<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997 Commission file number 0-9964
BESICORP GROUP INC.
(Name of small business issuer in its charter)
New York 14-1588329
(State or other jurisdiction of incorporation or organization) (Internal Revenue
Service Employer Identification No.)
1151 Flatbush Road, Kingston, N.Y. 12401
(Address of principal executive offices (Zip Code)
(914) 336-7700
(Issuer's Telephone Number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class: Common Stock, $.10 par value
Name of each exchange on which registered: AMEX Emerging Company Marketplace
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. __X__
The issuer's revenues for its most recent fiscal year: $14,567,551
The aggregate market value of Common Stock, $.10 par value, held by
nonaffiliates based upon the closing AMEX sale price on June 23, 1997 was
approximately $22,275,747.
The number of outstanding shares of Common Stock, $.10 par value, on June 23,
1997 was 2,934,656 Common Shares.
Transactional Small Business Disclosure Format: Yes____ No __X_
DOCUMENTS INCORPORATED BY REFERENCE:
The information called for by Part III is incorporated by reference from the
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held September 30, 1997, which will be filed on or before July 29, 1997.
<PAGE>
BESICORP GROUP INC.
Cross-Reference Sheet/Documents Incorporated by Reference Securities and
Exchange Commission Item Number and Description
<TABLE>
<CAPTION>
<S> <C> <C>
PART I Page No. in
this Form
10-KSB
Item 1. Description of Business 1 - 13
Item 2. Description of Properties 13
Item 3. Legal Proceedings 14 - 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder 17 - 18
Matters
Item 6. Management's Discussion and Analysis or Plan of Operation 19 - 24
Item 7. Financial Statements 25 - 46
Item 8. Changes in and Disagreements with Accountants on Accounting and 46
Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; 47
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation 47
Item 11. Security Ownership of Certain Beneficial Owners and Management 47
Item 12. Certain Relationships and Related Transactions 47
PART IV
Item 13. Exhibits, Lists and Reports on Form 8-K 47 - 48
Signatures 49
Index to Exhibits 50 - 51
</TABLE>
<PAGE>
This Form 10-KSB contains forward-looking statements. Additional written and
oral forward-looking statements may be made by the Company from time to time in
Securities and Exchange Commission ("SEC") filings and otherwise. The Company
cautions readers that results predicted by forward-looking statements,
including, without limitation, those relating to the Company's future business
prospects, revenues, working capital, liquidity, capital needs and income are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those indicated in the forward-looking statements, due to
risks and factors identified in this Form 10-KSB and as may be identified from
time to time in the Company's future filings with the SEC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS:
BESICORP GROUP INC. (together with its subsidiaries the "Company") specializes
in the development of power projects and energy technologies. The Company was
organized under the laws of the State of New York in 1976.
Working with partners, the Company develops independent power projects (the
"Project Segment"). Domestically, the Company has partnership interests in six
completed gas-fired cogeneration plants located in New York State.
Internationally, the Company has an interest in a development project to build a
coal-fired power plant in India. In addition, the Company is pursuing the
development of new power projects in countries within Asia and Latin America.
The Company also provides engineering, system design, project management and
turn-key installation of photovoltaics ("PV") and thermal energy systems and
fabricates, manufactures, markets and distributes alternative energy projects
through a domestic and international network (the Product Segment"). In November
1996 the Company discontinued its non-agricultural heat transfer product lines.
During the five years ended March 31, 1997, the revenues and income (loss) per
segment were as follows:
<TABLE>
<CAPTION>
Year ended Project Segment Product Segment
<S> <C> <C> <C> <C>
Revenues Income (loss) Revenues Income (loss)
3/31/97 $ 9,638,394 $ 2,888,567 $ 4,929,157 $ (1,714,845)
3/31/96 4,046,089 (902,722) 4,033,430 (1,575,597)
3/31/95 9,702,467 1,325,526 4,593,675 (1,692,603)
3/31/94 5,566,798 1,264,220 3,759,470 (1,257,699)
3/31/93 16,035,598 9,965,074 2,855,822 (280,283)
</TABLE>
See Note 17 of Notes to Consolidated Financial Statements for details of segment
information.
PROJECT SEGMENT - DEVELOPMENT AND OWNERSHIP ACTIVITIES:
Business Strategy and Revenue Sources The Company develops independent power
projects with the primary intent to maintain long- term interests. The Company's
Project Segment business strategy is to bring early-stage development, financial
and analytical skills to a project and build alliances with partners who offer
strategic services and capital to new projects. The Company develops projects
jointly with partners and holds its ownership interests, primarily in the form
of partnership interests, through special-purpose entities formed to be the
legal owners of the projects. Financing for these entities is secured solely by
their respective assets.
The development of a typical project involves structuring long-term
relationships with participants in one or more projects. Project concepts and
technical options are reviewed, and necessary contracts and relationships are
established. Rights to projects may also be acquired in various stages of
development. Each transaction and relationship is unique in that the terms and
conditions are specifically negotiated based upon the requirements and
circumstances of the proposed project, in particular, the location and the
capabilities of the participants.
A significant portion of the Company's selling, general and administrative
expenses is expended on project development activities. Prior to projects
entering the construction phase, the Company's internal costs as well as certain
third party development costs are funded from its internal sources, borrowings,
and development funding agreements.
The Company has earned development fees by taking an active role in the early
stage development of each project. Development fees are generally paid from the
proceeds of the project loans and are capitalized as part of the cost of the
project. The amounts and timing of such payments of development fees are subject
to negotiations with the parties to the transaction and represent the Company's
fees for services it provides. There can be no assurance that the Company will
earn development fees on new project opportunities. The Company structures
proposed projects from an economic and financial perspective. The Company
prepares financial models of the project taking into account operating
parameters and risk considerations, documents the project, and arranges and
negotiates appropriate development capital and construction and long-term
financing. In addition, the Company negotiates power purchase agreements
("PPA"), host contracts, permitting arrangements, engineering and construction
contracts, fuel supply and transportation agreements, and financial
participation and risk sharing agreements. A PPA is a long-term contract
pursuant to which the electrical output of the cogeneration plant will be
purchased by a utility. The PPA is the most critical contract in the project
development process, as a significant portion of the revenues are generally
derived thereunder.
Other anticipated sources of revenues and cash flows are income and
distributions from project operations and management fees for coordinating and
overseeing partnership activities during the construction and operating phases
of the projects.
Construction, operation, engineering, and design of a project are contracted on
a turn-key basis to third parties. When development is substantially complete,
the projects typically enter into construction financing and when construction
is complete, the projects enter into long-term debt and/or equity financing. To
the maximum extent possible, financing is arranged on a limited- recourse basis,
with the sources of repayment being limited to the revenues generated by the
particular project(s) being financed. Except to the extent that the Company
provides bridge or other financing to a project, the debt of the partnership is
collateralized solely by the assets of the project(s), without guarantees of
repayment by the Company.
Each of the Company's domestic projects discussed under "Project Descriptions"
is owned by a separate partnership entity of which a Besicorp subsidiary is a
general partner, and, in certain instances, a separate subsidiary of the Company
holds a limited partner interest as well. The types of ownership entities formed
with respect to international power projects are dependent upon foreign and
domestic taxation, limiting liability and other legal considerations.
Partnership profits and losses are allocated in accordance with each applicable
partnership agreement and cash distributions, if any, in excess of debt service
and operating expenses are paid to the Company and other partners. Upon
commencement of operations of a power facility, the Company continues to monitor
and manage its ownership interests.
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As a result of a decline in opportunities in the independent power industry in
the United States, as discussed below, the Company's strategy has been to focus
on foreign project development primarily in Latin America and Asia. During
Fiscal 1997 the Company continued to expend significant effort to develop
projects in Brazil and Mexico. To date the Company has only developed operating
projects located in the United States. There can be no assurance that the
Company will be successful in international project development.
Industry Information
In recent years, the domestic independent power industry has stagnated.
Utilities have lower "avoided costs" of power, due largely to a surplus of spot
market short-term energy. In addition, utilities have cited level or decreasing
demand for power as a basis for not signing PPA's with independent, non-utility
generators ("NUG's"). Furthermore, certain regulatory entities have created
uncertainty as to their stance towards NUG's.
As the independent power industry has slowed in the United States, opportunity
has emerged internationally resulting in a competitive market. Many of the less
developed nations have the need for increased electric power generating capacity
but have limited access to capital. Many of these countries have invited
proposals from foreign developers to meet their needs for development.
Projects overseas require long development periods and considerable capital. The
risks in less developed markets are also considerable, encompassing political
and expropriation concerns, currency translation and the risks associated with
operation. The market is relatively new and unproven, presenting a variety of
risks and challenges to the developers of independent power.
Funding for international projects has come from various sources, including the
private sector (both domestic and international), government sponsors, the
Export-Import Bank of the United States, the Overseas Private Investment
Corporation and other commercial banks. There can be no assurance that the
Company will be able to secure any funding or sufficient funding in connection
with its international development projects.
NIMO Contracts
New York State, where the Company owns interests in six completed power plants,
has undergone particular turbulence with regard to the independent production of
power. Niagara Mohawk Power Corporation ("NIMO") is the principal purchaser of
electricity produced by the Company's five operating projects. In 1995 NIMO,
which has a large number of contracts with independent power producers, sought,
through the Public Service Commission of the State of New York ("PSC"), a
significant reduction in the price for power purchased from NUG's, and has
declared that it may avail itself of a bankruptcy proceeding in order to obtain
relief from the high cost of independent power contracts.
During 1995 revised PPA's for the Company's five NIMO projects became effective.
These agreements were renegotiated by the Company and its partner, Kamine
Development Corporation (together with its affiliated companies, "Kamine") in
1994. (See "Significant Development Relationships" below.) The revised contracts
provide NIMO with more favorable terms and operating flexibility and removed
accounting liabilities termed "tracking accounts" from all of the contracts and
reduced the risk of curtailment in running hours. The implementation of the
revised PPA's required the restructuring of financing arrangements and numerous
other underlying agreements for each project.
On August 1, 1996 NIMO offered to terminate 44 of its power contracts with 19
independent power producers ("IPP's"), including the Company's five PPA's. On
March 10, 1997 an agreement in principle was announced whereby NIMO would
restructure or terminate the 44 PPA's. On July 10, 1997 it was announced that a
master restructuring agreement ("MRA") was entered into between NIMO and 16
IPP's holding 29 PPA's, including the Company's five PPA's, formalizing the
agreement in principle with respect to those parties. The IPP's will receive
combinations of cash and common stock. Certain IPP's also will enter into
restructured contracts.
On May 21, 1997 the PSC announced that it was granting utilities the right to
activate curtailment clauses which are contained in certain PPA's. Activation of
these curtailment clauses would likely result in a reduction or elimination of
running hours for applicable projects. However, because the risk of curtailment
in running hours was reduced for its five NIMO projects, the Company does not
anticipate that this announcement will have an adverse impact on its operations.
In addition to the degree of uncertainty created by NIMO's threatened
bankruptcy, there can be no assurance as to the ultimate impact the current NIMO
negotiations will have on the Company's operations.
Project Descriptions
The following is a list of projects, including operating projects and projects
under development, in which Besicorp has a material interest. Projects under
development are listed only where there is a PPA or comparable major contract in
place, and, in the opinion of the Company, there is a reasonable likelihood of
completing development of that project. From time to time, the Company may
discontinue development of a project, or make material modifications to the
proposed scope of the project, including costs, capacity, and estimated
commercial operation dates.
<TABLE>
<CAPTION>
Actual or
Estimated Percentage
Facility Equity Actual or
Cost Ownership at Estimated
(millions) June 30, 1997 Commercial
Project Name (1) (2) Operation Date
- -------------- ------------ ------------- ------------------
<S> <C> <C> <C>
IN OPERATION:
Carthage
Cogeneration
Facility (58
megawatts) $67 50.0% November 1991
South Glens
Falls
Cogeneration
Facility(58
megawatts) 63 50.0 November 1991
Natural Dam
Cogeneration
Facility (49
megawatts)(3) 86 50.0 July 1993 (3)
Syracuse
Cogeneration
Facility (79
megawatts) 183 35.715 February 1994 (3)
Beaver Falls
Cogeneration
Facility (79
megawatts) 199 50.2 June 1995 (3)
Allegany
Cogeneration
Facility (55
megawatts)
(3) 95 50.0 December 1994 (4)
Krishnapatnam
Project (500 (estimated)
megawatts) 700 50.0 (estimated) 2001
</TABLE>
<PAGE>
(1) Represents the financing provided to the facility for physical plant,
contract costs and letter of credit and working capital needs.
(2) Indicates the Company's ownership in the project entities.
(3) Pursuant to the terms of the PPA, the project is currently operating in
standby availability status.
(4) In November 1995 Kamine/Besicorp Allegany L.P. filed a voluntary petition
for bankruptcy under Chapter 11. The Allegany Cogeneration Facility is currently
not operating as a result of the bankruptcy and protracted litigation involving
the project. See Item 1. Description of Business. "Allegany Cogeneration
Facility" and Item 3. Legal Proceedings.
The Company earns fees for developing its projects that are recognized as
revenue when deemed payable under the agreements. The project partnerships are
expected to generate income from the operation of the facilities; however, in
early years of operation, significant book losses may be incurred, and the
Company will not recognize income until such time as the operating income of the
projects exceeds accumulated losses. During Fiscal 1995 the Carthage, South
Glens Falls and Natural Dam partnerships generated income from operations which
exceeded the cumulative prior year losses, and consequently the Company
recognized income from these partnerships. The Carthage and South Glens Falls
partnerships continued to generate income during Fiscal 1996, and the Company
recognized additional income from these partnerships. During Fiscal 1997 the
Carthage and South Glens Falls partnerships again generated income, and, in
addition, the Natural Dam and Beaver Falls partnerships earned income from
operations in excess of cumulative prior year losses. As a result, the Company
recognized income on these four projects. There can be no assurance that income
will be recorded from these or other project partnerships in the near future as
income is dependent upon the results of operations which may vary. See Note 5 to
the Notes to Consolidated Financial Statements.
The following is an expanded discussion of the status of each of the projects
listed above.
Domestic Projects:
CARTHAGE COGENERATION FACILITY
The Carthage Cogeneration Facility, located in Carthage, NY, at the site of a
paper mill owned by James River II, Inc. is a natural gas fired cogeneration
plant which is leased from General Electric Capital Corp. ("GECC") by a project
partnership, of which the Company is a 50% owner. A revised PPA is in place to
sell approximately 58MW of electricity to NIMO over a period of 35 years
commencing in November 1994. The facility was developed in partnership with
Kamine. Capital costs of this facility were approximately $67 Million.
The facility was constructed by Ansaldo North America, Inc. (together with its
affiliated companies "Ansaldo") on a completely turn-key basis. Commercial
operations commenced in November 1991. Steam is provided to the host mill under
terms of an energy services agreement. Operations and maintenance of the
facility are provided by Stewart and Stevenson Operations, Inc. ("SSOI"). The
primary supplier of natural gas for the project is Renaissance Energy Ltd.
("Renaissance") of Alberta, Canada. In 1990 the Company assigned a portion of
its future development fees in this project to the Kamine/Besicorp GlenCarthage
Partnership ("GlenCarthage") as discussed below.
During Fiscal 1997 the Company recorded $63,530 of management fees from the
project and anticipates receiving additional management fees throughout the term
of the lease agreement. Ownership distributions of $2,406,220 and distributions
of $133,950 to fund gross receipt taxes were received by the Company in Fiscal
1997.
<PAGE>
SOUTH GLENS FALLS COGENERATION FACILITY
The South Glens Falls Cogeneration Facility, located in South Glens Falls, NY,
at the site of a paper mill owned by Encore Paper Company, Inc., is a natural
gas fired cogeneration plant which is leased from GECC by a project partnership,
of which the Company is a 50% owner. A revised PPA is in place to sell
approximately 58MW of electricity to NIMO over a period of 35 years commencing
in November 1994. The facility was developed in partnership with Kamine. Capital
costs of this facility were approximately $63 Million.
The facility was constructed by Ansaldo on a completely turn-key basis.
Commercial operations commenced in November 1991. Steam is provided to the host
mill under terms of an energy services agreement. Operations and maintenance of
the facility are provided by SSOI. The primary supplier of natural gas for the
project is Renaissance. In 1990 the Company assigned a portion of its future
development fees in this project to GlenCarthage as discussed below.
During Fiscal 1997 the Company recorded $60,451 of management fees from the
project and anticipates receiving additional management fees throughout the term
of the lease agreement. Ownership distributions of $2,592,261 and distributions
to fund gross receipt taxes of $144,875 were received by the Company in Fiscal
1997.
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
The Company assigned a portion of its expected future development fees in the
Carthage and South Glens Falls projects to Nova Northwest, Inc. ("Nova") in
consideration of funding of $2,500,000 on November 9, 1990, which was paid to
GlenCarthage in which a subsidiary of the Company is a 50% general partner. In
conjunction with the sale/leaseback transactions during Fiscal 1995 with GECC,
this partnership's obligation to Nova was repaid in full by obtaining loans from
the Carthage and South Glens Falls projects. Distributions of development fees
paid to GlenCarthage by the two projects, which were in excess of the
partnership's debt service requirements, in the aggregate amount of $670,027
were received by the Company during Fiscal 1997 under this arrangement.
NATURAL DAM COGENERATION FACILITY
The Natural Dam Cogeneration Facility, located in Gouverneur, NY, at the site of
a paper mill owned by The Fonda Group, is a natural gas fired cogeneration plant
which is leased from GECC by a project partnership of which the Company is a 50%
owner. A revised PPA is in place to sell approximately 49MW of electricity to
NIMO over a period of 35 years commencing in November 1994. Pursuant to the
terms of the PPA, during the period through January 2001 the facility is
expected to be on standby availability. The facility was developed in
partnership with Kamine. Capital costs of this facility were approximately $86
Million.
The facility was constructed by Century Contractors West, Inc., on a completely
turn-key basis. Commercial operations commenced in July 1993. Steam is provided
to the host mill under terms of an energy services agreement. Operations and
maintenance are provided by SSOI. The primary supplier of natural gas for the
project is Norcen Energy Resources Limited ("Norcen"), formerly known as North
Canadian Marketing Inc.
During Fiscal 1997 the Company recorded $71,050 of management fees from the
project and anticipates receiving additional management fees throughout the term
of the lease agreement. Ownership distributions of $1,640,853 and distributions
to fund gross receipt taxes of $33,517 were received by the Company during
Fiscal 1997.
CARTHAGE, SOUTH GLENS FALLS AND NATURAL DAM COGENERATION FACILITIES FINANCINGS
During Fiscal 1995 the Company entered into long-term financing agreements in
the form of sale/leaseback transactions with GECC for the Carthage, South Glens
Falls and Natural Dam projects. The lease agreements for the Carthage and South
Glens Falls projects have 25-year terms and the Natural Dam project has a
20-year term, all commencing in December 1994. The financings for these three
projects are cross-collateralized. A default in payment on one project would
result in an encumbrance on otherwise distributable cash from either or both of
the other projects.
SYRACUSE COGENERATION FACILITY
The Syracuse Cogeneration Facility, located in Solvay, NY, on the site of a
chemical plant owned by the Hanlin Group, is a natural gas fired cogeneration
plant which is owned by a project partnership of which the Company is a 35.715%
owner. A revised PPA is in place to sell up to 79MW of electricity to NIMO over
a period of 35 years commencing in November 1994. Pursuant to the terms of the
PPA, during the period through January 2001 the facility is expected to be on
standby availability. The facility was developed in partnership with Kamine.
Capital costs of this facility were approximately $183 Million. The facility was
constructed by Ansaldo on a completely turn-key basis. Ansaldo was granted a
limited partnership interest in consideration of the bridge financing it
provided to the project, thereby reducing the Company's ownership interest from
50% to 35.715%. Commercial operations commenced in February 1994. Steam is
provided to the New York State Fair, a division of the New York State Department
of Agriculture and Markets, under terms of an energy services agreement.
Operations and maintenance of the facility are provided by SSOI. The primary
supplier of natural gas for the project is Norcen.
A development fee of $1.25 Million was received by the Company on April 30, 1997
upon conversion of the construction financing to term financing and was
recognized as revenue during Fiscal 1997. During Fiscal 1997 the Company
recorded $68,662 of management fees from the project and anticipates receiving
additional management fees throughout the term of the financing agreement. To
date no ownership distributions have been received from the Syracuse project,
and the Company can not predict when material distributions, if any, will
commence. However, distributions of $83,077 were received by the Company during
Fiscal 1997 to fund gross receipt taxes.
BEAVER FALLS COGENERATION FACILITY
The Beaver Falls Cogeneration Facility, located in Beaver Falls, NY, on the site
of a paper mill owned by Fiber Mark, Inc. ("FI"), (formerly Specialty
Paperboard, Inc.), is a natural gas fired cogeneration plant which is owned by a
project partnership of which the Company is a 50.2% owner. A revised PPA is in
place to sell up to 79MW of electricity to NIMO over a period of 35 years
commencing in May 1995. Pursuant to the terms of the PPA, during the period
through January 2001 the facility is expected to be on standby availability. The
facility was developed in partnership with Kamine. Capital costs of this
facility were approximately $199 Million.
The facility was constructed by Ansaldo on a completely turn-key basis.
Commercial operations commenced in June 1995. Steam is provided to the host mill
as well as to an adjacent mill owned by Armstrong Gasket Products, Inc., which
was purchased from FI. Operations and maintenance of the facility are provided
by SSOI. The primary supplier of natural gas for the project is Norcen.
During Fiscal 1997 the Company recorded $60,523 of management fees from the
project and anticipates receiving additional management fees throughout the term
of the financing agreement. To date no ownership distributions have been
received from the Beaver Falls project, and the Company can not predict when
material distributions, if any, will commence. However, distributions of
$171,649 were received by the Company during Fiscal 1997 to fund gross receipt
taxes.
SYRACUSE AND BEAVER FALLS COGENERATION FACILITIES FINANCINGS
For both Syracuse and Beaver Falls, construction and permanent financing was
provided by bank groups led by Deutsche Bank AG, New York branch ("Deutsche")
(as agent), and subordinated loans were provided by Ansaldo and affiliates of
Siemens Corporation. In October 1994 the financing agreements for these projects
were restructured in order to accommodate the revised NIMO PPA's. The
<PAGE>
Company intends to refinance these projects with longer-term financing, but was
unable during Fiscal 1997, and is currently unable to do so primarily due to
NIMO's uncertain financial circumstances. Given the structure of the current
financing, it is unlikely that the Company will receive cash distributions until
a refinancing can be effected.
ALLEGANY COGENERATION FACILITY
The Allegany Cogeneration Facility, located in Rossberg, NY, is a natural gas
fired cogeneration plant which is owned by a project partnership of which the
Company is a 50% owner. Commercial operations of the facility commenced in
December 1994. However, as a result of litigation among and between the parties
to the project, the facility is currently not in operation (see Item 3. Legal
Proceedings.) The Company can not estimate when or if this facility will
commence commercial operations again.
A PPA is in place to sell approximately 55MW of electricity to Rochester Gas and
Electric ("RG&E") over a period of 25 years. The facility was developed in
partnership with Kamine. Capital costs of this facility were approximately $95
Million.
In August 1993 construction and permanent financing was provided by GECC. At the
closing the Company received development fees of $750,000 and expense
reimbursements of $71,696. Construction had commenced in March 1993 under bridge
financing provided by Besicorp and Kamine. At the closing Kamine/Besicorp
Allegany L.P. ("KBA"), the project partnership, paid S&S $300,000 on behalf of
the Company, thereby reducing the bridge financing from $2,800,000 to
$2,500,000. The bridge financing was converted to a subordinated term loan due
from the project partnership. It was anticipated that, in turn, these moneys
would be advanced to Allegany Greenhouse, Inc. ("AGI"), the owners of the
originally contemplated steam host, a greenhouse facility, to be repaid over a
term of approximately twelve years unless sooner refinanced. At March 31, 1997,
$1,944,624 of the $2,500,000 had been funded to AGI.
The facility was constructed by Ansaldo on a completely turn-key basis.
Operations and maintenance of the facility are provided by SSOI. The primary
supplier of natural gas for the project is MidCon Gas Services Corp. of Houston,
Texas. A distilled water facility owned by GECC is the steam host for this
project. AGI, under terms of a 25-year energy services agreement, was to operate
a greenhouse as a steam host. (See "Item 3, Legal Proceedings" for further
discussion of this project.) During Fiscal 1997 the Company recorded $53,460 of
management fees from the project, and payments continue to be made as called for
under the financing agreement as approved by the Bankruptcy Court. (See "Item 3,
Legal Proceedings".) To date no ownership distributions have been received from
Allegany, and the Company can not predict when material ownership distributions,
if any, will commence. No ownership distributions are expected during the
pendency of the ongoing litigation regarding this project. The Company received
no distributions to fund gross receipt taxes during Fiscal 1997.
International Projects:
KRISHNAPATNAM PROJECT (UNDER DEVELOPMENT)
The Krishnapatnam project contemplates the development of a coal-burning power
plant to be located near the village of Krishnapatnam, 120 miles north of Madras
on India's Eastern coast. This project is 50% owned by the Company. However, it
is likely that, due to the size of the project and the amount of debt and equity
capital necessary to be raised, the Company's ownership interest will be reduced
by the participation of equity investors. A PPA was entered into in November
1994 with the Andhra Pradesh State Electricity Board of India to sell
approximately 500MW of electricity. A renegotiated PPA is expected to be signed
prior to financial closing and the start of construction. The facility is being
developed in partnership with Chesapeake Power Investments Co. ("Chesapeake").
(See Significant Development Relationships" below.) Capital costs to construct
this project are currently estimated to be approximately $700 Million.
Completion of the pre-construction phase of the project requires forming
strategic alliances and achieving contracts for engineering procurement, fuel,
and operations and maintenance and various permits and other local approvals, as
well as making arrangements for debt and equity for the project's total cost.
Assuming that the development of this project is successful, including obtaining
project financing, current plans are to begin construction in 1998 and commence
commercial operations in 2001.
With respect to the development of the Krishnaptnam project in India, since 1995
the Company has secured commitments from third parties funding an aggregate $5.5
Million for project development and a potential $65 Million for equity.
Through March 31, 1997, the Company has received $935,926 for reimbursement of
development costs. Additional development financing will be sought from new
participants in Fiscal 1998. Such funding will be used to continue development
of the Krishnapatnam project. There can be no assurance that additional
development funds will be secured.
SIGNIFICANT DEVELOPMENT RELATIONSHIPS
In 1986 the Company entered into a Master Project Development Agreement ("MPDA")
with Kamine pursuant to which the companies agreed to jointly develop certain
cogeneration plants in North America, excluding Mexico. In addition, the MPDA
provides for sharing of future project development opportunities of either of
the two companies which meet the criteria of the MPDA. All cogeneration projects
in operation, as discussed under the heading "Project Descriptions," have been
developed as part of the Kamine relationship. All projects developed with Kamine
are to have equal ownership and sharing of development fees unless otherwise
modified by agreement. Each party bears its own internal costs of development.
The MPDA extends through 2000.
The Company is pursuing opportunities for the development of projects
internationally. In connection with this effort, in 1994 the Company entered
into a partnership agreement with Chesapeake and Chesapeake Power Transport,
Inc. The agreement, as amended, provides for the joint development of power
plants located in India. The agreement expires in January 2006. Pursuant to this
agreement, the Company is developing the Krishnapatnam project in India.
REGULATORY COMPLIANCE
The Company's domestic power production project activities are governed by
certain federal and state laws and regulations. PURPA was enacted by Congress in
order to remove certain impediments to the development of cogeneration and small
power production facilities and to stimulate energy conservation. Among other
things, PURPA requires that (i) electric utilities purchase, at just and
reasonable rates, any energy made available to such utilities by cogeneration
facilities, such as the Company's domestic power projects, that meet certain
criteria ("Qualifying Facilities") and (ii) such utilities may not discriminate
against Qualifying Facilities. In addition, PURPA requires that utilities (x)
sell to Qualifying Facilities any energy and capacity requested by such
Qualifying Facilities, (y) make such interconnections with any Qualifying
Facility as to permit the sale and purchase of energy and capacity and (z)
transmit the energy or capacity of such Qualifying Facility to other electric
utilities. PURPA thus enables Qualifying Facilities to compete in ways in which
they were previously unable. All of the Company's existing domestic cogeneration
projects discussed under the heading "Project Descriptions" are Qualifying
Facilities.
PURPA also grants exemptions to Qualifying Facilities from certain federal and
state regulations. Specifically, Qualifying Facilities are exempt from
regulation under the Federal Power Act, the Public Utility Holding Company Act,
and state laws relating to (i) electric utility rates and (ii) the financial and
organizational regulation of electric utilities, other than state laws relating
to the implementation of the arrangements between electric utilities and
Qualifying Facilities and state environmental and siting requirements.
The Company's domestic projects are subject to federal, state and local laws and
administrative regulations which govern the emissions and other substances
produced by a project and the geographical location, zoning, land use and
operation of a project. Applicable federal environmental laws and regulations
generally require that a wide variety of permits and other approvals be
<PAGE>
obtained before the commencement of construction or operation of an
energy-producing facility and that the facility then operate in compliance with
such permits and approvals.
To the best of the Company's knowledge, all of its domestic cogeneration
projects have been developed and/or constructed in full compliance with
applicable federal, state, and local laws and regulations. It is the Company's
belief that neither existing regulations nor any pending legislation would
require material capital expenditures in future periods, nor would the Company's
earnings or competitive position be adversely affected.
FOREIGN REGULATORY COMPLIANCE AND OTHER RISKS OF INTERNATIONAL OPERATIONS
The Company's present strategy is to focus on foreign project development. The
Company's business is subject to the risks of international operations,
including compliance with and unexpected changes in foreign regulatory
requirements, trade barriers, currency control regulations, fluctuations in
exchange rates, political instability, local economic conditions, and
difficulties in staffing and managing foreign operations. To date the Company
has only developed operating projects located in the United States. There can be
no assurance that the Company will be successful in international project
development.
PRODUCT SEGMENT - TECHNOLOGY ACTIVITIES:
The Company, through wholly-owned subsidiaries, fabricates, manufactures,
distributes and develops solar electric or PV products and systems and solar
thermal and heat transfer technology products and systems. In November 1996 the
Company discontinued its non-agricultural heat transfer product lines offered
through its subsidiary, Bio Thermal Unlimited, Inc.
The Company's strategy in the solar electric business is to become a niche
marketer and a worldwide supplier of solar electric power products and systems
to the growing domestic and international markets. Through its existing
arrangements, the Company is building a diversified portfolio of power supply
projects and products while establishing strategic marketing and manufacturing
alliances based upon the Company's proprietary technologies and expertise. In
addition to utilizing the Company's own resources, products are developed using
government grants, utility-funded projects, and technology demonstration
contracts to the extent practicable.
The Company conducts its solar thermal and heat transfer businesses through a
subsidiary, Bio-Energy Systems, Inc. ("BIO"). The principal markets are solar
pool heating and heating systems for commercial greenhouses.
Effective April 1, 1997, the Company began conducting its PV business through a
single subsidiary, SunWize Technologies, Inc. ("SunWize"). SunWize was
incorporated in February of 1997 in connection with the consolidation of three
subsidiaries (SunWize Energy Systems, Inc., SunWize Specialty Products, Inc. and
SunWize Marine Technologies, Inc.) into one company.
SunWize has been organized into three strategic business units: (1) Power and
Infrastructure Projects, which offers large-scale PV power project development,
execution and aftermarket service for infrastructure applications, including
telecommunications, rural electrification, water pumping, desalination,
ice-making and other remote power needs. The products range from large,
shelter-based PV generator hybrid power stations to small, modular stand-alone
PV systems. (2) PV Module Manufacturing and Integration, which specializes in
high value-added products powered by solar electric power modules. SunWize has
developed proprietary and unique solar power supply products for the wireless
electronics and telecommunications industries as well as proprietary polymer
encapsulation production processes for low-cost PV modules that can be
integrated into other products for consumer, commercial and industrial use. (3)
PV Product Fabrication and Distribution, which markets and sells packaged solar
electric power products and systems, system components, and system accessories.
NYSERDA Projects The Company, through its SunWize subsidiary, has entered into
various funding and development arrangements with the New York State Energy
Research and Development Authority ("NYSERDA") in connection with certain of its
energy technologies. The following describes the NYSERA-related projects:
In March 1994 NYSERDA co-sponsored with SunWize a research initiative aimed at
lowering the cost and widening the use of solar electric technology for consumer
products by encapsulating PV cells in urethane. NYSERDA provided $112,774 of
funding for this project, to be repaid from profits on future sales of any
products which have been developed as a result of this project. This initiative
was completed in March 1996, and the agreement was modified to include
additional development activities designed to increase production efficiency and
lower the overall cost of PV modules. NYSERDA is providing $219,696 of the
estimated costs of $491,266 for these activities, to be repaid from profits on
future sales of the additional products developed. The estimated completion date
is September 1998.
In September 1994 NYSERDA entered into a cost sharing agreement with SunWize to
build ten skid-mounted PV hybrid power systems: nine for demonstration at
certain remote government and non-profit facilities across the state and one
which is to be delivered to an independent testing lab to verify performance
under the National Electric Code. Pursuant to this agreement, the Company will
be reimbursed $366,142 of its estimated costs of $420,622 by NYSERDA, to be
repaid from revenues on future sales of these systems to other parties. Six
hybrid power systems were completed and shipped during Fiscal 1997. However, due
to a delay by NYSERDA in the processing of site agreements, the construction of
the remaining systems is not expected to be completed for shipment until August
1997. In March of 1996 this agreement was expanded to include two additional
initiatives. The first is the development of a controller for the PV hybrid
system designed to improve the energy efficiency of the system. The second
involves the development of a PV ice-making system to be tested in Mexico
pursuant to an agreement with Sandia National Laboratories and the State
Government of Chihuahua. NYSERDA is providing $140,130 of the estimated costs of
$295,265 for these projects, to be repaid from revenues on future customer sales
of PV hybrid systems. The estimated completion date for these new initiatives is
April 1998.
In March of 1996 a separate agreement was signed by SunWize with NYSERDA to
develop a series of electronic controllers for small- scale PV systems of up to
175 watts. NYSERDA is providing $23,154 of the estimated costs of $48,889 for
this project, to be repaid from revenues on future sales of these controllers.
The estimated completion date for this new project is July 1997.
In February 1997 NYSERDA entered into an agreement with SunWize to design,
develop, manufacture, test and deliver 200 PV solar home systems to a remote
community in Chihuahua. NYSERDA is providing $114,495 of the estimated costs of
$318,236 for this project, to be repaid from revenues on future customer sales
of this product. The remaining costs of this project will be shared by SunWize,
Sandia National Laboratories and the Chihuahua Directorate of Rural Development.
The estimated completion date is March 1999.
In March 1997 SunWize and NYSERDA entered into a cost-sharing agreement to
develop a photovoltaic cellular telephone power supply and charger. The product
will allow any cellular phone hand-set to operate directly on solar power, will
be compact enough to be carried in a handbag and will have the ability to be
deployed in several different ways. NYSERDA is providing $196,193 of the
estimated costs of $416,612 for this project, to be repaid from revenues on
future customer sales of this product. The estimated completion date is May
1998.
While a significant portion of the Company's Product Segment development is in
collaboration with NYSERDA, the Company does not believe that it is dependent on
NYSERDA for the development and manufacture of its current or future products.
Loss of NYSERDA sponsorship would necessitate that the Company replace such
funding through internal resources or other third-party arrangements.
<PAGE>
The Company markets and sells products through dealers and distributors
nationwide with solar thermal products primarily sold in sunbelt areas. In
addition, the Company has distributors in Europe, the Pacific Rim, and other
markets.
In January 1997 SunWize and Samsonite Corporation mutually terminated their
agreement to jointly develop, manufacture and market solar electric-powered
cases. These cases were intended to be used to power and recharge laptop
computers, cellular phones and other electronic products that ordinarily require
batteries for portable use. The Company will continue the development of this
product line independently.
CUSTOMERS AND BACKLOG
The Company fills orders from inventory and draws from its inventory to
fabricate and manufacture custom orders; therefore, backlog is generally filled
within the following quarter. Certain sales may be drop-shipped from
manufacturers' locations. Backlog of orders was $382,410, $497,664 and $286,892
as at March 31, 1997, March 31, 1996 and March 31, 1995, respectively. During
the year ended March 31, 1997, sales to one customer accounted for approximately
23% of Product Segment sales. No customer accounted for more than 10% of sales
for the years ended March 31, 1996 and 1995.
Competition The Company competes with approximately ten businesses engaged in
the distribution of solar electric products, of which three have larger market
share than the Company. Concerning value-added solar electric products and
systems, the Company believes that the market is highly fragmented. The Company
competes with many businesses engaged in the sale of solar thermal energy
products. Of such companies, there are several in the industry with significant
market share. In the heat transfer business the Company competes with several
other businesses, two of which hold significant market share.
The Company competes primarily on the basis of service, technical merits, and
pricing.
RESEARCH AND DEVELOPMENT
The Company has continued to expand its efforts in technology development,
particularly solar electric products. Expenditures for research and development
for the last three years were $646,817 in Fiscal 1997, $426,239 in Fiscal 1996
and $480,459 in Fiscal 1995. Personnel expenses, comprising a substantial
portion of these amounts, were $301,055 in Fiscal 1997, $324,662 in Fiscal 1996
and $431,002 in Fiscal 1995. Of the total amounts, expenses attributable to the
Company's agreements with NYSERDA were $414,307 in Fiscal 1997, $229,658 in
Fiscal 1996 and $115,883 in Fiscal 1995. The Company anticipates comparable
expenditures in Fiscal 1998 to further its efforts in technology development.
SUPPLY
The Company purchases solar electric products from several large manufacturers,
of which Siemens Solar Industries of Camarillo, California is the principal
supplier. There are no problems foreseen in the Company's ability to purchase
materials for any of its businesses. The Company procures extruded materials for
its proprietary solar thermal and heat transfer products from producers of
plastic and synthetic rubber extrusions using dies made to order for the
Company. The principal supplier of proprietary extruded materials is The Johnson
Rubber Company, a division of Duramax, Inc. of Middlefield, Ohio. The Company
purchases non- proprietary extruded materials from several producers of plastic
extrusions.
The Company may at times fabricate solar electric systems by combining solar
electric panels with other components. The Company fabricates pre-assembled
solar thermal and heat transfer modules for use in applications of its products
in both standard and customized sizes.
Patents The Company has a number of patents relating to installation and
assembly of solar thermal and heat transfer products. These patents provide
competitive advantages to the Company by enabling exclusive use of certain
assembly and installation methods. The Company believes it will still be able to
compete in its markets upon the expiration of the patents.
The Company owns the following U.S. patents relative to its product sales:
4,270,596 (method and apparatus by which tubes of SolaRoll are separated
from one another for connection to headers and to form crossovers remote
from headers - expires June 2, 1998);
4,341,002 (tool for installation of tube mat - expires July 27, 1999);
4,349,070 (insert connections between tube ends of SolaRoll mat - expires
September 14, 1999);
4,353,352 (solar thermosyphon water heater - expires October 12, 1999);
4,354,546 (header pair and tube mat connection - expires October 19, 1999);
and
4,399,319 (thermally insulated composite flexible hose - expires August 10,
2000).
EXPORT SALES
The Company's export sales, principally to Europe and the Pacific Rim, for the
Fiscal years ended March 31, 1997, March 31, 1996 and March 31, 1995 were
$297,761, $455,114 and $548,669, respectively. Generally, the Company's sales to
its foreign distributors are made based upon payment in U.S. dollars by
confirmed irrevocable letters of credit or by wire transfer.
EMPLOYEES
As of March 31, 1997, the Company had 82 full-time employees. None of these
employees are represented by a union. In the opinion of management, its
relationship with its employees is good.
The Company's growth and profitability are dependent upon, among other things,
the abilities and experience of the Company's management team, including Mr.
Michael F. Zinn, the Company's Chairman, Chief Executive Officer and President.
If the services of Mr. Zinn or a number of the Company's executive officers were
no longer available to the Company, the Company's business, financial condition
and results of operations could be adversely affected.
WARRANTIES
The Company has no warranty obligations with respect to the cogeneration
projects described above.
Warranty expense for the Company's Product Segment sales is provided on the
basis of management's estimate of the future costs to be incurred under product
warranties presently in force. Adjustments to revenue or expense are reflected
in the period in which revisions to such estimates are deemed appropriate.
Warranty expense for Fiscal years 1997, 1996 and 1995 was $295,333, $176,117 and
$178,943, respectively.
ITEM 2. DESCRIPTION OF PROPERTIES
The following is a description of the Company's principal properties:
1151 Flatbush Road, Kingston, New York: owned and subject to mortgages totaling
$643,406 at March 31, 1997. The property includes land, a building measuring
8,000 square feet housing the corporate, project development and technology
offices, and additional rental units.
<PAGE>
48 Canal Street, Ellenville, New York: owned and subject to a mortgage totaling
$63,400 at March 31, 1997. The property includes land and a building measuring
52,000 square feet. Approximately half this space is used for general
administration, sales offices, fabrication and distribution activities and for
inventory warehousing. The remaining space is not needed for operations and is
currently vacant.
1 Sun Street, Stelle, Illinois: leased for $550 per month currently. The term of
the lease is one year. The solar electric business occupies 2,000 square feet in
a commercial building which serves as a sales office.
90 Boices Lane, Kingston, New York: leased for $8,500 per month currently. The
term of the lease is six months and renews automatically for successive
six-month periods with either party having the right to terminate the lease upon
90 days' written notice. The solar electric business occupies 17,000 square feet
in a commercial building of which 2,000 square feet are office space and 15,000
square feet are for warehousing, manufacturing and assembly.
The Company believes its facilities, as specified above, are suitable and
adequate for its current operations. See Management's Discussion and Analysis -
Liquidity and Capital Resources.
ITEM 3. LEGAL PROCEEDINGS
On or about May 2, 1996 certain officers, directors, employees, former employees
of the Company and certain spouses and affiliates thereof, were served subpoenas
by the U.S. Attorney's office for the production of documents and/or potential
testimony before a United States Grand Jury in White Plains, New York. The
Company complied with the document request contained in the subpoena. On May 15,
1997 the United States District Court, Southern District, New York, returned an
indictment against the Company and its Chairman, Chief Executive Officer and
President, Michael F. Zinn, charging each with five counts of conspiring to
violate the Federal campaign finance laws and making false statements in
connection with the 1992 Congressional campaign of Maurice D. Hinchey.
On June 19, 1997 the Company and Mr. Zinn each entered guilty pleas to two
felony counts in United States District Court for the Southern District of New
York, White Plains, New York. The Company entered a guilty plea to one count of
causing a false statement to be made to the Federal Election Commission ("FEC")
and one count of filing a false tax return, both in connection with
contributions to the 1992 election campaign of Congressman Maurice Hinchey. Mr.
Zinn similarly entered a guilty plea to one count of causing a false statement
to be made to the FEC and one count of causing the filing of a false tax return
in connection with contributions to the 1992 election campaign of Congressman
Maurice Hinchey. On September 24, 1997 both the Company and Mr. Zinn are
scheduled to be sentenced. Sentencing was originally scheduled to be held on
September 19, 1997. The Company is uncertain as to what effect or consequences
this development will have to its current or future business activities.
On March 29, 1993 James Lichtenberg commenced a shareholder's derivative action
now pending in New York Supreme Court, Ulster County, entitled Lichtenberg v.
Michael F. Zinn, et al. The Company is named as nominal defendant in this
shareholder's derivative action, which also names as defendants Michael F. Zinn,
Steven I. Eisenberg, and Martin E. Enowitz, who were directors and officers at
the time the action was filed. The complaint alleges that the directors breached
their fiduciary duties to the Company by, among other things, the issuance of
stock to themselves in lieu of cash compensation, allegedly for inadequate
consideration, and by the accounting treatment given to the Company's interest
in various partnerships which own and operate cogeneration facilities, which
allegedly depressed the price of the Company's stock. The plaintiff is seeking
an award of damages to the Company, including punitive damages and interest, an
accounting and the return of assets to the Company, the appointment of
independent members to the Board of Directors, the cancellation of shares
allegedly improperly granted, and the award to the plaintiff of costs and
expenses of the lawsuit including legal fees. The defendants denied the
allegations of the complaint. The Company believes that meritorious defenses
have been asserted, and that the outcome of the action will have no material
adverse impact upon the Company. On May 6, 1994 the Board of Directors of the
Company formed a Special Litigation Committee ("SLC") comprised of independent,
outside directors to investigate the allegations made in the action and
determine if continued prosecution of the action is in the best interest of the
Company. On March 28, 1995, after an extensive investigation of the allegations
made in the complaint, the SLC issued a resolution finding that the continued
prosecution of the derivative action was not in the best interest of the
Company. By further resolution dated April 27, 1995, the SLC instructed the
Company's outside counsel to take the necessary steps in court to seek to have
the action dismissed. Pursuant to resolution of the SLC, on May 18, 1995, a
motion to dismiss the action based on the recommendation of the SLC was filed
with the Court and was being held in abeyance by the Court pending the
completion of limited discovery. On February 26, 1997 the Company renewed its
motion to dismiss which is sub judice. Oral argument on the matter was heard on
June 12, 1997, and the Company is awaiting a decision on the matter.
The Allegany Cogeneration Facility was completed in December 1994. The Company
holds a 50% equity interest in the project through the project partnership,
Kamine/Besicorp Allegany L.P. ("KBA"). Under the terms of the project's power
purchase agreement (the "Agreement"), power was to be supplied to Rochester Gas
and Electric Corporation ("RG&E"). On September 7, 1994 RG&E filed an action in
the Supreme Court of the State of New York, County of Monroe, against KBA,
Kamine Allegany Cogen Co., Inc., Beta Allegany Inc., Kamine Development Corp.
and Allegany Cogeneration Inc. The complaint, as amended, asks for a declaratory
judgment rescinding the Agreement on the grounds of mutual mistake,
impossibility, frustration, commercial impracticability and anticipatory breach
of the Agreement and claims for breach of contract and material
misrepresentations concerning the size of the plant and seeking reformation of
the Agreement. On January 3, 1995 KBA served its amended answer and
counterclaimed for breach of contract. On January 20, 1995 the defendants filed
a motion for summary judgment seeking dismissal of RG&E's complaint. On March
16, 1995 the Court denied defendants' motion for summary judgment, and KBA
appealed the denial. By order dated May 30, 1997 the Appellate Division affirmed
the lower Court's decision. RG&E has recently filed a motion to amend its
complaint, for which the response time has not yet expired. On June 26, 1997 KBA
removed the action to the United States District Court for the Western District
of New York. Management of the Company believes RG&E's actions have no basis and
KBA intends to vigorously defend this matter.
On January 27, 1995 KBA filed an action in the United States District Court,
Western District of New York, against RG&E for violations of Section 2 of the
Sherman Act alleging that RG&E had engaged in anti-competitive conduct. KBA is
seeking damages as well as injunctive relief preventing RG&E from engaging in
anti-competitive conduct. This suit was filed by KBA as a result of RG&E's
refusal to accept power from KBA under the Agreement. On November 2, 1995 the
Court denied KBA's motion for a preliminary injunction, except to the extent
that RG&E agreed to purchase power from the Company at the SC5 rate of
approximately $.02. RG&E currently is not purchasing power. In light of the
bankruptcy proceeding discussed below, this action is presently on hold.
On November 5, 1995 General Electric Capital Corp. ("GECC"), the construction
lender, exercised certain rights under a Pledge Agreement dated as of June 20,
1993, through which it replaced the directors and management of the general
partners of KBA, including Beta Allegany Inc., a wholly-owned subsidiary of the
Company.
On November 13, 1995 KBA filed a voluntary petition with the U.S. Bankruptcy
Court, District of New Jersey, to reorganize the business of KBA under Chapter
11 of the Bankruptcy Code. KBA also filed an adversary proceeding against RG&E
seeking enforcement of the automatic stay, specific performance, breach of
contract and breach of the covenant of good faith and fair dealing. It also
sought injunctive relief seeking enforcement of the power purchase agreement
during the determination of the adversary proceeding. This injunctive relief was
denied by the Bankruptcy Court. RG&E has counterclaimed in the adversary
proceeding claiming commercial impracticability, impossibility, mutual mistake,
frustration, anticipatory breach and reformation and recoupment of the
agreement.
<PAGE>
On November 21, 1995 RG&E filed a motion with the Bankruptcy Court asking that
the Court abstain from hearing the state law claims raised in the adversary
proceeding and permit the parties to litigate those claims in the pending New
York Supreme Court action. KBA opposed RG&E's motion, and the Bankruptcy Court
denied RG&E's request. On appeal, however, the District Court reversed and
remanded to the Bankruptcy Court for further consideration. On remand, the
Bankruptcy Court ruled on March 19, 1997, that the state law claims raised in
the adversary proceeding should be litigated in the pending New York State Court
action referenced above. The Bankruptcy Court also lifted the automatic stay so
that the State Court action could proceed. In May 1996 RG&E filed an $8 Million
proof of claim in the bankruptcy case seeking to recoup certain moneys it had
paid while the temporary restraining order granted in the Western District
action was in effect. Management believes KBA has meritorious claims against
RG&E and maintains meritorious defenses against the claims asserted by RG&E. KBA
intends to vigorously litigate these matters. As of March 27, 1997 the
Bankruptcy Court has approved $26.7 Million in debtor-in-possession interim
financing extended by GECC through July 31, 1997.
On October 26, 1994 KBA initiated an action in the Supreme Court of the State of
New York, County of New York, against Allegany Greenhouse Inc. ("AGI"), seeking,
among other things, to recover possession of the greenhouse which AGI had
contracted to develop, construct and operate on property adjacent to KBA's
cogeneration facility. KBA commenced this suit due to various defaults of AGI
under its contractual commitments to KBA, including its obligation to complete
the greenhouse by July 31, 1994. To date KBA has advanced to AGI the principal
sum of approximately $4,050,000, including the Company's share of $1,944,624,
with accrued interest due thereon. KBA is seeking damages in an amount not less
than the principal and accrued interest due under the term note in addition to
other costs and disbursements associated with this action, as well as possession
of the greenhouse and the real property upon which the greenhouse is located.
KBA's request for the appointment of a receiver was denied by the Court. On
December 24, 1994, AGI filed a counterclaim against KBA, asserting claims for
breach of contract, tortious interference with business relations, fraud and
damage to trade reputation. On September 19, 1995 KBA exercised certain voting
rights pursuant to the greenhouse financing agreements and replaced the
directors and management of AGI. AGI subsequently relinquished possession of the
greenhouse to KBA. These efforts are in part the subject of Ammerlaan
Agro-Protecten B.V.'s ("Ammerlaan") motion for preliminary injunction, as
discussed below. Management believes that KBA has meritorious claims against AGI
and meritorious defenses against AGI's counterclaims. As part of the bankruptcy
proceeding discussed above, this Supreme Court action has been stayed.
On December 2, 1994 Ammerlaan Agro-Projecten B.V. ("Ammerlaan"), the contractor
hired by AGI to construct the greenhouse, filed a mechanics lien in the amount
of $4,352,976 against the real property on which the greenhouse is located. On
January 17, 1995 Ammerlaan initiated an action in the Supreme Court of the State
of New York, County of Allegany, against KBA, AGI, Kamine Development Corp., the
Company, Industrial Development Agency of Allegany County, GECC, Pooler
Enterprises Inc. ("Pooler") and Fillmore Gas Company, Inc. ("Fillmore") to
foreclose on its mechanics lien and to recover certain moneys allegedly owed it.
On September 25, 1995, KBA filed counterclaims against Ammerlaan, alleging that
Ammerlaan failed to design and construct the greenhouse in accordance with the
contract specifications and applicable building codes. On November 3, 1995,
Ammerlaan filed a motion for preliminary injunction seeking to enjoin KBA, KDC,
AGI's new management, and the Company from engaging in construction activities
at the greenhouse site without Ammerlaan's consent. On November 3, 1995, the
Court granted a temporary restraining order prohibiting the foregoing parties
from engaging in such activities pending the hearing on the preliminary
injunction. The hearing on the preliminary injunction, however, was subsequently
stayed as a result of KBA's bankruptcy filing. The Bankruptcy Court subsequently
granted KBA permission to undertake repairs to the greenhouse over Ammerlaan's
objections, and authorized the expenditure of $650,000 for that purpose. On
April 9, 1997 Ammerlaan filed a motion with the Bankruptcy Court asking that the
automatic stay be lifted with respect to the Allegany County action. KBA has
opposed Ammerlaan's motion, and the motion was heard by the Bankruptcy Court on
May 29, 1997. The Bankruptcy Court reserved decision. Management believes that
KBA has meritorious claims against Ammerlaan and meritorious defenses to
Ammerlaan's claims.
On November 8, 1990 SNC, Ltd. ("SNC") commenced an action in New York Supreme
Court, New York County, against the Company, Kamine and certain of their
affiliates ("Kamine/Besicorp Defendants") and Ansaldo. The complaint alleges
that SNC was awarded the contracts to construct the Carthage and South Glens
Falls Cogeneration Facilities by the two project partnerships developing such
facilities and that the contracts were subsequently awarded to Ansaldo in breach
of SNC's contract. The plaintiff is seeking an award of compensatory damages, in
an undetermined amount in excess of $680,000, together with punitive damages,
against the various defendants. On January 15, 1991, the Kamine/Besicorp
Defendants answered the complaint and denied all the material allegations and
asserted various affirmative defenses. In February 1995 both the Kamine/Besicorp
Defendants and Ansaldo moved for summary judgment dismissing SNC's complaint. On
May 22, 1996, the Court granted, in part, the defendants' motion for summary
judgment finding that SNC and the Kamine/Besicorp Defendants "neither entered
into a contract for the construction of the projects nor agreed to a
mobilization payment." The Court denied the motion insofar as it sought
dismissal of plaintiff's other claims of: (1) breach of preliminary agreement to
negotiate in good faith; (2) unjust enrichment/quantum meruit; (3) promissory
estoppel; and (4) fraud and negligent misrepresentation.
All parties appealed the Trial Court's May 22, 1996 decision. The basis for the
Kamine/Besicorp defendants' appeal was the contention that the judge erred in
failing to apply the requisite legal analysis to the facts and should have
dismissed all of SNC's claims. SNC's cross-appeal sought reversal of the Court's
dismissal of SNC's breach of contract claims. By its decision and order dated
April 3, 1997 the Appellate Court affirmed the Trial Court's decision in all
respects. On April 10, 1997 the Ansaldo defendants filed a motion in the
Appellate Court for an order granting reargument of its appeal or for granting
Ansaldo leave to appeal to the Court of Appeals. On May 15, 1997 the Appellate
Court denied Ansaldo's motion and remanded the case to the Trial Court. At a
status conference held on June 9, 1997 the Trial Court ordered the case to be
submitted to non-binding mediation pursuant to the Commercial Division's program
of Alternative Dispute Resolution. The parties are currently engaged in the
process of choosing a neutral mediator. The mediation is scheduled to commence
within thirty days of confirmation of the mediator's appointment. If the
mediation does not result in a mutually agreeable settlement, the case will
proceed through the litigation process in the Supreme Court, New York County.
The Company believes that it and the other Kamine/Besicorp Defendants have
asserted meritorious defenses.
In April 1990 the Company commenced an action in United States District Court,
Northern District of New York, against Tecogen, Inc. ("Tecogen") and its parent
company Thermo Electron Corporation for breach of contract and breach of
warranty in connection with the Company's purchase of a cogeneration system
installed in St. Francis Hospital by Tecogen on a "turn-key" basis. The Company
sought compensatory damages. Tecogen counterclaimed for the unpaid purchase
price and extras in the amount of approximately $187,000 plus interest. In
October 1992 St. Francis Hospital shut down the operation of the cogeneration
system. In April 1993 the court excluded consequential and incidental damages
and limited the Company's recoverable damages. The case was tried without jury
in March 1995 in the United States District Court in Syracuse, New York, and a
decision is pending. At the conclusion of trial, the Company sought actual
damages in excess of $1,100,000. In July 1993 the Company commenced a separate
action in United States District Court, District of New Jersey, against Tecogen,
a licensed engineer who was an employee of Tecogen, and Cortese Corporation for
negligence, indemnification, and professional malpractice. The New Jersey suit
has been stayed pending the decision of the New York Court. The Company believes
that the outcome of these lawsuits will be favorable.
Other than as discussed above, the Company is party to various legal matters in
the ordinary course of business, the outcome of which the Company does not
believe will materially affect its operations. However, the Company may incur
substantial legal fees and other expenses in connection with these matters.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were
submitted by the Company to a vote of the shareholders through solicitation of
proxies or otherwise, during the quarter ended March 31, 1997.
PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS The Company's Common stock has been traded publicly since March 6, 1981,
and it has been listed since November 22, 1993 on the American Stock Exchange
Emerging Company Marketplace ("AMEX ECM") under the symbol BGI.EC. Prior to that
date, the Company's stock was traded in the over-the-counter market, and its
market quotations were available on the NASD OTC Bulletin Board.
In May 1995 the Board of Governors of the American Stock Exchange voted to
discontinue the ECM. As a result, no new companies will be listed on the ECM.
However, the Exchange is allowing current ECM companies to remain listed.
Although it is the Exchange's stated intention to allow sufficient time for
companies to qualify for and graduate to the primary list as quickly as
possible, there can be no assurance that the Company will meet the criteria for
such listing in the future.
In the following table the prices represent the high and low traded prices as
reported on the AMEX ECM for the two-year period ended March 31, 1997.
<PAGE>
Fiscal Year Ended March 31,
<TABLE>
<CAPTION>
High Low
---------- ----------
<S> <C> <C> <C>
1996 First Quarter 14-1/8 7
Second Quarter 12 8-3/8
Third Quarter 11-1/2 8
Fourth Quarter 15-1/2 9-5/8
1997 First Quarter 16 11-3/4
Second Quarter 14-3/4 10
Third Quarter 15-1/8 11-1/4
Fourth Quarter 20-7/8 12-1/4
</TABLE>
There were 1,882 shareholders of record of the Company's common stock as of
March 31, 1997. The Company has never paid any cash dividends on its common
stock and does not plan to pay any cash dividends in the foreseeable future.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS: 1997 1996 1995 1994 1993
- ----------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Revenues $14,567,551 $ 8,079,519 $14,296,142 $ 9,326,268 $18,891,480
Net Income (Loss) 1,173,722 (2,478,319) (367,077) 6,521 9,684,791
Income (Loss) Per Common
Share (a) .40 (.84) (.12) .00 3.29
BALANCE SHEETS:
- -----------------------------
Working Capital $ 2,577,849 $ 903,090 $ 2,872,506 $ 5,865,300 $ 4,543,937
Total Assets 11,836,799 9,404,990 10,869,342 13,080,989 11,772,977
Long-Term Debt 3,834,483 3,137,912 3,485,082 3,559,786 1,654,790
Other Long-Term Liabilities 2,725,232 2,775,180 1,653,175 2,510,945 1,400,826
Total Liabilities 9,104,760 8,144,015 6,886,323 7,872,066 5,970,865
Shareholders' Equity (b) 2,732,039 1,260,975 3,983,019 5,208,923 5,802,112
Dividends Per Common Share NONE NONE NONE NONE NONE
Dividends Per Preferred Share NONE NONE NONE NONE 2.03
</TABLE>
(a) Income (loss) per common share is computed on income (loss) for each year
after deducting dividends on preferred stock divided by the weighted average
number of common shares and share equivalents outstanding during the year. Stock
options and warrants were not used in the computations, when the effect on
income per share was anti-dilutive or was not material. Conversion of preferred
stock was not assumed, since the effect on income per share would be anti-
dilutive.
(b) See Note 9 of the Notes to Consolidated Financial Statements regarding
Common Stock transactions.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
RESULTS OF OPERATIONS
The Company's net income for Fiscal 1997 of $1,173,722 represents an increase of
$3,652,041 from the net loss of $2,478,319 for Fiscal 1996. The increase in
Fiscal 1997 is due primarily to an increase in Income from Partnerships of
$4,462,335 and an increase in development and management fees of $1,298,788,
which were partially offset by an increase in selling, general and
administrative expenses of $1,771,799, a decrease of $279,828 in gross margins
on the Company's product sales and an increase in the provision for income taxes
of $308,400.
The Company's net loss for Fiscal 1996 of $2,478,319 represents a decrease in
net income of $2,111,242 an compared to Fiscal 1995. The decrease in Fiscal 1996
was due primarily to a $1,925,813 decrease in development and management fees, a
decrease of $346,876 in gross margins on the Company's product sales, an
increase in the provision for income taxes of $354,500 and a $151,591 decrease
in interest and other investment income, which were partially offset by a
decrease in selling, general and administrative expenses of $630,459.
The Project Segment's net income for Fiscal 1997 increased by $3,791,289 to
$2,888,567 from the net loss of $902,722 recorded for Fiscal 1996. The increase
is due primarily to the increases in income from partnerships and development
and management fees of $4,462,335 and $1,298,788, respectively, partially offset
by an increase in selling, general and administrative expenses allocated to this
segment of $1,587,673. The details of these results are discussed below.
The Project Segment's net loss of $902,722 for Fiscal 1996 represents a decrease
of $2,228,248 from the net income recorded in Fiscal 1995. The decrease is due
primarily to a decrease of $1,925,813 in development and management fees.
The Product Segment's net loss for Fiscal 1997 of $1,714,845 reflects a decrease
in net income of $139,248 as compared to Fiscal 1996. This decrease was due
primarily to increases in cost of product sales (as discussed below). The
Company is continuing its efforts in solar electric technology development as
evidenced by significant research and development spending. Substantial
sales-related spending is anticipated in the coming fiscal year, reflecting an
effort to launch several value-added solar electric products. Continued losses
are anticipated in the segment until such time as these new products are
successfully received in the marketplace. The gross margins for this segment for
Fiscal 1997, 1996 and 1995 were 4%, 12% and 18%, respectively.
The Product Segment's net loss for Fiscal 1996 of $1,575,597 reflects an
increase in net income of $117,006 compared to Fiscal 1995. This increase was
due mainly to reductions in selling expenses (advertising and trade shows), and
general and administrative expenses (professional and legal fees).
RECENT DEVELOPMENTS
On or about May 2, 1996 certain officers, directors, employees, former employees
of the Company and certain spouses and affiliates thereof, were served subpoenas
by the U.S. Attorney's office for the production of documents and/or potential
testimony before a United States Grand Jury in White Plains, New York. The
Company complied with the document request contained in the subpoena. On May 15,
1997 the United States District Court, Southern District, New York, returned an
indictment against the Company and its Chairman, Chief Executive Officer and
President, Michael F. Zinn, charging each with five counts of conspiracy to
violate the Federal campaign finance laws and making false statements in
connection with the 1992 Congressional campaign of Maurice D. Hinchey.
On June 19, 1997 the Company and its Chairman, Chief Executive Officer and
President, Michael F. Zinn, each entered guilty pleas to two felony counts in
United States District Court for the Southern District of New York, White
Plains, New York. The Company entered a guilty plea to one count of causing a
false statement to be made to the Federal Election Commission ("FEC") and one
count of filing a false tax return, both in connection with contributions to the
1992 election campaign of Congressman Maurice Hinchey. Mr. Zinn similarly
entered a guilty plea to one count of causing a false statement to be made to
the FEC and one count of causing the filing of a false tax return in connection
with contributions to the 1992 election campaign of Congressman Maurice Hinchey.
Both the Company and Mr. Zinn are scheduled to be sentenced on September 24,
1997. The Company is uncertain as to what effect or consequences this
development will have to its current or future business activities.
On August 1, 1996 Niagara Mohawk Power Corporation ("NIMO") offered to terminate
44 of its power contracts with 19 independent power producers ("IPP's"),
including the Company's five contracts. NIMO is the principal purchaser of power
produced by the Company's five operating projects. On March 10, 1997 an
agreement in principle was announced whereby NIMO would restructure or terminate
the 44 PPA's. On July 10, 1997 it was announced that a master restructuring
agreement ("MRA") was entered into between NIMO and 16 IPP's holding 29 PPA's,
including the Company's five PPA's, formalizing the agreement in principle with
respect to those parties. The IPP's will receive combinations of cash and common
stock. Certain IPP's also will enter into restructured contracts. There can be
no assurance, however, as to the consummation of the MRA or to the ultimate
impact such consummation, if any, will have on the Company's operations.
On May 21, 1997 the Public Service Commission of New York State announced that
it was granting utilities the right to activate curtailment clauses which are
contained in its agreements with certain independent power producers. Activation
of these curtailment clauses would likely result in a reduction or elimination
of running hours for applicable projects. However, because the Company reduced
the risk of curtailment in running hours for its five NIMO projects by
renegotiating its contracts in Fiscal 1995, the Company does not anticipate that
this announcement will have an adverse impact on its operations.
REVENUES
CONSOLIDATED
Consolidated revenues increased by $6,488,032 from $8,079,519 to $14,567,551
during Fiscal 1997 as compared to Fiscal 1996, and consolidated revenues
decreased by $6,216,623 from $14,296,142 to $8,079,519 during Fiscal 1996 as
compared to Fiscal 1995.
PROJECT SEGMENT
Revenues for the Company's Project Segment development activities for the Fiscal
Years 1997, 1996 and 1995 were $9,638,394, $4,046,089 and $9,702,467,
respectively, representing 66%, 50% and 68% of consolidated revenues.
During Fiscal 1997 the Company earned development fees of $1,250,000 from the
Syracuse project in connection with conversion of the construction financing to
term financing but received no reimbursements in excess of deferred costs. The
Company also earned $377,675 in management fees during Fiscal 1997 in connection
with its projects.
During Fiscal 1996 the Company earned $328,887 in management fees in connection
with its projects. The Company received no development fees or reimbursements in
excess of deferred costs during Fiscal 1996.
During Fiscal 1995 the Company received $561,291 in development fees from the
Natural Dam project and recognized $400,000 of reimbursements in excess of
deferred costs from the Beaver Falls project. In conjunction with the
restructured financing of the Beaver Falls project, the Company's $400,000
obligation to Ansaldo North America, Inc. (together with its affiliated
companies, "Ansaldo") was repaid by the project partnership and was recorded as
revenue. The Company also earned $1,293,409 in management fees during Fiscal
1995 in connection with its projects.
<PAGE>
The capital costs for any particular project vary depending on its size and the
complexity of the system as well as specific contractual arrangements concerning
the development of the project. It has been the Company's experience, based upon
the cogeneration projects it has developed to date, that the capital costs of
any particular project do not necessarily correlate to the Company's direct
out-of-pocket development costs prior to obtaining construction financing nor to
the anticipated level of future revenues or cash flows achieved from such
projects.
Due to the nature of the Company's activities in the project development area,
results of operations from year to year may fluctuate significantly. As noted
above, the Company earned significant development fees during Fiscal 1997 and
1995, but none during Fiscal 1996. Development fees earned in connection with
project financings are subject to negotiations with lenders and co-participants.
Therefore, the Company does not recognize development fee revenue until deemed
earned and payable under the applicable contract due to the significant
contingencies associated with obtaining development fees from lenders to each
partnership in which the Company is a partner. Prior to Fiscal 1995 the Company
had received significant development fees in Fiscal 1988, 1990, 1993 and 1994
only. Due to the contingent nature of the payment of these fees, the Company can
not accurately project on a year-to-year basis when such events will occur.
The Company can not reasonably estimate the probable future earnings from
operations of the cogeneration partnerships to determine the Company's share of
future earnings. Cash flows to the Company from the partnerships generally
exceed reportable income during the early years of operations of the
cogeneration facilities.
During Fiscal 1997 the Company recorded income from partnerships of $7,907,393,
an increase of $4,462,335 over amounts recorded for Fiscal 1996. During Fiscal
1996 the Company recorded income from partnerships of $3,445,058, a decrease of
$90,250 as compared to Fiscal 1995.
PRODUCT SEGMENT
Revenues for the Company's Product Segment sales activities for the Fiscal Years
1997, 1996 and 1995 were $4,474,925, $3,900,754, and $4,551,631, respectively,
representing 31%, 48% and 32% of the consolidated revenues.
Sales for Fiscal 1997 increased by $574,171 compared to Fiscal 1996, due to
increased sales of solar electric products of $993,836, due primarily to the
expansion of the customer bases for both SunWize Energy Systems, Inc. and
SunWize Specialty Products, Inc. This increase was partially offset by lower
sales of solar thermal products of $172,093 and heat transfer products of
$247,572. The decrease in solar thermal volume was primarily due to reduced
sales of the Company's Sunboard product. No shipments were made during the third
quarter, as the product was being redesigned and a new supplier was being
sought. Competitive activity in the solar thermal pool heating market (which
necessitated several promotional pricing programs) during the first quarter of
Fiscal 1997 also contributed to reduced revenues. Export shipments of domestic
hot water heating products declined significantly, as well. The reduction in
sales of heat transfer products is the result of the Company's decision to
discontinue the non- agricultural portion of this product line.
Sales for Fiscal 1996 decreased by $650,877 compared to Fiscal 1995, as a result
of lower sales of solar heating products of $216,411, heat transfer products of
$258,369 and solar electric products of $176,097.
Included in Product Segment sales are international sales for Fiscal 1997, 1996
and 1995 of $296,527, $455,114 and $548,669, respectively. Generally,
international sales are made based upon payment in U.S. dollars via confirmed
irrevocable letters of credit or by wire transfers.
Other revenues attributable to the Product Segment were $295,922, $127,274 and
$10,981, representing 2%, 2% and less than 1% of consolidated revenues for
Fiscal Years 1997, 1996 and 1995, respectively. The significant increase in this
category for Fiscal 1997 versus Fiscal 1996, as well as the increase in Fiscal
1996 over Fiscal 1995 is due to revenue received from New York State Energy
Research and Development Authority ("NYSERDA") in accordance with several
cost-sharing agreements which became effective in late Fiscal 1995.
INTEREST AND OTHER INVESTMENT INCOME
Interest and other investment income decreased by $38,358 in Fiscal 1997 to
$134,580. Income from interest-bearing investments decreased during Fiscal 1997,
due primarily to lower average interest rates compared to Fiscal 1996. In
addition, a decrease in unrealized holding gain of $12,527 during Fiscal 1997
also contributed to the decrease.
Interest and other investment income decreased by $151,591 in Fiscal 1996 to
$172,938. The decrease is due primarily to the Company's decision not to record,
due to ongoing litigation, interest income on the combined loan of $2,500,000 to
the Allegany project. Interest income of $172,672 was recorded in connection
with this loan during Fiscal 1995. This decrease was partially offset by gains
recognized on the sale of short-term investments during the fiscal year.
OTHER INCOME
During Fiscal 1997 other income increased by $16,802 to $66,253. The increase is
due primarily to income earned from the settlement of a complaint against a
competitor, partially offset by expenses incurred in connection with the
expansion of the Company's marketing function.
COSTS AND EXPENSES
COST OF PRODUCT SALES
As a percentage of revenues attributable to product sales, cost of sales in
Fiscal 1997, 1996 and 1995 were 96%, 88% and 82%, respectively. The increase in
the cost of sales percentage is due primarily to substantially lower sales
volume of solar thermal products and the Company's decision to discontinue the
commercial portion of the heat transfer products line as discussed above. Fixed
overhead costs for these product lines were consistent with the prior year,
resulting in margin erosion. Competitive activity in the solar thermal pool
heating market also contributed to reduced margins, and inventory liquidation
sales of heat transfer products at or below cost also resulted in reduced
margins.
COSTS OF DEVELOPMENT AND MANAGEMENT FEES
Other than settlement of deferred costs in conjunction with project closings,
there are no specific costs and expenses identified with the development and
management fee revenue. Costs and expenses associated with the Project Segment
are the normal selling, general and administrative expenses of the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
CONSOLIDATED
Consolidated selling, general and administrative expenses increased by
$1,771,799, or 27%, in Fiscal 1997 as compared to Fiscal 1996 and decreased by
$630,459, or 9%, in Fiscal 1996 as compared to Fiscal 1995.
PROJECT SEGMENT
Selling, general and administrative expenses for the Company's Project Segment
for the Fiscal Years 1997, 1996 and 1995 were $5,890,250, $4,303,177 and
$4,558,460, respectively, representing 72%, 67% and 64% of the consolidated
totals.
<PAGE>
During Fiscal 1997 selling, general and administrative expenses increased by
$1,587,073 compared to Fiscal 1996. Factors contributing to the increase include
legal fees and other expenses of $821,066 incurred in connection with the U. S.
Attorney's Office investigation (see Item 3. Legal Proceedings). Other legal
fees increased by $82,142 during Fiscal 1997, due primarily to the Shareholder's
derivative lawsuit (see Item 3. Legal Proceedings). The Company also experienced
an increase in other professional fees of $132,574. Also contributing to the
increased selling, general and administrative expenses in Fiscal 1997 was an
increase in consulting fees of $237,019, including finders fees of $127,557
incurred in connection with the Company's receipt of cash distributions from
certain projects, the write-off of project costs previously deferred of
$264,815, and an increase of $43,356 in gross receipts taxes.
For Fiscal 1996 selling, general and administrative expenses decreased by
$255,283 from Fiscal 1995, primarily due to a net decrease of $432,883 in
compensation expenses as a result of deferral of costs, and a decrease of
$168,000 in legal fees and other litigation expenses. These decreases were
partially offset by an increase in project expenses of $236,274, including the
write- off of costs previously deferred of $124,318, an increase in gross
receipts taxes of $91,033, and an increase of $37,544 in depreciation expense,
the result of a full year's depreciation on computer and communication systems
and other capital improvements made in Fiscal 1995.
The Company's policy concerning remuneration of its executive and development
staff is to pay base salaries plus discretionary bonuses upon the completion of
transactions that create revenue and/or equity interests that are expected to
benefit the Company.
PRODUCT SEGMENT
Selling, general and administrative expenses for the Product Segment for Fiscal
Years 1997, 1996 and 1995 were $2,330,546, $2,145,820 and $2,520,996,
respectively, representing 28%, 33% and 36% of the consolidated totals. The
increase in Fiscal 1997 is due primarily to an increase in research and
development expenses of $220,578. The decrease in Fiscal 1996 compared to Fiscal
1995 was mainly due to reductions in sales personnel and spending for
advertising and trade shows. Administrative expenses also declined from Fiscal
1995, primarily due to reductions in legal and professional fees.
INTEREST EXPENSE
For Fiscal 1997 interest expense decreased by $98,207 to $357,185 compared to
Fiscal 1996. The higher amount incurred in Fiscal 1996 was due primarily to the
interest expense of $70,000 on additional federal income taxes for Fiscal 1993
and 1994 (see Note 8. Income Taxes, of the Notes to Consolidated Financial
Statements). Also contributing to the decrease in Fiscal 1997 were lower average
interest rates incurred during the current year on both the Stewart & Stevenson,
Inc. ("S&S") loan and on the mortgages on the Company's corporate headquarters.
Interest expense for Fiscal 1996 was $455,392, an increase of $15,074 over
Fiscal 1995. The higher amount incurred in Fiscal 1996 was due primarily to the
interest expense on additional federal income taxes for Fiscal 1993 and 1994
noted above. Also contributing to the increase were higher average interest
rates incurred during the current year on both the S&S loan and on the mortgage
on the Company's corporate headquarters. Offsetting these increases were
decreases related to higher amounts incurred during Fiscal 1995 due primarily to
interest expense of $117,024 on the $2,500,000 borrowed from General Electric
Capital Corp. ("GECC") to repurchase certain limited partnership interests
during the second quarter of Fiscal 1995.
PROVISION FOR INCOME TAXES
The provision for income taxes for Fiscal 1997 of $516,000 represents an
increase of $308,400 when compared to Fiscal 1996. The provision for income
taxes decreased $2,053,100 in Fiscal 1996 to $207,600. The Company provides for
federal and state income taxes based on enacted statutory rates adjusted for
projected benefits of tax operating loss carryforwards and other credits (see
Note 8. Income Taxes, of the Notes to Consolidated Financial Statements).
INFLATION
The Company's operations have not been, nor in the near term are expected to be,
materially affected by inflation. However, as the Company expands its operations
internationally, it may become subject to risks of inflation in the foreign
countries in which it operates.
LIQUIDITY AND CAPITAL RESOURCES
During Fiscal 1997 the Company's working capital increased by $1,674,759 from
$903,090 to $2,577,849. During Fiscal 1996 the Company's working capital
decreased by $1,969,416 from $2,872,506 in Fiscal 1995 to $903,090.
During Fiscal 1997 the Company's operating activities resulted in a net use of
cash of $244,623. The net income of $1,173,722, when adjusted for non-cash items
of $7,904,903, including partnership income of $7,907,393, resulted in a cash
loss of $6,731,181. Also contributing to the use of cash in operating activities
was the net change in other assets and liabilities of $1,329,292, which was
partially the result of Federal income tax deposits for Fiscal 1997 of $500,000
and additional Federal tax payments of $330,872 made as a result of Internal
Revenue Service examinations of Fiscal 1993 and 1994. These factors were largely
offset by distributions of $7,835,800 received from partnerships.
Cash of $407,367 was provided by financing activities due to a net increase in
borrowings of $381,067, primarily as a result of the Company's utilization of
the remaining line of credit available under the S&S loan agreement (see Note
7d. Long-Term Debt, of the Notes to the Consolidated Financial Statements).
Proceeds of $26,300 received from the issuance of common stock also contributed
to cash provided.
The Company's investing activities used cash of $62,790 during Fiscal 1997 due
to the acquisition of property, plant and equipment of $57,790 and the
contribution of additional capital of $5,000 to one of the partnerships.
Financing for the construction of development projects is generally provided by
loans to the particular partnerships which are secured by the project assets
only. Except for financing provided to the Allegany project, the Company
generally does not incur significant capital costs associated with construction
of these projects. The Company provided financing to the Allegany project in
Fiscal 1993 and 1994 utilizing $2,500,000 of its $3,000,000 line of credit under
the S&S loan agreement. On February 20, 1997 the Company borrowed the remaining
$500,000 available under the agreement (see Note 4a. Notes Receivable, and Note
7d. Long-Term Debt, of the Notes to Consolidated Financial Statements).
The Company is currently seeking financing for the construction of a 20,000 sq.
ft. facility at the site of the corporate headquarters in Kingston to house the
solar electric product development and manufacturing operations. This facility,
estimated to cost no more than $1,000,000, would replace space currently
occupied under a cancelable lease.
The Company has no significant capital commitments for Fiscal 1998 other than as
disclosed above.
The Company expects that capital requirements for its operations, for repayment
of long-term debt and for project development costs will be met by its current
cash and short-term investment position as well as by anticipated cash flows
from ownership distributions from operations of the projects and the anticipated
cash flows from projects currently under development, and by future borrowings
against project interests and other corporate financings, as available. However,
as discussed in "Recent Developments" in this section, as a result of the
uncertainty created by the status of the NIMO contracts and the guilty plea
relating to the
<PAGE>
indictment, there can be no assurance that cash flows from future operations of
the Company or its ability to borrow in amounts and on terms acceptable to it
will not be adversely affected.
ITEM 7. FINANCIAL STATEMENTS
CITRIN COOPERMAN & COMPANY, LLP
Certified Public Accountants
529 Fifth Avenue, Tenth Floor
New York, New York 10017
212-697-1000
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS BESICORP GROUP INC.
Independent Auditors' Report
We have audited the consolidated balance sheet of Besicorp Group Inc. and
subsidiaries as at March 31, 1997 and 1996 and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for the
years ended March 31, 1997, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of Besicorp Group Inc.
and subsidiaries as at March 31, 1997 and 1996 and the results of their
operations and their cash flows for the years ended March 31, 1997, 1996 and
1995 in conformity with generally accepted accounting principles.
The Company and an affiliated partnership are currently involved in certain
litigation which effects the collectibiity of notes receivable as described in
Note 4. The ultimate outcome of the litigation can not presently be determined.
Accordingly, no provision for any liability nor allowance for uncollectible
amounts that may result has been recognized in the accompanying consolidated
financial statements.
/s/ Citrin Cooperman & Company, LLP
CITRIN COOPERMAN & COMPANY, LLP
June 19, 1997
New York, New York
<PAGE>
BESICORP GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS 1997 1996
---------- ---------
Current Assets:
Cash and cash equivalents $ 210,533 $ 90,579
Short-term investments 1,012,814 761,807
Trade accounts receivable (less allowance for doubtful accounts of $39,346
in 1997 and $25,600 in 1996) 604,263 540,967
Due from affiliates 1,338,802 89,734
Current portion of long-term notes receivable:
Others (includes interest of $11,201 in 1997 and $13,854 in 1996) 97,016 92,402
Inventories 1,180,265 1,259,190
Refundable income taxes 0 187,384
Deferred income taxes 362,600 0
Other current assets 316,601 111,950
---------- ---------
Total Current Assets 5,122,894 3,134,013
---------- ---------
Property, Plant and Equipment:
Land and improvements 279,910 279,910
Buildings and improvements 1,890,065 1,878,781
Machinery and equipment 961,335 917,990
Furniture and fixtures 195,941 195,441
Construction in progress 8,079 14,908
---------- ---------
3,335,330 3,287,030
Less: accumulated depreciation and amortization 1,398,576 1,104,817
---------- ---------
Net Property, Plant and Equipment 1,936,754 2,182,213
---------- ---------
Other Assets:
Patents and trademarks, less accumulated amortization of $651,526 in 1997
and $634,681 in 1996 47,184 60,024
Long-term notes receivable:
Affiliate 555,376 555,376
Others 2,168,246 2,254,061
Deferred costs 1,480,728 1,039,421
Deferred income taxes 369,700 0
Other assets 155,917 179,882
---------- ---------
Total Other Assets 4,777,151 4,088,764
---------- ---------
TOTAL ASSETS $11,836,799 $9,404,990
---------- ---------
---------- ---------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
BESICORP GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY ---------- ----------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued expenses $ 1,745,142 $ 1,247,612
Current portion of long-term debt 115,598 431,102
Current portion of accrued reserve and warranty expense 215,733 147,024
Taxes other than income taxes 101,786 64,753
Income taxes payable 366,786 340,432
---------- ----------
Total Current Liabilities 2,545,045 2,230,923
Investment in Partnerships 2,559,282 2,635,875
Long-Term Accrued Reserve and Warranty Expense 165,950 139,305
Long-Term Debt 3,834,483 3,137,912
---------- ----------
Total Liabilities 9,104,760 8,144,015
---------- ----------
Shareholders' Equity:
Common stock, $.10 par value: authorized 5,000,000 shares; issued 3,234,953
shares in 1997 and 3,233,146 shares in 1996 323,495 323,315
Additional paid-in capital 4,925,524 4,771,769
Retained earnings (deficit) (810,645) (1,984,367)
---------- ----------
4,438,374 3,110,717
Less: treasury stock at cost (300,298 shares in 1997 and 321,212 shares in
1996) (1,706,335) (1,849,742)
---------- ----------
Total Shareholders' Equity 2,732,039 1,260,975
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,836,799 $ 9,404,990
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
BESICORP GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Product sales $ 4,474,925 $ 3,900,754 $ 4,551,631
Development and management fees 1,627,675 328,887 2,254,700
Other revenues 356,725 182,431 57,867
Income from partnerships 7,907,393 3,445,058 7,075,803
Interest and other investment income 134,580 172,938 324,529
Other income 66,253 49,451 31,612
---------- ---------- ----------
Total Revenues 14,567,551 8,079,519 14,296,142
---------- ---------- ----------
Costs and Expenses:
Cost of product sales 4,299,848 3,445,849 3,749,850
Selling, general and administrative expenses 8,220,796 6,448,997 7,079,456
Interest expense 357,185 455,392 440,318
---------- ---------- ----------
Total Costs and Expenses 12,877,829 10,350,238 11,269,624
---------- ---------- ----------
Income (Loss) Before Income Taxes 1,689,722 (2,270,719) 3,026,518
Provision for Income Taxes 516,000 207,600 1,056,900
---------- ---------- ----------
Income (Loss) Before Extraordinary Item 1,173,722 (2,478,319) 1,969,618
Extraordinary Item, Net of Income Taxes of $1,203,800 in
1995 0 0 (2,336,695)
---------- ---------- ----------
Net Income (Loss) $ 1,173,722 $(2,478,319) $ (367,077)
---------- ---------- ----------
---------- ---------- ----------
Income (Loss) per Common Share:
Income (loss) before extraordinary item $ .40 $ (.84) $ .64
Extraordinary item .00 .00 (.76)
---------- ---------- ----------
Net Income (Loss) per Common Share $ .40 $ (.84) $ (.12)
---------- ---------- ----------
---------- ---------- ----------
Weighted Average Number of Shares Outstanding 2,916,439 2,938,144 3,081,742
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
BESICORP GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $ 1,173,722 $(2,478,319) $ (367,077)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Deferred taxes including taxes allocated to capital (431,800) 22,300 (166,800)
Extraordinary item 0 0 3,540,495
Amortization of discounts on notes (2,196) (2,196) (2,196)
Realized and unrealized (gains)/losses 10,238 (14,653) 79,227
Depreciation and amortization 355,604 388,437 347,316
Partnership income recognized (7,907,393) (3,445,058) (7,075,803)
Distributions from partnerships 7,835,800 4,768,874 3,462,288
Stock based compensation 70,644 17,815 48,000
Debt incurred (repaid) for expenses 0 0 (400,000)
Changes in assets and liabilities:
Short-term investments (251,755) 725,123 0
Accounts and notes receivable (1,228,967) 289,041 27,101
Inventories 78,925 85,752 (226,037)
Accounts payable and accrued expenses 441,128 (111,415) 241,081
Taxes payable/refundable 207,071 97,603 441,243
Other assets and liabilities, net (575,644) (155,229) (1,145,008)
---------- ---------- ----------
Net Cash Provided (Used) By Operating Activities (224,623) 188,075 (1,196,170)
---------- ---------- ----------
Financing Activities:
Increase in borrowings 500,000 41,440 0
Repayment of borrowings (118,933) (117,456) (98,849)
Purchase of common stock 0 (637,509) (1,039,840)
Issuance of common stock 26,300 172,669 12,813
---------- ---------- ----------
Net Cash Provided (Used) By Financing Activities 407,367 (540,856) (1,125,876)
---------- ---------- ----------
Investing Activities:
Investments in partnerships (5,000) 0 (250,372)
Purchases of short-term investments 0 0 (3,970,264)
Proceeds from sales of short-term investments 0 0 7,315,321
Acquisition of property, plant and equipment (57,790) (252,271) (430,099)
---------- ---------- ------------
Net Cash Provided (Used) By Investing Activities (62,790) (252,271) 2,664,586
---------- ---------- ----------
Increase (Decrease) in Cash and Cash Equivalents 119,954 (605,052) 342,540
Cash and Cash Equivalents Beginning 90,579 695,631 353,091
---------- ---------- ----------
Cash and Cash Equivalents Ending $ 210,533 $ 90,579 $ 695,631
---------- ---------- ----------
---------- ---------- ----------
Supplemental Cash Flow Information:
Interest paid $ 420,747 $ 387,143 $ 440,493
Income taxes paid (received) 777,429 11,022 (351,232)
Additions to property, plant, and equipment which were
financed and not included above $ 0 $ 70,230 $ 66,270
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
BESICORP GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Treasury Stock
-------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Retained
Additional Earnings
Shares Amount Paid-in Capital (Deficit) Shares At Cost Total
--------- ------- --------------- ---------- ------- ---------- ---------------
Balance at March
31, 1994 3,222,144 $322,214 $ 4,727,150 $ 861,029 103,381 $ (701,470) $ 5,802,923
Shares purchased 160,710 (1,039,840) (1,039,840)
Shares issued for
fractional shares 2 1 (1)
Shares issued to
employees under
Incentive Stock
Option Plan 1,250 125 1,438 1,563
Treasury shares
issued for
Incentive Stock
Options and
compensation (296,658) (54,000) 355,908 59,250
Tax benefit on
compensatory stock
transactions 120,200 120,200
Net loss for the
year (367,077) (367,077)
--------- ------- --------------- ---------- ------- ---------- ----------
Balance at March
31, 1995 3,223,396 322,340 4,552,129 493,952 210,091 (1,385,402) 3,983,019
Shares purchased 135,366 (637,509) (637,509)
Shares issued to
employees under
Incentive Stock
Option Plan 5,250 525 16,006 16,531
Shares issued for
warrants 4,500 450 7,988 8,438
Treasury shares
issued for
Incentive Stock
Options and
compensation (7,654) (24,245) 173,169 165,515
Tax benefit on
compensatory stock
transactions 203,300 203,300
Net loss for the
year (2,478,319) (2,478,319)
--------- ------- --------------- ---------- ------- ---------- ----------
Balance at March
31, 1996 3,233,146 323,315 4,771,769 (1,984,367) 321,212 (1,849,742) 1,260,975
Shares purchased 86 (1,250) (1,250)
Shares issued for
fractional shares 7
Shares issued to
employees under
Incentive Stock
Option Plan 1,800 180 6,120 6,300
Treasury shares
issued for warrants (117,367) (20,000) 137,367 20,000
Treasury shares
issued for
Incentive Stock
Options (6,040) (1,000) 7,290 1,250
Tax benefit on
compensatory stock
transactions 256,800 256,800
Compensatory non-
statutory stock
options 14,242 14,242
Net income for the
year 1,173,722 1,173,722
--------- ------- --------------- ---------- ------- ---------- ----------
Balance at March
31, 1997 3,234,953 $323,495 $ 4,925,524 $ (810,645) 300,298 $(1,706,335) $ 2,732,039
--------- ------- --------------- ---------- ------- ---------- ----------
--------- ------- --------------- ---------- ------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Besicorp Group Inc. (together with its subsidiaries the "Company") specializes
in the development of power projects and energy technologies. Working with
partners, the Company develops independent power projects. The Company also
provides engineering, system design, project management and turn- key
installation of photovoltaics and thermal energy systems, and fabricates,
manufactures, markets and distributes alternative energy projects through a
domestic and international network.
Principles of Consolidation
The consolidated financial statements include Besicorp Group Inc. and its
wholly-owned subsidiaries. Investments in partnerships are recorded under the
equity method of accounting. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
Management uses estimates in preparing the consolidated financial statements, in
conformity with generally accepted accounting principles. Significant estimates
include collectibility of accounts receivable, warranty costs, profitability on
long-term contracts, as well as recoverability of long- term assets and residual
values. The Company regularly assesses these estimates and, while actual results
may differ from these estimates, management does not anticipate a material
difference in its actual results versus estimates in the near term.
Reclassification
Certain items in the 1996 and 1995 financial statements have been reclassified
to conform with the 1997 presentation.
Inventories
Inventories are carried at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation on such assets is
computed on a straight-line basis at rates adequate to allocate the cost over
their expected useful lives from 3 years to 39 years.
Patents and Trademarks
Costs of patents ($651,306 at March 31, 1997 and $647,301 at March 31, 1996) are
capitalized and amortized on a straight-line basis over the remaining useful
life of the patent of up to 17 years. Trademark costs ($47,405 at March 31, 1997
and 1996) are capitalized and amortized on a straight-line basis over the
estimated useful life of 35 years.
Deferred Costs
Consists of engineering and legal fees, licenses and permits, site testing, bids
and other charges, including salaries and employee expenses, incurred by the
Company in developing projects. These costs are deferred until the date the
project construction financing is arranged and then expensed against development
fees received, or, in some cases, such costs are reimbursed periodically or at
the time of closing. When in the opinion of management it is determined that a
project will not be completed, the deferred costs are expensed.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
The excess of the purchase price over the book value of a corporation acquired
at March 31, 1993 of $557,898 was added to the basis of the land and buildings
of such corporation based upon an independent appraisal of the property acquired
and is being amortized on a straight-line basis over the asset lives of 31.5
years. The remaining book value at March 31, 1997 and 1996 was $491,625 and
$508,193, respectively.
Impairment of Long-Lived Assets
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," as of April 1, 1996. The Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairments whenever events or changes in circumstances indicate that the
carrying
<PAGE>
amount of an asset may not be recoverable. Adoption of this Statement did not
have an impact on the Company's financial position or results of operations.
Accounting for Stock-Based Compensation
Effective April 1, 1996, the Company adopted the fair value disclosure
requirement of SFAS No. 123, "Accounting for Stock-Based Compensation." As
permitted by SFAS No. 123, the Company did not change the method of accounting
for its employee stock compensation plans. See Note 9 for the fair value
disclosures required under SFAS No. 123.
Product Warranties
Warranty expense for the Company's product sales is provided on the basis of
management's estimate of the future costs to be incurred under product
warranties presently in force. Adjustments to revenue or expense are reflected
in the period in which revisions to such estimates are deemed appropriate.
Revenue Recognition
Revenues on product sales are recognized at the time of shipment of goods.
Development and management fee revenues are recognized when deemed payable.
Deferred Income Taxes
Deferred income taxes are provided for the temporary difference between
reporting for income tax purposes and financial statement purposes. (See Note
8.)
Income (Loss) Per Common Share
Income (loss) per common share is computed on income (loss) for each year
divided by the weighted average number of common shares and share equivalents
outstanding during the year. Stock options and warrants were not used in the
computations when the effect on income per share was anti-dilutive or was not
material.
Research and Development
Research and development costs are expensed when incurred.
Statement of Cash Flows
For purposes of the consolidated statement of cash flows, the Company considers
temporary investments with a maturity of three months or less when purchased to
be cash equivalents.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Short-Term Investments
In 1995 the Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which requires that the Company's investments be
designated as trading, available for sale or held-to-maturity. The Company's
investments qualify as trading securities which are reported at fair value, with
changes in fair value included in earnings. The unrealized losses at March 31,
1997 and March 31, 1996 were $5,735 and $6,553, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash, short-term investments and trade
receivables. The Company places its cash and investments with high credit
qualified financial institutions and, by policy, limits the amount of credit
exposure to any one financial institution. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base, and their dispersion across many
different industries and geographies. During the year ended March 31, 1997 sales
to one customer accounted for approximately 23% of product sales. No customer
accounted for more than 10% of sales for the years ended March 31, 1996 and
1995.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Assembly parts $479,689 $467,281
Finished goods 700,576 791,909
---------- -----------
$1,180,265 $1,259,190
---------- -----------
---------- -----------
</TABLE>
<PAGE>
NOTE 3 - DEFERRED COSTS
Deferred and reimbursable costs at March 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Internal Costs
--------------------
Third Party
Payroll Expenses Costs Total
--------- --------- ------------ ----------
<S> <C> <C> <C> <C>
Balance March 31, 1995 350,602 57,477 524,626 932,705
Additions 707,872 114,120 260,239 1,082,231
Expensed (72,872) (13,686) (37,760) (124,318)
Reimbursements (601,672) 0 (249,525) (851,197)
--------- --------- ------------ ----------
Balance March 31, 1996 383,930 157,911 497,580 1,039,421
Additions 667,654 126,848 114,910 909,412
Expensed (90,381) (16,085) (158,350) (264,816)
Reimbursements (43,532) (727) (159,030) (203,289)
--------- --------- ------------ ----------
Balance March 31, 1997 $917,671 $267,947 $295,110 $1,480,728
--------- --------- ------------ ----------
--------- --------- ------------ ----------
</TABLE>
Pursuant to an agreement with a partnership for development of a project in
India, the Company loaned $300,000 to the partnership during Fiscal 1995 which
reimbursed one of the partners for development expenses it had already incurred.
The note receivable evidencing this loan is included in Deferred Costs at March
31, 1997 and 1996, and it is anticipated that it will be repaid from receipt of
development capital or from proceeds of project financings.
NOTE 4 - NOTES RECEIVABLE
Long-term notes receivable consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Due from affiliate (a) $555,376 $555,376
---------- ----------
---------- ----------
Due from others:
- - Greenhouse (a) $1,944,624 $1,944,624
- - 9% notes receivable due from limited
partnerships, receivable in annual
installments through December, 2001 (b) 309,437 387,985
Less current portion - net of interest (85,815) (78,548)
---------- ----------
TOTAL $2,168,246 $2,254,061
---------- ----------
---------- ----------
</TABLE>
(a) The Company advanced $2,500,000 of its working capital loan (see Note 7) to
one of its affiliated partnerships to partially finance project costs. This
advance was to be repaid by the partnership by in turn advancing funds to a
greenhouse facility, an unrelated company, which was to utilize steam from the
cogeneration facility. As moneys were advanced by the partnership on behalf of
the Company to the greenhouse, they became obligations of the greenhouse to the
Company. To date the greenhouse has not commenced commercial operation, and the
parties are in litigation. The loan to the greenhouse
<PAGE>
was to bear an interest rate of prime plus 3% until the greenhouse commenced
commercial operation which was expected to occur in Fiscal 1995. Thereafter, the
loan was to bear an interest rate of 13% over the approximate 12-year term of
the loan. As of March 31, 1997 the partnership had advanced $1,944,624 on behalf
of the Company to the greenhouse. Accordingly, the balance due to the Company
from the project partnership has been reduced to $555,376 at March 31, 1997.
Interest income recorded from the partnership at an imputed interest rate of
6.37% for the year ended March 31, 1995 was $50,928. The Company decided, due to
the ongoing litigation described below, not to record interest income from the
partnership for the years ended March 31, 1997 and March 31, 1996 and for part
of the year ended March 31, 1995.
The greenhouse facility was not completed as scheduled, and the partnership
initiated an action against the owner of the greenhouse facility to recover
possession of the greenhouse due to various defaults by the owner under its
contractual commitments, including its obligations to complete the greenhouse by
July 31, 1994. The greenhouse owner has counterclaimed against the partnership
asserting claims for breach of contract and other items. In addition, the
contractor hired by the greenhouse owner to construct the greenhouse filed legal
action against the greenhouse owner, the partnership and the Company relating to
nonpayment for construction of the greenhouse. The Company believes that it has
meritorious claims against the greenhouse owner and meritorious defenses against
its counterclaims and believes the outcome of this litigation will be favorable.
In addition, the partnership is involved in litigation with the primary
purchaser of the electricity generated by the partnership's facility (see Notes
5 and 13). Management of the Company believes that the litigation with the
greenhouse contractor and the purchaser of electricity is without merit. The
ultimate outcome of this litigation can not be presently determined.
Accordingly, no provision for any liability, nor allowance for uncollectible
amounts, that may result has been recognized in the accompanying consolidated
financial statements.
NOTE 4 - NOTES RECEIVABLE (CONTINUED)
The Company has entered into negotiations to have the greenhouse renovated and
to begin commercial operation during Fiscal 1998 under a leasing arrangement of
the facility. Based on their projections, management of the Company believes
that the greenhouse operation should generate sufficient cash flows to repay the
outstanding notes receivable. However, there can be no assurance that the
operation will be successful and that it will have sufficient cash flows to
repay the notes.
(b) The Company contracted to design, build, and operate energy systems with
limited partnerships. Under the terms of the sales agreements, the purchase
price included cash down payments and long-term notes receivable. Additional
interest was imputed at the rate of 2% per annum to yield an effective rate of
11% per annum on substantially all of the long-term notes receivable.
NOTE 5 - INVESTMENTS IN PARTNERSHIPS
The Company, through separate wholly-owned subsidiaries, is a general partner,
and, in certain cases also a limited partner in partnerships which were formed
to develop, own, and operate cogeneration facilities. The Company earns fees for
developing and monitoring these facilities, and the partnerships generate
revenues from the operation of the facilities. At March 31, 1997, five
facilities were being operated. Monitoring and administrative fees earned by the
Company from the partnerships were $377,675 for the year ended March 31, 1997,
$328,887 for the year ended March 31, 1996, and $1,293,409 for the year ended
March 31, 1995.
Development fees of $1,250,000 were earned from one project, while there was no
income recognized from the excess of reimbursements over related deferred costs
during Fiscal 1997. There were no development fees earned or income recognized
from excess reimbursements during Fiscal 1996. Development fees of approximately
$561,000 were earned in Fiscal 1995 from one project and $400,000 of income was
recognized from excess reimbursements.
The Company's interests in the partnerships range from 35.715% to 50.2% and are
accounted for under the equity method. The partnerships are highly leveraged,
with the operating assets of the partnership securing the debt. There is
generally little or no initial investment in the partnerships by the Company,
and the expected significant losses of the partnerships in the early years of
operation are funded by the partnership's debt. Since there is no obligation for
the Company to fund such losses, and since the Company is not generally
obligated to pay the partnership's debt, the Company's share of losses is not
generally recorded in the financial statements. Income is recognized when it
exceeds
<PAGE>
cumulative losses. For the year ended March 31, 1997, income from partnerships
exceeded prior unrecognized accumulated losses of $1,811,770. For the year ended
March 31, 1996, there were unrealized losses of $544,499 on one of the
partnerships for which income was recorded that was not included in Fiscal 1996
results. Income from partnerships recorded for the year ended March 31, 1995
exceeded prior unrecognized accumulated losses of $790,306.
Cash distributions to the Company from the partnerships to pay franchise taxes
and other cash distributions have been recorded as reductions of equity of these
partnerships. In addition, the Company has funded certain of the development
activities of one of the partnerships (see Note 4) and has made capital
contributions and investments in three partnerships.
NOTE 5 - INVESTMENTS IN PARTNERSHIPS (CONTINUED)
The investment in partnerships was comprised of the following at March 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Capital contributions and investments $2,976,813 $2,971,813
Partnership distributions (20,617,776) (12,781,976)
Recognized share of income (losses) 15,081,681 7,174,288
----------- -----------
$(2,559,282) $(2,635,875)
----------- -----------
----------- -----------
</TABLE>
The financial position and results of operations for the partnerships, based on
the audited financial statements, as at December 31, 1996 and 1995 and for the
years then ended were as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------- -------------
<S> <C> <C>
TOTAL PARTNERSHIPS:
Assets $535,270,470 $543,148,967
Plant and equipment 400,616,762 413,475,414
Secured debt 516,799,694 526,879,647
Partners' equity (deficit) (22,332,572) (22,610,152)
Revenues 150,595,750 114,313,019
Income (loss) 15,701,763 (1,212,069)
COMPANY'S SHARE:
Partners' equity (deficit) (9,789,803) (10,488,957)
Income 8,393,340 57,836
</TABLE>
The income (loss) from partnerships, which has been recorded on the consolidated
financial statements in Fiscal 1997 in the amount of $7,907,393 has been
recognized on projects where income has exceeded prior unrecognized accumulated
losses, but not on partnerships where current income of $1,811,770 does not
exceed prior unrecognized accumulated losses, nor on one partnership where
current losses of $1,332,601 are in excess of net investment.
Cash flows and equity interests in several of the projects have been pledged to
secure debt agreements.
One of the partnerships, as a result of the denial of a motion for a preliminary
injunction and as a result of the construction lender exercising certain rights
under a pledge agreement, filed a voluntary petition to reorganize under Chapter
11 of the Bankruptcy Code and is seeking enforcement of the power purchase
agreement (see Notes 4 and 13). The amounts pertaining to this partnership were
excluded from the partnerships' financial position and results of operations
presented above.
In December 1994 the partnerships concluded long-term financing agreements in
the form of sale/lease-
<PAGE>
back transactions with General Electric Capital Corporation ("GECC") for three
of the partnership facilities. These transactions involved assets with a book
value of approximately $164,600,000. The approximately $7,000,000 of gains on
the transactions were deferred on the books of the respective partnerships and
will be taken into income over the twenty- and twenty-five-year lives of the
leases.
As a result of the refinancings of the facilities, the partnerships reported
extraordinary charges of $7,080,989 representing the write-off of unamortized
deferred financing costs of the original debt. The Company's share of these
extraordinary charges recognized in Fiscal 1995 was $3,540,495.
NOTE 5 - INVESTMENTS IN PARTNERSHIPS (CONTINUED)
In July 1994 the Company borrowed $2,500,000 from GECC to repurchase 7-1/2%
interests in each of two partnerships which had been sold to a third party for
$1,000,000 in November 1989. This loan was repaid in December 1994 via an
assignment of a distribution from the partnerships at the closing of the
aforementioned sale/leaseback transactions. Such distribution and repayment of
debt have been excluded from partnership distributions and debt repayment in the
Consolidated Statement of Cash Flows.
The five operating partnerships are principally engaged in a single line of
business - the production and sale of electric power to one customer, Niagara
Mohawk Power Corporation ("NIMO").
The regulated investor-owned utility industry is presently subject to
considerable market pressures and change in the federal and state regulatory
environment in which it operates. These pressures are resulting in industry
consolidation and pressure to disaggregate electric generation, transmission and
distribution assets and to adjust cost structures to meet market conditions.
NIMO made a filing on October 10, 1995 to the Public Service Commission of the
State of New York setting forth numerous restructuring proposals, including a
significant reduction on the price for power purchased from independent power
producers currently under contract with NIMO. The partnerships expect many of
NIMO's proposals to be strongly contested, including the significant reduction
on the price for power. NIMO has also stated in such filing that its financial
viability is threatened. In 1996, NIMO suspended payments of dividends on its
common stock.
On August 1, 1996 NIMO proposed to buy out 44 of its independent power
contracts, including those of the partnerships, in exchange for a combination of
cash and securities. On March 10, 1997 an agreement in principle was announced
whereby NIMO would restructure or terminate the power contracts for combinations
of cash and/or debt securities, common stock and new agreements. Discussions
between NIMO and the holders of the power contracts are continuing in order to
finalize these agreements. The outcome of the NIMO negotiations and NIMO's
financial viability can not be presently determined.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as at March 31, 1997 and 1996 were
comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Trade accounts payable $301,752 $561,231
Accrued interest expense 38,970 102,295
Accrued legal fees 349,826 0
Accrued salaries 593,115 246,994
Due to affiliate 56,624 56,624
Deposits and other payables 404,855 280,468
---------- ----------
$1,745,142 $1,247,612
---------- ----------
---------- ----------
</TABLE>
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of the following:
<PAGE>
<TABLE>
<CAPTION>
Long-term debt consists of the following: 1997 1996
----------- ----------
<S> <C> <C>
- - Installment loans at 0% to 14.62% maturing
through April 1999 (a) $76,376 $139,834
- - Mortgage loan payable in monthly installments
of $1,060 plus interest at prime plus 1.5%
through March 2002 (b, c) 63,400 76,120
- - Mortgage loan payable in monthly installments
of $4,180 including interest at prime plus 1.5%
through April 2007, when the unpaid balance is
due (b, f) 331,739 348,634
- - Second mortgage payable in monthly
installments of $1,771 plus interest at prime
plus 1.5% through March 2002, when the unpaid
balance is due (b, c, g) 311,667 331,146
- - Obligation on SunWize asset acquisition (e) 166,899 173,280
- - Working capital loan (d) 3,000,000 2,500,000
----------- ----------
Total 3,950,081 3,569,014
Less: Current maturities 115,598 431,102
----------- ----------
$3,834,483 $3,137,912
----------- ----------
----------- ----------
</TABLE>
Long-term debt maturities at March 31, 1997, including current maturities, are
as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $115,598
1999 76,396
2000 63,352
2001 63,939
2002 271,666
Thereafter 3,359,130
-----------
$3,950,081
-----------
-----------
</TABLE>
a. Collateral for the installment loans consists of automobiles, computer
equipment and furniture and fixtures with a net book value of $119,599 and
$180,845 at March 31, 1997 and 1996, respectively.
b. Collateralized by mortgages on land and/or buildings owned by the Company
with a net book value of $1,340,932 and $1,404,301 at March 31, 1997 and 1996,
respectively.
c. As a part of his guarantees of the Company's debts of $375,067 and $407,266
at March 31, 1997 and 1996, the Chairman, Chief Executive Officer and President
of the Company has a security interest in various assets, patents, and personal
property owned by the Company.
d. On June 1, 1992, the Company and its partnership co-developer entered into a
loan agreement with Stewart & Stevenson Services, Inc. to borrow up to
$3,000,000 each for working capital. Interest on advances under the agreement
are payable quarterly in arrears at the rate of 2% above prime. The loan
requires payments of interest only during the initial term. Principal is to be
repaid based on termination dates of operating and maintenance contracts on
certain projects with an initial term of six years that may be extended an
additional six years. Loans are secured by cash flows of certain of the
partnerships in the event of default. During Fiscal 1993 and 1994 the Company
borrowed $2,500,000 under the agreement to fund development activities of one of
the partnerships (see Note 4), and, in February 1997, borrowed the remaining
$500,000 available under the loan agreement.
<PAGE>
NOTE 7 - LONG-TERM DEBT (CONTINUED)
e. Obligation payable on the acquisition of SunWize assets, payable as a
percentage of future gross margins of the SunWize division (see Note 14). $6,381
was paid in 1997. No payments were made in 1996.
f. The loan balance outstanding at March 31, 1997 was originally due April 1,
1997. A modification and extension agreement was signed in April 1997, renewing
the mortgage for an additional ten years.
g. In accordance with the mortgage taken in conjunction with the renovation of
the Company's corporate headquarters in 1991, the remaining principal in the
amount of approximately $319,000 became due and payable on November 1, 1996 and
was extended until March 1997, at which time it was renewed for an additional
five years.
NOTE 8 - INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
The tax benefits of tax operating loss carryforwards are recorded to the extent
available, less a valuation allowance if it is more likely than not that some
portion of the deferred tax asset will not be realized.
The provision (credit) for taxes is comprised of the following after combining
in 1995 the provision of $1,056,900 for income taxes and the $1,203,800 credit
for income taxes on the extraordinary item:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
State:
Current $23,000 $20,033 $19,900
Deferred 20,000 (56,100) (35,400)
---------- ---------- ----------
43,000 (36,067) (15,500)
---------- ---------- ----------
Federal:
Current 924,800 165,267 0
Deferred (451,800) 78,400 (131,400)
---------- ---------- ----------
473,000 243,667 (131,400)
---------- ---------- ----------
TOTAL $516,000 $207,600 $(146,900)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
As a result of the prior years' operating losses of a subsidiary, the subsidiary
had a net operating loss carryforward of approximately $800,000 as at March 31,
1993, which expires between 1996 and 1999. The subsidiary was merged into the
Company in 1994 so that the loss is now available to the Company. For Fiscal
1995, $287,540 of such carryforward was utilized; $276,855 of the loss
carryforward expired in Fiscal 1996, and $238,901 is being utilized in Fiscal
1997.
Deferred income taxes include the tax effects of temporary differences between
pretax accounting income and taxable income. The principal components of
deferred income taxes are as follows:
NOTE 8 - INCOME TAXES (CONTINUED)
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
------------- ---------- ----------
<S> <C> <C> <C>
Tax depreciation in excess of book
depreciation $(500) $(500) $(26,000)
Equipment differences 115,600 115,600 0
Accrued compensation 123,500 0 0
Bad debt allowance 15,700 10,200 9,000
Inventory differences 66,800 48,200 43,200
Unrealized loss (gain) on investments 2,300 2,600 (2,800)
Warranties and reserves 152,700 114,700 98,000
Timing difference on other expenses 89,600 28,000 0
Timing difference in recognition of
partnership income 985,100 499,400 (321,400)
Accrued vacation 16,300 16,600 19,000
Net operating loss carryforwards and 0 130,400 289,400
credits ------------- ---------- ----------
1,567,100 965,200 108,400
Valuation allowance (834,800) (965,200) (289,400)
------------- ---------- ----------
Total $732,300 $0 $(181,000)
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
The difference between the effective rate of the provision (credit) for income
taxes and the statutory rate for Federal income taxes is summarized as follows
(on a combined basis for taxes on the ordinary and extraordinary items in 1995):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Statutory rate 34.0% (34.0)% (34.0)%
State income taxes .9 .6 2.6
Allocation of tax benefit to additional
paid-in capital 15.2 9.0 23.4
Increase (decrease) in valuation allowance (7.7) 32.9
Tax assessments 6.9
Permanent differences (14.1) (10.4) (20.6)
Other 2.2 4.1
---------- ---------- ----------
Total 30.5% 9.1% (28.6)%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The provision for taxes for Fiscal 1996 includes additional tax provisions of
$156,292 pertaining to Fiscal 1994 and 1993, the result of Internal Revenue
Service examinations covering these periods.
The Company recognized certain federal and state tax benefits resulting from the
sale of stock purchased via exercise of certain incentive stock options and the
lapse of certain restrictions attached to stock awarded to employees. The tax
benefits received, amounting to $256,800, $203,300 and $120,200 for the years
ended March 31, 1997, 1996, and 1995, respectively, have been credited to
additional paid-in capital.
NOTE 8 - INCOME TAXES (CONTINUED)
Permanent differences result mainly from non-taxable interest and non-deductible
goodwill amortization, meals and officers' life insurance.
<PAGE>
The Company is using the equity method in recognizing partnership income and
losses for book purposes and, therefore, had not recognized losses when they
exceeded the investment in the partnership. Accumulated unrealized partnership
losses of approximately $29,182,069 had been incurred at March 31, 1997 for
financial statement purposes and approximately $39,565,284 for tax purposes.
NOTE 9 - COMMON STOCK
A. As of March 31, 1997 warrants to purchase 25,000 shares of common stock were
outstanding. The warrants were exercisable at any time before the expiration
date of November 6, 2000 at an exercise price of $1.875 per share.
During Fiscal 1997 warrants were exercised for 20,000 shares of common stock at
$1.00 per share.
B. The following are options outstanding at March 31, 1997, which the Company
has granted to its employees in accordance with the Incentive Stock Option Plan
which was adopted in 1982 and expired on March 12, 1992. The options outstanding
expire ten years after the date of grant.
<TABLE>
<CAPTION>
Date of Grant Number of Shares Exercise Price
- --------------------------------------------------------
<S> <C> <C>
April 26, 1988 7,000 5.00
August 8, 1988 2,500 6.25
January 26, 1989 8,000 6.90
August 17, 1989 2,000 7.50
February 1, 1990 6,000 5.90
November 6, 1990 12,000 1.875
------------------
TOTAL STOCK OPTIONS 37,500
------------------
------------------
</TABLE>
C. During Fiscal 1997, 1996 and 1995, 2,800, 6,450 and 7,250 options were
exercised for $7,550, $20,731 and $12,813, respectively, under the above plan.
Of the 2,800 options exercised during Fiscal 1997, 1,000 were exercised and paid
by the return of 86 shares which were added to the treasury. Of the 6,450 and
7,250 shares purchased during Fiscal 1996 and 1995, 1,200 and 6,000,
respectively, were issued from treasury shares and subsequently repurchased by
the Company. At March 31, 1997, options to purchase 37,500 shares were
exercisable.
D. In August 1992 the Company entered into restricted stock agreements with
certain employees to provide incentive to continue in the employ of the Company.
Restrictions on the shares lapse to the extent of one-third of the award shares
on the third anniversary of the agreement, an additional one-third on the
fourth anniversary and the remaining one-third on the fifth anniversary of the
agreement. Upon an employee's termination during the restriction period, the
Company has the right within 30 days to purchase from the grantee all of the
award shares issued under the Plan at a price equal to the original grant date
value, plus 10% a year. In addition, during the restriction period the award
shares may not be sold, assigned, pledged, or otherwise transferred. Pursuant to
the agreements, 545,000 shares were granted during the year ended March 31,
1993. At March 31, 1997, 235,000 shares were still subject to the restrictions.
NOTE 9 - COMMON STOCK (CONTINUED)
E. In December 1992 the Board of Directors approved the adoption of the 1993
Incentive Plan to provide for up to 1,000,000 shares of common stock to be
available for issuance to officers, directors, employees and consultants. Awards
may be in the form of statutory stock options, non-statutory stock options,
stock appreciation rights, dividend payment rights or options to purchase
restricted stock at the discretion of the Compensation Committee. The 1993
Incentive Plan was approved by the shareholders, effective on January 1, 1993
and expires on December 31, 2002. On January 15, 1996 the plan was amended and
restated by the Board of Directors, effective January 1, 1996 (the Amended and
Restated 1993 Incentive Plan (the "1993 Plan")), to meet the requirements of
Exchange Act rule 16b-3 so that transactions effected pursuant to the 1993 Plan
qualify for exemption from Section 16(b) of the Exchange Act.
<PAGE>
In December 1995 the Company gave certain employees the option to take
restricted stock grants in lieu of cash bonuses. The stock was valued at $7.00
per share, has a five-year restriction against transfer, and will be held in
escrow during the restriction period. Upon termination of employment during the
restriction period, all bonus stock would be forfeited and the Company would
repurchase the shares at $7.00 per share plus a rate of return based on the
prime rate. The Company may waive the forfeiture provision within 30 days of
termination. Treasury shares were issued to cover the 2,545 restricted shares
granted.
In January 1996 the Company granted non-statutory restricted options to two
executive officers under the 1993 Plan to purchase 20,500 shares of the
Company's common stock at $7.00 per share until December 31, 1996. The options
were subsequently exercised. Option shares are subject to transfer restrictions
and forfeiture provisions which lapse on the fifth anniversary of the grant and
will be held in escrow during the restriction period. Upon termination of
employment during the restriction period, all option shares would be forfeited
and the Company would repurchase the shares at $7.00 per share plus a rate of
return based on the prime rate. The Company may waive the forfeiture provision
within 30 days of termination.
In February 1996 the Company granted non-statutory options to officers and
employees under the 1993 Plan to purchase 61,500 shares of the Company's common
stock at $3.00 per share. The options vest as to 20% of the grant shares in each
of the sixth through the tenth years after the date of grant. During Fiscal 1997
options for 2,000 shares were canceled, and as of March 31, 1997, 59,500 options
were outstanding.
F. At the Company's annual shareholders' meeting in September 1993, the
shareholders approved a stock repurchase plan. Under this plan the Company, at
the discretion of the Board of Directors, could purchase up to 300,000 shares of
its common stock. Since January 1994 the Company has purchased 182,500 shares of
common stock for $1,288,071 under the repurchase plan and 198,702 shares for
$996,959 through various private transactions and other agreements.
G. In May 1995 the Company exercised its option to purchase 62,500 shares owned
by its partnership co-developer for $1.00 per share. The 62,500 shares were
purchased for cash and included in treasury stock.
H. The per share fair values of the two stock options granted during the year
ended March 31, 1996 were $6.55 and $10.11, respectively, on the date of grant
using the Black Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
<S> <C> <C>
Expected dividend yield 0%
- ---------------------------------------------
Risk-free interest rate 6% and 7%
- ---------------------------------------------
Expected stock volatility 62.5%
- ---------------------------------------------
Expected option life 5 and 10 years
- ---------------------------------------------
</TABLE>
NOTE 9 - COMMON STOCK (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for various stock-based
plans and, accordingly, no compensation cost is recognized in the financial
statements for its stock options which have an exercise price equal to the fair
value of the stock on the date of the grant. Compensation cost is recognized in
the financial statements for stock options which have an exercise price that is
less than the fair value of the stock on the date of the grant. The cost is
recognized over the vesting period of the grant and amounted to $59,860 for the
year ended March 31, 1997 and $10,783 for the year ended March 31, 1996. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net income would have
been reduced to the pro forma amounts of $1,146,806 and $(2,482,314) for the
years ended March 31, 1997 and 1996, respectively, and there would have been no
change in the per-share amounts in 1996 and a reduction of $.01 in 1997.
Pro forma net income reflects only options granted during the year ended March
31, 1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected
<PAGE>
in the pro forma net income amounts presented above because compensation cost is
reflected over the options' vesting periods of five and ten years, and
compensation cost for options granted prior to April 1, 1995 was not considered.
NOTE 10 - PREFERRED STOCK
The Company has authorized 7,500,000 shares of $1.00 par value preferred stock.
At March 31, 1997 there were no shares issued and outstanding.
NOTE 11 - RELATED PARTIES
Amounts due from affiliates at March 31, 1997 and 1996 relate principally to
receivables from the project partnerships for development and management fees of
$1,301,797 and $73,132, respectively. Also included is $37,005 in 1997 and
$16,602 in 1996 from companies owned by the Chairman, Chief Executive Officer
and President of the Company which provide certain services to the Company for
airport usage, plane services and engineering consulting services totaling
$90,621, $64,828 and $74,914 for the years ended March 31, 1997, 1996 and 1995,
respectively.
NOTE 12 - SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Year Ended
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Advertising costs $68,413 $76,972 $129,111
Research and development expenses(1) 646,817 426,239 480,459
Warranty expense 295,333 176,117 178,943
Amortization of patents and trademarks 16,845 23,630 43,955
Maintenance and repairs 73,169 71,684 110,786
Taxes other than payroll and income taxes 666,249 620,175 510,044
</TABLE>
(1)Since Fiscal 1994 the Company has expanded its efforts in technology
development, particularly solar electric products. Expenditures for research and
development for the last three years were $646,817 in Fiscal 1997, $426,239 in
Fiscal 1996 and $480,459 in Fiscal 1995. Personnel expenses, comprising the
largest portion of these amounts, were $301,055 in Fiscal 1997, $324,662 in
Fiscal 1996 and $431,002 in Fiscal 1995. Of the total amounts, expenses
attributable to the Company's agreements with the New York State Energy Research
and Development Authority were $414,307 in Fiscal 1997, $229,658 in Fiscal 1996
and $115,883 in Fiscal 1995.
NOTE 13 - LEGAL PROCEEDINGS
In June 1997 the Company and its Chairman, Chief Executive Officer and
President, Michael F. Zinn, each entered guilty pleas to two felony counts in
United States District Court for the Southern District of New York, White
Plains, New York. Each entered a guilty plea to one count of causing a false
statement to be made to the Federal Election Commission ("FEC") and one count of
filing a false tax return, both in connection with contributions to the 1992
election campaign of Congressman Maurice Hinchey. Both the Company and Mr. Zinn
are scheduled to be sentenced in September 1997. The Company is uncertain as to
what effect or consequences this development will have to its current or future
business activities.
The St. Francis Hospital cogeneration facility was shut down by the management
of the hospital, and the Company initiated a lawsuit against the third-party
turn-key operator, Tecogen, Inc., for failing to complete its obligations under
the contract prior to this action by the hospital. The Company is currently
seeking to recover its entire investment as well as other damages and, based
upon the opinion of counsel, management of the Company believes that the outcome
of the litigation should be favorable. However, given the potentially protracted
nature of the litigation, the Company made provision for the write-off of the
book value of the asset at March 31, 1992, resulting in "other expense" of
$1,102,611 and in Fiscal 1993 provided an additional $200,000 to cover the cost
of removal of the system from the facility. Outcome of the litigation is pending
a decision of the courts.
<PAGE>
In March 1993 a shareholder derivative suit was filed against the Company and
the Company's directors which alleges, among other charges, that the directors
acted improperly in issuing Company shares to themselves for little or no
consideration. The plaintiff is seeking award of damages to the Company,
including punitive damages and interest, an accounting and the return of assets
to the Company, the appointment of independent members to the Board of
Directors, the cancellation of allegedly improperly granted shares, and the
award to the plaintiff of costs and expenses of the lawsuit including legal
fees. The defendants have denied the allegations of the complaint. The Board of
Directors of the Company formed a Special Litigation Committee ("SLC") comprised
of independent, outside directors to investigate the allegations made in the
action and determine if continued prosecution of the action is in the best
interest of the Company. After an extensive investigation of the allegations
made in the complaint, the SLC issued a resolution dated March 28, 1995 finding
that the continued prosecution of the derivative action was not in the best
interest of the Company. By further resolution dated April 27, 1995, the SLC
instructed the Company's outside counsel to take the necessary steps in court to
seek to have the action dismissed. Pursuant to a resolution of the SLC, on May
18, 1995, a motion to dismiss the action based on the recommendation of the SLC
was filed with the Court and is being held in abeyance by the Court pending the
completion of limited discovery. On February 26, 1997 the Company renewed its
motion to dismiss which is sub judice. Oral argument on the matter was heard on
June 12, 1997, and the Company is awaiting a decision on the matter. Management
is of the opinion that meritorious defenses to the suit have been asserted and
that the outcome of the action will have no material adverse impact on the
Company.
As discussed in Notes 4 and 5, the Company, through its partner interests, was
involved in the construction of a cogeneration facility and an associated
greenhouse. Various legal proceedings have arisen from these facilities due to
construction problems, breaches of contract and bankruptcies so that neither
facility is presently being operated.
NOTE 14 - ACQUISITIONS
In 1995 the Company completed an agreement to acquire the assets of SunWize
Energy Systems, Inc. ("SW Illinois") effective as of October 1, 1992. The
$315,000 purchase price of the assets, which included distribution rights and a
new employment agreement of the president of SW Illinois, represented $200,000
payable as a percentage of future gross margins of the SunWize division and
$115,000 of liabilities that were assumed. As of March 31, 1997 the value of the
acquired assets was fully amortized. Included in other assets at March 31, 1996
is $45,000, representing the unamortized value of the acquired assets.
Consideration under the new employment agreement included the granting of 48,000
shares of the Company's common stock. Such shares were issued from shares held
in treasury upon completion of all the negotiations and signing of the
restructured SW Illinois agreement during 1995. Transfer restrictions were in
place on certain of these shares which were valued at $1.00 per share, the value
of the shares at the time of the original agreement. In January 1995 all of the
48,000 shares were repurchased by the Company at the then market value of
$312,000 and returned to treasury shares.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
At March 31, 1997, the Company has no significant minimum annual rental
commitments under non-cancelable operating leases for equipment and office
space. The Company has two leases for office and warehouse space. One lease
calls for monthly rental of $550 for a period of 12 months ending April 1998.
The second lease originally was for ten years at $150,000 per year commencing
December 15, 1994, with the Company having the annual right to terminate the
lease during the first seven years of the lease term. Effective September 1,
1995 this lease was renegotiated based upon a reduction of rented space from
25,000 square feet to 17,000 square feet. The term of this lease was for an
initial period of six months, commencing on October 1, 1995 and ending on March
31, 1996. The term automatically renews for successive periods of six months
each. After December 31, 1996, either party may terminate the lease at any time
by giving the other party at least ninety days notice in writing. The annual
rent from September 1, 1995 forward is $102,000, which will be adjusted in
future periods based on the Consumer Price Index. Rent expense on all operating
leases for the years ended March 31, 1997, 1996 and 1995 was $173,903, $177,161
and $96,967, respectively.
The Company has a long-term deferred compensation plan, pursuant to which
incentive compensation was provided to certain key employees based on the future
operating performance of certain projects. Awards under the plan at March 31,
1993 aggregated $404,625. During the year ended March 31, 1994
<PAGE>
early payout was made to three of the five individuals under the plan, whereby
they received $141,075 in cash and released the Company from $78,925 in payments
for the prepayment of the future amounts due. Payments of one award of $45,000
was pending settlement of a dispute with the individual at March 31, 1994 and
was settled in 1995 for $28,000. The balance of the awards of $139,625 is to be
paid contingent upon applicable project cash flows, if any, payable over a
four-year period commencing with December 31 following the start of commercial
operations of the respective project. Payments of $41,207 were made in 1995,
$68,691 in 1996 and $7,500 in 1997 with the final payment of $5,625 due in 1998.
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and short-term investments reported in the
consolidated balance sheet approximates their fair value. The estimated fair
value of long-term notes receivable, except those due from an affiliate and the
greenhouse, approximates the carrying value as management believes the
respective interest rates are commensurate with the credit, interest rate and
risks involved. Notes receivable due from an affiliate and the greenhouse
mentioned above are in default, and it is not practicable to estimate the fair
value. All significant long-term debts are floating rate instruments whose
carrying amounts approximate fair value. It is not practicable to estimate the
fair value of the Company's investment in partnerships because of the lack of
quoted market prices and the inability to estimate fair value without incurring
excessive costs.
NOTE 17 - SEGMENTS OF BUSINESS
The Company specializes in the development of power projects and energy
technologies. Working with partners, the Company develops independent power
projects (the "Project Segment"). The Company also provides engineering, system
design, project management and turn-key installation of photovoltaics and
thermal energy systems, and fabricates, manufactures, markets and distributes
alternative energy projects through a domestic and international network (the
"Product Segment"). The Company's export product sales, principally to Europe
and the Pacific Rim, for the years ended March 31, 1997, 1996 and 1995 were
$297,761, $455,114 and $548,669, respectively. A summary of industry segment
information for the years ended March 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 Project Product Eliminations Total
- ------------------------------ Segment Segment -------------------- -----------
---------- ----------
<S> <C> <C> <C> <C>
Net revenues $9,638,394 $4,929,157 $ $14,567,551
Net Income (loss) 2,888,567 (1,714,845) 1,173,722
Identifiable assets 40,385,917 3,692,166 (32,241,284) 11,836,799
Capital expenditures 32,109 25,681 57,790
Depreciation and amortization 272,715 82,889 355,604
</TABLE>
<TABLE>
<CAPTION>
1996
- ------------------------------
<S> <C> <C> <C> <C>
Net revenues $4,046,089 $4,033,430 $ $8,079,519
Net income (902,722) (1,575,597) (2,478,319)
Identifiable assets 29,131,974 3,563,959 (23,290,943) 9,404,990
Capital expenditures 262,950 59,551 322,501
Depreciation and amortization 276,271 112,166 388,437
</TABLE>
<TABLE>
<CAPTION>
1995
- ------------------------------
<S> <C> <C> <C> <C>
Net revenues $9,702,467 $4,593,675 $ $14,296,142
Net income (loss) 1,325,526 (1,692,603) (367,077)
Identifiable assets 25,640,671 3,556,545 (18,327,874) 10,869,342
Capital expenditures 341,704 154,665 496,369
Depreciation and amortization 238,727 108,589 347,316
</TABLE>
<PAGE>
ITEM 8. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
<PAGE>
PART III
The Proxy Statement for the Annual Meeting of Shareholders to be held September
30, 1997 (other than the portions thereof not deemed to be "filed" for the
purposes of Section 18 of the Securities Exchange Act of 1934), which when filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934 will be
incorporated by reference in this Annual Report on Form 10-KSB pursuant to
General Instruction E(3) of Form 10-KSB, will provide the information required
under Part III (Items 9, 10, 11 and 12).
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a.) Item
<TABLE>
<CAPTION>
<S> <C>
Exhibit No.
3-A Restated Certificate of Incorporation of the Registrant (filed as an Exhibit of the Company's
Form 10-Q for the quarter ended November 30, 1982 and incorporated herein by reference), as
amended by Certificate of Amendment of the Certificate of Incorporation of the Registrant
dated August 29, 1988, Certificate of Change of the Certificate of Incorporation of the
Registrant dated March 8, 1991, Certificate of Amendment of the Certificate of Incorporation
of the Registrant dated March 8, 1991, Certificate of Amendment of the Certificate of
Incorporation of the Registrant dated April 12, 1991, and Certificate of Change of the
Certificate of Incorporation of the Registrant dated July 1, 1991 (all filed as Exhibits to
the Company's Form 10-QSB for the quarter ended September 30, 1994 and also incorporated
herein by reference).
3-B Amended By-Laws of the Registrant as of May 6, 1994, filed as an Exhibit to the Company's Form
10-KSB for the year ended March 31, 1994, incorporated herein by reference.
10-A First Amendment to Second Amended and Restated Limited Partnership Agreement of BBI Power L.P.
among Besicorp International Power Corp., Chesapeake Power Investments Co. Inc., Beta
International Power Corp., and Chesapeake Power Transport Inc. dated September, 1996.
10-B Besicorp Group Inc. Incentive Stock Option Plan (filed March 16, 1984 on the Company's Form
S-8 and incorporated herein by reference).
10-C Besicorp Group Inc. 1993 Incentive Plan (filed as an Exhibit to the Company's 1993 Proxy
statement and incorporated herein by reference).
10-D Form of Stock Agreement for stock bonus award in lieu of cash bonus
21 Subsidiaries of the Company
23-B Consent of Citrin Cooperman & Company, LLP
27 Financial Data Schedule
99-A* Audited financial statements of Kamine/Besicorp Carthage L.P. for the years ended December 31,
1996 and 1995
99-B* Audited financial statements of Kamine/Besicorp South Glens Falls L.P. for the years ended
December 31, 1996 and 1995
99-C Audited financial statements of Kamine/Besicorp GlenCarthage Partnership for the years ended
December 31, 1996 and 1995
99-D* Audited financial statements of Kamine/Besicorp Natural Dam L.P. for the years ended December
31, 1996 and 1995
99-E* Audited financial statements of Kamine/Besicorp Syracuse L.P. for the years ended December 31,
1996 and 1995
99-F* Audited financial statements of Kamine/Besicorp Beaver Falls L.P. for the years ended December
31, 1996 and 1995
</TABLE>
<PAGE>
(b.) There were no reports filed on Form 8-K for the quarter ended March 31,
1997.
* Certain Confidential Material contained in this document has been omitted and
filed separately with the Securities and Exchange Commission pursuant to Rule
24b-2 of the Securities Act of 1934, as amended. The space where information
has been omitted has been marked as follows: (INFORMATION DELETED - SUBJECT OF
A CONFIDENTIALITY REQUEST)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BESICORP GROUP INC., Registrant
By: /s/ Michael F. Zinn Date: July 9, 1997
name: Michael F. Zinn
title: President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signatures Title Date
/s/ Michael F. Zinn President, Chairman, Director July 9, 1997
Michael F. Zinn (principal executive officer)
/s/ Gerald A. Habib Director July 10, 1997
Gerald A. Habib
/s/ Harold Harris Director July 9, 1997
Harold Harris
/s/ Richard E. Rosen Director July 10, 1997
Richard E. Rosen
/s/ Michael J. Daley Vice President, Chief Financial July 11, 1997
Michael J. Daley Officer (principal financial and
accounting officer)
</TABLE>
SUPPLEMENTAL INFORMATION
Subsequent to the filing of the report on this form, the Registrant shall
provide annual report and proxy material to security holders and the Registrant
shall furnish copies of such material to the commission at that time.
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit No. Page
No.
3-A Restated Certificate of Incorporation of the Registrant (filed as an Exhibit of --
the Company's Form 10-Q for the quarter ended November 30, 1982 and
incorporated herein by reference), as amended by Certificate of Amendment of
the Certificate of Incorporation of the Registrant dated August 29, 1988,
Certificate of Change of the Certificate of Incorporation of the Registrant
dated March 8, 1991, Certificate of Amendment of the Certificate of
Incorporation of the Registrant dated March 8, 1991, Certificate of Amendment
of the Certificate of Incorporation of the Registrant dated April 12, 1991, and
Certificate of Change of the Certificate of Incorporation of the Registrant
dated July 1, 1991 (all filed as Exhibits to the Company's Form 10-QSB for the
quarter ended September 30, 1994 and also incorporated herein by reference).
3-B Amended By-Laws of the Registrant as of May 6, 1994, filed as an Exhibit to the --
Company's Form 10-KSB for the year ended March 31, 1994, incorporated herein by
reference.
10-A First Amendment to Second Amended and Restated Limited Partnership Agreement of 52
BBI Power L.P. among Besicorp International Power Corp., Chesapeake Power
Investments Co. Inc., Beta International Power Corp., and Chesapeake Power
Transport Inc. dated September, 1996.
10-B Besicorp Group Inc. Incentive Stock Option Plan (filed March 16, 1984 on the --
Company's Form S-8 and incorporated herein by reference).
10-C Besicorp Group Inc. 1993 Incentive Plan (filed as an Exhibit to the Company's --
1993 Proxy statement and incorporated herein by reference).
10-D Form of Stock Agreement for stock bonus award in lieu of cash bonus 58
21 Subsidiaries of the Company 62
23-B Consent of Citrin Cooperman & Company, LLP 64
27 Financial Data Schedule 65
99-A* Audited financial statements of Kamine/Besicorp Carthage L.P. for the years 66
ended December 31, 1996 and 1995
99-B* Audited financial statements of Kamine/Besicorp South Glens Falls L.P. for the 83
years ended December 31, 1996 and 1995
99-C Audited financial statements of Kamine/Besicorp GlenCarthage Partnership for 100
the years ended December 31, 1996 and 1995
99-D* Audited financial statements of Kamine/Besicorp Natural Dam L.P. for the years 110
ended December 31, 1996 and 1995
99-E* Audited financial statements of Kamine/Besicorp Syracuse L.P. for the years 127
ended December 31, 1996 and 1995
99-F* Audited financial statements of Kamine/Besicorp Beaver Falls L.P. for the years 143
ended December 31, 1996 and 1995
</TABLE>
<PAGE>
* Certain Confidential Material contained in this document has been omitted and
filed separately with the Securities and Exchange Commission pursuant to Rule
24b-2 of the Securities Act of 1934, as amended. The space where information
has been omitted has been marked as follows: (INFORMATION DELETED - SUBJECT OF
A CONFIDENTIALITY REQUEST)
<PAGE>
EXHIBIT NO. 10-A
FIRST AMENDMENT
TO
SECOND AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT
OF BBI POWER L.P.
FIRST AMENDMENT TO SECOND AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT
dated as of the __________ day of September, 1996 (the "First Amendment") by and
among BESICORP INTERNATIONAL POWER CORP., a Delaware corporation ("Besicorp"),
and CHESAPEAKE POWER INVESTMENTS CO. INC., a British Virgin Islands corporation
("Chesapeake"), each as a general partner, and BETA INTERNATIONAL POWER CORP., a
Delaware corporation ("BIPC"), and CHESAPEAKE POWER TRANSPORT INC., a Delaware
corporation ("CPT"), each as a limited partner.
PREAMBLE
WHEREAS, BESICORP and CHESAPEAKE, as general partners, formed a Delaware
limited partnership with BIPC and CPT, as limited partners, pursuant to a
Limited Partnership Agreement, dated as of November 4, 1994 which was amended
and restated as of June ___, 1995 (the "Amended and Restated Agreement"), and
which Amended and Restated Agreement was amended and restated as of January 31,
1996 (the "Second Amended and Restated Limited Partnership Agreement");
WHEREAS, the parties hereto desire to amend the Second Amended and Restated
Limited Partnership Agreement, in certain respects, as more fully set forth
herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto mutually
covenant and agree as follows:
1. Definitions. All capitalized terms used in this First Amendment and not
otherwise defined herein shall have the meanings ascribed to them in the Second
Amended and Restated Limited Partnership Agreement.
2. Amendment to Article I. Article I of the Second Amended and Restated
Limited Partnership Agreement is hereby amended by amending and restating the
definitions of the following terms in their entirety to read as follows:
"'Prorata' shall mean the proportion the interest of Chesapeake, its
Affiliates, Clients and designees bears to the interest of Besicorp, its
Affiliates and designees of any kind in a Project Owner or for any cash flow
interest in a Partnership Development or for payment of expenses or fees or
representation on a committee, or for purposes of Section 3.11, which shall
mean a ratio of 50-50 in every case.
'Territory' shall mean the Union of India."
3. Amendment to Section 3.06. Section 3.06 is hereby amended to delete the
first sentence and to replace it with the following in its entirety to read as
follows:
"The Partnership is currently developing thermal power generation projects in
Krishnapatnam (the "Krishnapatnam Project") and Bhavanapadu, Andhra Pradesh,
India."
4. Amendment to Section 3.09. Section 3.09 is hereby amended and restated in
its entirety to read as follows:
"3.09. Allocation of Interests in Project Owners. (a) Ownership Interest. With
respect to all Partnership Developments, Chesapeake and Besicorp or their
respective designees shall have equal equity, cash flow and partnership
interests in each Project Owner until financial closing of construction
financing of such Partner-
<PAGE>
ship Development. After financial closing of construction financing of any
partnership Development, and subject to the provisions of any Operative
Contracts for such Partnership Development and the provisions of Section 7.04,
each of Besicorp and Chesapeake may Assign its interests in such Project Owner
without regard to whether, after the Assignment, the interests of Chesapeake
and Besicorp would remain equal.
(b) Dilution of Ownership Interests. If either through the sale of equity or
the granting of cash flow interests of an incorporated Project owner or the
granting of a partnership or cash flow interest in an unincorporated Project
Owner, or otherwise, the ownership interests of Chesapeake and Besicorp, or
their respective designees, is diluted in a Project Owner, the resulting
dilution shall, nonetheless, preserve the equal interest in such Project Owner
by Chesapeake and Besicorp, or their respective designees, until financial
closing of construction financing with respect to that Partnership
Development.
(c) Executive Committees. If a committee consisting of representatives of
Co-Developers or other financing parties or equity participants is constituted
for any Partnership Development, Besicorp and Chesapeake, or their respective
designees, shall have equal representation on such committee."
5. Amendment to Section 3.10. Paragraphs (c) and (d) of Section 3.10 are
hereby amended and restated in their entirety to read as follows:
"(c) Allocation of Reimbursement of Project Expenses. (i) To the extent that
the Partnership or any Project Owner receives funding for a Partnership
Development from a Co-Developer, any equity participant, or from another
financing source to reimburse the line items in the Development Cost Budget
entitled Third Party Reimbursable Costs, Internal Timing Billings and
Out-of-Pocket Expenses, as between Besicorp and Chesapeake, such funding shall
be distributed as follows:
(x) For any Third Party Reimbursable Cost (to the extent specifically set
forth as such as a line item in the Development Capital Budget for such
Partnership Development) on a first-in first-out basis to the General Partner
which incurred such expense.
(y) For Internal Time Billings and Out-of-Pocket expenses, with respect to
such Partnership Development to Chesapeake and Besicorp in equal amounts,
without regard to the actual ratio of such Internal Time Billings and
Out-of-Pocket Expenses incurred by such General Partners.
(ii) The Managing General Partner shall make reasonable efforts to ensure
that each Development Cost Budget shall contain line items for Internal Time
Billings and Out-of-Pocket Expenses.
(d) Payment of Development Fees. If the financing provided to any Project
Owner will permit the payment of development, administrative and/or management
fees, for a Partnership Development, such fees shall be paid to Chesapeake and
Besicorp as further payment for the provision of services of its personnel,
with respect to Partnership Developments in India, in equal shares."
6. Governing Law. This First Amendment shall be governed by and construed in
accordance with the laws of the State of Delaware (without reference to
principles of conflicts of laws).
7. Counterparts. This First Amendment may be executed in one or more
counterparts each of which when taken together with all original counterparts
will constitute one and the same instrument.
8. Amendment and Waiver. No amendment, modification or waiver of any
provision of this First Amendment shall be valid or effective unless made by one
or more instruments in writing and signed by such of the parties hereto which
would be affected by such amendment, modification or waiver.
9. Entire Agreement. The Second Amended and Restated Limited Partnership
Agreement as amended by this First Amendment constitutes the entire agreement
between the parties hereto with respect to the matters dealt with herein and
supersedes any previous agreement among the parties hereto, whether oral or
written, in relation to such matters.
10. Ratification. Except as expressly set forth herein, the Second Amended
and Restated Limited Partner-
<PAGE>
ship Agreement is not modified hereby and shall remain in full force and effect
in accordance with the respective provisions thereof on the date hereof, and the
Second Amended and Restated Limited Partnership Agreement is in all respects
ratified and affirmed.
IN WITNESS WHEREOF, the parties have duly executed this First Amendment as of
the day and year first above written.
BESICORP INTERNATIONAL POWER CORP.
By: /s/ Michael F. Zinn
Name: Michael F. Zinn
Title: President
BETA INTERNATIONAL POWER CORP.
By:/s/ Michael F. Zinn
Name: Michael F. Zinn
Title: President
CHESAPEAKE POWER INVESTMENTS CO. INC.
By Chesapeake Power Transport, Inc., its Agent
By:/s/ Paul B. Prager
Name: Paul B. Prager
Title: President
CHESAPEAKE POWER TRANSPORT, INC.
By:/s/ Paul B. Prager
Name: Paul B. Prager
Title: President
<PAGE>
Exhibit 10.D
STOCK AGREEMENT
This Agreement dated as of December 21, 1995 ("Date of Award") by and
between BESICORP GROUP INC., a New York Corporation (together with its
subsidiaries, the "Corporation") and _______________________________, (the
"Grantee").
In order to provide an incentive to the Grantee, who is an employee of the
Corporation, to continue in the employ of the Corporation, the Corporation is
willing to convey shares of the Corporation's common stock, par value $.10 per
share (the "Common Stock"), to the Grantee on the terms and conditions set forth
in this Agreement.
In consideration of the foregoing and of the covenants set forth below, the
Corporation and the Grantee agree as follows:
1. Grant. The Corporation agrees to convey to Grantee a restricted stock
award of _______________ shares of the Common Stock (the "Award Shares"), upon
payment by Grantee to the Corporation of the purchase price of Seven and 00/100
($7.00) per share, and subject to the terms and conditions set forth below.
2. Transfer Restrictions. During the applicable Restriction Period set
forth in Section 4 below, Award Shares shall not be sold, assigned, pledged or
otherwise transferred, disposed of, alienated or encumbered, voluntarily or
involuntarily, by the Grantee, provided that the Award Shares may be transferred
by will or under the laws of descent and distribution following the Grantee's
death but shall thereafter remain subject to the provisions of this Section 2
and the provisions of Section 3 below.
For purposes of this Section 2, an involuntary sale, assignment, pledge,
transfer or other disposition, alienation or encumbrance of the Award Shares
shall include any of (i) the adjudication of the Grantee as a bankrupt,
incompetent or insolvent by any court of competent jurisdiction, (ii) the filing
by the Grantee of a voluntary petition in bankruptcy or in assignment for the
benefit of creditors, (iii) an attempt to levy an execution, attachment,
sequestration or other writ upon any of the Award Shares or (iv) the appointment
by any court of competent jurisdiction of a receiver or trustee of all or
substantially all the assets of the Grantee, and such event shall be deemed to
occur in respect of all Award Shares owned by the Grantee.
Any attempted sale, assignment, pledge, transfer, disposition, alienation
or encumbrance not permitted by this Section 2 shall be void and of no effect.
The Corporation shall not be required (i) to transfer on its books any Award
Shares which shall have been sold, assigned, pledged, transferred, disposed of,
alienated or encumbered in violation of this Section 2, or (ii) to treat as
owner of such Award Shares or to accord the right to vote as such owner or to
pay dividends to any person or entity to whom such Award Shares shall have been
so sold, assigned, pledged, transferred, disposed of, alienated or encumbered.
3. Forfeiture. During the applicable Restriction Period set forth in
Section 4 below, in the event that the Grantee's employment with the Corporation
terminates for any reason, including but not limited to termination voluntarily,
whether upon retirement or otherwise, or involuntarily, whether or not for
cause, the Corporation shall have the right, exercisable in its sole discretion
at any time up to and including the thirtieth (30th) day after such termination,
to purchase from the Grantee all of the Award Shares at a purchase price per
share equal to Seven and 00/100 Dollars ($7.00) per share (the "Purchase Price")
(subject to adjustment as provided in Section 5 below), provided that the
Purchase Price shall be increased as of the date of termination to provide
Grantee a rate of return equal to the prime rate of interest, as published in
The Wall Street Journal, as in effect as of the date hereof. The Corporation may
elect to exercise the purchase right described in the immediately preceding
sentence by written notice to the Grantee given during such thirty (30) day
period, and the closing of such purchase shall occur at the Corporation's
principal office on the tenth (10th) business day after the date of such notice.
4. Restriction Periods. The transfer restriction and forfeiture provisions
set forth in Section 2 and 3 above shall lapse on the fifth (5th) anniversary of
the date of this Agreement.
5. Merger: Adjustment of Shares and Purchase Price. Notwithstanding
anything to the contrary contained in this Agreement:
(a) Award Shares may be surrendered in a merger, consolidation or share
exchange involving the Company; provided that the securities or other
consideration received in exchange for
<PAGE>
the Award Shares shall thereafter be subject to the restrictions and
conditions set forth in this Agreement and that the Grantee shall, by
accepting the securities or other consideration received in respect of or
in exchange for the Award Shares, be deemed to have agreed to be bound by
any shareholder agreement to which shareholders holding greater than 50%
of the voting securities of the successor corporation are parties.
(b) In the event of any change in the outstanding Common Stock resulting
from a subdivision or consolidation of the Common Stock, whether through
reorganization, recapitalization, share split, reverse share split, share
distribution, or combination of shares, distribution of a stock dividend
or otherwise, then (i) the Award Shares shall be treated in the same
manner in any such transaction as other shares of Common Stock, and the
term "Award Shares" shall thereafter be deemed to include any securities
received in respect of or in exchange for the Award Shares, and (ii) the
Board of Directors of the Corporation shall be entitled to make an
adjustment to the Purchase Price described in Section 3 above which the
Board, in its sole discretion, considers appropriate.
6. Rights as Stockholder. Except as otherwise provided in this Agreement,
the Grantee shall be entitled to all of the rights of a holder of Common Stock
with respect to the Award Shares, including the right to vote such shares and to
receive dividends and other distributions payable with respect to such shares
for any record date after the Date of Award.
7. Escrow of Award Share Certificates. Certificates for the Award Shares
shall be issued in the Grantee's name, shall bear the legends set forth in
Section 10 below and, at the Corporation's option, shall be held in escrow by
the Corporation until all transfer restriction and forfeiture provisions have
lapsed with respect to such shares or until such shares are forfeited as
provided in Section 3 above; provided, however, that such escrow shall permit
the transactions contemplated by Section 5 above. A certificate or certificates
representing the Award Shares as to which all transfer restriction and
forfeiture provisions have lapsed shall be delivered, without the legend set
forth in Section 10 (b) below, to the Grantee upon such lapse.
8. Government Regulations. Notwithstanding anything to the contrary
contained in this Agreement, the Corporation's obligation to issue or deliver
certificates evidencing the Award Shares shall be subject to all applicable
laws, rules and regulations and to such approvals by any governmental agencies,
national securities exchanges or the National Association of Securities Dealers,
Inc. as may then be required.
9. Withholding Taxes. The Grantee acknowledges that he or she understands
that, upon lapse of either the transfer restriction provision or the forfeiture
provision, the Award Shares will become subject to tax as compensation income to
the Grantee. The Corporation shall have the right to require the Grantee to
remit to the Corporation, or to withhold from other amounts payable to the
Grantee, as compensation or otherwise, an amount sufficient to satisfy all
federal, state and local withholding tax requirements with respect to the Award
Shares.
10. Legends. Certificates for the Award Shares shall bear the following
legends:
(a) "The shares represented hereby may not be sold, transferred or
otherwise disposed of, or subjected to any lien, claim or encumbrance,
except in compliance with the applicable provisions of the Securities Act
of 1933, as amended."
(b) "The transfer of these shares is further restricted and subject to
the terms of a certain Stock Agreement by and between the Company and the
holder hereof dated as of December 21, 1995."
11. Employment. The Grantee's right, if any, to continue in the employ of
the Corporation shall not be enlarged or otherwise affected by the terms and
conditions of this Agreement, and this Agreement does not constitute an
agreement to continue such employment.
12. Grantee's Representations. The Grantee hereby represents and warrants
to the Corporation as follows:
(a) The Grantee is fully aware of the business and financial status of
the Corporation.
(b) The Grantee is aware of the speculative nature of the Common Stock.
(c) The Grantee has adequate means of providing for current needs and
personal contingencies, and has no need for liquidity with respect to the
Award Shares.
(d) The Grantee is acquiring the Award Shares for investment and not with
a view to the
<PAGE>
sale or distribution thereof.
13. Further Assurances. At any time and from time to time the Grantee
shall, without further consideration, take such actions (including but not
limited to the delivery to the Corporation of the Certificates for the Award
Shares, together with stock powers duly endorsed in blank, if the Corporation
elects to exercise its right to hold such certificates in escrow pursuant to
Section 7 above) and execute and deliver such documents as the Corporation may
request to effectuate the purposes of this Agreement.
14. Entire Agreement: Modification. This Agreement sets forth the entire
understanding of the parties with respect to the subject matter hereof,
supersedes all existing agreements between them concerning such subject matter
and maybe modified only by a written instrument duly executed by each party.
15. Waiver. The failure of a party to insist upon strict adherence to any
term of this Agreement on one or more occasions shall not be considered a waiver
or deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing to
be effective.
16. Equitable Remedies. Since a breach by the Grantee of any of the
provisions of this Agreement could not adequately be compensated by money
damages, the Corporation shall be entitled, in addition to any other right or
remedy available to the Corporation, to an injunction restraining such breach or
a threatened breach and to specific performance of any such provision of this
Agreement, and in either case no bond or other security shall be required in
connection therewith, and the Grantee hereby consents to the issuance of such
injunction and to the ordering of specific performance.
17. Notices. Any notice or other communication required or permitted to be
given to the Grantee hereunder shall be in writing and shall be mailed by
certified mail, return receipt requested, or delivered in person against
receipt, to the Grantee at the address of the Grantee last shown on the stock
records of the Corporation. Any notice or other communication given by certified
mail shall be deemed given at the time of certification thereof.
18. Binding Effect. The provisions of this Agreement shall be binding upon
the parties hereto and the successors and assigns of the Corporation and the
assigns, heirs and personal representatives of the Grantee, and shall inure to
the benefit of the Corporation and its successors and assigns. The Corporation
may assign its rights and delegate its duties under this Agreement, including
but not limited to the purchase right set forth in Section 3 above.
19. Separability. If any provision of this Agreement is held to be invalid
or unenforceable, the balance of this Agreement shall remain in effect, and if
any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
20. Governing Law: Consent to Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
without giving effect to conflict of laws. Any action, suit, or proceeding
arising out of, based on, or in connection with this Agreement may be brought in
any court of, or any federal court located in, the State of New York, and each
party covenants and agrees not to assert, by way of motion, as a defense or
otherwise, in any such action, suit or proceeding, any claim that such party is
not subject personally to the jurisdiction of such court, that such party's
property is exempt or immune from attachment or execution, that the action, suit
or proceeding is brought in an inconvenient forum, that the venue of the action,
suit or proceeding is improper, or that this Agreement or the subject matter
hereof may not be enforced in or by such court.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
BESICORP GROUP INC.
By:____________________
Title:___________________
GRANTEE
________________________
(Please sign above line and print name
below line.)
<PAGE>
ACKNOWLEDGED AND ACCEPTED:
GRANTEE'S SPOUSE
_________________________
(Please sign above line and print name below line.)
<PAGE>
Exhibit 21
LIST OF SUBSIDIARIES
The following are subsidiaries of the Company:
Bio-Energy Services Corp. is a subsidiary of the Company and is
incorporated under the laws of the State of New York. The aforesaid subsidiary
does business under the name of Bio-Energy Services Corp.
Bio-Energy Systems, Inc. is a subsidiary of the Company and is incorporated
under the laws of the State of New York. The aforesaid subsidiary does business
under the name of Bio-Energy Systems, Inc.
Beta Carthage Inc. is a subsidiary of the Company and is incorporated under
the laws of the State of New York. The aforesaid subsidiary does business under
the name of Beta Carthage Inc.
Beta South Glens Falls Inc. is a subsidiary of the Company and is
incorporated under the laws of the State of New York. The aforesaid subsidiary
does business under the name of Beta South Glens Falls Inc.
Beta Syracuse Inc. is a subsidiary of the Company and is incorporated under
the laws of the State of New York. The aforesaid subsidiary does business under
the name of Beta Syracuse Inc.
Beta Beaver Falls Inc. is a subsidiary of the Company and is incorporated
under the laws of the State of New York. The aforesaid subsidiary does business
under the name of Beta Beaver Falls Inc.
Beta Natural Dam Inc. is a subsidiary of the Company and is incorporated
under the laws of the State of New York. The aforesaid subsidiary does business
under the name of Beta Natural Dam Inc.
Beta Allegany Inc. is a subsidiary of the Company and is incorporated under
the laws of the State of New York. The aforesaid subsidiary does business under
the name of Beta Allegany Inc.
Beta Nova Inc. is a subsidiary of the Company and is incorporated under the
laws of the State of New York. The aforesaid subsidiary does business under the
name of Beta Nova Inc.
Beta N Limited is a subsidiary of the Company and is incorporated under the
laws of the State of New York. The aforesaid subsidiary does business under the
name of Beta N Limited.
Beta Hydroponics Allegany Inc. is a subsidiary of the Company and is
incorporated under the laws of the State of New York. The aforesaid subsidiary
does business under the name of Beta Hydroponics Allegany Inc.
Reina Distributing, Inc. is a subsidiary of the Company and is incorporated
under the laws of the State of New York. The aforesaid subsidiary does business
under the name of Reina Distributing, Inc.
SunWize Energy Systems, Inc. is a subsidiary of the Company and is
incorporated under the laws of the State of New York. The aforesaid subsidiary
does business under the name of SunWize Energy Systems, Inc.
Bio Thermal Unlimited, Inc. is a subsidiary of the Company and is
incorporated under the laws of the State of New York. The aforesaid subsidiary
does business under the name of Bio Thermal Unlimited, Inc.
SunWize Specialty Products, Inc. is a subsidiary of the Company and is
incorporated under the laws of the State of New York. The aforesaid subsidiary
does business under the name of SunWize Specialty Products, Inc.
Bio-Hydroponics Inc. (formerly Nanocrystalline Technologies Inc.) is a
subsidiary of the Company and is incorporated under the laws of the State of New
York. The aforesaid subsidiary does business under the name of Bio-Hydroponics
Inc.
Beta C&S Limited is a subsidiary of the Company and is incorporated under
the laws of the State of New York. The aforesaid subsidiary does business under
the name of Beta C&S Limited.
Besicorp International Power Corp. is a subsidiary of the Company and is
incorporated under
<PAGE>
the laws of the State of Delaware. The aforesaid subsidiary does business under
the name of Besicorp International Power Corp.
Beta International Power Corp. is a subsidiary of the Company and is
incorporated under the laws of the State of Delaware. The aforesaid subsidiary
does business under the name of Beta International Power Corp.
Beta Mexico Inc. is a subsidiary of the Company and is incorporated under
the laws of the State of Delaware. The aforesaid subsidiary does business under
the name of Beta Mexico Inc.
Beta Worldwide Power Inc. (formerly Beta BBI Krishnapatnam Inc.) is a
subsidiary of the Company and is incorporated under the laws of the State of
Delaware. The aforesaid subsidiary does business under the name of Beta
Worldwide Power Inc.
Beta Global Developments (BVI), Inc. (formerly Beta Krishnapatnam BVI Inc.)
is a subsidiary of Beta Worldwide Power Inc. and is incorporated under the laws
of the British Virgin Islands. The aforesaid subsidiary does business under the
name of Beta Global Developments (BVI), Inc.
Beta Global Developments II (BVI), Inc. (formerly Beta Krishnapatnam BVI II
Inc.) is a subsidiary of Beta Worldwide Power Inc. and is incorporated under the
laws of the British Virgin Islands. The aforesaid subsidiary does business under
the name of Beta Global Developments (BVI) II, Inc.
SunWize Technologies, Inc. is a subsidiary of the Company and is
incorporated under the laws of the State of New York. The aforesaid subsidiary
does business under the name of SunWize Tedhnologies, Inc.
Beta Brasil Inc. is a subsidiary of the Company and is incorporated under
the laws of the State of Delaware. The aforesaid subsidiary does business under
the name of Beta Brasil Inc.
Beta BGE Inc. is a subsidiary of the Company and is incorporated under the
laws of the State of Delaware. The aforesaid subsidiary does business under the
name of Beta BGE Inc.
Beta Brasil Geracao de Energia Ltda. Is a subsidiary of Beta Global
Developments (BVI), Inc. and Beta Global Developments II (BVI), Inc. and is
incorporated under the laws of Brazil. The aforesaid subsidiary does business
under the name of Beta Brasil Geracao de Energia Ltda.
BBI Power Inc. is a 50% subsidiary of Beta Global Developments, Inc. and is
incorporated under the laws of the British Virgin Islands. The aforesaid
subsidiary does business under the name of BBI Power Inc.
<PAGE>
Exhibit 23-B
CITRIN COOPERMAN & COMPANY, LLP
Certified Public Accountants
529 Fifth Avenue, Tenth Floor
New York, New York 10017
----
212-697-1000
ACCOUNTANTS' CONSENT
To the Board of Directors and Shareholders Besicorp Group Inc.
We consent to the incorporation by reference in the registration statement of
Besicorp Group Inc. (No. 0-9964) on Form S-8 of Besicorp Group Inc. of our
report dated June 19, 1997, relating to the consolidated balance sheets of
Besicorp Group Inc. and subsidiaries as at March 31, 1997 and 1996, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended March 31,
1997, which report appears in the March 31, 1997 annual report on Form 10-KSB of
Besicorp Group Inc.
/s/ Citrin Cooperman & Company, LLP
CITRIN COOPERMAN & COMPANY, LLP
July 14, 1997
New York, New York
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEAR ENDED MARCH 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FORM 10-KSB FOR FISCAL
1997.
<MULTIPLIER>1
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-1-1996
<PERIOD-END> MAR-31-1997
<CASH> 210,533
<SECURITIES> 1,012,814
<RECEIVABLES> 643,609
<ALLOWANCES> (39,346)
<INVENTORY> 1,180,265
<CURRENT-ASSETS> 5,122,894
<PP&E> 3,335,330
<DEPRECIATION> (1,398,576)
<TOTAL-ASSETS> 11,836,799
<CURRENT-LIABILITIES> 2,545,045
<BONDS> 3,834,483
0
0
<COMMON> 323,495
<OTHER-SE> 2,408,544
<TOTAL-LIABILITY-AND-EQUITY> 11,836,799
<SALES> 4,474,925
<TOTAL-REVENUES> 14,567,551
<CGS> 4,299,848
<TOTAL-COSTS> 4,299,848
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 357,185
<INCOME-PRETAX> 1,689,722
<INCOME-TAX> 516,000
<INCOME-CONTINUING> 1,173,722
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,173,722
<EPS-PRIMARY> 40
<EPS-DILUTED> 0
<PAGE>
</TABLE>
EXHIBIT NO. 99-A
KAMINE/BESICORP CARTHAGE L.P.
Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Partners
Kamine/Besicorp Carthage L.P.:
We have audited the accompanying balance sheets of Kamine/Besicorp Carthage L.P.
as of December 31, 1996 and 1995, and the related statements of operations,
partners' deficiency, and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the general partners. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kamine/Besicorp Carthage L.P.
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
February 21, 1997
<PAGE>
KAMINE/BESICORP CARTHAGE L.P.
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
<S> <C> <C>
Current assets:
Cash $ 1,482,802 1,116,392
Cash held in escrow 421,919 271,021
Accounts receivable 2,235,457 2,479,972
Other receivables 897,888 165,669
Prepaid expenses and other current assets 487,299 435,038
Current portion of loans receivable from affiliate (note 8) 126,042 111,243
---------- ----------
Total current assets 5,651,407 4,579,335
---------- ----------
Facility under capital lease (note 4) 52,706,409 52,706,409
Less accumulated amortization 4,287,724 2,182,564
---------- ----------
Facility under capital lease, net 48,418,685 50,523,845
---------- ----------
Other assets:
Cash held in escrow 2,000,000 1,000,000
Loans receivable from affiliate (note 8) 2,325,875 2,451,917
---------- ----------
Deferred organization and start-up costs, less accumulated
amortization of $245,772 and $204,832 at December 31, 1996
and 1995, respectively -- 40,940
---------- ----------
Total other assets 4,325,875 3,492,857
---------- ----------
Total assets $58,395,967 58,596,037
---------- ----------
---------- ----------
Liabilities and Partners' Deficiency
Current liabilities:
Current installments of long-term debt (note 5) 207,679 200,738
Accounts payable 1,891,974 1,628,016
Amounts due to related parties (notes 2 and 8) 1,574,815 1,151,129
Accrued expenses and other current liabilities 3,635 14,838
Obligations under capital lease - current (note 4) 1,342,299 1,166,276
---------- ----------
Total current liabilities 5,020,402 4,160,997
Long-term debt, excluding current installments (note 5) 3,239,264 3,446,943
Obligations under capital lease (note 4) 49,221,475 50,563,774
Deferred gain on sale of Facility (note 3) 1,081,589 1,128,615
---------- ----------
Total liabilities 58,562,730 59,300,329
---------- ----------
Partners' deficiency (note 2):
General partners (82,842) (376,567)
Limited partners (83,921) (327,725)
---------- ----------
Total partners' deficiency (166,763) (704,292)
Commitments and contingencies (notes 4, 5, 6 and 7) ---------- ----------
Total liabilities and partners' deficiency $58,395,967 58,596,037
---------- ----------
---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP CARTHAGE L.P.
Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenues (note 7) $28,883,434 26,556,893 33,037,045
---------- ---------- ----------
Operating expenses:
Depreciation -- -- 2,698,705
Amortization of asset under capital lease 2,105,160 2,124,381 58,183
Fuel (note 1) 9,757,592 9,766,448 13,480,237
Operations and maintenance (note 7) 1,585,643 1,567,170 1,799,896
Overhaul (note 7) 366,599 466,520 630,360
Administrative fee (notes 2 and 8) 328,843 318,278 307,448
Insurance 331,208 318,654 295,262
Amortization of organization costs (note 1) 40,940 49,154 49,155
Amortization of financing costs (note 1) -- -- 139,655
Utilities 284,129 284,937 97,031
Property taxes 262,206 238,666 197,972
Other 220,588 267,996 242,341
---------- ---------- ----------
Total operating expenses 15,282,908 15,402,204 19,996,245
---------- ---------- ----------
Income from operations 13,600,526 11,154,689 13,040,800
---------- ---------- ----------
Other income (expense):
Interest expense (6,862,909) (7,074,297) (5,982,152)
Contract rights (note 8) (1,093,354) (1,091,540) (1,097,274)
Cash flow fees (note 8) (447,057) (251,464) (74,552)
Interest income 366,270 334,355 43,219
Gain on sale of Facility (note 3) 47,026 47,028 1,288
Other expenses (44,022) (56,138) (23,034)
---------- ---------- ----------
Total other expense (8,034,046) (8,092,056) (7,132,505)
---------- ---------- ----------
Income before extraordinary item 5,566,480 3,062,633 5,908,295
Extraordinary item (note 1) -- -- (1,702,582)
---------- ---------- ----------
Net income $ 5,566,480 3,062,633 4,205,713
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP CARTHAGE L.P.
Statements of Partners' Deficiency
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
General Limited Total
partners partners
<S> <C> <C> <C>
Partners' deficiency at December 31, 1993 $(1,328,456) (240,227) (1,568,683)
Partners' distributions (note 2) (846,241) (2,649,999) (3,496,240)
Net income (note 2) 1,449,856 2,755,857 4,205,713
---------- ---------- ----------
Partners' deficiency at December 31, 1994 (724,841) (134,369) (859,210)
Partners' distributions (note 2) (1,538,926) (1,368,789) (2,907,715)
Partnership restructuring (note 2) 276,255 (276,255) --
Net income (note 2) 1,610,945 1,451,688 3,062,633
---------- ---------- ----------
Partners' deficiency at December 31, 1995 (376,567) (327,725) (704,292)
Partners' distributions (note 2) (2,634,243) (2,394,708) (5,028,951)
Net income (note 2) 2,927,968 2,638,512 5,566,480
---------- ---------- ----------
Partners' deficiency at December 31, 1996 $ (82,842) (83,921) (166,763)
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP CARTHAGE L.P.
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,566,480 3,062,633 4,205,713
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation -- -- 2,698,705
Amortization of Facility under capital lease 2,105,160 2,124,381 58,183
Amortization of deferred financing costs and 40,940 49,154 1,891,392
deferred organization and start-up costs
(including write-off of balance of deferred
financing costs)
Amortization of deferred gain (47,026) (47,028) (1,288)
Changes in operating assets and liabilities:
(Increase) decrease in escrow accounts (1,150,898) (1,228,665) 463,399
(Increase) decrease in receivables (487,704) (62,475) 1,050,014
(Increase) decrease in prepaid expenses and (52,261) 364,012 (397,176)
other current assets
Decrease in other assets -- -- 157,500
Increase (decrease) in accounts payable 263,958 (307,686) (360,456)
Increase (decrease) in due to related parties 423,686 (62,397) 92,191
(Decrease) increase in accrued expenses and (11,203) 13,189 (403,761)
other current liabilities
Decrease in deferred revenue -- -- (3,200,498)
Increase in accrued interest under capital lease -- -- 183,946
Increase in deferred gain on sale of Facility -- -- 1,176,931
---------- ---------- -----------
Net cash provided by operating activities 6,651,132 3,905,118 7,614,795
---------- ---------- -----------
Cash flows from investing activities:
Proceeds from sale of Facility, net -- -- 51,544,936
Deferred gain on sale of Facility -- -- (1,176,931)
---------- ---------- -----------
Net cash provided by investing activities -- -- 50,368,005
---------- ---------- -----------
Cash flows from financing activities:
Payments on capital lease obligation (1,166,276) (1,160,305) --
Payments on permanent financing -- -- (5,083,336)
Repayment of permanent financing -- -- (48,884,838)
Proceeds from long-term debt -- 101,812 3,892,250
Payments on long-term debt (200,738) (148,880) --
Payments on note payable to bank, net -- (197,501) (350,000)
Decrease (increase) in loans receivable from affiliate 111,243 74,813) (2,637,973)
Partners' distributions (5,028,951) (2,907,715) (3,496,240)
---------- ---------- -----------
Net cash used in financing activities (6,284,722) (4,237,776) (56,560,137)
---------- ---------- -----------
Net increase (decrease) in cash 366,410 (332,658) 1,422,663
Cash at beginning of year 1,116,392 1,449,050 26,387
---------- ---------- -----------
Cash at end of year $ 1,482,802 1,116,392 1,449,050
---------- ---------- -----------
---------- ---------- -----------
Supplemental disclosure of cash flow information - cash
paid during the year for interest $ 6,894,397 7,275,471 5,787,192
---------- ---------- -----------
---------- ---------- -----------
Noncash investing and financing activities:
Capital lease $ -- -- 53,150,000
---------- ---------- -----------
---------- ---------- -----------
Capital lease repricing adjustment (note 4) $ -- 443,591 --
---------- ---------- -----------
---------- ---------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP CARTHAGE L.P.
Notes to Financial Statements
December 31, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
Organization
Kamine/Besicorp Carthage L.P. (the Partnership) is a Delaware limited
partnership formed on February 27, 1989. The Partnership was organized for the
purpose of constructing, owning and operating a 59-megawatt cogeneration
facility (the Facility or the Project) on the premises of James River II, Inc.
(James River) in Carthage, New York. The Facility is operated as a PURPA
qualifying cogeneration facility using natural gas as the primary source of
energy.
The general partners of the Partnership are Kamine Carthage Cogen Co.,
Inc. (KCCCI) and Beta Carthage Inc. (a subsidiary of Besicorp Group Inc.
(Besicorp)), each of which retains a 42.5% interest in the Partnership. Ansaldo
North America Inc. (Ansaldo) was a limited partner with a 15% interest and was
the construction contractor. On July 8, 1994, affiliates of the general
partners, Kamine Development Corp. (KDC) and Beta C&S Limited, each acquired 50%
of the Ansaldo limited partner interest. On May 3, 1995, KCCCI restructured its
42.5% general partner interest in the Project to a 32.4% limited partner
interest and a 10.1% general partner interest. KDC and KCCCI assigned the
economic rights of their limited partner interests to a trust, with Chemical
Bank as trustee, on May 3, 1995.
The Facility began commercial operations on November 1, 1991.
Substantially all revenues from the Facility are generated by selling power to
one customer, Niagara Mohawk Power Corporation (NIMO). Sales to NIMO
approximated 96%, 99% and 94% of total revenues in 1996, 1995 and 1994,
respectively.
The Partnership conveyed ownership of the Facility to the Jefferson County
Industrial Development Agency (IDA). The tax-exempt status of the IDA exempts
the Project from property taxes during IDA ownership. Payments in lieu of real
property taxes are made to the IDA and payments for special assessments are made
to Jefferson County under agreements dated June 1, 1991. The IDA has appointed
the Partnership as its agent and was to convey the Facility to the Partnership
in accordance with an installment sale agreement.
The Partnership's interest in the Facility was sold to General Electric
Capital Corporation (GECC) on December 22, 1994 and leased back by the
Partnership. GECC entered into a Trust Agreement with Manufacturers and Traders
Trust Company (M&T) as of December 9, 1994 to engage M&T as Owner Trustee. In
connection with the sale of the Partnership's interest in the Facility, the
installment sale agreement was assigned to M&T.
(1), Continued
Summary of Significant Accounting Policies
Plant and Equipment
Prior to the sale of the Partnership's interest in the Facility, plant and
equipment was stated at cost, less accumulated depreciation. Maintenance and
repairs which did not enhance the value or increase the basic productive
capacity of the asset were charged to operations as incurred. Depreciation of
assets was computed on a straight-line method over their useful lives of 20
years, commencing on the date the Facility was placed into service.
Effective November 5, 1994, the Partnership extended the estimated useful
life of the Facility to 35 years as a result of the amended and restated Power
Purchase Agreement (PPA) (see note 7). The effect of this change in estimate was
immaterial to the 1994 statement of operations.
At the sale date, the Facility's net book value of $50,368,005 was
recorded as a cost of the sale.
<PAGE>
Amortization of Capital Lease
Amortization of the Facility under capital lease is computed using the
straight-line method over the lease term.
Deferred Financing Costs
The deferred financing costs were being amortized on a straight-line basis
over the life of the permanent financing, which was 15 years commencing on the
date the Facility was placed into service. Amortization charged to operations
for the year ended December 31, 1994 was $139,655.
On the date of sale of the Facility to GECC, the term loans were repaid
and the unamortized deferred financing costs of $1,702,582 were expensed and
recorded as an extraordinary item in connection with the early retirement of
debt.
Deferred Organization and Start-up Costs
The deferred organization and start-up costs were amortized on a
straight-line basis over a 60-month period commencing on the date the Facility
was placed in service. Amortization charged to operations for the years ended
December 31, 1996, 1995 and 1994 was $40,940, $49,154 and $49,155, respectively.
Revenue Recognition
Revenues are recognized as earned.
(1), Continued
Gain on Sale
The gain from the sale of the Facility has been deferred and is being
recognized on a straight-line basis over the lease term.
Income Taxes
Income taxes have not been provided, since the Partnership is not a
taxable entity. The partners report their respective share of the Partnership's
taxable income or loss on their respective income tax returns.
Fuel Sales
Sales of fuel and transportation associated with excess natural gas
pipeline capacity purchased by the Partnership to support peak fuel requirements
have been treated as a reduction to fuel expense. Total sales related to
disposition of such excess capacity in 1996, 1995 and 1994 totaled $4,651,362,
$1,849,286 and $1,849,908, respectively.
Escrow Accounts
An escrow arrangement has been established for receipt of all revenues and
payment of all obligations of the Partnership. The security agent is Summit Bank
(Summit), formerly United Jersey Bank. Amounts in the collection account, which
represent general funds, are classified as cash on the balance sheets. Funds in
other accounts, which are set aside for specific purposes, are classified as
escrow accounts. The escrow accounts' balance at December 31, 1996 and 1995
consists of a current account principally for payment of taxes and insurance,
and a long-term escrow reserve for lease payments.
Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of the fair
value of certain financial instruments. The carrying amounts of accounts
receivable, accounts payable and accrued liabilities approximate fair value due
to the short-term maturity of such instruments. Management believes the carrying
amounts of loans receivable and long-term debt approximate fair value based on
rates that would be offered by the Partnership for issuance of loans and rates
that would be offered to the Partnership for debt, with similar maturities and
characteristics.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
<PAGE>
The Partnership adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," as of January 1, 1996. The Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairments whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held
(1), Continued
and used is measured by a comparison of the carrying amount of the assets
to the future net cash flows expected to be generated by the assets. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less the cost to sell. Adoption of this
Statement did not have an impact on the Partnership financial position or
results of operations.
Use of Estimates
In conformity with generally accepted accounting principles, management of
the Partnership has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent liabilities
in preparing the accompanying financial statements. Actual results could differ
from those estimates.
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount can be reasonably
estimated.
Risks and Uncertainties
The Partnership is principally engaged in a single line of business, the
production and sale of electric power to one customer, NIMO.
The regulated investor-owned utility industry is presently subject to
considerable market pressures and changes in the Federal and state regulatory
environment in which it operates. These pressures are resulting in industry
consolidation and pressure to disaggregate electric generation, transmission and
distribution assets and to adjust cost structures to meet market conditions. The
utility to which the Partnership sells its power, NIMO, made a filing on October
10, 1995 to the Public Service Commission of the State of New York setting forth
numerous restructuring proposals, including a significant reduction in the price
for power purchased from independent power producers currently under contract
with NIMO. The Partnership expects many of NIMO's proposals to be strongly
contested including the significant reduction in the price for power. NIMO has
also stated in such filing that its financial viability is threatened. In early
1996, NIMO suspended payment of dividends on its common stock. On August 1,
1996, NIMO proposed to buy out 44 independent power contracts in exchange for a
combination of cash and securities. The PPA of the Partnership is included among
these contracts. Discussions between NIMO and the holders of the power contracts
are continuing. The outcome of the industry trends, regulatory changes, the NIMO
filing and NIMO's financial viability cannot presently be determined.
Reclassification
Certain items in the 1995 and 1994 financial statements have been
reclassified to conform with the 1996 presentation.
(2) Allocation of Income, Losses and Cash Distributions
A separate capital account has been established and maintained for each
partner. Each such account is (a) increased by the amount of such partner's
capital contributions, any profits and items of income and gain allocated to
such partner, any increase in such partner's share of the liabilities of the
Partnership and the amount of partnership liabilities assumed by the partner;
and (b) decreased by the amount of cash and the fair market value of any
partnership assets distributed to such partner, the amount of losses allocated
to such partner, any decrease in such partner's share of liabilities of the
Partnership and the amount of any partner liabilities assumed by the
<PAGE>
Partnership (subject to certain provisions).
In accordance with the Amended and Restated Partnership Agreement, a
special allocation was made in 1994 to the new limited partners, KDC and Beta
C&S Limited. Each limited partner received a priority distribution of $1,250,000
from proceeds of the sale of the Facility.
Profits and losses for any calendar year or portion of such year are
allocated among the partners in proportion to their percentage ownership
interests, except that, to the extent any allocation of losses would reduce any
limited partner's adjusted capital account balance, as defined and agreed by the
partners, below zero, such portion of losses shall be specially allocated to the
general partners in equal shares and, in turn, any subsequent profits shall be
allocated so as to reverse the effect of such special allocation of losses.
The partners' accounts were restructured in 1995 to reflect KCCCI's change
in its general partner interest from 42.5% to 10.1% in exchange for a 32.4%
limited partner interest. The net effect of this change is a $276,255 decrease
in the general partners' deficiency account balance and a similar increase in
the limited partners' deficiency account balance.
Net cash flow, as defined, for each calendar quarter is distributed to the
partners in accordance with their percentage ownership interests. In addition,
amounts required for payment of New York State franchise taxes by the partners,
based upon a .769% (.75% plus 2.5% surcharge thereon) rate of each partner's pro
rata share of partnership revenues pursuant to Article 9, Section 186 of the New
York State Tax Code, are distributed to the partners when tax payments are due.
All partners' distributions in 1996, 1995 and 1994 were for payment of such
taxes as well as net cash flow distributions. Partners' distributions in 1994
also included the priority distribution from the sale of the Partnership's
interest in the Facility.
The partners have a deficiency in their partners' capital account balance
as a result of distributions over their proportionate share of net income.
Management anticipates that the deficiencies in the partners' capital account
balance will reverse in subsequent years.
(2), Continued
In addition to their respective shares of the partnership cash flow, the
general partners and/or their affiliates receive an administrative fee of
$300,000 per annum (escalated for changes in the Employment Cost Index),
contractual rights to cash flow development fees, and certain other project
management cost reimbursements under various contractual agreements.
(3) Sale of Facility
The Facility was sold on December 22, 1994 to GECC for $53,150,000.
Proceeds from the sale were used to repay the outstanding loans, pay a fee to
GECC and partially fund transaction costs. A gain on sale of $1,176,931 was
deferred and is being recognized over the term of the lease. In 1996, 1995 and
1994, $47,026, $47,028 and $1,288, respectively, of the gain was recognized.
(4) Lease of Facility
The Partnership entered into a Lease Agreement with M&T on December 22,
1994 to lease the Facility for 25 years with an option to renew for up to three
years at a fair market rental value. The lease is recorded as a capital lease.
The lease was subject to repricing to account for changes in assumptions and
estimated costs related to certain transaction expenses and the construction
costs of other equipment.
On December 20, 1995 (the repricing date), construction of other equipment
was completed and all rights, title and interest in such equipment was
transferred to M&T. In addition, the rental payments were revised on the
repricing date to account for the changes in assumptions and estimated costs. As
a result of the change in rental payments, the Facility under capital lease and
related lease obligation were decreased by $443,591 on December 20, 1995.
At December 31, 1996, the future minimum annual lease payments for the
capital lease obligation are as
<PAGE>
follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 7,651,542
1998 7,651,542
1999 7,651,542
2000 7,651,542
2001 7,651,542
Thereafter 82,472,907
-----------
120,730,617
Less interest 70,166,843
-----------
Future minimum annual lease payments $ 50,563,774
-----------
-----------
</TABLE>
(5) Financing
On July 9, 1992, the Partnership and GECC executed permanent financing
arrangements that were effective as of June 29, 1992. GECC provided term debt
with quarterly repayments over a term of 15 years commencing on June 30, 1992 in
an initial amount of $44,500,000 at an interest rate of 11.226%.
GECC also provided additional term debt with repayments over five years in
the amount of $17,400,000 at an interest rate of 9.891%.
Upon the permanent financing closing, GECC, in addition to the commitment
to provide the term debt, committed to provide the Project with a working
capital facility in a maximum amount of $2,000,000 with a floating interest rate
of the prime rate, as defined, plus 2%. GECC also committed to the issuance of
letters of credit in an aggregate maximum amount of $6,000,000. This agreement
was terminated on the date of the sale of the Facility. On December 22, 1994,
the term debt was repaid from the proceeds of the sale of the Facility.
On December 9, 1994, a Term Loan, a Working Capital and Letter of Credit
Financing Agreement was entered into with GECC. It provided for a Tranche A Term
Loan for up to $1,750,000 to fund construction for certain alterations to the
Facility, which were purchased by GECC. In connection therewith, the Tranche A
Term Loan was repaid in December 1995. In addition, a Tranche B Term Loan for up
to $4,250,000 was provided ($3,446,943 and $3,647,681 outstanding at December
31, 1996 and 1995, respectively) to fund transaction costs not funded by the
sale proceeds and a loan to a related party which will be repaid over 12 years
(see note 8). An amendment to the Tranche B Term Loan was entered into on
December 20, 1995 which fixed the interest rate at 10.21% effective December 1,
1995. In addition, the Working Capital Commitment of $2,000,000 is available to
the Partnership, as well as up to $6,000,000 for letters of credit related to
fuel obligations. At December 31, 1996 and 1995, there were no borrowings
outstanding under the Working Capital Commitment. At December 31, 1996, the
Partnership had open letters of credit of $2,254,350.
The total amounts of long-term debt due under the Tranche B Term Loan
during each of the next five years are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1997 $ 207,679
1998 230,228
1999 255,224
2000 282,090
2001 313,562
---------
---------
</TABLE>
(5), Continued
The Partnership also entered into an Alternate Working Capital Agreement
with Summit as of June 29, 1992. Summit provided a $2,000,000 line of credit
secured by receivables and inventory of the Project. Summit received an annual
facility fee of .50% of the committed facility and received interest at the rate
of 1% above its Floating Base Rate (prime) on amounts borrowed. There were no
outstanding borrowings at December 31, 1995. This agreement expired as of June
30, 1996.
<PAGE>
(6) Lease of Land
The Facility is on a parcel of land owned by James River adjacent to its
paper mill. The land is leased to the Partnership for a nominal amount. In 1994,
the lease was amended to extend the term to 40 years from November 5, 1994. The
lease has been assigned to M&T in connection with the sale of the Facility.
(7) Commitments and Contingencies
Commitments
Affiliates of the Partnership entered into a PPA with NIMO dated as of
June 5, 1987 with approval by the New York Public Service Commission (the
Commission) on September 1, 1987. The PPA was assigned to the Partnership. NIMO
agreed to purchase electricity generated by the Facility for a term of 20 years
from the date of commercial operation at the higher of $.06 per kilowatt-hour or
actual avoided cost, as defined.
As of May 27, 1992, the Partnership entered into an amendment to the PPA
whereby the amount of electricity to be sold was increased from approximately 49
megawatts (original capacity) to 56 megawatts in the summer period and 59
megawatts in the winter period (subject to adjustment based on performance).
Revenues for the original capacity continued to be earned based on the higher of
$.06 per kilowatt-hour or actual avoided cost, as defined, for the amount of
electricity generated. For the additional capacity NIMO was to make payments at
$.06 per kilowatt-hour for five years from the date of the amendment, with the
difference between $.06 and actual energy-only tariff rates to be accumulated in
an adjustment account and recorded as an asset or liability (deferred revenue).
After the five-year period, the additional capacity was to be sold to NIMO at
statutorily required minimum rates less the amount required to liquidate the
adjustment account over the remaining life of the PPA. The adjustment account
balance was secured by a lien on the Facility that was subordinate to GECC's
security.
(7), Continued
An amendment to the PPA was entered into as of January 4, 1994 and became
effective on November 5, 1994. The amendment requires NIMO to purchase
electricity generated by the Facility for 35 years from November 5, 1994. In
addition, the NIMO adjustment account of $5,323,534 at November 5, 1994 was
eliminated and was included in 1994 revenues as a result of the amended and
restated PPA.
The Partnership entered into an Energy Services Agreement (ESA) with James
River dated as of October 31, 1989 and amended and restated as of October 21,
1994. James River will purchase mill requirements for steam from the Facility
according to pricing set forth in the amended and restated ESA for a term of 35
years from November 5, 1994.
The Partnership entered into a Peak Shaving Agreement with NIMO as of
December 9, 1993. Under this agreement, NIMO can take the Partnership's
contracted natural gas, subject to defined limitations, for up to 35 days from
every November 15 to April 16 of the following year. As compensation, the
Partnership receives a fee of 25 cents to 75 cents per decatherm of gas plus the
cost of alternate fuel or the cost of the gas. Revenues realized pursuant to
this agreement were $327,357. There were no revenues realized pursuant to this
agreement in 1995 and 1994.
The Partnership entered into an Operations and Maintenance Agreement (O&M
Agreement) with Stewart & Stevenson Operations, Inc. (the Operator) as of
January 31, 1991. The O&M Agreement was amended and restated as of October 21,
1994 to conform with the plan for operations associated with the amended and
restated PPA. Under the amended agreement, the Operator will operate and
maintain the Facility for a period of 12 years and one successive six-year term,
unless 12 months' prior notice is given by the Partnership to the Operator.
Compensation will include a fee of (INFORMATION DELETED - SUBJECT OF A
CONFIDENTIALITY REQUEST) per year plus (INFORMATION DELETED - SUBJECT OF A
CONFIDENTIALITY REQUEST) per Operating Hour, both amounts subject to annual
escalation beginning January 1, 1995 based upon changes in the Producer Price
Index (PPI). The Operator will also be paid a fee for major facility overhauls
at a rate that ranges from (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY
REQUEST) to (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST) per
Equivalent Operating Hour, as
<PAGE>
defined. This fee is also subject to annual escalations based upon changes in
the PPI. The agreement also provided for the Partnership to pay the Operator a
mobilization fee of (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST)
prior to the acceptance date, as defined. The agreement also provides for the
Operator to receive a bonus or be obligated to pay a penalty based on a
performance factor, as defined. The Partnership will reimburse the Operator for
letter of credit fees and insurance premiums based upon evidence by the Operator
that such expenses have been paid.
The Partnership has entered into various contracts for the supply and
transportation of natural gas to the Project. Natural gas is being supplied by
Renaissance Energy Ltd. (a Canadian corporation) from dedicated reserves.
Transportation of natural gas by pipelines is provided by TransCanada Pipelines
Limited from Burstall, Saskatchewan, Canada to Grand Island, New York; by Empire
State Pipeline Company to Oneida, New York; and by NIMO to the Facility.
(7), Continued
The aforementioned agreements have been assigned to M&T in connection with
the sale of the Facility.
In addition, the Facility has the capacity to utilize kerosene as an
alternative fuel. The Partnership maintains an open account with Sprague Energy
Corporation to purchase such fuel.
Contingencies
The Partnership and certain related parties, including the general and
limited partners, have been named as defendants in a lawsuit. The plaintiff
alleges that on or about October 11, 1988, the plaintiff was awarded the
contracts for the construction of the Facility and a separate cogeneration
facility located in South Glens Falls, New York. The complaint alleges breach of
contract, unjust enrichment, promissory estoppel, and fraud and/or negligent
misrepresentation. The plaintiff is seeking $7,446,000 in damages under its
causes of action, plus unspecified punitive damages from all parties named in
the lawsuit.
On January 15, 1991 the defendants answered the complaint and denied all
the material allegations and asserted various affirmative defenses. On February
28, 1995, the defendants filed a motion for summary judgment dismissing
plaintiff's claims. On May 22, 1996, the court dismissed the claim alleging
breach of contract. The court declined to issue a summary judgment ruling on the
remaining claims. On September 25, 1996, the defendants appealed the court's
failure to dismiss the remaining claims. The plaintiff appealed the court
dismissal of the claim alleging breach of contract. The Appellate Court has
scheduled oral argument on the appeals for March 12, 1997. Management and legal
counsel believe that the lawsuit has little or no merit. The ultimate outcome of
this litigation cannot currently be determined.
(8) Related-party Transactions
Affiliates of the general partners receive an administrative fee for
managing the operations of the Partnership. Administrative fees were $328,843,
$318,278 and $307,448 in 1996, 1995 and 1994, respectively.
As of December 9, 1994, the Partnership entered into an interfacility loan
agreement with Kamine/Besicorp South Glens Falls L.P. (KBSGF) and
Kamine/Besicorp Natural Dam L.P. (KBND). The agreement allows KBSGF and KBND to
borrow funds or advance funds to the extent of available cash, as defined in the
loan agreement. Such loans to or from either KBSGF or KBND are required when
there are insufficient funds available to pay certain current obligations. At
December 31, 1996 and 1995, there were no outstanding amounts due to or from
KBSGF and KBND.
(8), Continued
On December 22, 1994, the Partnership advanced $2,637,973 to
Kamine/Besicorp GlenCarthage Partnership. The loan receivable is payable in
quarterly installments over 12 years and carried an interest rate based on
either the Commercial Paper Rate or the annual yield on ten year U.S. Treasury
obligations, as defined, plus 4.5%. The interest rate was fixed on December 1,
1995 at 10.21%, based on the ten-year U.S. Treasury at that time, plus 4.5%.
The Partnership has an agreement with the two developers for additional fees for
development work, manage-
<PAGE>
ment and administrative services. These fees (cash flow fees and contract
rights) have been assigned by the developers to Kamine/Besicorp GlenCarthage
Partnership in which the developers are partners. This partnership has the right
to receive these fees when the Partnership has sufficient funds available in
accordance with payment priority, provided that the developers deliver the
management and administrative services. The contract rights, as defined, are
payable through March 31, 2007. The Partnership has recorded as expense contract
rights of $1,093,354, $1,091,540 and $1,097,274 in 1996, 1995 and 1994,
respectively. Cash flow fees are payable over the life of the Project based on
8.5% of cash flows from operations, as defined. Cash flow fees paid to related
parties in 1996, 1995 and 1994 were $447,057, $251,464 and $74,552,
respectively.
<PAGE>
EXHIBIT NO. 99-B
KAMINE/BESICORP SOUTH GLENS FALLS L.P.
Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Partners
Kamine/Besicorp South Glens Falls L.P.:
We have audited the accompanying balance sheets of Kamine/Besicorp South Glens
Falls L.P. as of December 31, 1996 and 1995, and the related statements of
operations, partners' equity (deficiency), and cash flows for each of the years
in the three-year period ended December 31, 1996. These financial statements are
the responsibility of the general partners. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kamine/Besicorp South Glens
Falls L.P. as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1996 in conformity with generally accepted accounting principles.
February 21, 1997
<PAGE>
KAMINE/BESICORP SOUTH GLENS FALLS L.P.
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
<S> <C> <C>
Current assets:
Cash $ 1,127,247 814,312
Cash held in escrow 634,701 568,317
Accounts receivable, net 2,247,012 2,403,354
Other receivables 1,464,997 604,469
Prepaid expenses and other current assets 487,732 427,760
Current portion of loans receivable from affiliate (note 8) 126,042 111,243
---------- ----------
Total current assets 6,087,731 4,929,455
---------- ----------
Facility under capital lease (note 4) 51,002,261 51,002,261
Less accumulated amortization 4,153,593 2,116,694
---------- ----------
Facility under capital lease, net 46,848,668 48,885,567
---------- ----------
Other assets:
Cash held in escrow 2,500,000 1,500,000
Loans receivable from affiliate (note 8) 2,325,875 2,451,917
Deferred organization and start-up costs, less accumulated
amortization of $245,772 and $203,352 at December 31, 1996
and 1995, respectively -- 42,420
---------- ----------
Total other assets 4,825,875 3,994,337
---------- ----------
Total assets $57,762,274 57,809,359
---------- ----------
---------- ----------
Liabilities and Partners' Equity
Current liabilities:
Current installments of long-term debt (note 5) 203,580 197,060
Accounts payable 2,408,745 1,880,343
Amounts due to related parties (notes 2 and 8) 1,219,417 792,619
Accrued expenses and other current liabilities 343,639 251,878
Obligations under capital leases (note 4) 1,291,054 1,116,154
---------- ----------
Total current liabilities 5,466,435 4,238,054
Long-term debt, excluding current installments (note 5) 3,175,329 3,378,909
Obligations under capital leases (note 4) 47,704,890 48,995,943
Deferred gain on sale of Facility (note 3) 1,039,939 1,085,154
---------- ----------
Total liabilities 57,386,593 57,698,060
---------- ----------
Partners' equity (note 2):
General partners 198,915 49,773
Limited partners 176,766 61,526
---------- ----------
Total partners' equity 375,681 111,299
Commitments and contingencies (notes 4, 5, 6 and 7) ---------- ----------
Total liabilities and partners' equity $57,762,274 57,809,359
---------- ----------
---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP SOUTH GLENS FALLS L.P.
Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenues (note 7) $28,935,773 26,024,574 31,846,354
---------- ---------- ----------
Operating expenses:
Depreciation -- -- 2,616,096
Amortization of asset under capital lease 2,036,899 2,060,263 56,431
Fuel (note 1) 10,151,755 9,893,914 13,949,704
Operations and maintenance (note 7) 1,565,366 1,596,461 1,777,704
Overhaul (note 7) 408,773 475,205 617,975
Administrative fee (notes 2 and 8) 328,843 318,278 307,488
Insurance 330,215 316,407 284,705
Amortization of organization costs (note 1) 42,420 49,155 49,155
Amortization of financing costs (note 1) -- -- 134,962
Utilities 144,281 216,257 157,971
Property taxes 334,747 319,889 232,403
Other 258,288 373,654 350,433
---------- ---------- ----------
Total operating expenses 15,601,587 15,619,483 20,535,027
---------- ---------- ----------
Income from operations 13,334,186 10,405,091 11,311,327
---------- ---------- ----------
Other income (expense):
Interest expense (6,575,376) (6,778,629) (5,706,632)
Contract rights (note 8) (994,639) (2,703,132) (814,556)
Cash flow fees (note 8) (481,622) (69,070) --
Interest income 403,248 361,085 41,616
Gain on sale of Facility (note 3) 45,215 45,216 1,238
Other expenses (41,008) (41,382) (66,345)
---------- ---------- ----------
Total other expense (7,644,182) (9,185,912) (6,544,679)
---------- ---------- ----------
Income before extraordinary item 5,690,004 1,219,179 4,766,648
Extraordinary item (note 1) -- -- (1,649,500)
---------- ---------- ----------
Net income $ 5,690,004 1,219,179 3,117,148
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP SOUTH GLENS FALLS L.P.
Statements of Partners' Equity (Deficiency)
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
General Limited Total
partners partners
<S> <C> <C> <C>
Partners' deficiency at December 31, 1993 $ (836,445) (147,630) (984,075)
Partners' contributions 425,000 75,000 500,000
Partners' distributions (note 2) (245,802) (2,543,380) (2,789,182)
Net income (note 2) 524,576 2,592,572 3,117,148
---------- ---------- ----------
Partners' deficiency at December 31, 1994 (132,671) (23,438) (156,109)
Partners' distributions (note 2) (509,378) (442,393) (951,771)
Partnership restructuring (note 2) 50,534 (50,534) --
Net income (note 2) 641,288 577,891 1,219,179
---------- ---------- ----------
Partners' equiity at December 31, 1995 49,773 61,526 111,299
Partners' distributions (note 2) (2,843,800) (2,581,822) (5,425,622)
Net income (note 2) 2,992,942 2,697,062 5,690,004
---------- ---------- ----------
Partners' equiity at December 31, 1996 $ 198,915 176,766 375,681
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP SOUTH GLENS FALLS L.P.
Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,690,004 1,219,179 3,117,148
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation -- -- 2,616,096
Amortization of Facility under capital lease 2,036,899 2,060,263 56,431
Amortization of deferred financing costs and
deferred organization and start-up costs
(including write-off of balance of deferred
financing costs) 42,420 49,155 1,833,617
Amortization of deferred gain (45,215) (45,216) (1,238)
Changes in operating assets and liabilities:
(Increase) decrease in escrow accounts (1,066,384) (1,538,789) 174,784
(Increase) decrease in receivables (704,186) 224,898 460,323
(Increase) decrease in prepaid expenses and other
current assets (59,972) 272,686 (331,090)
Decrease in other assets -- -- 125,000
Increase (decrease) in accounts payable 528,402 (965,537) 714,820
Increase (decrease) in due to related parties 426,798 217,378 (98,883)
Increase (decrease) in accrued expenses and other
current liabilities 91,761 (62,528) (206,606)
Decrease in deferred revenue -- -- (2,947,589)
(Decrease) increase in accrued interest under
capital lease -- (175,789) 175,789
Increase in deferred gain on sale of Facility -- -- 1,131,608
---------- ---------- -----------
Net cash provided by operating activities 6,940,527 1,255,700 6,820,210
---------- ---------- -----------
Cash flows from investing activities:
Proceeds from sale of Facility, net -- -- 50,030,275
Deferred gain on sale of Facility -- -- (1,131,608)
---------- ---------- -----------
Net cash provided by investing activities -- -- 48,898,667
---------- ---------- -----------
Cash flows from financing activities:
Payments on capital lease obligation (1,116,153) (890,164) --
Payments on permanent financing -- -- (4,950,574)
Repayment of permanent financing -- -- (47,323,864)
Payments on note payable to bank -- -- (1,000,000)
Proceeds from long-term debt -- 424,092 3,728,861
Payments on long-term debt (197,060) (576,985) --
Decrease (increase) in loans receivable from affiliate 111,243 74,813 (2,637,973)
Partners' contributions -- -- 500,000
Partners' distributions (5,425,622) (951,771) (2,789,182)
---------- ---------- -----------
Net cash used in financing activities (6,627,592) (1,920,015) (54,472,732)
---------- ---------- -----------
Net increase (decrease) in cash 312,935 (664,315) 1,246,145
Cash at beginning of year 814,312 1,478,627 232,482
---------- ---------- -----------
Cash at end of year $ 1,127,247 814,312 1,478,627
---------- ---------- -----------
---------- ---------- -----------
Supplemental disclosure of cash flow information - cash
paid during the year for interest $ 6,606,816 6,960,374 5,568,292
---------- ---------- -----------
---------- ---------- -----------
Noncash investing and financing activities:
Capital lease $ -- -- 51,550,000
---------- ---------- -----------
---------- ---------- -----------
Capital lease repricing adjustment (note 4) $ -- 547,739 --
---------- ---------- -----------
---------- ---------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP SOUTH GLENS FALLS L.P.
Notes to Financial Statements
December 31, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
Organization
Kamine/Besicorp South Glens Falls L.P. (the Partnership) is a Delaware
limited partnership formed on February 27, 1989. The Partnership was
organized for the purpose of constructing, owning and operating a 59-megawatt
cogeneration facility (the Facility or the Project) on the premises of James
River II, Inc. (James River) in South Glens Falls, New York (premises sold to
Encore Paper Company (Encore) in March 1992). The Facility is operated as a
PURPA qualifying cogeneration facility using natural gas as the primary source
of energy.
The general partners of the Partnership are Kamine South Glens Falls Cogen Co.,
Inc. (KSGFCCI) and Beta South Glens Falls Inc. (a subsidiary of Besicorp Group
Inc. (Besicorp)), each of which retains a 42.5% interest in the Partnership.
Ansaldo North America Inc. (Ansaldo) was a limited partner with a 15% interest
and was the construction contractor. On July 8, 1994, affiliates of the general
partners, Kamine Development Corp. (KDC) and Beta C&S Limited, each acquired 50%
of the Ansaldo limited partner interest. On May 3, 1995, KSGFCCI restructured
its 42.5% general partner interest in the Project to a 32.4% limited partner
interest and a 10.1% general partner interest. KDC and KSGFCCI assigned the
economic rights of their limited partner interests to a trust, with Chemical
Bank as trustee, on May 3, 1995.
The Facility began commercial operations on November 12, 1991. Substantially all
revenues from the Facility are generated by selling power to one customer,
Niagara Mohawk Power Corporation (NIMO). Sales to NIMO approximated 98%, 98% and
96% of total revenues in 1996, 1995 and 1994, respectively.
The Partnership conveyed ownership of the Facility to the County of Saratoga
Industrial Development Agency (IDA). The tax-exempt status of the IDA exempts
the Project from property taxes during IDA ownership. Payments in lieu of real
property taxes are made to the IDA under an agreement dated January 1, 1991. The
IDA has appointed the Partnership as its agent and was to convey the Facility to
the Partnership in accordance with an installment sale agreement.
The Partnership's interest in the Facility was sold to General Electric Capital
Corporation (GECC) on December 22, 1994 and leased back by the Partnership. GECC
entered into a Trust Agreement with Manufacturers and Traders Trust Company
(M&T) as of December 9, 1994 to engage M&T as Owner Trustee. In connection with
the sale of the Partnership's interest in the Facility, the installment sale
agreement was assigned to M&T.
(1), Continued
Summary of Significant Accounting Policies
Plant and Equipment
Prior to the sale of the Partnership's interest in the Facility, plant and
equipment was stated at cost, less accumulated depreciation. Maintenance and
repairs which did not enhance the value or increase the basic productive
capacity of the asset were charged to operations as incurred. Depreciation of
assets was computed on a straight- line method over their useful lives of 20
years, commencing on the date the Facility was placed into service.
Effective November 5, 1994, the Partnership extended the estimated useful life
of the Facility to 35 years as a result of the amended and restated Power
Purchase Agreement (PPA) (see note 7). The effect of this change in estimate was
immaterial to the 1994 statement of operations.
At the sale date, the net book value of $48,898,667 was recorded as a cost
of the sale.
<PAGE>
Gain on Sale
The gain from the sale of the Facility has been deferred and is being
recognized on a straight-line basis over the lease term.
Amortization of Capital Lease
Amortization of the Facility under capital lease is computed using the
straight-line method over the lease term.
Deferred Financing Costs
The deferred financing costs were being amortized on a straight-line basis
over the life of the permanent financing, which was 15 years commencing on the
date the Facility was placed in service. Amortization charged to operations for
the year ended December 31, 1994 was $134,962.
On the date of sale of the Facility to GECC, the term loans were repaid and
the unamortized deferred financing costs of $1,649,500 were expensed and
recorded as an extraordinary item in connection with the early retirement of
debt.
Deferred Organization and Start-up Costs
The deferred organization and start-up costs were amortized on a
straight-line basis over a 60-month period commencing on the date the Facility
was placed in service. Amortization expense charged to operations for the years
ended December 31, 1996, 1995 and 1994 was $42,420, $49,155 and $49,155,
respectively.
(1), Continued
Revenue Recognition
Revenues are recognized as earned.
Income Taxes
Income taxes have not been provided, since the Partnership is not a taxable
entity. The partners report their respective share of the Partnership's taxable
income or loss on their respective income tax returns.
Fuel Sales
Sales of fuel and transportation associated with excess natural gas
pipeline capacity purchased by the Partnership to support peak fuel requirements
have been treated as a reduction to fuel expense. Total sales related to
disposition of such excess capacity in 1996, 1995 and 1994 totaled $7,038,129,
$3,317,199 and $1,363,637, respectively.
Escrow Accounts
An escrow arrangement has been established for receipt of all revenues and
payment of all obligations of the Partnership. The security agent is Summit Bank
(Summit), formerly United Jersey Bank. Amounts in the collection account, which
represent general funds, are classified as cash on the balance sheets. Funds in
other accounts, which are set aside for specific purposes, are classified as
escrow accounts. The escrow accounts at December 31, 1996 and 1995 consist of a
current account principally for the payment of taxes and insurance, and two
long-term accounts - a reserve for lease payments and an alternate steam host
reserve.
Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of the fair
value of certain financial instruments. The carrying amounts of accounts
receivable, accounts payable and accrued liabilities approximate fair value due
to the short-term maturity of such instruments. Management believes that the
carrying amount of loans receivable and long-term debt approximates fair value
based on rates that would be offered by the Partnership for issuance of loans
and rates that would be offered to the Partnership for debt, with similar
maturities and characteristics.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
<PAGE>
The Partnership adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," as
of January 1, 1996. The Statement requires that long- lived assets and certain
identifiable
(1), Continued
intangibles be reviewed for impairments whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to the future net cash flows
expected to be generated by the assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
the cost to sell. Adoption of this Statement did not have an impact on the
Partnership financial position or results of operations.
Use of Estimates
In conformity with generally accepted accounting principles, management of
the Partnership has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent liabilities
in preparing the accompanying financial statements. Actual results could differ
from those estimates.
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount can be reasonably
estimated.
Risks and Uncertainties
The Partnership is principally engaged in a single line of business, the
production and sale of electric power to one customer, NIMO.
The regulated investor-owned utility industry is presently subject to
considerable market pressures and changes in the Federal and state regulatory
environment in which it operates. These pressures are resulting in industry
consolidation and pressure to disaggregate electric generation, transmission and
distribution assets and to adjust cost structures to meet market conditions. The
utility to which the Partnership sells its power, NIMO, made a filing on October
10, 1995 to the Public Service Commission of the State of New York setting forth
numerous restructuring proposals, including a significant reduction in the price
for power purchased from independent power producers currently under contract
with NIMO. The Partnership expects many of NIMO's proposals to be strongly
contested, including the significant reduction in the price for power. NIMO has
also stated in such filing that its financial viability is threatened. In early
1996, NIMO suspended payment of dividends on its common stock. On August 1,
1996, NIMO proposed to buy out 44 independent power contracts in exchange for a
combination of cash and securities. The PPA of the Partnership is included among
these contracts. Discussions between NIMO and the holders of the power contracts
are continuing. The outcome of the industry trends, regulatory changes, the NIMO
filing and NIMO's financial viability cannot presently be determined.
(1), Continued
Reclassification
Certain items in the 1995 and 1994 financial statements have been
reclassified to conform with the 1996 presentation.
(2) Allocation of Income, Losses and Cash Distributions
A separate capital account has been established and maintained for each
partner. Each such account is (a) increased by the amount of such partner's
capital contributions, any profits and items of income and gain allocated to
such partner, any increase in such partner's share of the liabilities of the
Partnership and the amount of partnership liabilities assumed by the partner;
and (b) decreased by the amount of cash and the fair market value of any
partnership assets distributed to such partner, the amount of losses allocated
to such partner, any decrease in such partner's share of the liabilities of the
Partnership and the amount of any partner liabilities assumed by the
<PAGE>
Partnership (subject to certain provisions).
In accordance with the Amended and Restated Partnership Agreement, a
special allocation was made in 1994 to the new limited partners, KDC and Beta
C&S Limited. Each limited partner received a priority distribution of $1,250,000
from proceeds of the sale of the Facility.
Profits and losses for any calendar year or portion of such year are
allocated among the partners in proportion to their percentage ownership
interests, except that, to the extent any allocation of losses would reduce any
limited partner's adjusted capital account balance, as defined and agreed by the
partners, below zero, such portion of losses shall be specially allocated to the
general partners in equal shares and, in turn, any subsequent profits shall be
allocated so as to reverse the effect of such special allocation of losses.
The partners' capital accounts were restructured in 1995 to reflect
KSGFCCI's change in its general partner interest from 42.5% to 10.1% in exchange
for a 32.4% limited partner interest. The net effect of this change is a $50,534
decrease in the general partners' deficiency account balance and a similar
increase in the limited partners' deficiency account balance.
Net cash flow, as defined, for each calendar quarter is distributed to the
partners in accordance with their percentage ownership interests. In addition,
amounts required for payment of New York State franchise taxes by the partners,
based upon a .769% (.75% plus 2.5% surcharge thereon) rate of each partner's pro
rata share of partnership revenues pursuant to Article 9, Section 186 of the New
York State Tax Code, are distributed to the partners when tax payments are due.
All partners' distributions in 1996, 1995 and 1994 were for payment of such
taxes, as well as net cash flow distributions. Partners' distributions in 1994
also included the priority distribution from the sale of the Partnership's
interest in the Facility.
(2), Continued
In addition to their respective shares of partnership cash flow, the
general partners and/or their affiliates receive an administrative fee of
$300,000 per annum (escalated for changes in the Employment Cost Index),
contractual rights to cash flow development fees, and certain other project
management cost reimbursements under various contractual agreements.
(3) Sale of Facility
The Partnership's interest in the Facility was sold on December 22, 1994 to
GECC for $51,550,000. Proceeds from the sale were used to repay the outstanding
loans, pay a fee to GECC and to partially fund transaction costs. A gain on sale
of $1,131,608 was deferred and is being recognized over the term of the lease.
In 1996, 1995 and 1994, $45,215, $45,216 and $1,238, respectively, of the gain
was recognized.
(4) Lease of Facility
The Partnership entered into a Lease Agreement with M&T on December 22,
1994 to lease the Facility for 25 years with an option to renew for up to three
years at a fair market rental value. The lease is recorded as a capital lease.
The lease was subject to repricing to account for changes in assumptions and
estimated costs related to certain transaction expenses and the construction
costs of other equipment.
On December 20, 1995 (the repricing date), construction of other equipment
was completed and all rights, title and interest in such equipment was
transferred to M&T. In addition, the rental payments were revised on the
repricing date to account for the changes in assumptions and estimated costs. As
a result of the change in rental payments, the Facility under capital lease and
related lease obligation were decreased by $547,739 on December 20, 1995.
At December 31, 1996, the future minimum annual lease payments for the
capital lease obligation are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 7,315,460
1998 7,315,460
1999 7,315,460
2000 7,315,460
2001 7,315,460
Thereafter 80,204,349
-----------
116,781,649
Less interest 67,785,705
-----------
Future minimum annual lease payments $ 48,995,944
-----------
-----------
</TABLE>
<PAGE>
(5) Financing
On July 9, 1992, the Partnership and GECC executed permanent financing
arrangements that were effective as of June 29, 1992. GECC provided term debt
with quarterly repayments over a term of 15 years commencing on June 30, 1992 in
an initial amount of $43,000,000 at an interest rate of 11.226%.
GECC also provided additional term debt with repayments over five years in
the amount of $17,000,000 at an interest rate of 9.891%.
Upon the permanent financing closing, GECC, in addition to the commitments
to provide the term debt, committed to provide the Project with a working
capital facility in a maximum amount of $2,000,000 with a floating interest rate
of the prime rate, as defined, plus 2%. GECC also committed to the issuance of
letters of credit in an aggregate maximum amount of $4,000,000. This agreement
was terminated on the date of the sale of the Facility. On December 22, 1994,
the term debt was repaid from the proceeds of the sale of the Facility.
On December 9, 1994 a Term Loan, Working Capital and Letter of Credit
Financing Agreement was entered into with GECC. It provided for a Tranche A Term
Loan for up to $750,000 to fund construction for certain alterations to the
Facility, which were purchased by GECC. In connection therewith, the Tranche A
Term Loan was repaid in December 1995. In addition, a Tranche B Term Loan for up
to $4,250,000 was provided ($3,378,909 and $3,575,969 outstanding at December
31, 1996 and 1995, respectively) to fund transaction costs not funded by the
sale proceeds and a loan to a related party which will be repaid over 12 years
(see note 8). An amendment to the Tranche B Term Loan was entered into on
December 20, 1995 which fixed the interest rate at 10.21% effective December 1,
1995. In addition, a Working Capital Commitment of $2,000,000 is available to
the Partnership, as well as up to $4,000,000 for Letters of Credit related to
fuel obligations. At December 31, 1996 and 1995, there were no borrowings
outstanding under the Working Capital Commitment. At December 31, 1996, the
Partnership had open letters of credit of $1,726,108.
The total amounts of long-term debt due under the Tranche B Term Loan
during each of the next five years are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1997 $203,580
1998 225,684
1999 250,187
2000 276,522
2001 307,373
-------
-------
</TABLE>
(5) Financing
The Partnership also entered into an Alternate Working Capital Agreement
with Summit as of June 29, 1992. Summit provided a $2,000,000 line of credit
secured by receivables and inventory of the Project. Summit received an annual
facility fee of 1/2% of the committed facility and received interest at the rate
of 1% above its Floating Base Rate (prime) on amounts borrowed. There were no
outstanding borrowings at December 31, 1995. This agreement expired as of June
30, 1996.
(6) Lease of Land
The Facility is on a parcel of land owned by Encore adjacent to its paper
mill. The land is leased to the
<PAGE>
Partnership for a nominal amount. In 1994, the lease was amended to extend the
term to 40 years from December 22, 1994. The lease has been assigned to M&T in
connection with the sale of the Facility.
(7) Commitments and Contingencies
Commitments
Affiliates of the Partnership entered into a PPA with NIMO dated as of June
5, 1987 with approval by the New York Public Service Commission (the Commission)
on September 1, 1987. The PPA was assigned to the Partnership. NIMO agreed to
purchase electricity generated by the Facility for a term of 20 years from the
date of commercial operation at the higher of $.06 per kilowatt-hour or actual
avoided cost, as defined.
As of May 22, 1992, the Partnership entered into an amendment to the PPA
whereby the amount of electricity to be sold was increased from approximately 49
megawatts (original capacity) to 55 megawatts in the summer period and 59
megawatts in the winter period (subject to adjustment based on performance).
Revenues for the original capacity continued to be earned based on the higher of
$.06 per kilowatt-hour or actual avoided cost, as defined, for the amount of
electricity generated. For the additional capacity, NIMO was to make payments at
$.06 per kilowatt-hour for five years from the date of the amendment, with the
difference between $.06 and actual energy-only tariff rates to be accumulated in
an adjustment account and recorded as an asset or liability (deferred revenue).
After the five-year period, the additional capacity was to be sold to NIMO at
statutorily required minimum rates less the amount required to liquidate the
adjustment account over the remaining life of the PPA. The adjustment account
balance was secured by a lien on the Facility that was subordinate to GECC's
security.
An amendment to the PPA was entered into as of January 4, 1994 and became
effective on November 5, 1994. The amendment requires NIMO to purchase
electricity generated by the Facility for 35 years from November 5, 1994. In
addition, the NIMO adjustment account of $4,939,571 at November 5, 1994 was
eliminated and was included in 1994 revenues as a result of the amended and
restated PPA.
(7), Continued
The Partnership entered into an Energy Service Agreement (ESA) with James
River dated as of October 31, 1989. James River was to purchase mill
requirements for steam from the Facility at the mill's energy cost according to
formulas and methodology set forth in the ESA for a term of 20 years from the
date of commercial operation. The ESA provided for a share of the Facility's
revenues to be paid to James River. As of March 12, 1992, all of James River's
rights, title, and interest in and to the ESA, except its right to receive a
share of the Facility's revenues, were transferred to Encore. This ESA was
terminated on August 15, 1994. As of October 21, 1994, the Partnership entered
into a new ESA with Encore for a term of 35 years with pricing terms as defined
in the ESA.
The Partnership entered into a Peak Shaving Agreement with NIMO as of June
29, 1992. Under this agreement, NIMO can take the Partnership's contracted
natural gas, subject to defined limitations, for up to 35 days from every
November 15 to April 16 of the following year. As compensation, the Partnership
receives a fee of 25 cents to 75 cents per decathern of gas plus the cost of
alternate fuel or the cost of the gas. Revenues realized pursuant to this
agreement were $316,431 in 1996. There were no revenues realized pursuant to
this agreement in 1995 and 1994.
The Partnership entered into an Operations and Maintenance Agreement (O&M
Agreement) with Stewart & Stevenson Operations, Inc. (the Operator) as of
January 31, 1991. The O&M Agreement was amended and restated as of October 21,
1994 to conform with the plan for operations associated with the amended and
restated PPA. Under the amended agreement, the Operator will operate and
maintain the Facility for a period of 12 years and one successive six-year term,
unless 12 months' prior notice is given by the Partnership to the Operator.
Compensation will include a fee of (INFORMATION DELETED - SUBJECT OF A
CONFIDENTIALITY REQUEST) per year plus (INFORMATION DELETED - SUBJECT OF A
CONFIDENTIALITY REQUEST) per Operating Hour, both amounts subject to annual
escalation beginning January 1, 1995 based upon changes in the Producer Price
Index (PPI). The Operator will also be paid a fee for major facility overhauls
at a rate that ranges from (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY
REQUEST) to (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST) per
Equivalent Operating Hour, as
<PAGE>
defined. This fee is also subject to annual escalations based upon changes in
the PPI. The agreement also provided for the Partnership to pay the Operator a
mobilization fee of (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST)
prior to the acceptance date, as defined. The agreement also provides for the
Operator to receive a bonus or be obligated to pay a penalty based on a
performance factor, as defined. The Partnership will reimburse the Operator for
letter of credit fees and insurance premiums based upon evidence by the Operator
that such expenses have been paid.
The Partnership has entered into various contracts for the supply and
transportation of natural gas to the Project. Natural gas is being supplied by
Renaissance Energy Ltd. (a Canadian corporation) from dedicated reserves.
Transportation of natural gas by pipelines is by TransCanada Pipelines Limited
from Burstall, Saskatchewan, Canada to Emerson, Manitoba, Canada; by Great Lakes
Gas Transmission Company to Crystal Falls, Michigan; by ANR Pipeline Company to
Lebanon, Ohio; by CNG Transmission Corporation to West Schenectady, New York;
and by NIMO to the Facility.
(7), Continued
The aforementioned agreements have been assigned to M&T in connection with
the sale of the Facility.
In addition, the Facility has the capacity to utilize Number 2 fuel oil as
an alternative fuel. The Partnership maintains an open account with Sprague
Energy Corporation to purchase such fuel.
Contingencies
The Partnership and certain related parties, including the general and
limited partners, have been named as defendants in a lawsuit. The plaintiff
alleges that on or about October 11, 1988, the plaintiff was awarded the
contracts for the construction of the Facility and a separate cogeneration
facility located in Carthage, New York. The complaint alleges breach of
contract, unjust enrichment, promissory estoppel, fraud and/or negligent
misrepresentation. The plaintiff is seeking $7,446,000 in damages under its
causes of action, plus unspecified punitive damages from all parties named in
the lawsuit.
On January 15, 1991, the defendants answered the complaint and denied all
the material allegations and asserted various affirmative defenses. On February
28, 1995, the defendants filed a motion for summary judgment dismissing
plaintiff's claims. On May 22, 1996, the court dismissed the claim alleging
breach of contract. The court declined to issue a summary judgement ruling on
the remaining claims. On September 25, 1996, the defendents appealed the court's
failure to dismiss the remaining claims. The plaintiff appealed the court's
dismissal of the claim alleging breach of contract. The appellate court has
scheduled oral argument on the appeals for March 12, 1997. Management and legal
counsel believe that the lawsuit has little or no merit. The ultimate outcome of
this litigation cannot presently be determined.
(8) Related-party Transactions
Affiliates of the general partners receive an administrative fee for
managing the operations of the Partnership. Administrative fee amounts in 1996,
1995 and 1994 were $328,843, $318,278 and $307,488, respectively.
As of December 9, 1994, the Partnership entered into an interfacility loan
agreement with Kamine/Besicorp Carthage L.P. (KBC) and Kamine/Besicorp Natural
Dam L.P. (KBND). The agreement allows the Partnership to borrow funds or advance
funds to the extent of available cash, as defined in the loan agreement. Such
loans to or from either KBC or KBND are required when there are insufficient
funds available to pay certain current obligations. At December 31, 1996 and
1995, there were no outstanding amounts due to or from KBC and KBND.
(8), Continued
On December 22, 1994, the Partnership advanced $2,637,973 to
Kamine/Besicorp GlenCarthage Partnership. The loan receivable is payable in
quarterly installments over 12 years and carries an interest rate based on
either the Commercial Paper Rate or the annual yield on ten-year U.S. Treasury
obligations, as defined, plus 4.5%. The interest rate was fixed on December 1,
1995 at 10.21%, based on the ten-year U.S. Treasury at that time, plus 4.5%.
<PAGE>
The Partnership has an agreement with the two developers for additional
fees for development work, management and administrative services. These fees
(cash flow fees and contract rights) have been assigned by the developers to
Kamine/Besicorp GlenCarthage Partnership in which the developers are partners.
This partnership has the right to receive these fees when the Partnership has
sufficient funds available in accordance with payment priority, provided that
the developers provide management and administrative services. The contract
rights, as defined, are payable through March 31, 2007. For 1996, 1995 and 1994,
the Partnership recorded contract rights expense of $994,639, $2,703,132 and
$814,556, respectively. Cash flow fees are payable over the life of the Project
based on 8.5% of cash flows from operations, as defined. Cash flow fees paid to
related parties in 1996 and 1995 were $481,622 and $69,070, respectively. There
were no cash flow fees paid in 1994.
<PAGE>
EXHIBIT NO. 99-C
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Partners
Kamine/Besicorp GlenCarthage Partnership:
We have audited the accompanying balance sheets of Kamine/Besicorp GlenCarthage
Partnership as of December 31, 1996 and 1995, and the related statements of
operations, partners' deficiency, and cash flows for each of the years in the
three-year period ended December 31, 1996. These financial statements are the
responsibility of the general partners. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kamine/Besicorp GlenCarthage
Partnership as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1996 in conformity with generally accepted accounting principles.
February 21, 1997
<PAGE>
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
Assets
<S> <C> <C>
Cash $ 1,450 3,376
Accounts receivable - Cogeneration Projects (notes 4 and 6) 716.988 661,863
---------- ----------
Total assets $ 718,438 665,239
---------- ----------
---------- ----------
Liabilities and Partners' Deficiency
Current liabilities:
Current portion of loans payable - Cogeneration Projects
(note 3) 252,085 222,487
Amounts due to related parties (note 7) 128,101 134,110
Accrued expenses 196,968 111,857
---------- ----------
Total current liabilities 577,154 468,454
Loans payable - Cogeneration Projects, net of current portion
(note 3) 4,651,749 4,903,834
---------- ----------
Total liabilities 5,228,903 5,372,288
Partners' deficiency (note 2) (4,510,465) (4,707,049)
---------- ----------
Total liabilities and partners' deficiency $ 718,438 665,239
---------- ----------
---------- ----------
See accompanying notes to financial statements
</TABLE>
<PAGE>
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenue:
Contract rights (note 4) $2,087,993 3,794,672 1,911,830
Developers' cash flow fees (note 6) 928,680 320,534 63,256
--------- --------- ---------
3,016,673 4,115,206 1,975,086
--------- --------- ---------
Operating expenses:
Interest expense 518,446 545,691 588,820
Amortization of financing costs -- -- 43,665
Cash flow fees (note 6) 928,680 320,534 63,256
Other 7,425 5,700 7,570
--------- --------- ---------
Total operating expenses 1,454,551 871,925 703,311
--------- --------- ---------
Income from operations 1,562,122 3,243,281 1,271,775
--------- --------- ---------
Other income (expense):
Interest income -- 673 9,063
Other expense (note 8) -- -- (425,000)
--------- --------- ---------
-- 673 (415,937)
--------- --------- ---------
Income before extraordinary item 1,562,122 3,243,954 855,838
Extraordinary item (note 3) -- -- (968,745)
--------- --------- ---------
Net income (loss) $1,562,122 3,243,954 (112,907)
--------- --------- ---------
--------- --------- ---------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
Statements of Partners' Deficiency
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Partners' deficiency at beginning of year $(4,707,049) (4,572,788) (2,764,835)
Partners' contributions 5,000 -- --
Partners' distributions (note 2) (1,370,538) (3,378,215) (1,695,046)
Net income (loss) (note 2) 1,562,122 3,243,954 (112,907)
---------- ---------- ----------
Partners' deficiency at end of year $(4,510,465) (4,707,049) (4,572,788)
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,562,122 3,243,954 (112,907)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization and write-off of deferred
financing costs -- -- 352,410
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (55,125) 185,945 358,655
Decrease in escrow funds -- 115,810 117,554
(Decrease) increase in amounts due to related
parties (6,009) (43,379) 177,489
Increase (decrease) in accrued expenses 85,111 23,317 (26,560)
---------- ---------- ----------
Net cash provided by operating activities 1,586,099 3,525,647 866,641
---------- ---------- ----------
Cash flows from financing activities:
Payments on long-term loan payable (222,487) (149,625) (4,448,044)
Proceeds from loans payable - Cogeneration Projects -- -- 5,275,946
Distribution to partners, net of contributions (1,365,538) (3,378,215) (1,695,046)
---------- ---------- ----------
Net cash used in financing activities (1,588,025) (3,527,840) (867,144)
---------- ---------- ----------
Decrease in cash (1,926) (2,193) (503)
Cash at beginning of year 3,376 5,569 6,072
---------- ---------- ----------
Cash at end of year $ 1,450 3,376 5,569
---------- ---------- ----------
---------- ---------- ----------
Cash paid during year for interest $ 524,455 411,581 667,443
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
Notes to Financial Statements
December 31, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
Organization
Kamine/Besicorp GlenCarthage Partnership (the Partnership) is a New York
general partnership formed on October 30, 1990. The Partnership was organized to
enter into a loan agreement (the Loan Agreement) between the Partnership and
NNW, Inc. (formerly Nova Northwest, Inc.).
The partners of the Partnership are Kamine Development Corp. (KDC) and
Beta Nova Inc. (a subsidiary of Besicorp Group Inc.), each of which holds a 50%
interest in the Partnership. On May 3, 1995, KDC assigned the economic rights of
its interest in the Partnership to a trust with Chemical Bank as trustee.
Summary of Significant Accounting Policies
Deferred Financing Costs
All costs associated with the Loan Agreement were deferred over the life
of the loan and amortized on a straight-line basis. The remaining balance of
these deferred costs at December 22, 1994 was charged to operations (see note
3).
Income Taxes
Income taxes have not been provided since the Partnership is not a taxable
entity. The partners report their respective share of the Partnership's income
or loss on their individual income tax returns.
Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value of
certain financial instruments. The carrying amounts of accounts receivable,
amounts due to related parties and accrued expenses approximate fair value due
to the short-term maturity of such instruments. Management believes that the
carrying amount of loans payable approximates fair value based on rates that
would be offered to the Partnership for debt with similar maturities and
characteristics.
Use of Estimates
In conformity with generally accepted accounting principles, management of
the Partnership makes estimates and assumptions relating to the reporting of
assets and liabilities and the disclosure of contingent liabilities in preparing
the accompanying financial statements. Actual results could differ from those
estimates.
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount can be reasonably
estimated.
(2) Allocation of Income, Losses and Cash Distributions
A separate capital account has been established for each partner. Each
such account is (a) increased by the amount of such partner's capital
contributions, any profits and items of income and gain allocated to such
partner, any increase in such partner's share of the liabilities of the
Partnership and the amount of partnership liabilities assumed by the partners;
and (b) decreased by the amount of cash and the fair market value of any
partnership assets distributed to such partner, the amount of losses allocated
to such partner, any decrease in such partner's share of the liabilities of the
Partnership and the amount of any partner liabilities assumed by the
Partnership.
Profits and losses for any year or portion of such year are allocated
among the partners in proportion to their percentage ownership interests.
Excess cash received by the Partnership is distributed to the partners in
accordance with their percentage
<PAGE>
ownership interests.
(3) Loans Payable
On October 1, 1990, the partners, doing business as the Partnership,
entered into the loan Agreement with NNW, Inc. pursuant to which $5,000,000 was
borrowed from NNW, Inc.
The general partners of the Carthage and South Glens Falls cogeneration
projects (the Cogeneration Projects) guaranteed the Loan Agreement by pledging
their ownership interests in the Cogeneration Projects, to the extent permitted
under the respective limited partnerships' participation agreements, as well as
pledging their cash flow from such ownership in the event that the cash flow
development fees were insufficient to cover the loan requirements.
In addition, 8.5% of the operating cash flows from each of the
Cogeneration Projects has been contributed to the Partnership and is to be paid
to NNW, Inc. over the life of the Cogeneration Projects as partial consideration
for the loan, regardless of the timing of final payment of the loan.
On December 22, 1994, the Partnership obtained loans aggregating
$5,275,946 from the Cogeneration Projects. These loans are payable in quarterly
installments over 12 years and carried an interest rate based on either the
Commercial Paper Rate or the annual yield on ten-year U.S. Treasury obligations,
as defined, plus 4.5%. The interest rate was fixed on December 1, 1995 at 10.21%
based on the ten-year U.S. Treasury rate plus 4.5% at that time. The loan
proceeds were used to repay the outstanding loan with NNW, Inc., including
prepayment premiums. In connection with the repayment of the debt to NNW, Inc.,
the unamortized deferred financing costs and a prepayment penalty related to the
early retirement of debt were expensed and recorded as an extraordinary item in
the December 31, 1994 statement of operations.
(3), Continued
The total amounts of loans payable - Cogeneration Projects due during each
of the next five years are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1997 $ 252,085
1998 285,270
1999 323,099
2000 365,992
2001 414,267
---------
---------
</TABLE>
(4) Contract Rights
The general partners have pledged their cash flow development fee rights
(contract rights) from the Cogeneration Projects to repay the loan. The contract
rights are earned by the partners when the Cogeneration Projects have generated
sufficient cash to make the required payment. The revenues earned from the
Cogeneration Projects for the years ended December 31, 1996, 1995 and 1994
amounted to $2,087,993, $3,794,672 and $1,911,830, respectively. As of December
31, 1996 and 1995, the Partnership has a receivable with respect to contract
rights of $524,020 and $542,781, respectively, from the Cogeneration Projects.
(5) Business and Operating Matters
The Partnership was organized to enter into the Loan Agreement with NNW,
Inc., which was to be repaid from cash flows of the Cogeneration Projects. The
loan was repaid in advance of its maturity and replaced by loans from the
Cogeneration Projects. The continued operations of the Partnership are dependent
upon the Cogeneration Projects generating sufficient cash flows in order to be
able to pay the Partnership's obligations. At December 31, 1996, the Partnership
has a substantial excess of liabilities over assets. Management anticipates that
sufficient cash flows will be available from the Cogeneration Projects to pay
the Partnership's obligations.
(6) Developers' Cash Flow
The general partners have acquired an 8.5% cash flow fee from operations
in addition to their cash flow
<PAGE>
development fee rights in the Cogeneration Projects. The general partners have
assigned these fees to the Partnership, which are being paid to NNW, Inc. as
additional consideration for the loan. These cash flow fees will be received
over the life of the
(6), Continued
projects. The revenues earned from the Cogeneration Projects and fees paid to
NNW, Inc. for the years ended December 31, 1996, 1995 and 1994 were $928,680,
$320,534 and $63,256, respectively. At December 31, 1996 and 1995, the
Partnership has outstanding receivables with respect to cash flow fees of
$192,968, and $119,082, respectively, from the Cogeneration Projects.
(7) Amounts Due to Related Parties
Amounts due to related parties at December 31, 1996 and 1995 consist of
accrued interest on loans from the Cogeneration Projects.
(8) Other Expense
In 1994, the Partnership paid NNW, Inc. $425,000. This payment represents
8.5% of a special distribution made to the limited partners of the Cogeneration
Projects in connection with the sale of the Cogeneration Projects' facilities.
<PAGE>
EXHIBIT NO. 99-D
KAMINE/BESICORP NATURAL DAM L.P.
Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Partners
Kamine/Besicorp Natural Dam L.P.:
We have audited the accompanying balance sheets of Kamine/Besicorp Natural Dam
L.P. as of December 31, 1996 and 1995, and the related statements of operations,
partners' deficiency, and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the general partners. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kamine/Besicorp Natural Dam
L.P. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1996 in conformity with generally accepted accounting principles.
February 21, 1997
<PAGE>
KAMINE/BESICORP NATURAL DAM L.P.
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
<S> <C> <C>
Current assets:
Cash $ 1,091,152 829,755
Cash held in escrow 665,218 451,145
Accounts receivable 1,592,073 1,284,559
Prepaid expenses and other current assets 279,347 253,911
----------- ----------
Total current assets 3,627,790 2,819,370
----------- ----------
Facility under capital lease (note 4) 71,272,406 71,272,406
Less accumulated amortization 7,251,268 3,694,538
----------- ----------
Facility under capital lease, net 64,021,138 67,577,868
----------- ----------
Other assets:
Cash held in escrow 3,174,270 3,085,292
Deferred fuel costs, less accumulated amortization of $614,865
and $331,081 at December 31, 1996 and 1995, respectively
(note 7) 1,135,135 1,418,919
----------- ----------
Total other assets 4,309,405 4,504,211
----------- ----------
Total assets $ 71,958,333 74,901,449
----------- ----------
----------- ----------
Liabilities and Partners' Deficiency
Current liabilities:
Current installments of long-term debt (note 5) 472,347 452,790
Accounts payable 497,762 587,784
Amounts due to related parties (notes 2 and 8) 1,089,052 737,936
Accrued expenses and other current liabilities 649,694 657,570
Obligations under capital lease (note 4) 1,326,309 1,109,419
----------- ----------
Total current liabilities 4,035,164 3,545,499
Long-term debt, excluding current installments (note 5) 4,231,984 4,704,331
Obligations under capital lease (note 4) 69,812,681 71,138,989
Deferred gain on sale of Facility (note 3) 4,228,921 4,463,861
----------- ----------
Total liabilities 82,308,750 83,852,680
----------- ----------
Partners' deficiency (note 2):
General partners (3,219,056) (2,783,924)
Limited partners (7,131,361) (6,167,307)
----------- ----------
Total partners' deficiency (10,350,417) (8,951,231)
Commitments (notes 4, 5, 6 and 7) ----------- ----------
Total liabilities and partners' deficiency $ 71,958,333 74,901,449
----------- ----------
----------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP NATURAL DAM L.P.
Statements of Operations
Years ended December 31, 1996, 1995 and 19934
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenues (note 7) $19,357,075 15,254,402 30,095,818
---------- ---------- ----------
Operating expenses:
Depreciation -- -- 2,576,899
Amortization of asset under capital lease 3,556,730 3,596,043 98,495
Fuel (note 1) 2,530,135 1,613,462 10,662,692
ESA payments (note 7) -- 537,293 140,213
Operations and maintenance (note 7) 898,998 841,407 1,704,900
Overhaul (note 7) -- -- 629,200
Administrative fee (notes 2 and 8) 329,368 318,786 307,980
Insurance 243,502 253,537 313,645
Amortization of financing costs (note 1) -- -- 228,537
Amortization of fuel costs 283,784 283,784 47,297
Utilities 399,606 290,519 370,692
Property taxes 284,583 247,482 260,157
Late fees (note 7) -- -- 210,000
Other 174,253 175,158 51,418
---------- ---------- ----------
Total operating expenses 8,700,959 8,157,471 17,602,125
---------- ---------- ----------
Income from operations 10,656,116 7,096,931 12,493,693
---------- ---------- ----------
Other income (expense):
Interest expense (9,140,381) (9,213,444) (8,332,431)
Interest income 178,217 201,657 87,033
Gain on sale of Facility (note 3) 234,940 234,936 6,437
Other expense (42,179) (31,169) (145,477)
---------- ---------- ----------
Total other expense (8,769,403) (8,808,020) (8,384,438)
---------- ---------- ----------
Income (loss) before extraordinary item 1,886,713 (1,711,089) 4,109,255
Extraordinary item (note 1) -- -- (2,760,162)
---------- ---------- ----------
Net income (loss) $ 1,886,713 (1,711,089) 1,349,093
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP NATURAL DAM L.P.
Statements of Partners' Deficiency
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
General Limited Total
partners partners
<S> <C> <C> <C>
Partners' deficiency at December 31, 1993 (1,058,943) (1,802,819) (2,861,762)
Partners' distributions (note 2) (1,288,457) (2,193,865) (3,482,322)
Net income (note 2) 499,164 849,929 1,349,093
---------- ---------- -----------
Partners' deficiency at December 31, 1994 (1,848,236) (3,146,755) (4,994,991)
Partners' distributions (note 2) (698,244) (1,546,907) (2,245,151)
Partnership restructuring (note 2) 294,704 (294,704) --
Net loss (note 2) (532,148) (1,178,941) (1,711,089)
---------- ---------- -----------
Partners' deficiency at December 31, 1995 (2,783,924) (6,167,307) (8,951,231)
Partners' distributions (note 2) (1,021,900) (2,263,999) (3,285,899)
Net income (note 2) 586,768 1,299,945 1,886,713
---------- ---------- -----------
Partners' deficiency at December 31, 1996 $(3,219,056) (7,131,361) (10,350,417)
---------- ---------- -----------
---------- ---------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP NATURAL DAM L.P.
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,886,713 (1,711,089) 1,349,093
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation -- -- 2,576,899
Amortization of Facility under capital lease 3,556,730 3,596,043 98,495
Amortization of deferred financing costs (including
write-off of balance of deferred financing cost) -- -- 2,988,699
Amortization of fuel costs 283,784 283,784 47,297
Amortization of deferred gain (234,940) (234,936) (6,437)
Changes in operating assets and liabilities:
Increase (decrease) in escrow accounts (303,051) 154,191 (3,514,361)
Increase (decrease) in receivables (307,514) (69,275) 1,711,913
Increase (decrease) in prepaid expenses and other
current assets (25,436) 274,288 (192,148)
Increase in deferred fuel costs -- -- (1,750,000)
Decrease in other assets -- -- 132,885
Decrease in accounts payable (90,022) (218,037) (2,462,613)
Increase (decrease) in due to related parties 351,116 (1,562,487) 88,987
Decrease in accrued expenses and other current
liabilities (7,876) (202,902) (1,581,385)
Decrease in deferred revenue -- -- (2,254,686)
Increase in accrued interest under capital lease -- 741,764 234,238
Increase in deferred gain on sale of Facility -- -- 4,705,234
---------- ---------- -----------
Net cash provided by operating activities 5,109,504 1,051,344 2,172,110
---------- ---------- -----------
Cash flows from investing activities:
Proceeds from sale of Facility, net -- -- 70,037,297
Deferred gain on sale of Facility -- -- (4,705,234)
---------- ---------- -----------
Net cash provided by investing activities -- -- 65,332,063
---------- ---------- -----------
Cash flows from financing activities:
Payments on capital lease obligation (1,109,418) -- --
Payments on construction loan -- -- (68,596,205)
Proceeds from long-term debt -- 1,306,590 5,443,560
Payments on long-term debt (452,790) (1,593,029) --
Partners' distributions (3,285,899) (2,245,151) (3,482,322)
---------- ---------- -----------
Net cash used in financing activities (4,848,107) (2,531,590) (66,634,967)
---------- ---------- -----------
Increase (decrease) in cash 261,397 (1,480,246) 869,206
Cash at beginning of year 829,755 2,310,001 1,440,795
---------- ---------- -----------
Cash at end of year $ 1,091,152 829,755 2,310,001
---------- ---------- -----------
---------- ---------- -----------
Supplemental disclosure of cash flow information -
cash paid during the year for interest $ 9,188,784 7,842,604 8,204,611
---------- ---------- -----------
---------- ---------- -----------
Noncash investing and financing activities:
Capital lease $ -- -- 72,000,000
---------- ---------- -----------
---------- ---------- -----------
Capital lease repricing adjustment (note 4) $ -- 727,594 --
---------- ---------- -----------
---------- ---------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP NATURAL DAM L.P.
Notes to Financial Statements
December 31, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
Organization
Kamine/Besicorp Natural Dam L.P. (the Partnership) is a Delaware limited
partnership formed on August 1, 1991. The Partnership was organized for the
purpose of constructing, owning and operating a 49- megawatt cogeneration
facility (the Facility) on premises leased from James River Paper Company, Inc.
(James River) in Gouverneur, New York (premises sold to Fonda Group, Inc.
(Fonda) on May 6, 1996). The Facility is operated as a PURPA qualifying
cogeneration facility using natural gas as the primary source of fuel.
The general partners of the Partnership are Kamine Natural Dam Cogen Co.,
Inc. (KNDCCI) and Beta Natural Dam, Inc. (a subsidiary of Besicorp Group Inc.
(Besicorp)), which retain a 16% and 21% interest in the Partnership,
respectively. The limited partners are Kamine Development Corp. (KDC) and Beta N
Limited (a subsidiary of Besicorp), which retain a 34% and 29% interest in the
Partnership, respectively. On May 3, 1995, KNDCCI restructured its 16% general
partner interest in the project to a 5.9% limited partner interest and a 10.1%
general partner interest. KDC and KNDCCI assigned the economic rights of their
limited partner interests in the Partnership to a trust, with Chemical Bank as
trustee, on May 3, 1995.
The Facility began commercial operations on July 6, 1993. Prior to July 6,
1993, the Facility was under construction, with its only activities consisting
of expenditures for construction, financing and other related costs. Sales to
Niagara Mohawk Power Corporation (NIMO) approximated 96%, 98% and 98% of total
revenues in 1996, 1995 and 1994, respectively.
The Partnership conveyed ownership of the Facility to the St. Lawrence
County Industrial Development Agency (IDA). The tax-exempt status of the IDA
exempts the project from property taxes during IDA ownership. Payments in lieu
of real property taxes (PILOT) are made to the IDA under a PILOT Agreement. The
IDA has appointed the Partnership as its agent and was to convey the Facility to
the Partnership in accordance with an installment sale agreement.
The Partnership's interest in the Facility was sold to General Electric
Capital Corporation (GECC) on December 22, 1994 and leased back by the
Partnership. GECC entered into a Trust Agreement with Manufacturers and Traders
Trust Company (M&T) as of December 9, 1994 to engage M&T as Owner Trustee. In
connection with the sale of the Partnership's interest in the Facility, the
installment sale agreement was assigned to M&T.
(1), Continued
Summary of Significant Accounting Policies
Plant and Equipment
Prior to the sale of the Partnership's interest in the Facility, plant and
equipment was stated at cost, less accumulated depreciation. Maintenance and
repairs which did not enhance the value or increase the basic productive
capacity of the asset were charged to operations as incurred. Depreciation of
assets was computed on a straight-line method over their useful lives of 25
years, commencing on the date the Facility was placed into service.
Effective November 3, 1994, the Partnership extended the estimated useful
life of the Facility to 35 years as a result of the amended and restated Power
Purchase Agreement (PPA) (see note 7). The effect of this change in estimate was
immaterial to the 1994 statement of operations.
At the sale date, the net book value of $65,332,063 was recorded as a cost
of the sale.
<PAGE>
Amortization of Capital Lease
Amortization of the Facility under capital lease is computed using the
straight-line method over the lease term.
Deferred Financing Costs
The deferred financing costs were being amortized on a straight-line basis
over the life of the expected permanent financing, which was 13 years,
commencing on the date the Facility was placed into service. Amortization
charged to operations for the year ended December 31, 1994 was $228,537.
On the date of sale of the Facility to GECC, the term loans were repaid and
the unamortized deferred financing costs of $2,760,162 were expensed and
recorded as an extraordinary item in connection with the early retirement of
debt.
Deferred Fuel Cost
The cost associated with modifying the fuel arrangements until January 1,
2001 to accommodate revised PPA terms (see note 7) is deferred and amortized
during the period from November 1, 1994 (the date the modifications became
effective) through December 31, 2000.
(1), Continued
Revenue Recognition
Revenues are recognized as earned.
Gain on Sale
The gain from the sale of the Facility has been deferred and is being
recognized on a straight-line basis over the lease term.
Income Taxes
Income taxes will not be provided for since the Partnership is not a
taxable entity. The partners report their respective share of the Partnership's
taxable income or loss on their respective income tax returns.
Fuel Sales
Sales of fuel and transportation associated with excess natural gas
pipeline capacity purchased by the Partnership to support peak fuel requirements
have been treated as a reduction to fuel expense. Total sales related to
disposition of such excess capacity in 1995 and 1994 totaled $34,292 and
$436,583, respectively. There were no sales related to disposition of excess
capacity in 1996.
Escrow Accounts
An escrow arrangement has been established for receipt of all revenues and
payment of all obligations of the Partnership. The security agent is Summit Bank
(Summit), formerly United Jersey Bank. Amounts in the collection account, which
represent general funds, are classified as cash on the balance sheets. Funds in
other accounts, which are set aside for specific purposes, are classified as
escrow accounts. The escrow accounts at December 31, 1996 and 1995 consist of a
current account principally for the payment of taxes and insurance, and two
long-term accounts - a reserve for lease payments and an escrow account for
restart costs of the Facility (expected to be incurred in late 2000).
Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of the fair
value of certain financial instruments. The carrying amounts of accounts
receivable, accounts payable and accrued liabilities approximate fair value due
to the short-term maturity of such instruments. Management believes that the
carrying amounts of long-term debt approximate fair value based on rates that
would be offered to the Partnership with similar maturities and characteristics.
(1), Continued
<PAGE>
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Partnership adopted the provisions of SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," as of January 1, 1996. This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairments whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the assets to the future net cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair value
less the cost to sell. Adoption of this statement did not have an impact on the
Partnership financial position or results of operations.
Use of Estimates
In conformity with generally accepted accounting principles, management of
the Partnership has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent liabilities
in preparing the accompanying financial statements. Actual results could differ
from those estimates.
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount can be reasonably
estimated.
Risks and Uncertainties
The Partnership is principally engaged in a single line of business, the
production and sale of electric power to one customer, NIMO.
The regulated investor-owned utility industry is presently subject to
considerable market pressures and changes in the Federal and state regulatory
environment in which it operates. These pressures are resulting in industry
consolidation and pressure to disaggregate electric generation, transmission and
distribution assets and to adjust cost structures to meet market conditions. The
utility to which the Partnership sells its power, NIMO, made a filing on October
10, 1995 to the Public Service Commission of the State of New York setting forth
numerous restructuring proposals, including a significant reduction in the price
for power purchased from independent power producers currently under contract
with NIMO. The Partnership expects many of NIMO's proposals to be strongly
contested, including the significant reduction in the price for power. NIMO has
also stated in such filing that its financial viability is threatened. In early
1996, NIMO suspended payment of dividends on its common stock. On August 1,
1996, NIMO proposed to buy out 44 independent power contracts in exchange for a
combination of cash and securities. The PPA of the Partnership is included among
these contracts. Discussions between NIMO and the holders of the power contracts
are continuing. The outcome of the industry trends, regulatory changes, the NIMO
filing and NIMO's financial viability cannot presently be determined.
Relassification
Certain items in the 1995 and 1994 financial statements have been
reclassified to conform with the 1996 presentation.
(2) Allocation of Income, Losses and Cash Distributions
A separate capital account is established and maintained for each partner.
Each account shall be (a) increased by the amount of such partner's capital
contributions, any profits and items of income and gain allocated to such
partner, and any increase in such partner's share of the liabilities of the
Partnership and the amount of the Partnership's liabilities assumed by the
partner; and (b) decreased by the amount of cash and the fair market value of
any of the Partnership's assets distributed to such partner, the amount of
losses allocated to such partner, and any decrease in such partner's share of
the liabilities of the Partnership and the amount of any partner liabilities
assumed by the Partnership (subject to certain provisions).
<PAGE>
Profits and losses for any calendar year or portion of such year are
allocated among the partners in proportion to their percentage ownership
interests, except that any net losses of the Partnership will be allocated among
the partners in accordance with the positive balances in their capital accounts,
and thereafter any remaining losses will be allocated according to the
percentages of ownership.
The partners' capital accounts were restructured in 1995 to reflect
KNDCCI's change in its general partner interest from a 16.0% general partner
interest to 10.1%, in exchange for a 5.9% limited partner interest. The net
effect of this change is a $294,704 decrease in the general partners' deficiency
account balance and a similar increase in the limited partners' deficiency
account balance.
(2), Continued
Net cash flow, as defined, for each calendar quarter is distributed to the
partners in accordance with their percentage ownership interests. In addition,
amounts required for payment of New York State franchise taxes by the partners,
based upon a .769% (.75% plus 2.5% surcharge thereon) rate of each partner's pro
rata share of partnership revenues pursuant to Article 9, Section 186 of the New
York State Tax Code, are distributed to the partners when tax payments are due.
Partners' distributions in 1996, 1995 and 1994 were for payment of such taxes,
as well as net cash flow distributions.
The partners have a deficiency in their partners' capital account balance
as a result of distributions over their proportionate share of net income.
Management anticipates that the deficiencies in the partners' capital account
balance will reverse in subsequent years.
In addition to their respective shares of partnership cash flow, the
general partners and/or their affiliates receive an administrative fee of
$300,000 per annum (escalated for changes in an Employment Cost Index) and
development fees under various contractual agreements.
(3) Sale of Facility
The Partnership's interest in the Facility was sold on December 22, 1994 to
GECC for $72,000,000. Proceeds from the sale were used to repay the outstanding
loans, pay a fee to GECC and to partially fund transaction costs. A gain on sale
of $4,705,234 was deferred and is being recognized over the term of the lease.
In 1996, 1995 and 1994, $234,940, $234,936 and $6,437, respectively, of the gain
was recognized.
(4) Lease of Facility
The Partnership entered into a Lease Agreement with M&T on December 22,
1994 to lease the Facility for 20 years with an option to renew for up to eight
years at a fair market rental value. The lease is recorded as a capital lease.
The lease was subject to repricing to account for changes in assumptions and
estimated costs related to certain transaction expenses and the construction
costs of other equipment.
On December 20, 1995 (the repricing date), construction of other equipment
was completed and all rights, title and interest in such equipment was
transferred to M&T. In addition, the rental payments were revised on the
repricing date to account for the changes in assumptions and estimated costs. As
a result of the change in rental payments, the Facility under capital lease and
related lease obligation were decreased by $727,594 on December 20, 1995.
(4), Continued
<PAGE>
At December 31, 1996, the future minimum annual lease payments for the
capital lease obligation are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 $ 9,700,570
1998 9,700,570
1999 9,700,570
2000 9,700,570
2001 9,700,570
Thereafter 119,706,843
------------
168,209,693
Less interest 97,070,703
------------
Future minimum annual lease payments $ 71,138,990
------------
------------
</TABLE>
The lease payments made in 1995 were interest only as the payments under the
lease were less than the imputed interest under the lease capitalization.
Included in obligations under capital leases at December 31, 1995 is accrued
interest of $741,764.
(5) Financing
Construction financing of $78,400,000 was provided by GECC, with the
Facility serving as collateral. Interest was charged at the greater of the
Bankers Trust Company prime rate plus 1.5% or an average 30-day LIBOR rate plus
0.5%. The maturity of the loans was extended to December 31, 1994 and terms were
implemented on an interim basis consistent with permanent financing as provided
for in the project documents as of October 1, 1993. These terms provided for a
13-year loan with quarterly payments commencing on December 31, 1994 with a
fixed interest rate of 11.38%. In addition, GECC received supplemental payments
to enable achievement of target yields. On December 22, 1994, the construction
loans were repaid from the proceeds of the sale of the Facility.
The Partnership and GECC entered into a Working Capital Agreement on August
16, 1993 which provided a working capital facility in a maximum amount of
$3,000,000. GECC received a commitment fee paid quarterly in arrears equal to
3/8% per annum of the average daily amount of the undrawn portion of the working
capital line of credit during such quarter. Borrowings incurred interest daily
at a rate per annum equal to GECC's 30-day Commercial Paper Rate plus 4.5%. This
agreement was terminated on the date of the sale of the Facility.
(5), Continued
On December 9, 1994 a Term Loan, a Working Capital and Letter of Credit
Financing Agreement was entered into with GECC. It provided for a Tranche A Term
Loan for up to $1,500,000 to fund construction for certain alterations to the
Facility, which were purchased by GECC. In connection therewith, the Tranche A
Term Loan was repaid in December 1995. In addition, a Tranche B Term Loan for up
to $4,500,000 ($3,398,707 and $3,597,685 outstanding at December 31, 1996 and
1995, respectively) was provided to fund transaction costs not funded by the
sale proceeds, operator demobilization costs and an initial lease reserve amount
which will be repaid over 12 years. GECC also provided for $1,750,000
($1,305,624 and $1,559,436 outstanding at December 31, 1996 and 1995,
respectively) to fund the payment made to Norcen Energy Resources Limited
(NORCEN), formerly North Canadian Marketing Inc. (see note 7) pursuant to the
Second Amendment to the Gas Purchase Agreement which will be repaid over six
years. The Tranche A and B Term Loans carried an interest rate based on either
the Commercial Paper Rate or the annual yield on ten-year U.S. Treasury
obligations, as defined in the agreement, plus 4.5%. The interest rate on the
$1,750,000 loan is at 12.49%. An amendment to the Tranche B Term Loans was
entered into on December 20, 1995, which fixed the interest rate at 10.21%
effective December 1, 1995. A Working Capital Commitment of $3,000,000 is
available to the Partnership as well as up to $5,000,000 for letters of credit
related to fuel obligations. At December 31, 1996 and 1995, there were no
borrowings outstanding under the Working Capital Commitment. At December 31,
1996, the Partnership had open letters of credit of $1,450,000.
<PAGE>
The total amounts of long-term debt due during each of the next five years
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1997 $ 472,347
1998 530,502
1999 595,892
2000 668,457
2001 309,147
---------
---------
</TABLE>
The Partnership also entered into an Alternate Working Capital Agreement
with Summit as of June 29, 1992. Summit provided a $2,000,000 line of credit
secured by receivables and inventory of the Project. Summit received an annual
facility fee of .50% of the committed facility and received interest at the rate
of 1% above its Floating Base Rate (prime) on amounts borrowed. There were no
outstanding borrowings at December 31, 1995. This agreement expired as of June
30, 1996.
(6) Lease of Land
The Facility is on a parcel of land owned by Fonda adjacent to its paper
mill. The land is leased to the Partnership. In 1994, the lease was amended to
extend the term to 45 years from the start of commercial operation. The rental
payment is nominal for the first five years, then $200,000 per year for years
six through 25 and nominal thereafter. The lease has been assigned to M&T in
connection with the sale of the Facility.
(7) Commitments
Affiliates of the Partnership entered into a PPA with NIMO dated as of
December 4, 1987, with amendments dated August 28, 1989, October 19, 1990 and
September 26, 1991. The PPA was assigned to the Partnership on November 1, 1991.
NIMO agreed to purchase all electricity generated by the Facility for the term
of 25 years from the date of commercial operation.
In 1993, the Partnership entered into an amendment to the PPA which
required payments on different bases during defined periods. During Period 1, as
defined, NIMO was to pay $60.00 per megawatt-hour for the first 400,000
megawatt-hours per year, with the difference between $60.00 and the contract
schedule avoided cost rates to be accumulated in an adjustment account and
recorded as an asset or liability (deferred revenue). Period 1 was to continue
until the adjustment account equaled zero. During Period 2, as defined, NIMO was
to purchase electricity at 95% of the contract schedule avoided cost rates for
the first 400,000 megawatt-hours per year with the difference between those
amounts and 95% of the actual avoided cost tariff rates to be accumulated in an
adjustment account and recorded as an asset or liability (deferred revenue).
Period 2 was to continue until the 15th anniversary of commercial operation.
During Period 3, as defined, NIMO was to purchase the electricity at 90% of the
actual avoided cost tariff rates plus or minus an adjustment defined in the
agreement to reduce the adjustment account to zero by the end of the term of the
PPA. During all periods, amounts in excess of 400,000 megawatt-hours per year
were to be purchased by NIMO at the actual energy-only avoided cost tariff rate.
The adjustment account balance was secured by a lien on the Facility that was
subordinate to GECC's security.
An amendment to the PPA was entered into as of January 4, 1994 and became
effective on November 3, 1994. The amendment requires NIMO to purchase
electricity generated by the Facility for 35 years from November 3, 1994. In
addition, during the period through January 1, 2001, the Facility is expected to
be on standby availability and will not generate electricity except in the case
of certain requirements or if NIMO elects to restart the Facility at an earlier
date. Also, the NIMO adjustment account of $3,442,209 at November 3, 1994 was
eliminated and was included in 1994 revenues as a result of the amended and
restated PPA. In addition, the Partnership became obligated to pay NIMO $210,000
for commencing the PPA after August 4, 1994.
(7), Continued
The Partnership is to receive annual capacity payments from NIMO which it
expects to be more than sufficient to cover debt service and fixed costs during
the standby availability period.
<PAGE>
The Partnership entered into an Energy Service Agreement (ESA) with James
River dated as of November 29, 1991 and amended and restated as of October 21,
1994. James River will purchase mill requirements for steam from the Facility
for the term of 45 years from the start of commercial operation, at a price set
forth in and adjusted pursuant to the amended and restated ESA, which will be
multiplied by .5 for the first five years of operation and none thereafter. If
the Partnership is unable to provide steam to the mill, it is obligated to
reimburse them for their incremental cost to produce their own steam. In
conjunction with the sale to Fonda (see note 1), all of James River's rights,
title and interest in and to the ESA and Ground Lease, were transferred to
Fonda.
The Partnership entered into a natural gas Peak Shaving Supply Agreement
with The Consumers' Gas Company Limited (Consumers) as of August 1, 1991,
amended as of October 25, 1994. Under this agreement, Consumers can take the
Partnership's contracted natural gas, subject to defined limitations, for up to
30 days each year. As compensation, the Partnership receives a fee of $2.00 per
million cubic feet of gas taken pursuant to the agreement plus the excess cost
of alternate fuel. A portion of the compensation is advanced as an annual
minimum payment of $240,000. Revenues realized pursuant to this agreement were
$360,000, $240,000 and $251,982 in 1996, 1995 and 1994, respectively.
The Partnership entered into an Operation and Maintenance Agreement (O&M
Agreement) with Stewart & Stevenson Operations, Inc. (the Operator) dated as of
November 1, 1991. The O&M Agreement was amended and restated as of October 21,
1994 to conform with the plan for operations associated with the amended and
restated PPA. Under the amended agreement, the Operator will operate and
maintain the Facility for a period of 12 years and one successive six-year term,
unless 12 months' prior notice is given by the Partnership to the Operator.
While the Facility is on standby, compensation will include a fee of
(INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST) plus (INFORMATION
DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST) to (INFORMATION DELETED -
SUBJECT OF A CONFIDENTIALITY REQUEST) per equivalent operating hour, as defined,
per year escalated by producer price index (PPI) plus letter of credit fees and
insurance premium less interruption payments. When the Facility is operating,
the fee will change to (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY
REQUEST) per year plus (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY
REQUEST) to (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST) per
year for major facility overhauls, both amounts subject to escalation for PPI.
In addition, the Operator will be reimbursed for demobilization costs of up to
(INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST). This agreement
also provided for the Partnership to pay the Operator a mobilization fee, as
defined, of (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST) prior
to the acceptance date, as defined. In addition, this agreement provided for the
Operator to receive a bonus or be obligated to pay a penalty based on a
performance factor, as defined.
(7), Continued
The Partnership has entered into various contracts for the supply and
transportation of natural gas to the project. Natural gas is supplied by NORCEN.
Transportation of natural gas by pipelines is by TransCanada Pipelines Limited
(TCPL) from a point near the Alberta/Saskatchewan border to the Province of
Quebec near the Canada/U.S. border; by the Iroquois Gas Transmission System,
L.P. to the Route 58 gate station connection with St. Lawrence Gas Company, Inc.
in upstate New York; and by St. Lawrence Gas Company, Inc. to the Facility. In
1994, the gas supply agreement with NORCEN was amended to suspend the
Partnership's obligation to purchase gas until January 1, 2001 and to assign the
Partnership's contracted pipeline space on TCPL to NORCEN. In connection with
the amended and restated agreement, the Partnership paid NORCEN $1,750,000. The
unamortized cost is included in deferred fuel cost at December 31, 1996 and
1995. In addition, the Facility has the capacity to utilize Number 2 heating oil
as an alternative fuel. The Partnership maintains an open account with Sprague
Energy to purchase such fuel.
The aforementioned agreements have been assigned to M&T in connection with
the sale of the Facility.
On July 19, 1995 the Partnership entered into a Guarantee Agreement with
GECC to induce, execute and deliver a $4,000,000 Pipeline Loan Agreement with
St. Lawrence Gas Company, Inc. Under the Guarantee Agreement, the Partnership
has unconditionally guaranteed the payment of principal and interest ($3,756,767
<PAGE>
outstanding at December 31, 1996) on the Pipeline Loan Agreement and all other
amounts due GECC under such agreement.
(8) Related-party Transactions
Affiliates of the general partners receive an administrative fee for
managing the operations of the Partnership. The administrative fee for 1996,
1995 and 1994 was $329,368, $318,786 and $307,980, respectively.
On December 9, 1994, the Partnership entered into an interfacility loan
agreement with Kamine/Besicorp South Glens Falls L.P. (KBSGF) and
Kamine/Besicorp Carthage L.P. (KBC). The agreement allows the Partnership to
borrow funds or advance funds to the extent of available cash, as defined in the
loan agreement. Such loans to or from either KBSGF or KBC are required when
there are insufficient funds available to pay certain current obligations. At
December 31, 1996 and 1995, there were no outstanding amounts due to or from
KBSGF or KBC.
<PAGE>
EXHIBIT NO. 99-E
KAMINE/BESICORP SYRACUSE L.P.
Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Partners
Kamine/Besicorp Syracuse L.P.:
We have audited the accompanying balance sheets of Kamine/Besicorp Syracuse L.P.
as of December 31, 1996 and 1995, and the related statements of operations,
partners' deficiency, and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the general partners. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kamine/Besicorp Syracuse L.P.
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Kamine/Besicorp Syracuse L.P. will continue as a going concern. As discussed in
note 4 to the financial statements, the Partnership was not in compliance with
certain covenants in its senior and subordinated financing agreements. As a
result, all borrowings of loans payable and related deferred financing costs
have been classified as current. At December 31, 1996, total current liabilities
substantially exceed current assets, which raises substantial doubt about the
entity's ability to continue as a going concern. Managements' plans with regard
to these matters are described in note 4. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
February 21, 1997
<PAGE>
KAMINE/BESICORP SYRACUSE L.P.
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
<S> <C> <C>
Current assets:
Cash $ 4,087,855 6,479,478
Accounts receivable 3,140,890 2,135,663
Other receivables 89,319 123,911
Prepaid expenses and other current assets 848,614 1,426,712
Deferred financing costs, less accumulated amortization of
$2,026,509 and 1,295,944 at December 31, 1996 and 1995,
respectively (note 4) 8,653,486 9,384,051
----------- -----------
Total current assets 16,820,164 19,549,815
----------- -----------
Plant and equipment - cogeneration facility (notes 3 and 4) 129,032,968 127,685,218
Less accumulated depreciation 10,945,043 7,393,330
----------- -----------
Plant and equipment, net 118,087,925 120,291,888
----------- -----------
Deferred fuel costs, less accumulated amortization of
$9,131,070 and $4,993,658 at December 31, 1996 and 1995,
respectively (note 6) 17,847,975 21,985,387
Cash held in escrow (note 1) 9,413,071 5,827,320
----------- -----------
Other assets 358,018 405,242
----------- -----------
Total other assets 27,619,064 28,217,949
----------- -----------
Total assets $162,527,153 168,059,652
----------- -----------
----------- -----------
Liabilities and Partners' Deficiency
Current liabilities:
Loans payable - current (note 4) 145,226,100 148,982,000
Subordinated loans - current (note 4) 20,000,000 20,000,000
Accounts payable and accrued expenses 6,811,106 4,352,888
Retainage payable - construction (note 6) 45,750 420,750
Amounts due to related parties (note 7) 53,064 53,663
----------- -----------
Total liabilities 172,136,020 173,809,301
----------- -----------
Partners' deficiency (note 2):
General partners (4,969,355) (2,973,848)
Limited partners (4,639,512) (2,775,801)
----------- -----------
Total partners' deficiency (9,608,867) (5,749,649)
Commitments (notes 4, 5, 6 and 9) ----------- -----------
Total liabilities and partners' deficiency $162,527,153 168,059,652
----------- -----------
----------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP SYRACUSE L.P.
Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenues (note 6) $ 32,484,975 26,151,260 28,222,400
----------- ----------- -----------
Operating expenses:
Fuel (note 1) 4,434,907 2,447,715 12,350,318
Operations and maintenance (note 6) 1,015,063 967,150 1,286,787
Overhaul 2,721,823 -- --
Rent (note 5) 47,223 47,023 42,344
Management fee (note 7) 292,693 337,992 351,503
Insurance 541,759 600,983 508,462
Depreciation 3,551,713 3,560,896 3,832,434
Amortization of financing costs 730,565 734,053 561,891
Amortization of fuel costs 4,137,412 4,138,681 827,432
Utilities 559,768 107,639 189,030
Property tax 224,886 95,933 2,164
Late fees (note 6) -- -- 336,000
Other 295,753 473,353 31,535
----------- ----------- -----------
Total operating expenses 18,553,565 13,511,418 20,319,900
----------- ----------- -----------
Income from operations 13,931,410 12,639,842 7,902,500
----------- ----------- -----------
Other income (expense):
Interest expense (note 9) (17,512,465) (17,200,112) (11,143,469)
Interest income 646,462 728,454 125,869
Other income (expense), net (note 8) (796,615) (848,361) 3,014,296
----------- ----------- -----------
Total other expense (17,662,618) (17,320,019) (8,003,304)
----------- ----------- -----------
Net loss $ (3,731,208) (4,680,177) (100,804)
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP SYRACUSE L.P.
Statements of Partners' Deficiency
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
General Limited Total
partners partners
<S> <C> <C> <C>
Partners' deficiency at December 31, 1993 $ (182,310) (169,969) (352,279)
Net loss (note 2) (52,418) (48,386) (100,804)
Partners' distributions (note 2) (159,382) (148,812) (308,194)
---------- ---------- ----------
Partners' deficiency at December 31, 1994 (394,110) (367,167) (761,277)
Net loss (note 2) (2,420,354) (2,259,823) (4,680,177)
Partners' distributions (note 2) (159,384) (148,811) (308,195)
---------- ---------- ----------
Partners' deficiency at December 31, 1995 (2,973,848) (2,775,801) (5,749,649)
Net loss (note 2) (1,929,594) (1,801,614) (3,731,208)
Partners' distributions (note 2) (65,913) (62,097) (128,010)
---------- ---------- ----------
Partners' deficiency at December 31, 1996 $(4,969,355) (4,639,512) (9,608,867)
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP SYRACUSE L.P.
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,731,208) (4,680,177) (100,804)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 3,551,713 3,560,896 3,832,434
Amortization of deferred fuel costs 4,137,412 4,138,681 827,432
Amortization of financing costs 730,565 734,053 561,891
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,005,227) 320,312 (2,455,975)
Decrease (increase) in other receivables 34,592 3,232,484 (3,356,395)
Decrease (increase) in prepaid expenses and other
current assets 578,098 1,240,534 (2,418,856)
Decrease in other assets 47,224 118,797 --
Increase in deferred fuel costs -- -- (24,500,000)
Increase in escrow accounts (3,585,751) (4,777,705) (1,049,615)
Increase (decrease) in accounts payable and accrued
expenses 2,458,218 (10,902,920) 5,479,875
(Decrease) increase in due to related parties (599) (284,480) 316,590
---------- ----------- -----------
Net cash provided by (used in) operating
activities 3,215,037 (7,299,525) (22,863,423)
----------- ------------- -------------
Cash flows from investing activities - construction and
purchase of plant and equipment, net of amounts payable (1,722,750) (4,670,988) (9,614,150)
---------- ----------- -----------
Cash flows from financing activities:
Proceeds from loans payable 2,739,100 37,700,000 16,400,000
Payments on loans payable (6,495,000) (1,323,000) (30,000)
Proceeds from loan payable - bank -- -- 24,500,000
Payments on loan payable - bank -- (24,500,000) --
Partners' distributions (128,010) (308,195) (308,194)
Increase in deferred financing costs -- (58,014) (1,545,022)
---------- ----------- -----------
Net cash (used in) provided by financing
activities (3,883,910) 11,510,791 39,016,784
----------- ----------- -----------
Net (decrease) increase in cash (2,391,623) (459,722) 6,539,211
Cash at beginning of year 6,479,478 6,939,200 399,989
---------- ----------- -----------
Cash at end of year $ 4,087,855 6,479,478 6,939,200
---------- ----------- -----------
---------- ----------- -----------
Supplemental disclosure of cash flow information - cash
paid during the year for interest, net of interest
capitalized. The amount of interest that was capitalized
was $3,687,300 in 1994 (none in 1995 and 1996) $17,625,385 16,397,809 6,609,484
---------- ----------- -----------
---------- ----------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP SYRACUSE L.P.
Notes to Financial Statements
December 31, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
Organization
Kamine/Besicorp Syracuse L.P. (the Partnership) is a Delaware limited
partnership formed on August 4, 1989. The Partnership was organized for the
purpose of constructing, owning and operating a 79.9-megawatt cogeneration
facility (the Facility) on premises leased from Hanlin Group, Inc. (Hanlin) near
Syracuse, New York. The Facility is operated as a PURPA qualifying cogeneration
facility using natural gas as the primary source of fuel.
The general partners of the Partnership are Kamine Syracuse Cogen Co., Inc.
(KS Cogen) and Beta Syracuse, Inc. (Beta) (a subsidiary of Besicorp Group,
Inc.), which retained an initial 16% and 50% interest in the Partnership,
respectively. Kamine Development Corp. (KDC) is a limited partner with an
initial 34% interest in the Partnership. On November 9, 1992, the partnership
agreement was amended whereby KS Cogen, Beta, KDC and Ansaldo North America,
Inc. (Ansaldo), a limited partner, retain interests of 16%, 35.715%, 19.715% and
28.57%, respectively.
The Partnership commenced commercial operations as of February 26, 1994.
Sales to Niagara Mohawk Power Corporation (NIMO) approximated 98%, 99% and 99%
of total revenues in 1996, 1995 and 1994, respectively.
Summary of Significant Accounting Policies
Plant and Equipment
Plant and equipment are stated at cost, less accumulated depreciation.
Maintenance and repairs which do not enhance the value or increase the basic
productive capacity of the asset are charged to operations as incurred.
Depreciation of assets was computed on a straight-line basis over their useful
lives of 25 years, commencing on the date the Facility was placed into service.
Effective November 3, 1994, the Partnership extended the estimated useful
life of the Facility to 35 years as a result of the amended and restated Power
Purchase Agreement (PPA) (see note 6). The effect of this change in estimate was
immaterial to the 1994 statement of operations.
All costs of the Partnership during the construction period were
capitalized to the Facility unless they specifically related to organization and
start-up costs, the costs of obtaining financing, the costs of obtaining fuel
commitments, or general operating expenses. Construction costs included direct
materials and labor costs, purchase of equipment and those indirect costs
related thereto. Interest costs during construction were capitalized.
Construction costs incurred but not yet paid are classified as either accounts
payable, accrued expenses or retainage payable.
Deferred Financing Costs
All costs associated with the financing of the Facility are deferred and
amortized over the life of the permanent financing.
(1), Continued
Deferred Fuel Costs
Costs associated with obtaining the commitment of natural gas supplies for
the Facility are deferred and amortized over the life of the gas supply
contract.
The cost associated with modifying the fuel arrangements through January 1,
2001 (see note 6) to accom-
<PAGE>
modate the revised PPA terms is deferred and amortized during the period from
November 1, 1994 (the date the modifications became effective) through December
31, 2000.
Revenue Recognition
Revenues are recognized as earned.
Income Taxes
Income taxes have not been provided since the Partnership is not a taxable
entity. The partners report their share of the Partnership's taxable income or
loss on their respective income tax returns.
Fuel Sales
Sales of fuel and transportation associated with excess natural gas
pipeline capacity purchased by the Partnership to support peak fuel requirements
have been treated as a reduction to fuel expense. Total sales related to the
disposition of such excess capacity in 1996, 1995 and 1994 was $450,786,
$150,721 and $1,738,737, respectively.
Financial Instruments
The carrying values of the Partnership's financial instruments at December
31, 1996 approximate their estimated fair value. The carrying amounts of
accounts receivable, accounts payable, accrued expenses and other current
liabilities approximate fair value due to the short-term maturity of such
instruments. Management believes that the carrying amount of loans payable
approximates fair value based on rates that would be offered to the Partnership
for loans with similar maturities and characteristics.
The Partnership has entered into interest rate swap and interest rate cap
agreements to manage its interest rate risk. These transactions are entered into
with notional amounts scheduled to be consistent with expected outstanding
balances associated with loan agreements. The net interest differential,
including premiums paid or received, if any, on interest rate swaps and interest
rate caps, is recognized on an accrual basis and is recorded as a part of
interest expense.
Counterparties to the interest rate swap and interest rate cap agreements
are major financial institutions. Credit loss from counterparty nonperformance
is not anticipated.
(1), Continued
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Partnership adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," as of January 1, 1996. The
Statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairments whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
the assets to the future net cash flows expected to be generated by the assets.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less the cost to sell. Adoption of this
Statement did not have an impact on the Partnership financial position or
results of operations.
Use of Estimates
In conformity with generally accepted accounting principles, management of
the Partnership has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent liabilities
in preparing the accompanying financial statements. Actual results could differ
from those estimates.
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount can be reasonably
estimated.
<PAGE>
Risk and Uncertainties
The Partnership is principally engaged in a single line of business, the
production and sale of electric power to one customer, NIMO.
The regulated investor-owned utility industry is presently subject to
considerable market pressures and changes in the federal and state regulatory
environment in which it operates. These pressures are resulting in industry
consolidation and pressure to disaggregate electric generation, transmission and
distribution assets and to adjust cost structures to meet market conditions. The
utility to which the Partnership sells its power, NIMO, made a filing on October
10, 1995 to the Public Service Commission of the State of New York setting forth
numerous restructuring proposals, including a significant reduction in the price
for power purchased from independent power producers currently under contract
with NIMO. The Partnership expects many of NIMO's proposals to be strongly
contested, including the significant reduction in the price for power. NIMO has
also stated in such filing that its financial viability is threatened. In
(1), Continued
early 1996, NIMO suspended payment of dividends on its common stock. On August
1, 1996, NIMO proposed to buy out 44 independent power contracts in exchange for
a combination of cash and securities. The PPA of the Partnership is included
among these contracts. Discussions between NIMO and the holders of the power
contracts are continuing. The outcome of the industry trends, regulatory
changes, the NIMO filing and NIMO's financial viability cannot presently be
determined.
Cash Held in Escrow
The Partnership has established two long-term escrow accounts. These
accounts are principally for major maintenance payments and debt payment
reserves. The security agent is Deutsche Bank AG, New York Branch (Deutsche Bank
AG).
Reclassifications
Certain items in the 1995 and 1994 financial statements have been
reclassified to conform with the 1996 presentation.
(2) Allocation of Income, Losses and Cash Distributions
A separate capital account has been established and maintained for each
partner. Each such account is (a) increased by the amount of such partner's
capital contributions, any profits and items of income and gain allocated to
such partner, and any increase in such partner's share of the liabilities of the
Partnership and the amount of partnership liabilities assumed by the partner;
and (b) decreased by the amount of cash and the fair market value of any
partnership assets distributed to such partner, the amount of losses allocated
to such partner, and any decrease in such partner's share of the liabilities of
the Partnership and the amount of any partner liabilities assumed by the
Partnership (subject to certain provisions).
Profits and losses for any calendar year or portion of such year shall be
allocated among the partners in proportion to their percentage ownership
interests. Net cash flow, as defined, for each quarter shall be distributed to
the partners in accordance with their percentage ownership interests.
In addition, amounts required for payment of New York State franchise taxes
by the partners, based upon a .769% (.75% plus 2.5% surcharge thereon) rate of
each partner's pro rata share of partnership revenues pursuant to Article 9,
Section 186, of the New York State Tax Code, are distributed to the partners
when tax payments are due. All partners' distributions in 1996, 1995 and 1994
were for payment of such taxes.
(2), Continued
The partners have a deficiency in their partners' capital account balance
as a result of distributions as well as their proportionate share of net loss.
Management anticipates that the deficiencies in the partners' capital account
balance will reverse in subsequent years.
(3) Plant and Equipment
<PAGE>
The Facility was constructed under the terms of a turnkey fixed price
Engineering, Procurement and Construction (EPC) Contract by Ansaldo.
Plant and equipment at December 31, 1996 and 1995 includes $10,958,087 of
capitalized interest.
(4) Financing
The Partnership entered into agreements with SV Syracuse, Inc. (SVS) and
Ansaldo on January 22, 1992 whereby SVS and Ansaldo agreed to provide interim
financing of up to $15,000,000 and $5,000,000, respectively, for the development
and construction of the Facility until other financing for the construction and
completion of the Facility could be obtained.
On November 9, 1992, the Partnership converted the interim loans to term
loans and entered into subordinated financing agreements with SVS and Ansaldo in
the amounts of $15,000,000 and $5,000,000, respectively, as contemplated in the
interim loan agreements. Each of the subordinated financing agreements provides
for interest to be charged at the LIBOR rate, as defined, plus a range of 5.4%
to 7.875%, payable quarterly (13.4375% at December 31, 1996). Principal payments
are not required to begin until 2003, at which time quarterly payments will
begin and continue until October 31, 2008, each agreement's maturity date. SVS
was awarded a 12.5% share of the net cash flow generated, as defined, by the
Facility, and Ansaldo was awarded its 28.57% limited partner interest as
additional compensation for providing financial support for the Facility.
As of November 9, 1992, the Partnership entered into a financing agreement
with Deutsche Bank AG, as agent, and four other banks (the Banks) whereby the
Banks agreed to provide construction financing not to exceed $111,800,000. The
construction financing bore interest at the base rate, as defined, plus 1.1%, or
at the LIBOR rate, as defined, plus 1.9%, as determined at the option of the
Partnership, with a maturity date of no later than April 20, 1994. Subject to
conditions set forth in the financing agreement, the Banks, at the request of
the Partnership, will convert the construction financing into a term loan not to
exceed $114,300,000. The term loan bears interest at the base rate, as defined,
plus a range of 1.5% to 1.625%, or at the LIBOR rate, as defined, plus a range
of 2.25% to 2.375%, as
(4), Continued
determined at the option of the Partnership (7.9375% at December 31, 1996), with
a maturity date of no later than December 31, 2008. Principal payments are made
quarterly, over a 15-year period. The Banks have been granted a first priority
security interest in the Facility and other collateral.
As of October 20, 1994, the financing agreement was amended and restated to
increase the construction financing and term loan commitment by $15,000,000 in
conjunction with conversion to the revised PPA terms (see note 6). Loan terms
are the same as for the original financing.
In addition to the above-mentioned financing arrangements, the Banks agreed
to provide a working capital loan, not to exceed $2,500,000, until the term loan
maturity date. The Partnership shall also repay the aggregate unpaid principal
amount at least once each fiscal quarter. The working capital loan will bear
interest at the base rate, as defined, plus a range of 1.5% to 1.625%. There
were no outstanding borrowings under this agreement as of December 31, 1996 and
1995. The Banks also agreed to provide letters of credit not to exceed
$6,800,000 prior to term loan conversion and $5,800,000 subsequent to term loan
conversion. At December 31, 1996 letters of credit totaling $431,132 were
outstanding.
On November 3, 1994, Key Bank of New York loaned $24,500,000 to the
Partnership for use in making the payment to NORCEN Energy Resources Limited
(NORCEN), formerly North Canadian Marketing (see note 6), pursuant to the Second
Amendment to the Gas Purchase Agreement. The loan was repaid on December 29,
1995 with the proceeds received from a $24,500,000 LC Loan Facility (LC Loan)
from Deutsche Bank AG. Interest on the LC Loan is equal to LIBOR plus 2.75%
(8.125% at December 31, 1996). Commencing on December 31, 1996 and each
successive year thereafter, the interest rate increases by .25% per annum. Until
the LC Loan is repaid in full, 80% of the monies otherwise available to equity
and cash flow holders will be utilized for repayment of the LC Loan. In
addition, when the LC Loan is paid in full and the LC Loan of the Partnership's
affiliate, Kamine/Besicorp Beaver Falls L.P. (KBF), remains unpaid, 80% of the
monies that would be
<PAGE>
available to the Partnership equity and cash flow holders will be loaned to KBF
to repay its obligation.
On November 30, 1992, the Partnership entered into agreements with the
Onondaga County Industrial Development Agency (IDA) for loans in the amounts of
$150,000 and $300,000. These notes represent a deferral of IDA fees that were
due at construction loan closing. The loans were made to assist the Facility in
making payment of property taxes due. The $150,000 loan is non-interest bearing
and is payable in annual installments of $15,000 commencing December 1, 1993
through December 1, 2002. The $300,000 loan bears an interest rate of 6% through
November 30, 1997, and thereafter, at the option of the IDA, either the prime
rate or five-year treasury rate until maturity, with principal payments
commencing on April 1, 1994 through January 1, 2003.
(4), Continued
As of December 31, 1996, the PSD Permit Test, as defined in the
Construction Contract, had not been satisfactorily completed on oil and final
completion was delayed beyond December 31, 1995, both of which are Events of
Default under the financing agreements. As a result of the aforementioned Events
of Default, all borrowings of loans payable, subordinated loans and related
deferred financing costs have been classified as current. At December 31, 1996,
total current liabilities substantially exceed total current assets, which
raises substantial doubt about the Partnership's ability to continue as a going
concern. Management anticipates that the existing Events of Default will be
cured in the first half of 1997. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The total scheduled amounts of loans payable due during each of the next
five years, if the Events of Default are resolved, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $33,160,350
1998 7,818,000
1999 7,818,000
2000 9,111,000
2001 9,111,000
----------
----------
</TABLE>
As of November 9, 1992, the Partnership conveyed ownership of the Facility
to the IDA. The tax-exempt status of the IDA has caused payment of a fee to the
IDA upon its issuance of a mortgage bond in lieu of mortgage recording taxes and
exempts the Facility from all sales taxes during the construction of the
Facility and from property taxes during IDA ownership. Payments in lieu of real
property taxes have been made to the IDA beginning on June 30, 1995. Payments
are calculated based on a specified annual payment and percentage of gross steam
and net electric revenues, as defined. The IDA has appointed the Partnership as
its agent and will convey the Facility to the Partnership in accordance with an
installment sale agreement, with the conveyance expected to be on December 31,
2014.
(5) Lease of Land
The Facility is located on a parcel of land leased to the Partnership from
Hanlin for a term of 48 years starting February 15, 1991 through February 14,
2039. The Partnership paid rent of $600 per annum for the period February 15,
1991 to February 15, 1993, after which the Partnership pays rent of $45,000 per
annum. The lease provides for adjustments related to the consumer price index
after December 31, 1991.
(6) Commitments
An affiliate of the Partnership entered into a PPA with NIMO dated as of
December 4, 1987 with amendments dated August 25, 1989 and October 19, 1990 with
approval by the New York Public Service Commission (the Commission) on various
dates through November 21, 1990. There was a subsequent amendment on September
26, 1991 which did not require the approval of the Commission. The PPA was
assigned to the Partnership on November 1, 1991. NIMO agreed to purchase all
electricity generated by the Facility for a term of 25 years from the date of
commercial operation.
An amendment to the PPA was entered into as of January 4, 1994 and became
effective on November 3, 1994 (Commencement Date). The amendment requires NIMO
to purchase electricity generated by the Facility
<PAGE>
for 35 years from the Commencement Date. In addition, during the period through
January 1, 2001, the Facility is expected to be on standby availability and will
not generate electricity except in the case of certain requirements or if NIMO
elects to restart the Facility at an earlier date. The Partnership is to receive
annual capacity payments from NIMO which will be more than sufficient to cover
debt service and fixed costs during the standby availability period. Also, the
Partnership became obligated to pay NIMO $336,000 for commencing the PPA after
August 4, 1994.
The Partnership entered into an Energy Service Agreement (ESA) with the New
York State Fair and the Industrial Exhibit Authority dated as of August 6, 1991.
The New York State Fair and the Industrial Exhibit Authority will purchase
thermal energy from the Facility at a price set forth in and adjusted pursuant
to the ESA which shall be 8.5% of the rental revenues for each building that
benefits from the delivery of thermal energy during those periods of time that
energy services are taken (excluding any revenues derived from the New York
State Fair).
The Partnership entered into a Peak Shaving Agreement with NIMO as of May
28, 1993. Under this agreement, NIMO can take the Partnership's contracted
natural gas, subject to defined limitations, for up to 35 days from every
November 15 to April 16 of the following year. As compensation, the Partnership
receives a fee of 25 cents to 75 cents per decatherm of gas plus the cost of
alternate fuel or the cost of the gas. Revenues realized pursuant to this
agreement were $215,112 in 1996. There were no revenues realized pursuant to
this agreement in 1995 and 1994.
The Partnership entered into an Operation and Maintenance Agreement (O&M)
with Stewart and Stevenson Operations, Inc. (Operator) dated as of June 17,
1992. Under the O&M, the Operator will operate and maintain the Facility for two
successive six-year terms unless six months' prior notice is given by the
Partnership to the Operator. The O&M was amended and restated to conform with
the plan for operations associated with the amended and restated PPA. While the
Facility is on standby availability, compensation includes
(6), Continued
a fee of (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST) per year
plus (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST) for the
Operator's labor fee; both amounts are subject to escalation by the Employment
Cost Index (ECI). When the Facility is operating, the fee will change to
(INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST) per year subject to
escalation for ECI plus reimbursable costs. Major facility overhauls, as
defined, will be performed under the direction of the Operator, with costs of
the overhaul to be borne by the Partnership. The Partnership is required to
establish and fund a reserve account for major facility overhaul costs.
The Partnership has entered into various contracts for the supply and
transportation of natural gas to the project. Natural gas will be supplied by
NORCEN. Transportation of natural gas by pipelines will be by TransCanada
Pipelines Limited (TCPL) from a point near the border between Saskatchewan and
Alberta, Canada to Chippewa, Ontario; by Empire State Pipeline Company to
Syracuse; and by NIMO to the Facility.
The natural gas supply and transportation contracts became effective on
November 1, 1993 based on the estimated completion date for the Facility and the
gas industry standard of contract years beginning on November 1. This caused the
Partnership to become responsible for fixed costs associated with these
contracts, which the Partnership attempted to minimize through sales of natural
gas to third parties utilizing the Partnership's contractual arrangements.
In 1994, the gas supply agreement with NORCEN was amended to suspend the
Partnership's obligation to purchase gas until January 1, 2001 and to assign the
Partnership's contracted pipeline space on TCPL to NORCEN. In connection with
the amended agreement, the Partnership paid NORCEN $24,500,000. The unamortized
cost is included in deferred fuel cost at December 31, 1996.
The Partnership entered into an EPC Contract Settlement Agreement with
Ansaldo as of May 22, 1995. It fixed the net payment obligation to Ansaldo with
respect to all remaining work, claims, amounts due under the Commercial
Operations Agreement and any other amounts associated with the EPC Contract. As
of December 31, 1996, $45,750 is due at Final Acceptance of the Facility.
<PAGE>
(7) Related-party Transactions
In addition to their respective shares of partnership cash flow, the
general partners and/or their affiliates will receive a management fee per
annum, as defined, and an operation and maintenance management fee per annum, as
defined (both adjusted for inflation). The management fees for 1996, 1995 and
1994 were $292,693, $337,992 and $351,503, respectively, of which a portion
thereof is unpaid and included in amounts due to related parties at December 31,
1996, 1995 and 1994.
(8) Other Income
The Partnership entered into a Commercial Operations Agreement (the
Agreement) as of March 8, 1994 with Ansaldo. The Agreement required Ansaldo to
pay the Partnership a penalty for the aggregate amount of the difference between
actual electric revenues and fuel costs (gross margin) and projected gross
margin, as defined in the Agreement, and certain other payments during the
period from commencement of commercial operations to the date of operational
acceptance under the construction contract. Included in other income for the
years ended December 31, 1995 and 1994 are penalties of $21,159 and $3,407,530,
respectively.
(9) Derivative Financial Instruments Held - Other Than Trading
On December 31, 1992, the Partnership entered into an interest rate swap
agreement effective from November 1, 1993 through October 31, 2008 whereby
floating rate debt (senior debt) based on LIBOR plus a range of 2.25% to 2.375%
over the scheduled life of the debt has been effectively converted to fixed rate
debt of 7.745% plus a range of 2.25% to 2.375%. In 1996, 1995 and 1994, this
contract resulted in interest charges of $2,431,677, $1,970,529 and $4,277,980,
respectively, for the excess of the fixed rate over the variable rate. The
notional principal amount at December 31, 1996, 1995 and 1994 is $107,328,000,
$111,800,000 and $111,800,000. The fair value of the Partnership's future
payment obligation over the remaining life of the agreement is estimated to be
approximately $15,200,000, based on discounted cash flows using current interest
rates.
On December 1, 1992, the Partnership also entered into an interest rate cap
agreement effective from October 29, 1993 through October 31, 2008 whereby
floating rate debt (subordinated loans) based on LIBOR plus a range of 7.75% to
7.875% was limited to a rate of no higher than 8.7% plus a range of 7.75% to
7.875%. In 1996, $386,616 of costs resulted from this contract. No costs
resulted from this contract in 1995 and 1994. The cost of this agreement will be
realized as a .35% premium on the previously described interest rate swap
agreement from November 1, 1995 through October 31, 2008. The notional principal
amount is $20,000,000 for the years ended December 31, 1996, 1995 and 1994. The
fair value of the Partnership's future payment obligation over the remaining
life of the agreement is estimated to be approximately $2,100,000, based on
discounted cash flows using current interest rates.
On November 3, 1994, the Partnership entered into an additional interest rate
cap agreement effective from November 3, 1994 through December 26, 1995 whereby
floating rate debt (Key Bank of New York) based on LIBOR plus .55% was limited
to 7.00%. The Partnership paid $139,650 for this interest rate protection, of
which $121,435 and $18,215 was charged to interest expense in 1995 and 1994,
respectively.
<PAGE>
EXHIBIT NO. 99-F
KAMINE/BESICORP BEAVER FALLS L.P.
Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Partners
Kamine/Besicorp Beaver Falls L.P.:
We have audited the accompanying balance sheets of Kamine/Besicorp Beaver Falls
L.P. as of December 31, 1996 and 1995, and the related statements of operations,
partners' equity (deficiency), and cash flows for each of the years in the
three-year period ended December 31, 1996. These financial statements are the
responsibility of the general partners. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kamine/Besicorp Beaver Falls
L.P. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1996 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Kamine/Besicorp Beaver Falls L.P. will continue as a going concern. As discussed
in note 4 to the financial statements, the Partnership was not in compliance
with certain covenants in its senior and subordinated financing agreements. As a
result, all borrowings of long-term debt and related deferred financing costs
have been classified as current. At December 31, 1996, total current liabilities
substantially exceed current assets, which raises substantial doubt about the
entity's ability to continue as a going concern. Management's plans with regard
to these matters are described in note 4. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
February 21, 1997
<PAGE>
KAMINE/BESICORP BEAVER FALLS L.P.
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
<S> <C> <C>
Cash $ 7,995,240 4,064,389
Accounts receivable 3,144,776 2,079,797
Other receivables 146,379 100,095
Prepaid expenses and other assets 954,636 942,420
Deferred financing costs, less accumulated amortization of
$2,416,876 and $964,549 in 1996 and 1995, respectively (note
4) 15,876,977 17,329,304
----------- -----------
Total current assets 28,118,008 24,516,005
----------- -----------
Plant and equipment - cogeneration facility (notes 3, 4 and 5) 129,298,800 128,612,117
Less accumulated depreciation 6,058,454 2,415,871
----------- -----------
Plant and equipment, net 123,240,346 126,196,246
----------- -----------
Other assets:
Deferred fuel costs, less accumulated amortization of
$6,107,719 and $2,419,520 in 1996 and 1995, respectively
(note 6) 17,051,514 20,739,713
Deferred rent (note 5) 8,823,437 7,078,992
Cash held in escrow (note 1) 6,675,000 4,586,275
----------- -----------
Total assets $183,908,305 183,117,231
----------- -----------
----------- -----------
Liabilities and Partners' Equity (Deficiency)
Liabilities:
Current liabilities:
Loans payable - current (note 4) 144,440,869 146,300,000
Subordinated loans (note 4) 20,000,000 20,000,000
Accounts payable 2,231,302 3,603,041
Accrued expenses and other current liabilities 8,454,423 8,866,479
Retainage payable - construction (note 3) 6,853,452 6,845,226
Amount due to related parties (note 7) -- 111,715
----------- -----------
Total current liabilities 181,980,046 185,726,461
----------- -----------
Partners' equity (deficiency) (note 2):
General partners 1,276,441 (1,727,377)
Limited partner 651,818 (881,853)
----------- -----------
Total partners' equity (deficiency) 1,928,259 (2,609,230)
Commitments (notes 4, 5, 6 and 8) ----------- -----------
Total liabilities and partners' equity (deficiency) $183,908,305 183,117,231
----------- -----------
----------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP BEAVER FALLS L.P.
Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenues (note 6) $ 37,917,820 16,450,684 --
----------- ----------- ---------
Operating expenses:
Fuel (note 1) 5,842,570 708,926 --
Operations and maintenance (note 6) 1,205,748 499,440 --
Depreciation 3,642,583 2,415,871 --
Management fee (note 7) 293,293 133,885 --
Rent (note 5) 255,556 165,452 --
Amortization of deferred fuel costs 3,688,199 2,419,520 --
Amortization of financing costs 1,452,327 964,549 --
Property tax 283,445 164,746 --
Other 919,681 672,054 --
----------- ----------- ---------
Total operating expenses 17,583,402 8,144,443 --
----------- ----------- ---------
Income from operations 20,334,418 8,306,241 --
----------- ----------- ---------
Other income (expense):
Interest expense (note 8) (15,905,220) (10,233,286) (197,218)
Interest income 669,438 176,540 19,340
Other expenses (370,984) (596,064) --
----------- ----------- ---------
Total other expense (15,606,766) (10,652,810) (177,878)
----------- ----------- ---------
Net income (loss) $ 4,727,652 (2,346,569) (177,878)
----------- ----------- ---------
----------- ----------- ---------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP BEAVER FALLS L.P.
Statements of Partners' Equity (Deficiency)
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
General Limited Total
partners partner
<S> <C> <C> <C>
Partners' equity at December 31, 1993 -- 100 100
Net loss (note 2) $ (117,755) (60,123) (177,878)
---------- --------- ----------
Partners' deficiency at December 31, 1994 (117,755) (60,023) (177,778)
Net loss (note 2) (1,553,429) (793,140) (2,346,569)
Partners' distributions (note 2) (56,193) (28,690) (84,883)
---------- --------- ----------
Partners' deficiency at December 31, 1995 (1,727,377) (881,853) (2,609,230)
Net income (note 2) 3,129,706 1,597,946 4,727,652
Partners' distrtibutions (note 2) (125,888) (64,275) (190,163)
---------- --------- ----------
Partners' equity at December 31, 1996 $ 1,276,441 651,818 1,928,259
---------- --------- ----------
---------- --------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP BEAVER FALLS L.P.
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,727,652 (2,346,569) (177,878)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 3,642,583 2,415,871 --
Amortization of deferred fuel costs 3,688,199 2,419,520 --
Amortization of financing costs 1,452,327 964,549 --
Changes in operating assets and liabilities:
Increase in accounts receivable (1,064,979) (2,079,797) --
Increase in other receivable (46,284) (100,095) --
(Increase) decrease in prepaid ecpenses and other (12,216) 780,588 (128,284)
assets
Increase in deferred fuel costs -- -- (19,500,000)
Increase in deferred rent (1,744,445) (2,578,992) --
Increase in cash held in escrow (2,088,725) (4,586,275) --
(Decrease) increase in accounts payable (1,371,739) 3,603,041 --
(Decrease) increase in due to related parties (111,715) 111,715 --
---------- ----------- -----------
Net cash provided by (used in) operating
activities 7,070,658 (1,396,444) (19,806,162)
---------- ----------- -------------
Cash flows from investing activities - construction and
purchase of property and equipment, net of amounts
payable (1,090,513) (20,737,095) (68,640,005)
---------- ----------- -----------
Cash flows from financing activities:
Proceeds from loan payable 3,503,369 42,400,000 67,400,000
Payments on loans payable (5,362,500) -- --
Proceeds from subordinated loans -- 4,600,000 6,800,000
Proceeds from loans payable - bank -- -- 19,500,000
Payments on loans payable - bank -- (19,500,000) --
Partners' distributions (190,163) (84,883) --
Decrease in deferred financing costs -- (1,484,325) (5,727,580)
---------- ----------- -----------
Net cash (used in) provided by financing
activities (2,049,294) 25,930,792 87,972,420
---------- ----------- -----------
Net increase (decrease) in cash 3,930,851 3,797,253 (473,747)
Cash at beginning of year 4,064,389 267,136 740,883
---------- ----------- -----------
Cash at end of year $ 7,995,240 4,064,389 267,136
---------- ----------- -----------
---------- ----------- -----------
Supplemental disclosure of cash flow information - cash
paid during the year for interest, net of amounts
capitalized of $3,881,090, and $5,148,074 in 1995, 1994,
respectively (note 3) $15,974,203 10,164,303 197,218
---------- ----------- -----------
---------- ----------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP BEAVER FALLS L.P.
Notes to Financial Statements
December 31, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
Organization
Kamine/Besicorp Beaver Falls L.P. (the Partnership) is a Delaware limited
partnership formed on August 4, 1989. The Partnership was organized for the
purpose of constructing, owning and operating a 79-megawatt cogeneration
facility (the Facility) on the premises of Specialty Paperboard, Inc. (SPI) in
Beaver Falls, New York. The Facility operates as a PURPA qualifying cogeneration
facility using natural gas as the primary source of fuel.
The general partners of the Partnership are Kamine Beaver Falls Cogen Co.,
Inc. (a New York corporation) and Beta Beaver Falls, Inc. (a New York
corporation), which retain a 16% and 50.2% interest in the Partnership,
respectively. The limited partner is Kamine Development Corp. (KDC) with a 33.8%
interest in the Partnership.
The Partnership commenced commercial operations as of May 7, 1995. Sales
to Niagara Mohawk Power Corporation (NIMO) approximated 96% and 99% of total
revenues in 1996 and 1995, respectively.
Summary of Significant Accounting Policies
Plant and Equipment
Plant and equipment are stated at cost, less accumulated depreciation.
Maintenance and repairs which do not enhance the value or increase the basic
productive capacity of the asset are charged to operations as incurred.
Depreciation of assets is computed on a straight-line basis over their useful
lives, commencing on the date the Facility was placed into service.
Effective November 3, 1994, the Partnership extended the estimated useful
life of the Facility to 35 years as a result of the amended and restated Power
Purchase Agreement (PPA) (see note 6).
All costs of the Partnership during the construction period were
capitalized to the project unless they specifically related to organization and
start-up costs, the costs of obtaining financing, the costs of obtaining fuel
commitments, or general operating expenses. Costs included were direct materials
and labor costs, purchase of equipment, and those indirect costs related
thereto. Interest costs pursuant to construction financing were capitalized.
Construction costs incurred but not yet paid are classified as either accounts
payable, accrued expenses or construction retainage payable dependent upon their
payment terms.
Deferred Financing Costs
All costs associated with the permanent financing of the Facility are
deferred and amortized over the life of the permanent financing.
(1), Continued
Deferred Fuel Costs
Costs associated with obtaining the commitment of natural gas supplies for
the Facility are deferred and amortized over the life of the gas supply
contract.
The cost associated with modifying the fuel arrangements until January 1,
2001 to accommodate revised PPA terms (see note 6) is deferred and amortized
during the period from March 1, 1995 (the scheduled commencement of deliveries
under the gas purchase agreement) through December 31, 2000.
Revenue Recognition
Revenues are recognized as earned.
Income Taxes
<PAGE>
Income taxes will not be provided for since the Partnership is not a
taxable entity. The partners report their respective share of the Partnership's
taxable income or loss on their respective income tax returns.
Fuel Sales
Sales of fuel and transportation associated with excess natural gas
pipeline capacity purchased by the Partnership to support peak fuel requirements
have been treated as a reduction to fuel expense. Total sales related to the
disposition of such excess capacity in 1996 and 1995 was $573,558 and $140,383,
respectively.
Financial Instruments
The carrying values of the Partnership's financial instruments at December
31, 1996 approximate their estimated fair value. The carrying amounts of
accounts receivable, accounts payable, accrued expenses and other current
liabilities approximate fair value due to the short-term maturity of such
instruments. The carrying amount of loans payable approximates fair value since
interest rates on such loans fluctuate with changes in the base rate of the
lending institution.
The Partnership has entered into interest rate swap and interest rate cap
agreements to manage its interest rate risk. These transactions are entered into
with notional amounts scheduled to be consistent with expected outstanding debt
balances associated with loan agreements. The net interest differential,
including premiums paid or received, if any, on interest rate swaps and interest
rate caps, is recognized on an accrual basis and is recorded as a part of
interest expense.
(1), Continued
Counterparties to the interest rate swap and interest rate cap agreements
are major financial institutions. Credit loss from counterparty nonperformance
is not anticipated.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Partnership adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", as of January 1,
1996. This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairments whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to the future net cash flows
expected to be generated by the assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
the cost to sell. Adoption of this Statement did not have an impact on the
Partnership financial position or results of operations.
Use of Estimates
In conformity with generally accepted accounting principles, management of
the Partnership has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent liabilities
in preparing the accompanying financial statements. Actual results could differ
from those estimates.
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount can be reasonably
estimated.
Risks and Uncertainties
The Partnership is principally engaged in a single line of business, the
production and sale of electric power to one customer, NIMO.
The regulated investor-owned utility industry is presently subject to
considerable market pressures and changes in the Federal and state regulatory
environment in which it operates. These pressures are resulting in industry
consolidation and pressure to disaggregate electric generation, transmission and
distribution assets and
<PAGE>
to adjust cost structures to meet market conditions. The utility to which the
Partnership sells its power, NIMO, made a filing on October 10, 1995 to the
Public Service Commission of
(1), Continued
the State of New York setting forth numerous restructuring proposals, including
a significant reduction in the price for power purchased from independent power
producers currently under contract with NIMO. The Partnership expects many of
NIMO's proposals to be strongly contested, including the significant reduction
in the price for power. NIMO has also stated in such filing that its financial
viability is threatened. In early 1996, NIMO suspended payment of dividends on
its common stock. On August 1, 1996, NIMO proposed to buy out 44 independent
power contracts in exchange for a combination of cash and securities. The PPA of
the Partnership is included among these contracts. Discussions between NIMO and
the holders of the power contracts are continuing. The outcome of the industry
trends, regulatory changes, the NIMO filing and NIMO's financial viability
cannot presently be determined.
Cash Held in Escrow
An escrow arrangement has been established for receipt of all revenues and
payment of all obligations of the Partnership. The security agent is Deutsche
Bank A.G., New York branch (Deutsche Bank). Amounts in the collection account,
which represent general funds, are classified as cash on the balance sheets.
Funds in other accounts, which are set aside for specific purposes, are
classified as cash held in escrow, which at December 31, 1996 consists of an
escrow reserve for debt payments.
Reclassification
Certain items in the 1995 and 1994 financial statements have been
reclassified to conform with the 1996 presentation.
(2) Allocation of Income, Losses and Cash Distributions
A separate capital account shall be established and maintained for each
partner. Each account shall be (a) increased by the amount of such partner's
capital contributions, any profits and items of income and gain allocated to
such partner, any increase in such partner's share of the liabilities of the
Partnership and the amount of partnership liabilities assumed by the partner,
and (b) decreased by the amount of cash and the fair market value of any
partnership assets distributed to such partner, the amount of losses allocated
to such partner, any decrease in such partner's share of liabilities of the
Partnership and the amount of any partner liabilities assumed by the Partnership
(subject to certain provisions).
Profits and losses for any calendar year or portion of such year shall be
allocated among the partners in proportion to their percentage ownership
interests. Net cash flow for each quarter shall be distributed to the partners
in accordance with their percentage ownership interests.
(2), Continued
In addition, amounts required for payment of New York State franchise
taxes by the partners, based upon a .769% (.75% plus 2.5% surcharge thereon)
rate of each partner's pro rata share partnership revenues pursuant to Article
9, Section 186 of the New York State Tax Code, are distributed to the partners
when tax payments are due. All partners distributions in 1996 and 1995 were for
payment of such taxes.
(3) Plant and Equipment
The Facility was constructed under the terms of a turnkey fixed-price
Engineering, Procurement and Construction Contract by Ansaldo North America,
Inc. (Ansaldo).
Plant and equipment at December 31, 1996 and 1995 includes $10,186,445 of
capitalized interest.
(4) Financing
As of May 7, 1993, the Partnership entered into a financing agreement with
Deutsche Bank, as adminis-
<PAGE>
trative agent, and seven other banks (the Banks) whereby the Banks agreed to
provide construction financing not to exceed $140,000,000. The construction
financing bore interest at the base rate, as defined, plus 1.0%, or at the LIBOR
rate, as defined, plus 1.9%, as determined at the option of the Partnership,
with a maturity date not later than November 29, 1995. Subject to conditions set
forth in the financing agreement, the Banks, at the request of the Partnership,
converted the construction financing into a term loan not to exceed
$140,000,000. The term loan bears interest at the base rate, as defined, plus a
range of 1.25% to 1.50%, or at the LIBOR rate, as defined, plus a range of 2.25%
to 2.50%, as determined at the option of the Partnership, with a maturity date
of no later than December 31, 2007 (7.625% at December 31, 1996). Principal
payments are due quarterly over a 12-year period. The Banks have been granted a
first priority security interest in the Facility and other collateral.
As of October 20, 1994, the financing agreement was amended and restated
to increase the construction financing and term loan commitment by $10,000,000
in conjunction with conversion to the revised PPA terms (see note 6). Loan terms
are the same as for the original financing.
In addition to the above-mentioned financing arrangement, the Banks agreed
to provide a working capital loan, not to exceed $3,000,000, until the term loan
maturity date. The Partnership shall repay the aggregate unpaid principal amount
at least once each fiscal quarter. The working capital loan will bear interest
at the base rate, as defined, plus a range of 1.25% to 1.50%. There were no
outstanding borrowings as of December 31, 1996 and 1995. The Banks also agreed
to provide letters of credit not to exceed $6,500,000 prior to term loan
conversion and $5,400,000 subsequent to term loan conversion. At December 31,
1996, $200,000 of letters of credit were outstanding.
(4), Continued
On November 3, 1994, Key Bank of New York loaned $19,500,000 to the
Partnership, which was secured by a letter of credit issued by Deutsche Bank for
use in making the payment to Norcen Energy Resources Limited (NORCEN), formerly
North Canadian Marketing (see note 6) pursuant to the Second Amendment to the
Gas Purchase Agreement. Interest on the loan was at the LIBOR rate plus .55%.
The loan was repaid on December 29, 1995 with the proceeds received from a
$19,500,000 LC Loan Facility (LC Loan) from Deutsche Bank ($21,203,369 was
outstanding at December 31, 1996, the increase to the original principal balance
represents accrued but unpaid interest). Interest on the LC Loan is equal to
LIBOR plus 2.75% (8.125% at December 31, 1996). Commencing on December 31, 1996
and each successive year thereafter, the interest rate will increase by .25% per
annum. Until the LC Loan is repaid in full, all of the monies otherwise
available to equity and cash flow holders will be utilized for repayment of the
LC Loan. In addition, when the LC Loan is paid in full and the Partnership's
affiliate, Kamine/Besicorp Syracuse L.P. (KBS), LC Loan remains unpaid, all
monies that would be available to the Partnership's equity and cash flow holders
will be loaned to KBS to repay their obligation.
As of May 7, 1993, the Partnership entered into subordinated financing
agreements with SV Beaver Falls, Inc. (SVBF) and Ansaldo whereby SVBF and
Ansaldo agreed to provide financing ($10,000,000 each) to be funded during the
construction of the Facility. Each of the subordinated financing agreements
provides for interest to be paid quarterly at the LIBOR rate, as defined, plus a
spread of 5.4%, or at the base rate, as defined, plus a spread of 6.5% during
construction, and LIBOR plus a range of 7.75% to 8.0% or base rate plus a range
of 6.75% to 7.0% thereafter (13.3125% at December 31, 1996). Principal payments
were required to begin by December 31, 1995, at which time quarterly payments
were to continue for 14 years. The Partnership has not made scheduled principal
payments and is paying the default interest rate (16.3125% at December 31, 1996)
on all missed principal payments. SVBF and Ansaldo will each receive a 2.5%
share of the net cash flow generated, as defined, by the Facility as additional
compensation for providing the subordinated financing.
The Partnership entered into four interest rate protection agreements with
Deutsche Bank Capital Corporation. The first provided that the Partnership would
be reimbursed for interest paid if LIBOR exceeded 7.0% based on an agreed-upon
estimated construction loan drawdown schedule which covered the expected
construction period. This instrument expired on June 30, 1995. The second
agreement fixes the term loan interest rate from July 1, 1995 through the entire
scheduled term of the loan at a range of 8.95% to 10.77%. The third and fourth
agreements provide that the Partnership will be reimbursed for interest paid on
subordinated debt to the extent LIBOR exceeds 8.0% during the scheduled term of
the subordinated debt.
<PAGE>
As of December 31, 1996, the Partnership was not in compliance with the
following covenants in its senior and subordinated financing agreements
(Financing Agreements): (a) Completion, as defined in the Financing Agreements,
has been delayed beyond September 30, 1995: (b) Final Completion, as defined in
the Financing Agreements, has been delayed
(4), Continued
beyond November 29, 1995; and (c) principal payments due to the subordinated
lenders on December 29, 1995, March 29, 1996, June 28, 1996, September 30, 1996
and December 31, 1996 have not been made, each of which is an Event of Default
under the Financing Agreements. As a result of the aforementioned Events of
Default, all borrowings of long-term debt and related deferred financing costs
have been classified as current. Under the terms of the financing agreement,
principal payments on subordinated debt are not permitted prior to term
conversion, which cannot occur until Final Completion is achieved. At December
31, 1996, total current liabilities substantially exceed total current assets,
which raises substantial doubt about the Partnership's ability to continue as a
going concern. A completion agreement has been entered into with the
construction contractor. Management is working to resolve the existing Events of
Default. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The total scheduled amounts of loans payable due during each of the next
five years, if the Events of Default are resolved, are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 $ 29,030,869
1998 10,350,000
1999 11,862,500
2000 12,012,500
2001 12,887,500
-----------
-----------
</TABLE>
As of May 7, 1993, the Partnership conveyed ownership of the Facility to
the Lewis County Industrial Development Agency (the IDA). The tax-exempt status
of the IDA has caused payment of a fee to the IDA upon its issuance of a
mortgage bond in lieu of mortgage recording taxes and exempts the Facility from
all sales taxes during the construction of the project and from property taxes
during IDA ownership of the Facility. Payments in lieu of real property taxes
(PILOT) will be made to the IDA, as defined in the PILOT Agreement. The IDA has
appointed the Partnership as its agent and will convey the Facility to the
Partnership in accordance with an installment sale agreement, with the expected
conveyance to be 20 years after the start of commercial operation.
(5) Lease of Land
The Partnership leases land for the Facility from SPI. The Partnership
pays rent of $1 per year through May 2041, plus cash payments totaling
$11,500,000 on various milestone dates, of which $9,500,000 has been paid
through December 31, 1996. The final payment of $2,000,000 is payable in 1997.
(6) Commitments
An affiliate of the Partnership entered into a PPA with NIMO dated as of
September 19, 1989 with amendments dated April 9, 1991 and September 26, 1991,
all approved by the New York Public Service Commission. NIMO agreed to purchase
all electricity generated by the Facility for a term of 25 years from the date
of commercial operation.
An amendment to the PPA was entered into as of January 4, 1994 and became
effective on May 7, 1995 (Commencement Date). The amendment requires NIMO to
purchase electricity generated by the Facility for 35 years from the
Commencement Date. In addition, during the period from the Commencement Date
through January 1, 2001, the Facility is expected to be on standby availability
and will not generate electricity except in the case of certain requirements or
if NIMO elects to restart the Facility at an earlier date. The Partnership is to
receive annual capacity payments from NIMO, which management expects to be more
than sufficient to cover debt service and fixed costs during the standby
availability period.
The Partnership has entered into an Energy Service Agreement (ESA) with
SPI for two of SPI's mills.
<PAGE>
The term of the ESA is 25 years from Commercial Operation, as defined by the
PPA. On March 22, 1996, SPI sold one of its two paper mills in Beaver Falls, New
York to Armstrong Gasket Products, Inc. (Armstrong). In connection with this
sale, all of SPI's rights, title and interest in and to the ESA were transferred
to Armstrong.
The Partnership entered into a Natural Gas Peak Shaving Supply Agreement
with The Consumers' Gas Company Ltd. (Consumers) as of August 1, 1991. Under
this agreement, Consumers can take the Partnership's contracted natural gas,
subject to defined limitations, for up to 30 days each year. As compensation,
the Partnership receives $2 per million cubic feet of gas taken pursuant to the
agreement plus the excess cost of alternate fuel. Revenues realized pursuant to
this agreement were $483,000, in 1996. There were no revenues recognized
pursuant to this agreement in 1995 and 1994.
The Partnership entered into an Operation and Maintenance Agreement (O&M)
with Stewart and Stevenson Operations, Inc. (Operator) dated as of April 25,
1993. Under the O&M, the Operator will operate and maintain the Facility for two
successive six-year terms unless six months' prior notice is given by the
Partnership to the Operator. The O&M was amended and restated as of October 9,
1994 to conform with the plan for operations associated with the amended and
restated PPA. While the Facility is on standby availability, compensation will
include a fee of (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST)
per year plus (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST) for
the Operator's labor fee; both amounts are subject to escalation by the
Employment Cost Index (ECI). When the Facility is operating, the fee will change
to (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST) per year subject
to escalation for ECI plus reimbursable costs. Major facility overhauls, as
defined, will be performed under the direction of the Operator, with costs of
the overhaul to be borne by the Partnership. The Partnership is required to
establish and fund a reserve account for major facility overhaul costs. The
agreement also provides for the Partnership to pay the Operator a mobilization
fee of (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST) prior to the
acceptance date.
(6), Continued
The Partnership has entered into various contracts for the supply and
transportation of natural gas to the project. Natural gas will be supplied by
NORCEN. Transportation of natural gas by pipelines will be by TransCanada
Pipeline Limited (TCPL) from a point near the Alberta/Saskatchewan, Canada
border to Waddington, New York; by Iroquois Gas Transmission System, L.P. to a
gate station near New Bremen, New York; and by St. Lawrence Gas Company, Inc. to
the Facility.
In 1994, the gas supply agreement with NORCEN was amended to suspend the
Partnership's obligation to purchase gas until January 1, 2001 and to assign the
Partnership's contracted pipeline space on TCPL to NORCEN. In connection with
the amended agreement, the Partnership paid NORCEN $19,500,000. The cost is
included in deferred fuel costs at December 31, 1996 and 1995.
(7) Related-party Transactions
Additional development fee amounts may be earned by the developers on the
permanent financing closing date based on the unspent amount of the construction
loan commitment after payment of all project costs. In addition, the general
partners are paid a construction monitoring fee during the construction of the
Facility. Through December 31, 1996, payments to the general partners for
monitoring fees amounted to $5,407,802, which was capitalized as part of the
Facility.
In addition to their respective shares of partnership cash flow, the
general partners and/or their affiliates will receive a management fee per
annum, as defined, and an operation and maintenance management fee per annum, as
defined, (both adjusted for inflation). The management fees for 1996 and 1995
were $293,293 and $133,885, respectively, of which a portion thereof, for 1995,
was unpaid and included in amounts due to related parties.
(8) Derivative Financial Instruments Held - Other Than Trading
On May 28, 1993, the Partnership entered into an interest rate swap
agreement effective from July 1, 1995 through June 30, 2007 whereby floating
rate debt (senior debt) based on LIBOR plus a range of 2.25% to
<PAGE>
2.50% over the scheduled life of the debt has been effectively converted to
fixed rate debt with a range of 7.30% to 8.27% plus a range of 2.25% to 2.50%.
For the years ended December 31, 1996 and 1995, $1,205,025 and $754,686 of
costs, respectively, resulted from this contract. The notional principal amount
of this agreement at December 31, 1996 was $127,979,250. The fair value of the
Partnership's future payment obligation over the remaining life of the agreement
is estimated to be approximately $12,000,000 based on discounted cash flows
using current interest rates.
(8), Continued
On May 28, 1993, the Partnership entered into two interest rate cap
agreements, both effective from May 28, 1993 through June 30, 2008, whereby
floating rate debt (subordinated debt) based on LIBOR plus a range of 7.75% to
8.00% was limited to a rate of no higher than a range of 8.00% to 11.00%, plus a
range of 7.75% to 8.00%. For the years ended December 31, 1996 and 1995,
$264,064 and $134,713, respectively, of costs resulted from this contract. The
cost of this agreement will be realized as a .20% premium on the previously
described interest rate swap agreement. The notional principal amount of each
agreement at December 31, 1996 was $10,000,000. The fair value of the
Partnership's future payment obligations over the remaining life of the
agreement is estimated to be approximately $1,300,000 based on discounted cash
flows using current interest rates.
On November 3, 1994, the Partnership entered into an interest rate cap
agreement effective from November 3, 1994 through December 26, 1995 whereby
floating rate debt (Key Bank of New York) based on LIBOR plus .55% was limited
to 7.00%. The Partnership paid $111,150 with respect to this interest rate
protection agreement, of which $96,652 was charged to interest expense in 1995.
<PAGE>
