U.S. Energy Systems, Inc.
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Dated as of July 31, 2000
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Energy Systems Investors, L.L.C.
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇. 4D
New York, New York 10028
Re: Plan of Recapitalization
Ladies and Gentlemen:
The parties hereto have agreed, subject to the conditions set
forth below and as more fully set forth herein, that a plan of recapitalization
(the "Plan of Recapitalization") of U.S. Energy Systems, Inc. (the
"Corporation") would be effected under which: (i) the dividends payable with
respect to the 1,138,888 shares of Series A Convertible Preferred Stock (the
"Series A Stock") outstanding would be reduced; (ii) a reserve fund would be
established to ensure the payment in part of the dividends with respect to all
of the shares of Series A Stock outstanding; (iii) the interest payable with
respect to the limited recourse promissory note bearing interest at the rate of
9.25% per annum in the original principal amount of $7,741,378.90 (the "Note")
would be reduced; and (iv) the Series B Warrants, in the form annexed hereto as
Exhibit A (the "Warrants"), to acquire 1,500,000 shares of the Corporation's
Common Stock at an exercise price of $4.00 per share would be issued to the
persons identified in accordance with Section 1(b) hereof. To effect the
foregoing, Energy Systems Investors, L.L.C. ("ESI"), ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ ("▇.
▇▇▇▇▇▇▇▇▇") and ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ("▇. ▇▇▇▇▇▇▇▇▇") (▇. ▇▇▇▇▇▇▇▇▇ and ▇. ▇▇▇▇▇▇▇▇▇
being collectively referred to herein as the "Schneiders"), and the Corporation
hereby agrees as follows (ESI and the Schneiders and any other subsequent holder
of Series A Stock required to become a party to this or other similar agreement
are hereby referred to collectively as "Series A Stockholders"):
1. Dividend and Interest Rate Reduction; Issuance of Warrants.
(a) Notwithstanding anything to the contrary in the Note nor
the Corporation's Certificate of Designation filed with the Secretary of State
of Delaware (the "Delaware
Secretary") on March 23, 1998, as amended by a certificate of increase filed
with the Delaware Secretary on July 31, 2000 (as amended from time to time, the
"Certificate of Designation"), the parties hereto agree that commencing as of
the date all the conditions set forth in Section 3(a) herein have been waived by
all the parties hereto or satisfied (the "Effective Date"), the dividends
payable on each share of Series A Stock shall be $0.54 per share (subject to
adjustment as provided in the Certificate of Designation) per annum (the
"Adjusted Dividend Rate") (i.e., the dividend payable through and including the
Effective Date shall be calculated at the rate provided for in the Certificate
of Designation and thereafter, shall be calculated at the Adjusted Dividend
Rate) and the interest rate on the Note shall be reduced from 9.25% per annum to
6.25% per annum (i.e., the interest payable through and including the Effective
Date shall be calculated at the rate provided for in the Note and thereafter,
shall be calculated at the rate provided for herein). (The rate of default
interest on the Note shall not be effected by this Plan of Recapitalization).
From and after the Effective Date, any and all determinations required under or
with respect to the Certificate of Designation shall use the Adjusted Dividend
Rate for the Series A Stock.
(b) The Corporation shall, upon execution of this agreement of
Plan of Recapitalization, issue one or more of the Warrants to the persons and
in the quantities identified pursuant to a written instruction letter executed
by ESI and the Schneiders.
2. Dividend Payment Protection Fund.
(a) To ensure in part the payment of cash dividends on the
Series A Stock, the Corporation covenants that commencing as of the Effective
Date it will (i) set apart (in the manner contemplated by the last sentence of
Section 3(b) of the Certificate of Designation) promptly a fund (the "Dividend
Payment Fund") consisting of $1,229,999.04 in cash (the "Dividend Payment
Protection Amount"), and (ii) within six months following the application of all
or a portion of the Dividend Payment Fund pursuant to Section 2(c), it will set
apart (in the manner contemplated by the last sentence of Section 3(b) of the
Certificate of Designation), the amount so applied pursuant to Section 2(c) but
only to the extent the Dividend Payment Protection Amount exceeds the amount in
the Dividend Payment Fund and subject to such further reduction as may be
appropriate pursuant to Section 2(d) hereof. Notwithstanding anything to the
contrary herein, the Corporation shall not be required to set apart funds with
respect to dividends payable after March 1, 2004 and the maximum amount that the
Corporation shall be
required to set apart shall not exceed in the aggregate $0.158 for each dollar
in the principal amount of the Note that has been paid.
(b) All funds set apart pursuant to the provisions of Section
2(a) shall be applied in accordance with the provisions of Section 2(c),
provided, however, that after March 1, 2004, the Corporation may use the
Dividend Payment Fund to pay any and all dividends on the Series A Stock,
notwithstanding the limitations set forth in Section 2(c).
(c) If on any Dividend Payment Date (as defined in the
Certificate of Designation), the Corporation determines that the funds available
to it (without recourse to the Dividend Payment Fund) are insufficient to pay
the dividends required on such date to be paid with respect to the Series A
Stock or that such payment out of the Corporation's funds (other than the
Dividend Payment Fund) would be violative of applicable law (including
creditors' rights or similar laws), the Corporation shall, except as may be
otherwise required by law or its Certificate of Incorporation (which term
includes any applicable certificates of designations or similar instruments),
pay such dividends from the Dividend Payment Fund, net of any interest payment
due under the Note on such date.
(d) The Corporation shall be entitled to withdraw from the
Dividend Payment Fund from time to time such sums as the Board of Directors of
the Corporation determines in good faith will not be required for the payment of
dividends on the Series A Stock because (i) of a reduction in the number of
outstanding shares of Series A Stock, (ii) the amount held in the Dividend
Payment Fund exceeds the Dividend Payment Protection Amount, (iii) the amount of
dividends that must be paid with respect to all the outstanding shares of Series
A Stock at the dividend rate provided for in this agreement of Plan of
Recapitalization at any time after the date hereof through March 1, 2004 is less
than the Dividend Protection Payment Amount or (iv) the obligations of the
Corporation pursuant to Section 2 hereof are otherwise secured, including
without limitation, by means of a letter of credit or guaranty issued by a
banking or other institution.
(e) Notwithstanding anything to the contrary in the
Certificate of Designation, in the event the funds set apart pursuant to this
Section 2 are insufficient to pay all applicable dividends on the Series A
Stock, then such funds shall be applied to the Series A Stock on a pro-rata
basis.
3. Conditions to Effectiveness of the Plan; Covenants with Respect to the Plan.
(a) The parties hereto covenant and agree to cooperate and use
commercially reasonable efforts to cause the satisfaction (but not the waiver)
of the conditions set forth in Section 3(b).
(b) The effectiveness of the Plan of Recapitalization,
including without limitation, the exercisability of the Warrants, the reduction
of the dividend rate on the Series A Stock, the reduction of the interest rate
on the Note, the establishment and implementation of the Dividend Payment Fund
and the other obligations imposed on the parties to this Agreement pursuant to
Sections 1 and 2 hereof shall be subject to the satisfaction (or the waiver) by
all of the parties hereto of the following conditions:
(i) a private letter ruling shall have been
obtained from the Internal Revenue Service to the effect that the consummation
of the Plan of Recapitalization will not have an adverse tax effect on the
parties hereto; and
(ii) the issuance of the Warrants has been
approved by the stockholders of the Corporation to the extent required by
Nasdaq.
In the event such conditions have not been waived or satisfied
by December 31, 2001, this agreement respecting the Plan of Recapitalization
shall terminate and be of no further force or effect and this Plan of
Recapitalization shall be deemed abandoned and terminated (and the Warrants will
be of no further force or effect).
4. Miscellaneous.
(a) The Schneiders and ESI jointly and severally represent and
warrant to the Corporation that (i) immediately prior to the execution of this
agreement, they own, in the aggregate, all of the issued and outstanding shares
of Series A Stock free and clear of any and all liens, claims and encumbrances,
other than the encumbrances imposed pursuant to the Pledge Agreement dated as of
July 31, 2000 by and between ESI and the Corporation and (ii) there are no
outstanding options or other rights to acquire such shares of Series A Stock.
(b) The Series A Stockholders agree to present all
certificates representing Series A Stock now owned or hereafter acquired by
them, for the placement thereon of the following legend (and such other legends
as the Corporation in good ▇▇▇▇▇ ▇▇▇▇▇ appropriate), which will remain thereon
as long as Series A Stock is outstanding (or, if this Plan of Recapitalization
is terminated pursuant to Section 3 hereof, until the date of such termination):
The securities represented by this certificate are subject to
the provisions of an agreement of Plan of Recapitalization
dated as of July 31, 2000, between the Corporation, ▇.
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Such agreement, among other things, restricts the payment of
dividends on these securities and limits the transferability
of these securities. A copy of said agreement is on file at
the office of the Secretary of the Corporation.
The Corporation may enter a stop transfer order with the transfer agent or
agents of Series A Stock against the transfer of Series A Stock except in
compliance with the requirements of this agreement. The Series A Stockholders
agree that they will not transfer or otherwise dispose of their shares of Series
A Stock, until the proposed transferee has entered into an agreement with the
Company and the other Series A Stockholders containing terms and provisions
similar to those set forth herein.
(c) For the convenience of the parties, any number of
counterparts of this agreement may be executed by the parties hereto and each
such executed counterpart shall be, and shall be deemed to be, an original
instrument.
(d) All notices, requests, demands and other communications
which are required or may be given under this agreement (including all legal
process in regard hereto) shall be in writing and shall be deemed to have been
duly given or made: if by hand, immediately upon delivery; if by telex,
telecopier, telegram or similar electronic device, immediately upon sending,
provided it is sent on a business day, but if not, then immediately upon the
beginning of the first business day after being sent; if by Federal Express,
Express Mail or any other overnight delivery service, on the first business day
after dispatch; and if mailed by certified mail, return receipt requested, three
(3) business days after mailing. All notices, requests and demands are to be
given or made to the parties at the addresses set forth on the first page of
this agreement (or to such
other address as a party may designate by notice in accordance with the
provisions of this Section 3(d)).
(e) Except as otherwise provided or contemplated herein, from
and after the date that there are no shares of Series A Stock are outstanding or
earlier termination of this agreement of Plan of Recapitalization, the covenants
of the parties set forth herein shall be of no further force or effect and the
parties shall be under no further obligation with respect thereto.
(f) This agreement of Plan of Recapitalization shall be
governed by and construed and enforced in accordance with the laws of the State
of Delaware applicable to contracts made and to be performed therein.
Kindly acknowledge your consent to the foregoing by signing
your name where indicated below.
U.S. Energy Systems, Inc.
By: ▇▇▇▇▇ ▇▇▇▇▇▇▇
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▇▇▇▇▇ ▇▇▇▇▇▇▇, President
ACKNOWLEDGED AND AGREED:
Energy Systems Investors, L.L.C.
By: ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
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▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇, Manager
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