-----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, CjukfJxmFVPnMLV5bj4v5HZG9SSyT4acx4EthGts1BvgT9xvPoZOplvmaF8CfW8P gYJxu2cNXVFA4gdyc/hJAA== 0000950123-98-003303.txt : 19980402 0000950123-98-003303.hdr.sgml : 19980402 ACCESSION NUMBER: 0000950123-98-003303 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19980401 SROS: NASD SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: U S ENERGY SYSTEMS INC CENTRAL INDEX KEY: 0000351917 STANDARD INDUSTRIAL CLASSIFICATION: MOTORS & GENERATORS [3621] IRS NUMBER: 521216347 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: SC 13D SEC ACT: SEC FILE NUMBER: 005-47687 FILM NUMBER: 98585033 BUSINESS ADDRESS: STREET 1: 515 N FLAGLER DR STREET 2: STE 702 CITY: WEST PALM BEACH STATE: FL ZIP: 33401 BUSINESS PHONE: 5618209779 MAIL ADDRESS: STREET 1: 515 NORTH FLAGLER DRIVE STREET 2: SUITE 702 CITY: WEST PALM BEACH STATE: FL ZIP: 33401 FORMER COMPANY: FORMER CONFORMED NAME: U S ENVIROSYSTEMS INC /DE/ DATE OF NAME CHANGE: 19960607 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: ENERGY SYSTEMS INVESTORS LLC CENTRAL INDEX KEY: 0001058699 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 450 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2127150150 MAIL ADDRESS: STREET 1: 450 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 SC 13D 1 SCHEDULE 13D 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13D Under the Securities Exchange Act of 1934 U.S. Energy Systems, Inc. (Name of Issuer) Series A Convertible Preferred Stock, par value $0.01 per share (Title of Class of Securities) 902951102 (CUSIP Number) David I. Faust Faust, Rabbach & Oppenheim, LLP 488 Madison Avenue New York, New York 10022 (212) 751-7700 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) March 23, 1998 (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this Schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ]. Check the following box if a fee is being paid with the statement [ ] Page 1 of 7 pages 2 SCHEDULE 13D 000CUSIP No. 902951102 - -------------------------------------------------------------------------------- 1. NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Energy Systems Investors, LLC (I.D. No. Pending) - -------------------------------------------------------------------------------- 2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [ ] - -------------------------------------------------------------------------------- 3. SEC USE ONLY - -------------------------------------------------------------------------------- 4. SOURCE OF FUNDS WC - -------------------------------------------------------------------------------- 5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) [ ] - -------------------------------------------------------------------------------- 6. CITIZENSHIP OR PLACE OF ORGANIZATION Delaware ----------------------------------------------------------------- 7. SOLE VOTING POWER 1,000,000* ----------------------------------------------------------------- SHARES 8. SHARED VOTING POWER BENEFICIALLY OWNED BY EACH REPORTING ----------------------------------------------------------------- PERSON WITH 9. SOLE DISPOSITIVE POWER 1,000,000* ----------------------------------------------------------------- 10. SHARED DISPOSITIVE POWER - -------------------------------------------------------------------------------- 11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 1,000,000* - -------------------------------------------------------------------------------- 12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] 100% of Series A Convertible Preferred Stock 16.99% of Common Stock (assuming conversion into 1,000,000 of Common Stock - -------------------------------------------------------------------------------- 13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 00 - -------------------------------------------------------------------------------- 14. TYPE OF REPORTING PERSON* - -------------------------------------------------------------------------------- *SEE INSTRUCTIONS BEFORE FILLING OUT! *250,000 shares of Series A convertible Preferred Stock, convertible into 1,000,000 shares of common stock, with the current power to vote as if converted. Page 2 of 7 pages 3 Item 1. Security and Issuer This filing relates to Series A Convertible Preferred Stock, par value $0.01 per share (the "Preferred Stock") of U.S. Energy Systems Inc. (the "Issuer"). The Preferred Stock is convertible into Common Stock of the Issuer at the current conversion rate of four (4) shares of Common Stock for each share of Preferred Stock. The conversion rate is subject to change as provided in the Certificate of Designation of Series A Convertible Preferred Stock, a copy of which is annexed as Exhibit 1 (the "Certificate of Designation"). The principal executive offices of the Issuer are at 515 North Flagler Drive, Suite 702, West Palm Beach, Florida 33401. Item 2. Identity and Background (A) Energy Systems Investors LLC ("ESI") is a limited liability company formed under the laws of the State of Delaware. (B) ESI's principal business is investments. ESI's registered office is c/o National Registered Agents, Inc., 9 East Lockerman Street, Dover, Delaware. It also has an office at 450 Park Avenue, Suite 1000, New York, New York 10022. (C) The managers of ESI are Lawrence I. Schneider and Henry N. Schneider, both of whom have offices at 450 Park Avenue, Suite 1000, New York, New York 10022. Messrs. Page 3 of 7 pages 4 Schneiders' principal occupation is investing. Henry N. Schneider is the son of Lawrence I. Schneider. (D) During the past five years neither ESI, Lawrence I. Schneider nor Henry N. Schneider have been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). (E) During the past five years neither ESI, Lawrence I. Schneider nor Henry N. Schneider was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, Federal or State securities laws or finding any violation with respect to such laws. (F) Lawrence I. Schneider and Henry N. Schneider are citizens of the United States of America. Item 3. Source and Amount of Funds or Other Consideration ESI paid $9.00 per share, for a total of $2,250,000, for the 250,000 shares of Preferred Stock. The funds were contributed to ESI as capital by its members. Item 4. Purpose of Transaction ESI purchased the Preferred Stock as an investment. It has no current plans or proposals which relate to or would result in: (A) The acquisition by any person of additional securities of the Issuer, or the disposition of the Issuer (except that (i) subject to the approval of Issuer's shareholders, ESI may purchase up to 222,000 additional shares of Preferred Stock on or prior to May 22, 1999 at the same price and on the same terms and conditions under which it made the purchase reported by this filing, as contemplated in Section 7(g) of the Subscription Agreement, a copy of which is annexed as Exhibit 2 (the "Subscription Agreement"); (ii) ESI may be granted additional shares of Preferred Stock under the circumstances set forth in Section 7(h) of the Subscription Agreement; and (iii) ESI Page 4 of 7 pages 5 may receive shares of Common Stock as dividends on the Preferred Stock pursuant to Section 3 of the Certificate of Designation); (B) An extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the Issuer or any of its subsidiaries; (C) A sale or transfer of a material amount of assets of the Issuer or of any of its subsidiaries; (D) Any change in the present board of directors or management of the Issuer, including any plans or proposals to change the number or term of directors or to fill any existing vacancies on the board (except that the Issuer has agreed to appoint Lawrence I. Schneider to the Board of Directors effective as of March 23, 1998, to nominate him for a three year term as a director at the next election of directors, and to appoint him as Chairman of the Executive Committee); (E) Any material change in the present capitalization or dividend policy of the Issuer (other than the creation and issuance of the Preferred Stock); (F) Any other change in the Issuer's business or corporate structure, including but not limited to, if the Issuer is a registered closed-end investment company, any plans or proposals to make any changes in its investment policy for which a vote is required by Section 13 of the Investment Company Act of 1940; (G) Changes in the Issuer's charter, by-laws or instruments corresponding thereto or other actions which may impede the acquisition of control of the Issuer by any person; (H) Causing a class of securities of the Issuer to be delisted from a national securities exchange or to cease to be authorized to be quoted in an inter-dealer quotation system of a registered national securities association; Page 5 of 7 pages 6 (I) A class of equity securities of the Issuer becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Act; or (J) Any action similar to any of those enumerated above. Item 5. Interest in Securities of the Issuer On March 23, 1998, ESI bought 250,000 shares of Preferred Stock from the Issuer. The acquisition was for cash in a private transaction. The Preferred Stock is convertible on a one-for-four basis into 1,000,000 shares of Common Stock (such ratio is subject to adjustment as provided in the Certificate of Designation). The Issuer reported 4,885,628 shares of Common Stock outstanding as of October 31, 1997. Accordingly, if the Preferred Stock were fully converted, ESI would hold 16.99% of all of the outstanding Common Stock. The Preferred Stock has voting rights equal to the number of shares of Common Stock into which it is convertible. Messrs. Schneider, as the managers of ESI, have the sole right to exercise such voting power. Item 6. Contracts, Agreements, Undertakings or Relationships with Respect to Securities of the Issuer The Preferred Stock and its holder have the various rights and preferences as described in the Certificate of Designation (Exhibit 1). The Preferred Stock was acquired by ESI pursuant to the Subscription Agreement (Exhibit 2). The holder of the Preferred Stock has registration rights described in a Registration Rights Agreement, a copy of which is annexed as Exhibit 3. Page 6 of 7 pages 7 Item 7. Exhibits 1. Certificate of Designation of Series A Convertible Preferred Stock of U.S. Energy Systems, Inc. 2. Subscription Agreement dated as of March 20, 1998. 3. Registration Rights Agreement dated as of March 20, 1998. SIGNATURES After reasonable inquiry and to the best knowledge and belief of the undersigned, each of the undersigned certifies that the information set forth in this statement by or about it or him is true, complete and correct. ENERGY SYSTEMS INVESTORS,LLC Date: March 27, 1998 By: /s/ Lawrence I. Schneider ----------------------------- Lawrence I. Schneider Manager Date: March 27, 1998 By: /s/ Henry N. Schneider -------------------------- Henry N. Schneider Manager Page 7 of 7 pages 8 EXHIBIT INDEX Exhibit No. Description 1 Certificate of Designation of Series A Convertible Preferred Stock of U.S. Energy Systems, Inc. 2 Subscription Agreement dated as of March 20, 1998. 3 Registration Rights Agreement dated as of March 20, 1998. EX-99.1 2 CERTIFICATE OF DESIGNATION 1 Exhibit 1 STATE OF DELAWARE PAGE 1 OFFICE OF THE SECRETARY OF STATE I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF DESIGNATION OF "U.S. ENERGY SYSTEMS, INC.," FILED IN THIS OFFICE ON THE TWENTY-THIRD DAY OF MARCH, A.D. 1998, AT 9 O'CLOCK A.M. /s/ Edward J. Freel ------------------------------------- Edward J. Freel, Secretary of State [Seal] AUTHENTICATION: 0913844 8100 DATE: 8988976 98ii105i7 03-24-98 2 CERTIFICATE OF DESIGNATION OF SERIES A CONVERTIBLE PREFERRED STOCK OF U.S. ENERGY SYSTEMS, INC. (PURSUANT TO SECTION 151 OF THE DELAWARE GENERAL CORPORATION LAW) U.S. Energy Systems, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (hereinafter called the "Corporation"), hereby certifies that the following resolution was adopted by the Board of Directors of the Corporation as required by Section 151 of the Business Corporation Law at a meeting duly called and held on March 18, 1998: RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (hereinafter called the "Board of Directors" or the "Board") in accordance with the provisions of the Certificate of Incorporation of the Corporation, the Board of Directors hereby creates a Series A Preferred Stock, $.01 par value per share (the "Preferred Stock"), of the Corporation and hereby states the designation and number of shares, and fixes the relative rights, preferences, and limitations thereof as follows: Convertible Preferred Stock: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Convertible Preferred Stock" (the "Preferred Stock") and the number of shares constituting the Preferred Stock shall be 600,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Preferred Stock to a number less than the number of shares then outstanding and no increase shall increase the number of shares of Preferred Stock above the total number of authorized shares. Section 2. Rank. The Preferred Stock shall rank as to distributions of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary: (i) senior to all of the Corporation's common stock, par value $.01 per share (the "Common Stock"); (ii) senior to any class or series of capital stock of the Corporation hereafter created specifically ranking by its terms junior to the Preferred Stock (collectively, with the Common Stock, "Junior Securities" or "Junior Stock"); and (iii) on parity with any class or series of capital 3 stock of the Corporation hereafter created specifically ranking by its terms on parity with the Preferred Stock ("Parity Securities" or "Parity Stock"). While any shares of Preferred Stock are outstanding, no Parity Securities or equity securities senior to the Preferred Stock shall be authorized or issued without the written consent of the holders of the Preferred Stock, voting as a class. This prohibition shall not include the authorization or issuance of any form of debt securities or instruments to a bank or other institution. Section 3. Dividends. (a) The holders of the Preferred Stock shall be entitled to receive out of funds of the Corporation legally available for payment cash dividends, payable quarterly in arrears, at the rate of $0.81 per share per annum, payable in cash, Common Stock or some combination thereof at the holder's option. Any Common Stock granted as a Dividend under this Section 3 shall be granted at a price equal to the average trading price of the Common Stock of the Corporation on the five trading days prior to the date the Corporation declares the dividend. Dividends on the Preferred Stock shall accrue from the date of issuance or thereafter, from the most recent date on which dividends were payable, and shall be payable quarterly on April 30, July 31, October 3l and January 3l of each year (each a "Dividend Payment Date"), commencing with a pro-rata dividend on the first Dividend Payment Date after the initial issuance of the Preferred Stock; provided, however, that if any such day is a non-business day, the Dividend Payment Date will be the next business day. Each declared dividend shall be payable to holders of record as they appear at the close of business on the stock books of the Corporation on such record date, not more than 30 calendar days and not less than 10 calendar days preceding the Dividend Payment Date therefor, as determined by the Board of Directors (each of such dates a "Record Date"). Quarterly dividend periods (each a "Dividend Period") shall commence on and include the 1st day of February, May, August and November of each year and shall end on and include the day next preceding the next following Dividend Payment Date. If any state or federal laws or regulations or the then applicable rules of the National Association of Securities Dealers, or any market or exchange on which the Common Stock of the Corporation is traded, prohibit any dividend payment from being made with Common Stock, then such payment shall be made in cash. (b) No dividends shall be declared or paid or set apart for payment on any Common Stock, Parity Stock or Junior Stock during any calendar quarter unless full dividends on the Preferred Stock for all Dividend Periods ending prior to or during such calendar quarter have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof is set apart for such payment. When dividends are not so paid in full (or a sum sufficient for such full payment is not so set apart) upon the Preferred Stock and any other Parity Stock, dividends upon the Preferred Stock and dividends on such other Parity Stock payable during such calendar quarter shall be declared pro rata so that the amount of such dividends so payable per share on the Preferred Stock and such other Parity Stock shall in all cases bear to each other the same ratio that full dividends on the shares of Preferred Stock and full dividends, if any, on shares of such other Parity Stock, bear to each other. If full dividends on the Preferred Stock have not been declared and paid or set apart for payment, no dividend or distribution, other 2 4 than in shares of capital stock ranking junior to the Preferred Stock as to dividends or liquidation preference ("Junior Stock"), may be declared, set aside or paid on any shares of Junior Stock. Except with respect to the Corporation's 9% Convertible Secured Subordinated Debentures and Redeemable Common Stock Purchase Warrants, so long as any Preferred Stock is outstanding, the Corporation may not repurchase, redeem or otherwise acquire any shares of its Junior Stock (except by conversion into or exchange for Junior Stock), and may not, directly or indirectly, repurchase, redeem or otherwise acquire (except by conversion into or exchange for Junior Stock) any shares of any class or series of Junior Stock or warrants, calls, options or other rights to acquire capital stock of the Corporation or other security exercisable or exchangeable into capital stock of the Corporation without the written consent of the holders of the Preferred Stock. Holders of the Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of the dividends provided for herein. No interest or sum of money in lieu of interest shall be payable in respect of any declared dividend payment or payments on the Preferred Stock which may be in arrears. As used herein, the phrase "set apart" in respect of the payment of dividends shall require deposit of any funds in a bank or trust company in a separate deposit account maintained for the benefit of the holders of the Preferred Stock. Section 4. Voting Rights. Each share of Preferred Stock shall be entitled to a number of votes in any vote brought before the holders of the Common Stock of the Corporation equal to $9.00 divided by the Conversion Price (as set forth in Section 6 hereof) determined as of the record date of such vote of stockholders. Holders of shares of Preferred Stock shall be entitled to notice of all stockholder meetings or written consents with respect to which they would be entitled to vote, which notice shall be provided pursuant to the Corporation's bylaws and applicable law. To the extent that under Delaware law the vote of the holders of shares of Preferred Stock, voting separately as a class, is required to authorize a given action of the Corporation, the affirmative vote or consent of the holders of at least a majority of the outstanding shares of the Preferred Stock shall constitute the approval of such action by the class. Section 5. Conversion. Subject to and upon compliance with this Section 5, the holders of shares of Preferred Stock shall have conversion rights as follows: (a) Optional Conversion. Each holder of a share of Preferred Stock shall have the right, at any time, at the office of the Corporation or any transfer agent for the Preferred Stock, to convert such share of Preferred Stock into that number of fully paid and nonassessable shares of Common Stock equal to $9.00 divided by the Conversion Price of such share of Preferred Stock as set forth in Section 6 hereof. (b) Mechanics of Conversion. In order to convert shares of Preferred Stock into shares of Common Stock, the holder of shares of Preferred Stock shall (i) fax or otherwise deliver a copy of the fully executed notice of conversion in the form attached hereto as Exhibit A ("Notice of Conversion") to the Corporation at its principal office and to the transfer agent for the Preferred Stock that such holder elects to convert the same, which notice shall specify the 3 5 number of shares of Preferred Stock to be converted and shall contain the Conversion Price (together with a copy of the first page of each certificate to be converted) prior to 5:00 p.m., Eastern Standard time (the "Conversion Notice Deadline") on the date of conversion specified on the Notice of Conversion and (ii) surrender the original certificate or certificates for the shares of Preferred Stock to be converted, duly endorsed, and deliver the original Notice of Conversion by either overnight courier or two-day courier, to the principal office of the Corporation or the office of the transfer agent for the Preferred Stock; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless the certificates evidencing such shares of Preferred Stock are delivered to the Corporation or its transfer agent as provided above. Upon receipt by the Corporation of evidence of the loss, theft, destruction or mutilation of any certificate representing shares of Preferred Stock, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Corporation, and upon surrender and cancellation of any certificate representing shares of Preferred Stock, if mutilated, the Corporation shall execute and deliver a new certificate of like tenor and date. No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional share to which the holder of shares of Preferred Stock would otherwise be entitled, the Corporation shall pay cash to such holder in an amount equal to such fraction multiplied by the Conversion Price then in effect. In the case of a dispute as to the calculation of the Conversion Rate, the Corporation's calculation shall be deemed conclusive absent manifest error. The Corporation shall use all reasonable efforts to issue and deliver within seven (7) business days after delivery to the Corporation of the certificates representing the shares of Preferred Stock to be converted, or after such agreement and indemnification, to such holder of Preferred Stock at the address of the holder on the books of the Corporation, a certificate or certificates for the number of shares of Common Stock to which the holder shall be entitled as aforesaid. The date on which conversion occurs (the "Date of Conversion") shall be deemed to be the date set forth in such Notice of Conversion, provided (i) that the advance copy of the Notice of Conversion is delivered to and received by the Corporation before 5:00 pm., Eastern Standard time, on the Date of Conversion, and (ii) that the original stock certificates representing the shares of Preferred Stock to be converted are received by the Corporation or the transfer agent within two (2) business days thereafter. The person or persons entitled to receive the shares of Preferred Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Date of Conversion. If the original certificates representing the shares of Preferred Stock to be converted are not received by the Corporation or the transfer agent within two (2) business days after the Date of Conversion or if the facsimile of the Notice of Conversion is not received by the Corporation or its transfer agent prior to the Conversion Notice Deadline, the Notice of Conversion, at the Corporation's option, may be declared null and void. Following any conversion of shares of Preferred Stock, such share of Preferred Stock shall no longer be outstanding and all rights of a holder with respect to the shares surrendered for conversion shall immediately terminate except for the right to receive Common Stock. 4 6 (c) Reservation of Shares. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding shares of Preferred Stock and to pay the dividends thereon in Common Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock or to pay the dividends thereon in Common Stock, the Corporation will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. Section 6. Conversion Price. The "Conversion Price" per share of the Preferred Stock shall be $2.25, subject to adjustment as set forth below. (a) The Conversion Price shall be adjusted from time to time as follows: (i) If the Corporation consummates any offering of its Common Stock (or securities exercisable or convertible into Common Stock) at a price (or exercise or conversion price) below the Conversion Price, the Conversion Price of the Preferred Stock shall be reduced to such offering price (or exercise price or conversion price, as applicable). The provisions of this Section 6(a) shall not apply upon the issuance of securities in connection with an acquisition of the stock or equity interests or substantially all the assets of an entity, or a merger by the Corporation. (ii) The Conversion Price shall not be reduced below $1.00 pursuant to this Section 6(a) unless the Corporation consummates any offering of its Common Stock or convertible securities at a price or conversion price less than an amount equal to the net book value per share of the Corporation as determined using the information provided in the Corporation's last quarterly or annual report as filed with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended. (b) If and whenever after the date hereof the Corporation shall issue or sell any shares of its Common Stock in connection with an acquisition or merger (as expressly excluded from the provisions of paragraph (a) above) for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, then, forthwith upon such issue or sale, the Conversion Price shall be reduced to the price (calculated to the nearest cent) determined by dividing (i) an amount equal to the sum of (a) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then existing Conversion Price, and (b) the consideration, if any received by the Corporation upon such issue or sale by (ii) the total number of shares of Common Stock outstanding immediately after such issue or sale. In case any shares of Common Stock shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Corporation therefor, without deduction therefrom of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Corporation in connection therewith. In case any shares of Common Stock shall be issued or sold for a consideration other than cash, the amount of the 5 7 consideration other than cash received by the Corporation shall be deemed to be the fair value of such consideration as determined by the Board of Directors of the Corporation, without deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Corporation in connection therewith. (c) In case at any time the Corporation shall in any manner grant in connection with an acquisition or merger (as expressly excluded from the provisions of paragraph (a) above) any rights to subscribe for or to purchase, or any options for the purchase of, Common Stock ("Options") or any stock or securities convertible into or exchangeable for Common Stock ("Convertible Securities") whether or not such Options or Convertible Securities are immediately exercisable or convertible, and the exercise price per share of such Options or the conversion price per share of such Convertible Securities shall be less than the Conversion Price in effect immediately prior to the time of the granting of such Options or Convertible Securities, then the Conversion Price shall be reduced to the price (calculated to the nearest cent) determined by dividing (i) an amount equal to the sum of (a) the number of shares of Common Stock outstanding immediately prior to such issuance multiplied by the then existing Conversion Price, and (b) the aggregate exercise price or conversion price to be received by the Corporation upon the exercise or conversion of the Options or Convertible Securities, as applicable, by (ii) the total number of shares of Common Stock outstanding immediately after the issuance of Options or Convertible Securities, assuming the exercise of such Options or the conversion of such Convertible Securities. (d) If, prior to the conversion of all outstanding shares of Preferred Stock, the number of outstanding shares of Common Stock is increased by a stock split, stock dividend or other similar event, the Conversion Price shall be proportionately reduced, or if the number of outstanding shares of Common Stock is decreased by a combination or reclassification of shares or other similar event, the Conversion Price shall be proportionately increased. (e) If, prior to the conversion of all outstanding shares of Preferred Stock, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization or other similar event, as a result of which shares of Common Stock of the Corporation shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Corporation or another entity, then the holders of shares of Preferred Stock shall thereafter have the right to purchase and receive upon conversion of Preferred Stock, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such shares of stock and/or securities as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore purchasable and receivable upon the conversion of the Preferred Stock held by such holders had such merger, consolidation, exchange of shares, recapitalization or reorganization not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the holders of the Preferred Stock to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Preferred Stock) shall thereafter be applicable, as nearly as may be practicable in relation to any shares of stock or 6 8 securities thereafter deliverable upon the exercise hereof. The Corporation shaft not effect any transaction described in this subsection 6(e) unless the resulting successor or acquiring entity (if not the Corporation) assumes by written instrument the obligation to deliver to the holders of the Preferred Stock such shares of stock and/or securities as, in accordance with the foregoing provisions, the holders of the Preferred Stock may be entitled to purchase. (f) No adjustment of the Conversion Price shall be made in an amount less than $.01 per share. (g) In no event shall the Conversion Price be adjusted pursuant to this Section 6 in connection with the issuance of Common Stock or Options to the officers, directors, employees or agents of the Corporation or to any person who shall be issued Common Stock or Options pursuant to a pending employment, agency or consulting agreement (whether or not such agreement is to be consummated in connection with an acquisition or merger). (h) Upon any adjustment of the Conversion Price, then and in each case the Corporation shall give written notice thereof, by first class mail, postage prepaid, addressed to each holder of shares of the Preferred Stock at the address of such holder as shown on the books of the Corporation, which notice shall state the Conversion Price resulting from such adjustment, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (i) In case at any time: (i) the Corporation shall declare any dividend upon its Common Stock payable in cash or stock or make any other distribution to the holders of its Common Stock; (ii) the Corporation shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (iii) there shall be any capital reorganization or reclassification of the capital stock of the Corporation, or a consolidation or merger of the Corporation with, or a sale of all or substantially all its assets to, another corporation; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then, in any one or more of said cases, the Corporation shall give, by first class mail, postage prepaid, addressed to each holder of any shares of Preferred Stock at the address of such holder as shown on the books of the Corporation, (i) at least 30 days' prior written notice of the date on which the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least 30 days' prior written notice of the date when the 7 9 same shall take place. Such notice in accordance with the foregoing clause (y) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (z) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be, and in the case of such merger or sale, the aggregate consideration to be received by the holder of the Corporation's capital stock. Section 7. Status of Converted or Reacquired Shares. Any shares of Preferred Stock converted into shares of Common Stock pursuant to Section 5 hereof or purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the conversion or acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, or in any other Certificate of Designation creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 8. Liquidation, Dissolution or Winding Up. (a) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of shares of Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders under applicable law, prior and in preference to any distribution to holders of the Common Stock or any Junior Securities but in parity with any distribution to holders of Parity Securities, an amount of $9.00 per share, plus a sum equal to all dividends accrued on such shares (whether or not declared) and unpaid for the then current Dividend Period. If upon the occurrence of such event, the assets and funds to be distributed among the holders of shares of Preferred Stock and Parity Securities shall be insufficient to permit the payment to such holders of the full preferential amounts due to the holders of shares of Preferred Stock and Parity Securities, respectively, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of shares of Preferred Stock and Parity Securities, pro rata, based on the respective liquidation amounts to which each such series of stock is entitled by the Corporation's Certificate of Incorporation and any certificate of designation of preferences. (b) Upon the completion of the distribution required by subsection 8(a) above, if assets remain in the Corporation, they shall be distributed to holders of Parity Securities (unless holders of Parity Securities have received distributions pursuant to subsection 8(a)) and Junior Securities in accordance with the Corporation's Certificate of Incorporation, including any duly adopted certificate(s) of designation of preferences. (c) A consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale, exchange, conveyance or disposition of all or substantially all of the assets of the Corporation or the effectuation by the Corporation of a transaction or 8 10 series of related transactions in which more than 50% of the voting power of the Corporation is disposed of, shall not be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 8. Section 9. Consolidation, Merger, etc, In the event of a merger, reorganization, recapitalization or similar event of or with respect to the Corporation (a "Corporate Change") (other than a Corporate Change in which all or substantially all of the consideration received by the holders of the Corporation's equity securities upon such Corporate Change consists of cash or assets other than securities issued by the acquiring entity or any affiliate thereof), the Preferred Stock shall be assumed by the acquiring entity and thereafter the Preferred Stock shall be convertible into such class and type of securities as the holder of shares of Preferred Stock would have received had such holder converted the Preferred Stock immediately prior to such Corporate Change. Section 10. Redemption. (a) At the option of the Corporation at any time and from time to time after March 1, 2001, the Preferred Stock may be redeemed in full or in part (in amounts no less than 50% of the outstanding Preferred Stock held by such holder) for cash at the following prices per share: $12.15 after March 1, 2001 through February 28, 2002 $11.70 after March 1, 2002 through February 28, 2003 $11.25 after March 1, 2003 plus, in each case, an amount equal to all accrued but unpaid dividends (whether or not declared) for all Dividend Periods preceding the date fixed for redemption (the "Redemption Date"). (b) Notice of redemption of the Preferred Stock, specifying the Redemption Date and place of redemption, shall be given by first class mail to each holder of record of the shares to be redeemed, at his address of record, not less than 30 nor more than 60 calendar days prior to the Redemption Date. Each such notice shall also specify the redemption price applicable to the shares to be redeemed. If less than all the shares owned by such holder are then to be redeemed, the notice shall also specify the number of shares thereof which are to be redeemed and the fact that a new certificate or certificates representing any unredeemed shares shall be issued without cost to such holder. (c) Notice of redemption of shares of the Preferred Stock having been given as provided in Section 10(b), then unless the Corporation shall have defaulted in the payment of the redemption price and all accrued and unpaid dividends (whether or not declared), all rights of the holders thereof (except the right to receive the redemption price and all accrued and unpaid dividends, whether or not declared) shall cease with respect to such shares on the Redemption Date and such shares shall not, after the Redemption Date, be deemed to be outstanding and shall not have the status of Preferred Stock. In case fewer than all the shares represented by any such 9 11 certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. (d) Shares of the Preferred Stock are not subject or entitled to the benefit of a sinking fund. (e) Notwithstanding the foregoing, if notice of redemption shall have been given pursuant to this Section 10 and any holder of the Preferred Stock shall, prior to the close of business on the date three business days next preceding the Redemption Date, give written notice to the Corporation pursuant to Section 5 hereof of the conversion of any or all of the shares held by the holder (accompanied by a certificate or certificates for such shares, duly endorsed or assigned to the Corporation), then the redemption shall not become effective as to such shares and the conversion shall become effective as provided in Section 5. Section 11. Forced Conversion. At the option of the Corporation at any time after March 1, 2006, and upon thirty (30) days written notice, the Corporation may require any holder of Preferred Stock to convert all or part of the Preferred Stock then held by such Holder into the number of shares of the Common Stock equal to $9.00 divided by the then applicable Conversion Price, plus accrued and unpaid dividends (whether or not declared) for all periods prior to such conversion date. IN WITNESS WHEREOF, this Certificate of Designation has been executed on behalf of the Corporation by its Chairman of the Board and attested by its Secretary this 20th day of March, 1998. On behalf of the Board of Directors: /s/ Theodore Rosen ------------------------------------ Theodore Rosen Chairman of the Board of Directors Attest: /s/ Seymour J. Beder - -------------------- Seymour J. Beder Secretary 10 12 EXHIBIT A NOTICE OF CONVERSION (TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT THE SERIES A PREFERRED STOCK) The undersigned hereby irrevocably elects to convert shares of Series A Preferred Stock, represented by stock certificate No(s). (the "Preferred Stock Certificates") into shares of common stock ("Common Stock") of U.S. Energy Systems, Inc. (the "Corporation") according to the conditions of the Certificate of Designation of Preferred Stock, as of the date written below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. No fee will be charged to the holder for any conversion, except for transfer taxes, if any. The undersigned represents and warrants that all offers and sales by the undersigned of the shares of Common Stock issuable to the undersigned upon conversion of the Preferred Stock shall be made pursuant to registration of such shares of Common Stock under the Securities Act of 1933, as amended, or pursuant to an exemption from registration under such Act. Conversion Calculations: ------------------------------------------ Date of Conversion ------------------------------------------ Applicable Conversion Price ------------------------------------------ Signature ------------------------------------------ Name Address: ------------------------------------------ ------------------------------------------ *No shares of Common Stock will be issued until the original Preferred Stock Certificate(s) to be converted and the Notice of Conversion are received by the Corporation's Transfer Agent. The original Stock Certificate(s) representing the Preferred Stock to be converted and the Notice of Conversion must be received by the Corporation's Transfer Agent by the second business day following the Date of Conversion, or the Notice of Conversion, at the Corporation's option, may be declared null and void. EX-99.2 3 SUBSCRIPTION AGREEMENT 1 EXHIBIT 2 U.S. ENERGY SYSTEMS, INC. SUBSCRIPTION AGREEMENT SUBSCRIBER: Energy Systems Investors LLC SECURITIES SUBSCRIBED FOR: 250,000 shares of Series A Convertible Preferred Stock, $.01 par value, at $9.00 per share. AGGREGATE PURCHASE PRICE: $2,250,000.00 SUBSCRIPTION AGREEMENT, dated as of March 20, 1998, by and between U.S. Energy Systems, Inc., a Delaware corporation (the "Company"), and Energy Systems Investors LLC, a Delaware limited liability company (the "Investor"). WITNESSETH: The Company desires to sell, and the Investor desires to buy, an aggregate of 250,000 shares of the Company's Series A Convertible Preferred Stock, par value $.01 per share (the "Preferred Stock"), at a purchase price of $9.00 per share, having the rights and preferences set forth in the Certificate of Designation attached hereto as Exhibit A (the "Certificate of Designation"). The Preferred Stock is sometimes referred to herein as the "Securities." The Company is described in the Company's Annual Report on Form 10-KSB for the fiscal year ended January 31, 1997, Quarterly Reports on Form 1O-QSB for the quarters ended April 30, 1997, July 31, 1997 and October 31, 1997, and current reports on Form 8-K dated April 24, 1997, August 12, 1997, August 22, 1997 and November 3, 1997 (collectively, the "Reports") filed with the Securities and Exchange Commission (the "Commission"). NOW, THEREFORE, the parties hereto agree as follows: 1. Subscription and Payment. Subject to the terms and conditions herein set forth, the Investor hereby subscribes for the number of shares of Preferred Stock set forth above. The Investor acknowledges that this subscription shall not be effective until accepted by the Company. The Investor agrees to deliver to the Company at the Closing (as defined below) by wire transfer to an account designated by the Company the aggregate purchase price of S2,250,000, payable in immediately available funds, for the Securities subscribed for hereby. 2 2. Closing. The closing (the "Closing") of the purchase and sale of the Securities subscribed for hereby (the "Offering") shall occur on March 23, 1998 or the earliest date thereafter on which the closing conditions specified in Sections 8 and 9 of this Agreement shall have been satisfied or waived (any such date, the "Closing Date"); provided, however, that if the Closing has not occurred by March 31, 1998, then this Agreement shall terminate and the Closing shall not take place. At the Closing, the Company will deliver to the Investor: (i) one executed copy of this Agreement; (ii) a stock certificate representing the Investor's ownership of the Preferred Stock subscribed for hereby; (iii) an executed Registration Rights Agreement in the form attached hereto as Exhibit B (the "Registration Rights Agreement"); and (iv) such other certificates, instruments, opinions and documents as are otherwise set forth herein or contemplated hereby. Subject to the provisions of Section 13 hereto and prior to execution by the Company, the Company shall have the right to reject this Subscription Agreement and not issue the Securities to the Investor, in its discretion. 3. Termination of Offering. The Investor understands and agrees that it will not be entitled to exercise the rights of a Stockholder of the Company until an appropriate certificate representing the Preferred Stock for which it has subscribed has been issued to it on the day of the Closing. If (a) the Company shall have reasonably determined that an event has occurred or a condition exists which could materially and adversely affect the business or proposed business of the Company and that such possibility warrants termination of the Offering, (b) the conditions to the Closing of the Offering are not satisfied or (c) the Company elects to terminate the Offering, the Offering will be terminated, and the Company will not issue the Preferred Stock and the Company will not be entitled to payment of the purchase price for the Preferred Stock. 4. Representations and Warranties by Investor. The Investor hereby represents and warrants to the Company that: (a) it is an "accredited investor" as that term is defined in Rule 501(a) under the Securities Act of 1933, as amended (the "Act"); (b) it has the requisite knowledge and experience in financial and business matters through its managers to be capable of evaluating the merits and risks of an investment in the Company; (c) it has received and read the Reports and has evaluated the risks of investing in the Company; (d) it has been given the opportunity to ask questions of, and receive answers from, the Company concerning the terms and conditions of the Offering and to obtain additional information necessary to verify the accuracy of the information contained in the Reports or such other information as it desired in order to evaluate its investment; (e) in making the decision to purchase the Securities herein subscribed for, it has relied solely upon the Reports, the representations, warranties, agreements, undertakings and acknowledgments of the Company in this Subscription Agreement and independent investigations made by such Member; 2 3 (f) it understands that an investment in the Company involves certain risks and the Investor has taken full cognizance of and understands such risks, including those set forth in the Reports; (g) it understands that neither the Preferred Stock nor the shares of Common Stock into which the Preferred Stock is convertible has been registered under the Act, and agrees that the Preferred Stock and the Common Stock may not be sold, offered for sale, transferred, pledged, hypothecated or otherwise disposed of except in compliance with the Act and subject to the terms of this Subscription Agreement; (h) it understands that no federal or state agency has made any finding or determination as to the fairness of the investment in, or any recommendation or endorsement of, the Preferred Stock; (i) the Securities herein subscribed for are being acquired by the Investor in good faith solely for the account of the Investor, for investment purposes and not with a view to subdivision, distribution or resale. The Investor will not sell or otherwise dispose of any shares of the Preferred Stock or Common Stock, as the case may be, unless: (i) the Investor shall have advised the Company in writing that it intends to dispose of such shares of Preferred Stock or Common Stock, as the case may be, in a manner to be described in such advice, and counsel reasonably acceptable to the Company and its respective counsel shall have delivered to the Company an opinion reasonably acceptable to the Company and its respective counsel that registration is not required under the Act or under any applicable securities laws of any jurisdiction; or (ii) a registration statement on an appropriate form under the Act, or a post-effective amendment to such registration statement, covering the proposed sale or other disposition of such shares of Preferred Stock or Common Stock, as the case may be, shall be in effect under the Act and such shares of Preferred Stock or Common Stock or the proposed sale or other disposition thereof shall have been registered or qualified under applicable securities laws of any jurisdiction. The Investor acknowledges and agrees that the certificates representing the Preferred Stock and the Common Stock shall bear the following legend (unless subsequently registered under the Act): "The securities represented by this certificate have not been registered under the Securities Act of 1933 and may not be sold, exchanged, hypothecated or transferred in any manner except in compliance with such Act and that certain Subscription Agreement dated as of March 20, 1998 between the Corporation and Energy Systems Investors LLC." 3 4 The Investor also acknowledges that the Comparing may place a stop transfer order against transfer of the Preferred Stock and the Common Stock, if necessary in the Company's reasonable judgment, in order to assure compliance by the Investor with the terms of this Agreement. (j) The Investor represents and warrants that (i) the individual executing this Agreement has appropriate authority to act on behalf of the Investor and (ii) the Investor is not an Investment Company, as defined under the Investment Company Act of 1940, as amended. This Agreement has been duly executed and delivered by or on behalf of the Investor and constitutes the valid and binding agreement of the Investor, enforceable against the Investor in accordance with its terms. (k) The Investor understands that the Securities are being offered and sold, and the shares of Common Stock issuable upon conversion of the Preferred Stock are being offered hereby in reliance on specific exemptions from the registration requirements of the Act and that the Company is relying on the foregoing representations, warranties, agreements, undertakings and acknowledgments in determining the availability of such exemptions and the Investor's suitability as the purchaser of the Securities. 5. Representations and Warranties of the Company. The Company represents and warrants to the Investor that: (a) The Company has duly filed with the Commission all reports required to be filed by it by the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company has furnished to the Investor a true and correct copy of each Report. Each Report did not, as of the date on which it was signed, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (b) The financial statements (including the related notes) of the Company included in the Reports present fairly the financial position of the Company as of the dates indicated and its results of operations for the periods specified therein. All such financial statements have been prepared in accordance with generally accepted accounting principles on a basis consistently applied. (c) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with full power and authority (corporate and other) to own its properties and conduct its business as described in the Reports, and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the character of the business conducted by it or the location of the properties owned or leased by it makes such qualification necessary for the conduct of its business as described in the Reports except where the failure to be so qualified would not have a material adverse effect on the Company. 4 5 (d) The authorized capital stock of the Company consists of (i) 5,000,000 shares of Preferred Stock, par value S.01 per share, of which none are outstanding as of January 31, 1998, and (ii) 35,000,000 shares of Common Stock, par value $.01 per share, of which 5,160,609 shares are issued and outstanding as of January 31, 1998. At January 31, 1998, there were outstanding options, warrants and convertible debentures exercisable for or convertible into a total of 5,912,725 shares of Common Stock. The Company has all requisite power and authority to issue, sell and deliver the Preferred Stock in accordance with and upon the terms and conditions set forth in this Agreement and the Common Stock issuable upon conversion of the Preferred Stock; and all corporate action required to be taken by the Company for the due and proper authorization, issuance, sale and delivery of the Securities and Common Stock has been validly and sufficiently taken. The outstanding shares of Common Stock are, and the shares of Common Stock issuable upon conversion of the Preferred Stock in accordance with their respective terms will be, when issued, duly authorized, validly issued, fully paid and nonassessable. (e) Except as set forth in this Agreement, or as described in the Reports, subsequent to the respective dates as of which information is given in the Reports, the Company has not incurred any material liability or obligation, direct or contingent, or entered into any material transaction (except for the transactions contemplated hereby), whether or not in the ordinary course of business, and there has not been any material change on a consolidated basis in the capital stock, or any material increase in the short-term debt or long-term debt, or any material adverse change in the condition (financial or other), business, key personnel, properties or results of operations of the Company. (f) The Company is not in violation of any material provision of its Certificate of Incorporation or Bylaws or in default in the performance of any material obligation contained in any material agreement, indenture or other instrument. The performance by the Company of its obligations under this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach of the Certificate of Incorporation or Bylaws of the Company, or any material agreement, indenture or other instrument to which the Company is a party or by which it is bound, or (assuming the accuracy of the Investor's representations and warranties herein) any law, rule, administrative regulation or decree of any court or governmental authority having jurisdiction over the Company or its properties, or result in the creation or imposition of any material lien, charge, claim or encumbrance upon any property or asset of the Company. Except as required by the Act and applicable state securities or blue sky laws and except for the filing of the Certificate of Designation with the Secretary of State of the State of Delaware, no consent, approval, authorization or order of any court or governmental authority is required in connection with the consummation of the transactions contemplated by this Agreement. The rights granted to the Investor hereunder do not in any way conflict with and are not inconsistent with any rights granted to the holders of the Company's securities or debt instruments. (g) The Common Stock issuable upon conversion of the Preferred Stock, upon such issuance, will conform to the description thereof contained in the Reports. Except as 5 6 described in the Reports, there are no preemptive rights or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any shares of Common Stock pursuant to the Company's Certificate of Incorporation or Bylaws or any agreement or other instrument to which the Company is a party. Neither the Offering nor the sale of the Preferred Stock as contemplated in this Agreement gives rise to any rights for or relating to the registration of any shares of Common Stock (other than as provided in Section 10 of this Agreement). (h) The Company has full right, power and authority to enter into this Agreement and this Agreement has been duly authorized, executed and delivered by the Company and (assuming the accuracy of the Investor's and Members' representations and warranties herein) constitutes the legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms (except in all cases as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors' rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding may be brought). (i) Except as set forth in the Reports, there are no actions, suits or proceedings pending before or by any court or governmental agency or authority, or any arbitrator, which seek to restrain or prohibit the consummation of the transactions contemplated hereby or which might reasonably be expected to result in any material adverse change in the condition (financial or other), business or results of operations of the Company and, to the best of the Company's knowledge, no such action, suit or proceeding has been threatened. (j) The Company is not in violation of any law, ordinance, governmental rule or regulation or court decree to which it may be subject and the Company has not failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of its property or to the conduct of its business, which violation or failure to obtain is likely to have a material adverse effect on the condition (financial or other), business or results of operations of the Company, except that (i) the Company and its affiliates have not received all authorization required to construct the private geothermal heating district project currently being developed by Reno Energy LLC in Reno, Nevada, and (ii) the Company and its affiliates have not received authorization necessary to renew its air commissions permit with respect to its cogeneration unit in Lehi, Utah. 6. Covenants of the Investor. (a) The Investor covenants with the Company that at all times during which it holds the Preferred Stock or Common Stock, it shall comply with all applicable federal and state securities laws, the rules and regulations of the Nasdaq Stock Market, or any other market or exchange on which the Company's securities are traded, and any applicable state law relating to the governance of corporations, pertaining to the amount of equity ownership of the Company that the Investor or its members may beneficially own, the aggregate voting rights the Investor or its members may have in respect to all other stockholders of the Company, and the affective 6 7 change in control of the Company. Should the Company reasonably believe that any dividend or distribution of Preferred Stock or Common Stock, additional grants of Preferred Stock or Common Stock. Purchase Price adjustment or other occurrence would place the Investor, the members or the Company in violation of any such rules, regulations or laws, it shall have the right to take any action it deems necessary to avoid any such violation, including, but not limited to, substitution of cash for any payment of a stock dividend or distribution or grant of additional securities of the Company. (b) The Investor will not engage in any activity that would jeopardize the status of the Offering as an exempt transaction under the Act or under the laws of any state in which the Offering is made. (c) The Investor acknowledges that the representations, warranties, agreements, undertakings and acknowledgments are made by the Investor with the intent that they be relied upon by the Company in determining whether to issue the Securities. 7. Covenants of the Company. The Company covenants with the Investor that: (a) The Company will apply the net proceeds from the sale of the Securities to working capital and other general corporate purposes and possible acquisitions. (b) The Company will, so long as the Investor shall be the holder of Preferred Stock or Common Stock, furnish to the Investor, as soon as practicable after the end of each fiscal year, an annual report with respect to such year (including financial statements audited by independent public accountants) and, as soon as practicable after the end of each quarterly period (other than the last quarterly period) of each fiscal year, a statement (which need not be audited) of the results of operations of the Company for such period, and, to the extent not otherwise furnished, promptly upon the filing thereof, copies of all reports filed by the Company with the Commission pursuant to the Exchange Act. (c) The Company shall at all times keep in reserve the number of shares of its Common Stock issuable from time to time upon the conversion of all the outstanding Preferred Stock. (d) The Investor shall have the right to nominate one person to the Company's Board of Directors, which person shall be appointed to the Board of Directors at the Closing, and shall be included in the slate of the Board of Directors for a three-year term as presented to the Stockholders of the Company at their 1998 annual meeting. (e) The Investor shall have the right to purchase in any public or private offering of the Company's securities (exclusive of issuances of Common Stock or options to purchase Common Stock to officers, directors, employees and consultants of the Company, or stock issued in connection with an acquisition or merger by the Company) within two (2) years 7 8 of the Closing Date a portion of such offering, on the same terms offered to other investors, equal to the Investor's then-current percentage of equity ownership in the Company. (f) Neither the Company nor any of its officers, directors or employees will engage in any activity that would jeopardize the status of the Offering as an exempt transaction under the Act or under the laws of any state in which the offering is made. (g) The Company acknowledges that the representations, warranties, agreements, undertakings and acknowledgments are made by the Company with the intent that they be relied upon by the Investor and the Members in determining whether to subscribe for the Securities. (h) The Company shall grant the Investor additional shares of Preferred Stock or Common Stock (provided such grant does not increase the Investor's (or combined group of investors) voting control in the Company above 19.9% at such time unless previously approved by the stockholders of the Company) or pay the Investor in cash, or some combination thereof at the Company's option, if any non-operational, extraordinary or non-recurring event (an "Event") occurs within 24 months of the Closing Date and which arises from a situation preceding the Closing Date hereof, which diminishes the stockholder equity in the Company as of January 31, 1998, in an amount greater than $500,000. The amount of any additional grant of Preferred Stock (or Common Stock, or payment of cash pursuant to this Section 7(h), shall be equal to the decrease in stockholder equity multiplied by the Investor's then-current equity percentage ownership in the Company, divided by the lesser of (a) the average market price of the Company's Common Stock on the five days prior to the Event or (b) 150% of the Conversion Price. (i) Any dividends to be received by the Investor pursuant to Section 3 of the Company's Certificate of Designation of its Series A Convertible Preferred Stock shall be paid by the Company in cash or a grant of Common Stock or some combination thereof, at the option of the Investor. (j) Subject to the approval of a majority of the stockholders of the Company in accordance with the rules of Nasdaq, the Investor shall have the option to purchase up to an additional 222,000 shares of Preferred Stock within one year of the date hereof on the same terms and conditions as set forth herein. 8. Conditions of Investor Obligations. The Investor's obligations under this Agreement are subject to the accuracy of the representations and warranties of the Company made in Section 5 hereof in all material respects, and to the performance by the Company of its other obligations under this Agreement to be performed at or prior to the Closing. 9. Conditions of Obligations of the Company. The obligations of the Company under this Agreement are subject to the accuracy of the representations and warranties of the Investor and the Members made in Section 4 hereof in all material respects, and to the 8 9 performance by the Investor and the Members of their other obligations under this Agreement to be performed at or prior to the Closing. 10. Rule 144. The Company covenants that it will file the reports required to be filed by it under the Act and the Exchange Act and the rules and regulations adopted by the Commission thereunder (or, if it ceases to be required to file such reports, it will, upon the request of the Investor, make publicly available other information that fulfills the information requirements set forth in Rule 144 (c) (2)), and it will take such further action as the Investor may reasonably request, all to the extent required from time to time to enable the Investor to sell the Common Stock without registration under the Act within the limitation of the exemptions provided by (a) Rule 144 under the Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Commission. Upon the request of the Investor, the Company will deliver to it a written statement as to whether the Company has complied with such information disclosure and other requirements. 11. Expenses. The Company agrees that it will pay in the aggregate up to $25,000 of the Investor's and the members' legal and other expenses incurred in connection with this Offering. All expenses of the Investor or any member in excess of $25,000 shall be borne solely by them. 12. Notices. (a) Any notice required to be given or delivered to the Investor or the Members shall be mailed first class, postage prepaid, return receipt requested, to the Investor's address shown on the signature page hereof. (b) Any notice required to be given or delivered to the Company shall be mailed first class, postage prepaid, return receipt requested, to: U.S. Energy Systems, Inc. 515 N. Flagler Drive, Suite 702 W. Palm Beach, FL 33401 Attn: Richard A. Nelson, President and CEO 13. Break-up Fee. The Company shall pay the Investor a break-up fee (the "Break-up Fee") in the amount of $100,000 if the Company refuses for reasons within its control to issue the Preferred Stock to the Investor as set forth herein, and engages in a corporate financing transaction with another investor within 90 days of the termination of the Offering. 14. Survival of Representations and Warranties. All representations and warranties and agreements hereunder shall survive execution of this Agreement and delivery of the Securities. 15. Governing Law. This Agreement and the rights and obligations of the parties shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts made and to be performed wholly within that State. 9 10 IN WITNESS WHEREOF, the undersigned has executed this Subscription Agreement as of the date first above written. ENERGY SYSTEMS INVESTORS LLC, a Delaware limited liability company By: /s/ Lawrence I. Schneider Lawrence I. Schneider, Manager The terms of the foregoing including the subscription described therein are agreed to and accepted on this 20th day of March, 1998: U.S. ENERGY SYSTEMS, INC. By: /s/ Richard H. Nelson Richard H. Nelson, President and CEO 10 EX-99.3 4 REGISTRATION RIGHTS AGREEMENT 1 Exhibit 3 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is made and entered into to be effective as of this 20th day of March, 1998, between U.S. ENERGY SYSTEMS, INC., a Delaware corporation (the "Company") and ENERGY SYSTEMS INVESTORS, LLC, a Delaware limited liability company (the "Holder"). RECITALS I. Pursuant to that certain Subscription Agreement dated as of March 20, 1998 (the "Subscription Agreement"), the Company has agreed to provide to Holder certain registration rights with respect to the shares of the Company's Common Stock issuable upon the conversion of 250,000 shares of the Company's Series A Preferred Stock (the "Preferred Stock") issued to the Holder pursuant to the Subscription Agreement, and any shares of Common Stock granted as dividends or otherwise on or with respect to the Preferred Stock (all of such shares of Common Stock being referred to herein as the "Restricted Shares"). II. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed thereto in the Subscription Agreement. AGREEMENT NOW, THEREFORE, in consideration of the premises and covenants set forth in the Subscription Agreement, the parties agree as follows: 1. Incidental (Piggyback) Registration Rights. (a) Subject to the limitations set forth in this Agreement, if the Company at any time after the first anniversary of the Closing Date proposes to file on its behalf and/or on behalf of any of its security holders other than the Holder ("the demanding security holders") a registration statement (a "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), on any form (other than a Registration Statement on Form S-4 or S-8 or any successor form not available for registering the Restricted Shares, or any form for securities to be offered in a transaction of the type referred to in Rule 145 under the Securities Act or to employees of the Company pursuant to any employee benefit plan, respectively) for the general registration of securities to be sold for cash with respect to its Common Stock or any other class of equity security (as defined in Section 3(a)(11) of the Securities Exchange Act of 1934, as amended) of the Company, it will give written notice to the Holder at least thirty (30) days before the initial filing with the Securities and Exchange Commission (the "Commission) of such Registration Statement, which notice shall set forth the intended method of disposition of the securities proposed to be registered by the Company. The notice shall offer to include in such filing the aggregate number of shares of Restricted Shares as the Holder may request. 2 (b) If the Holder desires to have Restricted Shares registered under this Section 1, he shall advise the Company in writing within fifteen (15) days after the date of receipt of such offer from the Company, setting forth the amount of such Restricted Shares for which registration is requested. The Company shall thereupon include in such filing the number of shares of Restricted Shares for which registration is so requested; provided that nothing herein shall prevent the Company from abandoning or delaying any such registration at any time. In the event that the proposed registration by the Company is, in whole or in part, an underwritten public offering of securities of the Company, the Company shall not be required to include any of the Restricted Shares in such underwriting unless the Holder agrees to accept the offering on the same terms and conditions as the shares of Common Stock, if any, otherwise being sold through underwriters under such registration; provided, however, that if the managing underwriter advises the Company in writing that the inclusion of all Restricted Shares proposed to be included by the Holder in the underwritten public offering and other issued and outstanding shares of Common Stock proposed to be included therein by the persons other than the Holder, the Company (the "Other Shares") would jeopardize the success of the Company's offering, then the Company shall be required to include in the offering (in addition to the number of shares to be sold by the Company) only that number of Restricted Shares that the managing underwriter believes will not jeopardize the success of the Company's offering and the number of Restricted Shares and Other Shares not included in such underwritten public offering shall be reduced pro rata based upon the number of shares of Restricted Shares and Other Shares requested by the holders thereof to be registered in such underwritten public offering. In the event the Company chooses a registration form which limits the size offering either in terms of the number of shares or dollar amount, the Company shall not be required to include in the offering (in addition to the number of shares to be sold by the Company) Restricted Shares which would exceed such limits. (c) Notwithstanding anything to the contrary contained in this Section 1, in the event that there is a firm commitment underwritten public offering of securities of the Company pursuant to a registration covering Restricted Shares and the Holder does not elect to sell his Restricted Shares to the underwriters of the Company's securities in connection with such offering, the Holder shall refrain from selling such Restricted Shares so registered pursuant to this Section 1 during the period of distribution of the Company's securities by such underwriters and the period in which the underwriting syndicate participates in the after market; provided, however, that the Holder shall, in any event, be entitled to sell its Restricted Shares commencing on the 90th day after the effective date of such registration statement. 2. Demand Registration Rights. (a) At any time after the second anniversary of the Closing Date and prior to the fifteenth anniversary of the Closing Date (the "Registration Period"), the Holder shall have one right to request (a "Registration Request") by delivery of written notice to the Company that the Company effect the registration under the Securities Act, of all or any portion of the Restricted Shares. In such event, the Company shall use reasonable efforts to cause the Restricted Shares to be registered under the Securities Act and to promptly effect and comply with all such qualifications, compliances and requirements as may be necessary to permit the sale or other transfer of such Restricted Shares in the manner described in such Registration Request, 2 3 including, without limitation, qualifications under the applicable Blue Sky or other state securities laws (provided that the Company shall not be required in connection therewith to qualify as a foreign corporation or to execute a general consent to service of process in any state); provided, however, that (i) the Company shall not be obligated to file and cause to become effective more than one registration statement in which Restricted Shares are sold pursuant to this subsection (a) (it being understood that (a) the Company will not withdraw any such registration statement if the Holder exercises his rights to a piggyback registration under Section 1 until the Section 1 registration statement becomes effective or (b) if the Company does withdraw the registration statement under this section after the Holder exercises his piggyback rights prior to the effectiveness of the registration statement under Section 1 hereof and the Section 1 registration statement does not become effective, then the Company will file another registration statement pursuant to Section 2) and (ii) the Company shall not be obligated to conduct a special audit of its financial statements, unless such audit shall have been requested by the Commission, or in any other case unless the Holder undertakes to pay the costs associated with such audit. (b) Notwithstanding the foregoing, the Company may delay filing a registration statement, and may withhold efforts to cause the registration statement to become effective, if the Board of Directors of the Company determines in good faith that such registration would reasonably be likely to (i) interfere with or affect the negotiation or completion of any transaction that is being contemplated by the Company (whether or not a final decision has been made to undertake such transaction) at the time the right to delay is exercised, or (ii) involve initial or continuing disclosure obligations that would not be in the best interest of the Company's stockholders. If, after a registration statement becomes effective, the Company advises the holders of registered shares that the Company considers it appropriate for the registration statement to be amended, the holders of such shares shall suspend any further sales of their registered shares until the Company advises them that the registration statement has been amended. 3. Registration Procedures. (a) In connection with the filing of a Registration Statement pursuant hereto, the Company will: (i) prepare and file with the Commission a Registration Statement with respect to such securities and use its reasonable efforts to cause such Registration Statement to become and remain effective for a period of time (not to exceed thirty (30) days) required for the disposition of such securities by the Holder thereof; (ii) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all securities covered by such Registration Statement until the earlier of 3 4 such time as all of such securities have been disposed of in a public offering or the expiration of sixty (60) days. (iii) furnish to the Holder such number of copies of a summary prospectus or other prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents, as the Holder may reasonably request; (iv) use its reasonable efforts to register or qualify the securities covered by such Registration Statement under such other securities or blue sky laws of such jurisdictions within the United States as the Holder of such securities shall reasonably request (provided, however, the Company shall not be obligated to qualify as a foreign corporation to do business under the laws of any jurisdiction in which it is not then qualified or to file any general consent to service or process), and do such other reasonable acts and things as may be required of it to enable the Holder to consummate the disposition in such jurisdiction of the securities covered by such Registration Statement; (v) enter into customary agreements (including an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Common Stock and as shall be required in connection with the action taken by the Company; and (vi) promptly notify in writing the Holder of the happening of any event, during the period of distribution, as a result of which the Registration Statement includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing (in which case, if so requested by the Company in writing, the Holder shall promptly take action to cease making any offers of the Restricted Shares until receipt and distribution of a revised or supplemental prospectuses). (b) In connection with any registration hereunder, the Holder will (i) prior to issuing a Registration Request or notifying the Company of his intent to include Restricted Shares in a registration statement to be filed by the Company, agree in writing to convert the shares of Preferred Stock necessary to provide the Holder that number of shares of Common Stock to be sold pursuant to the registration statement not later than the effective date of such registration statement, (ii) furnish the Company in writing such information with respect to himself and the proposed distribution by him as reasonably requested by the Company and all such information necessary in order to assure compliance with Federal and applicable state securities laws and (iii) if the Holder elects to sell the Restricted Shares to underwriters, enter into an agreement with the managing underwriters in such form and containing such provisions as are customary in the securities business for such an arrangement between major underwriters and companies of the Company's size and investment stature, provided that such agreement shall not contain any provisions applicable to the Company which are inconsistent with the provisions 4 5 hereof and, provided further, that the time and place of the closing of such agreement shall be as mutually agreed upon between the Company and the managing underwriter. 4. Expenses. All expenses incurred in complying with this Agreement, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, expenses of any special audits incident to or required by any such registration and expenses (including attorneys' fees) of complying with the securities or blue sky laws of any jurisdictions pursuant to Section 3(d), except to the extent required to be paid by participating selling security holders by state securities or blue sky laws, shall be paid by the Company; provided, however, that the Holder (and not the Company) shall be liable for (i) all fees, discounts and commissions to any underwriter or broker, if any, (ii) all transfer taxes, if any, and (iii) all fees and disbursements of legal counsel to the Holder, if any. 5. Indemnification. (a) Indemnification by the Company. In the event of any registration of any Restricted Shares under the Securities Act pursuant to this Agreement, the Company shall indemnify and hold harmless the Holder, each underwriter of the Restricted Shares, if any, each such broker or any other person, if any, who controls any of the foregoing persons, within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which any of the foregoing persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement of a material fact contained in the Registration Statement under which such Restricted Shares were registered under the Securities Act, any final prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or, with respect to any final prospectus, necessary to make the statements therein in light of the circumstances under which they were made, not misleading; and shall reimburse the Holder, such underwriter, broker and each such controlling person for any legal expenses reasonably incurred by any of them in connection with defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be obligated to so indemnify the Holder, such underwriter, broker or any such controlling person insofar as such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said Registration Statement, said final prospectus or said amendment or supplement in reliance upon and in conformity with information furnished to the Company or such underwriter or broker by the Holder in writing for use in preparation thereof. (b) Indemnification by Holder. Before Restricted Shares held by the Holder shall be included in any Registration Statement pursuant to this Agreement, the Holder shall indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 5(a) hereof for the indemnification of the Holder by the Company) the Company, each director of the Company, each officer of the Company who shall sign such Registration Statement and any person who controls the Company within the meaning of the Securities Act, with respect to any untrue statement or omission from such Registration Statement or final prospectus contained 5 6 therein or any amendment or supplement thereto, if such untrue statement or omission was (i) made in reliance upon and in conformity with information furnished to the Company by the Holder in writing for use in the preparation of such Registration Statement, final prospectus or amendment or supplement or (ii) contained in any Registration Statement which was utilized by the Holder or any controlling person or affiliate of the Holder after the Holder was notified, in accordance with Section 3(a)(vi) hereof, that such Registration Statement contained an untrue statement of a material fact or omitted to state any material fact. (c) Indemnification Procedures. Promptly after receipt by an indemnified party of notice of the commencement of any action involving a claim referred to in this Section 5, such indemnified party will, if a claim in respect thereof is made against any indemnifying party, give written notice to the latter of such claim and/or the commencement of such action. In case any such action is brought against an indemnified party, the indemnifying party will be entitled to participate in and assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party shall be responsible for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof, provided that if any indemnified party shall have reasonably concluded that there may be one or more legal defenses available to such indemnified party which conflict in any material respect with those available to the indemnifying party, or that such claim or litigation involves or could have an effect upon matters beyond the scope of the indemnity agreement provided in this Section 5, such indemnifying party shall reimburse such indemnified party and shall not have the right to assume the defense of such action on behalf of such indemnified party and such indemnifying party shall reimburse such indemnified party and any person controlling such indemnified party for that portion of the fees and expenses of any counsel retained by the indemnified party which are reasonably related to the matters covered by the indemnity agreement provided in this Section 5. The indemnifying party shall not make any settlement of any claims indemnified against thereunder without the written consent of the indemnified party or parties, which consent shall not be unreasonably withheld. Notwithstanding the foregoing provisions of this Section 5, if pursuant to an underwritten public offering of the Common Stock, the Company, the Holder and the underwriters enter into an underwriting or purchase agreement relating to such offering which contains provisions covering indemnification among the parties thereto in connection with such offering, the indemnification provisions of this Section 5 shall be deemed inoperative for purposes of such offering. 6. Certain Limitations on Registration Rights. Notwithstanding the other provisions of this Agreement, the Company shall not be obligated to register the Restricted Shares of the Holder if, in the opinion of counsel to the Company, the sale or other disposition of the Holder's Restricted Shares may be effected without registering such Restricted Shares under the Securities Act. 6 7 7. Miscellaneous. (a) Notice Generally. Any notice, demand, request, consent, approval, declaration, delivery or other communication hereunder to be made pursuant to the provisions of this Agreement shall be sufficiently given or made if in writing and either delivered in person with receipt acknowledged, delivered by reputable overnight courier, telecopied and confirmed separately in writing by a copy mailed as follows or sent by registered or certified mail, return receipt requested, postage prepaid, addressed as set forth in the Subscription Agreement. (b) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto; provided, however, that, the Holder's rights hereunder may not be assigned or transferred without the prior written consent of the Company. (c) Governing Law. This Agreement shall be governed by the laws of the State of Delaware, without regard to the provisions thereof relating to conflict of laws. (d) Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provisions shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. (e) Entire Agreement. This Agreement, together with the Subscription Agreement, is intended by the parties as a final expression of their agreement and intended to be a complete exclusive statement of the understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement supersedes all prior agreements and understandings between the parties with respect to the subject matter hereof. (f) Counterparts. This Agreement may be executed in any number of separate counterparts, each of which shall collectively and separately, constitute one agreement. (g) Dispute Resolution. In the event that a dispute arises in connection with any matter directly or indirectly related to this Agreement which cannot be resolved by the parties hereto or by mediation of the parties hereto, the parties shall resolve any such dispute through arbitration in New York, New York in accordance with the regulations of the American Arbitration Association. 7 8 IN WITNESS WHEREOF, the Company and the Holder have executed this Agreement as of the date first above written. U.S. ENERGY SYSTEMS, INC., a Delaware corporation By: /s/ Richard H. Nelson ------------------------------------ Richard H. Nelson, President and CEO ENERGY SYSTEMS INVESTORS, LLC, a Delaware limited liability company By: /s/ Lawrence I. Schneider ------------------------------------ Lawrence I. Schneider, Manager 8 -----END PRIVACY-ENHANCED MESSAGE-----