-----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, NfHEsu2RWx4JbAU6+tpcizLzi0H+w4E4Gflddb/X4uxfP7OPQrv3ej/jYh8LEC0Q 0+vZ/5Vsxt65boClCKpaSQ== 0001169232-04-005754.txt : 20041115 0001169232-04-005754.hdr.sgml : 20041115 20041115141037 ACCESSION NUMBER: 0001169232-04-005754 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041115 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: 041143884 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 d61279_10-q.txt FORM 10-Q ================================================================================ 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 September 30, 2004 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| The number of shares outstanding of each of issuer's classes of common stock as of September 30, 2004 was 11,890,711 shares of common stock. 1 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES CONTENTS
PART I: Financial Information PAGE Item 1: Financial Statements Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003 ..................... 3 Consolidated Statements of Operations and Comprehensive Income/(Loss) for the three months and nine months ended September 30, 2004 and 2003 ................................. 4 Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2004 and for the year 2003 ................................................. 5, 6 Consolidated Statements of Cash Flow for the nine months ended September 30, 2004 and 2003 ..... 7 Notes to Consolidated Financial Statements ..................................................... 8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations .. 12 Item 3: Quantitative and Qualitative Disclosures About Market Risk ............................. 15 Item 4: Controls and Procedures ................................................................ 15 PART II. Other Information Item 1: Legal Proceedings ...................................................................... 15 Item 6: Exhibits and Reports on Form 8-K ....................................................... 15 Signatures ..................................................................................... 23
2 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in Thousands)
Sept. 30, 2004 Dec. 31, 2003 ASSETS (Unaudited) (Audited) -------------- ------------- Current Assets: Cash .................................................................................. $ 16,794 $ 3,210 Restricted Cash ....................................................................... 10,577 17,703 Restricted Investments ................................................................ 17,539 -- Accounts Receivable ................................................................... 5,632 9,105 Notes Receivable ...................................................................... 3,108 2,678 Other Current Assets .................................................................. 2,838 3,664 --------- --------- Total Current Assets ............................................................. 56,488 36,360 Property, Plant and Equipment (Net of Accumulated Depreciation) ....................... 41,454 43,729 Construction in Progress .............................................................. -- 595 Notes Receivable, less Current Portion ................................................ 23,987 14,234 Investments ........................................................................... 1,766 8,251 Debt Issuance Costs (Net of Accumulated Amortization) ................................. 11,463 2,405 Deferred Tax Asset .................................................................... 10,954 11,812 Other Assets .......................................................................... 8 257 Currency Risk Management .............................................................. 1,213 -- Assets to be Disposed of .............................................................. -- 28,180 Goodwill .............................................................................. 26,618 26,218 --------- --------- Total Assets ..................................................................... $ 173,951 $ 172,041 ========= ========= LIABILITIES Current Liabilities: Current Portion Long-term Debt ........................................................ 1,336 $ 4,928 Notes Payable - Stockholder ........................................................... -- 688 Accounts Payable and Accrued Expenses ................................................. 4,248 5,887 Deferred Revenue Installment Sale Partnership Interest, Current Portion ............... 307 1,007 --------- --------- Total Current Liabilities ........................................................ 5,891 12,510 Long-Term Debt less Current Portion ................................................... 79,506 53,827 Notes Payable - Stockholder ........................................................... -- 10,641 Deferred Revenue Installment Sale Partnership Interest, less Current Portion .......... 2,867 5,105 Deferred Royalty Liability ............................................................ 5,686 -- Rate Incentive Liability .............................................................. 25,027 20,652 Advances from Joint Ventures .......................................................... -- 102 Liabilities to be Disposed of ......................................................... -- 21,745 --------- --------- Total Liabilities ................................................................ 118,977 124,582 --------- --------- Minority Interests .................................................................... 14,381 8,374 --------- --------- 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, 443,263 Shares of Common Stock and 2667 shares of preferred stock, at cost .. (2,204) (2,204) Additional Paid-in Capital .................................................................. 64,270 64,891 Accumulated Deficit ......................................................................... (21,910) (24,159) Other Comprehensive Income/(Loss) ........................................................... 302 422 --------- --------- Stockholders' Equity .................................................................. 40,593 39,085 --------- --------- Total Liabilities and Stockholders' Equity ............................................ $ 173,951 $ 172,041 ========= =========
See notes to consolidated financial statements 3 U.S. ENERGY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (Unaudited) (in Thousands Except Share Data)
THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003 -------------- -------------- -------------- -------------- Revenues ........................................................... $ 6,213 $ 8,706 $ 15,809 $ 28,939 -------- -------- -------- -------- Costs and expenses: Operating Expenses ............................................. 2,523 4,309 7,454 15,479 General and Administrative Expenses ............................ 1,733 1,764 3,415 4,793 Depreciation and Amortization .................................. 1,232 1,078 3,298 3,354 (Gain) from joint ventures ..................................... -- (227) -- (556) Reserve for SEFL Investment .................................... (1,087) -- 7,089 -- -------- -------- -------- -------- Total Costs and Expenses ................................... 4,401 6,924 21,256 23,070 -------- -------- -------- -------- Income (Loss) From Operations ...................................... 1,812 1,782 (5,447) 5,869 -- Interest Income .................................................... 806 454 1,933 1,084 Dividend Income .................................................... -- -- 15 20 Other income (Loss) ............................................... 2,357 -- 2,357 -- ICC related Income/ (Loss) ......................................... (44) -- (44) -- Interest Expense ................................................... (2,406) (2,312) (6,842) (6,689) Transaction Cost Expenses .......................................... 45 -- (12,185) -- Minority Interest .................................................. (670) (291) 3,481 (771) -------- -------- -------- -------- Income / (Loss) Before Taxes ....................................... 1,900 (367) (16,732) (487) Income Tax Benefit/(Expense) ....................................... (1,157) 1,084 8,541 2,513 -------- -------- -------- -------- Income (Loss) Before Discontinued Operations and Gain on Sale of Subsidiaries ............................................ 743 717 (8,191) 2,026 Income From Discontinued Operations (Net of Tax) ................... -- -- 495 -- Gain on Sale of Subsidiaries and Partnership Interest (Net of Income Tax -2004 $8,875 and 2003-$887) .................... -- -- 9,945 1,419 -------- -------- -------- -------- NET INCOME ......................................................... 743 717 2,249 3,445 DIVIDENDS ON PREFERRED STOCK ....................................... (207) (209) (621) (627) -------- -------- -------- -------- INCOME APPLICABLE TO COMMON STOCK ................................. $ 536 $ 508 $ 1,628 $ 2,818 ======== ======== ======== ======== INCOME (LOSS) PER SHARE OF COMMON STOCK: Income Per Share of Common Stock - Basic ...................... $ .04 $ .04 $ .13 $ .24 ======== ======== ======== ======== Income Per Share of Common Stock - Diluted .................... $ .03 $ .03 $ .09 $ .16 ======== ======== ======== ======== Weighted Average Number of Common Shares Outstanding - Basic ....... 11,890 11,950 11,890 11,950 Weighted Average Number of Common Shares Outstanding - Diluted ..... 17,053 17,115 17,053 17,115 ======== ======== ======== ======== OTHER COMPREHENSIVE INCOME, NET OF TAX: Net Income ......................................................... $ 743 $ 717 $ 2,249 $ 3,445 Comprehensive Income/(Loss) ........................................ 302 (1,798) (120) (413) -------- -------- -------- -------- Total Comprehensive Income/(Loss) .................................. $ 1,045 $ (1,081) $ 2,129 $ 3,032 ======== ======== ======== ========
See notes to consolidated financial statements 4 U.S. ENERGY SYSTEMS, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2003 (Audited) (in Thousands, except Share Data)
- --------------------------------------------------------------------------------------------------------------------------------- Preferred Stock Preferred Stock Preferred Stock Series B Series C Series D Treasury Stock Common Stock - --------------------------------------------------------------------------------------------------------------------------------- No. of No. of No. of No. of No. of Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount - --------------------------------------------------------------------------------------------------------------------------------- Balance - Dec. 31, 2002 as Previously Reported 368 -- 100,000 $ 1 1,138,888 $ 11 (383,450) $ (1,805) 12,333,613 $ 123 - --------------------------------------------------------------------------------------------------------------------------------- Adjustments -- -- -- -- -- -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Balance - Dec. 31, 2002 as Adjusted 368 100,000 1 1,138,888 11 (383,450) (1,805) 12,333,613 123 - --------------------------------------------------------------------------------------------------------------------------------- Issuance of Common Stock 361 - --------------------------------------------------------------------------------------------------------------------------------- Foreign Currency Translation Adjustment - --------------------------------------------------------------------------------------------------------------------------------- Treasury Stock (62,480) (399) - --------------------------------------------------------------------------------------------------------------------------------- Net Income for the Year Ended December 31, 2003 - --------------------------------------------------------------------------------------------------------------------------------- Dividends on Preferred Stock: - --------------------------------------------------------------------------------------------------------------------------------- Series B - --------------------------------------------------------------------------------------------------------------------------------- Series C - --------------------------------------------------------------------------------------------------------------------------------- Series D - --------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 2003 368 -- 100,000 $ 1 1,138,888 $ 11 (445,930) $ (2,204) 12,333,974 $ 123 ================================================================================================================================= - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- Additional Other Paid in Comprehensi Accumulated Capital ve Income Deficit Total - --------------------------------------------------------------------------------- Balance - Dec. 31, 2002 as Previously Reported $ 65,720 $ 701 $ (23,154) $ 41,597 - --------------------------------------------------------------------------------- Adjustments -- -- (2,843) (2,843) - --------------------------------------------------------------------------------- Balance - Dec. 31, 2002 as Adjusted 65,720 701 (25,997) 38,754 - --------------------------------------------------------------------------------- Issuance of Common Stock - --------------------------------------------------------------------------------- Foreign Currency Translation Adjustment (279) (279) - --------------------------------------------------------------------------------- Treasury Stock (399) - --------------------------------------------------------------------------------- Net Income for the Year Ended December 31, 2003 1,838 1,838 - --------------------------------------------------------------------------------- Dividends on Preferred Stock: - --------------------------------------------------------------------------------- Series B (34) (34) - --------------------------------------------------------------------------------- Series C (180) (180) - --------------------------------------------------------------------------------- Series D (615) (615) - --------------------------------------------------------------------------------- Balance - December 31, 2003 $ 64,891 $ 422 $ (24,159) $ 39,085 =================================================================================
See notes to consolidated financial statements 5 U.S. ENERGY SYSTEMS, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 UNAUDITED (in Thousands, except Share Data)
- --------------------------------------------------------------------------------------------------------------------------------- Preferred Stock Preferred Stock Preferred Stock Series B Series C Series D Treasury Stock Common Stock - --------------------------------------------------------------------------------------------------------------------------------- No. of No. of No. of No. of No. of Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount - --------------------------------------------------------------------------------------------------------------------------------- Balance - Dec. 31, 2003 368 -- 100,000 $ 1 1,138,888 $ 11 (445,930) $ (2,204) 12,333,974 $ 123 - --------------------------------------------------------------------------------------------------------------------------------- Issuance of Common Stock - --------------------------------------------------------------------------------------------------------------------------------- Foreign Currency Translation - --------------------------------------------------------------------------------------------------------------------------------- Adjustment - --------------------------------------------------------------------------------------------------------------------------------- Unrealized Lossses - --------------------------------------------------------------------------------------------------------------------------------- Treasury Stock - --------------------------------------------------------------------------------------------------------------------------------- Net Income for Nine Months Ended September 30, 2004 - --------------------------------------------------------------------------------------------------------------------------------- Dividends on Preferred - --------------------------------------------------------------------------------------------------------------------------------- Stock: - --------------------------------------------------------------------------------------------------------------------------------- Series B - --------------------------------------------------------------------------------------------------------------------------------- Series C - --------------------------------------------------------------------------------------------------------------------------------- Series D - --------------------------------------------------------------------------------------------------------------------------------- Balance - September 30, 2004 368 -- 100,000 $ 1 1,138,888 $ 11 (445,930) $ (2,204) 12,333,974 $ 123 ================================================================================================================================= - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- Additional Other Paid in Comprehensi Accumulated Capital ve Loss Deficit Total - --------------------------------------------------------------------------------- Balance - Dec. 31, 2003 $ 64,891 $ 422 $ (24,159) $ 39,085 - --------------------------------------------------------------------------------- Issuance of Common Stock - --------------------------------------------------------------------------------- Foreign Currency Translation - --------------------------------------------------------------------------------- Adjustment (422) (422) - --------------------------------------------------------------------------------- Unrealized Gain 302 302 - --------------------------------------------------------------------------------- Treasury Stock - --------------------------------------------------------------------------------- Net Income for Nine Months Ended September 30, 2004 2,249 2,249 - --------------------------------------------------------------------------------- Dividends on Preferred - --------------------------------------------------------------------------------- Stock: - --------------------------------------------------------------------------------- Series B (25) (25) - --------------------------------------------------------------------------------- Series C (135) (135) - --------------------------------------------------------------------------------- Series D (461) (461) - --------------------------------------------------------------------------------- Balance - September 30, 2004 $ 64,270 $ 302 $ (21,910) $ 40,593 =================================================================================
See notes to consolidated financial statements 6 U.S. ENERGY SYSTEMS, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (in Thousands)
Nine Months Ended ------------------------------- Sept. 30, 2004 Sept 30, 2003 -------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income ............................................................. $ 2,249 $ 3,445 Adjustments to reconcile Net Income to Net Cash provided by (used in) Operating Activities: Depreciation ...................................................... 2,799 3,354 Amortization ...................................................... 500 -- Minority Interest Expense/Liability ............................... 3,606 586 Income Tax Benefit ................................................ 2,898 (1,952) Gain on Sale of Subsidiaries ...................................... (23,945) (1,419) Reserve for Investment in SEFL .................................... 8,337 -- Changes In: Accounts and Notes Receivable Trade ............................... 3,473 1,525 Other Current Assets .............................................. 826 (1,755) Other Assets ...................................................... 250 11 Accounts Payable and Accrued Expenses ............................. (1,741) (27) Deferred Revenue and Other ........................................ (2,938) 468 Rate Incentive Liability .......................................... 4,375 4,710 -------- -------- Net Cash Provided from Operating Activities .................................. 689 8,946 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Restricted Investments ................................................. (18,068) -- Change in Investments .................................................. 15,776 (885) Acquisitions of Property and Equipment ................................. (524) (1,924) Construction in Progress ............................................... 595 (1,244) Goodwill ............................................................... (400) -- -------- -------- Net Cash Used in Investing Activities ........................................ (2,621) (4,053) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Notes Receivable ......................................... 69 -- Proceeds from Long-Term Debt ........................................... 22,087 -- Payments of Long Term Debt ............................................. (9,273) (1,121) Debt Issuance Costs .................................................... (9,558) -- Deferred Royalty Liability ............................................. 5,686 -- Dividends on Preferred Stock ........................................... (621) (627) -------- -------- Net Cash Provided by/(Used in) Financing Activities .......................... 8,390 (1,748) NET INCREASE IN CASH ......................................................... 6,458 3,145 Cash, restricted cash and cash equivalents - beginning of period ............. 20,913 16,215 -------- -------- Cash, restricted cash and cash equivalents - end of period ................... $ 27,371 $ 19,360 ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest ................................................. $ 5,452 $ 5,181 Contingent Note Receivable ............................................. 2,502 -- Note Receivable from Sale of Partnership Interest ...................... 14,000 -- Gain on Acquisition of Debt ............................................ 2,728 --
See notes to consolidated financial statements 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 and nine 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, 2003, as amended. NOTE B - NET INCOME (LOSS) PER SHARE Net Income (Loss) per share has been computed on the basis of the weighted average number of shares outstanding during the periods. In case of (Loss), common stock equivalents have not been included in the computation since their inclusion would be anti-dilutive. NOTE C - INCOME TAXES The nine-month financial statements for the period ended September 30, 2004 reflect a decrease in the deferred tax asset due to the gains associated with the CPIF, as defined in Note G, the purchase of subordinated indebtedness at a discount to the face value of the note and the gain associated with the AJG genco transaction less the write off of the investment in SEFL, as defined below. (See Notes G and K for a description of these transactions). In the first nine months of 2003 the increase in the deferred tax asset balance reflects increased net operating loss carry-forwards produced in that period. NOTE D - ADDITIONAL CAPITAL For the nine months ended September 30, 2004, and September 30, 2003, no stock options were exercised. NOTE E - INVESTMENTS Scandinavian Energy Finance, Limited / EnergiSystem i Sverige AB. In March 2002, together with EIC Electricity SA ("EIC"), a Swiss investment company specializing in energy investments, the Company formed a joint venture, Scandinavian Energy Finance Limited ("SEFL") and financed a new Swedish energy group, EnergiSystem i Sverige AB ("ESS"). SEFL had a 25 year option to acquire 90% of the fully diluted equity of ESS for a nominal sum, which it exercised in December 2003. As part of the transaction, EnergiSystem acquired seven operating district energy systems and several late-stage development projects. SEFL provided approximately $56 million to ESS in the form of financing. Approximately $45 million of this amount was made in the form of a senior secured convertible debenture to ESS and approximately $11 million was in the form of a subordinated loan to EnergiSystem. The senior secured convertible debenture carried an interest rate of approximately 6% per annum. The subordinated loan carried an interest rate of approximately 13%. A Swedish bank provided SEFL with approximately $45 million of long term financing on a non-recourse basis to SEFL's stockholders. The financing carried a variable interest rate of the Stockholm Inter-Bank Offered Rate ("STIBOR") plus 30 basis points per annum, capped at 4.7% for the first 5 years and a rate of STIBOR plus 110 basis points per annum thereafter. The loan had a 25 year term with no amortization during the first ten years. We initially invested approximately $5 million in cash and 167,976 of our common shares, valued at approximately $769,000 in SEFL, and EIC invested its proportionate share in cash. 8 On September 30, 2003 ESS sold a 2% interest in SEFL (See Note H) to Borg Energi AB for $223,000. Due to the issuance of additional common stock to EIC for additional investments in the fourth quarter of 2003, the Company's ownership interest in SEFL was reduced to 32% and was accounted for using the equity method in 2003. The investment in SEFL including equity investments, inter-company loans and unrepatriated retained earnings amounted to approximately $8.2 million. As indicated in Note I to the Consolidated Financial Statements for the period ended March 31, 2004, the Company disclosed pending litigation associated with the SEFL investment. As of the end of that quarter, the Company had reserved its entire $8.2 million investment in SEFL. On July 8 2004 in the context of an overall settlement, SEFL sold its loan and equity investments in ESS to its primary lender, Lantbrukskredit AB ("LBK) for 35.5 million Kronor and a release of SEFL and its shareholders from all obligations under the financing agreements with LBK. In addition, USEY and ESS terminated their service agreement. From the 35.5 million Kronor received from LBK, SEFL paid the Company $1.1 million as repayment of an intercompany loan from the Company to SEFL. Since the amount reserved for SEFL included this intercompany loan, the $1.1 million has been recognized during the third quarter of 2004 as a reduction in the reserve amount. The $1.1 million was received on July 21, 2004. Subsequent to the overall settlement, the total investment in SEFL was written off against the reserve account. NOTE F - ACCOUNTING CHANGES The Company's accounting policy pertaining to the financial accounting of the Illinois rate incentives received by its Illinois-based biogas to energy projects was changed effective as of April 1, 2001. The change in tax accounting had no impact on consolidated cash flow. Following is a summary of the prior period adjustments made to the audited financial statements:
- ----------------------------------------------------------------------------------------- Balance Sheet: (dollars in thousands) - ----------------------------------------------------------------------------------------- Deferred Tax Asset Goodwill Minority Interest Retained Earnings - ----------------------------------------------------------------------------------------- Year 2003 $(7,283) $ (430) $(3,528) $(4,185) - -----------------------------------------------------------------------------------------
NOTE G - SALE OF SUBSIDIARIES Introduction On April 8, 2004 Countryside Power Income Fund (CPIF), a newly formed Canadian income fund the Company sponsored, completed its initial public offering of trust units in Canada pursuant to which it raised approximately $102 million in net proceeds. All amounts reflected herein are stated in US dollars and the exchange rate used is the rate effective as of April 8, 2004 of Cdn $1.33 to US $1.00. In connection with such offering, one or more of US Energy Biogas Corporation ("USEB") and the Company completed the transactions described below. The following is a summary of the terms of such transactions and such summary is qualified in its entirety by reference to the applicable transaction document. Sale of Canadian District Energy Systems The Company sold to a subsidiary of CPIF, all of the capital stock of USE Canada Holdings Corp ("USE Canada"), a wholly owned subsidiary that owned two Canadian based district energy systems. The Company received approximately $15.2 million including $1.6 million for the repayment of inter-company debt related to USE Canada and $13.6 million from the sale of the stock. The sale price was determined pursuant to arms-length negotiation between the Company and CPIF, with the involvement of the underwriters of CPIF's initial public offering. The after tax gain on the sale of the Canadian District Energy System was $4,560,000. 9 USEB Loans Countryside Canada Power, Inc. ("Countryside Canada"), a subsidiary of CPIF, purchased the existing senior debt relating to certain of USEB's projects ("Existing Loans") from the holders thereof. One of such holders, AJG Financial Services Inc.("AJG"), a subsidiary of Arthur J. Gallagher, Inc., was paid an aggregate of $6,419,800 (inclusive of principal and accrued interest) for its portion of the Existing Loans. AJG and its affiliates beneficially own more than five percent of our common stock Upon acquisition of the Existing Loans, a subsidiary of the Fund advanced additional funds of $23.8 million ("Additional Advances") to USEB and amended the Existing Loans to, among other things, cover the Additional Advances and to modify certain loan covenants that were restrictive to USEB. Among other things, the Additional Advances were used to fund (i) approximately $9.6 million in costs related to the acquisition and amendment of the Existing Loans (ii) a debt service reserve account in the amount of $2 million, (iii) additional deposits of $8,200,000 into the Illinois Reserve account established to fund reimbursement payments due to the State of Illinois under the Illinois subsidy and (iv) an improvement reserve of $4 million established to fund USEB capital projects. Including the Additional Advances, the USEB Loans have a principal amount of approximately $81 million. The USEB Loans are denominated in Canadian dollars and the principal amount of such loans is Cdn$107 million. The loans purchased by CPIF are obligations of USEB, which are secured by a first ranking lien held by Countryside Canada on all of USEB's assets (with specified exceptions) and are generally guaranteed by USEB's subsidiaries. The guaranty obligations of the USEB subsidiaries are secured by the assets of such subsidiaries (with specified exceptions). The interest rate on the USEB Loans is 11% per annum, principal and interest is payable monthly, and the loans mature in 2019, subject to mandatory prepayment upon the occurrence of specified events and prepayment at the election of the lender after ten years. Due to the requirement in the amended loan documents that debt service payments be made to CPIF in Canadian dollars, USEB has entered into a three year hedge agreement with TD Bank fixing the US dollar to Canadian dollar exchange rate at US$0.76 per Canadian dollar. The agreement fixes the US Dollar amount USEB pays CPIF for the monthly principal and interest payments for the 3 year term of the agreement. Upon the expiration of the hedge agreement in April, 2007, USEB may be exposed to foreign currency risk at that time. According to the terms of the loan agreement with CPIF, USEB is required to maintain a foreign currency hedge agreement for a minimum of 75% of the remaining debt service payments. USEB will be at risk for fluctuations in the currency exchange rate should the rate vary from the exchange rate existing in the expiring hedge agreement. USEB Royalty Interest Countryside Canada acquired a royalty interest (the "Royalty Interest") in USEB for $6,000,000, entitling it to receive a quarterly amount (the "Royalty") from USEB that is determined by reference to, and limited by, USEB's distributable cash flow (determined in accordance with the royalty agreement). The Royalty Interest is convertible generally at any time on or after April, 2024 or on or after the prepayment in full of the USEB Loans, into non-voting common shares of USEB, representing 49% of the common shares of USEB outstanding at the time of conversion. Upon conversion of the Royalty Interest, Countryside Canada's right to receive the Royalty will terminate. The amount of the Royalty payable to Countryside Canada depends upon whether the Royalty Interest has become convertible. For each fiscal quarter prior to the quarter in which the Royalty Interest becomes convertible, the amount of the Royalty payable to Countryside Canada will be equal to 7% of USEB's distributable cash flow plus 1.8% of USEB's revenues (determined in accordance with the royalty agreement), but in any event, the Royalty payment will be subject to the Distribution Cap (described below). After the Royalty Interest becomes convertible, but remains unconverted, the Royalty will be equal to 49% of USEB's distributable cash flow, subject to the Distribution Cap. The Royalty Interest terminates upon the refinancing of the USEB Loans or the liquidation or sale of substantially all of the USEB operating assets, in which case Countryside Canada will be entitled to receive, subject to the Distribution Cap, $6 million (the "Return Amount") and 49% of the net residual proceeds (as determined pursuant to the royalty agreement). Notwithstanding the above, no amount will be payable to Countryside Canada under the Royalty Interest unless, in the case of the Return Amount, 500% of such amount is distributed concurrently to the USEB shareholders in respect of their common shares of USEB and, in all other cases, at least 104.09% of such amount is distributed concurrently to the USEB shareholders in respect of their common shares of USEB (the "Distribution Cap"). 10 Development Agreement with Cinergy and US Energy Pursuant to the Development Agreement by and among Cinergy, US Energy and CPIF (or the affiliates of the foregoing), during the five year period commencing April 8, 2004 (subject to an additional five year term unless a party chooses not to renew), these parties will seek opportunities to acquire or invest in energy projects that meet CPIF's guidelines on terms acceptable to all parties. No party is obligated to participate in any project or opportunity. A subsidiary of CPIF will provide investment analysis and evaluation services on behalf of these parties in consideration for which the Company will pay annual fees of $288,100. If the Company and/or Cinergy divest of an energy project acquired or invested, pursuant to this development agreement, CPIF (or a subsidiary thereof) will have a right of first refusal to acquire or invest in such energy project. Improvement Agreement with USEB and CPIF USEB has given CPIF a right of first offer to invest in two potential expansion opportunities relating to the existing Countryside and Morris biogas projects and two potential greenfield development opportunities currently available to USEB. The potential expansion of the Morris and Countryside projects would consist of the replacement of existing electric generation equipment that management expects will increase capacity and reduce operating costs of each project. The potential development of the greenfield projects consist of the construction of energy utilization facilities on existing landfill sites where gas collection systems have already been constructed. AJG Genco Transaction In April 2004, AJG paid Resources Generating Systems, Inc., (RGS) a wholly owned subsidiary of USEB, for an interest it had previously acquired in Illinois Electrical Generation Partners, II L.P. (IEGP II). The amount paid was $16 million of which $14 million is payable pursuant to a non-recourse note. The note bears interest at the rate of 15% per annum, matures in 2024, provides for scheduled amortization and is secured by AJG's ownership interest in IEPG II. AJG may defer payments on the note under specified circumstances and in the event AJG does not make scheduled principal and interest payments because distributions from IEGP II are insufficient to fund such payments. AJG's obligations under the note will accrue without triggering an event of default. During the period ending 30 days after the term of this note, RGS has the right to acquire from AJG, and RGS may be required to buy from AJG, AJG's interests in Illinois Electrical Generation Partners LP ("IEGP") and IEGP II on specified terms. IEGP is the indirect owner of three biogas projects and IEGP II is the indirect owner of seven biogas projects. The completion of this transaction resulted in a $16,000,000 non-recurring pre-tax gain for USEB recorded in the nine month period ended September 30, 2004. The USEY portion of this gain after allowing for Cinergy's minority interest and taxes amounts to $5,384,000. NOTE H - BASIS OF PRESENTATION As indicated in Note E the Company formed a joint venture Scandinavian Energy Finance, Limited ("SEFL") for the distribution of biomas-fueled energy to 800 customers in Sweden. The Company originally acquired a 51% interest in the SEFL venture for approximately $5.8 million and, accordingly, the joint venture's financial statement had been consolidated with the Company's Financial Statements. Effective September 30, 2003 the Company sold a 2% interest in the SEFL venture for $231,000 reducing its interest to 49%. The Company's interest was further reduced to 32% in the Fourth Quarter of 2003. As a result, the Company's investment in the SEFL joint venture was accounted for using the equity method. The deconsolidation of the SEFL Joint Venture had a significant effect on the Company's consolidated total assets. As indicated in Note E, SEFL has sold its investments in the Swedish energy business to SEFL's senior lender. The Company has fully eliminated its investment in SEFL from its financial statements. NOTE I - TRANSACTION AND DEBT ISSUANCE COSTS Transaction and Debt Issuance Costs totaling $12,185,000 consisting of non-recurring expenses associated with the completion of the transaction with CPIF were expensed during the period. Included in this amount is $9,886,000 reimbursed to CPIF related to expenses incurred by CPIF in the acquisition of the Existing Loans from the existing lenders and $2,299,000 of unamortized debt issuance costs related to the debt acquired by CPIF that remained on USEB books. 11 Debt issuance costs are amortized on a straight-line basis over the terms of the financing. For the nine months ended September 30, 2004, the amount amortized to expense was approximately $500,000 and the unamortized balance as of September 30, 2004 was $11,463,000. This amount will be amortized over 15 years, the remaining term of the debt, with the annual amortization expense equal to approximately $793,000 per annum. 12 NOTE J -- DISCONTINUED OPERATIONS The Company sold its USE Canada operation to the Countryside Fund. The closing date of the sale was April 8, 2004. The sale of USE Canada resulted in that entity becoming a discontinued operation in 2003 and was categorized as such on previous financial statements. Assets and liabilities categorized as discontinued operations were as follows: --------------------------------------------------------------------- Year 2003 --------- --------------------------------------------------------------------- Assets: --------------------------------------------------------------------- Cash $ 676 --------------------------------------------------------------------- Accounts Receivable 1,813 --------------------------------------------------------------------- Other Current Assets 833 --------------------------------------------------------------------- Property Plant and Equipment 22,948 --------------------------------------------------------------------- Deferred Tax Asset 1,678 --------------------------------------------------------------------- Other Assets 232 ------- --------------------------------------------------------------------- Total Assets $28,180 ===================================================================== --------------------------------------------------------------------- Liabilities: --------------------------------------------------------------------- Current Portion of Long Term Debt $ 2,013 --------------------------------------------------------------------- Accounts Payable and Other 2,316 --------------------------------------------------------------------- Long Term Debt less Current Portion 17,416 ------- --------------------------------------------------------------------- Total Liabilities $21,745 ===================================================================== These assets and liabilities are reflected on the year 2003 Balance Sheet under the caption "Assets to be disposed of" and "Liabilities to be disposed of". USE Canada was purchased by the Company on June 11, 2001. Total revenues for USE Canada for the first nine months of 2003 were $ 9,456,000. The Company sold Geothermal, LLC on June 30, 2003. Revenues for Geothermal, LLC for the first six months of 2003 were $1,003,000. NOTE K -- OTHER INCOME - ACQUISITION OF INDEBTEDNESS On September 30, 2004, USEB purchased the subordinated note issued by USEB to AJG Financial Services, Inc. The note, with an outstanding principal amount of $5,728,883 plus outstanding accrued interest, was purchased for $3,000,000. The purchase resulted in a non-recurring gain during the current reporting period of $2,728,000 equal to the difference between the acquisition price and the note's face value. The gain has been recorded as Other Income in the financial statements. 13 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Income for the three and nine months ended September 30, 2004 are lower than reported in the corresponding periods in the prior year due to a number of events affecting the Company. These events include: the sale of USE Canada to the CPIF, the change in accounting for SEFL to the equity method, the reserve for the SEFL investment and the sale of Geothermal LLC. USE Canada and Geothermal LLC are reflected on the statement of operations under the caption "Income from Discontinued Operations". See Notes H and J to the financial statements. The Company's revenues for the three month period ending September 30, 2004 were $6,213,000, a decrease of $2,493,000, or 29%, compared with the three month period ending September 30, 2003. For the nine month period ending September 30, 2004, revenues were $15,809,000, a decrease of $13,130,000, or 45%, compared to the similar nine month period in 2003. The primary reason for the decrease was the recording, during the 2003 comparative periods, of revenues from USE Canada and USE Geothermal operations that were not included in revenues for the 2004 periods. The table below indicates the revenues for the comparative periods pertaining to these operations:
Three Months Ended Nine Months Ended (in thousands) (in thousands) ------------------------------- ------------------------------- Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003 -------------- -------------- -------------- -------------- USE Canada Revenues -- $ 2,315 -- $ 9,456 USE Geothermal Revenues -- -- -- 1,003 ------- ------- ------- ------- Total -- $ 2,315 -- $10,459 ======= ======= ======= =======
The decrease in revenues from these operations is offset by decreases in operating expense and interest expense related to the assets. After adjusting total revenues for revenues from the sold operations, revenues for the three and nine month period ended September 30, 2004 decreased by $178,000, or 3%, and $2,671,000, or 14%, respectively. These decreases were primarily due to a USEB project that terminated operations in 2003 due to a contract termination and to the elimination of other revenues related to operations which were offset by operating expenses as indicated below. Operating expenses for the three month period ending September 30, 2004 were $2,523,000, a decrease of $1,786,000, or 41%, compared with the three month period ending September 30, 2003. For the nine month period ending September 30, 2004, operating expenses were $7,454,000, a decrease of $8,025,000, or 52%, compared to the similar nine month period in 2003. The primary reason for the decrease was the recording during the 2003 comparative periods, of operating expenses related to the operations of USE Canada and USE Geothermal operations. There were no operating expenses pertaining to these operations during the 2004 periods. The table below indicates the operating expenses for the comparative periods pertaining to these operations:
Three Months Ended Nine Months Ended (in thousands) (in thousands) ------------------------------- ------------------------------- Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003 -------------- -------------- -------------- -------------- USE Canada Operating Expenses -- $ 1,494 -- $ 6,702 USE Geothermal Operating Expenses -- -- -- 400 ------- ------- ------- ------- -- $ 1,494 -- $ 7,102 ======= ======= ======= =======
After adjusting operating expenses for expenses from the sold operations, operating expenses for the three and nine month period ended September 30, 2004 decreased by $292,000, or 10%, and $923,000, or 11%, respectively. The decrease was primarily due to the termination of a USEB operating project in 2003 due to a contract termination and to the elimination of expenses related to operations which were offset by the elimination of revenues as indicated above. 14 General and Administrative expenses for the three month periods ending September 30, 2004 were $1,733,000, a decrease of $31,000, or 2%, compared with the three month period ending September 30, 2003. For the nine month period ending September 30, 2004, general and administrative expenses were $3,415,000, a decrease of $1,378,000, or 29%, compared to the corresponding nine month period in 2003. The decrease is summarized in the following schedule:
Three Months Ended Nine Months Ended (in thousands) (in thousands) ------------------------------- ------------------------------- Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003 -------------- -------------- -------------- -------------- Salaries, Incentives & Other Compensation $ 423 $ 527 $ 4,706 $ 1,745 Legal and Professional 89 231 320 556 Insurance 110 117 389 504 Corporate Expenses 132 286 346 656 Other 979 603 1,115 1,332 CPIF Transaction Costs -- -- 1,378 -- CPIF Expense Reimbursement -- -- (4,839) -- ------- ------- ------- ------- Total $ 1,733 $ 1,764 $ 3,415 $ 4,793 ======= ======= ======= =======
A portion of the change in general and administrative expenses is due to the recording during the 2003 periods of expenses related to USE Canada and USE Geothermal operations. There were no general and administrative expenses related to these operations during the 2004 periods. The table below indicates the general and administrative expenses for the respective periods related to these assets:
Three Months Ended Nine Months Ended (in thousands) (in thousands) ------------------------------- ------------------------------- Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003 -------------- -------------- -------------- -------------- USE Canada -- $ 186 -- $ 550 USE Geothermal -- -- -- 322 ------- ------- ------- ------- -- $ 186 -- $ 872 ======= ======= ======= =======
After adjusting general and administrative expenses for expenses from the sold operations, general and administrative expenses increased for the three month period by $155,000, or 10%, and decreased for the nine month period by $506,000, or 13%. During the nine month period ended September 30, 2004, general and administrative expenses included the reimbursement from CPIF of $4,839,000 for expenses incurred by the Company related to the CPIF transaction. This reimbursement offset incentive compensation awarded to employees and officers in connection with the CPIF transaction and per existing employment agreements which, combined, totaled $3.2 million and $1,378,000 of costs associated with the CPIF transaction. Depreciation and amortization expenses for the three month period ending September 30, 2004 were $1,232,000, an increase of $154,000, or 14%, compared with the three month period ending September 30, 2003. Depreciation and amortization expenses for the nine month period ending September 30, 2004 were $3,298,000, a decrease of $56,000, or 2%, compared to the similar nine month period in 2003. A portion of these changes is the result of the recording, during the 2003 comparative periods, of depreciation related to USE Canada and USE Geothermal operations. The table below indicates the depreciation for the comparative periods pertaining to these operations:
Three Months Ended Nine Months Ended (in thousands) (in thousands) ------------------------------- ------------------------------- Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003 -------------- -------------- -------------- -------------- USE Canada Depreciation -- $ 194 -- $ 565 USE Geothermal Depreciation -- -- -- 126 ------- ------- ------- ------- -- $ 194 -- $ 691 ======= ======= ======= =======
15 After adjusting depreciation and amortization expenses for expenses from the sold operations, the expense increased by $348,000, or 39%, and $635,000, or 24%, for the comparative three and nine month periods. The increase is related to an increase in the amortization of debt issuance costs resulting from the CPIF transactions plus an increase in depreciation from the USEB assets due to the adjustment of the book value of certain assets to reflect current values. Other Income of $2,357,000 for the three and nine month period ended September 30, 2004, primarily resulted from the company's purchase of a subordinated note issued by USEB to AJG Financial Services. The note, with an outstanding principal amount of $5,728,883 plus outstanding accrued interest, was purchased for $3,000,000. The purchase resulted in a non recurring gain during the three month period ended September 30, 2004 of $2,728,883. The gain represents the acquisition price below the note's face value. Interest Income increased by $352,000 and $849,000 for the comparative three and nine months periods ended September 30. The increase is due to interest income from the AJG Financial Services, Inc note receivable as discussed in Note G. Interest Expense for the three month period ending September 30, 2004 was $2,406,000, an increase of $94,000, or 4%, when compared to the three month period ending September 30, 2003. Interest expense for the nine month period ending September 30, 2004 was $6,842,000, an increase of $153,000, or 2%, compared to the similar nine month period in 2003. Interest expense for the 2003 comparative periods included interest related to USE Canada and USE Geothermal operations. The table below indicates the interest expense for the comparative periods pertaining to these operations:
Three Months Ended Nine Months Ended (in thousands) (in thousands) ------------------------------- ------------------------------- Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003 -------------- -------------- -------------- -------------- USE Canada Interest Expense -- $ 326 -- $ 963 USE Geothermal Interest Expense -- -- -- -- ------- ------- ------- ------- -- $ 326 -- $ 963 ======= ======= ======= =======
After adjusting interest expense for expenses from the sold operations, interest expense for the three and nine month periods ended September 30, 2004 increased by $420,000, or 21%, and $1,116,000, or 19%, respectively. The increase is due to the increase in the amount of debt and the interest rate on that debt from the CPIF transaction. Transaction Costs totaling $12,185,000 consisting of non-recurring expenses associated with the completion of the CPIF transaction were expensed during the period. Included in this amount is $9,886,000 reimbursed to CPIF related to expenses incurred by CPIF in their acquisition of the Existing Loans and $2,299,000 of unamortized debt issuance costs related to the debt acquired by CPIF that remained on USEB books. Income from discontinued operations reflects the after tax net income applicable to the Canadian District Energy System (USE Canada) which was sold to CPIF in April 2004 and Geothermal, LLC (Steamboat) which was sold in June 2003. Gain on sale of subsidiaries reflects the sale of USE Canada to CPIF and the gain resulting from AJG's payment for its 50% ownership interests in IEGP II that it had previously acquired. The after-tax gain on the sale of USE Canada amounted to $4,561,000 and the net gain on AJG's payment for its interest in IEGP II after allowing for taxes and minority interest amounted to $5,384,000. For additional information on these items see note G to the consolidated financial statements. Comprehensive Income for the three month period ending September 30, 2004 was $302,000. This income is comprised of marked to market valuations for the foreign currency exchange hedging arrangement and open equity positions in the investment accounts. For the three month period comprehensive income related to the foreign currency exchanges hedging arrangement amounted to $409,000, net of taxes and minority interest, less an offsetting loss related to the mark to market for the open equity positions of $107,000. For the nine month period ending September 30, 2004, the 16 Comprehensive Loss included the items described above plus an additional comprehensive loss of $422,000 related to USE Canada operations. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2004, cash and cash equivalents totaled approximately $27,371,000 of which $16,794,000 was unrestricted, compared with $20,913,000 at December 31, 2003 of which $3,210,000 was unrestricted. In addition, the Company also had $17,539,000 in restricted investment accounts. When combined, the total cash and investment accounts totaled $44,910,000 as of September 30, 2004. In connection with notes payable by USEB, which are guaranteed by certain USEB subsidiaries, the lender requires the subsidiaries to maintain various restricted cash accounts and investment accounts, which, at September 30, 2004, amounted to $28,116,000. These restricted cash and investment accounts include a reserve for the repayment of the Illinois incentive liability, a debt service reserve and a construction reserve from which USEB can fund portfolio expansion. Prior to the CPIF transaction, certain lenders required USEB and certain of its subsidiaries to hold in restricted project revenue accounts, referred to in the table below as Lender Reserve Accounts. With the restructuring of these loans through the CPIF transaction, the requirement to maintain these project revenue accounts was eliminated. A summary of the restricted cash accounts at September 30, 2004 and December 31, 2003 follows:
------------------------------------------------- As of September 30, 2004 As of December 31, 2003 (in thousands) (in thousands) ------------------------------------------------- Illinois Reserve Account - Cash $ 3,016 $11,192 Illinois Reserve Account - Marketable Securities 17,539 -- Debt Service Reserve Account 2,005 -- Construction Reserve Account 4,010 -- Lender Reserve Account -- 5,750 Dividend Reserve Account 1,408 731 Other Reserve Accounts 138 30 ------------------------------------------------- Total $28,116 $17,703 =================================================
The increases in total cash and cash equivalents during the first nine months of 2004 amounting to $6,458,000 primarily reflect funds received from the CPIF transaction. During the first nine months of 2004, cash flow of $689,000 was generated by operating activities offset by $2,621,000 used in financing activities and $8,390,000 provided by financing activities. We continue to evaluate current and forecasted cash flow as a basis to determine financing and funding requirements for operations 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 and other possible contingencies during the next twelve months. OFF BALANCE SHEET ARRANGEMENTS As discussed in Note G - Sale of Subsidiaries-USEB Loans, USEB, in connection with the CPIF transaction, entered into a hedging arrangement fixing the US dollar to the Canadian dollar exchange rate at US$0.76 per Canadian dollar. This hedge arrangement transfers the risks and benefits of US dollar to Canadian dollar currency fluctuations from USEB to the counterparty to such arrangement until April 2007 at which time USEB is required to enter into a new arrangement for at least 75% of debt service payments. In accordance with FAS 133, this hedge arrangement is deemed a derivative security. 17 Changes in the currency exchange rate since the inception of the arrangement have been such that the US dollar has weakened when compared to the Canadian dollar. As of September 30, 2004, the exchange rate was approximately US$0.79 per Canadian dollar. Due to the requirement that debt service payments be made to CPIF in Canadian dollars, without the hedge arrangement, USEB would have been required to increase the US dollar denominated debt service payments in order to offset the increase in the US dollar to Canadian dollar exchange rate. Thus, this hedging arrangement is designed to fix the USEB debt service payments to CPIF notwithstanding currency fluctuations. Due to the weakening of the US dollar and the resultant change in the currency exchange rate, the estimated present value of the hedge arrangement at September 30, 2004 has increased by approximately $1,213,000 since its inception. After reflecting US taxes ($461,000) and the minority interest component of the hedge value ($343,000) the net amount is $409,000. 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, 2003, 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. It is our general policy to not enter into any interest rate, foreign currency or derivative transactions as a hedge against these market risks as the underling assets and investments are long-term in nature except what is required under the terms of the USEB loans. See Note G to the financial statements and to Management's Discussion and Analysis of Financial Conditions and Results of Operations - Off Balance Sheet Arrangements. 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. 18 PART II - Other Information Item 1: Legal Proceedings Re: Information in Note I of notes to our financial statements is incorporated herein by this reference. Item 5 - Other Information As noted in our Current Report on Form 8-K filed November 1, 2004 (the "8-K"), Goran Mornhed advised that he was, among other things, terminating his employment agreement. Our Board of Directors and/or a committee thereof are currently evaluating Mr. Mornhed's claims which are described in the 8-K. In September and October 2004 we issued, pursuant to our 2000 Executive Incentive Compensation Plan ("the Plan"), the following restricted stock units (pursuant to agreements, the forms of which have been filed as exhibits), to the directors and executive officers identified below (capitalized terms used without being defined herein shall have the meanings ascribed to such terms by the Plan): Number of Restricted Name Stock Units - ---- ----------- Lawrence I. Schneider 434,783(1) Stephen Brown 5,000(2) Evan Evans 7,051(2) Kenneth Leung 5,128(2)(3) Irving Levine 4,615(2)(3) Carl Greene 8,333(2) Allen J. Rothman 108,696(1) Richard J. Augustine 36,232(1) (1) Received the Officer's Restricted Stock Unit Award Agreement. Generally, this agreement provides that the restricted stock units vest in four equal annual installments beginning on or about the first anniversary of the grant date, subject to acceleration upon a Change in Control or termination of the employment relationship (other than the voluntary termination of employment by the recipient or the recipient's termination for Cause, in which case, the restricted stock units are forfeited, to the extent they have not vested). Vested shares will be delivered to the recipient on the earlier to occur of a date selected by the recipient (i.e., generally to the extent their allotment of restricted stock units has vested in full), their death, disability, termination of employment, the passage of time and a Change in Control. (2) Received the Director's Restricted Stock Unit Award Agreement. Generally, this agreement provides for the deferral of the receipt of the shares of common stock underlying the restricted stock units until the earlier of the recipient's death, disability, Change in Control and cessation of such person's service as a director. 10 Messrs. Leung and Levine no longer serve as directors. Item 6 - Exhibits - -------------------------------------------------------------------------------- Exhibit Number Description - -------------------------------------------------------------------------------- 2.1 Merger Agreement by and between the Company, USENVIRO Merger Corp., American Enviro-Services, Inc., and the shareholders of American Enviro-Services, dated as of August 4, 1997 (4) - -------------------------------------------------------------------------------- 2.2 Subscription Agreement dated as of August 23, 2000, by and among U.S. Energy System Castlebridge, LLC ("USE Sub"), Kemper-Castlebridge, Inc., ("KC"), GKM II Corporation ("GKM") and Castlebridge Partners, LLC ("Castlebridge") (9) - -------------------------------------------------------------------------------- 19 - -------------------------------------------------------------------------------- Exhibit Number Description - -------------------------------------------------------------------------------- 2.3 Agreement and Plan of Reorganization and Merger dated as of November 28, 2000, by and among U.S. Energy Systems, Inc. ("US Energy"), USE Acquisition Corp. ("US Energy Sub"), and Zahren Alternative Power Corp. ("Zapco") (without schedules or exhibits) (the "Merger Agreement"). (11) - -------------------------------------------------------------------------------- 2.4 Amendment No 1 dated as of the 11th day of December, 2000 to the Merger Agreement. (11) - -------------------------------------------------------------------------------- 2.5 Amendment No. 2 dated as of the 19th day of December, 2000 to the Merger Agreement. (15) - -------------------------------------------------------------------------------- 2.6 Amendment No. 3 dated as of the 19th day of January, 2001 to the Merger Agreement. (15) - -------------------------------------------------------------------------------- 2.7 Amendment No. 4 dated as of the 23rd day of February, 2001 to the Merger Agreement. (15) - -------------------------------------------------------------------------------- 2.8 Amendment No. 5 dated April 30, 2001 to the Merger Agreement. (16) - -------------------------------------------------------------------------------- 2.9 Stock Purchase Agreement dated as of June 11, 2001 by and between USE Canada Acquisition Corp. and Trigen-Canada Company LLC. (17) - -------------------------------------------------------------------------------- 2.10 Amendment No. 6 dated as of November 1, 2002 to the merger Agreement. (18) - -------------------------------------------------------------------------------- 2.11 Amendment No. 7 dated as of the 10th day of February, 2003 to the Merger Agreement. (19) - -------------------------------------------------------------------------------- 2.12 Amendment No. 8 dated as of the 13th day of March, 2003 to the Merger Agreement. (19) - -------------------------------------------------------------------------------- 2.13 Amendment No. 9 dated as of the 15th day of April, 2003 to the Merger Agreement (21) - -------------------------------------------------------------------------------- 2.14 Amendment No. 10 dated as of the 14th day of May, 2003 to the Merger Agreement (21) - -------------------------------------------------------------------------------- 2.15 Amendment No. 11 dated as of the 11th day of June, 2003 to the Merger Agreement (21) - -------------------------------------------------------------------------------- 2.16 Amendment No. 12 dated as of the 29th day of June, 2003 to the Merger Agreement (21) - -------------------------------------------------------------------------------- 2.17 Amendment No. 13 dated as of the 11th day of July, 2003 to the Merger Agreement (21) - -------------------------------------------------------------------------------- 2.18 Amendment No. 14 dated as of the 28th day of July, 2003 to the Merger Agreement (21) - -------------------------------------------------------------------------------- 3.1 Restated Certificate of Incorporation of the Company filed with the Secretary of State of Delaware. (1) - -------------------------------------------------------------------------------- 3.2 By-Laws of the Company (2) - -------------------------------------------------------------------------------- 3.3 Articles of Organization of Steamboat Envirosystems, L.C (1) - -------------------------------------------------------------------------------- 3.4 Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company (10) - -------------------------------------------------------------------------------- 3.5 Certificate of Increase of Series A Convertible Preferred Stock of the Company (10) - -------------------------------------------------------------------------------- 3.6 Amended and Restated By-Laws of US Energy (11) - -------------------------------------------------------------------------------- 3.7 Form of Certificate of Designation for US Energy's Series C Preferred Stock (15) - -------------------------------------------------------------------------------- 3.8 Form of Certificate of Designation for US Energy's Series D Preferred Stock (15) - -------------------------------------------------------------------------------- 3.9 Certificate of Correction to Certificate of Designation of Series A Preferred Stock (15) - -------------------------------------------------------------------------------- 3.10 Certificate of Correction to Certificate of Designation of Series B Preferred Stock (15) - -------------------------------------------------------------------------------- 4.1 Specimen Stock Certificate (1) - -------------------------------------------------------------------------------- 4.2 Form of Warrant (1) - -------------------------------------------------------------------------------- 4.3 Form of Warrant Agreement (1) - -------------------------------------------------------------------------------- 4.4 Form of Representative's Purchase Option (1) - -------------------------------------------------------------------------------- 20 - -------------------------------------------------------------------------------- Exhibit Number Description - -------------------------------------------------------------------------------- 4.5 Certificate of Designation of Series A Convertible Preferred Stock of the Company as filed with the Secretary of State of Delaware on March 23, 1998 (7) - -------------------------------------------------------------------------------- 4.6 Certificate of Designation of Series B Convertible Preferred Stock of the Company as filed with the Secretary of the State of Delaware (14) - -------------------------------------------------------------------------------- 4.7 Amended and Restated Plan of Recapitalization dated as of July 31, 2000 by and between the Company and the parties identified therein. (15) - -------------------------------------------------------------------------------- 4.8 Form of Series B Warrant to Purchase Shares of Common Stock (10) - -------------------------------------------------------------------------------- 4.9 Form of Series C Redeemable Common Stock Purchase Warrant of US Energy (11) - -------------------------------------------------------------------------------- 10.1 Plan of Reorganization of Cogenic Energy Systems, Inc. (2) - -------------------------------------------------------------------------------- 10.2 8% Convertible Subordinated Debenture due 2004 (2) - -------------------------------------------------------------------------------- 10.5 Purchase Agreement, dated as of January 24, 1994, between Lehi Co-Gen Associates, L.C. and Lehi Envirosystems, Inc. (2) - -------------------------------------------------------------------------------- 10.6 Operating Agreement among Far West Capital, Inc., Suma Corporation and Lehi Envirosystems, Inc. dated January 24, 1994 (2) - -------------------------------------------------------------------------------- 10.7 Form of Purchase and Sale Agreement between Far West Capital, Inc., Far West Electric Energy Fund, and L.P., 1-A Enterprises, the Company and Steamboat LLC (1) - -------------------------------------------------------------------------------- 10.8 Form of Operation and Maintenance Agreement between Steamboat LLC and S.B. Geo, Inc. (1) - -------------------------------------------------------------------------------- 10.9 Letter Agreement, dated as of November 8, 1994, between the Company, PSC Cogeneration Limited Partnership, Central Hudson Cogeneration, Inc. and Independent Energy Finance Corporation (1) - -------------------------------------------------------------------------------- 10.10 Agreement among the Company, Plymouth Envirosystems, Inc., IEC Plymouth, Inc. and Independent Energy Finance Corporation dated November 16, 1994 (1) - -------------------------------------------------------------------------------- 10.11 Amended and Restated Agreement of Limited Partnership of Plymouth Cogeneration Limited Partnership between PSC Cogeneration Limited Partnership, Central Hudson Cogeneration, Inc. and Plymouth Envirosystems, Inc. dated November 1, 1994 (1) - -------------------------------------------------------------------------------- 10.12 Amended and Restated Agreement of Limited Partnership of PSC Cogeneration Limited Partnership among IEC Plymouth, Inc., Independent Energy Finance Corporation and Plymouth Envirosystems, Inc. dated December 28, 1994 (1) - -------------------------------------------------------------------------------- 10.13 Purchase and Sale Agreement, dated as of December 31, 1995, between the Company, Far West Capital, Inc., Far West Electric Energy Fund, L.P., 1-A Enterprises and Steamboat Enviro systems, LLC (1) - -------------------------------------------------------------------------------- 10.13(a) Letter Agreement, dated September 25, 1996, between the Company and Far West Capital, Inc. (1) - -------------------------------------------------------------------------------- 10.16 Security Agreement and Financing Statement among the Company, Lehi Envirosystems, Inc., Plymouth Envirosystems, Inc. and Anchor Capital Company, LLC dated June 14, 1995, as amended (1) - -------------------------------------------------------------------------------- 10.20 Lease dated September 1, 1995 between the Company and Gaedeke Holdings, Ltd. (1) - -------------------------------------------------------------------------------- 10.21 Documents related to Private Placement (1) - -------------------------------------------------------------------------------- 10.21(a) Certificate of Designations (1) - -------------------------------------------------------------------------------- 10.22 Purchase Agreement between the Company and Westinghouse Electric Corporation dated as of November 6, 1995 and amendments thereof (1) - -------------------------------------------------------------------------------- 21 - -------------------------------------------------------------------------------- Exhibit Number Description - -------------------------------------------------------------------------------- 10.25(a) Long-Term Agreement for the Purchase and Sale of Electricity Between Sierra Pacific Power Company and Far West Capital, Inc. dated October 29, 1988 (1) - -------------------------------------------------------------------------------- 10.25(b) Assignment of Interest, dated December 10, 1988 by and between Far West Capital, Inc. and 1-A Enterprises (1) - -------------------------------------------------------------------------------- 10.25I Letter dated August 18, 1989 by Gerald W. Canning, Vice President of Electric Resources, consenting to the Assignment of Interest on behalf of Sierra Pacific Power Company (1) - -------------------------------------------------------------------------------- 10.26(a) Agreement for the Purchase and Sale of Electricity, dated as of November 18, 1983 between Geothermal Development Associates and Sierra Pacific Power Company (1) - -------------------------------------------------------------------------------- 10.26(b) Amendment to Agreement for Purchase and Sale of Electricity, dated March 6, 1987, by and between Far West Hydroelectric Fund, Ltd. and Sierra Pacific Power Company (1) - -------------------------------------------------------------------------------- 10.27 Loan and Option Agreement dated August, 1996 by and among NRG Company, LLC and Reno Energy, LLC and ART, LLC and FWC Energy, LLC, and amendments thereto (1) - -------------------------------------------------------------------------------- 10.28 Promissory Note dated August 9, 1996 for $300,000 from Reno Energy, LLC to NRG Company, LLC (1) - -------------------------------------------------------------------------------- 10.29 Letter of Intent dated July 15, 1996 on behalf of Reno Energy, LLC (1) - -------------------------------------------------------------------------------- 10.30 Limited Liability Company Operating Agreement of NRG Company, LLC dated as of September 8, 1996, and amendments thereto (1) - -------------------------------------------------------------------------------- 10.31 Form of Limited Liability Company Operating Agreement of Steamboat, Envirosystems, L.C. dated as of October, 1996 (1) - -------------------------------------------------------------------------------- 10.32 Form of Debenture Conversion Agreement (1) - -------------------------------------------------------------------------------- 10.33(a) First Amended and Restated Loan and Option Agreement, dated April 9, 1997, by and between USE Geothermal, LLC, and Reno Energy LLC, ART, LLC and FWC Energy, LLC (3) - -------------------------------------------------------------------------------- 10.33(b) Note in the amount of $1,200,000, dated as of April 9, 1997, made by Reno Energy LLC in favor of USE Geothermal, LLC (3) - -------------------------------------------------------------------------------- 10.33(c) Security Agreement, dated as of April 9, 1997, made by Reno Energy LLC in favor of USE Geothermal, LLC (3) - -------------------------------------------------------------------------------- 10.33(d) Form of Security Agreement and Collateral Assignment, entered into by and between USE Geothermal, LLC and both FWC Energy LLC and ART LLC (3) - -------------------------------------------------------------------------------- 10.33(e) Guaranty Agreement, dated as of April 9, 1997, made by FWC Energy LLC and ART LLC in favor of USE Geothermal, LLC (3) - -------------------------------------------------------------------------------- 10.34 1996 Stock Option Plan (5) - -------------------------------------------------------------------------------- 10.35 Form of 9% Convertible Subordinated Secured Debenture due 2004 (6) - -------------------------------------------------------------------------------- 10.36 Form of Employment Agreement by and between the Company and Howard Nevins (4) - -------------------------------------------------------------------------------- 10.37 Subscription Agreement, dated March 20, 1998, between the Company and Energy Systems Investors, LLC (7) - -------------------------------------------------------------------------------- 10.38 Registration Rights Agreement, dated March 20, 1998, between the Company and Energy Systems Investors, LLC (7) - -------------------------------------------------------------------------------- 10.39 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 (10) - -------------------------------------------------------------------------------- 10.40 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 (10) - -------------------------------------------------------------------------------- 22 - -------------------------------------------------------------------------------- Exhibit Number Description - -------------------------------------------------------------------------------- 10.41 Pledge Agreement dated as of July 31, 2000 by and between the Company and Energy Systems Investors, L.L.C. (10) - -------------------------------------------------------------------------------- 10.42 Limited Recourse Promissory Note dated July 31, 2000 issued by Energy Systems Investors, L.L.C. in favor of the Company (10) - -------------------------------------------------------------------------------- 10.43 Stockholders' and Voting Agreement dated as of November 28, 2000 by and among AJG Financial Services, Inc., Bernard Zahren, Environmental Opportunities Fund, Environmental Opportunities Fund/Cayman, Finova Mezzanine Capital Corp., Frederic Rose, M & R Associates, Martin F. Laughlin, Michael J. Carolyn and Richard J. Augustine (collectively, the "Zapco Stockholders"), US Energy, Cinergy Solutions, Inc. ("Cinergy Solutions") and certain stockholders of US Energy. (11) - -------------------------------------------------------------------------------- 10.44 Termination Fee Agreement dated as of November 28, 2000 by and among US Energy, Zapco and Cinergy Energy Solutions, Inc. ("Cinergy Energy"). (11) - -------------------------------------------------------------------------------- 10.45 Indemnification Agreement dated as of November 28, 2000 by and among the Zapco Stockholders, Zapco, US Energy, US Energy Sub and Cinergy Energy. (11) - -------------------------------------------------------------------------------- 10.46 Escrow Agreement dated November 28, 2000 by and among the Zapco Stockholders, Zapco, US Energy, US Energy Sub, Cinergy Energy and Tannenbaum Helpern Syracuse & Hirschtritt LLP as Escrow Agent. (11) - -------------------------------------------------------------------------------- 10.47 Registration Rights Agreement dated November 28, 2000 by and among US Energy and the Zapco Stockholders. (11) - -------------------------------------------------------------------------------- 10.48 Employment Agreement dated November 28, 2000 by and between US Energy and Bernard Zahren. (11) - -------------------------------------------------------------------------------- 10.49 Form of Stock Option Agreement to be entered into by and between US Energy and Bernard Zahren. (11) - -------------------------------------------------------------------------------- 10.50 Performance Guaranty dated as November 28, 2000 of US Energy.(11) - -------------------------------------------------------------------------------- 10.51 Performance Guaranty of Cinergy Solutions Holding Company, Inc. dated as of November 28, 2000. (11) - -------------------------------------------------------------------------------- 10.52 Subscription Agreement dated as of November 28, 2000 by and among US Energy, US Energy Sub and Cinergy Energy. (11) - -------------------------------------------------------------------------------- 10.53 Stockholders Agreement dated as of November 28, 2000 by and among US Energy, US Energy Sub and Cinergy Energy. (11) - -------------------------------------------------------------------------------- 10.54 Indemnification Agreement dated as of November 28, 2000 by and among US Energy, US Energy Sub and Cinergy Energy. (11) - -------------------------------------------------------------------------------- 10.55 Employment Agreement dated as of May 10, 2000 by and between the Company and Lawrence Schneider (13) - -------------------------------------------------------------------------------- 10.56 Employment Agreement dated as of May 10, 2000 by and between the Company and Goran Mornhed (13) - -------------------------------------------------------------------------------- 10.57 2000 Executive Incentive Compensation Plan (13) - -------------------------------------------------------------------------------- 10.58 2000 Executive Bonus Plan (13) - -------------------------------------------------------------------------------- 10.59 Stock Option Agreement between the Company and Lawrence Schneider with respect to 1,000,000 shares of Common Stock (13) - -------------------------------------------------------------------------------- 10.60 Stock Option Agreement between the Company and Goran Mornhed with respect to 187,500 shares of Common Stock (13) - -------------------------------------------------------------------------------- 23 - -------------------------------------------------------------------------------- Exhibit Number Description - -------------------------------------------------------------------------------- 10.61 Stock Option Agreement between the Company and Goran Mornhed with respect to 562,500 shares of Common Stock (13) - -------------------------------------------------------------------------------- 10.62 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.(17) - -------------------------------------------------------------------------------- 10.63 Promissory Note dated June 11, 2001 made by USE Canada Acquisition Corp. in favor of Trig-n - Canada Company LLC (17) - -------------------------------------------------------------------------------- 10.64 Guaranty made as of June 11, 2001 by USE Energy Systems, Inc. in favor of Trig-n - Canada Company LLC and the other person identified therein (17) - -------------------------------------------------------------------------------- 10.65 Development Incentive Plan (18) - -------------------------------------------------------------------------------- 10.66 Corporate Incentive Plan (18) - -------------------------------------------------------------------------------- 10.67 Finance Incentive Plan (18) - -------------------------------------------------------------------------------- 10.68 Employment Agreement dated as of August 20, 2001 between the Company and Allen J. Rothman (18) - -------------------------------------------------------------------------------- 10.69 Employment Agreement dated as of January 1, 2002 between the Company and Edward Campana (18) - -------------------------------------------------------------------------------- 10.70 Employment Agreement dated as of September 8, 2000 between the Company and Henry Schneider (18) - -------------------------------------------------------------------------------- 10.71 Shareholder Agreement dated March 2002 by and among Scandinavian Energy Finance Limited, Endoray Investments BV, US Energy Systems, Inc., EIC Investments (Jersey) Limited and A&A EIC Electricity Investment Company (18) - -------------------------------------------------------------------------------- 10.72 Financing Agreement dated as of March 11, 2002 by and between Scandinavian Energy Finance Limited and Gigantissimo 2321 AB n/k/a EnergiSystems Sverige AB (18) - -------------------------------------------------------------------------------- 10.73 Conditions on Gigantissimo 2321 AB n/k/a EnergiSystems Sverige AB's Convertible Debenture Loan 2002-2027 (18) - -------------------------------------------------------------------------------- 10.74 Subordinated Loan Agreement dated as of March 11, 2002 between Gigantissimo 2324 AB to be renamed Narvarme Acquisition I and AB Scandinavian Energy Finance Limited (18) - -------------------------------------------------------------------------------- 10.75 Shareholders Agreement dated as of March 11, 2002 by and among Goran Ernstson, Scandinavian Energy Finance Limited, Lansforsakringar Liv Forsakringsaktiebolag for the shares of Gigantissimo 2321 AB n/k/a EnergiSystem Sverige AB (18) - -------------------------------------------------------------------------------- 10.76 Security Holders Agreement dated as of March 11, 2002 between Scandinavian Energy Finance Limited and Goran Ernstson (18) - -------------------------------------------------------------------------------- 10.77 Option Agreement dated as of March 7, 2002 by and between Goran Ernstson and Scandinavian Energy Finance Limited (18) - -------------------------------------------------------------------------------- 10.78 Amendment No. 1 to Escrow Agreement dated as of May 22, 2001 by and among the Zapco stockholders, Zapco, US Energy, USE Acquisition Corp., Cinergy Energy and Tannenbaum Helpern Syracuse & Hirschtritt LLP as Escrow Agent (18) - -------------------------------------------------------------------------------- 10.79 Amendment No. 1 to Indemnification Agreement dated as of May 11, 2001 by and among the Zapco stockholders, Zapco, US Energy, USE Acquisition Corp. and Cinergy Energy (18) - -------------------------------------------------------------------------------- 10.80 Amendment No. 2 to Indemnification Agreement dated as of November 1, 2002 by and among stockholders, Zapco, US Energy, USE Acquisition Corp. and Cinergy Energy (18) - -------------------------------------------------------------------------------- 24 - -------------------------------------------------------------------------------- Exhibit Number Description - -------------------------------------------------------------------------------- 10.81 Amendment No. 2 to Escrow Agreement dated as of November 1, 2002 by and among the Zapco stockholders, Zapco, US Energy, USE Acquisition Corp., Cinergy Energy and Tannebaum Helpern Syracuse & Hirschtritt LLP as Escrow Agent. (18) - -------------------------------------------------------------------------------- 10.80a Agreement by and among AJG Financial, as agent, US Energy, Cinergy Energy, US Energy Biogas and Tannenbaum, Halpern as agent dated as of October 16, 2003. (20) - -------------------------------------------------------------------------------- 10.81b Amendment No. 15 to indemnification Agreement dated as of October 16, 2003 by an among major stockholders, US Energy Biogas Corp, US Energy and Cinergy Energy. (20) - -------------------------------------------------------------------------------- 10.82 Escrow letter by and among, Tannenbaum, Halpern escrow agent, AJG Financial, Cinergy Energy, US Energy, US Energy Biogas Corp. (20) - -------------------------------------------------------------------------------- 10.83 Amended and Restated Subordinated Note from US Energy Biogas Corp. to AJG Financial Services, Inc. (20) - -------------------------------------------------------------------------------- 10.84 Amendment No. 1 to Shareholders Agreement by and among SEEFL, Endoray, US Energy and EIC dated as of February 2003. (20) - -------------------------------------------------------------------------------- 10.85 Amendment No. 2 to Shareholders Agreement by and among SEFL, Endoray, US Energy, Borg Energy and EIC dated as of October 1, 2003. (20) - -------------------------------------------------------------------------------- 10.86 Loan Agreement dated as of August 20, 2003 between SEFL and EIC. (20) - -------------------------------------------------------------------------------- 10.87 Loan Agreement dated as of November 3, 2003. (20) - -------------------------------------------------------------------------------- 10.88 2003 Finance Incentive Plan. (20) - -------------------------------------------------------------------------------- 10.89 2003 Development Incentive Plan. (20) - -------------------------------------------------------------------------------- 10.90 Royalty Agreement dated as of April 8, 2004 by and between US Energy Biogas Corporation, Countryside Canada Power Inc., the Registrant and Cinergy Energy Solutions Inc. (22) - -------------------------------------------------------------------------------- 10.91 Amendment to Note Purchase Agreement dated as of April 8, 2004 by and between US Energy Biogas Corp., Avon Energy Partners, LLC and the other parties identified therein. (22) - -------------------------------------------------------------------------------- 10.92 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. (22) - -------------------------------------------------------------------------------- 10.93 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. (22) - -------------------------------------------------------------------------------- 10.94 Form of Restricted Stock Unit for Directors - -------------------------------------------------------------------------------- 10.95 Form of Restricted Stock Unit for Officers - -------------------------------------------------------------------------------- 10.96 Purchase Agreement dated September 30, 2004 among AJG Financial Services, Inc and US Energy Biogas Corp. - -------------------------------------------------------------------------------- 10.97 Assignment Agreement dated September 30, 2004 among AJG Financial Services, Inc and US Energy Biogas Corp. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 25 - -------------------------------------------------------------------------------- Exhibit Number Description - -------------------------------------------------------------------------------- 99.2 Second Amended and Restated Operating Agreement dated as of August 23, 2000 by and between USE Sub, KC, GKM and Castlebridge. (12) - -------------------------------------------------------------------------------- (1) Incorporated by reference to the Company's Registration Statement on Form SB-2 (File No. 333-94612). - -------------------------------------------------------------------------------- (2) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended January 31, 1994. - -------------------------------------------------------------------------------- (3) Incorporated by reference to the Company's Current Report on Form 8-K filed on April 24, 1997. - -------------------------------------------------------------------------------- (4) Incorporated by reference to the Company's Current Report on Form 8-K dated August 12, 1997. - -------------------------------------------------------------------------------- (5) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended January 31, 1997. - -------------------------------------------------------------------------------- (6) Incorporated by reference to the Company's Current Report on Form 8-K dated August 18, 1997. - -------------------------------------------------------------------------------- (7) Incorporated by reference to the Company's Current Report on Form 8-K filed on March 26, 1998. - -------------------------------------------------------------------------------- (8) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended January 31, 1998. - -------------------------------------------------------------------------------- (9) Incorporated by reference to the Company's Current Report on Form 8-K/A filed on September 5, 2000. - -------------------------------------------------------------------------------- (10) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended July 31, 2000. - -------------------------------------------------------------------------------- (11) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended October 31, 2000. - -------------------------------------------------------------------------------- (12) Incorporated by reference to the Company's Registration Statement on Form S-3 filed on February 20, 2001. - -------------------------------------------------------------------------------- (13) Incorporated by reference to the Company's Current Report on Form 8-K dated May 4, 2000. - -------------------------------------------------------------------------------- (14) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended January 31, 1999. - -------------------------------------------------------------------------------- (15) Incorporated by reference to the Company's Report on Form 10-KSB for the period ended December 31, 2000. - -------------------------------------------------------------------------------- (16) Incorporated by reference to the Company's Post-Effective Amendment to Registration Statement on Form Series SB-2 filed on May 14, 2001. - -------------------------------------------------------------------------------- (17) Incorporated by reference to the Company's Current Report on Form 8-K dated June 11, 2001. - -------------------------------------------------------------------------------- (18) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB dated August 14, 2002 - -------------------------------------------------------------------------------- (19) Incorporated by reference to the Company's Report on Form 10-KSB for the period ended December 31, 2002. - -------------------------------------------------------------------------------- (20) Incorporated by reference to the Company's Report on Form 10-K for the period ended December 31, 2003, as amended. - -------------------------------------------------------------------------------- (21) Incorporated by reference to the Company's Report on Form 10-Q for the period ended June 30, 2003. - -------------------------------------------------------------------------------- (22) Incorporated by reference to the Company's Report on Form 10-Q for the period ended March 31, 2004. - -------------------------------------------------------------------------------- 26 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 Schneider -------------------------------------------- Lawrence Schneider Dated: November 11, 2004 Chief Executive Officer (Principal Executive Officer) By: /s/ Richard J. Augustine -------------------------------------------- Richard J. Augustine Dated: November 11, 2004 Chief Accounting Officer (Principal Accounting and Financial Officer) 27 EX-10.94 2 d61279_ex10-94.txt FORM OF RESTRICTED STOCK UNIT FOR DIRECTORS Exhibit 10.94 DRSUAA No.:_________ DIRECTOR'S RESTRICTED STOCK UNIT AWARD AGREEMENT Name: __________________________ Date: __________________ 1. (a) Pursuant to, among other things, Sections 6(e) and 6(h) of US Energy Systems, Inc.'s 2000 Executive Incentive Compensation Plan (the "2000 Plan"), you are hereby granted, subject to your execution of this agreement and the execution of this agreement by US Energy Systems, Inc. ("US Energy"), and subject, with respect to awards granted subsequent to the date hereof, to the prior approval of the Board or the Committee, the number of restricted stock units ("Restricted Stock Units") issuable pursuant to Section 1(b) hereof. Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms by the 2000 Plan. (b) As of the last Business Day (as defined) of each calendar quarter commencing July 1, 2003, you shall be entitled to the number of Restricted Stock Units equal to the quotient obtained by dividing (i) the product obtained by multiplying (A) the compensation payable to you in such quarter for Directors Services (as defined) performed in such calendar quarter by (B) 0.4 by (ii) the Fair Market Value of a share of Common Stock (as defined) as of the close of business on the last Business Day of the applicable calendar quarter. (c) The term "Business Day" shall mean any day other than Saturday, Sunday, or a day on which banks in the State of New York are authorized or obligated to be closed. The term "Director's Services" shall mean the fees and compensation payable to Directors of US Energy for the applicable calendar quarter for (i) serving a member of the Board, (ii) attending Board and/or committee meetings, (iii) serving on one or more of committees, (iv) serving as the chairman of a committee, and (v) any other services performed as a Director of US Energy to the extent Directors of US Energy are compensated for such services. (d) The Restricted Stock Units to which you are entitled pursuant to Section 1(b) shall be deemed to have vested in full immediately upon the applicable date to which you become entitled to same. Upon the expiration of the deferral period provided for herein, each Restricted Stock Unit will be converted automatically into one share of common stock of US Energy, par value $.01 per share (the "Common Stock"). (e) In the event the calculations provided for by Sections 1(b) would result in the issuance of a fraction of a Restricted Stock Unit, the number of units to which you are entitled shall be rounded to the nearest whole number. 2. Delivery of Shares Underlying Restricted Stock Units. (a) Promptly following the expiration of the deferral period provided for herein, US Energy will deliver to you or to your legal representative a certificate representing the shares of Common Stock underlying the applicable Restricted Stock Units granted or to be granted to you pursuant to this agreement (the "Underlying Shares"). (b) You hereby irrevocably elect to defer receipt of the Underlying Shares until the earlier to occur of (i) your death, (ii) your Disability, (iii) a Change in Control, (iv) the cessation of your service as a Director or (v) June 30, 2013. Upon the occurrence of any such event, the deferral period effected herein shall immediately terminate and you shall promptly receive a certificate for the number of Underlying Shares to which you are entitled pursuant to this agreement. You acknowledge that, except as otherwise provided in Section 2(c), you will not be entitled to any rights as a stockholder with respect to such Restricted Stock Units, including without limitation, the right to vote, until the deferral period has terminated,. (c) Contemporaneously with the grant of Restricted Stock Units to you pursuant to this agreement, US Energy hereby grants you, pursuant to, among other things, Section 6(g) of the 2000 Plan, Dividend Equivalent Rights (as defined). The term "Dividend Equivalent Rights" shall mean your right to receive, subject to your execution of an agreement in form reasonably acceptable to US Energy, the number of Restricted Stock Units equal to the quotient obtained by dividing the aggregate cash dividends that would have been payable with respect to your Underlying Shares (as if such shares had been issued and had not been deferred) as of the record date for the payment of such dividends by the Fair Market Value of a share of Common Stock on such date. The terms and conditions of the Restricted Stock Units granted pursuant to these Dividend Equivalent Rights shall be the same as otherwise provided herein. The Restricted Stock Units, if any, granted pursuant to the Dividend Equivalent Rights, shall be deemed to be granted as of the payment date for the applicable dividend payment. (d) Upon the occurrence of a Change in Control, the provisions of Section 9 (a) of the 2000 Plan shall apply. (e) US Energy shall deliver to you from time to time at your request a statement reflecting the number of Restricted Stock Units to which you are entitled pursuant to this agreement. 3. Transferability. You may not transfer, pledge, assign, sell or otherwise alienate your Restricted Stock Units or the Underlying Shares until the termination or expiration of the deferral period with respect thereto. 4. Taxes. US Energy shall deduct or cause to be deducted from, or collect or cause to be collected with respect to, your Restricted Stock Units (including the Underlying Shares) any federal, state, or local taxes required by law to be withheld or paid with respect to your Restricted Stock Units (including the Underlying Shares) and you or your legal representative or beneficiaries shall be required to pay any such amounts. US Energy shall have the right to take such action as may be necessary, in its reasonable judgment, to satisfy such obligations. 2 5. Governing Law. The validity, construction and effect of this Agreement shall be determined in accordance with the laws of the State of Delaware without giving effect to principles of conflicts of law. 6. Subject To 2000 Plan. This Agreement and the grant of Restricted Stock Units are subject to all of the terms and conditions of the 2000 Plan. In the event of a conflict between this Agreement and the 2000 Plan, the 2000 Plan shall govern. 7. Section 16. Notwithstanding anything to the contrary herein, in the event that you would be subject to liability for short swing profits pursuant to Section 16 of the Exchange Act resulting from the distribution to you of the Underlying Shares, then, except as otherwise provided by the Plan, the distribution of the Underlying Shares will be deferred and/or limited to the extent necessary to eliminate such liability. 3 Please indicate your acceptance of the foregoing by signing at the place provided and returning the original of this Agreement. Very truly yours, US ENERGY SYSTEMS, INC. By: ____________________________________ ACCEPTED AND AGREED: _______________________________ 4 EX-10.95 3 d61279_ex10-95.txt FORM OF RESTRICTED STOCK UNIT FOR OFFICERS Exhibit 10.95 ERSUAA No. __________________ OFFICER'S RESTRICTED STOCK UNIT AWARD AGREEMENT Name: _________________ Number of Restricted Stock Units: _______________ Grant Date: _______________________ Pursuant to, among other things, Sections 6(e) and 6(h) of US Energy Systems, Inc.'s 2000 Executive Incentive Compensation Plan (the "2000 Plan"), you are hereby granted, subject to your execution of this agreement and the execution of this agreement by US Energy Systems, Inc. ("US Energy"), as of the Grant Date, the number of restricted stock units ("Restricted Stock Units") set forth above. Upon the vesting of the Restricted Stock Units as described below and the expiration of the deferral period provided for herein, each Restricted Stock Unit will be automatically converted into one share of common stock of US Energy, par value $.01 per share (the "Common Stock"). Capitalized terms not otherwise defined herein shall have the meanings ascribed to such term by the 2000 Plan. 1. Vesting of Award. Subject to Section 2, the Restricted Stock Units shall vest and become non-forfeitable in cumulative annual increments of 25% commencing on the first anniversary of the Grant Date. (The date on which any Restricted Stock Unit vests being the "Vesting Date" for such Restricted Stock Unit and the period beginning on the Grant Date hereof and ending on the day prior to the Vesting Date for a Restricted Stock Unit is herein referred to as the "Restriction Period" with respect to such Restricted Stock Unit). In the event that a fractional number of Restricted Stock Units would vest on any Vesting Date, the number of units so vesting shall be rounded up to the next whole number. 2. Termination of Relationship. (a) If during the Restriction Period your employment with US Energy and all Subsidiaries thereof terminates for Cause (as defined) or if you voluntarily terminate your employment ("Voluntary Termination"), any Restricted Stock Units that have not vested as of the date of termination shall be forfeited. Voluntary Termination does not include your termination of your employment due to, the assignment to you after the Grant Date of any duties inconsistent in any material respect of your then position (including status, offices, titles and reporting relationships, authority, duties or responsibilities), or any other action by US Energy after the Grant Date which when taken as a whole results in a significant diminution in your position, authority, duties or responsibilities. (b) If during the Restriction Period your employment with US Energy and all Subsidiaries thereof terminates for any other reason other than Cause or Voluntary Termination, the Restricted Stock Units will become non-forfeitable and vest immediately, the Restriction Period will end and the Underlying Shares (as defined) will be delivered to you as specified in Section 3 hereof. (c) Upon the occurrence of a Change in Control during or after the expiration of the Restriction Period, the provisions of Section 9 (a) of the 2000 Plan shall apply. In furtherance of and not by way of limitation of the foregoing, the restrictions, deferral of settlement, and forfeiture conditions applicable to the Restricted Stock Units shall lapse and such units shall be deemed to be fully vested as of the time of the Change in Control, except to the extent you waive same and subject to the applicable restrictions set forth in Section 10(a) of the 2000 Plan. (d) The term "Cause" means your (i) having been convicted of a crime which constitutes a felony under applicable law or having entered a plea of guilty or nolo contendere with respect thereto, or (ii) engaging in illegal or fraudulent conduct with respect to US Energy. 3. Delivery of Shares Underlying Restricted Stock Units. (a) After the expiration of the deferral period elected pursuant to Section 3(b), US Energy will deliver to you or your legal representative, a certificate representing the shares of Common Stock underlying your Restricted Stock Units (the "Underlying Shares") that have vested pursuant to this agreement. (b) By signing this agreement, you hereby irrevocably elect to defer receipt of the Underlying Shares and all other benefits incident thereto to the extent same have vested as provided above, until the expiration of the deferral period specified on the signature page hereto or as otherwise provided herein. (c) Notwithstanding your deferral election, in the event of the earlier to occur of your death, your Disability, a Change in Control, the termination of your employment with US Energy and all Subsidiaries or the day immediately preceding the tenth anniversary of the Grant Date, the deferral effected herein shall immediately terminate and you shall promptly receive the Underlying Shares to which you are entitled pursuant to this agreement. You acknowledge that until the deferral period has terminated, you will not, except as otherwise provided in Section 3(d) hereof, be entitled to any rights as a stockholder with respect to the Restricted Stock Units, including without limitation, the right to vote. (d) Contemporaneously with the grant of Restricted Stock Units to you pursuant to this agreement, US Energy hereby grants you, pursuant to, among other things, Section 6(g) of the 2000 Plan, Dividend Equivalent Rights (as defined). The term "Dividend Equivalent Rights" shall mean your right to receive, subject to your execution of an agreement in form reasonably acceptable to US Energy, the number of Restricted Stock Units equal to the quotient obtained by dividing the aggregate cash dividends that would have been payable with respect to your Underlying Shares (as if such shares had been issued and had not been deferred) as of the record date for the payment of such dividends by the Fair Market Value of a share of Common Stock on such date. The terms and conditions (including the deferral provided for by Section 3 hereof) of the Restricted Stock Units granted pursuant to the Dividend Equivalent Rights shall be the same as otherwise provided herein and shall vest as provided in Section 1 and 2 hereof and as if the Grant Date for determining the Restriction Period with respect to such units was the Grant Date set forth above. The Restricted Stock Units, if any, granted pursuant to the Dividend Equivalent Rights shall be granted only to the extent the applicable dividend payment is actually paid. 2 4. Transferability. You may not transfer, pledge, assign, sell or otherwise alienate your Restricted Stock Units or the Underlying Shares, until the termination or expiration of the Restriction Period and deferral period with respect thereto. 5. Taxes. US Energy shall deduct or cause to be deducted from, or collect or cause to be collected with respect to, your Restricted Stock Units (including the Underlying Shares) any federal, state, or local taxes required by law to be withheld or paid with respect to your Restricted Stock Units (including the Underlying Shares), and you or your legal representative or beneficiaries shall be required to pay any such amounts. US Energy shall have the right to take such action as may be necessary, in its reasonable judgment, to satisfy such obligations. 6. Governing Law. The validity, construction and effect of this Agreement shall be determined in accordance with the laws of the State of Delaware without giving effect to choice of law principles. 7. Subject To 2000 Plan. This Agreement and the grant of Restricted Stock Units and Dividend Equivalent Rights are subject to all of the terms and conditions of the 2000 Plan. 8. Section 16. Notwithstanding anything to the contrary herein, in the event that you would be subject to liability for short swing profits pursuant to Section 16 of the Exchange Act resulting from the distribution to you of the Underlying Shares, then, except as otherwise provided by the Plan, the distribution of the Underlying Shares will be deferred and/or limited to the extent necessary to eliminate such liability. 3 Please indicate your acceptance of the foregoing by signing at the place provided and returning the original of this Agreement. Very truly yours, US ENERGY SYSTEMS, INC. By: ____________________________________ ACCEPTANCE OF RESTRICTED STOCK UNITS AND DEFERRAL ELECTION I hereby accept these Restricted Stock Units and Dividend Equivalent Rights and elect to defer my receipt of the Underlying Shares, subject to acceleration as provided in Section 2(c) herein, as follows (insert your initials in the appropriate box and then sign your name below): |_| On the vesting of all* of my Restricted Stock Units subject to this agreement. |_| On the first anniversary of the vesting of all* of my Restricted Stock Units subject to this agreement. |_| On the second anniversary of the vesting all* of my Restricted Stock Units subject to this agreement. |_| On the _____________ anniversary of vesting of all* of my Restricted Stock Units subject to this agreement (but in no event, on or after the tenth anniversary of the Grant Date). *The reference to "all" my Restricted Stock Units shall mean all such units subject to this agreement, provided, however, if my employment with US Energy and Subsidiaries terminates for Cause or Voluntary Termination, the term "all" shall refer to my Restricted Stock Units that vested as of the date of termination of my employment. ACCEPTED AND AGREED: ____________________________ 4 EX-10.96 4 d61279_ex10-96.txt PURCHASE AGREEMENT Exhibit 10.96 PURCHASE AGREEMENT THIS PURCHASE AGREEMENT (this "Agreement") is made as of the 30th day of September, 2004 among AJG FINANCIAL SERVICES, INC., a Delaware corporation ("AJG"), U.S. ENERGY BIOGAS CORP., a Delaware corporation (the "Company"). RECITALS WHEREAS, the Company has issued to AJG a Second Amended and Restated Subordinate Note dated April 8, 2004 in the original principal amount $5,728,883 (the "Subordinated Note"); WHEREAS, the Company desires to acquire from AJG and AJG desires to transfer to the Company the Subordinated Note for a cash payment of $3,000,000; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Purchase and Sale of Subordinated Note; Closing. 1.1. Purchase and Sale of Subordinated Note. On the terms and subject to the conditions of this Agreement, the Company hereby agrees to purchase from AJG, and AJG hereby agrees to sell and assign to the Company, the Subordinated Note and all accrued and unpaid interest thereon for the purchase price set forth in Section 1.2. 1.2. Purchase Price. The aggregate purchase price for the Subordinated Note will be equal to $3,000,000 (the "Purchase Price"). 1.3. Manner of Payment of Purchase Price. The Purchase Price will be paid or satisfied at the Closing (as defined below), by means of a wire transfer of immediately available funds to: Harris Trust and Savings Bank Chicago, Illinois ABA 071000288 Account Name: AJG Financial Services, Inc. Account Number: 160-458-6 1.4. Time and Place of Closing. The transactions contemplated by this Agreement will be consummated (the "Closing") at the offices of AJG on September 30, 2004 or as promptly as practicable after satisfaction or waiver of each of the conditions set forth in Section 4. The date on which the Closing occurs is referred to in this Agreement as the "Closing Date". 1.5. Further Assurances. AJG from time to time after the Closing at the request of the Company and without further consideration shall execute and deliver such further instruments and take such other further action as the Company may reasonably require to make effective each provision of this Agreement. 2. Representations, Warranties and Covenants of AJG. AJG hereby represents, warrants and covenants to the Company that: 2.1. Corporate Existence; Compliance with Law. AJG (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; (ii) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where the failure to be so qualified would have a material and adverse effect upon the business of AJG; (iii) has the requisite corporate power and authority and the legal right to own, pledge, mortgage or otherwise encumber and operate its properties, and to conduct its business as currently conducted; and (iv) is in compliance with its Certificate of Incorporation and By-laws. 2.2. Corporate Power; Authorization; Enforceable Obligations. The execution, delivery and performance by AJG of this Agreement and the Assignment Agreement attached hereto as Exhibit A (the "Assignment Agreement"), (i) are within its corporate power; (ii) have been duly authorized by all necessary or proper corporate action; (iii) are not in contravention of any provision of its Certificate of Incorporation or By-laws; (iv) will not violate any law or regulation, or any order or decree of any court or governmental instrumentality; and (v) do not require any consent, approval, authorization or permission of, or filing with or notification to, any governmental or regulatory authority, domestic or foreign, or any other person, except as has been obtained and is in full force and effect or will have been obtained at or prior to the Closing. This Agreement constitutes a legal, valid and binding obligation of AJG, enforceable against it in accordance with its terms subject to bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws of general application affecting the rights and remedies of creditors and by general principles of equity. 2.3. Title to the Subordinated Note. On the date hereof and as of the Closing Date, AJG has good title to the Subordinated Note, free and clear of all liens, security interests, options, claims and encumbrances of each and every kind and nature and has not sold or pledged the Subordinated Note or any interest therein to any other party. 2.4. Securities Laws. In reliance on the investment representations contained in Section 3, the offer, sale and delivery of the Subordinated Note is exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), and any state securities laws. 3. Representations and Warranties of the Company. The Company hereby represents, warrants and covenants to AJG that: 3.1 Corporate Representations. (a) The Company (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; (ii) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where the failure to be so -2- qualified would have a material and adverse effect upon the business of the Company; (iii) has the requisite corporate power and authority and the legal right to own, pledge, mortgage or otherwise encumber and operate its properties, and to conduct its business as currently conducted; and (iv) is in compliance with its Certificate of Incorporation and By-laws. (b) The execution, delivery and performance by the Company of this Agreement and the Assignment Agreement, (i) are within its corporate power; (ii) have been duly authorized by all necessary or proper corporate action; (iii) are not in contravention of any provision of its Certificate of Incorporation or By-laws; (iv) will not violate any law or regulation, or any order or decree of any court or governmental instrumentality; and (v) do not require any consent, approval, authorization or permission of, or filing with or notification to, any governmental or regulatory authority, domestic or foreign, or any other person, except as has been obtained and is in full force and effect or will have been obtained at or prior to the Closing. This Agreement constitutes a legal, valid and binding obligation of the Company, enforceable against it in accordance with its terms subject to bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws of general application affecting the rights and remedies of creditors and by general principles of equity. 3.2 Securities Representations. (a) The Company has such knowledge and experience in business, finance and securities generally, and in investments (based on actual participation) in particular, is capable of evaluating (and has evaluated) the merits and risks of an investment in the Subordinated Note and of making an informed investment decision, and has been given adequate opportunity to obtain information and documents relating to the purchase of the Subordinated Note and to ask questions and receive answers about AJG and all questions asked have been satisfactorily answered. (b) This Agreement is made with the Company in reliance upon the Company's representation to AJG, which by the Company's execution of this Agreement the Company hereby confirms, that the Subordinated Note will be acquired for investment for the Company's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Company has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Company further represents that the Company does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to the Subordinated Note. 4. Conditions Precedent. 4.1. Documents to be Received by the Company. The obligation of the Company to complete the Closing shall be subject to receipt (or waiver) by the Company of each of the following, each in form and substance satisfactory to the Company: (a) Executed copy of the Assignment Agreement; -3- (b) Funding approval by each of the shareholders of the Company; and (c) The original Subordinated Note. 4.2. Documents to be Delivered by the Company. The obligation of AJG to complete the Closing shall be subject to receipt (or waiver) by AJG of each of the following, each in form and substance satisfactory to AJG: (a) Executed copy of the Assignment Agreement; (b) The Purchase Price in the manner set forth in Section 1.2. 5. Miscellaneous. 5.1. Cooperation. AJG and the Company shall cooperate with each other and use all reasonable efforts to take all actions necessary or appropriate to satisfy the conditions to Closing set forth in Section 4.1 and 4.2. 5.2. Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. 5.3. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to principles of conflicts of law. The parties consent and submit to the jurisdiction of the federal and state courts located within the city of Chicago and State of Illinois, and further agree that any such action or proceeding brought by either party to enforce any right, assert any claim, or obtain any relief whatsoever in connection with this Agreement shall be brought by such party exclusively in the federal or state courts located within Chicago, Illinois. 5.4. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 5.5. Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 5.6. Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified, or by telecopy with a confirmation of receipt, or upon deposit with a reputable overnight courier or with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof, or at such other address as such party may designate by ten (10) days advance written notice to the other parties. -4- 5.7. Expenses Each party shall bear its own expenses in connection with the transactions contemplated by this Agreement. 5.8. Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived only with the written consent of AJG and the Company. Any amendment or waiver effected in accordance with this Section shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), each future holder of all such securities, and AJG. 5.9. Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision was so excluded and shall be enforceable in accordance with its terms. 5.10. Waiver of Trial by Jury. AJG AND THE COMPANY HEREBY WAIVE TRIAL BY JURY AND ANY RIGHT TO SEEK PUNITIVE OR CONSEQUENTIAL DAMAGES IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATED TO THIS AGREEMENT AND/OR ANY ACT OR OMISSION WHICH A PARTY ASSERTS RESULTING IN ANY LIABILITY TO AJG, THE COMPANY OR THEIR RESPECTIVE OFFICERS, DIRECTORS, STOCKHOLDERS, PARTNERS, EMPLOYEES OR AGENTS, TO THE FULL EXTENT PERMITTED BY LAW. 5.11. Entire Agreement. This Agreement, the Assignment Agreement and the other documents delivered pursuant hereto and thereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. -5- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. Address: Gallagher Center AJG FINANCIAL SERVICES, INC. Two Pierce Place Itasca, IL 60143 Attn: Kerry Abbott, Esq. Assistant General Counsel Fax: 630-285-4272 By: ____________________________________ Name: Title: Address: 40 Tower Lane U.S. ENERGY BIOGAS CORP. Avon, CT 06001 Attn: President Fax: 860-677-6054 By: ____________________________________ Name: Title: -6- EXHIBIT A ASSIGNMENT AGREEMENT This ASSIGNMENT AGREEMENT ("Assignment") is made this 30th day of September, 2004 by and among AJG FINANCIAL SERVICES, INC., a Delaware corporation ("AJG"), and U.S. ENERGY BIOGAS CORP., a Delaware corporation (the "Company"). WHEREAS, the Company issued a Second Amended and Restated Subordinated Note dated April 8, 2004 (the "Subordinated Note") to AJG; and WHEREAS, pursuant to a Purchase Agreement dated September 30, 2004 between AJG and the Company (the "Purchase Agreement"), AJG desires to sell and assign the Subordinated Note to the Company and the Company desires to purchase the Subordinated Note. NOW THERFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows; 1. Any capitalized terms used herein and not otherwise defined, shall have the meaning ascribed thereto in the Purchase Agreement. 2. AJG hereby sells, assigns and transfers to the Company, its successors and assigns, all right, title and interest of AJG in, to and under the Subordinated Note. 3. The Company accepts assignment of the Subordinated Note and agrees to pay or has paid the Purchase Price to AJG. 4. The parties agree to duly execute and deliver such further instruments or documents or take such further action as the other may request in writing in order to obtain the full benefit of this Assignment and the rights granted herein. 5. This Assignment shall be governed by and construed in accordance with the laws of the state of Delaware. 6. This assignment shall be binding upon and inure to the benefit of each party hereto, its successors and permitted assigns. This assignment is not intended to create any third-party beneficiary rights in any person not a party to this Assignment. -7- IN WITNESS WHEREOF, the parties have executed this Assignment as of the day and year first written above. AJG FINANCIAL SERVICES, INC. By:____________________________ Title:_________________________ U.S. ENERGY BIOGAS CORP. By:____________________________ Title:_________________________ -8- EX-10.97 5 d61279_ex10-97.txt ASSIGNMENT AGREEMENT Exhibit 10.97 ASSIGNMENT AGREEMENT This ASSIGNMENT AGREEMENT ("Assignment") is made this 30th day of September, 2004 by and among AJG FINANCIAL SERVICES, INC., a Delaware corporation ("AJG"), and U.S. ENERGY BIOGAS CORP., a Delaware corporation (the "Company"). WHEREAS, the Company issued a Second Amended and Restated Subordinated Note dated April 8, 2004 (the "Subordinated Note") to AJG; and WHEREAS, pursuant to a Purchase Agreement dated September 30, 2004 between AJG and the Company (the "Purchase Agreement"), AJG desires to sell and assign the Subordinated Note to the Company and the Company desires to purchase the Subordinated Note. NOW THERFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows; 1. Any capitalized terms used herein and not otherwise defined, shall have the meaning ascribed thereto in the Purchase Agreement. 2. AJG hereby sells, assigns and transfers to the Company, its successors and assigns, all right, title and interest of AJG in, to and under the Subordinated Note. 3. The Company accepts assignment of the Subordinated Note and agrees to pay or has paid the Purchase Price to AJG. 4. The parties agree to duly execute and deliver such further instruments or documents or take such further action as the other may request in writing in order to obtain the full benefit of this Assignment and the rights granted herein. 5. This Assignment shall be governed by and construed in accordance with the laws of the state of Delaware. 6. This assignment shall be binding upon and inure to the benefit of each party hereto, its successors and permitted assigns. This assignment is not intended to create any third-party beneficiary rights in any person not a party to this Assignment. IN WITNESS WHEREOF, the parties have executed this Assignment as of the day and year first written above. AJG FINANCIAL SERVICES, INC. By:____________________________ Title:_________________________ U.S. ENERGY BIOGAS CORP. By:____________________________ Title:_________________________ EX-31.1 6 d61279_ex31-1.txt CEO CERTIFICATION Exhibit 31.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Richard J. 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-15e and 15d-15e) 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: November 11, 2004 /s/ Richard J. Augustine - ------------------------------ Richard J. Augustine Chief Accounting Officer (Principal Accounting Officer and Financial Officer) EX-31.2 7 d61279_ex31-2.txt CFO CERTIFICATION Exhibit 31.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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-15e and 15d-15e) 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: November 11, 2004 /s/ Lawrence Schneider - ----------------------------- Lawrence Schneider Chief Executive Officer (Principal Executive Officer) EX-32.1 8 d61279_ex32-1.txt CERTIFICATIONS 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 September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned chief executive officer and chief financial officer, certify, pursuant to 18 U.S.C. ss. 1350, as adopted 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 Schneider ---------------------------- Lawrence Schneider Dated: November 11, 2004 Chief Executive Officer (Principal Executive Officer) /s/ Richard J. Augustine Dated: November 11, 2004 ---------------------------- Richard J. Augustine Chief Accounting Officer (Principal Accounting and Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----