fees and expenses. The Company shall take such action as may be reasonably requested by the Representative to obtain a secondary market trading exemption in such states as may be requested by the Representative, including the payment of any necessary fees and expenses and the filing of a Form (e.g., 25101(b)) for secondary market trading in the ---- State of California on the Effective Date or as soon thereafter as is permissible. 3.9 Nasdaq Maintenance. For a period of five years from the date hereof, ------------------ the Company will use its best efforts to maintain the quotation of the Common Stock and Warrants by Nasdaq SmallCap Market and, if the Company satisfies the inclusion standards of the Nasdaq National Market System, to apply for and maintain quotations by the Nasdaq National Market System of such securities during such period. 3.10 Warrant Solicitation and Warrant Solicitation Fees. The Company -------------------------------------------------- hereby engages the Representative, on a non-exclusive basis, as its agent for the solicitation of the exercise of the Warrants. The Company, at its cost, will (i) assist the Representative with respect to such solicitation, if requested by the Representative and will (ii) provide the Representative, and direct the Company's transfer and warrant agent to provide to the Representative, lists of the record and, to the extent known, beneficial owners of the Company's Warrants. Commencing one year from the Effective Date, the Company will pay the Representative a commission of five percent of the Warrant exercise price for each Warrant exercised, payable on the date of such exercise, on the terms provided for in the Warrant Agreement, if allowed under the rules and regulations of the NASD and only if the Representative has provided bona fide services to the Company in connection with the exercise of such Warrants and has received written confirmation from the holder that the Representative has solicited such exercise. In addition to soliciting, either orally or in writing, the exercise of Warrants, such services may also include disseminating information, either orally or in writing, to Warrantholders about the Company or the market for the Company's securities, and assisting in the processing of the exercise of the Warrants. The Representative may engage sub-agents who are members of the NASD in its solicitation efforts. The Company will disclose the arrangement to pay such solicitation fees to the Representative in any prospectus used by the Company in connection with the registration of the shares of Common Stock underlying the Warrants. 16 3.11 Registration of Common Stock. The Company agrees that prior to the ---------------------------- date that the Warrants become exercisable, it shall file with the Commission a post-effective amendment to the Registration Statement, if possible, or a new registration statement, for the registration, under the Act, of the Common Stock issuable upon exercise of the Warrants. In either case, the Company shall cause the same to become effective at or prior to the date that the Warrants become 17 exercisable, and to maintain the effectiveness of such registration statement and keep current a prospectus thereunder until the expiration of the Warrants in accordance with the provisions of the Warrant Agreement. 3.12 Reports to the Representative. ----------------------------- 3.12.1 Periodic Reports, Etc. For a period of five years from the ---------------------- Effective Date, the Company will promptly furnish to the Representative, and to each other Underwriter who may so request, copies of such financial statements and other periodic and special reports as the Company from time to time files with any governmental authority or furnishes generally to holders of any class of its securities, and promptly furnish to the Representative (i) a copy of each periodic report the Company shall be required to file with the Commission, (ii) a copy of every press release and every news item and article with respect to the Company or its affairs which was released by the Company, (iii) copies of each Form SR, (iv) a copy of each Form 8-K or Schedules 13D, 13G, 14D-1 or 13E-4 received or prepared by the Company, (v) a copy of monthly statements setting forth such information regarding the Company's results of operations and financial position (including balance sheet, profit and loss statements and data regarding operations) as is regularly prepared by management of the Company, and (vi) such additional documents and information with respect to the Company and the affairs of any future subsidiaries of the Company as the Representative may from time to time reasonably request. 3.12.2 Transfer Sheets and Weekly Position Listings. For a period of -------------------------------------------- five years from the Closing Date, the Company will furnish to the Representative at the Company's sole expense such transfer sheets and position listings of the Company's securities as the Representative may request, including the daily, weekly and monthly consolidated transfer sheets of the transfer agent of the Company and the weekly security position listings of the Depository Trust Company. 3.12.3 Secondary Market Trading Memorandum. Until such time as the ----------------------------------- Public Securities are listed or quoted, as the case may be, on the New York Stock Exchange, the American Stock Exchange or Nasdaq Smallcap Market, the Company shall cause the Representative's legal counsel to deliver to the Representative at the times set forth below a written memorandum detailing those states in which Public Securities may be traded in non-issuer transactions under the Blue Sky laws of the fifty states ("Secondary Market Trading Memorandum"). The Secondary Market Trading Memorandum shall be delivered to the Representative on the Effective Date and on the first day of every calendar quarter thereafter. The Company shall pay to Representative's legal counsel a one-time fee of $5,000 for such services at the Closing. 3.13 Agreements between the Representative and the Company. ----------------------------------------------------- 3.13.1 [Intentionally Omitted.] ------------------------ 3.13.2 [Intentionally Omitted.] ------------------------ 18 3.13.3 Representative's Purchase Option. On the Closing Date, the -------------------------------- Company will execute and deliver to the Representative the Representative's Purchase Option substantially in the form filed as an exhibit to the Registration Statement. 3.14 Disqualification of Form S-1 (or other appropriate form). For a -------------------------------------------------------- period equal to seven years from the date hereof, the Company will not take any action or actions which may prevent or disqualify the Company's use of Form S-1 (or other appropriate form) for the registration of the Warrants and the Representative's Warrants and the securities issuable upon exercise of those securities under the Act. 3.15 Payment of Expenses. ------------------- 3.15.1 General Expenses. The Company hereby agrees to pay on the ---------------- Closing Date and, to the extent not paid on the Closing Date, on the option Closing Date, if any, all expenses incident to the performance of the obligations of the Company under this Agreement, including but not limited to (i) the preparation, printing, filing, delivery and mailing (including the payment of postage with respect to such mailing) of the Registration Statement, the Prospectus and the Preliminary Prospectuses and the printing and mailing of this Agreement and related documents, including the cost of all copies thereof and any amendments thereof or supplements thereto supplied to the Underwriters in quantities as may be required by the Underwriters, (ii) the printing, engraving, issuance and delivery of the shares of Common Stock and the Warrants and the Representative's Purchase Option, including any transfer or other taxes payable thereon, (iii) the qualification of the Public Securities under state or foreign securities or Blue Sky laws, including the filing fees under such Blue Sky laws, the costs of printing and mailing the "Preliminary Blue Sky Memorandum," and all amendments and supplements thereto, fees up to an aggregate of $35,000 and disbursements of Underwriters' counsel and a one time fee of $5,000 payable to the Underwriters' counsel for the preparation of the Secondary Market Trading Memorandum, (iv) filing fees, costs and expenses (including fees and disbursements of Underwriters' counsel, which fees shall not exceed $5,000) incurred in registering the offering with the NASD, (v) costs of placing "tombstone" advertisements in The Wall Street Journal, (vi) fees and ----------------------- disbursements of the transfer and warrant agent, (vii) the preparation, binding and delivery of transaction "bibles" and transaction lucite cubes or similar commemorative items in a form, style and quantity as requested by the Representative, (viii) any listing of the Public Securities on Nasdaq SmallCap or National Market, as the case may be, and any securities exchange, and any listing in Standard & Poor's, (ix) the Company's expenses associated with "due diligence" meetings arranged by the Underwriter, and (x) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section 3.15.1. Since an important part of the public offering process is for the Company to appropriately and accurately describe both the background of the principals of the Company and the Company's competitive position in its industry, the Company has engaged and will pay for an investigative search firm of the Representative's choice to conduct an investigation of principals of the Company mutually selected by the Representative and the Company. If the Company's representative have not submitted to a bindery acceptable to the Representative all of the closing and other documents material to the transactions contemplated hereby within 30 days of the Effective Date, the Company shall pay the fees and costs of the Representative's agents to prepare the transactional bibles and have them bound. The Representative may deduct from the net proceeds of the offering payable to the Company on the 19 Closing Date, or the Option Closing Date, if any, the expenses set forth herein to be paid by the Company to the Representative and/or to third parties. 3.15.2 Non-Accountable Expenses. The Company further agrees that, in ------------------------ addition to the expenses payable pursuant to Section 3.15.1, it will pay to the Representative a non-accountable expense allowance equal to three percent (3%) of the gross proceeds received by the Company from the sale of the Public Securities, of which $50,000 has been paid to date, and the Company will pay the balance on the Closing Date and any additional monies owed attributable to the Option Securities or otherwise on the Option Closing Date by certified or bank cashier's check or, at the election of the Representative, by deduction from the proceeds of the offering contemplated herein. If the offering contemplated by this Agreement is not consum mated for any reason whatsoever then the following provisions shall apply: The Company's liability for payment to the Representative of the non-accountable expense allowance shall be equal to the sum of the Representative's actual out-of-pocket expenses (including, but not limited to, counsel fees, "road-show" and due diligence expenses). The Representative shall retain such part of the non-accountable expense allowance previously paid as shall equal such actual out-of-pocket expenses. If the amount previously paid is insufficient to cover such actual out-of-pocket expenses, the Company shall remain liable for and promptly pay any other actual out-of-pocket expenses. If the amount previously paid exceeds the amount of the actual out-of-pocket expenses, the Representative shall promptly remit to the Company any such excess. Upon request, the Representative shall furnish the Company with copies of receipts or other evidence of payment of its actual out- of-pocket expenses. 3.16 Application of Net Proceeds. The Company will apply the net --------------------------- proceeds from the offering received by it in a manner consistent with the application described under the caption "Use Of Proceeds" in the Prospectus. The Company hereby agrees that, without the express prior consent of the Representative, except as so described, the Company will not apply any net proceeds from the offering to pay (i) any debt for borrowed funds or (ii) any debt or obligation owed to any Insider. 3.17 Delivery of Earnings Statements to Security Holders. The Company --------------------------------------------------- will make generally available to its security holders as soon as practicable, but not later than the first day of the fifteenth full calendar month following the Effective Date, an earnings statement (which need not be certified by independent accountants unless required by the Act or the Regulations, but which shall satisfy the provisions of Rule 158(a) under Section 11(a) of the Act) covering a period of at least twelve consecutive months beginning after the Effective Date. 3.18 Key Person Life Insurance. The Company will maintain, for a period ------------------------- of not less than one year from the Effective Date, key person life insurance in an amount no less than $1,000,000 on the life of Richard A. Nelson and pay the annual premiums therefor and name the Company as the sole beneficiary thereof. 3.19 Stabilization. Neither the Company, nor, to its knowledge, any of ------------- its employees, directors or stockholders has taken or will take, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result in, under the 20 Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Public Securities. 3.20 Internal Controls. The Company maintains and will continue to ----------------- maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization, (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 3.21 Accountants and Lawyers. For a period of five years from the ----------------------- Effective Date, the Company shall retain independent accountants and securities lawyers acceptable to the Representative. Richard A. Eisner & Co., LLP, and Reid & Priest, LLP, are acceptable to the Representative. 3.22 Transfer Agent. For a period of five years from the Effective Date, -------------- the Company shall retain a transfer agent for the Common Stock and Warrants acceptable to the Representa tive. American Stock Transfer & Trust Company is acceptable to the Representative. 3.23 Sale of Securities. Except in accordance with the agreements ------------------ referred to in Section 2.26, the Company agrees not to permit or cause a private or public sale or private or public offering of any of its securities (in any manner, including pursuant to Rule 144 under the Act) owned nominally or beneficially by the Insiders for a period of thirteen months following the Effective Date without obtaining the prior written consent of the Representative. 3.24 Other Transactions. The Company will take such action as is ------------------ necessary to consummate the Acquisition Transactions and the transactions contemplated by the Conversion Agreement and the Preferred Stock Exchange Agreement concurrently with the consummation of the transactions contemplated by this Agreement. 3.25 Secondary Offering. With respect to the secondary offering of ------------------ securities of the Company by Anchor Capital Company LLC ("Anchor") which has been registered under the Registration Statement, the Company shall: (a) submit to the Corporate Financing of the NASD (the "Department") at the same time they are filed with the Commission all post- effective amendments to the Registration Statement or supplements to the Prospectus disclosing actual price and selling terms; (b) submit to the Department at the same time they are filed with the Commission all post-effective amendments or prospectus supplements disclosing actual price and selling terms; 21 (c) advise the Department if any 5% or greater shareholder of the Company is or becomes an affiliate or associated person of an NASD member participating in the distribution; (d) if a portion of the securities offered by Anchor are underwritten, prior to the commencement of the distribution (i) submit to the Department for review copies of all underwriting documents proposed for use and (ii) submit to the Department for approval the maximum compensation to be paid to the underwriter(s); and (e) prior to any distribution or other disposition of the securities registered for the secondary offering, furnish, or cause the selling securityholders to furnish, all information required by Department if a member of the NASD is involved in such distribution or other disposition, whether for its own account or as a broker, dealer or underwriter, including but not limited to information concerning the maximum compensation to be received by any NASD member. 4. Conditions of Underwriters' Obligations. The obligations of the several --------------------------------------- Underwriters to purchase and pay for the Securities, as provided herein, shall be subject to the continuing accuracy of the representations and warranties of the Company as of the date hereof and as of each of the Closing Date and the Option Closing Date, if any, to the accuracy of the statements of officers of the Company made pursuant to the provisions hereof and to the performance by the Company of its obligations hereunder and to the following conditions: 4.1 Regulatory Matters. ------------------ 4.1.1 Effectiveness of Registration Statement. The Registration --------------------------------------- Statement has been declared effective on the date of this Agreement and, at each of the Closing Date and the Option Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for the purpose shall have been instituted or shall be pending or contemplated by the Commission and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of Graubard Mollen & Miller, counsel to the Underwriters. 4.1.2 NASD Clearance. By the Effective Date, the Representative -------------- shall have received clearance from the NASD as to the amount of compensation allowable or payable to the Underwriters as described in the Registration Statement. 4.1.3 No Blue Sky Stop Orders. No order suspending the sale of the ----------------------- Securities in any jurisdiction designated by the Representative pursuant to Section 3.3 hereof shall have been issued on either on the Closing Date or the Option Closing Date, and no proceedings for that purpose shall have been instituted or shall be contemplated. 4.2 Company Counsel Matters. ----------------------- 4.2.1 (a) Effective Date Opinion of Counsel. On the Effective Date, --------------------------------- the Representative shall have received the favorable opinion of Reid & Priest, LLP, counsel to the 22 Company, dated the Effective Date, addressed to the Representative and in form and substance satisfactory to Graubard Mollen & Miller, counsel to the Underwriters, to the following effect, except that such opinion need not address any matters relating to Steamboat L.L.C. other than in the following clause (i): (i) (A) The Company has been duly organized and is validly existing as a corporation and is in good standing under the laws of its state of incorporation and is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which to such counsel's knowledge its ownership or leasing of any properties or the character of its operations requires such qualification or licensing, except where the failure to qualify would not have a material adverse effect on it or its properties or business. (B) Each of Steamboat L.L.C., NRG and Lehi has been duly organized and is validly existing as a limited liability company and is in good standing under the laws of its state of organization and is duly qualified and licensed and in good standing as a foreign limited liability company in each jurisdiction in which to such counsel's knowledge its ownership or leasing or any properties or the character of its operations requires such qualification or licensing, except where the failure to qualify would not have a material adverse effect on it or its properties or business. (C) Plymouth has been duly organized and is validly existing as a limited partnership and is in good standing under the laws of its state of organization and is duly qualified and licensed and in good standing as a foreign limited partnership in each jurisdiction in which to such counsel's knowledge its ownership or leasing or any properties or the character of its operations requires such qualification or licensing, except where the failure to qualify would not have a material adverse effect on it or its properties or business. (D) The Company, through its subsidiaries, is the record and, to such counsel's knowledge, beneficial owner of 50% of the equity interests of Lehi and Plymouth, of 81.5% of the equity interests of NRG and of 95% of the equity interests of Steamboat L.L.C. (ii) Except to the extent that the lack of such authorizations, approvals, orders, licenses, certificates and permits would not have a materially adverse effect on the Company or Steamboat L.L.C. or their respective activities, each of the Company, Lehi, Plymouth, NRG and Steamboat L.L.C. has all requisite power and authority, and has all necessary authorizations, approvals, orders, licenses, certificates and permits of and from all governmental or regulatory officials and bodies to own or lease its properties and conduct its business as described in the Prospectus, and such counsel has no actual knowledge that any of the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. is conducting its activities without material compliance with such approvals, orders, licenses, certificates and permits. Each of the Company and Steamboat L.L.C. has all power and authority to enter into those of this Agreement, the Warrant Agreement, the NRG Acquisition Agreement, the Steamboat Acquisition Agreement, the Conversion Agreement, the Preferred Stock Exchange Agreement and the Representative's Purchase Option to which it is a party and to carry out the provisions and conditions hereof and thereof, and all consents, authorizations, approvals and orders required in connection therewith 23 have been obtained. No consents, approvals, authorizations or orders of, and no filing with any court or governmental agency or body (other than such as may be required under the Act and applicable Blue Sky laws) are required as to the Company, Lehi, Plymouth, NRG and Steamboat L.L.C. for the valid authorization, issuance, sale and delivery of the Securities, and the consummation of the transactions and agreements contemplated by this Agreement, the Warrant Agreement, the NRG Acquisition Agreement, the Steamboat Acquisition Agreement, the Conversion Agreement, the Preferred Stock Exchange Agreement and the Representative's Purchase Option and as contemplated by the Prospectus or, if so required, all such authorizations, approvals, consents, orders, registrations, licenses and permits have been duly obtained and are in full force and effect and have been disclosed to the Representative. (iii) All issued and outstanding securities of the Company have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission with respect thereto and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or, to the best of such counsel's knowledge, similar contractual rights granted by the Company. The outstanding options and war rants to purchase shares of Common Stock constitute the valid and binding obligations of the Company, enforceable in accordance with their terms, except (a) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (b) as enforceability of any indemnification provision may be limited under the federal and state securities laws, and (c) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the direction of the court before which any proceeding therefor may be brought. The offers and sales by the Company of the outstanding Common Stock and options and warrants to purchase shares of Common Stock were at all relevant times either registered under the Act and the applicable state securities or Blue Sky Laws or exempt from such registration requirements. The authorized and outstanding capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus. (iv) The Securities have been duly authorized and, when issued and paid for, will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders. The Securities are not and will not be subject to the preemptive rights of any holders of any security of the Company or, to the best of such counsel's knowledge after due inquiry, similar contractual rights granted by the Company. All corporate action required to be taken for the authorization, issuance and sale of the Securities has been duly and validly taken. When issued, the Warrants, the Representative's Purchase Option and the Representative's Warrants will constitute valid and binding obligations of the Company to issue and sell, upon exercise thereof and payment therefor, the number and type of securities of the Company called for thereby and such Warrants, Representative's Purchase Option and Representative's Warrants, when issued, will be enforceable against the Company in accordance with their respective terms, except (a) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (b) as enforceability of any indemnification provision may be limited under the federal and state securities laws, and (c) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any 24 proceeding therefor may be brought. The certificates representing the Securities are in due and proper form. (v) To the best of such counsel's knowledge, after due inquiry, except as set forth in the Prospectus, no holders of any securities of the Company or of any options, warrants or securities of the Company exercisable for or convertible or exchangeable into securities of the Company have the right to require the Company to register any such securities of the Company under the Act or to include any such securities in a registration state ment to be filed by the Company. (vi) To the best of such counsel's knowledge, after due inquiry, the Units, the shares of Common Stock and the Warrants are eligible for quotation on the Nasdaq SmallCap Market. (vii) This Agreement, the Warrant Agreement, the NRG Acquisition Agreement, the Steamboat Acquisition Agreement, the Conversion Agreement, the Preferred Stock Exchange Agreement and the Representative's Purchase Option have each been duly and validly authorized by the Company and Steamboat L.L.C. to the extent it is a party thereto and, when executed and delivered by the Company and Steamboat L.L.C., to the extent it is a party thereto, will constitute valid and binding obligations of the Company and Steamboat L.L.C., as the case may be, enforceable against the Company and Steamboat L.L.C., to the extent it is a party thereto, in accordance with their respective terms, except (a) as such enforce ability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (b) as enforceability of any indemnification provisions may be limited under the federal and state securities laws, and (c) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (viii) The execution, delivery and performance by the Company and Steamboat L.L.C., to the extent it is a party thereto, of this Agreement, the Warrant Agreement, the NRG Acquisition Agreement, the Steamboat Acquisition Agreement, the Conversion Agreement, the Preferred Stock Exchange Agreement and the Representative's Purchase Option, the issuance and sale of the Securities by the Company, the consummation of the transactions contemplated hereby and thereby and the compliance by the Company and Steamboat L.L.C., to the extent any is a party thereto, with the terms and provisions hereof and thereof, do not and will not, with or without the giving of notice or the lapse of time, or both, (a) conflict with, or result in a breach of, any of the terms or provisions of, or constitute a default under, or result in the creation or modification of any lien, security interest, charge or encum brance upon any of the respective properties or assets of the Company or Steamboat L.L.C. pursuant to the terms of, any material mortgage, deed of trust, note, indenture, written loan, contract or other material agreement or instrument of which such counsel has knowledge and, to the best of such counsel's knowledge, to which the Company or Steamboat is a party or by which the Company or Steamboat or any of their respective properties or assets may be bound, (b) result in any violation of the provisions of the respective Certificates of Incorporation, By-Laws, Certificate of Formation or Operating Agreement of the Company or Steamboat L.L.C., (c) violate any statute or any judgment, order or decree of which such counsel has knowledge, rule or regulation applicable to the Company or Steamboat L.L.C. 25 of any court, domestic or foreign, or of any federal, state or other regulatory authority or other governmental body having jurisdiction over the Company or Steamboat L.L.C., their respective properties or assets, or (d) have a material adverse effect on any permit, certification, registration, approval, consent, license or franchise of the Company or Steamboat L.L.C. (ix) The Registration Statement, each Preliminary Prospectus and the Prospectus and any post-effective amendments or supplements thereto (other than the financial statements included therein, as to which no opinion need be rendered) comply as to form in all material respects with the requirements of the Act and Regulations. The Securities and all other securities issued or issuable by the Company conform in all respects to the description thereof contained in the Registration Statement and the Prospectus. The information in the Prospectus under "Business," "Management," "Certain Transactions," "Principal Stockholders," "Description of Securities" and "Shares Eligible for Future Sale" have been reviewed by such counsel, and insofar as it contains descriptions of law, descriptions of statutes, rules or regulations or legal conclusions such information is correct in all material respects. No statute or regulation or legal or governmental proceeding required to be described in the Prospectus is not described as required, nor are any contracts or documents of which such counsel has knowledge of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement not so described or filed as required. (x) Counsel has participated in conferences with officers and other representatives of the Company, representatives of the independent accountants for the Company and representatives of the Representative at which the contents of the Registration Statement, the Prospectus and related matters were discussed and although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus (except as otherwise set forth in counsel's opinion), no facts have come to the attention of such counsel which lead them to believe that neither the Registration Statement or the Prospectus nor any amendment or supplement thereto, as of the date of such opinion, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and schedules and other financial and statistical data included in the Registration Statement or Prospectus). (xi) The Registration Statement is effective under the Act, and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act or applicable state securities laws. (xii) [Intentionally omitted.] ---------------------- (xiii) Except as described in the Prospectus, to the best of such counsel's knowledge, no material default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other material agreement or instrument evidencing an 26 obligation for borrowed money, or any other material agreement or instrument to which the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. is a party or by which the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. may be bound or to which any of the respective properties or assets of the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. is subject. None of the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. is in material violation of any term or provision of its Certificate of Incorporation, By-Laws, Certificate of Formation, Operating Agreement or other similar document or of any franchise, license, permit, applicable law, rule, regulation, judgment or decree of any governmental agency or court, domestic or foreign, having jurisdiction over it or any of its properties or business, except as described in the Prospectus. (xiv) [Intentionally omitted.] ---------------------- (xv) To the best of such counsel's knowledge, after due inquiry, except as described in the Prospectus and except for subsidiaries whose operations are included in their respective consolidated financial statements included in the Prospectus, none of the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. owns an interest in any corporation, partnership, joint venture, trust or other business entity. (xvi) To the best of such counsel's knowledge, after due inquiry, except as set forth in the Prospectus, there is no action, suit or proceeding before or by any court of governmental agency or body, domestic or foreign, now pending, or threatened against the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. which might result in any material and adverse change in the condition (financial or otherwise), business or prospects of the Company, Lehi, Plymouth, NRG or Steamboat L.L.C., or might materially and adversely affect the properties or assets thereof. (xvii) the Company should not have any liability to Enviro Partners, L.P. ("Partners") if it refuses to sell its preferred stock to Partners or its warrants to Energy Management Corporation in accordance with the terms of the Convertible Preferred Stock Purchase Agreement dated May 3, 1996 between the Company and Partners if such refusal is based upon the inability of the Company to have its securities listed for quotation on the Nasdaq SmallCap Market if such sale were to occur. (xviii) To the best of such counsel's knowledge, after due inquiry, except as described in the Prospectus, there are no claims, payments, issuances, arrangements or understandings for services in the nature of a finder's or origination fee with respect to the sale of the Securities hereunder or financial consulting arrangements or any other arrangements, agreements, understandings, payments or issuances that may affect the Representative's compensation, as determined by the NASD. (b) Other Counsel's Opinion. On the Effective Date, the ----------------------- Representative shall have received the opinion of the counsel listed in Schedule 3 hereto ("Other Counsel") in form and substance satisfactory to Graubard Mollen & Miller, counsel to the Underwriters, relating to litigation, title to properties, permits and licenses and environmental and regulatory matters of that of the Company, Lehi, NRG, Plymouth and Steamboat L.L.C listed next to its name in Schedule 27 3 (such counsel's "Opinion Subject"). Such opinion shall include, among other things, statements to the effect that: (i) Other Counsel is not aware of any federal, state or local statute, rule or regulation relating to electricity production, operation, marketing or transportation matters or environmental matters which it considers to be material to the operations of its Opinion Subject in the states in which they operate other than those set forth in the Prospectus (collectively, the "Applicable Laws and Regulations"). (ii) To the best of Other Counsel's knowledge, after due inquiry, it is not aware of any state of facts which would lead it to believe that its Opinion Subject is not in substantial compliance with the Applicable Laws and Regulations. By "substantial compliance," Other Counsel means that, based on its experience as attorneys, it believes that any compliance exceptions of which it has knowledge are not of a level of significance, individually or collectively, to the various regulatory authorities which enforce the Applicable Laws and Regulations which would result in its Opinion Subject losing its ability to operate any of its properties (or to receive the benefits from those properties operated by others in which it has an interest) or in a fine or penalty that would significantly affect the financial condition of the Company. (iii) Other Counsel has examined and passed upon statements concerning the Applicable Laws and Regulations in the following sections of the Prospectus: the sections in "Risk Factors" entitled "Governmental Regulation" and "Environmental Risks" and the section in "Business" entitled "Government Regulation." Such sections, insofar as they refer to the Applicable Laws and Regulations, are accurate and complete and do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein, in light of the circumstances in which they were made, not misleading. (c) Unless the context clearly indicates otherwise, the term "Company" as used in this Section 4.2.1 shall include each subsidiary of the Company. The opinion of counsel for the Company and Other Counsel and any opinion relied upon by such counsel shall include a statement to the effect that it may be relied upon by counsel for the Representative in its opinion delivered to the Representative. 4.2.2 Closing Date and Option Closing Date Opinions of Counsel. On -------------------------------------------------------- each of the Closing Date and the Option Closing Date, if any, the Representative shall have received the favorable opinions of Company Counsel and Other Counsel, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Representative and in the forms and substance satisfactory to Graubard Mollen & Miller, counsel to the Underwriters, confirming as of the Closing Date and, if applicable, the Option Closing Date, the statements made by such counsel in their opinions delivered on the Effective Date and, in the case of the opinion of Company Counsel, referring to Steamboat L.L.C. as set forth in Section 4.2.1. 4.2.3 Reliance. In rendering such opinions, such counsel may rely -------- (i) as to matters involving the application of laws other than the laws of the jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon 28 an opinion or opinions (in form and substance reasonably satisfactory to the Underwriters' counsel) of other counsel reasonably acceptable to the Underwriters' counsel, familiar with the applicable laws, and (ii) as to matters of fact, to the extent they deem proper, on certificates or other written statements of officers of departments of various jurisdiction having custody of documents respecting the corporate existence or good standing of the Company, Lehi, Plymouth, NRG and Steamboat L.L.C., provided that copies of any such statements or certificates shall be delivered to the Underwriters' counsel if requested. Each such opinion of counsel shall include a statement to the effect that it may be relied upon by counsel for the Underwriters in its opinion delivered to the Representative. 4.2.4 Secondary Market Trading Memorandum. On the Effective Date, ----------------------------------- the Representative shall have received the Secondary Market Trading Memorandum. 4.3 Cold Comfort Letters. At the time this Agreement is executed and at -------------------- each of the Closing Date and the Option Closing Date, if any, you shall have received a letter, addressed to the Representative and in form and substance satisfactory in all respects (including the non-material nature of the changes or decreases, if any, referred to in clause (iii) below) to you and to Graubard Mollen & Miller, counsel for the Underwriters, the accounting firms specified in Schedule 4 hereto, dated, respectively, as of the date of this Agreement and as of the Closing Date and the Option Closing Date, if any: (i) confirming that they are independent accountants with respect to the Company, Lehi, Plymouth or Steamboat L.L.C., as the case may be (such firm's "Comfort Letter Subject"), within the meaning of the Act and the applicable Regulations; (ii) stating that in their opinion the financial statements of its Comfort Letter Subject included in the Registration Statement and Prospectus comply as to form in all material respects with the applicable accounting requirements of the Act and the published Regulations thereunder; (iii) stating that, based on the performance procedures specified by the American Institute of Certified Public Accountants ("AICPA") for a review of the latest available unaudited interim financial statements of its Comfort Letter Subject (as described in SAS No. 71 Interim Financial Information), with an indication of the date of the latest available unaudited interim financial statements, a reading of the latest available minutes of the stockholders and board of directors and the various committees of the board of directors, consultations with officers and other employees of its Comfort Letter Subject responsible for financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention which would lead them to believe that (a) the unaudited financial statements of its Comfort Letter Subject included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Regulations or any material modification should be made to the unaudited interim financial statements included in the Registration Statement for them to be in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements of its Comfort Letter Subject included in the Registration Statement, (b) at a date not later than five days prior to the Effective Date, Closing Date or Option Closing Date, as the case may be, there was any change in the capital stock or 29 long-term debt of the Company, or any decrease in the stockholders' equity of the Company as compared with amounts shown in the most recent balance sheet included in the Registration Statement, other than as set forth in or contemplated by the Registration Statement, or, if there was any decrease, setting forth the amount of such decrease, and (c) during the period from the date of the most recent balance sheet included in the Registration Statement, to a specified date not later than five days prior to the Effective Date, Closing Date or Option Closing Date, as the case may be, there was any decrease in revenues, or increase in net loss or net loss per share of Common Stock, in each case as compared with the corresponding period in the preceding year and as compared with the corresponding period in the preceding quarter, other than as set forth in or contemplated by the Registration Statement, or, if there was any such decrease, setting forth the amount of such decrease; (iv) as to Steamboat L.L.C., only, stating that, based on the performance of procedures specified by the AICPA for a review of unaudited pro forma financial statements of the Company and Steamboat L.L.C. and Steamboat Facilities and inquiries of the officers and other employees of the Company responsible for financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention which would lead them to believe that (a) the unaudited pro forma condensed consolidated balance sheet at June 30, 1996 and the unaudited pro forma condensed consolidated statements of operations for the year ended January 31, 1996 and the six month period ended July 31, 1996 of the Company and the unaudited pro forma condensed combined statements of operations for the year ended December 31, 1995 and the six month period ended June 30, 1996 of Steamboat Facilities included in the Registration Statement (collectively, the "Pro Forma Financial Statements") do not comply as to form in all material respects with applicable requirements of the Act, the Regulations and applicable accounting requirements, (b) that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of the Pro Forma Financial Statements, or (c) that the assumptions used in the preparation of the Pro Forma Financial Statements are not appropriate; (v) setting forth, at a date not later than five days prior to the Effective Date, the amount of liabilities of its Comfort Letter Subject (including a break-down of commercial paper and notes payable to banks); (vi) as to the Company only, stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, statements and other financial information pertaining to the Company, Lehi and Plymouth set forth in the Prospectus, in each case to the extent that such amounts, numbers, percentages, statements and information may be derived from the general accounting records and work sheets of the Company, with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter and found them to be in agreement; (vii) stating that they have not during the immediately preceding five year period brought to the attention of the management of the Company or its Comfort Letter Subject any reportable condition related to internal structure, design or operation as defined in the Statement on Auditing Standards No. 60 -- "Communication of Internal Control Structure Related Matters Noted in an Audit," in the internal controls of its Comfort Letter Subject; and 30 (viii) statements as to such other matters incident to the transaction contemplated hereby as you may reasonably request. 4.4 Officers' Certificates. ---------------------- 4.4.1 Officers' Certificate. At each of the Closing Date and the --------------------- Option Closing Date, if any, the Representative shall have received a certificate of the Company signed by the President and the Chief Financial Officer of the Company, dated the Closing Date or the Option Closing Date, as the case may be, respectively, to the effect that the Company has performed all covenants and complied with all conditions required by this Agreement to be performed or complied with by the Company prior to and as of the Closing Date, or the Option Closing Date, as the case may be, and that the conditions set forth in Section 4.5 hereof have been satisfied as of such date and that, as of Closing Date and the Option Closing Date, as the case may be, the representations and warranties of the Company set forth in Section 2 hereof are true and correct. In addition, the Representative will have received such other and further certificates of officers of the Company as the Representative may reasonably request. 4.4.2 Secretary's Certificate. At each of the Closing Date and the ----------------------- Option Closing Date, if any, the Representative shall have received a certificate of the Company signed by the Secretary of the Company, dated the Closing Date or the Option Date, as the case may be, respectively, certifying (i) that the Certificate of Incorporation and By-Laws, as amended, of the Company are true and complete, have not been modified and are in full force and effect, (ii) that the resolutions relating to the public offering contemplated by this Agreement are in full force and effect and have not been modified, (iii) all correspondence between the Company or its counsel and the Commission, (iv) all correspondence between the Company or its counsel and Nasdaq concerning inclusion of the Securities on Nasdaq, and (v) as to the incumbency of the officers of the Company. The documents referred to in such certificate shall be attached to such certificate. 4.5 No Material Changes. Prior to and on each of the Closing Date and the ------------------- Option Closing Date, if any, (i) there shall have been no material adverse change or development involving a prospective material change in the condition or prospects or the business activities, financial or otherwise, of the Company, Lehi, Plymouth, NRG and Steamboat L.L.C., taken together, from the latest dates as of which such condition is set forth in the Registration Statement and Prospectus, (ii) there shall have been no transaction, not in the ordinary course of business, entered into by the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. from the latest date as of which the financial condition of the Company, Lehi, Plymouth, NRG and Steamboat L.L.C. is set forth in the Registration Statement and Prospectus which is materially adverse to the Company, Lehi, Plymouth, NRG and Steamboat L.L.C., (iii) the Company, Lehi, Plymouth, NRG and Steamboat L.L.C. shall not be in default under any provision of any instrument relating to any outstanding indebtedness which default would have a material adverse effect on it, (iv) no material amount of the assets of the Company, Lehi, Plymouth, NRG and Steamboat L.L.C. shall have been pledged or mortgaged, except as set forth in the Registration Statement and Prospectus, (v) no action suit or proceeding, at law or in equity, shall have been pending or threatened against the Company, Lehi, Plymouth, NRG or Steamboat L.L.C. or affecting any of its property or business before or by any court or governmental commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may materially adversely affect the business, operations, 31 prospects or financial condition or income of the Company, Lehi, Plymouth, NRG and Steamboat L.L.C., except as set forth in the Registration Statement and Prospectus, (vi) no stop order shall have been issued under the Act and no proceedings therefor shall have been initiated or threatened by the Commission, and (vii) the Registration Statement and the Prospectus and any amendments or supplements thereto contain all material statements which are required to be stated therein in accordance with the Act and the Regulations and conform in all material respects to the requirements of the Act and the Regulations, and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. As used in this Section 4.5, the term "Company" shall mean the Company and its subsidiaries, taken as a whole. 4.6 Delivery of Agreements. At the Closing, the Company shall have ---------------------- delivered to the Representative executed copies of the Representative's Purchase Option. 4.7 Opinion of Counsel for the Underwriters. All proceedings taken in --------------------------------------- connection with the authorization, issuance or sale of the Securities as herein contemplated shall be reasonably satisfactory in form and substance to you and to Graubard Mollen & Miller, counsel to the Underwriters, and you shall have received from such counsel a favorable opinion, dated the Closing Date and the Option Closing Date, if any, with respect to such of these proceedings as you may reasonably require. On or prior to the Effective Date, the Closing Date and the Option Closing Date, as the case may be, counsel for the Underwriters shall have been furnished such documents, certificates and opinions as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in this Section 4.7, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions herein contained. 4.8 Other Transactions. The Acquisition Transactions shall have been ------------------ effected on the Closing Date and all conditions required to consummate the transactions contemplated by the NRG Acquisition Agreement, the Steamboat Acquisition Agreement, the Conversion Agreement and the Preferred Stock Exchange Agreement shall have been fulfilled concurrently with the consummation of the transactions contemplated by this Agreement. 5. Indemnification. --------------- 5.1 Indemnification of the Underwriters. ----------------------------------- 5.1.1 General. Subject to the conditions set forth below, the ------- Company agrees to indemnify and hold harmless each of the Underwriters, their respective directors, officers, agents and employees and each person, if any, who controls an Underwriter ("controlling person") within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all loss, liability, claim, damage and expense whatsoever (including but not limited to any and all legal or other expenses reasonably incurred in investigating, preparing or defending against any litigation or claims whatsoever, commenced or threatened, whether arising out of any action between any of the Underwriters and the Company or between any of the Underwriters and any third-party or 32 otherwise) to which they or any of them may become subject under the Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in (i) any Preliminary Prospectus, the Registration Statement or the Prospectus (as from time to time each may be amended and supplemented); (ii) in any post-effective amendment or amendments or any new registration statement and prospectus in which is included securities of the Company issued or issuable upon exercise of the Representative's Purchase Option; or (iii) any application or other document or written communication (in this Section 5 collectively called "application") executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, Nasdaq or any securities exchange; or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, unless such statement or omission was made in reliance upon and in strict conformity with written information furnished to the Company with respect to any Underwriter by or on behalf of such Underwriter expressly for use in any Preliminary Prospectus, the Registration Statement or Prospectus, or any amendment or supplement thereof, or in any application, as the case may be. The Company agrees promptly to notify the Representative of the commencement of any litigation or proceedings against the Company or any of its officers, directors or controlling persons in connection with the issue and sale of the Securities or in connection with the Registration Statement or Prospectus. 5.1.2 Procedure. If any action is brought against an Underwriter or --------- controlling person in respect of which indemnity may be sought against the Company pursuant to Section 5.1.1, such Underwriter shall promptly notify the Company in writing of the institution of such action and the Company shall assume the defense of such action, including the employment and fees of counsel (subject to the approval of the Underwriter) and payment of actual expenses. Such Underwriter or controlling person shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Underwriter or such controlling person unless (i) the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action, or (ii) the Company shall not have employed counsel to have charge of the defense of such action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to the Company (in which case the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events the fees and expenses of not more than one additional firm of attorneys selected by the Underwriter or Underwriters and/or controlling person shall be borne by the Company. Notwithstanding anything to the contrary contained herein, if an Underwriter or controlling person shall assume the defense of such action as provided above, the Company shall have the right to approve the terms of any settlement of such action which approval shall not be unreasonably withheld. 5.2 Indemnification of the Company. Each of the Underwriters, severally ------------------------------ and not jointly, agrees to indemnify and hold harmless the Company against any and all loss, liability, claim, damage and expense described in the foregoing indemnity from the Company to the several Underwriters, as incurred, but only with respect to untrue statements or omissions, or alleged 33 untrue statements or omissions directly relating to the transactions effected by the Underwriters in connection with this offering made in any Preliminary Prospectus, the Registration Statement or Prospectus or any amendment or supplement thereto or in any application in reliance upon, and in strict conformity with, written information furnished to the Company with respect to an Underwriter by or on behalf of such Underwriter expressly for use in such Preliminary Prospectus, the Registration Statement or Prospectus or any amendment or supplement thereto or in any such application. In case any action shall be brought against the Company or any other person so indemnified based on any Preliminary Prospectus, the Registration Statement or Prospectus or any amendment or supplement thereto or any application, and in respect of which indemnity may be sought against any Underwriter, such Underwriter shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the several Underwriters by the provisions of Section 5.1.2. 5.3 Contribution. ------------ 5.3.1 Contribution Rights. In order to provide for just and ------------------- equitable contribution under the Act in any case in which (i) any person entitled to indemnification under this Section 5 makes claim for indemnification pursuant hereto but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 5 provides for indemnification in such case, or (ii) contribution under the Act, the Exchange Act or otherwise may be required on the part of any such person in circumstances for which indemnification is provided under this Section 5, then, and in each such case, the Company and the Underwriters shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by said indemnity agreement incurred by the Company and the Underwriters, as incurred, in such proportions that the Underwriters are responsible for that portion represented by the percentage that the underwriting discount appearing on the cover page of the Prospectus bears to the initial offering price appearing thereon and the Company is responsible for the balance; provided, that, no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding the provisions of this Section 5.3, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Public Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay in respect of such losses, liabilities, claims, damages and expenses. For purposes of this Section, each director, officer and employee of an Underwriter, and each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act shall have the same rights to contribution as such Underwriter and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the Act shall have the same rights to contribution as the Company. 5.3.2 Contribution Procedure. Within fifteen days after receipt by ---------------------- any party to this Agreement (or its representative) of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is to be made against another party ("contributing party"), notify the contributing party of the commencement thereof, but the omission 34 to so notify the contributing party will not relieve it from any liability which it may have to any other party other than for contribution hereunder. In case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party or its representative of the commencement thereof within the aforesaid fifteen days, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. Any such contributing party shall not be liable to any party seeking contribution on account of any settlement of any claim, action or proceeding which was effected by such party seeking contribution on account of any settlement of any claim, action or proceeding effected by such party seeking contribution without the written consent of such contributing party. The contribution provisions contained in this Section are intended to supersede, to the extent permitted by law, any right to contribution under the Act, the Exchange Act or otherwise available. 6. Default by an Underwriter. ------------------------- 6.1 Default Not Exceeding 10% of Firm Securities or Option Securities. ----------------------------------------------------------------- If any Underwriter or Underwriters shall default in its or their obligations to purchase the Firm Securities or the Option Securities, if exercised, hereunder, and if the number of the Firm Securities or the Option Securities with respect to which such default relates does not exceed in the aggregate 10% of the number of Firm Securities or Option Securities which all Underwriters have agreed to purchase hereunder, then such Firm Securities or Option Securities to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to their respective commitments hereunder. 6.2 Default Exceeding 10% of Firm Securities or Option Securities. In ------------------------------------------------------------- the event that such default relates to more than 10% of the Firm Securities or Option Securities, you may in your discretion arrange for yourself or for another party or parties to purchase such Firm Securities or Option Securities to which such default relates on the terms contained herein. If within one business day after such default relating to more than 10% of the Firm Securities or Option Securities you do not arrange for the purchase of such Firm Securities or Option Securities, then the Company shall be entitled to a further period of one business day within which to procure another party or parties satisfactory to you to purchase said Firm Securities or Option Securities on such terms. In the event that neither you nor the Company arrange for the purchase of the Firm Securities or Option Securities to which a default relates as provided in this Section 6, this Agreement may be terminated by you or the Company (but only with respect to the obligations relating to the Option Securities if such default occurs after the Closing Date) without liability on the part of the Company (except as provided in Section 3.15 and Section 5.1 hereof) or the several Underwriters but nothing herein shall relieve a defaulting Underwriter of its liability, if any, to the other several Underwriters and to the Company for damages occasioned by its default hereunder. 6.3 Postponement of Closing Date. In the event that the Firm Securities ---------------------------- or Option Securities to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, you or the Company shall have the right to postpone the Closing Date or the Option Closing Date for a reasonable period, but not in any event exceeding five business days, in order to effect whatever changes may thereby be made necessary in the Registration 35 Statement or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment to the Registration Statement or the Prospectus which in the opinion of counsel for the Underwriters may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any party substituted under this Section 6 with like effect as if it had originally been a party to this Agreement with respect to such Securities. 7. Additional Covenants. -------------------- 7.1 Board Designee. For a period of not less than five years from the -------------- Effective Date, the Company will recommend and use its best efforts to elect a designee of the Representative, at the option of the Representative, either as a member of or a non-voting advisor to the Board of Directors of the Company. Such designee, if elected or appointed, shall attend meetings of the Board and receive no more or less compensation than is paid to other non-management directors of the Company and shall be entitled to receive reimbursement for all reasonable costs incurred in attending such meetings, including, but not limited to, food, lodging and transporta tion. To the extent permitted by law, the Company will agree to indemnify the Representative and its designee for the actions of such designee as a director of the Company. In the event the Company maintains a liability insurance policy affording coverage for the acts of its officers and directors, it will, if possible, include each of the Representative and its designee as an insured under such policy. If the Representative does not exercise its option to designate a member of the Company's Board of Directors, the Representative shall nevertheless have the right to send a representative (who need not be the same individual from meeting to meeting) to observe each meeting of the Board of Directors. The Company agrees to give the Representative written notice of each such meeting and to provide the Representative with an agenda and minutes of the meeting no later than it gives such notice and provides such items to the other directors. 7.2 [Intentionally Omitted.] ------------------------ 7.3 Rule 144 Sales. During the five year period following the Effective --------------- Date, the Representative shall have the right to purchase for the Representative's account or to sell for the account of the Company's officers, directors and Principal Stockholders any securities sold pursuant to Rule 144 under the Act. Each of the officers, directors and Principal Stockholders ("144 Sellers") will agree to consult with the Representative with regard to any such sales and will offer the Representative the exclusive opportunity to purchase or sell such securities on terms at least as favorable to the 144 Sellers as they can secure elsewhere. If the Represen tative fails to accept in writing any such proposal for sale by the 144 Sellers within three business days after receipt of a notice containing such proposal, then the Representative shall have no claim or right with respect to any such sales contained in any such notice. If, thereafter, such proposal is modified in any material respect, the 144 Sellers shall adopt the same procedure as with respect to the original proposal. 7.4 Press Releases. Except as required by law, the Company will not -------------- issue a press release or engage in any other publicity until 25 days after the Effective Date without the Representative's prior written consent. 7.5 Form S-8 or any Similar Form. The Company shall not file a ---------------------------- Registration Statement on Form S-8 (or any similar or successor form) for the registration of shares of Common Stock 36 underlying stock options for a period of one year from the Effective Date without the Representative's prior written consent. 7.6 Employment Agreements. On or before the Closing Date, Theodore Rosen --------------------- and Richard H. Nelson shall have entered into employment agreements having terms of five years from the Effective Date and containing such other terms and conditions as shall have been approved by the Representative. 7.7 Compensation and Other Arrangements. The Company hereby agrees that, ----------------------------------- for a period of three years from the Effective Date, all the compensation and other arrangements between the Company and its officers, directors and affiliates shall be approved by a Compensation Committee of the Company's Board of Directors, a majority of the members of which shall have no affiliation or other relationship with the Company other than as directors. 8. Representations and Agreements to Survive Delivery. Except as the context -------------------------------------------------- otherwise requires, all representations, warranties and agreements contained in this Agreement shall be deemed to be representations, warranties and agreements at the Closing Dates and such representations, warranties and agreements of the Underwriters and Company, including the indemnity agreements contained in Section 5 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Underwriters, the Company or any controlling person, and shall survive termination of this Agreement or the issuance and delivery of the Securities to the several Underwriters until the earlier of the expiration of any applicable statute of limitations and the seventh anniversary of the later of the Closing Date or the Option Closing Date, if any, at which time the representations, warranties and agreements shall terminate and be of no further force and effect. 9. Effective Date of This Agreement and Termination Thereof. -------------------------------------------------------- 9.1 Effective Date. This Agreement shall become effective on the -------------- Effective Date at the time that the Registration Statement is declared effective. 9.2 Termination. You shall have the right to terminate this Agreement at ----------- any time prior to any Closing Date, (i) if any domestic or international event or act or occurrence has materially disrupted, or in your opinion will in the immediate future materially disrupt, general securities markets in the United States; or (ii) if trading on the New York Stock Exchange, the American Stock Exchange, The Boston Stock Exchange or in the over-the-counter market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been fixed, or maximum ranges for prices for securities shall have been required on the over-the- counter market by the NASD or by order of the Commission or any other government authority having jurisdiction, or (iii) if the United States shall have become involved in a war or major hostilities, or (iv) if a banking moratorium has been declared by a New York State or federal authority, or (v) if a moratorium on foreign exchange trading has been declared which materially adversely impacts the United States securities market, or (vi) if the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in your opinion, make it inadvisable to proceed with the delivery of the Securities, or 37 (vii) if Richard H. Nelson or Theodore Rosen shall no longer serve the Company in his present capacities, or (viii) if any of the Acquisition Agreement, the Conversion Agreement or the Preferred Stock Exchange Agreement is terminated, or (ix) if the Company has breached any of its representations, warranties or obligations hereunder, or (x) if the Representative shall have become aware after the date hereof of such a material adverse change in the condition (financial or otherwise), business, or prospects of the Company, Lehi, Plymouth and Steamboat L.L.C., or such adverse material change in general market conditions as in the Representative's judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Securities or to enforce contracts made by the Representative for the sale of the Securities. 9.3 Notice. If you elect to prevent this Agreement from becoming ------ effective or to terminate this Agreement as provided in this Section 9, the Company shall be notified on the same day as such election is made by you by telephone or telecopy, confirmed by letter. 9.4 Expenses. In the event that this Agreement shall not be carried out -------- for any reason whatsoever, within the time specified herein or any extensions thereof pursuant to the terms herein, the obligations of the Company to pay the expenses related to the transactions contemplated herein shall be governed by Section 3.15 hereof. 9.5 Indemnification. Notwithstanding any contrary provision contained in --------------- this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Section 5 shall not be in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. 10. Miscellaneous. ------------- 10.1 Notices. All communications hereunder, except as herein otherwise ------- specifically provided, shall be in writing and shall be mailed, delivered or telecopied and confirmed If to the Representative: Gaines, Berland Inc. 712 Fifth Avenue - 21st Floor New York, New York 10015 Attention: Alan Gaines Copy to: Graubard Mollen & Miller 600 Third Avenue New York, New York 10016 Attention: David Alan Miller, Esq. If to the Company: U.S. Energy Systems, Inc. 515 North Flagler Drive Suite 202 West Palm Beach, Florida 33401 Attention: President Copy to: Reid & Priest, LLP 40 West 57th Street New York, New York 10019 Attention: Gregory Katz, Esq. 10.2 Headings. The headings contained herein are for the sole purpose of -------- convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement. 10.3 Amendment. This Agreement may only be amended by a written --------- instrument executed by each of the parties hereto. 10.4 Entire Agreement. This Agreement (together with the other ---------------- agreements and documents being delivered pursuant to or in connection with this Agreement) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. 10.5 Binding Effect. This Agreement shall inure solely to the benefit of -------------- and shall be binding upon the Representative, the Underwriters, the Company and the controlling persons, directors and officers referred to in Section 5 hereof, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. 10.6 Governing Law; Jurisdiction. This Agreement shall be governed by --------------------------- and construed and enforced in accordance with the law of the State of New York, without giving effect to conflicts of law. The Company hereby agrees that any action, proceeding or claim against it arising out of, relating in any way to this Agreement shall be brought and enforced in the courts of the State of New York or the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any such process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 10.1 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company and the Representative agree that the prevailing party(ies) in any such action shall be entitled to 38 recover from the other party(ies) all of its reasonable attorneys' fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. 10.7 Execution in Counterparts. This Agreement may be executed in one or ------------------------- more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. 10.8 Waiver, Etc. The failure of any of the parties hereto to at any ------------ time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way effect the validity of this Agreement or any provision hereof or the right of any of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non- fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment. If the foregoing correctly sets forth the understanding between the Representative, for itself and as Representative of the Underwriters listed in Schedule 1 hereto, and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us. Very truly yours, U.S. ENERGY SYSTEMS, INC. By:_______________________ Name: Richard H. Nelson Title: President Accepted as of the date first above written. New York, New York GAINES, BERLAND INC. (for itself and as Representative of the Underwriters listed on Schedule 1 hereto) 39 By:______________________________ Name: Joseph Berland Title: Chairman 40 SCHEDULE 1 ========== U.S. ENERGY SYSTEMS, INC. 3,100,000 SHARES OF COMMON STOCK AND 3,100,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS UNDERWRITER NUMBER OF SHARES OF COMMON NUMBER OF WARRANTS - ----------- STOCK TO BE PURCHASED TO BE PURCHASED --------------------------- ------------------ Gaines, Berland Inc. --------- --------- 3,100,000 3,100,000 41 SCHEDULE 2 ========== NAME NUMBER OF SHARES LOCK-UP PERIOD ---- ---------------- ============== 42 SCHEDULE 3 ========== OTHER COUNSEL OPINION SUBJECT ------------- --------------- Reid & Priest, LLP The Company Stanford Stoddard Smith and Wood Quinn & Crapo L.C. Lehi Brown, Olson & Wilson, P.C. and Mark R. Dunn Plymouth Jenkins & Frey Steamboat L.L.C. NRG 43 SCHEDULE 4 ========== ACCOUNTING FIRM COMFORT LETTER SUBJECT --------------- ---------------------- Richard A. Eisner & Company, LLP The Company Traveller Winn & Mower, PC Lehi Price Waterhouse LLP Plymouth Robison, Hill & Co., PC Steamboat L.L.C. 44 EX-3.1 3 RESTATED CERTIFICATE OF INCORPORATION Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION OF U.S. ENERGY SYSTEMS, INC. (ORIGINALLY INCORPORATED MAY 6, 1981 UNDER THE NAME OF COGENIC ENERGY SYSTEMS, INC.) U.S. Energy Systems, Inc. a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: FIRST: The name of the corporation is U.S. Energy Systems, Inc. (hereinafter referred to as the "Corporation"). SECOND: The address of the Corporation's registered office in the State of Delaware is 1013 Centre Road in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is THE CORPORATION SERVICE COMPANY. THIRD: The purpose for which the Corporation is formed and the business or objects to be transacted, carried on and promoted by it, is the design, sale, construction, installation and finance of diesel and natural gas powered electrical generating systems and to exercise and generally to enjoy all of the powers, rights and privileges granted to, or conferred upon, corporations by the general laws of the State of Delaware now or thereafter in force. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is Thirty Five Million (35,000,000) shares of Common Stock and the par value of each such share is One Cent ($0.01); and Five Million (5,000,000) shares of Preferred Stock and the par value of each such share is One Cent ($0.01). The Board of Directors shall determine, at its discretion, all rights and privileges to be attached to such Preferred Stock. The preferences, limitations, and relative rights of the above two classes of stock shall be as follows: A. PREFERRED STOCK. --------------- (1) Shares of Preferred Stock may be issued in one or more series at such time or times and for such consideration as the Board of Directors may determine. Each such series shall be given a distinguishing designation. All shares of any one series shall have preferences, limitations and relative rights identical with those of other shares of the same series, and, except to the extent otherwise provided in the description of such series, with those of other shares of Preferred Stock. (2) Authority is hereby expressly granted to the Board of Directors to fix from time to time, by resolutions, providing for the establishment and/or issuance of any series of Preferred Stock, the designation of such series and the preferences, limitations and relative rights of the shares of such series, including the following: (a) The distinctive designation and number of shares comprising such series, which number may (except where otherwise provided by the Board of Directors in creating such series) be increased or decreased (but not below the number of shares then outstanding) from time to time by action of the Board of Directors; (b) The voting rights, if any, which shares of that series shall have, which may be special, conditional, limited or otherwise; (c) The rate of dividends, if any, on the shares of that series, whether dividends shall be non-cumulative, cumulative to the extent earned, partially cumulative or cumulative (and, if cumulative, from which date or dates), whether rights, or in shares of the corporation's capital stock, and the relative rights or priority, if any, of payment of dividends on shares of that series over shares of any other series or over the Common Stock; (d) Whether the shares of that series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, the event of events upon or after which they shall be redeemable, whether they shall be redeemable at the option of the corporation, the shareholder or another person, the amount per share payable in case of redemption (which amount may vary under different conditions and at different redemption dates), whether such amount shall be a designated amount or an amount determined in accordance with a designated formula or by reference to extrinsic data or events and whether such amount shall be paid in cash, indebtedness, securities, or other property or rights, including securities of any other corporation; (e) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series and, if so, the terms of and amounts payable into such sinking fund; (f) The rights to which the holders of the shares of that series shall be entitled in the event of voluntary or involuntary dissolution or liquidation of the corporation, and the relative rights of priority, if any, of payment of shares of that series over shares of any other series or over the Common Stock in any such event; -2- (g) Whether the shares of that series shall be convertible into or exchangeable for cash, shares of stock of any other class or any other series, indebtedness, or other property or rights, including securities of another corporation, and, if so, the terms and conditions of such conversion or exchange, including the rate or rates of conversion or exchange, and whether such rate shall be a designated amount or an amount determined in accordance with a designated formula or by reference to extrinsic data or events, the data or dates upon or after which they shall be convertible or exchangeable, the duration for which they shall be convertible or exchangeable, and whether they shall be convertible or exchangeable at the option of the corporation, the shareholder or another person, and the method (if any) of adjusting the rate of conversion or exchange in the event of a stock split, stock dividend, combination of shares or similar event; (h) Whether the issuance of any additional shares of such series, or of any shares of any other series, shall be subject to restrictions as to issuance, or as to the powers, preferences or rights of any such other series; and (i) Any other preferences, privileges and powers and relative, participating, optional or other special rights and qualifications, limitations or restrictions of such series, as the Board of Directors may deem advisable and as shall not be inconsistent with the provisions of this Article Fourth and to the full extent now or hereafter permitted by the laws of the State of Delaware. Before issuing any shares of a series of Preferred Stock the Corporation shall deliver to the Secretary of State for Filing Certificate of Incorporation, which shall be effective without shareholder action, that set forth (a) the name of the corporation, (b) the text of the amendment determining the terms of the series, (c) the data it was adopted and (d) a statement that the amendment was duly adopted by the Board of Directors. B. COMMON STOCK. ------------ (1) After the requirements with respect to preferential dividends, if any, on any series of Preferred Stock (fixed pursuant to paragraph A(2) (c) of this Article Fourth) shall have been met, and after the corporation shall have complied with all requirements, if any, with respect to the setting aside of sums in a sinking fund for the purchase or redemption of shares of any series of Preferred Stock (fixed pursuant to paragraph A(2)(e) of this Article Fourth), then, and not otherwise, the holders of Common Stock shall receive, to the extent permitted by law and to the extent the Board of Directors shall determine, such dividends as may be declared from time to time by the Board of Directors. (2) After distribution in full of the preferential amount, if any (fixed pursuant to paragraph A(2)(f) of this Article Fourth), to be distributed to the holders of any series of Preferred Stock, in the event of the voluntary or involuntary dissolution or liquidation -3- of the corporation, the holders of Common Stock (and the holders of any series of Preferred Stock, if and to the extent provided pursuant to paragraph A(2)(f) of this Article Fourth) shall be entitled to receive the net assets of the corporation of whatever kind available for distribution. (3) Except as may be otherwise required by law or by this Certificate of Incorporation, each holder of Common Stock shall have one vote in respect of each share of such stock held by him on all matters voted upon by the stockholders. Effective as of May 6, 1996, each 40 shares of the issued and outstanding Common Stock, $.01 par value, of the Corporation shall be reverse split into one (1) share of Common Stock of the Corporation. This reverse split shall affect issued and outstanding shares and outstanding options, warrants and other rights to acquire shares of Common Stock. The total number of shares authorized shall not be amended and shall be as set forth in the Article FOURTH. Each record and beneficial bolder of shares of Common Stock of the Corporation whose aggregate number of shares held in one name and one account is less than 40 shall be deemed by the Corporation to hold a fractional share of Common Stock. All such fractional shares of the Corporation's Common Stock are hereby immediately canceled. The holder of such fractional share shall be entitled to cash payment in an amount equal to ten cents ($0.10) par (pre-reverse split) share upon proper surrender of the holder's certificate or certificates. FIFTH: The name and mailing address of incorporator is: Name Mailing Address ---- --------------- Peter Rothberg 280 Park Avenue New York, New York 10017 SIXTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been -4- made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. SEVENTH: All corporate powers shall be exercised by the Board of Directors, except as otherwise provided by statute or by this Certificate of incorporation, or any amendment thereof, or by the By-Laws. The By-Laws may be adopted, amended or repealed by the Board of Directors of the Corporation, except as otherwise provided by law, but any by-law made by the Board of Directors is subject to amendment or repeal by the stockholders of the Corporation. EIGHTH: As authorized by Section 1202(b)(7) of subsection (b) of Section 102, Title 8 of the Delaware Code (the "Code"), as the same may be interpreted or amended from time to time,no director shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided, however, that the foregoing 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 Code, or (iv) for any transaction from which the director derived an improper personal benefit. IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which restates and integrates but does not further amend the provisions of the Corporation's Certificate of Incorporation and having been duly adopted by the Board of Directors of the Corporation in accordance with the provisions of Section 245 of the General Corporation Laws of the State of Delaware, has been executed this twentieth day of November, 1996 by Seymour J. Beder, its authorized officer. U.S. Energy Systems, Inc. /s/ Seymour J. Beder -------------------------- Title: Secretary -5- EX-4.2 4 REDEEMABLE WARRANT CERTIFICATE EXHIBIT 4.2 NUMBER VOID AFTER 5:00 P.M., EASTERN TIME WARRANT ON W- , 2001 REDEEMABLE WARRANT CERTIFICATE FOR PURCHASE OF SHARES OF COMMON STOCK U.S. ENERGY SYSTEMS, INC. CUSIP 902951 11 0 This certifies that FOR VALUE RECEIVED or registered assigns ("Registered Holder"), is the owner of the number of warrants set forth above. Each Warrant (subject to adjustments as hereinafter referred to) entitles the Registered Holder to purchase at any time from December 2, 1997 until 5:00 p.m. Eastern Time on December 1, 2001 one fully paid and non-assessable share of common stock (the "Common Stock") of U.S. Energy Systems, Inc., a Delaware corporation (the "Company") (such shares of Common Stock being hereinafter referred to as "Shares" or a "Share"), upon payment of the warrant price (as hereinafter described and presentation and surrender of this Warrant Certificate, provided, however, that under certain conditions set forth in the Warrant Agreement hereinafter mentioned, the number of Shares purchasable upon the exercise of this Warrant may be increased or reduced and the warrant price may be adjusted. Subject to adjustment as aforesaid, the warrant price per Share (hereinafter called the "Warrant Price") shall be $4.00 per Share if exercised on or before 5:00 p.m. Eastern Time on December 1, 2001. As provided in said Warrant Agreement, the Warrant Price is payable upon the exercise of the Warrant, either in cash or by certified check or bank draft to the order of the Company. Under certain conditions set forth in the Warrant Agreement, this Warrant may be called for redemption at the option of the Company, at any time after the Warrants become exercisable and prior to their expiration, at a redemption price of $0.01 per Warrant upon at least 30 days' written notice if the last sales price of the Common Stock has been at least one hundred fifty percent (150%) of the Warrant Price on each of the twenty (20) consecutive trading days during a period ending on the third business day prior to the date on which the notice of redemption is given. Each Warrant not exercised on or before the date called for in such notice shall become void, and all rights thereunder shall terminate. Upon the exercise of this Warrant, the form of election to purchase on the reverse hereof must be properly completed and executed. In the event this Warrant is exercised in respect not less than all of such Shares, a new Warrant for the remaining number of Shares will be issued on such surrender. This Warrant is issued under and the rights represented hereby are subject to the terms and provisions contained in a Warrant Agreement dated as of December __, 1996, by and among the Company, American Stock Transfer & Trust Company, as Warrant Agent (the "Warrant Agent") and Gains, Berland Inc., all the terms and provisions of which the Registered Holder of this Warrant, by acceptance hereof, assents. Reference is hereby made to said Warrant Agreement for a more complete statement of the rights and limitations of rights of the Registered Holders hereof, the rights and duties of the Warrant Agent and the rights and obligations of the Company thereunder. Copies of said Warrant Agreement are on file at the office of the Warrant Agent. The Company shall not be obligated to deliver any Shares pursuant to the exercise of any Warrants unless a registration statement under the Securities Act of 1933 with respect to such Shares is effective. The Company has covenanted and agreed that it will file a registration statement or a post- effective amendment to its existing registration statement and will use its best efforts to cause the same to become effective and to keep it current while any of the Warrants are outstanding and exercisable. The Warrants represented hereby shall not be exercisable by a Registered Holder in any state where such exercise would be unlawful. The Company shall not be required upon the exercise of this Warrant to issue fractions of Shares, but shall make adjustment therefor in cash on the basis of the current market value of any fractional interest as provided in the Warrant Agreement. The Warrant is transferable at the office of the Warrant Agent (or of its successor as Warrant Agent) by the Registered Holder hereof in person or by attorney duly authorized in writing, but only in the manner and subject to the limitations provided in the Warrant Agreement and upon surrender of this Warrant and the payment of any transfer taxes. Upon any such transfer, a new Warrant or new Warrants of different denominations, of this tenor and representing in the aggregate the right to purchase a like number of Shares will be issued to the transferee in exchange for this Warrant. This Warrant, when surrendered at the office of the Warrant Agent (or its successor as Warrant Agent) by the Registered Holder hereof in person or by attorney duly authorized in writing, may be exchanged in the manner and subject to the limitations provided in the Warrant Agreement, for another Warrant, or other Warrants of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of Shares equal to the number of such Warrants. If this Warrant Certificate shall be surrendered for exercise within any period during which the transfer books for the Company's Common Stock or other securities purchasable upon the exercise of the Warrants are closed for any purpose, the Company shall not be required to make delivery of certificates for the securities purchasable upon exercise until the date of the reopening of said transfer books. The holder of this Warrant shall not be entitled to any of the rights of a shareholder of the Company prior to the exercise hereof. This Warrant Certificate shall not be valid unless countersigned by the Warrant Agent. WITNESS the facsimile seal of the Company and the facsimile signature of its duly authorized officers. EX-10.16 5 SECURITY AGREEMENT AND FINANCING STATEMENT Exhibit 10.16 U.S. ENERGY SYSTEMS, INC. 515 N. Flagler Drive, Suite 202 West Palm Beach, Florida 33401 October 7, 1996 RE: Amendment to Security Agreement, Promissory Note and Financing Statement between U.S. Energy Systems, Inc. (formerly U.S. Envirosystems, Inc.) ("Borrower") and Solvation, Inc., a Delaware corporation ("Lender"), dated as of December 15, 1995 and as amended from time to time thereafter (collectively, the "Loan Agreement") Gentlemen: This letter is to confirm our understanding that the maturity of the above- referenced Loan Agreement has been extended to October 25, 1996 (the "Extension"), such that the Due Date, as referred to in the Loan Agreement and related documents, shall mean the earlier of the date of the closing of the public offering of the Borrower's Common Stock and October 25, 1996. Further, the Commitment period, as referred to in the Loan Agreement and related documents, shall mean the period from and including the Closing Date to but not including the earlier of (i) the date of the closing of the public offering of the common stock of USE; (ii) USE's decision not to pursue a public offering of its common stock; (iii) the decision by USE's underwriter that the public offering of USE's common stock is not feasible by October 25, 1996; and (iv) October 25, 1996. All other terms and conditions of Loan Agreement shall remain in effect. All capitalized terms not defined herein shall have the meanings ascribed to them in the Loan Agreement. If the forgoing confirms your understanding, please indicate acceptance of the Extension of the Anchor Bridge Loan by executing and returning to us the enclosed copy of this letter by facsimile whereupon the Extension shall become effective. Sincerely, U.S. ENERGY SYSTEMS, INC. PLYMOUTH ENVIROSYSTEMS, INC. BY: /s/ Richard H. Nelson BY: /s/ Richard H. Nelson LEHI ENVIROSYSTEMS, INC. BY: /s/ Richard H. Nelson AGREED TO: SOLVATION, INC. BY: /s/ Bruce Schnelwar SECOND AMENDMENT TO SECURITY AGREEMENT, PROMISSORY NOTE AND FINANCING STATEMENT DATED JUNE 15, 1995 (and all collateral documents associated therewith) All collectively hereinafter referred to as the "Anchor Bridge Loan" By and Between ANCHOR CAPITAL COMPANY, LLC ("LENDER") and U.S. ENVIROSYSTEMS, INC. ("BORROWER") AMENDMENT DATED MARCH 11, 1996 It is hereby recognized by Lender and Borrower that Borrower has not as of the date hereinabove finalized its Registration Statement on Form SB-2 nor filed same with the U.S. Securities and Exchange Commission ("SEC"). In addition it is further recognized that the Anchor Bridge Loan shall become due and payable on March 11, 1996 (the "Due Date"), such date being before the projected date of Borrower's completing a public offering of Borrower's securities (the "Public Offering"). Capitalized terms used herein shall have the same meaning as in the Anchor Bridge Loan and the First Amendment unless otherwise noted herein. In recognition of the foregoing facts, and in consideration of Lender's agreement to extend the Due Date to May 31, 1996, Borrower and Lender agree that the Anchor Bridge Loan shall be amended herewith as follows (Nothing contained herein shall be deemed to be a waiver of any of Lender's or Borrower's rights under the Anchor Bridge Loan and the First Amendment to the Anchor Bridge Loan): A.) Borrower, immediately upon receipt thereof, shall provide Lender with copies of all correspondence and executed agreements with any Gaines Berland, Inc. (the "Underwriter"), Far West Capital (the "Far West Agreement"), Westinghouse Credit Corporation (the Westinghouse Agreement") and Smith (the "Smith Bridge" and the "Smith Preferred Agreement"). B.) The terms and conditions of the preferred stock issued to Lender on June 15, 1995 shall be amended to provide that: (1) The preferred stock shall be convertible into 205,000 common shares. The preferred stock conversion right shall be contemporaneous with the Public Offering and shall continue for a period of twelve (12) months subsequent to the Public Offering. (2) In the event that the conversion ratio results in a price per share which is greater than the final price per share of the Public Offering (the Public Offering Price), then the conversion ratio for the preferred stock retained by Anchor Capital Company, L.L.C. (as per Section B(3) below) shall be determined using the Public Offering Price multiplied by 85%, (3) The preferred stock certificate for 57,500 shares currently issued to Lender shall be reissued by Borrower as follows:
# OF UNITS ENTITY # PREFERRED SHARES CONVERTED TO - ------ ------------------ ------------ ANCHOR CAPITAL COMPANY, L.L.C. 34,000 146,250 AMERICAN GROUP OF 33,750 NY, INC. 13,500 KRISHNA K. MEHTA 10,000 25,000
(4) Borrower shall perform all reasonable and necessary procedures to ensure that none of the entities described above shall have their shares subject to a Lock-up Agreement with the Underwriter. (5) The preferred stock shall (at Lender's sole discretion) take on any additional rights and preferences granted to Smith, except that, (6) The Anchor Stock shall be registered in a shelf registration to be filed within 30 days of the closing of the public offering. C.) The Registration Statement shall be filed with the SEC before March 13, 1996. Borrower agrees to provide Lender with a copy of same before filing on or before March 13, 1996. Borrower shall also provide evidence to Lender of the filing of the Registration Statement on or before March 13, 1996. D.) Borrower shall pay to Lender at the earlier to occur of May 31, 1996 or the date of completion of the Public Offering, $660,00 plus such other amounts of Default Interest and Late Payment Penalties as are calculated under the terms and conditions of the Anchor Bridge Loan. E.) The Anchor Bridge Loan shall remain the sole Senior Secured indebtedness of Borrower. F.) The due date of the Smith Bridge shall be extended contemporaneously herewith to May 31, 1996. The Smith Bridge shall not have a due date earlier than, nor be payable prior to, that of the Anchor Bridge Loan. Evidence of same shall be provided to Anchor contemporaneously herewith. G.) The Far West Agreement for the purchase of Geo 1 and Geo 1A shall be extended to a date not earlier than May 31, 1996. H.) The Westinghouse Agreement shall be extended to a date not earlier than May 31, 1996. I.) In the event that Lender shall sell, assign or transfer all or any portion of its interest in the Anchor Bridge Loan to any party, Lender shall still be entitled to receive the Anchor Stock as per the terms and conditions of the Anchor Bridge Loan, the First Amendment to the Anchor Bridge Loan and this Second Amendment. J.) In the event that Borrower does not fully comply with the terms and conditions of this Second Amendment, Lender shall have the right to declare Borrower in default of the Anchor Bridge Loan and shall proceed to protect its interests under the terms of the Anchor Bridge Loan and this Second Amendment. K.) Lender shall have the right to file this Second Amendment with all governmental authorities which have a recorded lien related to the Anchor Bridge Loan. The execution of this Second Amendment by Richard H. Nelson and Theodore Rosen, President and Chairman of Borrower, respectively, shall signify that this Second Amendment is binding upon Borrower and is as of the date firstabove written in full force and effect upon Borrower. -2- The execution of this Second Amendment does not signify a waiver by Lender or Borrower of any of their rights, privileges, remedies and actions currently existing under the Anchor Bridge Loan. Lender preserves all of its available rights, remedies and actions under the Anchor Bridge Loan as well as the First Amendment thereto and this Second Amendment. Unless otherwise specifically stated herein, this Second Amendment does not change or alter any of the terms and conditions of the Security Agreement, Promissory Note and Financing Statement and all collateral documents associated therewith dated June 15, 1995 and the First Amendment thereto between Borrower and Lender. Anchor Capital Company, LLC /s/ Gregory N. Senkevitch - -------------------------------------- By: Gregory N. Senkevitch -- President Date: 3/11/96 US Envirosystems, Inc. /s/ Theodore Rosen /s/ Richard H. Nelson - ------------------------------------- ---------------------------------- By: Theodore Rosen -- Chairman By: Mr. Richard H. Nelson -- President Date: 3/11/96 Date: 3/11/96 -3- EX-10.18 6 LOAN AGREEMENT Exhibit 10.18 U.S. ENERGY SYSTEMS, INC. 515 N. Flagler Drive, Suite 202 West Palm Beach, Florida 33401 November 1, 1996 RE: Amendment to Security Agreement, Promissory Note and Financing Statement between U.S. Energy Systems, Inc. (formerly U.S. Envirosystems, Inc.) ("Borrower") and Anchor Capital Company, L.L.C. ("Lender"), dated as of June 15, 1995 and as amended from time to time thereafter (collectively, the "Anchor Bridge Loan") Gentlemen: This letter is to confirm our understanding that the maturity of the above- referenced Loan Agreement has been extended to November 29, 1996 (the "Extension"), such that the Due Date, as referred to in the Loan Agreement and related documents, shall mean the earlier of the date of the closing of the public offering of the Borrower's Common Stock and November 29, 1996. All other terms and conditions of the Anchor Bridge Loan, including all amendments thereto, shall remain in effect. All capitalized terms not defined herein shall have the meanings ascribed to them in the Anchor Bridge Loan. If the foregoing confirms your understanding, please indicate acceptance of the Extension of the Anchor Bridge Loan by executing and returning to us the enclosed copy of this letter by facsimile whereupon the Extension shall become effective. Sincerely, /s/ Theodore Rosen Chairman U.S. Energy Systems, Inc. ACCEPTED: ANCHOR CAPITAL COMPANY, L.L.C. BY: /s/ Michael A. Gales Title: Chairman and CEO EX-10.19 7 PLEDGE AGREEMENT EXHIBIT 10.19 PLEDGE AGREEMENT PLEDGE AGREEMENT, dated as of December 15, 1995, made by U.S. ENVIROSYSTEMS, INC., a Delaware corporation (the "Pledgor"), in favor of SOLVATION, Inc., a Delaware corporation, (the "Lender"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, pursuant to the Loan Agreement, dated as of December, 1995 (as amended, supplemented, restated or otherwise modified from time to time, the "Loan Agreement"), among the Pledgor, Lehi Envirosystems, Inc., a Delaware corporation ("Lehi"), Plymouth Envirosystems, Inc., a Delaware corporation ("Plymouth" and, collectively with Lehi and the Pledgor, the "Borrowers"), and the Lender, the Lender has agreed to extend credit to and for the account of the Borrowers upon the terms and subject to the conditions set forth therein; WHEREAS, the Pledgor is the legal and beneficial owner of the shares of Pledged Stock (as hereinafter defined) listed on Schedule I hereto issued by Lehi and Plymouth; and WHEREAS, it is a condition precedent to the obligation of the Lender to make its extensions of credit to and for the account of the Borrowers under the Loan Agreement that the Pledgor shall have executed and delivered this Pledge Agreement to the Lender; NOW, THEREFORE, in consideration of the premises and to induce the Lenders to enter into the Loan Agreement and to induce the Lenders to make loans to the Borrowers under the Loan Agreement, the Pledgor hereby agrees with the Lender as follows: 1. Defined Terms. Unless otherwise defined herein, terms which are defined in ------------- the Loan Agreement and used herein are so used as so defined, and the following terms shall have the following meanings: "Collateral" means the Pledged Stock and all ---------- Proceeds. "Lehi Stock" means Pledged Stock issued by Lehi. ---------- 2 "Obligations" means the unpaid principal amount of, and interest on, the Notes ----------- and all other obligations and liabilities of the Borrowers to the Lender, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Loan Agreement, the Note, or this Pledge Agreement or any other Loan Document, and any other document executed and delivered in connection therewith or herewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees and expenses of counsel to the Lender) or otherwise. "Pledge Agent" means the pledge agent for the benefit of the holders of the ------------ Convertible Debentures. "Pledge Agreement" means this Pledge Agreement, as amended, restated, ---------------- supplemented or otherwise modified from time to time. "Pledged Stock" means the shares of capital stock of each of Lehi and Plymouth ------------- listed on Schedule I hereto, and all capital stock of each of Lehi and Plymouth at any time hereafter owned by the Pledgor, together with all stock certificates, and all warrants, options or other rights to acquire shares of the capital stock of Lehi or Plymouth whether now or at any time hereafter owned by the Pledgor. "Plymouth Stock" means Pledged Stock issued by Plymouth. -------------- "Proceeds" means all "proceeds" as such term is defined in Section 9-306(1) of -------- the UCC on the date hereof and, in any event, shall include, without limitation, all dividends or other income from the Pledged Stock, collections thereon or distributions with respect thereto and proceeds from any sale or other disposition thereof. "UCC" means the Uniform Commercial Code from time to time in effect in the State of New York; provided, however, that if by reason of mandatory provisions -------- ------- of law, the perfection or the effect of perfection or non-perfection of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than New York, "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non- perfection. 2. Pledge; Grant of Security Interest. The Pledgor hereby pledges, sets over, ---------------------------------- and confirms unto the Lender, all the Pledged Stock, has heretofore delivered to 3 the Pledge Agent as agent of, and bailee for, the Lender in case of Lehi Stock, and to Anchor, as agent of and bailee for, the Lender in case of Plymouth Stock, and hereby grants to the Lender, a security interest in the Collateral, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. 3. Stock Powers. The Pledgor shall deliver to the Lender on the Closing Date, ------------ and at any time thereafter upon the Lender's request or as otherwise provided herein, stock powers covering the certificates representing the Pledged Stock, duly executed in blank by the Pledgor with, if the Lender so requests, signature guaranteed. 4. Representations and Warranties. The Pledgor represents and warrants that: ------------------------------ (a) the shares of Pledged Stock of Lehi and Plymouth listed on Schedule I constitute all the issued and outstanding shares of all classes of the capital stock of Lehi and Plymouth, as the case may be, and there are no outstanding commitments to issue any additional shares of the capital stock of Lehi or Plymouth or any securities convertible into or exchangeable for such shares; (b) all the shares of the Pledged Stock listed on Schedule I have been duly and validly issued and are fully paid and nonassessable; (c) the Pledgor is the record and beneficial owner of, and has good title to, the Pledged Stock listed on Schedule I, free of any and all Liens or options in favor of, or claims of, any other Person, except (i) the Lien created by this Pledge Agreement (ii) the security interest of Anchor in Plymouth Stock and (iii) the security interest of Anchor and the holders of the Convertible Debentures in Lehi Stock; (d) all certificates representing Lehi Stock are as of the date hereof held by the Pledge Agent pursuant to a pledge agreement between Pledgor and the Pledge Agent, for the benefit of the holders of the Convertible Debentures, and all certificates representing Plymouth Stock are as of the date hereof held by Anchor pursuant to the pledge agreement between the Pledgor and Anchor; (e) upon delivery of (i) the stock certificates evidencing the Lehi Stock listed on Schedule I to the Lender or to the Pledge Agent and the acknowledgment by the Pledge Agent that it holds the Lehi Stock as agent of, and bailee for, the Lender, and, following the payment in full of all obligations under the Convertible Debentures 4 and receipt by Anchor of the Lehi Stock, the acknowledgment by Anchor that it holds the Lehi Stock as agent of, and bailee for, the Lender, and (ii) the stock certificates evidencing the Plymouth Stock listed on Schedule I to the Lender or to Anchor and acknowledgment by Anchor that it holds the Plymouth Stock as agent of, and bailee for, the Lender, the Lien granted pursuant to this Agreement will constitute a valid, perfected Lien on the Collateral, enforceable as such against all creditors of the Pledgor and any Persons purporting to purchase any Collateral from the Pledgor, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles. 5. Covenants. The Pledgor covenants and agrees with the Lender, so long as --------- this Pledge Agreement is in effect, that: (a) If the Pledgor shall, as a result of its ownership of the Pledged Stock, become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights, whether in addition to, in substitution of, as a conversion of, or in exchange for any shares of the Pledged Stock, or otherwise in respect thereof, the Pledgor shall accept the same as the agent of the Lender, or, as the case may be, Anchor or the Pledge Agent, hold the same in trust for the Lender and deliver the same forthwith to the Lender, (or, in the case of Plymouth Stock, to Anchor as agent of, and bailee for, the Lender and in the case of Lehi Stock, to the Pledge Agent as agent of, and bailee for, the lender) duly endorsed by the Pledgor in blank or accompanied by a stock power covering such certificate duly executed in blank by the Pledgor and with, if the Lender so requests, signature guaranteed, to be held by the Lender, subject to the terms hereof, as additional collateral security for the Obligations. Any sums paid upon or in respect of the Pledged Stock upon the liquidation or dissolution of the Lehi or Plymouth shall be paid over to the Lender to be held by it hereunder as additional collateral security for the Obligations, and in case the distribution of capital shall be made on or in respect of the Pledged Stock or any property shall be distributed upon or with respect to the Pledged Stock pursuant to the recapitalization or reclassification of the capital of Lehi or Plymouth or pursuant to the reorganization thereof, the property so distributed shall be delivered to the Lender (or, in the case of Plymouth Stock, to Anchor as agent of, and bailee for, the Lender and in the case of Lehi Stock, to the Pledge 5 Agent as agent of, and bailee for, the Lender) to be held by it hereunder as additional collateral security for the Obligations. If any sums of money or property so paid or distributed in respect of the Pledged Stock shall be received by the Pledgor, the Pledgor shall, until such money or property is paid or delivered to the Lender (or, in the case of Plymouth Stock, as agent of, and bailee for, the Lender and in the case of Lehi Stock, to the Pledge Agent as agent of, and bailee for, the Lender), hold such money or property in trust for the Lender, or, as the case may be, Anchor or the Pledge Agent, segregated from other funds of the Pledgor, as additional collateral security for the Obligations. (b) Without the prior written consent of the Lender, the Pledgor will not (i) vote to enable, or take any other action to permit, Lehi or Plymouth to issue any stock or other equity securities of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any stock or other equity securities of any nature of Lehi or Plymouth, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Collateral, or (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Collateral, or any interest therein, except for the Lien provided for by this Pledge Agreement and except to the extent permitted pursuant to Section 5.11 of the Loan Agreement. The Pledgor will defend the right, title and interest of the Lender in and to the Collateral against the claims and demands of all Persons whomsoever. (c) At any time and from time to time, upon the written request of the Lender, and at the sole expense of the Pledgor, the Pledgor will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Lender may reasonably request for the purposes of obtaining or preserving the full benefits of this Pledge Agreement and of the rights and powers herein granted. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be promptly delivered to the Lender or, in the case of Plymouth Stock, Anchor as agent of, and bailee for, the Lender and in the case of Lehi Stock, to the Pledge Agent as agent of, and bailee for, the Lender, duly endorsed in a manner satisfactory to the Lender, to be held as Collateral pursuant to this Agreement. (d) The Pledgor agrees to pay, and to save the Lender harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and 6 all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Pledge Agreement. 6. Cash Dividends; Voting Rights. Unless an Event of Default shall ----------------------------- have occurred and be continuing, the Pledgor shall be permitted to receive and apply all cash dividends paid by Lehi or Plymouth, in respect of the Pledged Stock and to exercise all voting and corporate rights with respect to the Pledged Stock, provided, however, and that no vote shall be cast or corporate -------- ------- right exercised or other action taken which, in the Lender's reasonable judgment, would impair the Collateral or which would be inconsistent with or result in any violation of any provision of the Loan Agreement, the Note or any other Loan Document. 7. Remedies. -------- (a) If an Event of Default shall occur and be continuing, the Lender may exercise, in addition to all other rights and remedies granted in this Pledge Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the UCC. (b) If an Event of Default shall occur and be continuing and the Lender shall give notice to the Pledgor of its intent to exercise such rights, (i) the Lender shall have the right to receive any and all cash dividends paid in respect of the Pledged Stock subject to Section 5 of the Intercreditor Agreement, and make application thereof to the Obligations in such order as provided under Section 7(e) hereof and (ii) subject to the Intercreditor Agreement, upon request of the Lender, all shares of the Pledged Stock shall be registered in the name of the Lender or its nominee, and the Lender or its nominee may thereafter exercise (A) all voting, corporate and other rights pertaining to such shares of the Pledged Stock at any meeting of shareholders of Lehi or Plymouth or otherwise and (B) any and all rights, privileges or options pertaining to such shares of the Pledged Stock as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Stock upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of Lehi or Plymouth, or upon the exercise by the Pledgor or the Lender of any right, privilege or option pertaining to such shares of the Pledged Stock, and in connection therewith, the right to deposit and deliver any and all of the Pledged Stock with any committee, depositary, transfer agent, registrar or other designated 7 agency upon such terms and conditions as it may determine), all without liability except to account for property actually received by it and except for its gross negligence or willful misconduct. (c) If an Event of Default shall occur and be continuing, the Lender, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Pledgor, Lehi, Plymouth or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived to the extent permitted by applicable law), may, subject to the Intercreditor Agreement, in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, in the over-the-counter market, at any exchange, broker's board or office of the Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Lender shall be authorized at any such sale (if it deems it advisable to do so) to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing the Collateral for their own account for investment and not with a view to the distribution or sale thereof, and upon consummation of any such sale the Lender shall have the right to assign, transfer and deliver to the purchaser or purchasers thereof the Collateral so sold. The Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold. Each such purchaser at any such sale shall hold the property sold absolutely and free from Lien or other claim or right of whatever kind on the part of the Pledgor, including any equity or right of redemption of the Pledgor, and the Pledgor, to the full extent permitted by applicable law, hereby specifically waives all rights of redemption, stay and appraisal which the Pledgor now has or may have at any time in the future under any law now existing or hereafter enacted or adopted (as well as any rights to exoneration, subrogation or reimbursement arising at law, in equity or otherwise). (d) If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 business days before such sale or other disposition and, in the case of a proposed public sale, such 8 notice shall state the time and place fixed for such sale. All waivers by the Pledgor of rights (including rights to notice), and all rights and remedies afforded the Lender herein, and all other provisions of this Pledge Agreement, are expressly made subject to any applicable mandatory provisions of law limiting, or imposing conditions (including conditions as to reasonableness) upon, such waivers or the effectiveness thereof or any such rights and remedies. Any sale or other disposition of the Collateral and the possession thereof by the Lender shall be in compliance with all provisions of applicable law (including applicable securities laws and applicable provisions of the UCC). The Pledgor shall remain liable for any deficiency if the proceeds of any sale or other disposition of Collateral are insufficient to pay the Obligations and the reasonable fees and expenses of any counsel or other agency employed by the Lender to collect such deficiency. (e) The Proceeds of any sale of, or other realization upon, Collateral pursuant to or as contemplated by this Pledge Agreement, as well as any Collateral consisting of cash, shall be promptly applied by the Lender, subject to Section 5 of the Intercreditor Agreement, as follows: FIRST, to payment of all reasonable costs and expenses incurred by the Lender in connection with such sale or incidental to the care or safekeeping of any of the Collateral or the rights of the Lender hereunder or otherwise in connection with the Lender's rights under this Pledge Agreement, including, but not limited to, all court costs and the reasonable fees, expenses and other charges of its agents and legal counsel, the repayment of all advances made by the Lender hereunder on behalf of the Pledgor and any other costs or expenses incurred in connection with the exercise of any right or remedy hereunder; SECOND, to the payment in full of the Obligations; and THIRD, to the Pledgor, its successors and assigns, or as a court of competent jurisdiction may otherwise direct. (f) The rights of the Lender hereunder shall not be conditioned or contingent upon the pursuit by the Lender of any right or remedy against the Pledgor or Lehi or Plymouth or any other Person which may be or become liable in respect of all or any part of the Obligations or against any collateral security therefor or right of offset with respect thereto. Neither the Lender nor any Lender shall be liable for any failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing 9 so, nor shall the Lender be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The Pledgor waives all claims, damages and demands it may acquire against the Lender arising out of the exercise by it of any rights hereunder, except to the extent of any gross negligence, bad faith or willful misconduct on the part of the Lender. 8. Lender Appointed Attorney-in-Fact; Proxy. ---------------------------------------- (a) Effective upon the occurrence and during the continuance of an Event of Default, the Pledgor hereby irrevocably appoints the Lender as the Pledgor's attorney-in-fact for the purpose of carrying out the provisions of this Pledge Agreement and taking any action and executing any instrument which the Lender may deem necessary or advisable to accomplish the purposes hereof, which appointment is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, the Lender shall have the right, upon the occurrence and during the continuance of an Event of Default, with full power of substitution either in the Lender's name or in the name of the Pledgor, to (i) ask for, demand, sue for, collect, receive receipt and give acquittance for any and all moneys due or to become due and under and by virtue of any Collateral, (ii) endorse checks, drafts, orders and other instruments for the payment of money payable to the Pledgor representing any Proceeds and give full discharge for the same, (iii) settle, compromise, prosecute or defend any action, claim or proceeding with respect to any of the foregoing and (iv) sell, assign, endorse, pledge, transfer and make any agreement respecting, or otherwise deal with, any of the Collateral. (b) Effective upon the occurrence and during the continuance of an Event of Default, the Pledgor hereby irrevocably appoints the Lender as its proxy, with full power of substitution, to exercise all voting rights, including voting and other rights with respect to the Pledged Stock, at any annual or special meeting of the stockholders of the issuer thereof, or any adjournment or postponement thereof, or by written consent in lieu of meeting, or otherwise. The foregoing appointment is irrevocable and coupled with an interest. (c) Nothing contained in this Agreement shall be construed as requiring or obligating the Lender to make any commitment or to make any inquiry as to the nature or sufficiency of any payment received by the Lender, or to present or file any claim or notice, or to take any action with respect to the Collateral or any part thereof or the 10 moneys due or to become due on or with respect thereto or any property covered thereby, and no action taken by the Lender or omitted to be taken with respect to the Collateral or any part thereof shall give rise to any defense, counterclaim or offset in favor of the Pledgor or to any claim or action against the Lender, except in the case of the gross negligence or willful misconduct of the Lender. 9. Registration Rights: Private Sales. ---------------------------------- (a) If the Lender shall determine to exercise its right to sell any or all of the Pledged Stock pursuant to Section 7 hereof, and if in the reasonable opinion of the Lender it is necessary or advisable to have the Pledged Stock, or that portion thereof to be sold, registered under the provisions of the Securities Act of 1933, as amended (the "Securities Act"), the Pledgor will cause the Borrower whose stock is to be so registered to (i) execute and deliver, and use its best efforts to cause the directors and officers of Lehi or Plymouth, as the case may be, to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts as may be, in the reasonable opinion of the Lender, necessary or advisable to register the Pledged Stock, or that portion thereof to be sold, under the provisions of the Securities Act, (ii) use its best efforts to cause the registration statement relating thereto to become effective and to remain effective for a period of one year from the date of the first public offering of the Pledged Stock, or that portion thereof to be sold, and (iii) make all amendments thereto and/or to the related prospectus which, in the reasonable opinion of the Lender, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto. The Pledgor agrees to use its best efforts to cause Lehi or Plymouth, as the case may be, whose stock is to be so registered to comply with the provisions of the securities or "Blue Sky" laws of any and all jurisdictions which the Lender shall reasonably designate, and use its best efforts to cause Lehi or Plymouth, as the case may be, to make available to its security holders, as soon as practicable, an earnings statement (which need not be audited) which will satisfy the provisions of Section ll(a) of the Securities Act. (b) The Pledgor recognizes that the Lender may be unable to effect a public sale of any or all of the Pledged Stock, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, or the Lender may determine that in its judgment that a private sale is advisable, and may be compelled to resort to one or more private sales thereof to a group of purchasers restricted in number, nature of 11 business and investment intention for the purposes of complying with the Securities Act, which group will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Lender shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit Lehi or Plymouth, as the case may be, whose stock is to be so registered to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so. (c) The Pledgor further agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Pledged Stock pursuant to this Section 9 valid and binding and in compliance with any and all other applicable Requirements of Law. The Pledgor further agrees that a breach of any of the covenants contained in this Section 9 will cause irreparable injury to the Lender, that the Lender have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 9 shall be specifically enforceable against the Pledgor, and the Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants. 10. Security Interest Absolute. All rights of the Lender hereunder, the grant -------------------------- of the security interest in the Collateral and all obligations of the Pledgor hereunder shall be absolute and unconditional irrespective of (i) any lack of validity or enforceability of the Obligations, the Loan Agreement or any other Loan Document or any other agreement or instrument relating to any of the foregoing, (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Loan Agreement or any other Loan Document or any other agreement or instrument relating to any of the foregoing, (iii) failure by the Lender to take steps to perfect or maintain perfected its security interest in, or to preserve its rights to, any of the Collateral, (iv) any exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to or departure from any guaranty, for all or any of the Obligations, (v) the disallowance under Section 502 of the Bankruptcy Code of all or any portion of the claims of the 12 Lender for repayment of the Obligations or (vi) any other circumstance which might otherwise constitute a legal or equitable defense available to, or a legal or equitable discharge of, the Pledgor with respect to the Obligations or with respect to this Agreement other than the indefeasible payment in full of all of the Obligations. 11. Amendments etc. with respect to the Obligations. The Pledgor shall remain ----------------------------------------------- obligated hereunder, and the Collateral shall remain subject to the Lien granted hereby, notwithstanding that, without any reservation of rights against the Pledgor, and without notice to or further assent by the Pledgor, any demand for payment of any of the Obligations made by the Lender may be rescinded by the Lender, and any of the Obligations continued, and the Obligations, or the liability of the Borrowers or any other Person upon or for any part thereof, or any collateral security or guarantee therefor in right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Lender or any Lender, and the Loan Agreement, the Note, the other Loan Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or part, as the Lender may deem advisable from time to time, and any guarantee, right of offset or other collateral security at any time held by the Lender for the payment of the Obligations may be sold, exchanged, waived, surrendered or released. The Lender shall have no obligation to protect, secure, perfect or insure any other Lien at any time held by it as security for the Obligations or any property thereto. The Pledgor waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Lender upon this Agreement; the Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Pledge Agreement; and all dealings between Lehi, Plymouth and the Pledgor, on the one hand, and the Lender, on the other, shall likewise be conclusively presumed to have been had or consummated in reliance upon this Pledge Agreement. The Pledgor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Pledgor or any other Person with respect to the Obligations. 12. Limitation on Duties Regarding Collateral. The Lender's sole duty with ----------------------------------------- respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the UCC or otherwise, shall be to deal with it in the same manner as the Lender would deal with similar securities and property for its own account. Neither the Lender nor any of its directors, 13 officers, employees or Lenders shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or otherwise. 13. Powers Coupled with an Interest. All authorizations and agencies herein ------------------------------- contained with respect to the Collateral are irrevocable and constitute powers coupled with an interest. 14. Severability. Any provision of this Pledge Agreement which is prohibited ------------ or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15. Paragraph Headings. The paragraph headings used in this Pledge Agreement ------------------ are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 16. No Waiver; Cumulative Remedies. The Lender shall not by any act (except by ------------------------------ a written instrument pursuant to Section 18 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Lender of any right or remedy hereunder on any occasion shall not be construed as a bar to any right or remedy which the Lender would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 17. Waivers and Amendments; Successors and Assigns. None of the terms or ---------------------------------------------- provisions of this Pledge Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Pledgor and the Lender, provided that any provision of this Pledge Agreement may be waived -------- by the Lender in a written letter or agreement executed by the Lender or by telex or facsimile transmission from the Lender. This Pledge 14 Agreement shall be binding upon the successors and assigns of the Pledgor and shall inure to the benefit of the Lender and the Lenders and their respective successors and assigns. 18. Notices. Notices by the Lender to be effective shall be in writing and ------- provided as set forth in the Loan Agreement. The Pledgor and the Borrower may change their respective addresses and transmission numbers by written notice to the Lender. 19. Irrevocable Authorization and Instruction to Issuers. The Pledgor hereby ---------------------------------------------------- authorizes and instructs Lehi and Plymouth to comply with any instruction received by it from the Lender in writing that (a) states that an Event of Default has occurred and is continuing and (b) is otherwise in accordance with the terms of this Pledge Agreement, without any other or further instructions from the Pledgor, and the Pledgor agrees that the Borrower shall be fully protected in so complying. 20. Duration of Agreement: Release of Security. This Pledge Agreement and the ------------------------------------------ security interests granted hereunder shall terminate when all of the Obligations (to the extent then capable of being paid) have been fully paid and performed or otherwise satisfied and the Lender has no further Commitment to make the Loans or perform any other obligations under the Loan Agreement or any Loan Document. The release of Collateral or reassignment of rights to the Pledgor upon the termination of this Agreement shall be without recourse to or warranty by the Lender and shall be made by the Lender at the expense of the Pledgor. Upon request of the Pledgor at any time following such termination, the Lender will deliver (at the sole cost and expense of the Pledgor) to the Pledgor all certificates and instruments representing or evidencing the Pledged Stock, together with all other Collateral held by the Lender hereunder, and execute and deliver (at the sole cost and expense of the Pledgor) to the Pledgor such other documents as the Pledgor shall reasonably request to evidence such termination. 21. Reinstatement. This Pledge Agreement shall remain in full force and effect ------------- and continue to be effective should any petition be filed by or against the Pledgor for liquidation or reorganization, should the Pledgor become insolvent or make an assignment for any benefit of creditors or should a receiver or trustee be appointed for all or any significant part of the Pledgor's assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Obligations, whether as a "voidable 15 preference," "fraudulent conveyance," or otherwise, all as though such payment or performance had not been made. In the event any payment, or any part thereof, is rescinded, reduced, restored or returned, the Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned. 22. GOVERNING LAW. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED ------------ AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 23. WAIVER OF JURY TRIAL. THE LENDER AND THE PLEDGOR HEREBY IRREVOCABLY WAIVE -------------------- ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED UPON, OR ARISING OUT OF, THIS PLEDGE AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS OR ACTIONS OF THE AGENT OR THE PLEDGOR RELATING THERETO. 24. Counterparts. This Pledge Agreement may be executed in any number of identical counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract. 16 IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed and delivered as of the date first above written. U.S. ENVIROSYSTEMS, INC. By --------------------------------- Name: Title: SOLVATION, INC. By --------------------------------- Name: Title: ACKNOWLEDGMENT AND CONSENT The undersigned hereby acknowledges receipt of a copy thereof and agrees to be bound thereby and to comply with the terms thereof insofar as such terms are applicable to it. The undersigned agrees to notify the Agent promptly in writing of the occurrence of any of the events described in Section 5(a) of the Pledge Agreement. The undersigned further agrees that the terms of Section 9 of the Pledge Agreement shall apply to it, mutatis mutandis, with respect to all ------- -------- actions that may be required of it under or pursuant to or arising out of Section 9 of the Pledge Agreement. LEHI ENVIROSYSTEMS, INC. By --------------------------------- Name: Title: ACKNOWLEDGMENT AND CONSENT The undersigned hereby acknowledges receipt of a copy thereof and agrees to be bound thereby and to comply with the terms thereof insofar as such terms are applicable to it. The undersigned agrees to notify the Agent promptly in writing of the occurrence of any of the events described in Section 5(a) of the Pledge Agreement. The undersigned further agrees that the terms of Section 9 of the Pledge Agreement shall apply to it, mutatis mutandis, with respect to all ------- -------- actions that may be required of it under or pursuant to or arising out of Section 9 of the Pledge Agreement. PLYMOUTH ENVIROSYSTEMS, INC. By --------------------------------- Name: Title: SCHEDULE 1 to Pledge Agreement ---------------- DESCRIPTION OF PLEDGED STOCK
Number of Shares Stock Represented Certificate by such Issuer Class of Interest No. Certificate Date of Certificate ------ ----------------- ----------- ----------- ------------------- Lehi Envirosystems, Inc. Common Stock 1 100 -- Plymouth Envirosystems, Inc. Common Stock 1 100 December 15,1995
EX-10.32 8 CONVERTIBLE SUBORDINATED DEBENTURES EXHIBIT 10.32 US Envirosystems, Inc. April __, 1996 To All Holders of Convertible Subordinated Debentures: We have completed arrangements for a private placement and a public stock offering for the Company totalling $10 million, which will provide the funds for future strength and growth. The simultaneous closing is expected to take place by early June. The public offering consists of 1,625,000 shares of Common Stock at $4.00 per share, and 1,625,000 Warrants, exercisable at $4.00 per share, at ten cents per Warrant. In the underwriting, the Warrants are only offered to purchasers of the Common Stock. One requirement of the financing is for a reverse split of our Common Stock, 1 for 40, which has already been approved by a majority of our stockholders, and which will be put into effect immediately. As a result of the reverse split, the number of shares of Common Stock into which the Convertible Subordinated Debentures would now be convertible has changed from 2,666 shares to 66 shares per $1,000 principal amount of debentures. Another requirement of the financing is for one-third ($500,000) of our outstanding Convertible Subordinated Debentures to be converted to Common Stock. A number of debenture holders have expressed their desire to convert all of their debentures if the conversion rate were at the public offering price. We have negotiated with the investment bankers a conversion structure which we believe you will find advantageous. In order to give everyone an equal opportunity to convert, we are therefore offering the following: 1. You may tender all of your debentures for conversion into (a) ___ shares of Common Stock and (b) ___ Warrants exercisable at $4.00 each, per $1,000 of principal Value of debentures. One third will automatically be accepted for conversion at these rates. More than one-third will be accepted on a pro-rata basis if other debenture holders fail to tender. The Company cannot accept more than a total of $500,000 at these rates. The remaining debentures will continue to be outstanding, but at a conversion rate of 125 shares (in place of the present 66 shares) of Common Stock per $1,000 of principal value, and the interest rate will be reduced to 9%. This offer is valid for 14 days from the date of this letter. 2. All accrued and deferred interest at the current rates will be paid when the financings are effective. Your past cooperation in helping the Company to this point has been appreciated, and we feel that these changes are in your best interests. They certainly held the Company to a promising future, which in turn will enhance the value of the shares you will own or into which your holdings will be convertible. Please indicate your wishes by returning the attached form as soon as possible. /s/ Richard H. Nelson NOTE: THIS DOCUMENT MUST BE RETURNED TO THE COMPANY BY MAY 20, 1996. IT IS NOT NECESSARY TO RETURN THE ORIGINAL DEBENTURE AT THIS TIME. To: U.S. Envirosystems, Inc. 515 North Flagler Drive, Suite 202 West Palm Beach, FL 33401 Gentlemen: I hereby tender the 18% Convertible Subordinated Debentures issued by U.S. Envirosystems, Inc. due 2004 and currently held by me. It is my understanding that, based on the 1:40 reverse split of the common shares of U.S. Envirosystems, Inc., each $1,000 face amount of the Debentures are convertible into 66 common shares. It is my further understanding that this tender will cause U.S. Envirosystems, Inc. to issue to me 250 fully paid and non-assessable common shares and 250 warrants to purchase one common share per warrant for each $1,000 face amount of the Debentures. Since the Debentures have been held for a period in excess of two years, the common shares so issued will be freely tradable or transferable by me pursuant to Rule 144 of the Securities Act. I further understand that U.S. Envirosystems, Inc. guarantees that at least one-third of the total face value of Debentures not converted as above, will have a conversion rate of 125 common shares per $1,000 face amount, and that the continuing interest rate to be paid on the non-converted Debentures will be 9%. Additionally, all accrued interest will be paid upon closing of the presently contemplated public financing of the company /s/________________________ EX-11.3 9 PRO FORMA EARNINGS PER SHARE -- JANUARY 31, 1996 EXHIBIT 11.3 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES PRO FORMA EARNINGS PER SHARE CALCULATION JANUARY 31, 1996 Weighted average number of shares 438,773 outstanding............................ Anchor preferred stock converted to 129,740 common................................. Conversion of debentures ($500,000 125,000 principal)............................. Assumed proceeds from sale of securities required for transactions in (A) below.......... $7,237,000 Net proceeds per share = $10,662,000/3,100,000............... $3.44 2,103,779 ----- ---------- Total pro forma common shares 2,797,292 outstanding............................ ========== INCOME BEFORE EXTRAORDINARY ITEM........ $ 481,000 ========== EARNINGS PER SHARE...................... $0.17 ==========
(A) Includes acquisition of Steamboat Facilities, repayment of loans and accrued interest and purchase of interest in NRG. EX-11.4 10 PRO FORMA EARNINGS PER SHARE-JULY 31, 1996 EXHIBIT 11.4 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES PRO FORMA EARNINGS PER SHARE CALCULATION JULY 31, 1996 Number of shares issued and outstanding. 439,650 Anchor preferred stock converted to 205,000 common................................. Conversion of debentures ($500,000 125,000 principal)............................. Assumed proceeds from sale of securities required for transaction in (A) below........... $7,723,000 Net proceeds per share = $10,662,000/3,100,000................. $3.44 2,245,058 ----- ---------- Total pro forma common shares 3,014,708 outstanding............................ ========== NET INCOME.............................. $ 266,000 ========== EARNINGS PER SHARE...................... $0.09 ==========
(A) Includes acquisition of Steamboat Facilities, repayment of loans and accrued interest and purchase of interest in NRG. EX-11.5 11 SUPP. EARNINGS PER SHARE-JAN. 31 & JULY 31, 1996 EXHIBIT 11.5 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES SUPPLEMENTAL HISTORICAL EARNINGS PER SHARE CALCULATION JANUARY 31, 1996 AND JULY 31, 1996
January 31, 1996 July 31, 1996 ------------------------ -------------------------- Loss applicable to common stock - historical............................. $(1,412,000) $ (857,000) Addback interest: Notes payable.......................... $ 110,000 $ 55,000 Loans payable.......................... 71,000 86,000 ---------- ---------- 181,000 141,000 Addback debt discount: Notes payable.......................... 20,000 10,000 Loans payable.......................... 18,000 9,000 Deferred financing on bridge........... 34,000 31,000 ---------- ---------- 72,000 50,000 ----------- ---------- Loss applicable to common stock - $(1,159,000) $ (666,000) supplemental........................... =========== ========== Net loss before extraordinary gain - $(1,242,000) supplemental........................... =========== Outstanding common shares - historical.. 438,773 439,650 Shares for which proceeds are to be used to retire debt: Notes payable.......................... 1,000,000 1,000,000 Loans payable.......................... 785,000 960,000 ---------- ---------- 1,785,000 1,960,000 Net proceeds per common share........... $3.44 $3.44 ---------- ---------- 518,895 569,767 ----------- ---------- OUTSTANDING SHARES - SUPPLEMENTAL....... $ 957,668 $1,009,417 =========== ========== LOSS PER SHARE - SUPPLEMENTAL........... $(1.30) $(0.66) =========== ==========
EX-23.2 12 CONSENT OF RICHARD A. EISNER & COMPANY, LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the use in both Prospectuses constituting a part of this Registration Statement of our report dated March 1, 1996 (May 6, 1996 as to Note J(4) and May 17, 1996 as to Note A) relating to the consolidated financial statements of U.S. Energy Systems, Inc. and subsidiaries, which is contained in those Prospectuses. We also consent to the reference to our firm under the caption "Experts" in the Prospectuses. Richard A. Eisner & Company, LLP New York, New York November 25, 1996 EX-23.3 13 CONSENT OF ROBISON, HILL & CO., P.C. (FAR WEST) EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We hereby consent to the inclusion in this Registration Statement on Amendment No. 5 to Form SB-2 and the prospectuses included therein of our report dated February 29, 1996 on our audit of the financial statements of Far West Electric Energy Fund, L.P. We also consent to the reference to our firm under the caption "Experts". /s/ Robison, Hill & Co. Robison, Hill & Co. Certified Public Accountants Salt Lake City, Utah November 25, 1996 EX-23.4 14 CONSENT OF ROBISON, HILL & CO., P.C. (1-A ENT.) EXHIBIT 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We hereby consent to the inclusion in this Registration Statement on Amendment No. 5 to Form SB-2 and the prospectuses included therein of our report dated March 5, 1996 on our audit of the financial statements of 1-A Enterprises. We also consent to the reference to our firm under the caption "Experts". /s/ Robison, Hill & Co. Robison, Hill & Co. Certified Public Accountants Salt Lake City, Utah November 25, 1996 EX-23.5 15 CONSENT OF TRAVELLER WINN & MOWER, PC EXHIBIT 23.5 We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated March 19, 1996, with respect to the financial statements of Lehi Independent Power Associates, L.C. in the Registration Statement (Form SB-2 No.333-04612) and related Prospectuses of U.S. Energy Systems, Inc. /s/ Traveller Winn & Mower, PC Salt Lake City, Utah November 25, 1996 EX-23.6 16 CONSENT OF PRICE WATERHOUSE LLP (PRIMARY PROS) Exhibit 23.6 Consent of Independent Accountants We hereby consent to the use in the Primary Prospectus constituting part of this Registration Statement on Form SB-2 of our report dated February 27, 1996 relating to the financial statements of Plymouth Cogeneration Limited Partnership, which appears in such Prospectus. We also consent to the reference to us under the heading "Experts." Price Waterhouse LLP Hartford, Connecticut November 26, 1996 EX-23.7 17 CONSENT OF PRICE WATERHOUSE LLP (SECONDARY PROS) Exhibit 23.7 Consent of Independent Accountants We hereby consent to the use in the Secondary Prospectus constituting part of this Registration Statement on Form SB-2 of our report dated February 27, 1996 relating to the financial statements of Plymouth Cogeneration Limited Partnership, which appears in such Prospectus. We also consent to the reference to us under the heading "Experts." Price Waterhouse LLP Hartford, Connecticut November 26, 1996 EX-27 18 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS OF OPERATIONS, BALANCE SHEET, STATEMENTS OF STOCKHOLDERS' EQUITY AND STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS JAN-31-1997 JUL-31-1996 1,000 0 20,000 0 0 21,000 0 0 2,076,000 2,815,000 1,525,000 0 1,000 4,000 (3,562,000) 2,076,000 0 0 0 500,000 0 0 328,000 (828,000) 0 (828,000) 0 0 0 (828,000) (1.95) (1.95)
-----END PRIVACY-ENHANCED MESSAGE-----