-----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, UVFq/Izp/rjqaKiMP87Md2aabssvEe9gBfwQ2QjZ87JRKHQKJLToMCr8qEWOebMz eMXhbeWBS+o3pykmmKh8KQ== 0001144204-05-016876.txt : 20050523 0001144204-05-016876.hdr.sgml : 20050523 20050523165326 ACCESSION NUMBER: 0001144204-05-016876 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050523 DATE AS OF CHANGE: 20050523 FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S ENERGY SYSTEMS INC CENTRAL INDEX KEY: 0000351917 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC, GAS & SANITARY SERVICES [4900] IRS NUMBER: 521216347 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10238 FILM NUMBER: 05851807 BUSINESS ADDRESS: STREET 1: ONE NORTH LEXINGTON AVE STREET 2: 4TH FLOOR CITY: WHITE PLAINS STATE: NY ZIP: 10601 BUSINESS PHONE: 9149936443 MAIL ADDRESS: STREET 1: ONE NORTH LEXINGTON AVE STREET 2: 4TH FLOOR CITY: WHITE PLAINS STATE: NY ZIP: 10601 FORMER COMPANY: FORMER CONFORMED NAME: U S ENVIROSYSTEMS INC /DE/ DATE OF NAME CHANGE: 19960607 FORMER COMPANY: FORMER CONFORMED NAME: COGENIC ENERGY SYSTEMS INC DATE OF NAME CHANGE: 19940714 10-Q 1 v018934_10q.txt ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM __________ TO __________. COMMISSION FILE NUMBER: 0-10238 U.S. ENERGY SYSTEMS, INC. Delaware 52-1216347 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) One North Lexington Avenue Fifteenth Floor White Plains, NY 10601 (Address of Principal Executive Offices) (914) 993-6443 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] State the number of shares outstanding of each of issuer's classes of common equity, as of May 13, 2005: 11,970,061 shares of Common Stock U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES CONTENTS PART I: Financial Information PAGE Item 1: Financial Statements Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004.........3 Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2005 and 2004...........................5 Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004......................................................6 Notes to Consolidated Financial Statements.....................................7 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations............................................11 Item 3: Quantitative and Qualitative Disclosures About Market Risk...........13 Item 4: Controls and Procedures..............................................13 PART II. Other Information Item 6: Exhibits.............................................................14 Signatures....................................................................18 2 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
ASSETS March 31, 2005 December 31, 2004* -------------- ----------------- (Unaudited) (As Restated) Current Assets: Cash $ 14,746 $ 15,982 Restricted Cash and Marketable Securities 30,025 29,609 Accounts Receivable (less allowance for doubtful accounts of $46 and $1,313 in 2005 and 2004, respectively) 5,152 4,857 Installment Sale Partnership Interest and Interest Receivable, Current Portion 2,711 2,494 Other Current Assets 1,826 1,639 -------- -------- Total Current Assets, Net 54,460 54,581 Property, Plant and Equipment, Net 41,160 41,901 Construction in Progress 198 198 Installment Sale Partnership Interest, less Current Portion 23,312 23,537 Investments 1,175 801 Debt Issuance Costs, Net of Accumulated Amortization 11,068 11,266 Goodwill 26,618 26,618 Foreign Currency Hedge 2,279 2,414 Deferred Tax Asset 14,812 14,605 Other Assets 57 11 -------- -------- Total Assets $175,139 $175,932 ======== ======== LIABILITIES Current Liabilities: Current Portion Long-Term Debt $ 1,567 $ 1,517 Accounts Payable and Accrued Expenses 4,370 4,057 Deferred Revenue Installment Sale Partnership Interest, Current Portion 272 398 -------- -------- Total Current Liabilities 6,209 5,972 Long-Term Debt less Current Portion 85,529 86,297 Deferred Revenue Installment Sale Partnership Interest, less Current Portion 2,725 2,699 Deferred Royalty 5,598 5,686 Illinois Subsidy Liability 27,602 26,346 -------- -------- Total Liabilities 127,663 127,000 Minority Interests 10,428 10,733
3 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands, except share data)
March 31, 2005 December 31, 2004* -------------- ----------------- (unaudited) (as restated) STOCKHOLDERS' EQUITY Preferred Stock, $.01 par Value, Authorized 10,000,000 Shares: Series B, Cumulative, Convertible, Issued and Outstanding 368 Shares -- -- Series C Cumulative, Convertible, Issued and Outstanding 100,000 Shares, 1 1 Series D, Cumulative, Convertible, Issued and Outstanding 1,138,888 Shares 11 11 Common Stock, $.01 par Value, Authorized 50,000,000 Shares, issued 12,333,974 123 123 Treasury Stock, at Cost (2,204) (2,204) Additional Paid-in Capital 63,857 64,063 Accumulated Deficit (26,483) (25,805) Accumulated Other Comprehensive Income 1,743 2,010 --------- --------- Total Stockholders' Equity 37,048 38,199 ========= ========= TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 175,139 $ 175,932 ========= =========
See notes to consolidated financial statements *Derived from the Company's audited Consolidated Balance Sheet at December 31, 2004 4 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited) (in Thousands, except Earning per Share)
THREE MONTHS ENDED ------------------ March 31, 2005 March 31, 2004 -------------- -------------- Revenues $ 5,024 $ 5,117 -------- -------- Costs and Expenses: Operating Expenses 2,179 2,218 General and Administrative Expenses 1,207 8,422 Depreciation and Amortization 1,095 978 -------- -------- Total Costs and Expenses 4,481 11,618 -------- -------- INCOME (LOSS) FROM OPERATIONS 543 (6,501) OTHER INCOME (LOSS): Interest Income 820 347 Interest Expense (2,714) (1,848) Dividend Income -- 15 Foreign Currency Transaction Income 345 -- Other expenses (4) -- ICC Related Expense (12) -- Minority Interest 80 (5) -------- -------- Loss from continuing operations before income taxes (942) (7,992) Income Tax Benefit 111 3,566 -------- -------- LOSS BEFORE DISCONTINUED OPERATIONS (831) (4,426) Income from Discontinued Operations (Net of Tax) 150 452 -------- -------- NET LOSS (681) (3,974) Dividends on Preferred Stock (207) (207) -------- -------- LOSS APPLICABLE TO COMMON STOCK $ (888) $ (4,181) ======== ======== EARNINGS(LOSS) PER SHARE OF COMMON STOCK: Loss per Share of Common Stock Continuing Operations $ (.09) $ (.39) Income per Share of Common Stock Discontinued Operations $ .02 $ .04 Loss Per Share of Common Stock $ (.07) $ (.35) Weighted Average Number of Common Stock Outstanding - Basic and Diluted 11,970 11,890 COMPREHENSIVE LOSS, NET OF TAX Net Loss $ (681) $ (3,974) Other Comprehensive Loss (267) (109) -------- -------- Total Comprehensive Loss $ (948) $ (4,083) ======== ========
See notes to consolidated financial statements 5 U.S. ENERGY SYSTEMS, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in Thousands) (unaudited)
THREE MONTHS ENDED ------------------ March 31, 2005 March 31, 2004 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ (681) $ (3,974) Adjustments to reconcile Net Income to Net Cash provided by (used in) Operating Activities: Depreciation 897 918 Amortization 198 60 Minority Interest (305) 5 Deferred Income Taxes (205) (3,566) Unrealized Gains (267) -- Foreign Currency Translation Adjustment (389) (109) Valuation Allowance on Investment -- 6,336 Changes In: Accounts and Notes Receivable Trade (295) 1,510 Other Current Assets (187) 517 Other Assets (46) (2,120) Accounts Payable and Accrued Expenses 314 777 Deferred Revenue and Other (100) (178) Foreign Currency Hedge 134 -- Rate Incentive Liability 1,256 1,354 Net Effect of Discontinued Operations -- (367) -------- -------- Net Cash Provided by Operating Activities 324 1,163 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Restricted Cash (416) (1,284) Change in Investments (373) -- Acquisitions of Property and Equipment (156) (81) Construction in Progress -- (101) -------- -------- Net Cash Used in Investing Activities (945) (1,466) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Notes Receivable 8 341 Payment of Long-Term Debt (328) (1,152) Deferred Royalty (88) -- Dividends on Preferred Stock (207) (207) -------- -------- Net Cash Used in Financing Activities (615) (1,018) -------- -------- NET DECREASE IN CASH (1,236) (1,321) Cash - beginning of period 15,982 3,210 -------- -------- Cash - end of period $ 14,746 $ 1,889 ======== ========
See notes to consolidated financial statements 6 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2005 AND MARCH 31, 2004 (amounts in Thousands, except per share data) NOTE A -- BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and Regulation S-X, and accordingly, do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal accruals) considered necessary for a fair presentation have been included. The results for the three months are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, you should refer to the financial statements included in the U.S. Energy Systems Inc.'s (the "Company") Annual Report Form 10-K for the year ended December 31, 2004, as amended. NOTE B -- RESTATEMENT On May 16, 2005 the Company filed a current report on Form 8-K announcing that an error had been identified relating to accounting for a foreign currency loan and related hedge arrangement entered into in April 2004 in connection with the CDN $107 million debt arrangement between a majority owned subsidiary, US Energy Biogas Corp ("USEB") and the Countryside Power Income Fund and its subsidiaries (the "Countryside Debt"). The accounting issue relates to the Application of Statement of Financial Accounting Standards No. 52, Foreign Currency Translation, as amended ("SFAS No. 52") and Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended ("SFAS No. 133"). The Company is restating its financial statements for the year ended December 31, 2004 and for the interim periods ended June 30, 2004 and September 30, 2004 to reflect the impact of the changes in the current exchange rate for debt service payments beyond the expiration of the hedge arrangement in April 2007, to reflect the outstanding principal amount of the Countryside Debt using the current exchange rate in effect at the end of the applicable period and to record changes in the fair value of the hedge arrangement. The following table isolates each of the restated amounts in the Company's Consolidated Balance Sheet as of December 31, 2004:
RESTATED AS ORIGINALLY REPORTED -------- ---------------------- Consolidated Balance Sheet: Foreign Currency Hedge $2,414 $1,207 Deferred Tax Asset $14,605 $12,409 Total Assets $175,932 $172,529 Long-Term Debt $87,814 $80,521 Minority Interests $10,733 $12,662 Accumulated Deficit $(25,805) $(23,516) Acc. Other Comprehensive Income $2,010 $1,682 Total Stockholder's Equity $38,199 $40,160 Total Liabilities and Stockholders Equity $175,932 $172,529
Unrelated to the restatement of the 2004 financial statements, the Company has reclassified restricted cash from cash in the consolidated statement of cash flows. 7 Significant accounting policies followed in the preparation of the financial statements are as follows: NOTE C-- BASIS OF REPORTING The consolidated financial statements of the Company include the accounts of the Company and its wholly owned and majority-owned subsidiaries. Investments in joint ventures are accounted for under the equity method. Investments in partnerships, in which our ownership does not exceed 1%, are unconsolidated and carried at cost. All inter-company accounts and transactions have been eliminated in the consolidation. NOTE D -- REVENUE RECOGNITION Revenues are recognized upon delivery of energy or service. NOTE E -- EARNINGS SHARE DATA Income (Loss) per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the periods. In arriving at income available to common stockholders, preferred stock dividends have been deducted. Potential common shares, amounting to 5,167 have not been included due to their anti-dilutive effect for 2005 and 2004. NOTE F -- STOCK-BASED COMPENSATION The Company has elected to account for its stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employee's and discloses the pro forma effects on net loss and loss per share had the fair value of options been expensed. Under the provisions of APB No. 25, compensation arising from the grant of stock options is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of grant over the amount an employee must pay to acquire the stock. There were no stock options granted or vested for the three month periods ended March 31, 2005 and 2004. NOTE G -- FOREIGN CURRENCY The functional currency for our foreign operations is the local currency. For these foreign entities, we translate income statement amounts at average exchange rates for the period, and we translate assets and liabilities at the end-of-period exchange rates. We report translation adjustments on inter-company foreign currency transactions of a long-term nature in Other Comprehensive Income. Foreign currency transaction gains or losses are recognized in the period incurred and are included in Other Income (Loss) in the consolidated statement of operations. NOTE H -- INVESTMENTS IN DERIVATIVES The Company holds derivative financial instruments for the sole purpose of hedging the risks relating to changes in foreign currency exchange rates, the variability of which impacts future earnings and cash flows. The Company documents its risk management strategy and hedge effectiveness at the inception of and during the term of the hedge. Changes in the fair market value of our foreign currency cash flow hedge derivatives are recorded each period in other comprehensive income. NOTE I -- SUBSIDIARIES AND AFFILIATES (1) U.S. Energy Biogas Corp. ("USEB"). On May 11, 2001 we, together with Cinergy Energy Solutions, Inc. ("Cinergy Energy"), acquired through a merger, Zahren Alternative Power Corporation ("Zapco"), and renamed such entity U.S. Energy Biogas Corp. We own 54.26% and Cinergy Energy, a wholly owned subsidiary of Cinergy Corp. ("Cinergy"), owns 45.74% of Biogas. 8 (2) USE Canada Energy Corp. ("USE Canada"). On June 11, 2001 USE Canada Acquisition Corp., a wholly-owned Canadian subsidiary of the Company, purchased 100% of the issued and outstanding stock of Trigen Energy Canada Company, and renamed it USE Canada Energy Corp. ("USE Canada"). Effective December 31, 2003 USE Canada became a discontinued operation pending its sale to the Countryside Fund. On April 8, 2004, USE Canada was sold to the Countryside Fund. (3) Scandinavian Energy Finance, Limited /EnergiSystems I Sverige AB("SEFL"). During the three month period ended March 31, 2004, the Company reserved $7,700 against its investment in and receivables from SEFL due to pending litigation. This reserve, which amount was charged to general and administrative expenses in our consolidated statement of operations, included a $6,336 reserve against its equity investment and $1,364 against receivables due the Company from SEFL. Subsequently, in 2004, an additional $475 was reserved against additional receivables. During the quarter ended June 30, 2004, after giving effect to the repayment to the Company of $1,086 in amounts owed by SEFL, the entire investment was written off against the reserve. NOTE J -- RESTRICTED CASH AND MARKETABLE SECURITIES USEB's financing arrangements with the Countryside Income Fund and subsidiaries (the "Countryside Fund") established various reserve accounts which are also collateral for the financing with the Countryside Fund. These accounts include the Illinois Subsidy Liability Reserve Account, a debt service reserve account and an improvement reserve account. The funds held in the improvement reserve account can be utilized to fund capital expenditures. The funds in the Illinois Subsidy Liability Reserve Account (the "Illinois Accounts") are to be utilized to retire the Illinois subsidy liability as it becomes due. Restricted cash and marketable securities were as follows: March 31, 2005 December 31, 2004 -------------- ----------------- Illinois Subsidy Liability Reserve Accounts $24,144 $23,438 Improvement Reserve 3,653 4,022 Debt Service Reserve 2,090 2,011 Project Contract Reserve 138 138 ------- -------- $30,025 $29,609 Included in the Illinois Subsidy Liability Reserve Accounts at March 31, 2005 is $22,144 that is managed by a professional investment manager under investment allocation parameters established by the Company. The amounts managed by the professional manager, as of March 31, 2005, included $13,276 invested in equity fund accounts, $7,295 invested in debt accounts, and $1,573 being held in cash or cash equivalent accounts. The cost basis of the investments, which have been invested since July 2004, is $20,696. NOTE K - ILLINOIS RETAIL RATE PROGRAM USEB has 10 operating projects in Illinois which are receiving a subsidy for each kilowatt hour ("kwh") of electricity sold to the local utility under the Illinois Retail Rate Program. In accordance with the Illinois Retail Rate Program, the utility has contracted, for a ten year period, with each project to purchase electricity for an amount that exceeds the utility's Avoided Cost (what it would otherwise pay for the generation of electricity). The excess paid above avoided cost is the subsidy. The utility then receives a tax credit from the State of Illinois ("Illinois") equal to the amount of that excess. Each project is obligated to begin to repay the subsidy to Illinois after the project has recouped its capital investment and retired all debt associated with the financing and construction of the project but, in any case, no later than 10 years from the date the project commenced commercial operations. All subsidy liabilities must be fully repaid to Illinois (without interest) by the end of the actual useful life of the project but no later than 20 years from the date the project commenced commercial operations. This subsidy is accounted for reporting purposes in a manner similar to an original issue discount whereby the amount to be repaid in the future is discounted to its net present value and the discount is amortized (as interest expense) over the 10-year period until repayment begins. The amount of power generation revenue recognized each period is equal to the Avoided Cost rate plus the difference between the subsidy received by the project and the net present value of the subsidy. This unamortized discount and the liability are shown net on the consolidated balance sheet as Illinois Subsidy Liability. 9 USEB is required by the Countryside Fund to deposit funds into the Illinois Subsidy Liability Reserve Accounts for repayment of the Illinois subsidy liability. The Illinois Accounts are classified as restricted cash and marketable securities (see NOTE J). The amount deposited into the Illinois Accounts is based upon the amount of subsidy received and contemplates an annual return sufficient to fund the current period subsidy liability repayment as it becomes due. Regular deposits combined with actual and expected returns on those deposits may not be sufficient to fully repay the respective liabilities as they become due. Should the amounts in the Illinois Accounts be insufficient to fully repay the obligations, any shortfall would have to be funded from the project's operations or assets. Following is a summary of significant dates pertaining to a project's participation in the Illinois Retail Rate Program.
Estimated Commencement of Expiration of Commencement Commercial Illinois Retail of Repayment of Project Operations Rate Program Subsidy Liability(1) - ----------------------------------------------------------------------------------------------------------- Countryside April, 2001 April, 2011 May, 2011 Dolton May, 1998 May, 2008 June, 2008 Dixon Lee July, 1999 July, 2009 August, 2009 Morris December, 2000 December, 2010 January, 2011 Roxana November, 1999 November, 2009 December, 2009 Upper Rock April, 2000 April, 2010 May, 2010 122nd Street July, 1998 July, 2008 August, 2008 Brickyard September, 1999 September, 2009 October, 2009 Streator January, 2000 January, 2010 February, 2010 Willow Ranch January, 1998 January, 2009 February, 2009
(1) The estimated commencement of the repayment of the liability is based upon management's assumptions. One year before a project's eligibility for participation in the program terminates, a proposed repayment schedule must be presented to the Illinois Commerce Commission for their approval. Until any repayment schedule is approved by the Illinois Commerce Commission, it will continue to be an estimated schedule. The funds held in the Illinois Accounts are currently invested in equities and fixed income securities. These investments are being managed by a third-party professional money manager with the investment allocations being approved by the management of the Company and USEB. The amount held in the Illinois Accounts as of March 31, 2005 was $24,144. The amount of the subsidy liability owed to Illinois as of March 31, 2005 was $50,669. It is anticipated that repayments of the incentive will begin in 2008 and continue through 2021. Under the terms of the Illinois Retail Rate Program, estimated rates are paid for production sold to the utility with that rate being trued up annually, on the anniversary date of the commencement of commercial operations of the applicable project, to the actual rates paid for electricity by the local municipality. After the actual rate is determined, sales for the preceding calendar year, retroactive to the last anniversary date, are adjusted based upon the actual rate. If the actual rate is greater than the estimated rate, additional sales proceeds are paid to the project. If the actual rate is less than the estimated rate, then prior sales proceeds received, equal to the excess amounts paid, must be refunded to the utility. This actual rate then becomes the estimated rate for the subsequent year. In the past, the annual reconciliation of estimated rates to actual rates has resulted in both increases and decreases in retroactive revenue. USEB cannot predict whether any changes in future rates will result in increases or decreases in revenues from the Illinois projects. The Company receives approximately 19% of its revenues from the subsidy paid under the Illinois Retail Rate Program. From time to time during the past few years including 2004 and 2005, proposed changes to or the elimination of the Illinois Retail Rate Program have been introduced in the Illinois legislature. While legislation has not been adopted, the adoption of legislation or the implementation of rules that would reduce or eliminate the benefits received by the Company under this program would have a material adverse effect on the Company. NOTE L -- TRANSACTIONS WITH AFFILIATES USEB is a general partner in alternative energy and equipment finance transactions with related unconsolidated limited partnerships and collects management fees from the partnerships. Fees earned from such general partner undertakings amount to $198 for the three months ended March 31, 2005 and $73 for the three months ended March 31, 2004. 10 USEB reimburses its shareholders, including the Company, for a majority of the costs incurred by them for the benefit of USEB. These costs include management and accounting salary and benefit costs, office expenses associated with the accounting services and an allocation of rent expenses. The total reimbursements for the three month periods ended March 31, 2005 and 2004 were $217 and $194, respectively. NOTE M -- FOREIGN CURRENCY TRANSACTIONS USEB's debt obligation to the Countryside Fund requires that debt service payments be made in Canadian dollars. USEB has entered into a cash flow foreign currency hedge agreement with financial institutions fixing the Canadian dollar to US dollar exchange rate at $1.331 Canadian dollar per US dollar. This hedge agreement, in an amount equal to the debt service payments, expires on March 31, 2007. Subsequent to the expiration of the hedge agreement, USEB's debt service payments to the Countryside Fund are subject to fluctuations in the currency exchange rate. As required by SFAS No. 52 and SFAS No. 133, USEB has adjusted the outstanding principal on the debt owed to the Countryside Fund to reflect the currency exchange rate as of the end of the financial reporting period. The gain or loss resulting from the adjustment of the outstanding principal from that recorded in the previous reporting periods is recorded as Foreign Currency Transaction Income(Loss). Following is a summary of the Foreign Currency Transaction account as of March 31, 2005(the exchange rates are Canadian dollars per one US dollar and are stated whole dollars, all other amounts are in $000's): Currency Exchange Rate at Loan Origination, April 8, 2004 $1.3140 Currency Exchange Rate at December 31, 2004 $1.2047 Currency Exchange Rate as of March 31, 2005 $1.2096 Cumulative Translation Adjustments Beginning Of Reporting Period $6,988 Cumulative Translation Adjustments End Of Reporting Period $6,643 Aggregate Adjustment for the Current Reporting Period Income/ (Expense) $345 Deferred Income Taxes Allocated To Adjustment in the Reporting Period $147 NOTE N - OTHER COMPREHENSIVE INCOME/(LOSS) The other Comprehensive loss for the three months ended March 31, 2005 is comprised of $(303) of unrealized losses on available for sale marketable securities and $36 in gains associated with foreign currency exchange rates. The $(109) loss reported for the three months ended March 31, 2004 is comprised of losses associated with foreign currency exchange rates. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In March 2005, a special committee of independent directors was organized to evaluate a potential combination with a private company in a related line of business. We continue to explore such opportunity. No assurance can be given that such transaction will be complete, or that if completed, it will be on terms favorable to current stockholders. On May 9, 2005, Duke Energy Corporation and Cinergy Corp. announced that they were merging. An affiliate of Cinergy owns a minority interest in US Energy Biogas Corp. and we or our subsidiaries are parties to various agreements with Cinergy affiliates pursuant to which, among other things, Biogas would enhance current power projects or develop new projects. We are currently unable to determine the impact of this merger on our relationship with Cinergy or these opportunities. 11 RESULTS OF OPERATIONS The net loss for the three months ended March 31, 2005 of $681 was a decrease of $3,293 from the $3,974 net loss reported for the three months ended March 31, 2004. This decrease was primarily due to the $4,774 after tax expense recorded in 2004 pertaining to the reserve for the SEFL investment offset by $866 in additional interest expenses associated with the Countryside Fund debt which closed in April 2004 and $505 of increased general and administrative expenses related to the Countryside Fund transaction that were incurred during the three months ended March 31, 2004 and capitalized. Revenues for the three month period ended March 31, 2005 were $5,024, a decrease of $93, or 2%, from the $5,117 reported for the three month period ended March 31, 2004. The decrease was the primarily the result of the reallocation of expenses reimbursed to Biogas which were recorded as revenues for the period ended March 31, 2004 and offset directly against operating expenses for the three month period ended March 31, 2005. Total operating expenses for the three months ended March 31, 2005 were $2,179, a decrease of $39 or 1.8% from the $2,218 reported for the three month period ended March 31, 2004. The components of general and administrative expenses for the three month periods were as follows: Three Months Ended March 31, 2005 March 31, 2004 -------------- -------------- Salaries and Consulting $431 $659 Legal and Professional 122 128 Insurance 55 96 Corporate Expenses 148 52 SEFL Reserve 0 7,700 Royalty Expense 132 24 Other 319 (237) ------ ------ Total $1,207 $8,422 General and administrative expenses increased by $485 or 67% in the first three months of 2005 compared with the first three months of 2004, excluding the effect of the SEFL reserve of $7.7 million in 2004. The primary reason for this increase was the capitalization during the three month period ended March 31, 2004 of approximately $505 of general and administrative expenses related to the Countryside transaction and $88 of royalty expense related to the Countryside Fund transaction for the three months ended March 31, 2005, an obligation that did not exist during the 2004 period. Excluding the general and administrative costs associated with the Countryside transaction, the royalty expense related to the Countryside transaction and the SEFL reserve, general and administrative for the three month periods ended March 31, 2005 and 2004 were $1,119 and $1,227, respectively. Depreciation and amortization expense increased by $117 or 12% in the first quarter of 2005 compared with the first quarter of 2004 due principally to the increase in the amortization of debt issuance costs associated with the Countryside transaction. Interest income increased by 136% in first quarter 2005 from first quarter 2004 as a result of the $14,000 note, bearing interest at the rate of 15% per annum, issued to us in April 2004 by AJG Financial Services; this increase was partially offset by a decrease in interest earned on the Installment Sale Partnership Interest notes as a result of the continuing reduction in outstanding principal on such notes. The reduction in outstanding principal is the result of the continuing amortization of the principal amounts due to note payments. Interest expense increased to $2,714 for the three months ended March 31, 2005, an increase of $866 or 47% when compared to the $1,848 in interest for the three months ended March 31, 2004. This increase is solely due to additional interest paid to the Countryside Fund resulting from the refinancing of the USEB debt. Foreign Currency Transaction income was $345 for the three months ended March 31, 2005 and represents the adjustment, as required by SFAS 52, Foreign Currency Translations, to the outstanding principal owed to the Countryside Fund to reflect the change in the currency exchange rate from the start of the reporting period. The Canadian dollar to US dollar exchange rate increased to $1.2096 from $1.2047 as of December 31, 2004 resulting in a net gain for the period of $345, after adjustments relating to our foreign currency cash flow hedge. The Deferred Income Tax asset was reduced by $147 to reflect the tax effect of the Translation gain. See Note M to the Consolidated Financial Statements. During the three months ended March 31, 2004, there was no Foreign Currency Transaction adjustment as the Countryside debt arrangements were entered into on April 8, 2004. Provision for income taxes resulted in a tax benefit for the three months ended March 31, 2005 of $111, a decrease of $3,455 from the $3,566 in tax benefits reported for the three months ended March 31, 2004. The amount reported for the three months ended March 31, 2004 included the tax benefit related to the reserve against the SEFL investment. The $111 benefit for the three months ended March 31, 2005 is comprised of the benefit related to the recognition of net operating losses generated by USEB operations. 12 LIQUIDITY AND CAPITAL RESOURCES At March 31, 2005, unrestricted cash amounted to $14,746 compared with $15,982 of unrestricted cash at December 31, 2004. The debt arrangements between the Countryside Fund and the USEB projects require these subsidiaries to maintain various restricted cash accounts, which, at March 31, 2005, amounted to $30,025. Included in the restricted cash and marketable securities is $22,144 that is managed by a professional investment manager under investment allocation parameters established by the Company. The amounts managed by the professional manager, as of March 31, 2005, included $13,276 invested in equity fund accounts, $7,295 invested in debt accounts, and $1,573 being held in cash or cash equivalent accounts. The cost basis of the investments, which have been invested since July 2004, is $20,696. During the three months ended March 31, 2005, cash flow from operating activities was $324, a decrease of $839 from the $1,163 generated by operating activities for the three month period ended March 31, 2004. The primary reason for this decrease was the elimination of the discontinued operations from the 2005 operating period. Cash used in investing activities decreased to $945 for the three months ended March 31, 2005 from the $1,466 used during the three months ended March 31, 2004, a decrease of $521. This decrease was primarily the result of an $868 decrease in amounts transferred to the Illinois Subsidy Liability Reserve Accounts due to a decrease in the amount of subsidy received by the USEB projects offset by a $373 increase in investments made by USEB pertaining to the expansion of the landfill gas collection systems at two of USEB's projects. Cash used in financing activities decreased to $615 for the three month period ended March 31, 2005, a decrease of $403 from the $1,018 used in financing activities for the three months ended March 31, 2004. The decrease is primarily due to a reduction in principal payments made on outstanding debt resulting from the Countryside Fund transaction. USEB's financing arrangements with the Countryside Fund limit the ability of USEB and its subsidiaries to distribute funds to the Company or to make improvements or expand certain projects unless specified conditions are satisfied. We continue to evaluate current and forecasted cash flow as a basis to determine financing operating requirements and capital expenditures. We believe that we have sufficient cash flow from operations and working capital including unrestricted cash on hand to satisfy all obligations under outstanding indebtedness, to finance anticipated capital expenditures and to fund working capital requirements during the next twelve months. CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS This Form 10-Q contains certain "forward looking statements" which represent our expectations or beliefs, including, but not limited to, statements concerning industry performance and our operations, performance, financial condition, growth and strategies. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate" or "continue" or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors which are noted herein, including but not limited to the potential impact of competition, changes in local or regional economic conditions, our ability to continue our growth strategy, dependence on management and key personnel, supervision and regulation issues and the ability to find financing on terms suitable to us. Additional factors which may impact our business, prospects, operating results and financial condition are described under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2004, as amended. Item 3: Quantitative and Qualitative Disclosures about Market Risk We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, changes in equity investment prices and changes in corporate tax rates. Generally the Company does not enter into any interest rate or derivative transactions as a hedge against these market risks as the underlying assets and investments are long-term in nature. However, the foreign currency hedge entered into by USEB as discussed in Note M to the Consolidated Financial Statements eliminates the impact of fluctuations in exchange rates on our Countryside debt service payments through March 31, 2007. This issue is discussed in more detail in our Annual Report on Form 10-K for the year ended December 31, 2004, as amended. 13 Item 4: Controls and Procedures Evaluation of Disclosure Controls and Procedures: The Company has established a series of systems and procedures to assure full and timely disclosure of material information respecting the Company. Our Chief Executive Officer and Chief Accounting Officer (the person who performs the functions of the Chief Financial Officer), carried out an evaluation of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, they concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings. PART II - Other Information Item 6: Exhibits - -------- -------------------------------------------------------------------- Exhibit Number Description - -------- -------------------------------------------------------------------- 3.1 Restated Certificate of Incorporation of the Company filed with the Secretary of State of Delaware (1) 3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company (4) 3.3 Amended and Restated By-Laws of US Energy (5) 3.4 Form of Certificate of Designation for US Energy's Series C Preferred Stock (8) 3.5 Form of Certificate of Designation for US Energy's Series D Preferred Stock (8) 3.6 Certificate of Correction to Certificate of Designation of Series B Preferred Stock (8) 4.1 Specimen Stock Certificate (1) 4.2 Certificate of Designation of Series B Convertible Preferred Stock of the Company as filed with the Secretary of the State of Delaware (7) 4.3 Amended and Restated Plan of Recapitalization dated as of July 31, 2000 by and between the Company and the parties identified therein (8) 4.4 Form of Series B Warrant to Purchase Shares of Common Stock (4) 4.5 Form of Series C Redeemable Common Stock Purchase Warrant of US Energy (5) 10.1 Purchase Agreement, dated as of January 24, 1994, between Lehi Co-Gen Associates, L.C. and Lehi Envirosystems, Inc. (2) 10.2 Operating Agreement among Far West Capital, Inc., Suma Corporation and Lehi Envirosystems, Inc. dated January 24, 1994 (2) 10.3 Agreement among the Company, Plymouth Envirosystems, Inc., IEC Plymouth, Inc. and Independent Energy Finance Corporation dated November 16, 1994 (1) 10.4 Amended and Restated Agreement of Limited Partnership of Plymouth Cogeneration Limited Partnership between PSC Cogeneration Limited Partnership, Central Hudson Cogeneration, Inc. and Plymouth Envirosystems, Inc. dated November 1, 1994 (1) 10.5 Amended and Restated Agreement of Limited Partnership of PSC Cogeneration Limited Partnership among IEC Plymouth, Inc., Independent Energy Finance Corporation and Plymouth Envirosystems, Inc. dated December 28, 1994 (1) 14 - -------- -------------------------------------------------------------------- Exhibit Number Description - -------- -------------------------------------------------------------------- 10.6 Security Agreement and Financing Statement among the Company, Lehi Envirosystems, Inc., Plymouth Envirosystems, Inc. and Anchor Capital Company, LLC dated June 14, 1995, as amended (1) 10.7 Certificate of Designations (1) 10.8 Loan and Option Agreement dated August, 1996 by and among NRG Company, LLC and Reno Energy, LLC and ART, LLC and FWC Energy, LLC, and Amendments thereto (1) 10.9 Form of Debenture Conversion Agreement (1) 10.10 Subscription Agreement, dated March 20, 1998, between the Company and Energy Systems Investors, LLC (3) 10.11 Registration Rights Agreement, dated March 20, 1998, between the Company and Energy Systems Investors, LLC (3) 10.12 Amended and Restated Stock Option Agreement between the Company and Lawrence I. Schneider dated May 10, 2000 with respect to 750,000 shares of the Company Common Stock (4) 10.13 Amended and Restated Stock Option Agreement between the Company and Goran Mornhed dated May 10, 2000 with respect to 1,000,000 shares of the Company Common Stock (4) 10.14 Pledge Agreement dated as of July 31, 2000 by and between the Company and Energy Systems Investors, L.L.C. (4) 10.15 Limited Recourse Promissory Note dated July 31, 2000 issued by Energy Systems Investors, L.L.C. in favor of the Company (4) 10.16 Registration Rights Agreement dated November 28, 2000 by and among US Energy and the Zapco Stockholders (5) 10.17 Performance Guaranty dated as November 28, 2000 of US Energy (5) 10.18 Performance Guaranty of Cinergy Solutions Holding Company, Inc. dated as of November 28, 2000 (5) 10.19 Subscription Agreement dated as of November 28, 2000 by and among US Energy, US Energy Sub and Cinergy Energy (5) 10.20 Stockholders Agreement dated as of November 28, 2000 by and among US Energy, US Energy Sub and Cinergy Energy (5) 10.21 Indemnification Agreement dated as of November 28, 2000 by and among US Energy, US Energy Sub and Cinergy Energy (5) 10.22 Employment Agreement dated as of May 10, 2000 by and between the Company and Lawrence Schneider (6) 10.23 Employment Agreement dated as of May 10, 2000 by and between the Company and Goran Mornhed (6) 10.24 2000 Executive Incentive Compensation Plan (6) 10.25 2000 Executive Bonus Plan (6) 10.26 Stock Option Agreement between the Company and Lawrence Schneider with respect to 1,000,000 shares of Common Stock (6) 10.27 Stock Option Agreement between the Company and Goran Mornhed with respect to 187,500 shares of Common Stock (6) 10.28 Stock Option Agreement between the Company and Goran Mornhed with respect to 562,500 shares of Common Stock (6) 15 - -------- -------------------------------------------------------------------- Exhibit Number Description - -------- -------------------------------------------------------------------- 10.29 Standby Payment Agreement dated as of June 11, 2001 by and among U.S. Energy Systems, Inc., USE Canada Acquisition Corp. and AJG Financial Services, Inc. (9) 10.30 Development Incentive Plan (10) 10.31 Corporate Incentive Plan (10) 10.32 Finance Incentive Plan (10) 10.33 Employment Agreement dated as of January 1, 2002 between the Company and Edward Campana (10) 10.34 Employment Agreement dated as of September 8, 2000 between the Company and Henry Schneider (10) 10.35 Agreement by and among AJG Financial, as agent, U.S. Energy, Cinergy Energy, U.S. Energy Biogas and Tannenbaum, Helpern as agent dated as of October 16, 2003 (11) 10.36 Escrow letter by and among, Tannenbaum, Halpern escrow agent, AJG Financial, Cinergy Energy, US Energy, U.S. Energy Biogas Corp (11) 10.37 Amended and Restated Subordinated Note from U.S. Energy Biogas Corp. to AJG Financial Services, Inc. (11) 10.38 Loan Agreement dated as of November 3, 2003 (11) 10.39 2003 Finance Incentive Plan (11) 10.40 2003 Development Incentive Plan (11) 10.41 Royalty Agreement dated as of April 8, 2004 by and between U.S. Energy Biogas Corp., Countryside Canada Power, Inc., the Registrant and Cinergy Energy Solutions, Inc. (12) 10.42 Amendment to Note Purchase Agreement dated as of April 8, 2004 by and between U.S. Energy Biogas Corp., Avon Energy Partners, LLC and the other parties identified therein (12) 10.43 Amendment to Indenture of Trust and Security Agreement dated as of April 8, 2004 by and among US Energy Biogas Corp., Countryside Canada Power, Inc. and the other parties identified therein (12) 10.44 Amendment dated April 8, 2004 among BMC Energy LLC, Countryside Canada Power Inc. and the other parties identified therein to the (i) Security Agreement dated as of May 2, 2001 among BMC Energy LLC, Countryside Canada Power, Inc. (as successor to AJG Financial Services, Inc.) and the other parties identified therein and (ii) Cash Collateral Pledge and Security Agreement dated as of April 30, 2001 among BMC Energy, LLC, Countryside Canada Power, Inc. (as successor to ABB Energy Capital, LLC) and the other parties identified therein (12) 10.45 Form of Restricted Stock Unit for Directors (13) 10.46 Form of Restricted Stock Unit for Officers (13) 10.47 Purchase Agreement dated September 30, 2004 among AJG Financial Services, Inc. and U.S. Energy Biogas Corp. (13) 10.48 Assignment Agreement dated September 30, 2004 among AJG Financial Services, Inc. and U.S. Energy Biogas Corp. (13) 10.49 Severance Agreement and Mutual Release is by and between Edward M. Campana and US Energy Systems, Inc.(14) 10.50 Severance Agreement, Mutual Release and Consulting Agreement by and between Allen J. Rothman and US Energy Systems, Inc.(14) 16 - -------- -------------------------------------------------------------------- Exhibit Number Description - -------- -------------------------------------------------------------------- 10.51 Employment Agreement dated as of May 10, 2005 by and between the Company and Lawrence I. Schneider 10.52 Description of compensation program for directors 31.1 Rule 13a-14(a)/15d-14(a) certifications 31.2 Rule 13a-14(a)/15d-14(a) certifications 32.1 Section 1350 certification - ------------- (1) Incorporated by reference to the Company's Registration Statement on Form SB-2 (File No. 333-94612) (2) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended January 31, 1994 (3) Incorporated by reference to the Company's Current Report on Form 8-K filed on March 26, 1998 (4) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended July 31, 2000 (5) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended October 31, 2000 (6) Incorporated by reference to the Company's Current Report on Form 8-K dated May 4, 2000 (7) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended January 31, 1999 (8) Incorporated by reference to the Company's Report on Form 10-KSB for the period ended December 31, 2000 (9) Incorporated by reference to the Company's Current Report on Form 8-K dated June 11, 2001 (10) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB dated August 14, 2002 (11) Incorporated by reference to the Company's Report on Form 10-K for the period ended March 31, 2003, as amended (12) Incorporated by reference to the Company's Report on Form 10-Q for the period ended March 31, 2004 (13) Incorporated by reference to the Company's Report on Form 10-Q for the period ended September 30, 2004 (14) Incorporated by reference to the Company's Annual Report on Form 10K, as amended, for the year ended December 31, 2004 17 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. U.S. ENERGY SYSTEMS, INC. By: /s/Lawrence I. Schneider ----------------------------------- Lawrence I. Schneider Dated: May 23, 2005 Chief Executive Officer (Principal Executive Officer) By: /s/Richard Augustine ----------------------------------- Richard J. Augustine Dated: May 23, 2005 Chief Accounting Officer (Principal Accounting and Financial Officer) 18 EX-10.51 2 v018934_ex10-51.txt EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement "), dated as of May 10, 2005, between US ENERGY SYSTEMS, INC., a Delaware corporation (the "Company"), and Lawrence I. Schneider (the "Executive"). W I T N E S S E T H: WHEREAS, the Executive has been employed by the Company pursuant to an employment agreement dated as of May 10, 2000 (the "Prior Agreement") which expires May 10, 2005. WHEREAS, the Company desires to retain the Executive as an employee and the Executive, to induce the Company to employ him, has agreed to forego certain benefits afforded to him under the Prior Agreement including without limitation, eliminating the Executive's right to payments equal to 2.9 times his base salary in connection with, among other things, a Change of Control of the Company (as defined in the Prior Agreement). WHEREAS, the Company and the Executive now desire to enter into this Agreement. NOW, THEREFORE, in consideration of the mutual promises, representations and warranties set forth herein and for other good and valuable consideration, it is hereby agreed as follows: 1. Position and Duties. (a) Employment and Position. The Company hereby agrees to employ the Executive as set forth in the next succeeding sentence, and the Executive hereby accepts such employment, upon the terms and conditions set forth herein. The Executive shall serve as Chief Executive Officer of the Company and shall have such other duties consistent with such office, as from time to time may be prescribed by the Board of Directors of the Company or a committee thereof (collectively, the "Board"). (b) Duties. During the Term (as defined), the Executive shall perform and discharge the duties that may be assigned to him by the Board from time to time as provided in this Agreement, and the Executive shall devote his reasonable best talents, efforts and abilities to the performance of his duties hereunder. During the Term, the Executive shall devote such time as is necessary to perform his duties and the Executive shall have no other employment whatsoever that would prevent him from fulfilling his obligations hereunder. 2. Compensation. (a) Base Salary. The Company shall pay the Executive for his services hereunder a salary (the "Base Salary") at the annual rate of $180,000 which shall be payable in accordance with the customary payroll practices of the Company but not less frequently than on a bi-weekly basis. The Base Salary shall be reviewed periodically by the Board and shall be subject to such adjustments as the Board, in its sole discretion, from time to time may determine. (b) Withholding. All payments required to be made by the Company to the Executive under this Agreement (whether under this Section 2 or otherwise) shall be subject to withholding of employment and income taxes and other payroll deductions in accordance with applicable tax requirements, the Company's policies applicable to employees of the Company at the Executive's level and the provisions of the Benefit Plans (as defined). 3. Benefits. (a) Benefit Plans. During the Term, the Company shall provide to the Executive all fringe benefits currently provided, as well as those which the Company may generally make available to its senior executives, including, without limitation, benefits provided under the Company's pension and profit-sharing plans (if any), health benefit plans (such as medical and hospitalization coverage), and insurance plans (such as life, supplemental life, disability, business travel, accident and accidental death and dismemberment) (collectively, the "Benefit Plans"). Such plans shall during the Term provide for at least the same level of benefits as the Benefit Plans provide at the date of this Agreement. (b) Automobiles. During the Term, the Company shall provide the Executive with a Company-owned or leased automobile of a type to be agreed upon by the Executive and the Company, or at the Executive's option, a car allowance of $600 per month in lieu thereof. The Company will bear all insurance, gasoline, registration, maintenance and repair costs incident to the Executive's use of such Company-owned or leased or Executive-owned or leased automobile in the performance of his duties hereunder. (c) Vacations, sick leave and holidays. The Executive shall be entitled to no less than four (4) weeks of paid vacation during each twelve month period commencing with the beginning of the Term. In addition, the Executive shall be entitled to paid sick leave and holidays in accordance with the Company's usual policies for its senior executives. (d) Company Life Insurance. The Company may obtain, at its sole cost and expense, a policy on the Executive's life for which the Company shall be the beneficiary and the Executive agrees to cooperate with the Company in obtaining such insurance. 4. Reimbursement of Expenses. During the Term, the Company shall pay or reimburse the Executive for all reasonable travel, entertainment and other business expenses actually incurred or paid by the Executive in the performance of his duties hereunder upon presentation to the chief accounting officer (or such other person as may be designated by the Board) of expense statements or vouchers or such other supporting information as the Company may reasonably require of the Executive. 2 5. Term: Termination. (a) Term. Subject to the provisions of this Section 5, the term of the Executive's employment under this Agreement shall commence on the date hereof and shall end on the second anniversary hereof, provided that the term of this Agreement shall automatically be renewed for successive additional one-year periods at the end of such two-year period and of each such one-year renewal period, unless either party elects not to renew by giving written notice to the other at least 90 days before an annual renewal date. The initial two -year term referred to herein, together with any renewal thereof, is referred to in this Agreement as the "Term". The employment of the Executive may be terminated prior to the expiration of the Term in the manner described in this Section 5 solely on the following grounds: (b) Termination by the Company for Cause. The Company shall have the right to terminate the employment of the Executive prior to expiration of the Term for Cause (as defined) by written notice to the Executive specifying the particulars of the conduct of the Executive forming the basis for such termination, as provided in this Agreement. (c) Termination upon Death. The employment of the Executive hereunder shall terminate immediately upon his death. (d) The Company's Option upon Disability. If the Executive becomes physically or mentally disabled ("Disability") during the Term so that he is unable to perform the services required of him pursuant to this Agreement for a period of six successive months, or an aggregate of six months in any consecutive twelve-month period (the "Disability Period"), the Company shall have the option, in its discretion, by giving written notice thereof, to terminate the Executive's employment hereunder prior to expiration of the Term. If the Company exercises such option, during the balance of the Term (but in no event for more than 18 months from the date of the commencement of the Disability Period), the Executive shall continue to receive his full compensation and other benefits provided for herein net of any payments received or to be received at any time under any disability policy or program provided or paid for by the Company of which the Executive or his designee is a beneficiary or recipient. (e) Termination by the Executive by Voluntary Resignation. The Executive shall have the right to terminate his employment hereunder prior to expiration of the Term (a "Voluntary Resignation") by written notice given at least 90 days prior to the Termination Date (as defined). (f) Termination Date. Any notice of termination given by the Company or the Executive pursuant to the provisions of this Agreement shall specify therein the effective date of such termination (the "Termination Date"). 3 (g) Certain Definitions. For purposes of this Agreement, the following terms shall have the following meanings: (i) The "Affiliate" of any Person means any other Person directly or indirectly through one or more intermediary Persons, controlling, controlled by or under common control with such Person. For purposes of this definition, "control" shall mean the power to direct the management and policies of such Person, directly or indirectly, by or through equity ownership, agency or otherwise, or pursuant to or in connection with an agreement, arrangement or understanding (written or oral) with one or more other Persons by or through equity ownership, agency or otherwise; and the terms "controlling" and "controlled" shall have meanings correlative to the foregoing. (ii) "Business Day" shall mean any day other than Saturday, Sunday or any other day in which banking institutions in New York City are authorized or obligated to close. (iii) "Cause" shall mean (A) failure of the Executive to perform the duties contemplated hereunder ("Non-Performance"), which failure continues after a written demand for performance is given to the Executive by the Board which identifies the manner in which the Board believes that the Executive has not performed, provided that "Non-Performance" shall not include a failure by the Executive to perform resulting from the Executive's incapacity due to death or Disability (as defined), (B) the Executive is charged with or indicted for or pleads guilty to (including a plea of nolo contendre) or is convicted of a (x) felony or (y) misdemeanor involving moral turpitude, financial misconduct, fraud or misrepresentation, (C) the Executive having engaged in or engaging in, illegal or fraudulent conduct with respect to the Company, its Affiliates, customers or other Person with which the Company or its Affiliates have a business relationship that is material to the Company and its subsidiaries, taken as a whole, (D) any act of disloyalty or breach of responsibilities to the Company by the Executive which results in significant harm to the Company or its Affiliates, (E) the Executive's violation of any one or more of the covenants set forth in Sections 7 or 8 hereof, or (F) in connection with any report, document, press release or other communication (whether formal, informal, written, oral, electronic or in any other format whatsoever) regarding the Company, its subsidiaries and Affiliates (collectively, a "Communication") filed, furnished or otherwise made available directly or indirectly to any governmental or quasi-governmental authority (including without limitation, the Securities and Exchange Commission, the National Association of Securities Dealers and any Affiliate thereof), the Board, the stockholders of the Company or the general public, the Executive makes, or allows to be made, a false or misleading statement or the Executive omits or allows the omission in such Communication of a statement or other information required to make the statements or other information in the Communication not false or misleading. (iv) "Person" means any individual, corporation, partnership, limited liability company, association, joint-stock company, trust, unincorporated organization, joint venture, court or government (or political subdivision or agency thereof). 6. Obligations on Termination. (a) Payment Obligations of the Company in case of Termination for Death. Upon termination of the Executive's employment upon death, the Company shall have no payment obligations to the Executive hereunder, except for any unreimbursed expenses and unpaid accrued benefits. (b) Payment Obligations of the Company in case of Termination for Disability. Upon termination of the Executive's employment upon Disability, the Executive shall receive the compensation provided for in Section 5(d) hereof plus any unreimbursed expenses and unpaid accrued benefits. 4 (d) Payment Obligations of the Company in case of Termination for Voluntary Resignation. Upon termination of the Executive's employment as a result of Voluntary Resignation, the Company shall have no payment obligations to the Executive hereunder, except that (i) to the extent permitted by applicable law, the Company shall continue to provide the Executive, at the Company's cost with medical, dental and hospitalization insurance coverage for the longest of (A) the 18-month period from the Termination Date; (B) the period prescribed by applicable law; and (C) the period set forth in the applicable Benefit Plans for the payment of any accrued and unpaid benefit, and (iii) reimbursement of any unreimbursed expenses. (e) Payment Obligations of the Company in case of Termination for Cause. Upon termination of the Executive's employment as a result of Cause, the Company shall have no payment obligations to the Executive hereunder, except for the payment of any accrued and unpaid benefit, and reimbursement of any unreimbursed expenses. 7. Trade Secrets; Confidentiality. The Executive recognizes and acknowledges that, in connection with his employment with the Company, he has had and will continue to have access to valuable trade secrets and confidential information of the Company and its Affiliates including, but not limited to, customer lists, business methods and processes, marketing, promotional, pricing, financial information, technical information and data relating to clients, employees and consultants (collectively, "Confidential Information") and that such Confidential Information is being made available to the Executive only in connection with the furtherance of his employment with the Company. The Executive agrees that during the Term (and for the purposes of this Section 7, Term includes the period encompassed by the Prior Agreement) and for two years thereafter, the Executive shall not disclose any Confidential Information to any Person, except that disclosure of Confidential Information will be permitted: (a) to the Company and its respective Affiliates and advisors; (b) if such Confidential Information has previously become available to the public through no fault of the Executive; (c) if required by law or any court or governmental agency or body, provided that in any such case covered by this clause (c) the Executive shall provide the Company, in advance of any such disclosure, with prompt notice of such requirement(s) and shall cooperate fully with the Company to the extent it may seek to limit such disclosure; (d) if necessary to establish or assert the rights of the Executive hereunder; or (e) if expressly consented to in writing by the Company. 8. Noncompetition and Nonsolicitation. (a) Prohibited Activities. The Executive hereby covenants and agrees that during the Term and for the respective periods set forth below immediately following the termination by the Company or the Executive, as applicable, of his employment under the respective circumstances set forth below he shall not, without the prior written consent of the Board, at any time, directly or indirectly, on his own behalf or on behalf of any Person: (i) own, manage, operate, control, be employed by, participate in, provide consulting services to, or be connected or associated in any manner with the ownership, management, operation or control of any business which is in competition with the Company (in the business in which the Company is substantially engaged during the Term in the case of acts committed during the Term or in the business in which the Company is substantially engaged at the time of termination of Executive's Employment in the case of acts committed after the Term) or any of its Affiliates in any state of the United States or in any foreign country in which any of them are engaged in business during the Term in the case of acts committed during the Term or in any state of the United States or in any foreign country in which any of them are engaged in business at the time of termination of Executive's employment in the case of acts committed after the Term for as long as the Company continues to conduct such business. 5 (ii) solicit or take any action to cause the solicitation of, or recommend that, any supplier, client, customer, contractor, vendor, agent or consultant of the Company or any of its Affiliates or other Person having business relations with the Company, discontinue business or cease such relationship, in whole or in part, with the Company or any of its Affiliates. (iii) employ any Person employed by the Company or any of its Affiliates at the time of, or during the 12 months preceding, such termination of the Executive's employment with the Company. (iv) solicit for employment (other than through unaffiliated employment recruiting or placement firms or services who are not specifically directed to solicit employees of the Company or provided with the names of any such employees) any Person employed by the Company or any of its Affiliates at the time of, or during the 12 months preceding such termination of the Executive's employment with the Company, or otherwise encourage or entice any such Person to leave such employment, provided, however, that nothing in this Agreement shall preclude the executive from owning less than five percent of any class of publicly traded equity of any entity (b) Savings Provision. The Employee acknowledges and agrees that (i) the restrictive covenants set forth in this Section 8 (the "Restrictive Covenants") are reasonable and valid in geographical and temporal scope and in all other respects, and (ii) it is the intention of the parties hereto that the Restrictive Covenants be enforceable to the fullest extent permitted by applicable law. Therefore, if any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full force and effect, without regard to the invalid or unenforceable parts and such court shall have the power to modify such Restrictive Covenant, or any part thereof, and, in its modified form, such Restrictive Covenants shall then be valid and enforceable. 9. Equitable Relief. In the event of a breach or threatened breach by the Executive of any of the covenants contained in this Agreement, the Company shall be entitled to a temporary restraining order, a preliminary injunction and/or a permanent injunction restraining the Executive from breaching or continuing to breach any of said covenants. Nothing herein contained shall be construed as prohibiting the Company from pursuing any other remedies that may be available to it under this Agreement for such breach or threatened breach. 6 10. Severability. Should any provision of this Agreement be held, by a court of competent jurisdiction, to be invalid or unenforceable, such invalidity or unenforceability shall not render the entire Agreement invalid or unenforceable, and this Agreement and each individual provision hereof shall be enforceable and valid to the fullest extent permitted by law. 11. Successors and Assigns. (a) Executive's Successors and Assigns. This Agreement and all rights under this Agreement are personal to the Executive and shall not be assignable other than by will or the laws of descent. All of the Executive's rights under the Agreement shall inure to the benefit of his heirs, personal representatives, designees or other legal representatives, as the case may be. (b) Company's Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. Any Person succeeding to the business of the Company by merger, purchase, consolidation or otherwise shall assume by contract or operation of law the obligations of the Company under this Agreement. 12. Governing Law: Jurisdiction. This Agreement shall be construed in accordance with and governed by the laws of the State of New York. The parties hereby agree to submit any and all disputes arising out of or in connection with this Agreement to binding arbitration in accordance with the rules of the American Arbitration Association. Such arbitration shall be held in New York City. Each party shall select one arbitrator and the two such selected arbitrators shall select a third arbitrator. Notwithstanding anything to the contrary in this Section 12, such parties may seek in any court of competent jurisdiction any injunctive relief pursuant to Section 9 of this Agreement. Provided that Executive's position in such dispute has a reasonable basis, any and all reasonable out of pocket costs incurred by the Executive in connection with any dispute arising out of this Agreement shall be promptly paid to the Executive by the Company upon presentation of appropriate documentation, up to an aggregate amount equal to $180,000. 13. Notices. All notices, requests and demands given to or made upon the respective parties hereto shall be deemed to have been given when received or refused if mailed by registered or certified mail, postage prepaid, if delivered by hand, or if delivered by Federal Express or similar overnight delivery service, addressed to the parties at their addresses set forth below or to such other addresses furnished by notice given in accordance with this Section 13: 7 (a) if to the Company, to Company Headquarters Attention Chairman of the Nominating & Governance Committee (b) if to the Executive, to Lawrence Schneider (most recent residential address according to Company records) 14. Complete Understanding; Waiver of Rights and Claims. (a) Integration. Other than any stock option agreements or restricted stock unit award agreements between the Company and the Executive, this Agreement supersedes any prior contracts, understandings, discussions and agreements relating to employment between the Executive and the Company and constitutes the complete understanding between the parties with respect to the subject matter hereof. (b) Waiver of Rights and Claims under Prior Agreement. The Executive hereby waives any and all claims or rights he has or may have had under or in connection with the Prior Agreement, including without limitation, bonus or similar plans referred to or contemplated therein, other than currently outstanding stock option agreements and restricted stock unit award agreements. 15. Modification. This Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Company and the Executive or in the case of a waiver, by the party against whom the waiver is to be effective. Any such waiver shall be effective only to the extent specifically set forth in such writing. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 16. Mutual Representations. (a) Executive's Representations. The Executive represents and warrants to the Company that the execution and delivery of this Agreement and the fulfillment of the terms hereof (i) will not constitute a default under or conflict with any agreement or other instrument to which he is a party or by which he is bound, and (ii) do not require the consent of any Person. (b) Company's Representations. The Company represents and warrants to the Executive that this Agreement has been duly authorized, executed and delivered by the Company and that the fulfillment of the terms hereof 8 (i) will not constitute a default under or conflict with any agreement or other instrument to which it is a party or by which it is bound and (ii) do not require the consent of any Person. (c) Joint Representations. Each party hereto warrants and represents to the other that this Agreement constitutes the valid and binding obligation of such party enforceable against such party in accordance with its terms. (d) Indemnification. The parties agree to indemnify, defend and hold the each other harmless for any claim, loss, damage, cost, expense including without limitation, reasonable attorney fees arising out of or relating to a breach of the foregoing representations in Section 16 (a), (b), and (c). The Executive's obligation under this Section 16 shall be limited to an aggregate amount of $180,000. 17. Headings. The headings in this Agreement are for convenience of reference only and shall not control or affect the meaning or construction of this Agreement. 18. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by the other party hereto. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed in its corporate name by one of its officers duly authorized to enter into and execute this Agreement, and the Executive has manually signed his name hereto, all as of the day and year first above written. US ENERGY SYSTEMS, INC. By: ____________________________________ Name: Title: ____________________________________ Lawrence I. Schneider 9 EX-10.52 3 v018934_ex10-52.txt COMPENSATION OF DIRECTORS Independent directors are compensated at an annual rate of $20,000 plus $1,000 for each Board meeting and $750 for each committee meeting (and $1,000 for audit committee meetings) attended in person or by telephone. Compensation for participating in meetings is limited to $1,000 per day. Members of the special committee formed in March 2005 to evaluate a potential business combination were each paid $10,000 for service on such committee and are not entitled to additional fees for participating in committee meetings. Newly appointed or elected directors are granted ten-year non-qualified stock options to acquire 40,000 shares of our common stock with an exercise price equal to the fair market value on the grant date. The Chairman of the Audit Committee and the Compensation Committee receive a retainer at the annual rate of $10,000 and $2,000, respectively. Forty percent of the foregoing compensation is paid to the directors in the form of restricted stock units which are granted on a quarterly basis at the fair market value of our common stock on the grant date. EX-31.1 4 v018934_ex31-1.txt Exhibit 31.1 CERTIFICATION PURSUANT TO Rules 13a - 14(a) and 15d - 14(a) under the Securities and Exchange Act of 1934, as amended I, Richard Augustine, the Chief Accounting Officer, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of U.S. Energy Systems Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Dated: May 23, 2005 /s/ RICHARD J. AUGUSTINE - ------------------------ Richard J. Augustine Chief Accounting Officer (Principal Accounting Officer and Financial Officer) EX-31.2 5 v018934_ex31-2.txt Exhibit 31.2 CERTIFICATION PURSUANT TO Rules 13a - 14(a) and 15d - 14(a) under the Securities Exchange Act of 1934, as amended I, Lawrence Schneider, the Chief Executive Officer, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of U.S. Energy Systems Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Dated: May 23, 2005 /s/ Lawrence I. Schneider - ------------------------- Lawrence I. Schneider Chief Executive Officer (Principal Executive Officer) EX-32.1 6 v018934_ex32-1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of US Energy Systems Inc (the "Company") on Form 10-Q for the period ending March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned certify, pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Lawrence I. Schneider - ------------------------- Lawrence I. Schneider Dated: May 23, 2005 Chief Executive Officer (Principal Executive Officer) /s/Richard J. Augustine Dated May 23, 2005 - ----------------------- Richard J. Augustine Chief Accounting Officer (Principal Accounting and Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----