<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, 1998 Commission file number 0-9964
BESICORP GROUP INC.
(Name of small business issuer in its charter)
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<CAPTION>
<S> <C>
New York 14-1588329
(State or other jurisdiction of incorporation (Internal Revenue Service Employer
or organization) Identification No.)
</TABLE>
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: $17,014,256
The aggregate market value of Common Stock, $.10 par value, held by
nonaffiliates based upon the closing AMEX sale price on June 19, 1998 was
approximately $48,594,024.75
The number of outstanding shares of Common Stock, $.10 par value, on June 19,
1998 was 2,967,174 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 23, 1998, which will be filed on or before July 29, 1998.
<PAGE>
BESICORP GROUP INC.
Cross-Reference Sheet/Documents Incorporated by Reference
Securities and Exchange Commission Item Number and Description
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<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 - 14
Item 3. Legal Proceedings 14 - 19
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder 20
Matters
Item 6. Management's Discussion and Analysis or Plan of Operation 22 - 29
Item 7. Financial Statements 29 - 51
Item 8. Changes in and Disagreements with Accountants on Accounting and 51
Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; 52
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation 52
Item 11. Security Ownership of Certain Beneficial Owners and Management 52
Item 12. Certain Relationships and Related Transactions 52
PART IV
Item 13. Exhibits, Lists and Reports on Form 8-K 52 - 53
Signatures 54
Index to Exhibits 55 - 56
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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 Latin America.
The Company also provides engineering, system design, project management and
turn-key installation of photovoltaics ("PV") and fabricates, manufactures,
markets and distributes alternative energy projects through a domestic and
international network (the "Product Segment"). In March 1998 the Company
discontinued its solar thermal and remaining heat transfer technology product
lines. The Company's non-agricultural heat transfer product lines were
discontinued in November 1996.
During each of the five years ended March 31, 1998, the revenues and income
(loss) per segment were as follows:
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Year ended Project Segment Product Segment
<S> <C> <C> <C> <C>
Revenues Income (loss) Revenues Income (loss)
3/31/98 $ 12,797,085 $ 2,846,475 $ 4,217,171 $ (2,651,089)
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)
</TABLE>
See Note 16 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 1998 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 for
several reasons. Regulated utilities' "avoided costs" of power has decreased due
largely to a surplus of spot market short-term energy, and utilities have cited
level or decreasing demand for power as a basis for not signing PPA's with
independent, non-utility generators ("NUG's"). Throughout the United States
deregulation of electric generation has and will continue to play a significant
role in pricing for electricity.
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, i.e.,
United States Trade and Development Agency, United States Agency for
International Development, Winrock International, International Fund for
Renewable Energy and Efficiency, 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 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. During Fiscal
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 Fiscal 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.
However, on October 10, 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 declared that it may avail itself of a bankruptcy
proceeding or other measures in order to obtain relief from the high cost of
independent power contracts. On August 1, 1996 NIMO offered to terminate 44
PPA's with 19 independent power producers ("IPP's"), including the five
contracts held by the Company's partnerships. 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 September 25, 1997
NIMO announced that it had reached an agreement with the staff of the New York
Department of Public Service on a rate and restructuring plan (including
recommended approval of the MRA). After a series of hearings and testimony by
interested parties, on December 29, 1997 the assigned administrative law judge
recommended approval of the rate and restructuring plan with some modifications.
On February 24, 1998 the Public Service Commission of the State of New York
("PSC") approved the MRA and, on March 20, 1998, it issued an Opinion and Order
Adopting Terms of Settlement Subject to Modifications and Conditions which NIMO
accepted on April 2, 1998. On May 8, 1998 NIMO announced that third party
conditions had been satisfied or waived by 14 IPP's holding 27 PPA's, including
the five PPA's held by the Company, and on May 14, 1998 NIMO's Board of
Directors approved the MRA. The closing date of the MRA is projected to be June
30, 1998 but remains subject to approval by NIMO's stockholders of both the
increase in the number of authorized shares of common stock and the issuance of
common stock to the IPP's pursuant to the MRA.
The consummation of the MRA may result in the receipt of substantial proceeds by
the project partnerships, and, as a result, significant gains for the Company.
Such consummation would also result in the termination of the PPA's and, as a
result, termination of future periodic ownership distributions and future
earnings to the Company from the operations of the projects. The ultimate impact
on the Company cannot presently be determined. However, should the MRA not be
consummated, the PPA's will remain in place but certain events involving NIMO's
financial viability could occur which could impact its ability to continue
making payments pursuant to the PPA's. Any such interruption or termination of
payments to the project partnerships could hinder the Company's ability to
continue operating as a going concern.
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.
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Percentage
Actual or Equity Actual or
Estimated Ownership at Estimated
Facility Cost March 31, Commercial
Project Name (millions) (1) 1998 (2) Operation Date
- - --------------- -------------- ------------- ------------------
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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) 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) 95 50.0 December 1994 (4)
Krishnapatnam
Project (500 (estimated)
megawatts) 700 50.0 (estimated) 2002
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(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. The same four projects continued to
generate income during Fiscal 1998. 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. In addition, the possible
consummation of the MRA could affect the project partnerships' ability to
generate income from future operations.
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 Fort James Corporation ("Fort James") (formerly 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.
<PAGE>
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. Until recently, steam was provided to the
host mill under terms of an energy services agreement ("ESA") (see below).
Operations and maintenance of the facility are provided by GE Energy Plant
Operation, Inc. ("GEEPO") (formerly Stewart and Stevenson Operations, Inc). 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 1998 the Company recorded $118,864 of management fees from the
project. Ownership distributions of $2,137,499 and distributions of $119,313 to
fund gross receipt taxes were received by the Company in Fiscal 1998.
In January 1998, Fort James announced plans to close the host paper mill on or
about April 1, 1998 and discontinue purchasing steam. Fort James has certain
obligations under the ESA to ensure the facility is able to continue as a
Qualifying Facility ("QF"). Alternatives are currently being considered
regarding this situation.
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 ESA. Operations and maintenance of the facility are
provided by GEEPO. 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 1998 the Company recorded $108,776 of management fees from the
project. Ownership distributions of $2,397,471 and distributions to fund gross
receipt taxes of $131,702 were received by the Company in Fiscal 1998.
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 $665,274
were received by the Company during Fiscal 1998 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 CelluTissue - Natural Dam (which purchased the mill from
The Fonda Group in March 1998), 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 ESA. Operations and maintenance are provided
by GEEPO. The primary supplier of natural gas for the project is Union Pacific
Resources, Inc. ("UPRI") (which purchased Norcen Energy Resources Limited in
March 1998).
During Fiscal 1998 the Company recorded $116,997 of management fees from the
project. Ownership distributions of $1,698,191 and distributions to fund gross
receipt taxes of $72,259 were received by the Company during Fiscal 1998.
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 ESA. Operations and
maintenance of the facility are provided by GEEPO. The primary supplier of
natural gas for the project is UPRI.
An additional development fee of $1.25 Million was earned by the Company during
Fiscal 1998 in connection with conversion of the construction financing to
permanent term financing and was recognized as revenue during Fiscal 1998.
During Fiscal 1998 the Company recorded $174,948 of management fees from the
project. Ownership distributions of $84,481 and distributions to fund gross
receipts taxes of $86,903 were received by the Company during Fiscal 1998.
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 com-
<PAGE>
mencing 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 GEEPO. The primary supplier of natural gas for the project is UPRI.
An additional development fee of $600,000 was received by the Company during
Fiscal 1998 in connection with conversion of the construction financing to
permanent term financing and was recorded as revenue during Fiscal 1998.
During Fiscal 1998 the Company recorded $135,016 of management fees from the
project. To date no ownership distributions have been received from the Beaver
Falls project (see below)However, distributions of $140,344 were received by the
Company during Fiscal 1998 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 Company
planned to refinance these projects with longer-term financing, but did not seek
to do so during Fiscal 1998 as a result of the Company's participation in the
MRA process. Although the Company received ownership distributions from the
Syracuse Project during Fiscal 1998, given the structure of the current
financing, the Company could not predict when material cash distributions from
the Beaver Falls Project would have commenced.
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).
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 Stewart & Stevenson, Inc.
$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,
1998, $1,944,624 of the $2,500,000 had been funded to AGI with the remaining
balance of $555,376 due from KBA.
The facility was constructed by Ansaldo on a completely turn-key basis.
Operations and maintenance of the facility are provided by GEEPO. 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 ESA, was to operate a greenhouse as a
steam host (See Item 3. Legal Proceedings for further discussion of this
project.)
On February 6, 1998, RG&E announced an agreement in principle to settle the
aforementioned litigation between the parties of the project stating that the
plan was contingent upon reaching final agreements between RG&E and the project
lender, as well as other interested parties. On June 8, 1998 RG&E announced that
the proposed settlement had been filed with the PSC, and set forth items of the
proposed settlement. The Company does not believe the proceeds of the proposed
settlement are likely to exceed the claims of the secured and unsecured
creditors of KBA. As discussed above, the Company funded combined loans of $2.5
million to the project and AGI. The Company's ability to recover this investment
will be jeopardized by this settlement, and, as a result, the Company has
established reserves to cover losses that may result from the possible
uncollectibility of these loans. The proposed settlement must be approved by
both the PSC and the Bankruptcy Court, as the project partnership has been
operating under Chapter 11 of the United States Bankruptcy Code since November
13, 1995. Besicorp is consulting with legal counsel concerning the proposed
settlement agreement and related bankruptcy court filings. (See Item 3. Legal
Proceedings and Note 4. Notes Receivable for further discussion of this
project.)
During Fiscal 1998 the Company recorded no management fees from the project, and
payments continued 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 no distributions
are expected during the pendency of the ongoing litigation regarding this
project.
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
Chennae (Madras) on India's Eastern coast. BBI Power Inc., the project company
developing Krishnapatnam, is 50% owned by the company and 50% owned by
Chesapeake Power Investments Co. 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. 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.
The project is undergoing review by the Central Electricity Authority ("CEA") in
Delhi. Assuming that the development of this project is successful, including
obtaining project financing, current plans are to begin construction in 1999 and
commence commercial operations in 2002.
The May 1998 nuclear tests conducted by India have resulted in the imposition of
economic sanctions by the United States. The ability to obtain project financing
may be affected by these sanctions.
With respect to the development of this project, since 1995 commitments have
been secured from third parties for funding an aggregate $6.6 Million for
project development.
<PAGE>
Through March 31, 1998, the Company has received $937,992 for reimbursement of
development costs. Additional development financing of $1.1 million was obtained
from new participants and $.25 million from the Company 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 six completed
cogeneration projects in New York State, 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 project development in Brazil under a Master Project
Agreement with MPR Associates ("MPR"). The agreement calls for equal sharing in
development fees and ownership interest in all projects developed with MPR.
Regulatory Compliance
The Company's domestic power production project activities are governed by
certain federal and state laws and regulations. The Public Utilities Regulatory
Policies Act of 1978 ("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" or "QF") 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 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. In March
1998 the Company discontinued its solar thermal and remaining heat transfer
technology product lines offered through its subsidiary, Bio-Energy Systems,
Inc. The Company's non-agricultural heat transfer lines were discontinued in
November 1996.
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 markets and sells products through dealers and distributors
nationwide. In addition, the Company has distributors in Europe, the Pacific
Rim, and other markets.
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
<PAGE>
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 at that time to
include additional development activities designed to increase production
efficiency and lower the overall cost of PV modules. The agreement was modified
a second time in January 1998 with the objective to further increase production
volume while at the same time lowering production costs by 40%. NYSERDA is
providing $416,744 of the estimated costs of $887,720 for these activities, to
be repaid from profits on future sales of the additional products developed. The
estimated completion date is December 2000.
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, $42,688 of
which will be repaid from revenues on future sales of these systems to other
parties. Eight hybrid power systems were completed and shipped through March 31,
1998. 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
August 1998.
In March 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 1998.
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 December
1998.
In February 1998 the Company and NYSERDA entered into a cost sharing agreement
to develop and manufacture solar-powered energy systems and packaged telephone
products. NYSERDA is providing $72,605 of the estimated costs of $229,982 for
this project to be repaid from revenues derived from sales of products using
technologies developed under the agreement. The estimated completion date of
this project is December 1999.
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.
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 $274,260, $382,410 and $497,664
as at March 31, 1998, March 31, 1997 and March 31, 1996, respectively. During
the year ended March 31, 1998, sales to one customer accounted for approximately
14% of Product Segment sales. 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 year ended March 31, 1996.
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 primarily on the basis of service, technical merits, and
pricing.
Research and Development
The Company has continued to expand its efforts in solar electric technology
development. Expenditures for research and development for the last three years
were $697,182 in Fiscal 1998, $646,817 in Fiscal 1997 and $426,239 in Fiscal
1996. Personnel expenses, comprising a substantial portion of these amounts,
were $330,428 in Fiscal 1998, $301,055 in Fiscal 1997 and $324,662 in Fiscal
1996. Of the total amounts, expenses attributable to the Company's agreements
with NYSERDA were $520,950 in Fiscal 1998, $414,307 in Fiscal 1997 and $229,658
in Fiscal 1996. The Company anticipates comparable expenditures in Fiscal 1999
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 may at times fabricate solar electric systems by combining solar
electric panels with other components.
Patents
The Company has a number of patents relating to installation and assembly of
solar thermal and heat transfer products. As previously discussed, the Company
discontinued these product lines in March 1998, and, as a result, the
unamortized costs of patents and trademarks associated with those product lines
have been written off.
<PAGE>
The Company owns the following U.S. patent relative to its solar electric
business:
5,717,478 (photovoltaic module with liquid crystal display indicator) - expires
June 7, 2016
Export Sales
The Company's export sales, principally to Europe and the Pacific Rim, for the
Fiscal years ended March 31, 1998, March 31, 1997 and March 31, 1996 were
$299,293, $297,761 and $455,114, 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, 1998, the Company had 70 full-time employees. None of these
employees are represented by a union. In the opinion of management, its
relationship with its employees is good.
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 1998, 1997, 1996 was $53,701, $295,333 and
$176,117, 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
$604,082 at March 31, 1998. The property includes land, a building measuring
8,000 square feet housing the corporate, project development and technology
offices, and additional rental units.
48 Canal Street, Ellenville, New York: owned and subject to a mortgage totaling
$50,680 at March 31, 1998. The property, which had been used to house the
Company's Bio-Energy Systems, Inc. subsidiary, includes land and a building
measuring 52,000 square feet. As previously discussed, the Company discontinued
the product lines offered through that subsidiary effective March 31, 1998, and
is seeking a buyer for the property. The book value of the property has been
adjusted to estimated net realizable value.
1 Sun Street, Stelle, Illinois: leased for $575 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
In August 1997 the Attorney General's office of the State of New York issued a
subpoena for numerous records of the Company in connection with an inquiry by
the Attorney General as to whether, in light of the criminal conviction of
Chairman, CEO and President, Michael F. Zinn (see below), he is fit to serve as
a Director of the Company. The Company made a partial production of documents in
the Fall of 1997, at which time the remainder of the subpoena was stayed by the
Attorney General's office. On March 10, 1998 the Attorney* General's office
issued Demands for Statements Under Oath and Documents (the "Demands") directed
to certain Besicorp employees. Pursuant to an agreement with the Attorney
General, the response to the Demands and the subpoena has now been stayed.
***
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 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 October 22, 1997 the Company and Mr. Zinn were sentenced by the Court in
connection with the guilty pleas entered. The Company was fined $36,400. Mr.
Zinn was fined $36,673 and sentenced to a six-month term of incarceration
(commencing November 12, 1997), and a two-year term of supervised release
thereafter. Effective November 11, 1997, Mr. Zinn tendered his resignation as
Chairman of the Board, Director, Chief Executive Officer and President of the
Company.
Effective with Mr. Zinn's resignation, Michael J. Daley, who had served as Vice
President, Chief Financial Officer and Corporate Secretary of the Company, was
appointed Chief Executive Officer and President of the Company and continued to
serve as Chief Financial Officer of the Company. In addition, on November 7,
1997, Mr. Daley was appointed Director, replacing Harold Harris, who resigned
from the Board due to declining health.
On May 8, 1998, Mr. Zinn was released from confinement, and on May 12, 1998,
accepted an invitation from the Company's Board of Directors to resume his
position as Chairman of the Board, President and Chief Executive Officer.
Effective May 12, 1998, Michael J. Daley who had been Chairman of the Board,
President, Chief Executive Officer and Chief Financial Officer, was appointed to
serve as Executive Vice President and will continue to serve as Chief Financial
Officer and as a Director.
***
<PAGE>
On August 8, 1997 John Bansbach commenced a shareholder derivative action in the
New York Supreme Court, Ulster County, entitled John Bansbach v. Michael Zinn,
et al., Index No. 97-8075. The Company is named as a nominal defendant in this
matter, which also names Michael F. Zinn, an officer and Director of the Company
at the time the action was filed, Michael J. Daley, an officer of the Company at
the time, and Gerald A. Habib, Harold Harris, and Richard E. Rosen, all
Directors of the Company at the time (collectively, "the named officers and
Directors"). The suit arises in connection with the criminal investigation,
indictments and guilty pleas described above. The plaintiff seeks to hold the
named officers and Directors liable to the Company for all sums advanced to Mr.
Zinn in connection with his defense of the criminal proceedings, and to Mr.
Daley, who was subpoenaed for information in connection with this matter, for
all legal expenses, costs and fines incurred by the Company itself in connection
with the criminal proceedings, and for all harm to the Company's reputation and
goodwill resulting from the criminal proceedings. On September 29, 1997 the
Company and the named officers and Directors moved to dismiss the action. On
April 10, 1998 the New York State Supreme Court dismissed the action, stating
that the plaintiff had failed to make a pre-suit demand upon the Company's Board
of Directors and had failed to demonstrate that such a demand would be futile.
The decision and order dismissing the action was entered on April 22, 1998. On
May 12, 1998 the plaintiff filed a notice of appeal.
***
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. 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. In a decision issued December 19, 1997, the Court granted the
Company's motion for summary judgment based upon the recommendation of the SLC,
and dismissed the derivative action in all respects. The plaintiff has filed a
notice of appeal. The Company believes that the outcome of the action will have
no material adverse impact upon the Company.
***
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 "PPA" or 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 (the
"NYS Action"), 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 PPA on the grounds of
mutual mistake, impossibility, frustration, commercial impracticability and
anticipatory breach, and asserts claims for breach of contract and material
misrepresentation concerning the size of the plant, as well as for 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, and defendants thereafter appealed
the denial. By order dated May 30, 1997 the Appellate Division affirmed the
lower Court's decision. RG&E thereafter filed a motion to amend its complaint
and to add Kamine Development L.P. as a party, which motion was subsequently
stipulated to by the defendants. On June 26, 1997 KBA removed the action to the
United States District Court for the Western District of New York based on
RG&E's adding of a federal claim. As discussed below, a proposed settlement
relating to this matter has been announced but is not yet finalized.
***
On January 27, 1995 KBA filed an action in the United States District Court,
Western District of New York (the "WDNY Action"), against RG&E for violations of
Section 2 of the Sherman Act alleging that RG&E had engaged in anti-competitive
conduct. KBA sought damages as well as injunctive relief. On January 31, 1995
KBA filed a motion for a preliminary injunction seeking to enjoin RG&E from
refusing to comply with its legal obligations and requiring it to abide by the
terms of the Agreement during the pendency of the lawsuit. On March 20, 1995 the
Court granted a temporary restraining order requiring RG&E to purchase capacity
and energy from KBA at $.06 per kilowatt hour. However, 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 KBA at the then-current SC5 rate of
approximately $.02. As discussed below, as part of the proposed settlement, this
action is to be dismissed with prejudice if the settlement is finalized.
***
On November 5, 1995, shortly after KBA's motion for a preliminary injunction was
denied, General Electric Capital Corp. ("GECC"), the project 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 to reorganize the business of
KBA under Chapter 11 of the Bankruptcy Code. KBA also filed an adversary
proceeding (the "Adversary Proceeding") against RG&E seeking enforcement of the
automatic stay, and specific performance, as well as damages for breach of
contract and breach of the covenant of good faith and fair dealing. It also
sought injunctive relief seeking enforcement of the PPA during the determination
of the adversary proceeding. This injunctive relief was denied by the Bankruptcy
Court. RG&E counterclaimed in the adversary proceeding claiming commercial
impracticability, impossibility, mutual mistake, frustration, anticipatory
breach, reformation of the Agreement and recoupment.
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 NYS
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 that the state law claims raised in the Adversary Proceeding should be
litigated in the pending NYS Action referenced above. The Bankruptcy Court also
lifted the automatic stay so that the NYS Action could proceed. (As noted above,
the NYS Action was subsequently removed by KBA to federal court.)
In May 1996 RG&E filed an $8 Million proof of claim in the bankruptcy case
seeking to recoup certain moneys it had paid KBA while the temporary restraining
order granted in the WDNY Action was in effect.
<PAGE>
As of March 31, 1998, the Bankruptcy Court has approved $38 million in
debtor-in-possession interim financing through April 30, 1998, with a right on
the part of GECC to increase that amount to $41.5 million and extend the term
until June 30, 1998.
As a result of settlement discussions between RG&E and GECC (the principal
secured creditor of KBA which controls KBA), a proposed global settlement in
principle has been announced by RG&E and GECC. The specific terms of the
proposed settlement are being finalized as is the documentation. The settlement
will not be effective until it is approved by the PSC, as well as the Bankruptcy
Court as part of an overall plan of reorganization. Under the proposed
settlement, the NYS Action, the WDNY Action and the Adversary Proceeding
discussed above will be dismissed with prejudice and with appropriate releases
in KBA's and the Company's favor. Under the terms of the proposed settlement,
the proceeds of the settlement will not exceed the claims of secured and
unsecured creditors of KBA. As a result, the Company's $2.5 million combined
investment in the project and the greenhouse constructed in connection with the
project will be jeopardized if the proposed settlement is approved. The proposed
settlement has not been finalized and is subject to approval by the PSC and the
Bankruptcy Court. Besicorp is consulting with legal counsel concerning the
proposed settlement agreement and related bankruptcy court filings.
***
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. Shortly after commencing this action, KBA
unsuccessfully sought the appointment of a temporary receiver to take possession
of the greenhouse during the pendency of the action. 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 a Pledge Agreement with Agri-Impex Ltd., the sole shareholder of AGI, and
replaced AGI's BBoard of DirectorsDirectors and officers. AGI subsequently
relinquished possession of the greenhouse to KBA. On May 29, 1996 AGI filed a
proof of claim against KBA with the Bankruptcy Court in the amount of
$34,819,000. On June 12, 1998 KBA objected to AGI's claim and filed a
counterclaim against AGI with the Bankruptcy Court seeking, among other things,
damages for breach of contract. A trial date of December 10, 1998 has been set
by the Court. Based upon the facts known to the Company, we believe that KBA has
meritorious claims against AGI and meritorious defenses to AGI's claims.
***
On December 2, 1994 Ammerlaan Agro-Projecten B.V. ("Ammerlaan"), the contractor
hired by AGI to construct the greenhouse, filed a mechanics lien against the
real property on which the greenhouse is located in an amount in excess of $4.3
million. Around the same time, Pooler Enterprises Inc. ("Pooler") and Fillmore
Gas Company, Inc. ("Fillmore"), which had provided goods or services to
Ammerlaan, filed their own mechanics lien against the property. (Each of their
liens did not exceed $100,000.) Under the Amended and Restated Engineering
Procurement and Construction Contract between AGI and Ammerlaan, dated as of
June 30, 1993, Ammerlaan is obligated to discharge these liens.
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, the Industrial Development Agency of Allegany County, GECC,
Pooler and 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.
Both Pooler and Fillmore have filed cross-claims seeking to foreclose on their
mechanics liens.
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. On
September 3, 1997 the Bankruptcy Court denied Ammerlaan's motion. In declining
to lift the stay, however, the Bankruptcy Court expressly noted that Ammerlaan
was free to pursue its claims for damages against the non-debtor defendants in
the Allegany County action. Ammerlaan subsequently appealed from the denial of
its motion, but later withdrew its appeal without predudice. On September 10,
1997 Ammerlaan filed a motion with the Allegany County state court seeking to
sever its claims against the non-debtor defendants, including the Company and
GECC. Ammerlaan's motion has not yet been heard.
GECC has advised KBA and the Company that it is negotiating a settlement with
Ammerlaan. Under the proposed settlement, Ammerlaan will be paid a certain sum
of money by GECC and will receive title to the greenhouse. GECC, KBA and the
Company, in return, will receive releases from Ammerlaan and Ammerlaan's claims
against them in the Allegany County action will be dismissed with prejudice. The
proposed settlement has not been finalized and is subject to approval by the
Bankruptcy Court.
***
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 engaged in two days of mediation
which
<PAGE>
did not result in a settlement. The case is proceeding 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, styled Besicorp Group Inc. et al. v.
Tecogen Incorporated, et al. 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 "turnkey" 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. At the conclusion of
trial the Company sought actual damages in excess of $1,000,000.
On October 10, 1997 the United States District Court for the Northern District
of New York ruled on the March 1995 trial and held that Tecogen was liable to
the Company in the amount of $30,000 for certain breaches of warranty regarding
the cogeneration system purchased by the Company from Tecogen in 1988 and that
the Company was liable for payment of the last installment on the purchase price
of $156,750. Certain other lesser issues were resolved, both for and against the
Company, but not involving damages. The Company moved to set aside the money
judgment against it and also sought relief on the amount of interest owed on the
judgment. Tecogen cross-moved for an award of pre-judgment interest. On January
29, 1998 the Court reaffirmed its prior ruling and found that pre-judgment
interest should be awarded to Tecogen. The Company has paid to Tecogen the net
base amount of the judgment of $126,750 and interest of $115,585. A satisfaction
of judgment has been filed with the Court Clerk's office, and there is no
further exposure to the Company.
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, which had been stayed pending
the decision in the New York Court, is no longer stayed, and the Company is
consulting with counsel regarding this proceeding.
***
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.
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, 1998.
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, 1998.
<PAGE>
Fiscal Year Ended March 31,
<TABLE>
<CAPTION>
High Low
---------- ----------
<S> <C> <C> <C>
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
1998 First Quarter 21-1/2 15-1/8
Second Quarter 40 19-7/8
Third Quarter 36-15/16 30-3/4
Fourth Quarter 35-1/2 23-5/8
</TABLE>
There were 1,730 shareholders of record of the Company's common stock as of
March 31, 1998. 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: 1998 1997 1996 1995 1994
- - ---------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Revenues $17,014,256 $14,567,551 $ 8,079,519 $14,296,142 $ 9,326,268
Net Income (Loss) 195,386 1,173,722 (2,478,319) (367,077) 6,521
Basic Earnings Per
Common Share (a) .07 .40 (.84) (.12) .00
Diluted Earnings per
Common Share (b) .06 .39 (.81) (.12) .00
BALANCE SHEETS:
- - ----------------------------
Working Capital $ 2,779,482 $ 2,577,849 $ 903,090 $ 2,872,506 $ 5,865,300
Total Assets 9,444,996 11,836,799 9,404,990 10,869,342 13,080,989
Long-Term Debt 3,766,074 3,834,483 3,137,912 3,485,082 3,559,786
Other Long-Term Liabilities 186,272 2,725,232 2,775,180 1,653,175 2,510,945
Total Liabilities 5,907,165 9,104,760 8,144,015 6,886,323 7,872,066
Shareholders' Equity (c) 3,537,831 2,732,039 1,260,975 3,983,019 5,208,923
Dividends Per Common Share NONE NONE NONE NONE NONE
</TABLE>
(a) Earnings per common share is computed on income (loss) for each year divided
by the basic weighted average number of shares outstanding during the year.
(b) Diluted earnings per share considers the effect of potential common shares
such as stock options and warrants.
(c) 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 1998 of $195,386 represents a decrease of
$978,336 from the net income of $1,173,722 for Fiscal 1997. The decrease in
Fiscal 1998 is due primarily to the reserve of $2.5 Million for the possible
uncollectibiity of the combined loans to one of the project partnerships (see
Recent Developments and Subsequent Events and Note 4a. Notes Receivable, of the
Notes to Consolidated Financial Statements), an increase of $1,339,794 in
selling, general and administrative expenses ("SG&A") and a decrease of $236,693
in margin on product sales. These were partially offset by increases of
$2,151,456 and $876,926 in income from partnerships and development and
management fees, respectively, and a decrease in the provision for income taxes
of $185,000.
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 SG&A 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 Project Segment's net income for Fiscal 1998 decreased by $42,092 to
$2,846,475 from the net income of $2,888,567 recorded for Fiscal 1997. The
decrease is due primarily to the reserve for the possible uncollectibility of
the $2.5 Million combined loan discussed above and an increase in SG&A of
$740,006. These were partially offset by increases in income from partnerships
and development and management fees of $2,151,456 and $876,926, respectively.
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 SG&A allocated to this segment of $1,587,673.
The Product Segment's net loss of $2,651,089 for Fiscal 1998 represents a
decrease in net income of $936,244, as compared to Fiscal 1997. The decrease is
due primarily to a decrease in margins on product sales of $236,693 and
increased SG&A of $599,788. Income of $150,000 earned from the settlement of a
complaint against a competitor also contributed to more favorable results in
Fiscal 1997. The gross margins for this segment for Fiscal 1998, 1997, and 1996
were (2%), 4%, and 12%.
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.
Recent Developments and Subsequent Events
On October 22, 1997, the Company and its Chairman, Chief Executive Officer and
President, Michael F. Zinn, were sentenced in the United States District Court,
Southern District, White Plains, New York, in connection with the
previously-disclosed guilty pleas entered for offenses relating to illegal
contributions to the 1992 election campaign of Congressman Maurice Hinchey. The
Company was fined $36,400, and Mr. Zinn was fined $36,673 and sentenced to a
six-month term of incarceration (commencing November 12, 1997), and a two-year
term of supervised release thereafter. Effective November 11, 1997, Mr. Zinn
tendered his resignation as Chairman of the Board, Director, Chief Executive
Officer and President of the Company.
On May 8, 1998, Mr. Zinn was released from confinement, and on May 12, 1998,
accepted an invitation from the Company's Board of Directors to resume his
position as Chairman of the Board, President and Chief Executive Officer. In a
related action effective May 12, 1998, Michael J. Daley, who had been the
Chairman of the Board, President, Chief Executive Officer and Chief Financial
Officer, was appointed to serve as Executive Vice President and to continue to
serve as Chief Financial Officer and as a Director.
On August 1, 1996 Niagara Mohawk Power Corporation ("NIMO") offered to terminate
44 of the power purchase agreements ("PPA's") with 19 independent power
producers ("IPP's"), including the five contracts held by the Company's
partnerships. 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 September 25, 1997 NIMO announced that it
had reached an agreement with the staff of the New York Department of Public
Service on a rate and restructuring plan (including recommended approval of the
MRA). After a series of hearings and testimony by interested parties, on
December 29, 1997 the assigned administrative law judge recommended approval of
the rate and restructuring plan with some modifications. On February 24, 1998
the Public Service Commission of the State of New York ("PSC") approved the MRA,
and, on March 20, 1998, it issued an Opinion and Order Adopting Terms of
Settlement Subject to Modifications and Conditions which NIMO accepted on April
2, 1998. On May 8, 1998 NIMO announced that third party conditions had been
satisfied or waived by 14 IPP's holding 27 PPA's, including the five PPA's held
by the Company, and, on May 14, 1998 NIMO's Board of Directors approved the MRA.
The closing date of the MRA is projected to be June 30, 1998 but remains subject
to approval by NIMO's common stockholders of both the increase in the number of
authorized shares of common stock and the issuance of common stock to the IPP's
pursuant to the MRA.
On April 11, 1998 Norcen Energy Resources Limited, a Canadian corporation which
supplies natural gas to the Natural Dam, Syracuse and Beaver Falls cogeneration
facilities in which the Company holds partnership interests ranging from 35.715%
to 50.2%, initiated a civil complaint against those partnerships and NIMO
alleging breach of contract and tortious interference with contracts related to
the Partnerships' gas purchase agreements with regard to the Partnerships'
participation in the MRA with NIMO. The complaint requested not less than $200
million from the defendants and $600 million from NIMO as punitive damages. The
Company does not believe that any breach of contract or tortious interference
with contracts occurred. On May 5, 1998 the Partnerships agreed to a settlement
with Norcen Energy Resources Limited, which provides for the complaint to be
withdrawn subject to conditions including the three Partnerships consummating
the MRA and making the agreed-upon payments.
In January 1998 Fort James Corporation (formerly James River II) announced plans
to close the host paper mill for the Carthage Cogeneration Project Facility
located in Carthage, NY, in April 1998 and discontinue purchasing steam under
the Energy Services Agreement ("ESA") between the project partnership and Fort
James. The Company, through two subsidiaries, holds an interest in the project
partnership, Kamine/Besicorp Carthage L.P. ("KBC"). Fort James has certain
obligations under the ESA to ensure that the Facility is able to continue as a
Qualifying Facility. Alternatives are currently being considered regarding this
situation.
The inability of the Facility to maintain status could have a material adverse
effect on the operations of the Facility. The Company is uncertain as to what
effect this development may have on its operations. No adjustments have been
made to the financial statements due to the uncertainty of this matter.
On February 6, 1998 Rochester Gas & Electric Corp. ("RG&E") announced an
agreement in principle to settle legal proceedings relating to the Allegany
Cogeneration Facility in Hume, New York in which the Company, through its
subsidiary, Beta Allegany Inc. ("Beta Allegany"), holds an interest in the
project partnership, Kamine/Besicorp Allegany L.P. ("KBA"). RG&E stated that the
plan was contingent upon reaching final agreements between RG&E and the project
lender, as well as other interested parties. On June 8, 1998 RG&E announced that
the proposed settlement had been filed with the PSC, and set forth items of the
proposed settlement.
<PAGE>
The Company does not believe the proceeds of the proposed settlement are likely
to exceed the claims of the secured and unsecured creditors of KBA. As discussed
above, the Company funded combined loans of $2.5 million to the project and
Allegany Greenhouse, Inc., ("AGI") an unrelated company. The Company's ability
to recover this investment will likely be jeopardized by this settlement, and,
as a result, the Company has established reserves to cover losses that may
result from the possible uncollectibility of the loans related to this funding.
The proposed settlement must be approved by both the PSC and the Bankruptcy
Court, as the project partnership has been operating under Chapter 11 of the
United States Bankruptcy Code since November 13, 1995. Besicorp is consulting
with legal counsel concerning the proposed settlement agreement and related
bankruptcy court filings. (See Item 3. Legal Proceedings and Note 4. Notes
Receivable for further discussion of this project).
On February 19, 1998, after resolving to increase the Board of Directors from
three to five members, the Company announced that Melanie Norden was appointed
as the Company's fourth director. Ms. Norden is the founder of BENCHMARKS, a
full service consulting firm, providing consultation, management and planning
services in fundraising, organizational development, conference and event
planning and execution, volunteer, board and staff training, and public
relations and marketing. BENCHMARKS, which provides services to both for-profit
and not-for-profit clients, has a diverse client base which has included, among
others, the International Planned Parenthood Federation, the National Coalition
for Women's Business Enterprise, the University of the West Indies, and Mt.
Sinai Medical Center.
On April 10, 1998 the New York State Supreme Court dismissed a shareholder
derivative suit brought against certain current and former executive officers
and directors of the Company. The Court ruled that the plaintiff in the lawsuit,
John Bansbach, was precluded from initiating suit because he failed to make a
demand upon the Company's Board of Directors to initiate legal proceedings
before he commenced suit. The suit sought to impose damages upon certain current
and former Besicorp officers and directors arising out of the Company's defense
of itself and Michael F. Zinn, against charges of campaign finance and tax law
violations relating to the 1992 campaign of Congressman Maurice Hinchey. The
plaintiff has filed an appeal. (See Item 3. Legal Proceedings).
As previously disclosed, the Company and Kamine Development Corporation ("KDC")
engaged PaineWebber Incorporated ("PW") to solicit participants for a potential
business combination involving its independent projects which supply electricity
to NIMO. PW notified KDC and the Company on December 12, 1997 of its intent to
terminate the engagement effective November 18, 1997. Since that time PW has
provided no further services. The Company has since engaged Josephthal &
Company, Inc. to render certain investment banking services to it in connection
with a potential business combination.
REVENUES
Consolidated
Consolidated revenues increased by $2,446,705 from $14,567,551 to $17,014,256
during Fiscal 1998 as compared to Fiscal 1997 and consolidated revenues
increased by $6,488,032 from $8,079,519 to $14,567,551 during Fiscal 1997 as
compared to Fiscal 1996.
Project Segment
Revenues for the Company's Project Segment development activities for the Fiscal
Years 1998, 1997 and 1996 were $12,797,085, $9,638,394, and $4,046,089,
respectively, representing 75%, 66% and 50% of consolidated revenues.
During Fiscal 1998 the Company earned development fees of $1,250,000 and
$600,000 from the Syracuse project and Beaver Falls project, respectively, in
connection with conversions of the construction financing to permanent term
financing. The Company also earned $654,601 in management fees during Fiscal
1998 in connection with its projects. There were no reimbursements in excess of
development costs received by the Company during Fiscal 1998.
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.
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 1998 and
1997, 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 1996 the Company
had received significant development fees in Fiscal 1988, 1990, 1993, 1994 and
1995 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.
During Fiscal 1998 the Company recorded income from partnership of $10,058,849,
an increase of $2,151,456 over amounts recorded for Fiscal 1997. The increase
for Fiscal 1998 versus Fiscal 1997 is due primarily to income of $3,408,978
recorded on the Beaver Falls project, an increase of $2,402,969 as compared to
the income of $1,106,009 recorded on that project during Fiscal 1997. 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.
Consummation of the MRA may result in the receipt of substantial proceeds by the
project partnerships and, as a result, significant gains for the Company. Such
consummation would also result in the termination of the PPA's and, as a result,
termination of future periodic ownership distributions and future earnings to
the Company from the operations of the projects.
Product Segment
Revenues for the Company's Product Segment sales activities for the Fiscal Years
1998, 1997 and 1996 were $3,838,351, $4,474,925 and $3,900,754, respectively,
representing 23%, 31% and 48% of the consolidated revenues.
Sales for Fiscal 1998 decreased by $636,574 compared to Fiscal 1997 due
primarily to lower sales of solar thermal products of $552,485 and heat transfer
products of $283,887. The reduction in sales of both product lines is primarily
due to competitive pricing activity and to the Company's decision, which
resulted in lower sales levels primarily during the later portion of the year,
to discontinue both product lines effective March 31, 1998. The Company had
discontinued the non-agricultural portion of
<PAGE>
its heat transfer product line during the third quarter of Fiscal 1997, which
also contributed to lower sales of heat transfer products during Fiscal 1998.
These decreases were partially offset by increased sales of solar electric
products of $199,798, which was primarily due to increased sales in the product
fabrication and distribution business unit.
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 base. This increase was partially offset by lower
sales of solar thermal products of $172,093 and heat transfer products of
$247,572.
Included in Product Segment sales are international sales for Fiscal 1998, 1997
and 1996 of $299,293, $297,761 and $455,114, 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 $378,820, $295,922 and
$127,224, representing 2%, 2% and 2% of consolidated revenues for Fiscal Years
1998, 1997 and 1996, respectively. The increase in this category for Fiscal 1998
versus Fiscal 1997, and for Fiscal 1997 versus Fiscal 1996 is due primarily 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 increased by $41,186 in Fiscal 1998 to
$175,766 compared to $134,580 for Fiscal 1997. The increase is due primarily to
higher invested principal balances.
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.
Other Income
Other income for the Fiscal Years 1998, 1997 and 1996 was $0, $66,253 and
$49,451, respectively. The amount recorded in Fiscal 1997 reflects income of
$150,000 earned from the settlement of a complaint against a competitor. This
was partially offset by expenses incurred during that period 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 1998, 1997 and 1996 were 102%, 96% and 88%, respectively. The increase in
the cost of sales percentage is due primarily to lower sales volume of solar
thermal and heat transfer products as a result of the Company's decision to
discontinue those product lines 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 SG&A increased by $1,339,794, or 16%, in Fiscal 1998 as compared to
Fiscal 1997 and increased by $1,771,799, or 27%, in Fiscal 1997 as compared to
Fiscal 1996.
Project Segment
SG&A for the Company's Project Segment for the Fiscal Years 1998, 1997 and 1996
were $6,630,256, $5,890,250 and $4,303,177, respectively, representing 69%, 72%
and 67% of the consolidated totals.
During Fiscal 1998 SG&A increased by $740,006 compared to Fiscal 1997. The
primary reasons for the increase are the increase in the write-off of project
costs previously deferred of $519,293, the judgment of $126,750 paid in
connection with the Tecogen litigation (see Item 3. Legal Proceedings), the
write-down of property by $141,468 to its estimated net realizable value in
connection with the discontinuance of the Company's solar thermal and heat
transfer technology product lines, and increased Board of Directors compensation
and related expenses of $241,529. These increases were partially offset by a net
decrease in professional fees of $276,814, primarily the result of the reversal
of a reserve of $200,000 previously established for legal fees and other
expenses incurred in connection with the Federal Criminal Proceeding and a
reduction in legal expenses of $186,000, representing the agreed reimbursement
to the Company of legal fees paid on behalf of the Company's Chairman, Chief
Executive Officer and President, Michael F. Zinn. Partially offsetting these
decreases in legal fees was an increase in consulting fees of $114,746,
primarily the result of expenses incurred in connection with the solicitation of
participants for a possible business combination (see Recent Developments and
Subsequent Events).
During Fiscal 1997 SG&A 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 Federal Criminal Proceeding (see Item 3. Legal
Proceedings). Other legal fees increased by $82,142 during Fiscal 1997, due
primarily to the Lichtenberg shareholder 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.
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
SG&A for the Product Segment for Fiscal Years 1998, 1997 and 1996 were
$2,930,334, $2,330,546 and $2,145,820, respectively, representing 31%, 28% and
33% of the consolidated totals. The increase in Fiscal 1998 is due primarily to
increased compensation expense of $535,652 resulting from the addition of
several management positions, as well as increases in the sales and marketing
support staff of the Company's solar electric business. Increased solar electric
advertising and promotional expenses of $73,741 and increased reserch and
development spending of $50,365 during the year also contributed to higher SG&A
expenses. The increase
<PAGE>
in Fiscal 1997 is due primarily to an increase in research and development
expenses of $220,578.
Interest Expense
Interest expense for Fiscal 1998 increased by $156,580 to $513,765 compared to
Fiscal 1997. The increase is due primarily to interest expense of $115,585
incurred in connection with the Tecogen judgment and to higher interest payments
associated with increased borrowing under the Stewart & Stevenson, Inc. ("S&S")
loan agreement.
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 S&S loan and on the
mortgages on the Company's corporate headquarters.
Other Expense
Other expense increased during Fiscal 1998 to $2,513,548 from $0 for both Fiscal
1997 and 1996, due primarily to the Company's decision to reserve for the
possible uncollectibility of the combined loan of $2,500,000 to KBA and AGI (see
"Recent Developments" and "Note 4a. Notes Receivable").
Provision for Income Taxes
The provision for income taxes for Fiscal 1998 of $331,000 represents a decrease
of $185,000 when compared to Fiscal 1997. The provision for income taxes for
Fiscal 1997 of $516,000 represents an increase of $308,400 when compared to
Fiscal 1996. 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).
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 continues to develop
business opportunities internationally, it may become subject to risks of
inflation in the foreign countries in which it operates.
LIQUIDITY AND CAPITAL RESOURCES
During Fiscal 1998 the company's working capital increased by $201,633 from
$2,577,849 to $2,779,482. During Fiscal 1997 the Company's working capital
increased by $1,674,759 from $903,090 to $2,577,849.
Cash of $1,042,282 was provided by operating activities in Fiscal 1998. The net
income of $195,386 when adjusted for no cash revenue/expense items of $6,681,575
including income from partnerships of $10,058,849, and the reserve of $2,500,000
for the possible uncollectibility of the combined loans to KBA and AGI, and
resulted in a cash loss of $6,486,189. The major factor offsetting this cash
loss was distributions from partnerships of $7,533,43.
Cash of $150,992 was used by financing activities due to a net repayment of
borrowings of $139,016 and the purchase of the Company's common stock associated
with the repurchase of option shares.
The Company's investing activities used cash of $288,852 during Fiscal 1998 due
to the acquisition of property, plant and equipment.
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. As discussed above and in "Recent
Developments," due to the nature of the proposed settlement involving RG&E and
the Allegany project, the Company believes that its ability to recover all or
part of the financing provided to the Allegany project will be jeopardized and,
as a result, has reserved for the possible uncollectibility of the related
loans. (See Note 4a., Notes Receivable, and Note 7d. Long-Term Debt, of the
Notes to Consolidated Financial Statements).
The Company has no significant capital commitments for Fiscal 1999 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. As
previously discussed, consummation of the MRA may result in the receipt of
substantial proceeds by the project partnerships at the time of closing and
would also result in the termination of the PPA's and, as a result, termination
of future periodic ownership distributions to the Company from the operations of
the projects. Should the MRA not be consummated, certain events involving NIMO's
financial viability could occur which could impact its ability to continue
making payments pursuant to the PPA's. Any such interruption or termination of
payments to the project partnerships could hinder the Company's ability to
continue operating as a going concern.
Year 2000
Many existing computer systems and software applications use two digits, rather
than four, to record years, i.e., "98" instead of "1998." Unless modified, such
systems will not properly record or interpret years after 1999, which could lead
to business disruptions. This is known as the Year 2000 issue.
The Company relies on computer hardware, software and related technology
primarily in its internal operations, such as billing and accounting. During
Fiscal 1998 the Company formed a Year 2000 Management Committee to address the
potential financial and business consequences of Year 2000 and to direct the
implementation of appropriate solutions, including hardware and software
upgrades. The Company expects to complete such upgrade purchases during 1998
with testing to be done during 1999.
The Company is also communicating with its vendors, suppliers and customers to
both monitor and encourage their respective remedial efforts regarding the Year
2000 issue. Failure by vendors and suppliers to successfully address the issue
could result in delays in various products and services becoming available to
the Company. Failure by customers could disrupt their ability to maximize their
use of the Company's products and services. There can be no assurance that
failure of systems of third parties on which the Company's systems and
operations rely to be Year 2000 compliant will not have a material adverse
effect on the Company's business, operating results or financial condition.
Except for capital expenditures associated with computer hardware and software
upgrades which are planned for Fiscal 1999 and which may be partially Year
2000-related, the Company does not anticipate that the incremental expenses
related to the Year 2000
<PAGE>
issue for Fiscal 1999 will be significant. Such incremental expenses incurred
during Fiscal 1998 were not significant.
ITEM 7. FINANCIAL STATEMENTS
<PAGE>
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, 1998 and 1997 and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for the
years ended March 31, 1998, 1997 and 1996. 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, 1998 and 1997 and the results of their
operations and their cash flows for the years ended March 31, 1998, 1997 and
1996 in conformity with generally accepted accounting principles.
/s/ Citrin Cooperman & Company, LLP
CITRIN COOPERMAN & COMPANY, LLP
June 23, 1998
New York, New York
<PAGE>
BESICORP GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS 1998 1997
--------- ----------
Current Assets:
Cash and cash equivalents $ 812,971 $ 210,533
Short-term investments 1,056,778 1,012,814
Trade accounts receivable (less allowance for doubtful accounts of $23,000
in 1998 and $39,346 in 1997) 369,539 604,263
Due from affiliates 870,295 1,338,802
Current portion of long-term notes receivable:
Others (includes interest of $8,316 in 1998 and $11,201 in 1997) 102,053 97,016
Inventories 944,013 1,180,265
Deferred income taxes 93,600 362,600
Other current assets 485,052 316,601
--------- ----------
Total Current Assets 4,734,301 5,122,894
--------- ----------
Property, Plant and Equipment:
Land and improvements 237,159 279,910
Buildings and improvements 1,906,953 1,890,065
Machinery and equipment 1,226,115 961,335
Furniture and fixtures 246,701 195,941
Construction in progress 0 8,079
--------- ----------
3,616,928 3,335,330
Less: accumulated depreciation and amortization 1,769,212 1,398,576
--------- ----------
Net Property, Plant and Equipment 1,847,716 1,936,754
--------- ----------
Other Assets:
Patents and trademarks, less accumulated amortization of $1,691 in 1998 and
$651,526 in 1997 7,823 47,184
Long-term notes receivable:
Affiliate - net of allowance of $555,376 in 1998 and 0 in 1997 0 555,376
Others - net of allowance of $1,944,624 in 1998 and 0 in 1997 129,886 2,168,246
Due from affiliates 375,000 0
Deferred costs 1,316,693 1,480,728
Deferred income taxes 916,600 369,700
Other assets 116,977 155,917
--------- ----------
Total Other Assets 2,862,979 4,777,151
--------- ----------
TOTAL ASSETS $9,444,996 $11,836,799
--------- ----------
--------- ----------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
BESICORP GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY ---------- ----------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued expenses $ 1,403,504 $ 1,745,142
Current portion of long-term debt 111,367 115,598
Current portion of accrued reserve and warranty expense 152,891 215,733
Taxes other than income taxes 114,811 101,786
Income taxes payable 172,246 366,786
---------- ----------
Total Current Liabilities 1,954,819 2,545,045
Investment in Partnerships 33,870 2,559,282
Long-Term Accrued Reserve and Warranty Expense 152,402 165,950
Long-Term Debt 3,766,074 3,834,483
---------- ----------
Total Liabilities 5,907,165 9,104,760
---------- ----------
Shareholders' Equity:
Common stock, $.10 par value: authorized 5,000,000 shares; issued 3,234,958
shares in 1998 and 3,234,953 shares in 1997 323,495 323,495
Additional paid-in capital 5,492,072 4,925,524
Retained earnings (deficit) (615,259) (810,645)
---------- ----------
5,200,308 4,438,374
Less: treasury stock at cost (278,234 shares in 1998 and 300,298 shares in
1997) (1,662,477) (1,706,335)
---------- ----------
Total Shareholders' Equity 3,537,831 2,732,039
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,444,996 $11,836,799
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
BESICORP GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Product sales $ 3,838,351 $ 4,474,925 $ 3,900,754
Development and management fees 2,504,601 1,627,675 328,887
Other revenues 436,689 356,725 182,431
Income from partnerships 10,058,849 7,907,393 3,445,058
Interest and other investment income 175,766 134,580 172,938
Other income 0 66,253 49,451
---------- ---------- ----------
Total Revenues 17,014,256 14,567,551 8,079,519
---------- ---------- ----------
Costs and Expenses:
Cost of product sales 3,899,967 4,299,848 3,445,849
Selling, general and administrative expenses 9,560,590 8,220,796 6,448,997
Interest expense 513,765 357,185 455,392
Other expense 2,513,548 0 0
---------- ---------- ----------
Total Costs and Expenses 16,487,870 12,877,829 10,350,238
---------- ---------- ----------
Income (Loss) Before Income Taxes 526,386 1,689,722 (2,270,719)
Provision for Income Taxes 331,000 516,000 207,600
---------- ---------- ----------
Net Income (Loss) $ 195,386 $ 1,173,722 $(2,478,319)
---------- ---------- ----------
---------- ---------- ----------
Basic Earnings per Common Share $ .07 $ .40 $ (.84)
---------- ---------- ----------
---------- ---------- ----------
Basic Weighted Average Number of Shares Outstanding 2,948,787 2,916,439 2,938,144
---------- ---------- ----------
---------- ---------- ----------
Diluted Earnings per Common Share $ .06 $ .39 $ (.81)
---------- ---------- ----------
---------- ---------- ----------
Diluted Weighted Average Number of Shares Outstanding 3,009,761 3,009,595 3,044,308
---------- ---------- ----------
---------- ---------- ----------
Dividends per Common Share None None None
---------- ---------- ----------
---------- ---------- ----------
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, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $ 195,386 $ 1,173,722 $(2,478,319)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Deferred taxes including taxes allocated to capital 259,900 (431,800) 22,300
Amortization of discounts on notes (2,196) (2,196) (2,196)
Provision for uncollectibles 2,483,654 0 0
Realized and unrealized (gains)/losses 61,980 10,238 (14,653)
Depreciation and amortization 421,379 355,604 388,437
Partnership income recognized (10,058,849) (7,907,393) (3,445,058)
Distributions from partnerships 7,533,437 7,835,800 4,768,874
Stock based compensation 152,557 70,644 17,815
Changes in assets and liabilities:
Short-term investments (42,426) (251,755) 725,123
Accounts and notes receivable 435,472 (1,228,967) 289,041
Inventories 236,251 78,925 85,752
Accounts payable and accrued expenses (453,813) 441,128 (111,415)
Taxes payable/refundable (137,315) 207,071 97,603
Other assets and liabilities, net (43,135) (575,644) (155,229)
----------- ---------- ----------
Net Cash Provided (Used) By Operating Activities 1,042,282 (224,623) 188,075
----------- ---------- ----------
Financing Activities:
Increase in borrowings 247,000 500,000 41,440
Repayment of borrowings (386,015) (118,933) (117,456)
Purchase of common stock (140,077) 0 (637,509)
Issuance of common stock 128,100 26,300 172,669
----------- ---------- ----------
Net Cash Provided (Used) By Financing Activities (150,992) 407,367 (540,856)
----------- ---------- ----------
Investing Activities:
Investments in partnerships 0 (5,000) 0
Acquisition of property, plant and equipment (288,852) (57,790) (252,271)
----------- ---------- ----------
Net Cash Used By Investing Activities (288,852) (62,790) (252,271)
----------- ---------- ----------
Increase (Decrease) in Cash and Cash Equivalents 602,438 119,954 (605,052)
Cash and Cash Equivalents Beginning 210,533 90,579 695,631
----------- ---------- ----------
Cash and Cash Equivalents Ending $ 812,971 $ 210,533 $ 90,579
----------- ---------- ----------
----------- ---------- ----------
Supplemental Cash Flow Information:
Interest paid $ 510,809 $ 420,747 $ 387,143
Income taxes paid 220,571 777,429 11,022
Additions to property, plant, and equipment which were
financed and not included above $ 66,375 $ 0 $ 70,230
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, 1998, 1997 AND 1996
<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,
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
Shares purchased 5,936 (140,076) (140,076)
Shares issued for
fractional shares 5
Treasury Shares
issued for Incentive
Stock Options (55,834) (28,000) 183,934 128,100
Tax benefit on
compensatory stock
transactions 582,000 582,000
Compensatory non-
statutory stock
options 40,382 40,382
Net income for the
year 195,386 195,386
--------- ------- --------------- ---------- ------- ---------- ----------
Balance at March 31,
1998 3,234,958 $323,495 $ 5,492,072 $ (615,259) 278,234 $(1,662,477) $ 3,537,831
--------- ------- --------------- ---------- ------- ---------- ----------
--------- ------- --------------- ---------- ------- ---------- ----------
</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 photovoltaic 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.
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 ($9,029 at March 31, 1998 and $651,306 at March 31, 1997) are
capitalized and amortized on a straight-line basis over the remaining useful
life of the patent of up to 17 years. Trademark costs ($485 at March 31, 1998
and $47,405 at March 31, 1997) are capitalized and amortized on a straight-line
basis over the estimated useful life of 35 years. During the year ended March
31, 1998 $690,467 of patent and trademark costs were written off upon the
discontinuance of the related product lines.
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.
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, 1998 and 1997 was $475,057 and
$491,625, respectively.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basic/Diluted Earnings per Common Share
<PAGE>
Effective December 15, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per Share. The
Statement requires companies with a complex capital structure to report both
Basic Earnings per share and Diluted Earnings per Share. Diluted Earnings per
Share considers the effect of potential common shares such as stock options and
warrants. The reporting requirements of SFAS No. 128 are reflected on the face
of the Consolidated Statement of Operations. For the twelve months ended March
31, 1998, Diluted Earnings per Share was $.06 compared to a Basic Earnings per
Share of $.07, a dilution of $.01 per share. For the twelve months ended March
31, 1997, Diluted Earnings per Share was $.39 as compared to Basic Earnings per
Share of $.40, a dilution of $.01 per share. For the twelve months ended March
31, 1996, Diluted Earnings per Share was ($.81) as compared to Basic Earnings
per Share of ($.84), a dilution of $.03 per share. The dilution in the
twelve-month periods ended March 31, 1998, 1997 and 1996 is due to the net
incremental effect of incentive stock options and warrants of 60,974, 93,156 and
106,164 shares, 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 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.)
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 Securi-
<PAGE>
ties," 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, 1998 and March 31, 1997
were $6,360 and $5,735, 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, 1998, one
customer accounted for approximately 14% of product sales. 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 year ended March
31, 1996.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------- -----------
<S> <C> <C>
Assembly parts $298,239 $479,689
Finished goods 645,774 700,576
--------- -----------
$944,013 $1,180,265
--------- -----------
--------- -----------
</TABLE>
NOTE 3 - DEFERRED COSTS
Deferred and reimbursable costs at March 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Internal Costs
--------------------
Third Party
Payroll Expenses Costs Total
--------- --------- ------------ ----------
<S> <C> <C> <C> <C>
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
Additions 259,335 34,706 388,238 682,279
Expensed (634,631) (85,142) (64,335) (784,108)
Reimbursements (58,825) -- (3,381) (62,206)
--------- --------- ------------ ----------
Balance March 31, 1998 $483,550 $217,511 $615,632 $1,316,693
--------- --------- ------------ ----------
--------- --------- ------------ ----------
</TABLE>
NOTE 4 - NOTES RECEIVABLE
<PAGE>
Long-term notes receivable consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Due from affiliate (net of allowance of $555,376 $0 $555,376
in 1998 and 0 in 1997 (a) --------- ----------
--------- ----------
Due from others:
- - - Greenhouse (net of allowance of $1,944,624 in $0 $1,944,624
1998 and 0 in 1997 (a)
- - - 9% notes receivable due from limited
partnerships, receivable in annual installments
through December, 2001 (b) 223,623 309,437
Less current portion - net of interest (93,737) (85,815)
--------- ----------
TOTAL $129,886 $2,168,246
--------- ----------
--------- ----------
</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
Allegany Greenhouse, Inc. ("AGI"), 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 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, 1998 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 was $555,376 at March 31, 1998. The Company decided, due to
the ongoing litigation described below, not to record interest income from the
partnership for the years ended March 31, 1998, March 31, 1997 and March 31,
1996, and, to fully reserve in Fiscal 1998 for the possible uncollectibility of
the loans.
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. In addition, the partnership is
involved in litigation with the primary purchaser of electricity generated by
the partnership's facility, Rochester Gas & Electric Corp. ("RG&E") (See Notes 5
and 13). On February 6, 1998, RG&E announced an agreement in principle to settle
the aforementioned litigation between the parties of the project stating that
the plan was contingent upon reaching final agreements between RG&E and the
project lender, as well as other interested parties. On June 8, 1998 RG&E
announced that the proposed settlement had been filed with the New York State
Public Service Commission ("PSC"), and set forth terms of the proposed
settlement. The Company does not believe the proceeds of the proposed settlement
are likely to exceed the claims of the secured and unsecured creditors of the
partnership. As discussed above, the Company funded combined loans of $2.5
million to the project and AGI. The Company's ability to recover this investment
will be jeopardized by this settlement, and, as a result, the Company has
established reserves to cover losses that may result from the possible
uncollectibility
NOTE 4 - NOTES RECEIVABLE (CONTINUED)
of the loans. The proposed settlement must be approved by both the PSC and the
Bankruptcy Court, as the project partnership has been operating under Chapter 11
of the United States Bankruptcy Code since November
<PAGE>
13, 1995. Besicorp is consulting with legal counsel concerning the proposed
settlement agreement and related bankruptcy court filings. (See Item 3. Legal
Proceedings and Item 6. MD&A, Recent Developments and Subsequent Events.)
(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, 1998, five
facilities were being operated. Monitoring and administrative fees earned by the
Company from the partnerships were $654,601 for the year ended March 31, 1998,
$377,675 for the year ended March 31, 1997 and $328,887 for the year ended March
31, 1996.
Development fees of $1,850,000 were earned from two projects during Fiscal 1998
and development fees of $1,250,000 were earned from one project during Fiscal
1997. There was no income recognized from the excess of reimbursements over
related deferred costs during Fiscal 1998 or Fiscal 1997. There were no
development fees earned or income recognized from excess reimbursements during
Fiscal 1996.
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 cumulative losses. At March 31, 1998, unrecognized accumulated
partnership losses were $3,110,466.
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.
The investment in partnerships was comprised of the following at March 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Capital contributions and investments $2,976,813 $2,976,813
Partnership distributions (28,151,213) (20,617,776)
Recognized share of income (losses) 25,140,530 15,081,681
----------- -----------
$(33,870) $(2,559,282)
----------- -----------
----------- -----------
</TABLE>
NOTE 5 - INVESTMENTS IN PARTNERSHIPS (CONTINUED)
The financial position and results of operations for the partnerships, based on
the audited financial statements, as
<PAGE>
at December 31, 1997 and 1996 and for the years then ended were as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
TOTAL PARTNERSHIPS:
Assets $520,329,768 $535,270,470
Plant and equipment 391,492,464 400,616,762
Secured debt 508,289,568 516,799,694
Partners' equity (deficit) (17,572,222) (22,332,572)
Revenues 149,469,661 150,595,750
Income (loss) 20,238,179 15,701,763
COMPANY'S SHARE:
Partners' equity (deficit) (7,354,035) (9,789,803)
Income 10,113,516 8,393,340
</TABLE>
The income (loss) from partnerships, which has been recorded on the consolidated
financial statements in Fiscal 1998 in the amount of $10,058,849 has been
recognized on projects where income has exceeded prior unrecognized accumulated
losses, but not one partnership where current income of $47,891 does not exceed
prior unrecognized accumulated losses.
Cash flows and equity interests in several of the projects have been pledged to
secure debt agreements.
The amounts pertaining to one partnership, which is involved in extensive
litigation, were excluded from the partnerships' financial position and results
of operations presented above (see Notes 4 and 13).
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. 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 offered to terminate 44 PPA's with 19 independent power
producers ("IPP's"), including the five contracts held by the Company's
partnerships. 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 September 25, 1997 NIMO announced that it
had reached an agreement with the staff of the New York Department of Public
Service on a rate and restructuring plan (including recommended approval of the
MRA). After a series of hearings and testimony by interested parties, on
December 29, 1997 the assigned administrative law judge recommended approval of
the rate and restructuring plan with some modifications. On February 24, 1998
the PSC approved the MRA, and, on March 20, 1998, it issued an Opinion and Order
Adopting Terms of Settlement Subject to Modifications and Conditions which NIMO
accepted on April 2, 1998. On May 8, 1998 NIMO announced that third party
NOTE 5 - INVESTMENTS IN PARTNERSHIPS (CONTINUED)
<PAGE>
conditions had been satisfied or waived by 14 IPP's holding 27 PPA's, including
the five PPA's held by the Company and on May 14, 1998 NIMO's Board of Directors
approved the MRA. The closing date of the MRA is projected to be June 30, 1998
but remains subject to approval by NIMO's common stockholders of both the
increase in the number of authorized shares of common stock and the issuance of
common stock to the IPP's pursuant to the MRA.
The consummation of the MRA may result in the receipt of substantial proceeds by
the project partnerships, and, as a result, significant gains for the Company.
Such consummation would also result in the termination of the PPA's and, as a
result, termination of future periodic ownership distributions and future
earnings to the Company from the operations of the projects. However, should the
MRA not be consummated, the PPA's will remain in place, but certain events
involving NIMO's financial viability could occur which could impact its ability
to continue making payments pursuant to the PPA's. Any such interruption or
termination of payments to the project partnerships could hinder the Company's
ability to continue operating as a going concern.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as at March 31, 1998 and 1997 were
comprised of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Trade accounts payable $465,592 $301,752
Accrued interest expense 39,421 38,970
Accrued legal fees 308,281 349,826
Accrued salaries 303,216 593,115
Due to affiliate 56,624 56,624
Deposits and other payables 230,370 404,855
---------- ----------
$1,403,504 $1,745,142
---------- ----------
---------- ----------
</TABLE>
NOTE 7 - LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following: 1998 1997
---------- ----------
<S> <C> <C>
- - - Installment loans at 0% to 10.54% maturing through
September 2000 (a) $75,639 $76,376
- - - Mortgage loan payable in monthly installments of
$1,060 plus interest at prime plus 1.5% to March
1998 and prime plus .5% thereafter through March
2001 (b,c) 50,680 63,400
- - - 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) 315,455 331,739
- - - 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) 288,646 311,667
- - - Obligation on SunWize asset acquisition (e) 147,021 166,899
- - - Working capital loan (d) 3,000,000 3,000,000
---------- ----------
Total 3,877,441 3,950,081
Less: Current maturities 111,367 115,598
---------- ----------
$3,766,074 $3,834,483
---------- ----------
---------- ----------
</TABLE>
<PAGE>
Long-term debt maturities at March 31, 1998, including current maturities, are
as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $111,367
2000 101,180
2001 89,977
2002 285,666
2003 49,252
Thereafter 3,239,999
-----------
$3,877,441
-----------
-----------
</TABLE>
a. Collateral for the installment loans consists of automobiles, machinery and
equipment, computer equipment and furniture and fixtures with a net book value
of $60,468 and $119,599 at March 31, 1998 and 1997, respectively.
b. Collateralized by mortgages on land and/or buildings owned by the Company
with a net book value of $1,153,622 and $1,340,932 at March 31, 1998 and 1997,
respectively.
c. As a part of his guarantees of the Company's debts of $339,326 and $375,067
at March 31, 1998 and 1997, 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. If the MRA with NIMO is
consummated, it is expected that this loan will be repaid in full.
e. Obligation payable on the acquisition of SunWize assets, payable as a
percentage of future gross margins of the SunWize division (see Note 14).
$19,878 was paid in 1998. $6,381 was paid in 1997.
f. Represents modification and extension agreement which was signed in April
1997, renewing the mortgage for an additional ten years.
g. Represents five-year renewal, signed in March 1997, of original mortgage
taken in conjunction with the renovation of the Company's corporate headquarters
in 1991.
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.
<PAGE>
The provision (credit) for taxes is comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
State:
Current $24,300 $23,000 $20,033
Deferred (62,300) 20,000 (56,100)
---------- ---------- ----------
(38,000) 43,000 (36,067)
---------- ---------- ----------
Federal:
Current 46,800 924,800 165,267
Deferred 322,200 (451,800) 78,400
---------- ---------- ----------
369,000 473,000 243,667
---------- ---------- ----------
TOTAL $331,000 $516,000 $207,600
---------- ---------- ----------
---------- ---------- ----------
</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 became 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 was 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:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------------- ----------
<S> <C> <C> <C>
Tax book depreciation difference $35,200 $(500) $(500)
Equipment differences 172,200 115,600 115,600
Accrued compensation 67,400 123,500 0
Bad debt allowance 1,009,200 15,700 10,200
Inventory differences 7,600 66,800 48,200
Unrealized loss (gain) on investments 2,500 2,300 2,600
Warranties and reserves 122,100 152,700 114,700
Timing difference on other expenses 9,600 89,600 28,000
Timing difference in recognition of
partnership income 406,100 985,100 499,400
Accrued vacation 13,100 16,300 16,600
Net operating loss carryforwards and credits 0 0 130,400
---------- ------------- ----------
1,845,000 1,567,100 965,200
Valuation allowance (834,800) (834,800) (965,200)
---------- ------------- ----------
Total $1,010,200 $732,300 $0
---------- ------------- ----------
---------- ------------- ----------
</TABLE>
NOTE 8 - INCOME TAXES (CONTINUED)
The difference between the effective rate of the provision (credit) for income
taxes and the statutory rate for Fed-
<PAGE>
eral income taxes is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% (34.0)%
State income taxes 3.0 .9 .6
Allocation of tax benefit to additional paid-
in capital 110.5 15.2 9.0
Increase (decrease) in valuation allowance 0 (7.7) 32.9
Tax assessments 0 0 6.9
Permanent differences (104.9) (14.1) (10.4)
Other 20.3 2.2 4.1
---------- ---------- ----------
Total 62.9% 30.5% 9.1%
---------- ---------- ----------
---------- ---------- ----------
</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 $582,000, $256,800 and $203,300 for the years
ended March 31, 1998, 1997 and 1996, respectively, have been credited to
additional paid-in capital.
Permanent differences result mainly from non-taxable interest and non-deductible
goodwill amortization, meals and officers' life insurance.
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 $3,110,466 had been incurred at March 31, 1998 for
financial statement purposes and approximately $8,782,000 for tax purposes.
NOTE 9 - COMMON STOCK
A. As of March 31, 1998 warrants to purchase 30,000 shares of common stock were
outstanding. Of this amount, 25,000 warrants were exercisable at any time before
the expiration date of November 6, 2000 at an exercise price of $1.875 per
share.
The balance of 5,000 warrants to purchase shares of common stock were issued
during Fiscal 1998. These warrants are exercisable at any time from March 31,
1998 until expiration on March 31, 2002 at an exercise price of $19.50 per
share.
B. The following are options outstanding at March 31, 1998, 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.
NOTE 9 - COMMON STOCK (CONTINUED)
<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
------------------
TOTAL STOCK OPTIONS 9,500
------------------
------------------
</TABLE>
<PAGE>
C. During Fiscal 1998, 1997 and 1996, 28,000, 2,800 and 6,450 options were
exercised for $128,100, $7,550, and $20,731, respectively, under the above plan.
The 28,000 options exercised during Fiscal 1998 were exercised from treasury
shares and paid by the return of 4,436 shares which were added to the treasury.
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 shares
purchased during Fiscal 1996, 1,200 were issued from treasury shares and
subsequently repurchased by the Company. At March 31, 1998, options to purchase
9,500 shares were exercisable, of which options to purchase 7,000 shares were
exercised in April 1998.
D. In August 1992 the Company entered into restricted stock agreements with
certain employees to provide incentives 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.
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.
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. During Fiscal 1998 the Company bought back 1,500
shares at a total cost of $11,976 inclusive of interest.
NOTE 9 - COMMON STOCK (CONTINUED)
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 1998
and 1997 options for 36,000 and 2,000 shares were canceled, respectively, and as
of March 31, 1998, 23,500 options were outstanding.
In March 1998 the Company granted restricted stock options to independent
directors under the 1993 Plan to purchase 7,500 shares of the Company's common
stock at $.10 per share. The options are exercisable at any time
<PAGE>
before the expiration date of December 31, 1998. Options to purchase 5,000
shares were exercised in April 1998.
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. The per share fair values of the warrants and options granted during the year
ended March 31, 1998 and March 31, 1996 on the date of grant, using the Black
Scholes option-pricing model and the assumptions used are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1996
- - ----------------------------------------------------------------
Expected dividend yield 0% 0%
- - ----------------------------------------------------------------
Risk-free interest rate 5.3% and 5.5% 6% and 7%
- - ----------------------------------------------------------------
Per share value $24.90 and $7.21 $6.55 and $10.11
- - ----------------------------------------------------------------
Expected stock volatility 63.4% and 60.1% 62.5%
- - ----------------------------------------------------------------
Expected option life 1 and 2 years 5 and 10 years
- - ----------------------------------------------------------------
</TABLE>
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 $112,175 for the
year ended March 31, 1998, $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 $69,839, $1,146,806 and $(2,482,314) for the years ended March 31, 1998, 1997
and 1996, respectively, and there would have been no change in the per-share
amounts in 1996, a reduction of $.01 in 1997 and a reduction of $.04 in 1998.
Pro forma net income reflects only options granted during the years ended March
31, 1998 and 1996. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is reflected over the
options' vesting periods, 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, 1998 there were no shares issued and outstanding.
NOTE 11 - RELATED PARTIES
Amounts due from affiliates at March 31, 1998 and 1997 relate principally to
receivables from the project partnerships for development and management fees of
$1,197,633 and $1,301,797, respectively. Also included is $47,662 in 1998 and
$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 $31,939, $90,621 and $64,828 for the years ended March 31,
1998, 1997 and 1996, respectively.
Included in other current assets at March 31, 1998 is a receivable of $164,211
from the President of the Company
<PAGE>
representing primarily the balance due on $186,000 of legal fees which the
President has agreed to reimburse to the Company.
NOTE 12 - SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Year Ended
-------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Advertising costs $142,154 $68,413 $76,972
Research and development expenses(1) 697,182 646,817 426,239
Warranty expense 53,701 295,333 176,117
Amortization of patents and trademarks 40,632 16,845 23,630
Maintenance and repairs 85,823 73,169 71,684
Taxes other than payroll and income taxes 622,663 666,249 620,175
</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 $697,182, in Fiscal 1998, $646,817 in
Fiscal 1997 and $426,239 in Fiscal 1996. Personnel expenses, comprising the
largest portion of these amounts, were $330,428 in Fiscal 1998, $301,055 in
Fiscal 1997 and $324,662 in Fiscal 1996. Of the total amounts, expenses
attributable to the Company's agreements with the New York State Energy Research
and Development Authority were $520,950 in Fiscal 1998, $414,307 in Fiscal 1997
and $229,658 in Fiscal 1996.
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
were fined approximately $36,000 and Mr. Zinn was sentenced to a six-month term
of incarceration, which was completed on May 8, 1998. 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. During Fiscal 1998 the court ruled that the Company was
liable to Tecogen, Inc. for final payment of the purchase price, and the Company
paid a judgment in the net amount of $126,750 plus interest of $115,585.
NOTE 13 - LEGAL PROCEEDINGS (CONTINUED)
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. In a decision issued December 19, 1997, the Court
granted the Company's motion for summary judgment based upon the recommendation
of the SLC, and dismissed the derivative action in all respects. The plaintiff
has filed a notice of appeal. Management is of the opin-
<PAGE>
ion 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.
The Company, through partnership 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.
Proposed settlements are now pending on these matters, as discussed in Notes 4
and 5.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
At March 31, 1998, 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 $575 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, 1998, 1997 and 1996 was $155,197, $173,903
and $177,161, respectively.
Since March 1994 the Company has been entering into cost-sharing agreements with
the New York State Energy Research and Development Authority ("NYSERDA") with
completion dates extending through April 2001. The agreements provide for
payment to the Company by NYSERDA of $1,442,237 (approximately $800,000 has been
earned through March 31, 1998) for funding and development of photovoltaic
projects with estimated costs of $2,963,235. Funds advanced by NYSERDA are to be
repaid from revenues on sales of products developed under the agreements, if
any.
The Company has a 401(k) plan covering substantially all full-time employees for
which the Company makes matching contributions as defined. The Company's
expenses under the plan for the years ended March 31, 1998, 1997, and 1996 were
$72,692, $51,688 and $36,176, respectively.
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company had 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 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 was 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 $68,691 were made in 1996,
$7,500 in 1997, and the final payment of $3,750 was made in 1998. The balance of
$1,875 was forfeited in Fiscal 1998.
NOTE 15 - 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. 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
<PAGE>
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 16 - 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, 1998, 1997 and 1996 were
$299,293, $297,761 and $455,114, respectively. A summary of industry segment
information for the years ended March 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 Project Segment Product Segment Eliminations Total
- - --------------------------------------------- --------------- ------------ -----------
<S> <C> <C> <C> <C>
Net revenues $12,797,085 $4,217,171 $ $17,014,256
Net income (loss) 2,846,475 (2,651,089) 195,386
Identifiable assets 42,199,945 2,166,286 (34,921,235) 9,444,996
Capital expenditures 63,778 291,449 355,227
Depreciation and amortization 312,555 108,824 421,379
</TABLE>
<TABLE>
<CAPTION>
1997
- - ------------------------------
<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 (loss) (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>
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
23, 1998 (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 Besicorp Group Inc. Incentive Stock Option Plan (filed March 16, 1984 on the Company's
Form S-8 and incorporated herein by reference).
10-B Besicorp Group Inc. Amended and Restated 1993 Incentive Plan.
10-C Form of Stock Agreement for stock bonus award in lieu of cash bonus (filed as an
Exhibit to the Company's Form 10-KSB for the year ended March 31, 1997, incorporated
herein by reference).
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, 1997 and 1996.
99-B* Audited financial statements of Kamine/Besicorp South Glens Falls L.P. for the years
ended December 31, 1997 and 1996.
99-C Audited financial statements of Kamine/Besicorp GlenCarthage Partnership for the years
ended December 31, 1997 and 1996.
99-D* Audited financial statements of Kamine/Besicorp Natural Dam L.P. for the years ended
December 31, 1997 and 1996.
99-E* Audited financial statements of Kamine/Besicorp Syracuse L.P. for the years ended
December 31, 1997 and 1996.
99-F* Audited financial statements of Kamine/Besicorp Beaver Falls L.P. for the years ended
December 31, 1997 and 1996.
</TABLE>
(b.) There were no reports filed on Form 8-K for the quarter ended March 31,
1998.
<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>
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: June 26, 1998
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 June 26, 1998
Michael F. Zinn (principal executive officer)
/s/ Michael J. Daley Director, Executive Vice President, June 26, 1998
Michael J. Daley Chief Financial Officer (principal
financial officer)
/s/ Gerald A. Habib Director June 26, 1998
Gerald A. Habib
/s/ Melanie Norden Director June 26, 1998
Melanie Norden
/s/ Richard E. Rosen Director June 26, 1998
Richard E. Rosen
/s/ James E. Curtin Vice President, Controller June 26, 1998
James E. Curtin (principal 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.
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 Besicorp Group Inc. Incentive Stock Option Plan (filed March 16, 1984 on the --
Company's Form S-8 and incorporated herein by reference).
10-B Besicorp Group Inc. Amended and Restated 1993 Incentive Plan. 57
10-C Form of Stock Agreement for stock bonus award in lieu of cash bonus (filed as an --
Exhibit to the Company's Form 10-KSB for the year ended March 31, 1997, incorporated
herein by reference).
21 Subsidiaries of the Company. 70
23-B Consent of Citrin Cooperman & Company, LLP. 72
27 Financial Data Schedule. 73
99-A* Audited financial statements of Kamine/Besicorp Carthage L.P. for the years ended 74
December 31, 1997 and 1996.
99-B* Audited financial statements of Kamine/Besicorp South Glens Falls L.P. for the years 90
ended December 31, 1997 and 1996.
99-C Audited financial statements of Kamine/Besicorp GlenCarthage Partnership for the 106
years ended December 31, 1997 and 1996.
99-D* Audited financial statements of Kamine/Besicorp Natural Dam L.P. for the years ended 116
December 31, 1997 and 1996.
99-E* Audited financial statements of Kamine/Besicorp Syracuse L.P. for the years ended 131
December 31, 1997 and 1996.
99-F* Audited financial statements of Kamine/Besicorp Beaver Falls L.P. for the years 147
ended December 31, 1997 and 1996.
</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-B
BESICORP GROUP INC.
AMENDED AND RESTATED 1993 INCENTIVE PLAN
ARTICLE 1
GENERAL
1.1 PURPOSE
Besicorp Group Inc., a New York corporation (the "Corporation"), hereby adopts
this amendment and restatement of its 1993 Incentive Plan. As so amended and
restated, this plan shall be known as the BESICORP GROUP INC. AMENDED AND
RESTATED 1993 INCENTIVE PLAN (the "Plan"). The Corporation and its Subsidiaries
are severally and collectively referred to hereinafter as the "Company." The
purpose of this Plan is to foster and promote the long-term financial success of
thc Company by: (a) strengthening the Company's capability to develop, maintain
and direct an outstanding management team; and (b) motivating performance by
means of long-term performance related incentives.
1.2 ADMINISTRATION:
(a) This Plan shall be administered by a committee of the Board of Directors of
the Corporation designated by the Board (the "Committee"), which shall consist
of at least two members. Each member shall be a "disinterested person," as such
term is defined by Rule 16b-3 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act") or any similar rule which may subsequently
be in effect ("Rule 16b-3"). The members shall be appointed and subject to
removal by the Board of Directors, and any vacancy on the Committee shall be
filled by the Board.
(b) Subject to the limitations of this Plan, the Committee shall have the sole
and complete authority: (i) to select from the officers, directors and regular,
full-time employees of the Company and consultants to the Company, those who
will participate in this Plan (a "Participant" or "Participants"), (ii) to make
awards in such forms and amounts as it shall determine, (iii) to impose such
limitations, restrictions and conditions upon such awards as it shall deem
appropriate, (iv) to interpret this Plan and to adopt, amend and rescind
administrative guidelines and other rules and regulations relating to this Plan,
(v) to correct any defect or omission or to reconcile any inconsistency in this
Plan or in any award granted hereunder and (vi) to make all other determinations
and to take all other actions necessary or advisable for the implementation and
administration of this Plan. The Committee's determinations on matters within
its authority shall be conclusive and binding upon the Company and all other
persons.
(c) All expenses associated with this Plan shall be borne by the Corporation,
subject to such allocation to its Subsidiaries and operating units as it deems
appropriate.
(d) The Committee may, to the extent that any such action will not prevent the
Plan from complying with Rule 16b-3, delegate any of its authority hereunder to
such persons as it deems appropriate.
1.3 SELECTION FOR PARTICIPATION:
Persons shall be selected by the Committee to participate in this Plan based on
whether they occupy responsible managerial or professional positions or provide
important services and have the capacity to contribute to the success of the
Company. In making this selection and in determining the form and amount of
awards, the Committee may give consideration to the functions and
responsibilities of the person, his past, present and potential contributions to
the Company's profitability and sound growth, the value of his services to the
Company and other factors deemed relevant by the Committee. Grants may be made
to the same individual on more than one occasion.
<PAGE>
1.4 TYPES OF AWARDS UNDER PLAN:
Awards under this Plan may be in the form of any one or more of the following:
(a) Statutory stock options ("ISOs", which term shall be deemed to include
Incentive Stock Options as defined in Section 2.5 and any future type of
tax-qualified option which may subsequently be authorized), Non-statutory Stock
Options ("NSOs" and, collectively with ISOs, "Options"), Stock Appreciation
Rights ("SARs") and Dividend Payment Rights, as described in Article II and, (b)
Options to Purchase Restricted Stock, as described in Article III (collectively,
"Awards").
1.5 SHARES SUBJECT TO PLAN:
Shares of stock covered by Awards under this Plan may be in whole or in part
authorized and unissued or treasury shares of the Corporation's common stock,
$.10 par value per share, or such other shares as may be substituted pursuant to
Section 4.2 ("Common Stock"). The maximum number of shares of Common Stock which
may be issued for all purposes under this Plan shall be one million (1,000,000)
(subject to adjustment pursuant to Section 4.2). Any shares of Common Stock
subject to an Option which for any reason is cancelled (excluding shares subject
to an Option cancelled upon the exercise of a related SAR to the extent shares
are issued upon exercise of such SAR) or terminated without having been
exercised, or any shares of Restricted Stock which are forfeited, shall again be
available for Awards under this Plan. No fractional shares shall be issued, and
the Committee shall determine the manner in which fractional share value shall
be treated.
1.6 GENDER AND NUMBER:
Except when otherwise indicated by the context, words in the masculine gender
when used in this Plan shall include the feminine gender, the singular shall
include the plural, and the plural shall include the singular.
ARTICLE II
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
2.1 AWARD OF STOCK OPTIONS:
The Committee may, from time to time, subject to the provisions of this Plan and
such other terms and conditions as the Committee may prescribe, award to any
Participant ISOs and NSOs to purchase Common Stock or to purchase Restricted
Stock.
2.2 STOCK OPTION AGREEMENTS:
The award of an Option shall be evidenced by a signed written agreement (a
"Stock Option Agreement") containing such terms and conditions as the Committee
may from time to time determine.
2.3 OPTION PRICE:
The purchase price of Common Stock under each Option (the "Option Price") shall
be: (a) for ISOs, not less than the Fair Market Value of the Common Stock on the
date the Option is awarded, and (b) for all other Options, not less than the par
value of the Common Stock on the date the Option is awarded or may be exercised.
2.4 EXERCISE OF OPTIONS:
(a) Options awarded under this Plan shall be exercisable at such times and be
subject to such restrictions and conditions as the Committee shall approve,
either at the time of grant of such Options or pursuant to a general
determination, and which need not be the same for all Participants. Each Option
which is intended to qualify as an ISO pursuant to Section 422 of the Internal
Revenue Code of 1986, as it may be amended from time to time (the "Code"), and
each Option which is intended to qualify as another type of tax-qualified option
which may subsequently be authorized by law, shall comply with the applicable
provisions of the Code pertaining to such Options.
<PAGE>
(b) The Committee shall establish procedures governing the exercise of Options
and shall require that written notice of exercise be given and, except as
provided in the next sentence, that the Option Price be paid in full in cash
(including check, bank draft or money order) at the time of exercise. The
Committee may permit a Participant, in lieu of part or all of the cash payment,
to make payment in Common Stock already owned by him, valued at Fair Market
Value on the date of exercise, as partial or full payment of the Option Price;
provided, however, that the Committee may, in any instance, in order to prevent
any possible violation of law, require the Option Price to be paid in cash. As
soon as practicable after receipt of each notice and full payment, the Company
shall deliver to the Participant a certificate or certificates representing the
acquired shares of Common Stock (except as provided in Section 3.1 with respect
to Restricted Stock). The exercise of an Option shall cancel any related SAR to
the extent of the number of shares as to which the Option is exercised.
2.5 LIMITATIONS ON ISOs:
Notwithstanding anything in this Plan to the contrary, to the extent required
from time to time by the Code, the following additional provisions shall apply
to the grant of Options which are intended to qualify as ISOs (as such term is
defined in Section 422 of the Code):
(a) The aggregate Fair Market Value (determined as of the date the Option is
granted) of the shares of Common Stock with respect to which ISOs are
exercisable for the first time by any Participant during any calendar year
(under all plans of the Company) shall not exceed $100,000 or such other amount
as may subsequently be specified by the Code; provided that, to the extent that
such limitation is exceeded, any excess Options (as determined under the Code)
shall be deemed to be NSOs.
(b) Any ISO authorized under this Plan shall contain such other provisions as
the Committee shall deem advisable, but shall in all events be consistent with
and contain or be deemed to contain all provisions required in order to qualify
the Options as ISOs.
(c) All ISOs must be granted within ten years from the earlier of the date on
which this Plan was adopted by the Board of Directors or the date this Plan was
approved by the shareholders.
(d) Unless sooner exercised, terminated or cancelled, all ISOs shall expire no
later than ten years after the date of grant.
2.6 TERMINATION OF EMPLOYMENT:
In the event a Participant who is an employee at the time of an Award ceases to
be an employee upon his death, retirement or disability, or otherwise in the
discretion of the Committee, each of his outstanding Options shall be
exercisable by the Participant (or his legal representative or designated
beneficiary), to the extent that such Option was then exercisable, at any time
prior to an expiration date established by the Committee in its discretion
(which may be the original expiration date of such Option or such earlier time
as the Committee may establish), but in no event after its respective expiration
date; provided that NSOs may be exercised up to one year after the death of a
Participant even if this is beyond their expiration date. Except as provided
above in this Section 2.6, if the Participant ceases to be an employee for any
reason, all of the Participant's then outstanding Options shall terminate
immediately. The Committee may establish terms regarding the extension of
exercisability of Options awarded to a consultant in the applicable Option
Agreement.
2.7 AWARD OF STOCK APPRECIATION RIGHTS:
(a) General. A SAR is a right to receive, without payment (except for applicable
withholding taxes) to the Company, a number of shares of Common Stock, cash, or
a combination thereof, the amount of which is determined pursuant to the formula
set forth in Section 2.7(e). A SAR may be granted (i) with respect to any Option
granted under this Plan, either concurrently with the grant of such Option, or
at such later time as determined by the Committee (as to all or any portion of
the shares of Common Stock subject to the Option), (ii) with respect to any
<PAGE>
stock option currently outstanding under other incentive plans of the
Corporation (as to all or any portion of the shares subject to the stock option)
on terms established by the Committee, or (iii) alone, without reference to any
related stock option. Each SAR granted by the Committee under this Plan shall be
subject to the terms and conditions of this Section 2.7.
(b) Number. Each SAR granted to any Participant shall relate to such number of
shares of Common Stock as shall be determined by the Committee, subject to
adjustment as provided in Section 4.2. In the case of a SAR granted with respect
to a stock option, the number of shares of Common Stock to which the SAR
pertains shall be reduced in the same proportion that the holder of the option
exercises the related stock option.
(c) Duration. The term of each SAR shall be determined by the Committee. Unless
otherwise provided by the Committee, each SAR shall become exercisable at such
time or times, to such extent and upon such conditions as the stock option, if
any, to which it relates is exercisable. The Committee may, in its discretion,
accelerate the execisability of any SAR.
(d) Exercise. A SAR may be exercised, in whole or in part, by giving written
notice to the Company, specifying the number of SARs which the holder wishes to
exercise. Upon receipt of such written notice, the Company shall, within 90 days
thereafter, deliver to the exercising holder a certificate for the shares of
Common Stock or cash or a combination thereof, as determined by the Committee,
to which the holder is entitled.
(e) Payment. Subject to the right of the Committee to deliver cash in lieu of
shares of Common Stock, the number of shares of Common Stock which shall be
issuable upon the exercise of a SAR shall be determined by dividing:
(i) the number of shares of Common Stock as to which the SAR is exercised
multiplied by the amount of the appreciation in such shares (for this purpose,
the "appreciation" shall be the amount by which the Fair Market Value of the
shares of Common Stock subject to the SAR on the exercise date exceeds (A) in
the case of a SAR related to a stock option, the purchase price of the shares
of Common Stock under the stock option or (B) in the case of a SAR granted
alone, without reference to a related stock option, an amount which shall be
determined by the Committee at the time of grant, subject to adjustment under
Section 4.2); by
(ii) the Fair Market Value of a share of Common Stock on the exercise date.
In lieu of issuing shares of Common Stock upon the exercise of a SAR, the
Committee may elect to pay the holder of the SAR cash equal to the Fair Market
Value on the exercise date of any or all of the shares which would otherwise be
issuable. No fractional shares of Common Stock shall be issued upon the exercise
of a SAR; instead, the holder of the SAR shall be entitled to receive a cash
adjustment equal to the same fraction of the Fair Market Value of a share of
Common Stock on the exercise date or to purchase the portion necessary to make a
whole share at its Fair Market Value on the date of exercise.
(f) Agreement. SARs awarded under this Plan shall be evidenced by either a Stock
Option Agreement or a separate signed written agreement between the Company and
a Participant.
2.8 DIVIDEND PAYMENTS:
The Committee may, in its discretion, grant to holders of Options the right to
receive with respect to each share covered by an Option payments of amounts
equal to the regular cash dividends paid to holders of the Common Stock during
the period that the Option is outstanding (such payments are hereinafter
referred to as "Dividend Payment Rights").
ARTICLE III
OPTIONS TO PURCHASE RESTRICTED STOCK
3.1 OPTIONS TO PURCHASE RESTRICTED STOCK:
<PAGE>
In accordance with Section 2.1, the Committee may award to any Participant
Options to purchase shares of Common Stock having the terms and conditions
prescribed by this Article III and such other terms and conditions as the
Committee may from time to time prescribe in the Stock Option Agreement
evidencing such Options (such shares being herein called "Restricted Stock").
Upon exercise of an Option to purchase Restricted Stock, each certificate for
Restricted Stock shall be registered in the name of the Participant and
deposited, together with a stock power endorsed in blank, with the Corporation.
3.2 RESTRICTlON PERIOD:
At the time of award of an Option to purchase Restricted Stock, there shall be
established for the Participant receiving such award a restriction period (the
"Restriction Period") of such length as shall be determined by the Committee.
Shares of Restricted Stock may not be sold, assigned, transferred, pledged or
otherwise disposed of or encumbered, except as hereinafter provided, during the
Restriction Period. Except for such restrictions on transfer, the Participant as
owner of such shares of Restricted Stock shall have all the rights of a holder
of Common Stock.
At the expiration of the Restriction Period, the Corporation shall deliver to
the Participant (or his legal representative or designated beneficiary) the
certificates deposited pursuant to Section 3.1.
3.3 TERMINATION OF EMPLOYMENT:
In the event the Participant ceases to be an employee upon his death, retirement
or disability, or otherwise in the discretion of the Committee, before the end
of the Restriction Period, the restrictions imposed under this Article III shall
lapse with respect to such number of shares theretofore awarded to him as shall
be determined by the Committee, but, in no event less than a number equal to the
product of (a) a fraction, the numerator of which is the number of completed
months elapsed from the beginning of the Restriction Period to the date of
termination and the denominator of which is the Number of months in the
Restriction Period and (b) the number of shares of Restricted Stock.
In the event the Participant ceases to be an employee for any other reason, all
shares of Restricted Stock theretofore acquired by him which are still subject
to restrictions shall be forfeited and the Corporation shall have the right to
complete the blank stock power.
ARTICLE IV
MISCELLANEOUS PROVISIONS
4.1 NON-TRANSFERABILITY
No Award under this Plan, and no interest therein, shall be transferable by the
Participant otherwise than by will or, if the Participant dies intestate, by the
laws of descent and distribution. All Awards shall be exercisable or received
during the Participant's lifetime only by the Participant or his legal
representative. To the extent required to comply with Rule 16b-3, no transfer or
other disposition of any shares of Common Stock underlying any Award may be made
within six months from the date of grant of such Award. Any transfer contrary to
this Section 6.1 will be null and void and will nullify the Award.
4.2 ADJUSTMENTS UPON CERTAIN CHANGES:
In the event of a stock dividend or stock split, or combination or other
increase in the number of issued shares of Common Stock, the Board of Directors
or the Committee may, in order to prevent the dilution or enlargement of rights
under Awards, make such adjustments in the number and type of shares authorized
by this Plan, the number and type of shares covered by, or with respect to which
payments are measured under, outstanding Awards and the exercise prices
specified therein as may be determined to be appropriate and equitable. The
Committee may, notwithstanding any other provision of this Plan to the contrary,
provide in the agreement evidencing any
<PAGE>
Award for adjustments to such Award in order to prevent the dilution or
enlargement of rights thereunder or to provide for acceleration of benefits
thereunder in the event of a change in control, merger, consolidation,
reorganization, recapitalization, sale or exchange of substantially all assets
or dissolution of or spinoff or similar transaction by the Corporation.
4.3 TAX WITHHOLDING:
(a) The Company shall have the power to withhold, or require a Participant to
remit to the Company, an amount sufficient to satisfy any withholding or other
tax due from the Corporation with respect to any amount payable and/or shares
issuable under this Plan, and the Corporation may defer such payment or issuance
unless indemnified to its satisfaction.
(b) Subject to the consent of the Committee, due to (i) the exercise of a NSO,
(ii) lapse of restrictions on Restricted Stock, or (iii) the issuance of any
stock award under this Plan, a Participant may make an irrevocable election (an
"Election") to (A) have shares of Common Stock otherwise issuable under (i)
withheld; or (B) tender back to the Corporation shares of Common Stock received
pursuant to (i), (ii), or (iii), or (C) deliver back to the Corporation pursuant
to (i), (ii), or (iii) previously-acquired shares of Common Stock of the
Corporation having a Fair Market Value sufficient to satisfy all or part of the
Participant's estimated tax obligations associated with the transaction. Such
Election must be made by a Participant prior to the date on which the relevant
tax obligation arises (the "Tax Date"). The Committee may disapprove of any
Election, may suspend or terminate the right to make Elections, or may provide
with respect to any Award under this Plan that the rights to make Elections
shall not apply to such Awards.
(c) If a Participant is an officer or director of the Corporation within the
meaning of Section 16 of the Exchange Act, then an Election is subject to the
following additional restrictions:
(i) No Election shall be effective for a Tax Date which occurs within six
months of the grant of the award, except that this limitation shall not apply
in the event death or disability of the Participant occurs prior to the
expiration of the six-month period.
(ii) The Election must be made either six months prior to the Tax Date or must
be made during a period beginning on the third business day following the date
of release for publication of the Company's quarterly or annual summary
statements of sales and earnings and ending on the twelfth business day
following such date.
4.4 CONDITION ON AWARDS:
In the event that the employment of a Participant holding any unexercised Option
or SAR, or any shares of Restricted Stock, shall terminate upon the
Participant's retirement or disability, or otherwise in the discretion of the
Committee, the rights of such Participant to any such Award shall be subject to
the conditions that until any such Option or SAR is exercised, or the
restrictions on any such share of Restricted Stock shall have lapsed, he shall
(a) not engage, either directly or indirectly, in any manner or capacity as
advisor, principal, agent, partner, officer, director, employee, member of any
association or otherwise, in any business or activity which is at the time
competitive with any business or activity conducted by the Company and (b) be
available, unless he shall have died, at reasonable times for consultations
(which shall not require substantial time or effort) at the request of the
Company's management with respect to phases of the business with which he was
actively connected during his employment, but such consultations shall not
(except in the case of a Participant whose active service was outside of the
United States) be required to be performed at any place or places outside of the
United States or during usual vacation periods or periods of illness or other
incapacity. In the event that either of the above conditions is not fulfilled,
the Participant shall forfeit all rights to any unexercised Option or SAR, or
shares of Restricted Stock, held as of the date of the breach of condition. Any
determination by the Board of Directors of the Corporation, which shall act upon
the recommendation of the Chairman, that the Participant is, or has, engaged in
a competitive business or activity as aforesaid or has not been available for
consultation as aforesaid shall be conclusive.
<PAGE>
4.5 AMENDMENT, SUSPENSION AND TERMINATION OF PLAN:
(a) The Board of Directors may suspend or terminate this Plan or any portion
thereof at any time and may amend it from time to time in such respects as the
Board of Directors may deem advisable in order that any Awards thereunder shall
conform to or otherwise reflect any change in applicable laws or regulations, or
to permit the Company or its employees to enjoy the benefits of any change in
applicable laws or regulations, or in any other respect the Board of Directors
may deem to be in the best interest of the Company; provided, however, that no
such amendment shall, without shareholder approval to the extent required by
law, agreement or the rules of any exchange upon which the Common Stock is
listed, (i) except as provided in Section 4.2, materially increase the number of
shares of Common Stock which may be issued under this Plan, (ii) materially
modify the requirements as to eligibility for participation in this Plan, (iii)
materially increase the benefits accruing to Participants under this Plan, or
(iv) extend the termination date of this Plan. No such amendment, suspension or
termination shall (x) impair the rights of Participants with respect to
outstanding Options, SARs, Dividend Payment Rights or Restricted Stock without
the consent of the Participants affected thereby or (y) make any change that
would disqualify the Plan, or any other plan of the Corporation intended to be
so qualified, from the exemption provided by Rule 16b-3.
(b) The Committee may amend or modify any outstanding Options, SARs or Dividend
Payment Rights in any manner to the extent that the Committee would have had the
authority under this Plan to initially award such Options, SARs or Dividend
Payment Rights, as so modified or amended, including without limitation, to
change the date or dates as of which such Options or SARs may be exercised. No
such amendment or modification shall impair the rights of any Participant under
any such Award without the consent of such Participant.
4.6 DEFINITIONS AND OTHER GENERAL PROVISIONS:
(a) The terms "retirement" and "disability" as used under this Plan shall be
construed by reference to the provisions of the pension plan or other similar
plan or program of the Company applicable to a Participant.
(b) The term "Fair Market Value" as it relates to Common Stock on any given date
means (i) the mean of the high and low sales prices of the Corporation's Common
Stock as reported by the Composite Tape of the New York Stock Exchange (or, if
not so reported, on any domestic stock exchanges on which the Common Stock is
then listed); or (ii) if the Common Stock is not listed on any domestic stock
exchange, the mean of the high and low sales price of the Corporation's Common
Stock as reported by the National Association of Securities Dealers Automated
Quotation System (or, if not so reported, by the system then regarded as the
most reliable source of such quotations) or, if there are not reported sales on
such date, the mean of the closing bid and asked prices as so reported; or (iii)
if the Common Stock is listed on a domestic exchange or quoted in the domestic
over-the-counter market, but there are no reported sales or quotations, as the
case may be, on the given date, the value determined pursuant to (i) or (ii)
above using the reported sale prices or quotations on the last previous date on
which so reported; or (iv) if none of the foregoing clauses apply, the fair
value as determined in good faith by the Corporation's Board of Directors or the
Committee.
(c) The term "Subsidiary" shall mean, unless the context otherwise requires, any
corporation (other than the Corporation) in an unbroken chain of corporations
beginning with the Corporation if each of the corporations other than the last
corporation in such chain owns stock possessing at least 50% of the voting power
in one of the other corporations in such chain.
(d) The adoption of this Plan shall not preclude the adoption by appropriate
means of any other stock option or other incentive plan for directors, officers,
employees or consultants.
4.7 NON-UNIFORM DETERMINATIONS:
The Committee's determinations under this Plan, including without limitation,
(a) the determination of the Participants to receive Awards, (b) the form,
amount and timing of such Awards, (c) the terms and provisions of such
<PAGE>
Awards and (d) the agreements evidencing the same, need not be uniform and may
be made by it selectively among Participants who receive, or who are eligible to
receive, Awards under this Plan, whether or not such Participants are similarly
situated.
4.8 LEAVES OF ABSENCE; TRANSFERS:
The Committee shall be entitled to make such rules, regulations and
determinations as it deems appropriate under this Plan in respect of any leave
of absence from the Company granted to a Participant. Without limiting the
generality of the foregoing, the Committee shall be entitled to determine (a)
whether or not any such leave of absence shall be treated as if the Participant
ceased to be an employee and (b) the impact, if any, of any such leave of
absence on Awards under this Plan. In the event a Participant transfers within
the Company, such Participant shall not be deemed to have ceased to be an
employee for purposes of this Plan.
4.9 LISTING, REGISTRATION AND LEGAL COMPLIANCE:
Each Award shall be subject to the requirement that if at any time the Committee
shall determine, in its discretion, the listing, registration or qualification
of such Award, or any shares of Common Stock or other property subject thereto,
upon any securities exchange or under any federal or state securities or other
law or regulation or the consent or approval of any governmental body or the
taking of any other action to comply with or otherwise with respect to any such
law or regulation, is necessary or desirable as a condition to or in connection
with the granting of such Award or the issue, delivery or purchase of shares of
Common Stock or other property thereunder, no such Award may be exercised or
paid in Common Stock or other property unless such listing, registration,
qualification, consent, approval or other action shall have been effected or
obtained free of any conditions not acceptable to the Committee and the holder
of the Award will supply the Corporation with such certificates, representations
and information as the Corporation shall request and shall otherwise cooperate
with the Corporation in effecting or obtaining such listing, registration,
qualification, consent, approval or other action. In the case of officers,
directors and other persons subject to Section 16(b) of the Exchange Act, the
Committee may at any time impose any limitations upon the exercise, delivery or
payment of any Award which, in the discretion of the Committee, are necessary or
desirable in order to comply with Section 16(b) and the rules and regulations
thereunder. If the Corporation, as part of an offering of securities or
otherwise, finds it desirable because of federal or state legal or regulatory
requirements to reduce the period during which Options or SARs may be exercised,
the Committee may, in its discretion and without the holders' consent, so reduce
such period on not less than 15 days' written notice to the holders thereof.
4.10 CASH PAYMENTS:
Options and SARs may, in the discretion of the Committee, provide that the
holder thereof, as soon as practicable after such holder exercises such Option
or SAR in whole or in part, will receive a cash payment in such amount as thc
Committee may determine, but not more than: (a) in the case of a Option
exercise, the excess of the Fair Market Value of a share of Common Stock (on the
date the holder recognizes taxable income) over the Option Price multiplied by
the number of shares as to which the Option is exercised, and (b) in the case of
a SAR exercise, the Fair Market Value (on the date or dates the holder
recognizes taxable income) of the Common Stock and other consideration issued to
the holder.
4.11 LOANS:
The Committee may provide for the Corporation or any Subsidiary to make loans to
finance the exercise of any Option as well as the estimated or actual amount of
any taxes payable by the holder as a result of the exercise of or payment for
any Option or the lapse of restrictions with respect to any shares of Restricted
Stock, and may prescribe, or may empower the Corporation or such Subsidiary to
prescribe, the other terms and conditions (including but not limited to the
interest rate, maturity date and whether the loan will be secured or unsecured)
of any such loan.
<PAGE>
4.12 OPTIONS IN SUBSTITUTION FOR OTHER OPTIONS:
The Committee may, in its sole discretion, at any time during the term of this
Plan, grant new Options to an employee under this Plan who is also a holder of
one or more unexercised outstanding Options previously granted under this Plan
or any other stock option plan of the Company on the condition that such
employee shall surrender for cancellation one or more outstanding Options which
represent the right to purchase (after giving effect to any previous partial
exercise thereof) a number of shares, in relation to the number of shares to be
covered by the new conditional grant hereunder, determined by the Committee. If
the Committee shall have so determined to grant such new Option on such a
conditional basis ("New Conditional Options"), no such New Conditional Option
shall become exercisable in the absence of such employee's consent to the
condition and surrender and cancellation as appropriate. New Conditional Options
shall be treated in all respects under this Plan as newly granted Options.
Options may be granted under this Plan from time to time in substitution for
similar rights held by employees of other corporations who are about to become
employees of the Company or a Subsidiary as a result of a merger or
consolidation of the employing corporation with the Company or a Subsidiary, or
the acquisition by the Company or a Subsidiary of the assets of the employing
corporation, or the acquisition by the Company or a Subsidiary of stock of the
employing corporation as the result of which it becomes a Subsidiary.
4.13 RIGHTS AS STOCKHOLDER:
Except for Dividend Payment Rights awarded under Section 2.8, a Participant
holding Options or a permitted transferee of Options shall have no rights as a
stockholder of the Company with respect to shares covered by such Options until
the date of issuance of a stock certificate to such person for such shares, and
no adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such stock certificate is issued.
4.14 INDEMNIFICATION:
Each person who is or shall have been a member of the Committee shall be
indemnified and held harmless by the Corporation against and from any loss,
cost, liability or expense that may be imposed upon or reasonably incurred by
him in connection with or resulting from any claim, action, suit or proceeding
to which he may be a party or in which he may be involved by reason of any
action taken or failure to act under this Plan and against and from any and all
amounts paid by him in settlement thereof, with the Corporation's approval, or
paid by him in satisfaction of any judgment in any such action, suit or
proceeding against him, provided he shall give the Corporation any opportunity,
at its own expense, to handle and defend it on its own behalf. The foregoing
right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Corporation's
Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any
power that the Corporation may have to indemnify them or hold them harmless.
4.15 BENEFlCIARY DESIGNATION:
Each Participant under this Plan may name, from time to time, any beneficiary or
beneficiaries (who may be named contingently or successively) to whom any
benefit under this Plan is to be paid in case of his death before he receives
any or all of such benefit. Each designation will revoke all prior designations
by the same Participant, shall be in a form prescribed by the Committee, and
will be effective only when filed by the Participant in writing with the
Committee during his lifetime. In the absence of any such designation, benefits
remaining unpaid at the Participant's death shall be paid to his estate.
4.16 RIGHTS OF PARTICIPANTS:
Nothing in this Plan shall interfere with or limit in any way the right of the
Company to terminate any Participant's employment at any time, nor confer upon
any Participant any right to continue in the employ of the Company for any
period of time or to continue his present or any other rate of compensation. No
employee shall have
<PAGE>
a right to be selected as a Participant, or, having been so selected, to be
selected again as a Participant.
4.17 REQUIREMENTS OF LAW; GOVERNING LAW:
The granting of Awards and the issuance of shares of Common Stock shall be
subject to all applicable laws, rules and regulations, and to such approvals by
any govenmental agencies or national securities exchanges, as may be required.
This Plan, and all agreements hereunder, shall be construed in accordance with
and governed by the laws of the State of New York.
4.18 EFFECTIVE DATE:
The restatement and amendment of the 1993 Incentive Plan which is effected
hereby shall be deemed effective as of January 1, 1996. No awards of Options,
SARs or Dividend Payment Rights shall be made hereunder after December 31, 2002.
* * * *
<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.
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.
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 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
<PAGE>
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 23, 1998, relating to the consolidated balance sheets of
Besicorp Group Inc. and subsidiaries as at March 31, 1998 and 1997, 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,
1998, which report appears in the March 31, 1998 annual report on Form 10-KSB of
Besicorp Group Inc.
/s/ Citrin Cooperman & Company, LLP
CITRIN COOPERMAN & COMPANY, LLP
June 25, 1998
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,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FORM 10-KSB FOR FISCAL
1998.
<MULTIPLIER>1
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> MAR-31-1998
<CASH> 812,971
<SECURITIES> 1,056,778
<RECEIVABLES> 392,539
<ALLOWANCES> 23,000
<INVENTORY> 944,013
<CURRENT-ASSETS> 4,734,301
<PP&E> 3,616,928
<DEPRECIATION> 1,769,212
<TOTAL-ASSETS> 9,444,996
<CURRENT-LIABILITIES> 1,954,819
<BONDS> 3,766,074
0
0
<COMMON> 323,495
<OTHER-SE> 3,214,336
<TOTAL-LIABILITY-AND-EQUITY> 9,444,996
<SALES> 3,838,351
<TOTAL-REVENUES> 17,014,256
<CGS> 3,899,967
<TOTAL-COSTS> 3,899,967
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 513,765
<INCOME-PRETAX> 526,386
<INCOME-TAX> 331,000
<INCOME-CONTINUING> 195,386
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 195,386
<EPS-PRIMARY> .07
<EPS-DILUTED> .06
</TABLE>
Exhibit No. 99-A
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 Exchange Act of 1933, as amended.
KAMINE/BESICORP CARTHAGE L.P.
Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
February 24, 1998
<PAGE>
KAMINE/BESICORP CARTHAGE L.P.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
<S> <C> <C>
Current assets:
Cash $ 1,441,960 1,482,802
Cash held in escrow 385,706 421,919
Accounts receivable 2,727,487 2,235,457
Other receivables 208,976 897,888
Prepaid expenses and other current assets 443,671 487,299
Current portion of loans receivable from affiliate (note 8) 142,635 126,042
---------- ----------
Total current assets 5,350,435 5,651,407
---------- ----------
Facility under capital lease (note 4) 52,706,409 52,706,409
Less accumulated amortization 6,392,885 4,287,724
---------- ----------
Facility under capital lease, net 46,313,524 48,418,685
---------- ----------
Other assets:
Cash held in escrow 3,000,000 2,000,000
Loans receivable from affiliate (note 8) 2,183,240 2,325,875
---------- ----------
Total other assets 5,183,240 4,325,875
---------- ----------
Total assets $56,847,199 58,395,967
---------- ----------
---------- ----------
Liabilities and Partners' Equity (Deficiency)
Current liabilities:
Current installments of long-term debt (note 5) 230,228 207,679
Accounts payable 1,779,929 1,891,974
Amounts due to related parties (notes 2 and 8) 1,534,475 1,574,815
Accrued expenses and other current liabilities 904 3,635
Obligations under capital lease - current (note 4) 1,522,030 1,342,299
---------- ----------
Total current liabilities 5,067,566 5,020,402
Long-term debt, excluding current installments (note 5) 3,009,036 3,239,264
Obligations under capital lease (note 4) 47,699,446 49,221,475
Deferred gain on sale of Facility (note 3) 1,034,564 1,081,589
---------- ----------
Total liabilities 56,810,612 58,562,730
---------- ----------
Partners' equity (deficiency) (note 2):
General partners 24,120 (82,842)
Limited partners 12,467 (83,921)
---------- ----------
Total partners' equity (deficiency) 36,587 (166,763)
Commitments and contingencies (notes 4, 5, 6 and 7) ---------- ----------
Total liabilities and partners' equity (deficiency) $56,847,199 58,395,967
---------- ----------
---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP CARTHAGE L.P.
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1994
<S> <C> <C> <C>
Revenues (note 7) $29,719,073 28,883,434 26,556,893
---------- ---------- ----------
Operating expenses:
Amortization of asset under capital lease 2,105,161 2,105,160 2,124,381
Fuel (note 1) 11,382,890 9,757,592 9,766,448
Operations and maintenance (note 7) 1,593,738 1,585,643 1,567,170
Overhaul (note 7) 415,691 366,599 466,520
Administrative fee (notes 2 and 8) 341,522 328,843 318,278
Insurance 366,152 331,208 318,654
Amortization of organization costs (note 1) -- 40,940 49,154
Utilities 276,547 284,129 284,937
Property taxes 198,856 198,900 198,370
Other 492,877 283,894 308,292
---------- ---------- ----------
Total operating expenses 17,173,434 15,282,908 15,402,204
---------- ---------- ----------
Income from operations 12,545,639 13,600,526 11,154,689
---------- ---------- ----------
Other income (expense):
Interest expense (6,666,244) (6,862,909) (7,074,297)
Contract rights (note 8) (1,090,556) (1,093,354) (1,091,540)
Cash flow fees (note 8) (397,131) (447,057) (251,464)
Interest income 397,216 366,270 334,355
Gain on sale of Facility (note 3) 47,025 47,026 47,028
Other expenses (67,993) (44,022) (56,138)
---------- ---------- ----------
Total other expense (7,777,683) (8,034,046) (8,092,056)
---------- ---------- ----------
Net income $ 4,767,956 5,566,480 3,062,633
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP CARTHAGE L.P.
Statements of Partners' Equity (Deficiency)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Limited Total
partners partners
<S> <C> <C> <C>
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)
Partners' distributions (note 2) (2,400,983) (2,163,623) (4,564,606)
Net income (note 2) 2,507,945 2,260,011 4,767,956
---------- ---------- ----------
Partners' equity at December 31, 1997 $ 24,120 12,467 36,587
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP CARTHAGE L.P.
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,767,956 5,566,480 3,062,633
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of Facility under capital lease 2,105,161 2,105,160 2,124,381
Amortization of deferred organization and
start-up costs -- 40,940 49,154
Amortization of deferred gain (47,025) (47,026) (47,028)
Changes in operating assets and liabilities:
Increase in escrow accounts (963,787) (1,150,898) (1,228,665)
Decrease (increase) in receivables 196,882 (487,704) (62,475)
Decrease (increase) in prepaid expenses and other
current assets 43,628 (52,261) 364,012
(Decrease) increase in accounts payable (112,045) 263,958 (307,686)
(Decrease) increase in due to related parties (40,340) 423,686 (62,397)
(Decrease) increase in accrued expenses and other
current liabilities (2,731) (11,203) 13,189
---------- ---------- ----------
Net cash provided by operating activities 5,947,699 6,651,132 3,905,118
---------- ---------- ----------
Cash flows from financing activities:
Payments on capital lease obligation (1,342,298) (1,166,276) (1,160,305)
Proceeds from long-term debt -- -- 101,812
Payments on long-term debt (207,679) (200,738) (148,880)
Payments on note payable to bank, net -- -- (197,501)
Decrease in loans receivable from affiliate 126,042 111,243 74,813
Partners' distributions (4,564,606) (5,028,951) (2,907,715)
---------- ---------- ----------
Net cash used in financing activities (5,988,541) (6,284,722) (4,237,776)
---------- ---------- ----------
Net (decrease) increase in cash (40,842) 366,410 (332,658)
Cash at beginning of year 1,482,802 1,116,392 1,449,050
---------- ---------- ----------
Cash at end of year $ 1,441,960 1,482,802 1,116,392
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information - cash
paid during the year for interest $ 6,666,244 6,894,397 7,275,471
---------- ---------- ----------
---------- ---------- ----------
Noncash investing and financing activities-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, 1997 and 1996
(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 Fort James Corporation
(Fort James), formerly James River Paper Company, Inc., 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. Affiliates of the
general partners, Kamine Development Corp. (KDC) and Beta C&S Limited, each own
a 7.5% 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 95%, 96% and
99% of total revenues in 1997, 1996 and 1995, 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.
Summary of Significant Accounting Policies
Amortization of Capital Lease
Amortization of the Facility under capital lease is computed using the
straight-line method over the lease term.
(1), Continued
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,
1997, 1996 and 1995 was $0, $40,940 and $49,154, respectively.
Revenue Recognition
<PAGE>
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 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 1997, 1996 and 1995 amounted to $2,288,173,
$4,651,362 and $1,849,286, 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). 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, 1997 and 1996 consists of a current account
principally for payment of taxes and insurance and a long-term escrow reserve
for lease payments.
Financial Instruments
The carrying value of the Partnership's financial instruments at December 31,
1997 approximate their estimated fair value. The carrying amounts of accounts
receivable, accounts payable, and accrued expenses and other current liabilities
approximate fair
(1), Continued
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
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 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's financial position or results of operations.
<PAGE>
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 revenues and expenses and the disclosure
of contingent assets and 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 currently 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 (the
Commission) setting forth numerous restructuring
(1), Continued
proposals, including a significant reduction in the price for power purchased
from independent power producers currently under contract with NIMO. NIMO 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. An agreement in principle was announced on March 10,
1997 whereby NIMO would restructure or terminate the power contracts for
combinations of cash and/or debt securities, common stock and new agreements. On
July 10, 1997, NIMO announced that a master restructuring agreement was signed
with respect to 29 independent power contracts, including the one held by the
Partnership. On September 25, 1997, NIMO announced that it had reached an
agreement with the staff of the New York Department of Public Service on a rate
and restructuring plan (including recommended approval of the master
restructuring agreement). After a series of hearings and testimony by interested
parties, on December 29, 1997 the assigned Administrative Law Judge recommended
approval of the rate and restructuring plan with some modifications. On February
24, 1998, the Commission approved the master restructuring agreement. Any
restructuring remains subject to the approval of third parties for both the
Partnership and NIMO and there is no assurance that a restructuring will be
completed or that changes will not occur. The outcome of the industry trends,
regulatory changes, the NIMO negotiations and NIMO's financial viability cannot
presently be determined.
Reclassification
Certain items in the 1996 and 1995 financial statements have been reclassified
to conform with the 1997 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 allo-
<PAGE>
cated 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 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.
(2), Continued
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 percentage 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 1997, 1996 and 1995 were for payment of such taxes as well as
net cash flow distributions.
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) and contractual
rights to cash flow development fees.
(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 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 1997, 1996 and 1995, $47,025,
$47,026 and $47,028, 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.
(4), Continued
<PAGE>
At December 31, 1997, the future minimum annual lease payments for the capital
lease obligation are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 $ 7,651,542
1999 7,651,542
2000 7,651,542
2001 7,651,542
2002 7,651,542
Thereafter 74,821,074
------------
113,079,074
Less interest 63,857,598
------------
Future minimum annual lease payments $ 49,221,476
------------
------------
</TABLE>
(5) Financing
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 ($3,239,264 and $3,446,943 outstanding at December
31, 1997 and 1996, 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, 1997 and 1996, there were no borrowings
outstanding under the Working Capital Commitment. At December 31, 1997, the
Partnership had open letters of credit of $2,106,218.
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:
1998 $ 230,228
1999 255,224
2000 282,090
2001 313,562
2002 347,606
---------
---------
</TABLE>
(6) Lease of Land
The Facility is on a parcel of land owned by Fort James Corporation 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 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
<PAGE>
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 at that date was eliminated.
The Partnership entered into an Energy Services Agreement (ESA) with Fort James
dated as of October 31, 1989 and amended and restated as of October 21, 1994.
Fort James 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.
(7), Continued
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 to $.75 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 in 1996. There were no revenues realized pursuant to this agreement in
1997 or 1995.
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 6-year term,
unless 12 months' prior notice is given by the Partnership to the Operator.
Compensation includes 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 also is 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 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
reimburses 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.
<PAGE>
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.
(7), Continued
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 the
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's
dismissal of the claim alleging breach of contract. On March 12, 1997, the
appellate court upheld the ruling of May 22, 1996. On June 9, 1997, the court
ordered that the case be submitted to non-binding mediation via the commercial
division's Alternative Dispute Resolution Program. Mediation was unsuccessful.
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 $341,522, $328,843
and $318,278 in 1997, 1996 and 1995, 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, 1997 and 1996, there are no outstanding amounts due to or from
KBSGF and KBND.
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 10-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 10-year U.S. Treasury yield at that time, plus 4.5%.
(8), Continued
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 deliver the management and administrative services. The contract
<PAGE>
rights, as defined, are payable through March 31, 2007. The Partnership has
recorded as expense contract rights of $1,090,556, $1,093,354 and $1,091,540 in
1997, 1996 and 1995, 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 1997, 1996 and 1995 were $397,131, $447,057 and
$251,464, respectively.
(9) Subsequent Event
In January 1998 Fort James announced plans to close its Carthage, New York
facility in April 1998 and discontinue purchasing steam under the ESA. Fort
James has certain obligations under the ESA to ensure that the Facility is able
to continue as a Qualifying Facility. Therefore, the Partnership, in conjunction
with Fort James, is currently pursuing a number of alternatives, including
potentially contracting with a new thermal customer to replace Fort James, in
order for the Facility to continue operating as a Qualifying Facility.
The Partnership believes that it will be successful in maintaining the status of
the Facility. The inability of the Facility to maintain this status could have a
material adverse effect on the Partnership's financial position. No adjustments
have been made to the financial statements due to the uncertainty of this
matter.
<PAGE>
EXHIBIT NO. 99-B
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 Exchange Act of 1933, as amended.
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 Exchange Act of 1933, as amended.
KAMINE/BESICORP SOUTH GLENS FALLS L.P.
Financial Statements
December 31, 1997 and 1996
(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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1997 in conformity with generally accepted accounting principles.
February 24, 1998
<PAGE>
KAMINE/BESICORP SOUTH GLENS FALLS L.P.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
<S> <C> <C>
Current assets:
Cash $ 1,642,468 1,127,247
Cash held in escrow 569,565 634,701
Accounts receivable, net 2,688,076 2,247,012
Other receivables 566,832 1,464,997
Prepaid expenses and other current assets 423,618 487,732
Current portion of loans receivable from affiliate (note 8) 142,635 126,042
---------- ----------
Total current assets 6,033,194 6,087,731
---------- ----------
Facility under capital lease (note 4) 51,002,261 51,002,261
Less accumulated amortization 6,190,491 4,153,593
---------- ----------
Facility under capital lease, net 44,811,770 46,848,668
---------- ----------
Other assets:
Cash held in escrow 3,500,000 2,500,000
Loans receivable from affiliate (note 8) 2,183,240 2,325,875
Total other assets 5,683,240 4,825,875
---------- ----------
Total assets $56,528,204 57,762,274
---------- ----------
---------- ----------
Liabilities and Partners' Equity
Current liabilities:
Current installments of long-term debt (note 5) 225,684 203,580
Accounts payable 2,011,763 2,408,745
Amounts due to related parties (notes 2 and 8) 1,735,740 1,219,417
Accrued expenses and other current liabilities 352,177 343,639
Obligations under capital leases (note 4) 1,461,239 1,291,054
---------- ----------
Total current liabilities 5,786,603 5,466,435
Long-term debt, excluding current installments (note 5) 2,949,645 3,175,329
Obligations under capital leases (note 4) 46,243,650 47,704,890
Deferred gain on sale of Facility (note 3) 994,724 1,039,939
---------- ----------
Total liabilities 55,974,622 57,386,593
---------- ----------
Partners' equity (note 2):
General partners 292,491 198,915
Limited partners 261,091 176,766
---------- ----------
Total partners' equity 553,582 375,681
Commitments and contingencies (notes 4, 5, 6 and 7) ---------- ----------
Total liabilities and partners' equity $56,528,204 57,762,274
---------- ----------
---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP SOUTH GLENS FALLS L.P.
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues (note 7) $29,168,450 28,935,773 26,024,574
---------- ---------- ----------
Operating expenses:
Amortization of asset under capital lease 2,036,898 2,036,899 2,060,263
Fuel (note 1) 10,718,112 10,151,755 9,893,914
Operations and maintenance (note 7) 1,576,409 1,565,366 1,596,461
Overhaul (note 7) 429,659 408,773 475,205
Administrative fee (notes 2 and 8) 341,522 328,843 318,278
Insurance 367,407 330,215 316,407
Amortization of organization costs (note 1) -- 42,420 49,155
Utilities 313,099 144,281 216,257
Property taxes 355,816 334,747 319,889
Other 335,466 258,288 373,654
---------- ---------- ----------
Total operating expenses 16,474,388 15,601,587 15,619,483
---------- ---------- ----------
Income from operations 12,694,062 13,334,186 10,405,091
---------- ---------- ----------
Other income (expense):
Interest expense (6,381,843) (6,575,376) (6,778,629)
Contract rights (note 8) (992,093) (994,639) (2,703,132)
Cash flow fees (note 8) (445,432) (481,622) (69,070)
Interest income 426,780 403,248 361,085
Gain on sale of Facility (note 3) 45,215 45,215 45,216
Other expenses (53,948) (41,008) (41,382)
---------- ---------- ----------
Total other expense (7,401,321) (7,644,182) (9,185,912)
---------- ---------- ----------
Net income $ 5,292,741 5,690,004 1,219,179
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP SOUTH GLENS FALLS L.P.
Statements of Partners' Equity (Deficiency)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Limited Total
partners partners
<S> <C> <C> <C>
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' equity 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' equity at December 31, 1996 198,915 176,766 375,681
Partners' distributions (note 2) (2,690,406) (2,424,434) (5,114,840)
Net income (note 2) 2,783,982 2,508,759 5,292,741
---------- ---------- ----------
Partners' equity at December 31, 1997 $ 292,491 261,091 553,582
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP SOUTH GLENS FALLS L.P.
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,292,741 5,690,004 1,219,179
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of Facility under capital lease 2,036,898 2,036,899 2,060,263
Amortization of deferred financing costs and
deferred organization and start-up costs -- 42,420 49,155
Amortization of deferred gain (45,215) (45,215) (45,216)
Changes in operating assets and liabilities:
Increase in escrow accounts (934,864) (1,066,384) (1,538,789)
Decrease (increase) in receivables 457,101 (704,186) 224,898
Decrease (increase) in prepaid expenses and other
current assets 64,114 (59,972) 272,686
(Decrease) increase in accounts payable (396,982) 528,402 (965,537)
Increase in due to related parties 516,323 426,798 217,378
Increase (decrease) in accrued expenses and other
current liabilities 8,538 91,761 (62,528)
Decrease in accrued interest under capital lease -- -- (175,789)
---------- ---------- ----------
Net cash provided by operating activities 6,998,654 6,940,527 1,255,700
---------- ---------- ----------
Cash flows from financing activities:
Payments on capital lease obligation (1,291,055) (1,116,153) (890,164)
Proceeds from long-term debt -- -- 424,092
Payments on long-term debt (203,580) (197,060) (576,985)
Decrease in loans receivable from affiliate 126,042 111,243 74,813
Partners' distributions (5,114,840) (5,425,622) (951,771)
---------- ---------- ----------
Net cash used in financing activities (6,483,433) (6,627,592) (1,920,015)
---------- ---------- ----------
Net increase (decrease) in cash 515,221 312,935 (664,315)
Cash at beginning of year 1,127,247 814,312 1,478,627
---------- ---------- ----------
Cash at end of year $ 1,642,468 1,127,247 814,312
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information - cash
paid during the year for interest $ 6,381,843 6,606,816 6,960,374
---------- ---------- ----------
---------- ---------- ----------
Noncash investing and financing activities -
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, 1997 and 1996
(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 Fort James Corporation
(Fort James), formerly James River Paper Company, Inc. 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.
Affiliates of the general partners, Kamine Development Corp. (KDC) and Beta C&S
Limited, each own a 7.5% 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% of total
revenues in 1997, 1996 and 1995.
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.
Summary of Significant Accounting Policies
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.
(1), Continued
Amortization of Capital Lease
Amortization of the Facility under capital lease is computed using the
straight-line method over the lease term.
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, 1997, 1996 and 1995 was $0, $42,420 and $49,155, respectively.
Revenue Recognition
<PAGE>
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 1997, 1996 and 1995 totaled $5,959,845, $7,038,129
and $3,317,199, 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). 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, 1997 and 1996 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
The carrying values of the Partnership's financial instruments at December 31,
1997 approximate their estimated fair value. The carrying amounts of accounts
receivable, accounts payable, and accrued expenses and other current liabilities
approximate fair
(1), Continued
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
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's 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 revenues and expenses and the disclosure
of contingent assets and 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
<PAGE>
customer, NIMO.
The regulated investor-owned utility industry is currently 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 (the
Commission) setting forth numerous restructuring proposals, including a
significant reduction in the price for power purchased from
(1), Continued
independent power producers currently under contract with NIMO. NIMO 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. An agreement in principle was announced on March 10,
1997 whereby NIMO would restructure or terminate the power contracts for
combinations of cash and/or debt securities, common stock and new agreements. On
July 10, 1997, NIMO announced that a master restructuring agreement was signed
with respect to 29 independent power contracts including the one held by the
partnership. On September 25, 1997, NIMO announced that it had reached an
agreement in principle with the staff of the New York Department of Public
Service on a rate and restructuring plan (including recommended approval of the
master restructuring agreement). After a series of hearings and testimony by
interested parties, on December 29, 1997 the assigned Administrative Law Judge
recommended approval on the rate and restructuring plan with some modifications.
On February 24, 1998, the Commission approved the master restructuring
agreement. Any restructuring remains subject to the approval of third parties
for both the Partnership and NIMO and there is no assurance that a restructuring
will be completed or that changes will not occur. The outcome of the industry
trends, regulatory changes, the NIMO negotiations and NIMO's financial viability
cannot presently be determined.
Reclassification
Certain items in the 1996 and 1995 financial statements have been reclassified
to conform with the 1997 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 Partnership
(subject to certain provisions).
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.
(2), Continued
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 percentage rate of each partner's pro rata share of partnership
revenues pursuant to Article 9,
<PAGE>
Section 186 of the New York State Tax Code, are distributed to the partners when
tax payments are due. All partners' distributions in 1997, 1996 and 1995 were
for payment of such taxes, as well as net cash flow distributions.
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) and contractual
rights to cash flow development fees.
(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 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
1997, 1996 and 1995, $45,215, $45,215 and $45,216, 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 were 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.
(4), Continued
At December 31, 1997, the future minimum annual lease payments for the capital
lease obligation are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 7,315,460
1999 7,315,460
2000 7,315,460
2001 7,315,460
2002 7,315,460
Thereafter 72,888,888
-----------
109,466,188
Less interest 61,761,299
-----------
Future minimum annual lease payments $ 47,704,889
-----------
-----------
</TABLE>
(5) Financing
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 that
was 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 ($3,175,329 and $3,378,909 outstanding at December 31, 1997 and
1996, 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, 1997 and 1996, there were no borrowings outstanding under the
Working Capital Commitment. At December 31, 1997, the Partnership had open
letters of credit of $1,452,926.
The total amounts of long-term debt due under the Tranche B Term Loan during
each of the next five years are as follows:
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1998 $225,684
1999 250,187
2000 276,522
2001 307,373
2002 340,746
-------
-------
</TABLE>
(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 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 Power Purchase Agreement (PPA) with
NIMO dated as of June 5, 1987 with approval by 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
statutory 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 at that date was eliminated.
The Partnership entered into an Energy Service Agreement (ESA) with Fort James
dated as of October 31, 1989. Fort James 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 Fort James. As of March 12, 1992, all of Fort James' 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.
(7), Continued
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 to $.75 per decatherm 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 1997 or 1995.
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
<PAGE>
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 6-year term, unless 12 months' prior notice is given by the
Partnership to the Operator. Compensation includes 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 is 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 defined. This fee is also subject to
annual escalations based upon changes in the PPI. 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, 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.
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.
(7), Continued
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 the
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's
dismissal of the claim alleging breach of contract. On March 12, 1997 the
appellate court upheld the ruling of May 22, 1996. On June 9, 1997 the court
ordered that the case be submitted to non-binding mediation via the commercial
division's Alternative Dispute Resolution Program. Mediation was unsuccessful.
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 1997, 1996 and
1995 were $341,522, $328,843 and $318,278, respectively.
On 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
<PAGE>
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, 1997 and 1996, there are no outstanding amounts due to or from KBC and KBND.
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 10-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 10-year U.S. Treasury yield at that time, plus 4.5%.
(8), Continued
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 1997, 1996 and 1995,
the Partnership recorded contract rights expense of $992,093, $994,639 and
$2,703,132, 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 1997, 1996 and 1995 were $445,432, $481,622 and
$69,070, respectively.
<PAGE>
EXHIBIT NO. 99-C
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
Financial Statements
December 31, 1997 and 1996
(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, 1997 and 1996, and the related
statements of operations, partners' deficiency, and cash flows for each of the
years in the three-year period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1997 in conformity with generally accepted accounting principles.
May 12, 1998
<PAGE>
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
Assets
<S> <C> <C>
Cash $ 2,350 1,450
Accounts receivable - Cogeneration Projects (notes 4 and 6) 757,073 716,988
---------- ----------
Total assets $ 759,423 718,438
---------- ----------
---------- ----------
Liabilities and Partners' Deficiency
Current liabilities:
Current portion of loans payable - Cogeneration Projects
(note 3) 285,270 252,085
Amounts due to related parties (note 7) 121,543 128,101
Accrued expenses 235,212 196,968
---------- ----------
Total current liabilities 642,025 577,154
Loans payable - Cogeneration Projects, net of current portion
(note 3) 4,366,479 4,651,749
---------- ----------
Total liabilities 5,008,504 5,228,903
Partners' deficiency (note 2) (4,249,081) (4,510,465)
---------- ----------
Total liabilities and partners' deficiency $ 759,423 718,438
---------- ----------
---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenue:
Contract rights (note 4) $2,082,649 2,087,993 3,794,672
Developers' cash flow fees (note 6) 842,564 928,680 320,534
---------- ---------- ----------
2,925,213 3,016,673 4,115,206
---------- ---------- ----------
Operating expenses:
Interest expense 492,155 518,446 545,691
Cash flow fees (note 6) 842,564 928,680 320,534
Other 1,850 7,425 5,700
---------- ---------- ----------
Total operating expenses 1,336,569 1,454,551 871,925
---------- ---------- ----------
Income from operations 1,588,644 1,562,122 3,243,281
---------- ---------- ----------
Other incomce -- interest -- -- 673
---------- ---------- ----------
Net income $1,588,644 1,562,122 3,243,954
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
Statements of Partners' Deficiency
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Partners' deficiency at beginning of year $(4,510,465) (4,707,049) (4,572,788)
Partners' contributions 5,000 5,000 --
Partners' distributions (note 2) (1,332,260) (1,370,538) (3,378,215)
Net income (note 2) 1,588,644 1,562,122 3,243,954
---------- ---------- ----------
Partners' deficiency at end of year $(4,249,081) (4,510,465) (4,707,049)
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,588,644 1,562,122 3,243,954
Adjustments to reconcile net income to net cash
provided by operating activities -- changes in
operating assets and liabilities:
(Increase) decrease in accounts receivable (40,085) (55,125) 185,945
Decrease in escrow funds -- -- 115,810
Decrease in amounts due to related parties (6,558) (6,009) (43,379)
Increase in accrued expenses 38,244 85,111 23,317
---------- ---------- ----------
Net cash provided by operating activities 1,580,245 1,586,099 3,525,647
---------- ---------- ----------
Cash flows from financing activities:
Payments on long-term loan payable (252,085) (222,487) (149,625)
Distribution to partners, net of contributions (1,327,260) (1,365,538) (3,378,215)
---------- ---------- ----------
Net cash used in financing activities (1,579,345) (1,588,025) (3,527,840)
---------- ---------- ----------
Increase (decrease) in cash 900 (1,926) (2,193)
Cash at beginning of year 1,450 3,376 5,569
---------- ---------- ----------
Cash at end of year $ 2,350 1,450 3,376
---------- ---------- ----------
---------- ---------- ----------
Cash paid during year for interest $ 498,713 524,455 411,581
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
Notes to Financial Statements
December 31, 1997 and 1996
(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 Chase Manhattan Bank as trustee.
Summary of Significant Accounting Policies
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.
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 revenues and expenses and the disclosure of
contingent assets and 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.
(2), Continued
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 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.
<PAGE>
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.
The total amounts of loans payable to the Cogeneration Projects due during
each of the next five years are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1998 $ 285,270
1999 323,098
2000 365,992
2001 414,268
2002 469,190
---------
---------
</TABLE>
(4) Contract Rights
The general partners have pledged their cash flow development fee rights
(contract rights) from the Cogeneration Projects to the Partnership to repay the
loans payable to the Cogeneration Projects. The contract rights are earned by
the partners when the Cogeneration Projects have generated sufficient cash to
make the required payment. As of December 31, 1997 and 1996, the Partnership has
a receivable with respect to contract rights of $523,611 and $524,020,
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, 1997, 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.
The Cogeneration Projects are principally engaged in a single line of
business, the production and sale of electric power to one customer, Niagara
Mohawk Power Corporation (NIMO). On July 10, 1997, NIMO announced that a master
restructuring agreement (MRA) was signed with respect to 29 independent power
contracts, including the ones held by the Cogeneration Projects, whereby NIMO
would restructure or terminate the independent power contracts for combinations
of cash and/or debt securities, common stock and new agreements. On March 20,
1998, the Commission issued an opinion and order with respect to the MRA
adopting the terms of settlement, subject to modifications and conditions. On
May 8, 1998, NIMO announced that third-party conditions had been satisfied or
waived by holders of 27 of independent power contracts, including the ones held
by the Cogeneration Projects. The closing date of the MRA is projected to be
June 30, 1998, but remains subject to certain conditions. The consummation of
the MRA is expected to result in the receipt of sufficient monies by the
Cogeneration Projects to enable prepayment of the remaining scheduled contract
rights amounts and provide additional developers' cash flow fees (see note 6)
for the Partnership. However, there is no assurance that the MRA will be
consummated and, accordingly, the ultimate impact on the Partnership cannot
presently be determined.
(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 October 1, 1990 loan (see note 3). These cash
flow fees will be received over the life of the projects. At December 31, 1997
and 1996, the Partnership has outstanding receivables with respect to cash flow
fees of $233,462 and $192,968, respectively, from the Cogeneration Projects.
(7) Amounts Due to Related Parties
Amounts due to related parties at December 31, 1997 and 1996 consist of
accrued interest on loans from the Cogeneration Projects.
<PAGE>
EXHIBIT NO. 99-D
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 Exchange Act of 1933, as amended.
KAMINE/BESICORP NATURAL DAM L.P.
Financial Statements
December 31, 1997 and 1996
(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, 1997 and 1996, and the related statements of operations,
partners' deficiency, and cash flows for each of the years in the three-year
period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1997 in conformity with generally accepted accounting principles.
February 24, 1998
<PAGE>
KAMINE/BESICORP NATURAL DAM L.P.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
<S> <C> <C>
Current assets:
Cash $ 967,440 1,091,152
Cash held in escrow 571,034 665,218
Accounts receivable 1,585,915 1,592,073
Prepaid expenses and other current assets 257,924 279,347
----------- -----------
Total current assets 3,382,313 3,627,790
----------- -----------
Facility under capital lease (note 4) 71,272,406 71,272,406
Less accumulated amortization 10,807,998 7,251,268
----------- -----------
Facility under capital lease, net 60,464,408 64,021,138
----------- -----------
Other assets:
Cash held in escrow 3,267,271 3,174,270
Deferred fuel costs, less accumulated amortization of $898,649
and $614,865 at December 31, 1997 and 1996, respectively
(note 7) 851,351 1,135,135
----------- -----------
Total other assets 4,118,622 4,309,405
----------- -----------
Total assets $ 67,965,343 71,958,333
----------- -----------
----------- -----------
Liabilities and Partners' Deficiency
Current liabilities:
Current installments of long-term debt (note 5) 530,502 472,347
Accounts payable 561,671 497,762
Amounts due to related parties (notes 2 and 8) 965,190 1,089,052
Accrued expenses and other current liabilities 658,162 649,694
Obligations under capital lease (note 4) 1,492,662 1,326,309
----------- -----------
Total current liabilities 4,208,187 4,035,164
Long-term debt, excluding current installments (note 5) 3,701,483 4,231,984
Obligations under capital lease (note 4) 68,320,019 69,812,681
Deferred gain on sale of Facility (note 3) 3,993,981 4,228,921
----------- -----------
Total liabilities 80,223,670 82,308,750
----------- -----------
Partners' deficiency (note 2):
General partners (3,812,416) (3,219,056)
Limited partners (8,445,911) (7,131,361)
----------- -----------
Total partners' deficiency (12,258,327) (10,350,417)
Commitments (notes 4, 5, 6 and 7) ----------- -----------
Total liabilities and partners' deficiency $ 67,965,343 71,958,333
----------- -----------
----------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP NATURAL DAM L.P.
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues (note 7) $19,228,875 19,357,075 15,254,402
---------- ---------- ----------
Operating expenses:
Amortization of asset under capital lease 3,556,730 3,556,730 3,596,043
Fuel (note 1) 2,621,165 2,530,135 1,613,462
ESA payments (note 7) -- -- 537,293
Operations and maintenance (note 7) 1,004,363 898,998 841,407
Administrative fee (notes 2 and 8) 342,006 329,368 318,786
Insurance 217,802 243,502 253,537
Amortization of fuel costs 283,784 283,784 283,784
Utilities 418,466 399,606 290,519
Property taxes 306,996 284,583 247,482
Other 315,477 174,253 175,158
---------- ---------- ----------
Total operating expenses 9,066,789 8,700,959 8,157,471
---------- ---------- ----------
Income from operations 10,162,086 10,656,116 7,096,931
---------- ---------- ----------
Other income (expense):
Interest expense (8,869,456) (9,140,381) (9,213,444)
Interest income 189,789 178,217 201,657
Gain on sale of Facility (note 3) 234,940 234,940 234,936
Other expense (53,403) (42,179) (31,169)
---------- ---------- ----------
Total other expense (8,498,130) (8,769,403) (8,808,020)
---------- ---------- ----------
Net income (loss) $ 1,663,956 1,886,713 (1,711,089)
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP NATURAL DAM L.P.
Statements of Partners' Deficiency
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Limited Total
partners partners
<S> <C> <C> <C>
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)
Partners' distributions (note 2) (1,110,850) (2,461,016) (3,571,866)
Net income (note 2) 517,490 1,146,466 1,663,956
---------- ---------- -----------
Partners' deficiency at December 31, 1997 $(3,812,416) (8,445,911) (12,258,327)
---------- ---------- -----------
---------- ---------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP NATURAL DAM L.P.
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,663,956 1,886,713 (1,711,089)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization of Facility under capital lease 3,556,730 3,556,730 3,596,043
Amortization of fuel costs 283,784 283,784 283,784
Amortization of deferred gain (234,940) (234,940) (234,936)
Changes in operating assets and liabilities:
Decrease (increase) in escrow accounts 1,183 (303,051) 154,191
Decrease (increase) in receivables 6,158 (307,514) (69,275)
Decrease (increase) in prepaid expenses and other
current assets 21,423 (25,436) 274,288
Increase (decrease) in accounts payable 63,909 (90,022) (218,037)
(Decrease) increase in due to related parties (123,862) 351,116 (1,562,487)
Increase (decrease) in accrued expenses and other
current liabilities 8,468 (7,876) (202,902)
Increase in accrued interest under capital lease -- -- 741,764
---------- ---------- ----------
Net cash provided by operating activities 5,246,809 5,109,504 1,051,344
---------- ---------- ----------
Cash flows from financing activities:
Payments on capital lease obligation (1,326,309) (1,109,418) --
Proceeds from long-term debt -- -- 1,306,590
Payments on long-term debt (472,346) (452,790) (1,593,029)
Partners' distributions (3,571,866) (3,285,899) (2,245,151)
---------- ---------- ----------
Net cash used in financing activities (5,370,521) (4,848,107) (2,531,590)
---------- ---------- ----------
(Decrease) increase in cash (123,712) 261,397 (1,480,246)
Cash at beginning of year 1,091,152 829,755 2,310,001
---------- ---------- ----------
Cash at end of year $ 967,440 1,091,152 829,755
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information -
cash paid during the year for interest $ 8,869,456 9,188,784 7,842,604
---------- ---------- ----------
---------- ---------- ----------
Noncash investing and financing activities -
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, 1997 and 1996
(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 or the Project) on premises leased from Fort James
Corporation (Fort James), formerly James River Paper Company, Inc., 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. Sales to Niagara
Mohawk Power Corporation (NIMO) approximated 94%, 96% and 98% of total revenues
in 1997, 1996 and 1995, 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.
Summary of Significant Accounting Policies
Amortization of Capital Lease
Amortization of the Facility under capital lease is computed using the
straight-line method over the lease term.
(1), Continued
Deferred Fuel Cost
The cost associated with modifying the fuel arrangements until January 1, 2001
to accommodate revised Power Purchase Agreement (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.
Revenue Recognition
<PAGE>
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 1997, 1996 and 1995 amounted to $1,660, $0 and
$34,292, 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). 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, 1997 and 1996 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
The carrying values of the Partnership's financial instruments at December 31,
1997 approximate their estimated fair value. The carrying amounts of accounts
receivable, accounts payable, and accrued expenses and other current liabilities
approximate fair
(1), Continued
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 for debt with similar maturities
and characteristics.
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 impairment 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's financial position or
results of operations.
<PAGE>
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 revenue and expenses and the disclosure
of contingent assets and 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 currently 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 (the
Commission) setting forth numerous restructuring proposals, including a
significant reduction in the price for power purchased from
(1), Continued
independent power producers currently under contract with NIMO. NIMO 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. An agreement in principle was announced on March 10,
1997 whereby NIMO would restructure or terminate the power contracts for
combinations of cash and/or debt securities, common stock and new agreements. On
July 10, 1997, NIMO announced that a master restructuring agreement was signed
with respect to 29 independent power contracts, including the one held by the
Partnership. On September 25, 1997, NIMO announced that it had reached an
agreement with the staff of the New York Department of Public Service on a rate
and restructuring plan (including recommended approval of the master
restructuring agreement). After a series of hearings and testimony by interested
parties, on December 29, 1997 the assigned Administrative Law Judge recommended
approval on the rate and restructuring plan with some modifications. On February
24, 1998, the Commission approved the master restructuring agreement. Any
restructuring remains subject to the approval of third parties for both the
Partnership and NIMO and there is no assurance that a restructuring will be
completed or that changes will not occur. The outcome of the industry trends,
regulatory changes, the NIMO negotiations and NIMO's financial viability cannot
presently be determined.
Reclassification
Certain items in the 1996 and 1995 financial statements have been reclassified
to conform with the 1997 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 Partner-
<PAGE>
ship'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).
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.
(2), Continued
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.
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 percentage 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 1997, 1996 and 1995 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 in excess of 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).
(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 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
1997, 1996 and 1995, $234,940, $234,940 and $234,936, 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 were 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, 1997, the future minimum annual lease payments for the capital
lease obligation are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 $ 9,700,570
1999 9,700,570
2000 9,700,570
2001 9,700,570
2002 9,700,570
Thereafter 110,006,273
------------
158,509,123
Less interest 88,696,442
------------
Future minimum annual lease payments $ 69,812,681
------------
------------
</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.
(5) Financing
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 $1,500,000 to fund construction for certain alterations to the Facility
that was 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
($3,193,935 and $3,398,707 outstanding at December 31, 1997 and 1996,
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
($1,038,050 and $1,305,624 outstanding at December 31, 1997 and 1996,
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, 1997 and 1996, there are no
borrowings outstanding under the Working Capital Commitment. At December 31,
1997, the Partnership has open letters of credit of $1,450,000.
(5), Continued
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:
1998 $ 530,502
1999 595,892
2000 668,457
2001 309,174
2002 342,742
---------
---------
</TABLE>
(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 6 through
25 and nominal thereafter. The lease has been assigned to M&T in connection with
the sale of the Facility.
<PAGE>
(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.
(7), Continued
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, the NIMO adjustment account at that date was eliminated. Also, 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. In
addition, the Partnership became obligated to pay NIMO $210,000 for commencing
the PPA after August 4, 1994.
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.
The Partnership entered into an Energy Service Agreement (ESA) with Fort James
dated as of November 29, 1991 and amended and restated as of October 21, 1994.
Fort James 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
the mill for the incremental cost to produce its own steam. In conjunction with
the sale to Fonda (see note 1), all of Fort James' 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 $312,000, $360,000
and $240,000 in 1997, 1996 and 1995, 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
<PAGE>
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 6-year term, unless 12 months' prior notice is given by the
Partnership to the Operator. While the Facility is on standby, compensation
includes a fee of (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEST)
plus (INFORMATION DELETED - SUBJECT OF A CONFIDENTIALITY REQUEDST) 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.
(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, 1997 and
1996. 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 ($3,587,541
outstanding at December 31, 1997) 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 1997, 1996 and
1995 was $342,006, $329,368 and $318,786, 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, 1997 and 1996, there are no outstanding amounts due to or from
KBSGF or KBC.
<PAGE>
EXHIBIT NO. 99-E
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 Exchange Act of 1933, as amended.
KAMINE/BESICORP SYRACUSE L.P.
Financial Statements
December 31, 1997 and 1996
(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, 1997 and 1996, and the related statements of operations,
partners' deficiency, and cash flows for each of the years in the three-year
period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
February 24, 1998
<PAGE>
KAMINE/BESICORP SYRACUSE L.P.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
<S> <C> <C>
Current assets:
Cash $ 4,313,991 4,087,855
Accounts receivable 2,659,189 3,140,890
Other receivables 284,133 89,319
Prepaid expenses and other current assets 796,627 848,614
----------- -----------
Total current assets 8,053,940 8,166,678
----------- -----------
Plant and equipment - cogeneration facility (notes 3 and 4) 133,955,248 129,032,968
Less accumulated depreciation 14,769,941 10,945,043
----------- -----------
Plant and equipment, net 119,185,307 118,087,925
----------- -----------
Deferred financing costs, less accumulated amortization of
$2,769,773 and 2,026,509 at December 31, 1997 and 1996,
respectively (note 4) 7,910,222 8,653,486
Deferred fuel costs, less accumulated amortization of
$13,268,928 and $9,131,070 at December 31, 1997 and 1996,
respectively (note 6) 13,710,117 17,847,975
Cash held in escrow (note 1) 10,752,980 9,413,071
Other assets 328,428 358,018
----------- -----------
Total other assets 32,701,747 36,272,550
----------- -----------
Total assets $159,940,994 162,527,153
----------- -----------
----------- -----------
Liabilities and Partners' Deficiency
Current liabilities:
Loans payable - current (note 4) 36,338,526 33,145,350
Accounts payable 3,825,910 6,427,021
Retainage payable - construction (note 6) -- 45,750
Amounts due to related parties (note 7) 2,587,790 53,064
Accrued expenses and other current liabilities 27,981 384,085
----------- -----------
Total current liabilities 42,780,207 40,055,270
Loans payable, excluding current installments (note 4) 107,070,250 112,080,750
Subordinated loans (note 6) 20,000,000 20,000,000
----------- -----------
Total liabilities 169,850,457 172,136,020
----------- -----------
Partners' deficiency (note 2):
General partners (5,124,808) (4,969,355)
Limited partners (4,784,655) (4,639,512)
----------- -----------
Total partners' deficiency (9,909,463) (9,608,867)
Commitments (notes 4, 5, 6 and 9) ----------- -----------
Total liabilities and partners' deficiency $159,940,994 162,527,153
----------- -----------
----------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP SYRACUSE L.P.
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues (note 6) $ 31,863,289 32,484,975 26,151,260
----------- ----------- -----------
Operating expenses:
Fuel (note 1) 2,913,941 4,434,907 2,447,715
Operations and maintenance (note 6) 1,124,594 1,015,063 967,150
Overhaul (note 10) (478,002) 2,721,823 --
Rent (note 5) 25,774 47,223 47,023
Management fee (note 7) 509,810 292,693 337,992
Insurance 527,229 541,759 600,983
Depreciation 3,824,898 3,551,713 3,560,896
Amortization of financing costs 743,264 730,565 734,053
Amortization of fuel costs 4,137,858 4,137,412 4,138,681
Utilities 686,497 559,768 107,639
Property tax 278,065 224,886 95,933
Other 405,782 295,753 473,353
----------- ----------- -----------
Total operating expenses 14,699,710 18,553,565 13,511,418
----------- ----------- -----------
Income from operations 17,163,579 13,931,410 12,639,842
----------- ----------- -----------
Other income (expense):
Interest expense (note 9) (17,353,347) (17,512,465) (17,200,112)
Interest income 679,555 646,462 728,454
Other expense, net (note 8) (355,696) (796,615) (848,361
----------- ----------- -----------
Total other expense (17,029,488) (17,662,618) (17,320,019)
----------- ----------- -----------
Net income (loss) $ 134,091 (3,731,208) (4,680,177)
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP SYRACUSE L.P.
Statements of Partners' Deficiency
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Limited Total
partners partners
<S> <C> <C> <C>
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)
Net income (note 2) 69,345 64,746 134,091
Partners' distributions (note 2) (224,798) (209,889) (434,687)
---------- ---------- ----------
Partners' deficiency at December 31, 1997 $(5,124,808) (4,784,655) (9,909,463)
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP SYRACUSE L.P.
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 134,091 (3,731,208) (4,680,177)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 3,824,898 3,551,713 3,560,896
Amortization of deferred fuel costs 4,137,858 4,137,412 4,138,681
Amortization of financing costs 743,264 730,565 734,053
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 481,701 (1,005,227) 320,312
(Increase) decrease in other receivables (194,814) 34,592 3,232,484
Decrease in prepaid expenses and other current
assets 51,987 578,098 1,240,534
Decrease in other assets 29,590 47,224 118,797
Increase in escrow accounts (1,339,909) (3,585,751) (4,777,705)
(Decrease) increase in accounts payable and other
accrued expenses (2,601,111) 2,458,218 (10,902,920)
(Increase) decrease in due to related parties 34,726 (599) (284,480)
---------- ---------- -----------
Net cash provided by (used in) operating
activities 5,302,281 3,215,037 (7,299,525)
----------- ------------ -------------
Cash flows from investing activities - construction and
purchase of plant and equipment, net of amounts payable (2,824,134) (1,722,750) (4,670,988)
---------- ---------- -----------
Cash flows from financing activities:
Proceeds from loans payable 4,816,506 2,739,100 37,700.000
Payments on loans payable (6,633,830) (6,495,000) (1,323,000)
Payments on loan payable - bank -- -- (24,500,000)
Partners' distributions (434,687) (128,010) (308,195)
Increase in deferred financing costs -- -- (58,014)
---------- ---------- -----------
Net cash (used in) provided by financing
activities (2,252,011) (3,883,910) 11,510,791
----------- ------------ -----------
Net increase (decrease) in cash 226,136 (2,391,623) (459,722)
Cash at beginning of year 4,087,855 6,479,478 6,939,200
---------- ---------- -----------
Cash at end of year $ 4,313,991 4,087,855 6,479,478
---------- ---------- -----------
---------- ---------- -----------
Supplemental disclosure of cash flow information - cash
paid during the year for interest $17,413,010 17,625,385 16,397,809
---------- ---------- -----------
---------- ---------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP SYRACUSE L.P.
Notes to Financial Statements
December 31, 1997 and 1996
(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 99%, 98% and 99% of
total revenues in 1997, 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 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).
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 accommodate 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
<PAGE>
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 1997, 1996 and 1995 amounted to $296,150,
$450,786 and $150,721, respectively.
Financial Instruments
The carrying values of the Partnership's financial instruments at December 31,
1997 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.
The counterparty to the interest rate swap and interest rate cap agreements is a
major financial institution. 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's 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 revenues and expenses and the disclosure
of contingent assets and 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
<PAGE>
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 currently 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 (the
Commission) setting forth numerous restructuring proposals, including a
significant reduction in the price for power purchased from independent power
producers currently under contract with NIMO. NIMO 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
(1), Continued
securities. An agreement in principle was announced on March 10, 1997 whereby
NIMO would restructure or terminate the power contracts for combinations of cash
and/or debt securities, common stock and new agreements. On July 10, 1997, NIMO
announced that a master restructuring agreement was signed with respect to 29
independent power contracts including the one held by the partnership. On
September 25, 1997, NIMO announced that it had reached an agreement in principle
with the staff of the New York Department of Public Service on a rate and
restructuring plan (including recommended approval of the master restructuring
agreement). After a series of hearings and testimony by interested parties, on
December 29, 1997 the assigned Administrative Law Judge recommended approval of
the rate and restructuring plan with some modifications. On February 24, 1998,
the Commission approved the master restructuring agreement. Any restructuring
remains subject to the approval of third parties for both the Partnership and
NIMO and there is no assurance that a restructuring will be completed or that
changes will not occur. The outcome of the industry trends, regulatory changes,
the NIMO negotiations and NIMO's financial viability cannot presently be
determined.
Cash Held in Escrow
The Partnership has established three 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 1996 and 1995 financial statements have been reclassified
to conform with the 1997 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.
(2), Continued
In addition, amounts required for payment of New York State franchise taxes by
the partners, based upon a 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 and 1995
<PAGE>
were for payment of such taxes. All partners' distributions in 1997 were for
payment of such taxes as well as net cash distributions.
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
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, 1997 and 1996 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 (13.6875% at December 31, 1997). 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
(4), Continued
request of the Partnership, converted 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 determined at the option of the Partnership
(8.1875% at December 31, 1997), with a maturity date of no later than October
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 is required to repay the aggregate unpaid
principal amount at least once each fiscal quarter. The working capital loan
bears interest at the base rate, as defined, plus a range of 1.5% to 1.625%.
There are no outstanding borrowings under this agreement as of December 31, 1997
and 1996. The Banks also agreed to provide letters of credit not to exceed
$5,800,000. At December 31, 1997 letters of credit totaling $431,132 are
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 ($28,531,776 was
<PAGE>
outstanding at December 31, 1997, the increase to the principal balance
represents accrued but unpaid interest). Interest on the LC Loan is equal to
LIBOR plus 3.0% (8.8125% at December 31, 1997). 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 available to the Partnership's 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 5.82% thereafter, with principal payments scheduled April
1, 1994 through January 1, 2003.
(4), Continued
The total scheduled amounts of loans payable due during each of the next five
years are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $36,338,526
1999 7,818,000
2000 9,111,000
2001 9,111,000
2002 10,533,300
----------
----------
</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 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 for 35 years from the
Commencement Date. In
(6), Continued
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
<PAGE>
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 to $.75 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 1997 or 1995.
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 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.
(6), Continued
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, 1997.
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, 1997 and 1996, $0 and $45,750, respectively, is due to Ansaldo under this
settlement.
(7) Related-party Transactions
Additional development fee amounts of $5,000,000 were 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. Of this amount
$2,500,000 was payable to these related parties at December 31, 1997.
<PAGE>
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 1997, 1996 and 1995 were
$509,810, $292,693 and $337,992, respectively, of which a portion thereof is
unpaid and included in amounts due to related parties at December 31, 1997, 1996
and 1995.
(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 year ended
December 31, 1995 are penalties of $21,159.
(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 1997, 1996 and 1995, this
contract resulted in interest charges of $2,154,558, $2,438,102 and $1,970,529,
respectively, for the excess of the fixed rate over the variable rate. The
notional principal amount at December 31, 1997 and 1996 is $101,738,000 and
$107,328,000, respectively. The fair value of the Partnership's future payment
obligation over the remaining life of the agreement is estimated to be
approximately $11,100,000, 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 1997 and 1996, $370,091 and $389,191, respectively, of costs resulted
from this contract. No costs resulted from this contract in 1995. 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 at December 31, 1997 and 1996. The fair
value of the Partnership's future payment obligation over the remaining life of
the agreement is estimated to be approximately $1,700,000, based on discounted
cash flows using current interest rates.
(10) Overhaul expense
The facility underwent a major overhaul during 1996. Significant expenses were
incurred related to the disassembly of the turbine, destacking of the rotor and
the inspection, refurbishment and repair of all the facility's components.
During 1997, the Partnership recovered $500,000 from the construction contractor
for the costs incurred during 1996. This amount was recorded as a reduction to
overhaul expense in 1997.
<PAGE>
EXHIBIT NO. 99-F
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 Exchange Act of 1933, as amended.
KAMINE/BESICORP BEAVER FALLS L.P.
Financial Statements
December 31, 1997 and 1996
(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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1997 in conformity with generally accepted accounting principles.
February 24, 1998
<PAGE>
KAMINE/BESICORP BEAVER FALLS L.P.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
<S> <C> <C>
Cash $ 2,385,298 7,995,240
Accounts receivable 3,025,742 3,144,776
Other receivables - 146,379
Prepaid expenses and other assets 778,596 954,636
----------- -----------
Total current assets 6,189,636 12,241,031
----------- -----------
Plant and equipment - cogeneration facility (notes 3, 4 and 5) 130,618,862 129,298,800
Less accumulated depreciation 9,901,407 6,058,454
----------- -----------
Plant and equipment, net 120,717,455 123,240,346
----------- -----------
Other assets:
Deferred financing costs, less accumulated amortization of
$3,912,605 and $2,416,876 in 1997 and 1996, respectively
(note 4) 14,381,248 15,876,977
Deferred fuel costs, less accumulated amortization of
$9,804,763 and $6,107,719 in 1997 and 1996, respectively
(note 6) 13,354,470 17,051,514
Deferred rent (note 5) 10,567,882 8,823,437
Cash held in escrow (note 1) 13,077,914 6,675,000
----------- -----------
Total assets $178,288,605 183,908,305
----------- -----------
----------- -----------
Liabilities and Partners' Equity
Current liabilities:
Loans payable - current (note 4) 16,383,419 28,515,869
Subordinated loans (note 4) 600,000 300,000
Accounts payable 683,666 2,231,302
Accrued expenses and other current liabilities 6,457,040 8,454,423
Retainage payable - construction (note 3) 50,000 6,853,452
----------- -----------
Total current liabilities 24,174,125 46,355,046
Loans payable excluding current installments (note 4) 126,975,000 115,925,000
Subordinated loans (note 4) 18,885,000 19,700,000
----------- -----------
Total liabilities 170,034,125 181,980,046
----------- -----------
Partners' equity (note 2):
General partners 5,464,399 1,276,441
Limited partner 2,790,081 651,818
----------- -----------
Total partners' equity 8,254,480 1,928,259
Commitments (notes 4, 5, 6 and 8) ----------- -----------
Total liabilities and partners' equity $178,288,605 183,908,305
----------- -----------
----------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP BEAVER FALLS L.P.
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues (note 6) $ 36,564,761 37,917,820 16,450,684
----------- ----------- -----------
Operating expenses:
Fuel (note 1) 1,773,717 5,842,570 708,926
Operations and maintenance (note 6) 1,109,315 1,205,748 499,440
Depreciation 3,842,953 3,642,583 2,415,871
Management fee (note 7) 483,698 293,293 133,885
Rent (note 5) 255,556 255,556 165,452
Amortization of deferred fuel costs 3,697,044 3,688,199 2,419,520
Amortization of financing costs 1,495,729 1,452,327 964,549
Property tax 332,366 283,445 164,746
Other 1,447,897 919,681 672,054
----------- ----------- -----------
Total operating expenses 14,438,275 17,583,402 8,144,443
----------- ----------- -----------
Income from operations 22,126,486 20,334,418 8,306,241
----------- ----------- -----------
Other income (expense):
Interest expense (note 8) (16,189,862) (15,905,220) (10,233,286)
Interest income 1,087,926 669,438 176,540
Other expenses (233,759) (370,984) (596,064)
----------- ----------- -----------
Total other expense (15,335,695) (15,606,766) (10,652,810)
----------- ----------- -----------
Net income (loss) $ 6,790,791 4,727,652 (2,346,569)
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP BEAVER FALLS L.P.
Statements of Partners' Equity (Deficiency)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Limited Total
partners partner
<S> <C> <C> <C>
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' distributions (note 2) (125,888) (64,275) (190,163)
---------- --------- ----------
Partners' equity at December 31, 1996 1,276,441 651,818 1,928,259
Net income (note 2) 4,495,504 2,295,287 6,790,791
Partners' distributions (note 2) (307,546) (157,024) (464,570)
---------- --------- ----------
Partners' equity at December 31, 1997 $ 5,464,399 2,790,081 8,254,480
---------- --------- ----------
---------- --------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP BEAVER FALLS L.P.
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 6,790,791 4,727,652 (2,346,569)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 3,842,953 3,642,583 2,415,871
Amortization of deferred fuel costs 3,697,044 3,688,199 2,419,520
Amortization of financing costs 1,495,729 1,452,327 964,549
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 119,034 (1,064,979) (2,079,797)
Decrease (increase) in other receivables 146,379 (46,284) (100,095)
Decrease (increase) in prepaid expenses and other
assets 176,040 (12,216) 780,588
Increase in deferred rent (1,744,445) (1,744,445) (2,578,992)
Increase in cash held in escrow (6,402,914) (2,088,725) (4,586,275)
(Decrease) increase in accounts payable (1,547,636) (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 6,572,975 7,070,658 (1,396,444)
----------- ---------- -------------
Cash flows from investing activities - construction and
purchase of property and equipment, net of amounts
payable (10,120,897) (1,090,513) (20,737,095)
----------- ---------- -----------
Cash flows from financing activities:
Proceeds from loan payable 18,635,823 3,503,369 42,400,000
Payments on loans payable (20,233,273) (5,362,500) --
Proceeds from subordinated loans -- -- 4,600,000
Payments on loans payable - bank -- -- (19,500,000)
Partners' distributions (464,570) (190,163) (84,883)
Decrease in deferred financing costs -- -- (1,484,325)
----------- ---------- -----------
Net cash (used in) provided by financing
activities (2,062,020) (2,049,294) 25,930,792
----------- ---------- -----------
Net (decrease) increase in cash (5,609,942) 3,930,851 3,797,253
Cash at beginning of year 7,995,240 4,064,389 267,136
----------- ---------- -----------
Cash at end of year $ 2,385,298 7,995,240 4,064,389
----------- ---------- -----------
----------- ---------- -----------
Supplemental disclosure of cash flow information - cash
paid during the year for interest, net of amounts
capitalized of $3,881,090 in 1995 (note 3) $ 16,189,862 15,974,203 10,164,303
----------- ---------- -----------
----------- ---------- -----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KAMINE/BESICORP BEAVER FALLS L.P.
Notes to Financial Statements
December 31, 1997 and 1996
(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 FiberMark Inc. (FiberMark), formerly
Specialty Paperboard, Inc., 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 97%, 96% and 99% of total
revenues in 1997, 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 the 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 1997, 1996 and 1995 amounted to $196,009,
$573,558 and $140,383, respectively.
Financial Instruments
The carrying values of the Partnership's financial instruments at December 31,
1997 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
The counterparty to the interest rate swap and interest rate cap agreements is a
major financial institution. 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's 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 revenues and expenses and the disclosure
of contingent assets and 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 currently subject to
considerable market pressures and changes in the federal and state regulatory
environment in which it operates. These pressures are resulting in industry
<PAGE>
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 (the
Commission) setting forth numerous restructuring proposals, including a
significant reduction in the price for power purchased from
(1), Continued
independent power producers currently under contract with NIMO. NIMO 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. An agreement in principle was announced on March 10,
1997 whereby NIMO would restructure or terminate the power contracts for
combinations of cash and/or debt securities, common stock and new agreements. On
July 10, 1997, NIMO announced that a master restructuring agreement was signed
with respect to 29 independent power contracts, including the one held by the
Partnership. On September 25, 1997, NIMO announced that it had reached an
agreement with the staff of the New York Department of Public Service on a rate
and restructuring plan (including recommended approval of the master
restructuring agreement). After a series of hearings and testimony by interested
parties, on December 29, 1997 the assigned Administrative Law Judge recommended
approval on the rate and restructuring plan with some modifications. On February
24, 1998, the Commission approved the master restructuring agreement. Any
restructuring remains subject to the approval of third parties for both the
Partnership and NIMO and there is no assurance that a restructuring will be
completed or that changes will not occur. The outcome of the industry trends,
regulatory changes, the NIMO negotiations 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, 1997 consists of an
escrow reserve for debt payments, major maintenance payments and capital
expenditures.
Reclassification
Certain items in the 1996 and 1995 financial statements have been reclassified
to conform with the 1997 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
(2), Continued
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.
In addition, amounts required for payment of New York State franchise taxes by
the partners, based upon a 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 1997, 1996 and 1995 were for payment of such taxes.
(3) Plant and Equipment
<PAGE>
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, 1997 and 1996 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 administrative 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 September 30, 2007 (8.1875%
at December 31, 1997). 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.
(4), Continued
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 is required to repay the aggregate unpaid
principal amount at least once each fiscal quarter. The working capital loan
bears interest at the base rate, as defined, plus a range of 1.25% to 1.50%.
There are no outstanding borrowings as of December 31, 1997 and 1996. The Banks
also agreed to provide letters of credit not to exceed $5,400,000. At December
31, 1997, letters of credit totaling $200,000 were outstanding.
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 ($6,633,419 was
outstanding at December 31, 1997, the increase to the original principal balance
represents accrued but unpaid interest). Interest on the LC Loan is equal to
LIBOR plus 3.0% (8.75% at December 31, 1997). 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 Partnership's LC Loan is paid in full and the LC
Loan of the Partnership's affiliate, Kamine/Besicorp Syracuse L.P. (KBS),
remains unpaid, all monies that would be available to the Partnership's equity
and cash flow holders will be loaned to KBS to repay its 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 (13.6875% at December 31, 1997). Principal payments
are paid quarterly and continue until maturity at September 30, 2009. SVBF and
Ansaldo will each receive a 5.5% and 6.0% share, respectively, 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
<PAGE>
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.
(4), Continued
The total scheduled amounts of loans payable due during each of the next five
years are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 $ 16,983,419
1999 11,862,500
2000 12,012,500
2001 12,887,500
2002 14,406,250
-----------
-----------
</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 FiberMark. The Partnership
pays rent of $1 per year through May 2041, plus cash payments totaling
$11,500,000 on various milestone dates, all of which has been paid at December
31, 1997. These payments are deferred and amortized on a straight-line basis
over the term of the lease.
(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 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.
(6), Continued
The Partnership has entered into an Energy Service Agreement (ESA) with
FiberMark for two of FiberMark's mills. The term of the ESA, as amended, is 40
years from Commercial Operation, as defined by the PPA. On March 22, 1996,
FiberMark 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
FiberMark'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 $320,000 and $483,000 in 1997 and 1996, respectively. There
were no
<PAGE>
revenues recognized pursuant to this agreement in 1995.
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.
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, 1997 and 1996.
(7) Related-party Transactions
Additional development fee amounts of $2,000,000 were 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, 1997, 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 1997, 1996 and 1995 were
$483,698, $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 2.50% over the scheduled
life of the debt has been effectively converted to fixed rate debt with a range
of 6.7% to 8.27% plus a range of 2.25% to 2.50%. For the years ended December
31, 1997 and 1996, $947,036 and $1,205,025 of costs, respectively, resulted from
this contract. The notional principal amount of this agreement at December 31,
1997 was $120,498,000. The fair value of the Partnership's future payment
obligation over the remaining life of the agreement is estimated to be
approximately $10,400,000 based on discounted cash flows using current interest
rates.
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, 1997 and 1996, $251,899 and
$264,064, respectively, of costs resulted
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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, 1997 was $20,000,000. The
fair value of the Partnership's future payment obligations over the remaining
life of the agreement is estimated to be approximately $1,100,000 based on
discounted cash flows using current interest rates.
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