SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)of the Securities Exchange Act of 1934
(Amendment No.3)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[_] Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
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Besicorp Group Inc.
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, par value $.10 per share
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2) Aggregate number of securities to which transaction applies:
3,051,435 shares of Common Stock
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3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
$34.50 per share
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4) Proposed maximum aggregate value of transaction:
$105,274,507.50
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5) Total fee paid:
$21,055.00
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[X] Fee paid previously with preliminary materials:
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
1) Amount previously paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
BESICORP GROUP INC.
1151 FLATBUSH ROAD
KINGSTON, NEW YORK 12401
March 1, 1999
To Our Shareholders:
You are cordially invited to attend a Special Meeting of Shareholders
of Besicorp Group Inc. ("Besicorp") to be held at 9:00 a.m. local time on March
19, 1999 in the Kent Room at the Warwick Hotel, 65 West 54 Street, New York, New
York.
At this important meeting, you will be asked to consider and vote upon
an Agreement and Plan of Merger, as amended (the "Plan of Merger"), by and among
Besicorp, BGI Acquisition LLC ("Acquisition") and BGI Acquisition Corp., a
wholly owned subsidiary of Acquisition. If the merger contemplated by the Plan
of Merger is completed, Besicorp will be owned by Acquisition and you will
receive $34.50 in cash (subject to upward adjustment if the Base Amount (as
defined in the Plan of Merger) exceeds $105,275,000), without any interest
thereon, for each share of Besicorp Common Stock you own. The Plan of Merger is
attached as Annex A to the Proxy Statement. In addition, immediately before the
merger, Besicorp will distribute (the "Spin-Off") to its shareholders on a pro
rata basis all of the shares of common stock of Besicorp Ltd. ("Newco"), a
subsidiary of Besicorp, which will, among other things, own Besicorp's
photovoltaic and independent power plant development businesses and have assumed
essentially all of Besicorp's liabilities and obligations. An Information
Statement containing information regarding the Spin-Off and Newco will be sent
to Besicorp's shareholders in conjunction with the Spin-Off. The Spin-Off does
not require your approval.
The Plan of Merger will be adopted only if the holders of at least 66
2/3% of the outstanding shares of Besicorp vote in its favor.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE
BEST INTERESTS OF, BESICORP AND ITS SHAREHOLDERS. THE BOARD OF DIRECTORS HAS
UNANIMOUSLY ADOPTED THE TERMS OF THE PLAN OF MERGER AND UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR THE ADOPTION OF THE PLAN OF MERGER.
Josephthal & Co., Inc., the financial advisor to Besicorp, has
delivered a written opinion to the Board of Directors of Besicorp that as of
November 20, 1998, the last business day prior to the date of the initial plan
of merger, the consideration to be received by each shareholder of Besicorp in
connection with the merger is fair from a financial point of view to Besicorp's
shareholders. You should read a copy of this opinion which is attached as Annex
B to the Proxy Statement.
Important information regarding Besicorp and the proposed merger is
included in the enclosed Proxy Statement. You are urged to read the Proxy
Statement carefully.
<PAGE>
Your vote is important. Whether or not you plan to attend the Special
Meeting, please complete, sign and date your proxy card and return it in the
enclosed envelope or by facsimile transmission to Continental Stock Transfer &
Trust Company ("Continental"). To return this card by fax, you must photocopy
both sides of the signed card so that they appear on the same page and fax the
photocopy to Continental at (212) 509-5152, Attn: Proxy Department. If you do
attend, you will be entitled to vote in person, and such vote will revoke your
proxy.
Sincerely,
/s/ Michael F. Zinn
-------------------
Michael F. Zinn
Chairman of the Board,
President and Chief Executive Officer
<PAGE>
BESICORP GROUP INC.
1151 FLATBUSH ROAD
KINGSTON, NEW YORK 12401
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders (the
"Special Meeting") of Besicorp Group Inc., a New York corporation (the "Company"
or "Besicorp"), will be held in the Kent Room at the Warwick Hotel, 65 West 54
Street, New York, New York on March 19, 1999 at 9:00 a.m. (local time) to:
(i) consider and vote upon a proposal to adopt the Agreement
and Plan of Merger dated November 23, 1998, as amended by Amendment No. 1 to the
Agreement and Plan of Merger dated January 28, 1999 and Amendment No. 2 to the
Agreement and Plan of Merger dated February 16, 1999 (as amended, the "Plan of
Merger")(a copy of which is attached as Annex A to the accompanying Proxy
Statement), by and among Besicorp, BGI Acquisition LLC ("Acquisition"), a
Wyoming limited liability company, and BGI Acquisition Corp. ("Merger Sub"), a
New York corporation and a wholly owned subsidiary of Acquisition, and
(ii) transact such other business as may properly be brought
before the Special Meeting or any adjournment or postponement thereof.
THE BOARD OF DIRECTORS OF BESICORP HAS UNANIMOUSLY DETERMINED THAT THE
PLAN OF MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, BESICORP AND ITS
SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS ADOPTION OF THE PLAN OF MERGER.
All shareholders are cordially invited to attend the Special Meeting.
Only shareholders of record at the close of business on February 3, 1999 are
entitled to notice of and to vote at the Special Meeting or any adjournment
thereof. The affirmative vote of at least 66 2/3% of the shares of the Besicorp
Common Stock outstanding on such record date is necessary to adopt the Plan of
Merger. PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND MAIL IT IN
THE ENCLOSED ENVELOPE WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING.
YOU MAY ALSO RETURN THE PROXY CARD BY FACSIMILE TRANSMISSION TO CONTINENTAL
STOCK TRANSFER & TRUST COMPANY ("CONTINENTAL"). TO RETURN THE CARD BY FAX, YOU
MUST PHOTOCOPY BOTH SIDES OF THE SIGNED PROXY CARD SO THAT THEY APPEAR ON THE
SAME PAGE AND FAX THE PHOTOCOPY TO CONTINENTAL AT (212) 509-5152, Attn: Proxy
Department.
BY ORDER OF THE BOARD OF DIRECTORS
/S/ Michael F. Zinn
------------------------------------------
Michael F. Zinn, Chairman of the Board,
President and Chief Executive Officer
Dated: March 1, 1999
<PAGE>
BESICORP GROUP INC.
1151 FLATBUSH ROAD
KINGSTON, NEW YORK 12401
------------------
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 19, 1999
------------------
This Proxy Statement is furnished to the holders of common stock, par
value $.10 per share ("Besicorp Common Stock"), of Besicorp Group Inc.
("Besicorp" or the "Company"), in connection with the solicitation of proxies by
the Board of Directors (the "Board") of Besicorp for use at the special meeting
of the shareholders of Besicorp to be held at 9:00 a.m., local time, on March
19, 1999 in the Kent Room at the Warwick Hotel, 65 West 54 Street, New York, New
York, and at any adjournment or postponement thereof (the "Special Meeting").
The purpose of the Special Meeting is to consider and vote upon an
Agreement and Plan of Merger dated November 23, 1998 (the "Initial Plan of
Merger"), as amended by Amendment No. 1 to the Agreement and Plan of Merger
dated January 28, 1999 ("Amendment No. 1") and Amendment No. 2 to the Agreement
and Plan of Merger dated February 16, 1999 ("Amendment No.2;" the Initial Plan
of Merger as amended by Amendment No. 1 and Amendment No. 2, the "Plan of
Merger") by and among Besicorp, BGI Acquisition LLC ("Acquisition"), a Wyoming
limited liability company, and BGI Acquisition Corp. ("Merger Sub" and together
with Acquisition, the "Buyer"), a New York corporation and a wholly owned
subsidiary of Acquisition. The Plan of Merger provides that Merger Sub will be
merged with and into Besicorp, with Besicorp being the surviving corporation
(the "Surviving Corporation") and wholly owned by Acquisition (the "Merger"). If
the Merger is consummated, Besicorp's shareholders will be entitled to receive
$34.50 in cash (subject to upward adjustment if the Base Amount (as defined in
the Plan of Merger, a copy of which is annexed hereto as Annex A) exceeds
$105,275,000 (the "Merger Consideration")), without any interest thereon, for
each share of Besicorp Common Stock. If the closing of the Merger (the
"Closing") had occurred on February 25, 1999, Besicorp estimates the upward
adjustment would have been $2.59 per share. It is anticipated that if there is
any upward adjustment, such adjustment will not exceed approximately $4.00 per
share. There will not be a downward adjustment to the Merger Consideration;
however, no assurance can be given that there will be any upward adjustment to
the Merger Consideration. See "Summary - The Merger Consideration" and "Plan of
Merger - Merger Consideration" for a description of the manner in which the
amount to be paid to Besicorp's shareholders is subject to upward adjustment. As
a result of these adjustment provisions, the exact amount to be received by
Besicorp's shareholders in excess of $34.50 per share is currently not precisely
determinable, is subject to confirmation by the parties to the Plan of Merger
and may not be determined until after shareholders have returned their proxies
with respect to the Special Meeting. Shareholders
<PAGE>
should base their decision on whether to adopt the Plan of Merger on a price of
$34.50 per share. Prior to the consummation of the Merger, Besicorp will
distribute to its shareholders on a pro rata basis all of the shares of common
stock ("Newco Common Stock") of Besicorp Ltd. ("Newco"), a subsidiary of
Besicorp (the "Spin-Off"), which at the time of the Spin-Off will (i) have
assumed essentially all of Besicorp's liabilities and obligations other than the
Permitted Liabilities (as defined below), for which the Surviving Corporation
remains liable, and (ii) own Besicorp's photovoltaic and independent power plant
development businesses and all of Besicorp's assets other than the following
assets (which assets will indirectly be acquired by Buyer in the Merger): (a)
Besicorp's cash (except for $1.5 million which Besicorp will contribute to
Newco, $6.5 million to fund the Escrow Fund (as defined), $2 million to pay
bonuses payable in connection with the consummation of the Merger and to pay
approximately $2 million in the estimated expenses of Transaction (as defined));
(b) securities owned by Besicorp (including the shares of common stock of
Niagara Mohawk Power Corporation); (c) the subsidiaries of Besicorp that own the
Partnership Interests (as defined) in the Power Plants and the Corporate
Headquarters (as defined); and (d) other assets consisting primarily of claims
of Besicorp and awards made to Besicorp in the aggregate face amount of
approximately $1.1 million. See "Unaudited Pro Forma Financial Information,"
"Summary - The Spin-Off" and "The Spin-Off -- The Contribution." Management
currently estimates that Newco will have a value ranging from $4.5 million to
$5.5 million. An Information Statement containing additional information
regarding the Spin-Off and Newco will be sent to Besicorp's shareholders in
conjunction with the Spin-Off. The Spin-Off does not require approval of
Besicorp's shareholders; however, the Spin- Off will not occur unless all the
conditions to the Merger (other than the Spin-Off) have been satisfied or
waived. See "The Spin-Off." The consummation of the Merger is subject to the
satisfaction (or waiver) of various conditions, including the shareholders'
adopting the Plan of Merger, the occurrence of the Spin-Off, confirmation of
Besicorp and Buyer with respect to the calculation of the Base Amount, such Base
Amount not being less than $105,275,000 and Merger Sub's having received debt
financing (the "Financing"), which, together with the equity to be contributed
to Merger Sub will be in an amount necessary to pay the Merger Consideration and
consummate the Merger. See "Plan of Merger -- Conditions to the Merger."
The Besicorp Common Stock is listed on the American Stock Exchange
Emerging Company Marketplace ("AMEX ECM") under the symbol "BGI.EC". As of
February 25, 1999, the last reported sales price of the Besicorp Common Stock
was $32-1/4. See "Market Information Regarding Besicorp Common Stock."
This Proxy Statement is dated March 1, 1999 and is, along with the
accompanying form of proxy, first being distributed to the shareholders of
Besicorp on or about such date.
AVAILABLE INFORMATION
Besicorp is required by the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), to file certain reports and documents with the Securities
and Exchange Commission (the "SEC"). These reports and documents may be
inspected and copied at the public reference facilities maintained by the SEC at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
<PAGE>
Washington, D.C. 20549 and are available for inspection and copying at the
public reference facilities maintained by the regional offices of the SEC
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such information can be obtained by mail from the Public
Reference Section of the SEC, Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Besicorp Common Stock is listed on the
American Stock Exchange Emerging Company Marketplace under the symbol "BGI.EC".
Reports, proxy and information statements, and other information concerning
Besicorp can also be inspected at the American Stock Exchange at 86 Trinity
Place, New York, New York 10006.
The SEC maintains a World Wide Web site that contains reports and
documents regarding Besicorp. The address of the SEC's web site is
http:\\www.sec.gov.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S>
<C>
SUMMARY..................................................................................................5
The Parties.....................................................................................5
The Special Meeting.............................................................................5
The Merger Consideration .......................................................................5
Record Date; Quorum; Vote Required..............................................................6
Background of the Merger........................................................................7
Recommendation of Besicorp's Board of Directors.................................................8
Opinion of Financial Advisor....................................................................8
Interests of Executive Officers and Directors in the Merger.....................................8
Conditions to the Merger........................................................................9
Termination.....................................................................................9
Effective Date; Cancellation of Stock Certificates; and
Receipt of Merger Consideration ...........................................................9
Dissenters' Rights..............................................................................10
Material Federal Income Tax Consequences........................................................10
Spin-Off........................................................................................10
Trading Market for and Market Price of Besicorp Common Stock....................................12
VOTING AT THE SPECIAL MEETING............................................................................12
Introduction....................................................................................12
Time, Date and Place of Meeting.................................................................12
Record Date; Vote Required......................................................................12
Quorum..........................................................................................13
Solicitation, Revocation and Use of Proxies.....................................................13
Dissenters' Rights..............................................................................14
FACTORS TO BE CONSIDERED.................................................................................14
Purposes and Effects of the Merger .............................................................14
Background of the Merger .......................................................................15
Recommendation of the Board of Directors; Fairness of the Merger ...............................20
Opinion of Financial Advisor....................................................................21
Partial Liquidation Alternative .......................................................22
Reinvestment Alternative...............................................................23
Price Volume Trading History...........................................................23
Interests of Executive Officers and Directors in the Merger.....................................25
Certain Effects of the Merger...................................................................27
Material Federal Income Tax Consequences........................................................27
Regulatory and Other Approvals..................................................................29
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S>
<C>
PLAN OF MERGER...........................................................................................29
The Merger......................................................................................29
Merger Consideration............................................................................30
Representations and Warranties..................................................................31
Certain Covenants...............................................................................32
Conduct of Business Pending the Merger.................................................32
Acquisition Proposals..................................................................33
Indemnification .......................................................................34
Conditions to the Merger........................................................................34
Financing Condition ...................................................................34
Other Conditions to the Merger ........................................................34
Termination ....................................................................................35
Right to Terminate ....................................................................35
Remedies ..............................................................................36
Damages ...............................................................................36
INDEMNIFICATION AGREEMENT................................................................................37
ESCROW AGREEMENT.........................................................................................38
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS...................................................39
EFFECT ON OPTIONS, WARRANTS AND RESTRICTED STOCK.........................................................39
FEES AND EXPENSES........................................................................................39
UNAUDITED PRO FORMA FINANCIAL INFORMATION................................................................40
BUSINESS OF THE COMPANY..................................................................................47
Background .....................................................................................47
Power Plant Activities .........................................................................47
Discontinued Operations and Recent Developments........................................47
Current Operations.....................................................................48
Foreign Regulatory Compliance and
Other Risks of International Operations...........................................49
Solar Energy Activities.........................................................................49
Current Operations.....................................................................49
Discontinued Operations and Recent Developments........................................50
Sales and Distribution..........................................................................50
Customers and Backlog...........................................................................50
Competition.....................................................................................50
Suppliers.......................................................................................51
Research and Development........................................................................51
Intellectual Property...........................................................................51
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>
<C>
Government Regulation and Environmental Matters.................................................51
Employees ......................................................................................51
Properties......................................................................................52
Legal Proceedings...............................................................................52
Security Ownership of Certain Beneficial Owners and Management..................................55
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS...................................... 56
Recent Developments.............................................................................56
Results of Operations...........................................................................57
Liquidity and Capital Resources.................................................................63
Year 2000.......................................................................................64
MARKET INFORMATION REGARDING BESICORP COMMON STOCK.......................................................65
THE SPIN-OFF.............................................................................................66
Background......................................................................................66
The Contribution................................................................................66
The Spin-Off....................................................................................67
Conditions to the Spin-Off......................................................................68
INFORMATION REGARDING ACQUISITION AND MERGER SUB.........................................................68
OTHER MATTERS............................................................................................68
ANNUAL MEETING OF SHAREHOLDERS...........................................................................68
INDEPENDENT PUBLIC ACCOUNTANTS...........................................................................68
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF BESICORP GROUP INC. ....................................................................... F-1
INDEX TO THE FINANCIAL STATEMENTS OF THE PARTNERSHIPS................................................... F-1
Annex A-1 -- Initial Plan of Merger
Annex A-2 -- Amendment No. 1 to the Agreement and Plan of Merger
Annex A-3 -- Amendment No. 2 to the Agreement and Plan of Merger
Annex B -- Fairness Opinion of Josephthal & Co., Ltd.
Annex C -- Subsidiaries of Besicorp
</TABLE>
4
<PAGE>
SUMMARY
The following is a summary of certain information contained in this
Proxy Statement (including the annexes). Because this is a summary, it does not
contain all the information that may be important to you. You should read the
entire Proxy Statement and its annexes carefully before you decide whether to
vote your shares in favor of the Plan of Merger. Capitalized terms used without
being defined herein shall have the meanings ascribed to such terms by the Plan
of Merger.
THE PARTIES
Besicorp Group Inc., a New York corporation ("Besicorp" or the
"Company"), is engaged in the development of independent power plants and the
development, assembly, manufacture, marketing and resale of photovoltaic
products and systems. Besicorp's principal executive offices are located at 1151
Flatbush Road, Kingston, New York 12401, (914) 336- 7700. See "Business of the
Company."
BGI Acquisition LLC ("Acquisition") is a limited liability company
organized in Wyoming. BGI Acquisition Corp. ("Merger Sub") is a New York
corporation and a wholly owned subsidiary of Acquisition. Merger Sub and
Acquisition have not carried on any activities, other than in connection with
the Merger. Acquisition is wholly owned by Lion Gate, LLC, a limited liability
company organized under the laws of the British Virgin Islands. Lion Gate, LLC
is engaged in the business of trading and investments. The sole member of Lion
Gate, LLC is Mr. Thamer Bin Saeed Al-Shanfari, a citizen of the Sultanate of
Oman. See "Information Regarding Acquisition and Merger Sub."
THE SPECIAL MEETING
The Special Meeting of the shareholders of Besicorp will be held at
9:00 a.m. (local time) on March 19, 1999, in the Kent Room at the Warwick Hotel,
65 West 54 Street, New York, New York.
The Special Meeting will be held to permit holders of shares of
Besicorp Common Stock to vote upon a proposal to adopt the Plan of Merger, a
copy of which is attached hereto as Annex A. The Plan of Merger provides for the
merger of Merger Sub with and into Besicorp and contemplates that prior to the
consummation of the Merger, Besicorp will distribute to its shareholders on a
pro rata basis all of the shares of Newco Common Stock. Newco at such time will,
among other things, own Besicorp's photovoltaic and independent power plant
development businesses and have assumed essentially all of Besicorp's
liabilities and obligations other than the Permitted Liabilities, for which the
Surviving Corporation remains liable.
<PAGE>
THE MERGER CONSIDERATION
If the Plan of Merger is adopted and the Merger consummated, each share
of Besicorp Common Stock issued and outstanding immediately prior to the
Effective Date (as defined) will be converted into the right to receive $34.50
in cash (subject to upward adjustment if the Base Amount exceeds $105,275,000,
as described herein and in the Plan of Merger), without any interest thereon.
See "Plan of Merger -- Merger Consideration." It is anticipated that if there is
any upward adjustment, such adjustment will not exceed approximately $4.00 per
share. There will not be a downward adjustment to the Merger Consideration;
however, no assurance can be given that there will be any upward adjustment to
the Merger Consideration.
The Base Amount is determined pursuant to the following formula:
The Base Amount is basically:
(A) the sum of:
(i) $500,000,
(ii) a claimed tax refund for fiscal year 1998 (but only up to
$3,909), (iii) Besicorp's cash and cash equivalents as of the
Effective Date, (iv) .9975 multiplied by the price of a share
of Niagara Mohawk Common Stock as of the trading day before
the Closing Date multiplied by the number of shares of Niagara
Mohawk Common Stock held by Besicorp as of the Effective Date
(not to exceed 50,000 shares), and (v) the liabilities of
Besicorp or any Remaining Subsidiary for unpaid federal income
taxes for the current fiscal year through the Effective Date
multiplied by .8357, less
(B) the sum of:
(i) all liabilities of Besicorp or a Remaining Subsidiary
(excluding certain state income tax and certain intercompany
liabilities) determinable as of the Effective Date; (ii) an
estimate of all Damages, and certain other damages; and (iii)
transfer and similar taxes incurred in connection with the
Transactions, assuming the prior establishment of the Escrow
Fund.
As an example, on February 25, 1999, based on the most recent
ascertainable financial information, Besicorp estimates that the Base Amount
would have equaled $113,174,721 (after deducting an aggregate of an additional
$5.5 million for (i) the estimated costs of the Transactions, (ii) paying
bonuses and (iii) contributing $1.5 million in cash to Newco). Since this
exceeds $105,275,000 by $7,899,721, there would be an upward adjustment of
$7,899,721 divided by 3,051,435 (the number of shares of Besicorp Common Stock
on a fully diluted basis
<PAGE>
(which is assumed to be the number of shares outstanding as of the Effective
Date)), or $2.59 per share of Besicorp Common Stock so that the Merger
Consideration would equal $37.09. The aggregate amount of the payment to be made
by Acquisition pursuant to the Plan of Merger equals the Merger Consideration
multiplied by the number of shares of Besicorp Common Stock outstanding
immediately prior to the Effective Date. This aggregate amount cannot be
determined at present. However, assuming that there are 3,051,435 shares
outstanding, this amount shall be no less than $105,275,000 and in the above
example would amount to $113,177,724. The aggregate amount is not likely to
exceed $117 million.
In order to determine whether there will be an adjustment to the Merger
Consideration, Besicorp is required no later than twenty days prior to Closing
to deliver to Buyer a statement (the "Statement") setting forth the components
of the Base Amount. The Statement is to be prepared in accordance with the
generally accepted accounting principles applied in preparation of Besicorp's
financial statements, with items to be reflected regardless of materiality and
all accruals known or contemplated for Liabilities of Besicorp or a Remaining
Subsidiary as of the Effective Date to be reflected. Besicorp and Buyer are to
use their reasonable best efforts to reach agreement on any disputed components
of the Statement prior to the Closing. In the event that Besicorp and Buyer are
unable to reach an agreement on the Statement within three days prior to
Closing, the Plan of Merger will be deemed terminated. It is the intent of the
parties to hold the Closing promptly following the Special Meeting;
therefore, it is anticipated that the Statement shall have been finalized prior
to the Special Meeting and the amount of the upward adjustment, if any, will
have been determined prior to such Special Meeting. See "Plan of Merger --
Merger Consideration."
5
RECORD DATE; QUORUM; VOTE REQUIRED
Only holders of record of Besicorp Common Stock as of the close of
business on February 3, 1999 (the "Record Date") will be entitled to notice of
and to vote at the Special Meeting. On the Record Date, 3,038,935 shares of
Besicorp Common Stock were outstanding.
The presence, in person or by proxy, of the holders of a majority of
the shares of Besicorp Common Stock outstanding on the Record Date is required
to constitute a quorum at the Special Meeting. See "Voting at the Special
Meeting -- Quorum." Shareholders of record on the Record Date are entitled to
one vote per share on any matter which may properly come before the Special
Meeting. For the Plan of Merger to be adopted, holders of at least 66 2/3% of
the shares of Besicorp Common Stock outstanding as of the Record Date must vote
in its favor. Abstentions and broker-non-votes will have the effect of votes
against the Plan of Merger. Abstentions, but not broker non-votes, will be
counted in determining the presence of a quorum. If the shareholders do not
adopt the Plan of Merger, the Merger, in its current form, will not be
consummated. See "Plan of Merger -- Conditions to the Merger."
As of the Record Date, the executive officers and directors of Besicorp
owned an aggregate of 1,598,707 shares of Besicorp Common Stock, representing
52.6% of the
<PAGE>
outstanding shares of Besicorp Common Stock without giving effect to shares (the
"Conversion Shares") issuable upon exercise or conversion of options, warrants
or other outstanding rights to acquire Besicorp Common Stock (the "Rights").
None of the Conversion Shares will be eligible to vote at the Special Meeting.
See "Factors to be Considered - Interests of Executive Officers and Directors in
the Merger." In addition, as of the Record Date, The Zinn Family Charitable
Trust (the "Trust") established by Michael F. Zinn, the Chairman of the Board,
President and Chief Executive Officer of Besicorp, owned 126,984 shares of
Besicorp Common Stock (Mr. Zinn disclaims beneficial ownership of these shares).
See "Business of the Company--Security Ownership of Certain Beneficial Owners
and Management." Accordingly, the favorable vote of only 300,266 shares (in
addition to the shares owned by the executive officers and directors and the
Trust, all of whom intend to vote such shares in favor of adopting the Plan
of Merger) of Besicorp Common Stock is required for adoption of the Plan
of Merger by Besicorp's shareholders. See "Voting at the Special Meeting --
Record Date; Vote Required" and "Plan of Merger -- Termination -- Damages."
6
BACKGROUND OF THE MERGER
Besicorp through wholly owned subsidiaries held, until recently,
ownership interests (the "Partnership Interests") in five domestic power plants
(the "Power Plants") which, pursuant to power purchase agreements (the "Power
Purchase Agreements"), provided capacity and electrical power to Niagara Mohawk
Power Corporation ("Niagara Mohawk"). On or about October 1995, Niagara Mohawk
announced its intention to renegotiate the Power Purchase Agreements and similar
agreements it had with other independent power producers. As a result of these
negotiations, the partnerships (the "Partnerships") which owned the Power
Plants, Niagara Mohawk and certain other independent power producers entered
into a Master Restructuring Agreement (the "MRA") in July 1997, which became
effective on June 30, 1998, and which provided for, among other things, the
termination or restructuring of the Power Purchase Agreements. Following the
effectiveness of the MRA, the Power Plants were sold. In connection therewith,
Besicorp has received through December 31, 1998, among other things, common
stock of Niagara Mohawk (the "Niagara Mohawk Common Stock") with a value of
approximately $69 million at June 30, 1998 and net cash of approximately $70
million (inclusive of Besicorp's share of the net proceeds of the Power Plant
sales, which occurred in December 1998, of approximately $11 million), $4
million of which remained subject to certain reserves as of December 31, 1998.
See Note 5 of Notes to Consolidated Financial Statements of Besicorp Group Inc.
Anticipating, among other things, that (i) the proceeds to be received as a
result of the MRA would substantially exceed the operating and projected
operating needs of Besicorp's remaining businesses, and (ii) after the
termination of these Power Purchase Agreements, the power generated by the
Power Plants could not be sold profitably, Besicorp, in March, 1997,
retained PaineWebber, and, after such relationship was terminated as of
November 1997 by PaineWebber (PaineWebber having discontinued the department
representing Besicorp), retained Josephthal & Co., Inc. ("Josephthal") in
December 1997 to assist Besicorp in formulating and consummating a strategy or
transaction to maximize the value of the MRA to Besicorp's shareholders and
in February 1998 the Partnerships retained Josephthal to sell the Power Plants.
<PAGE>
The proceeds of the MRA and the sale of the Power Plants far exceed
Besicorp's requirements for its remaining businesses (i.e., the photovoltaic
business and its independent power plant development business (the "Continuing
Businesses")); moreover, in management's opinion, the risks associated with
reinvesting the after-tax proceeds (the "Proceeds") from the MRA and the Power
Plant sales in such businesses exceed the benefits that could potentially be
realized from such reinvestment.
Since investing the Proceeds in the Continuing Businesses would
constitute a risky investment, Besicorp concluded it would be preferable, and
safer from the perspective of the shareholders of Besicorp, not to invest the
Proceeds (other than the $1.5 million Besicorp currently anticipates
contributing to Newco in connection with the Spin-Off) in the Continuing
Businesses. Therefore, Besicorp considered how best to go forward with the
Continuing Businesses, that in management's estimate would not be likely to
generate significant profits, if any, for the next several years, and with the
cash and shares of Niagara Mohawk Common Stock that Besicorp received as
proceeds of the MRA and the sale of the Power Plants.
Besicorp concluded that in light of the fact that its experience was
principally in developing and managing independent power plants and the solar
power business (the "Historical Company Businesses"), it would be inappropriate
to invest the Proceeds in a business new to Besicorp (i.e., businesses unrelated
to the Historical Company Businesses) in which Besicorp had no experience.
Besicorp concluded it would focus primarily on the continued development and
marketing of its photovoltaic products and systems and on the development of
independent power plants.
Besicorp concluded, after considering various alternatives, and
soliciting both cash and non-cash bids for Besicorp, that the sale of Besicorp
(other than the Continuing Businesses) for cash would be more beneficial to its
shareholders than any other viable alternative. This ultimately led Besicorp to
decide to effectuate the spin-off of the Continuing Businesses to its
shareholders pursuant to the Spin-Off, and enter into the Plan of Merger to seek
to maximize the return to Besicorp's shareholders on the Proceeds.
On behalf of Besicorp, Josephthal contacted approximately 40 different
entities to discuss their interest in pursuing some type of transaction with
Besicorp such as purchasing substantially all of its assets or making a tender
offer for all of the Besicorp Common Stock. As a result of Josephthal's efforts,
a transaction between Besicorp and Acquisition was proposed. From late August
through early September 1998, Besicorp and Acquisition exchanged proposed forms
of a letter of intent. During the months of September through November 1998,
representatives of Besicorp and Acquisition met numerous times and held
discussions by telephone to negotiate the terms and conditions of a plan of
merger, drafts of which were circulated from time to time. On November 23, 1998,
the Initial Plan of Merger was signed. See "Factors to be Considered --
Background of the Merger."
7
<PAGE>
RECOMMENDATION OF BESICORP'S BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF BESICORP HAS UNANIMOUSLY DETERMINED THAT THE
PLAN OF MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, BESICORP AND ITS
SHAREHOLDERS. THE BOARD OF DIRECTORS OF BESICORP UNANIMOUSLY RECOMMENDS ADOPTION
OF THE PLAN OF MERGER BY BESICORP'S SHAREHOLDERS. For a discussion of the
factors considered by Besicorp's Board of Directors in adopting the Plan of
Merger, see "Factors to be Considered."
OPINION OF FINANCIAL ADVISOR
Josephthal has delivered to the Board of Directors of Besicorp a
written opinion dated November 20, 1998, to the effect that, as of the date of
such opinion and based upon and subject to certain matters stated therein, the
Merger Consideration (assuming that the merger consideration is $34.50 per
share) was fair, from a financial point of view, to the holders of Besicorp
Common Stock. The full text of the written opinion of Josephthal which sets
forth the assumptions made, matters considered and limitations on the review
undertaken, is attached as Annex B to this Proxy Statement and should be read
carefully in its entirety. THE OPINION OF JOSEPHTHAL IS DIRECTED TO THE BOARD OF
DIRECTORS OF BESICORP AND RELATES ONLY TO THE FAIRNESS OF THE MERGER
CONSIDERATION FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT
OF THE MERGER (INCLUDING, WITHOUT LIMITATION, THE SPIN-OFF AND ITS EFFECT ON THE
MERGER CONSIDERATION) OR ANY RELATED TRANSACTIONS, AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE HIS
SHARES AT THE SPECIAL MEETING. A PORTION OF JOSEPHTHAL'S COMPENSATION IS
CONTINGENT UPON THE CONSUMMATION OF THE MERGER. See "Factors to Be Considered --
Opinion of Financial Advisor."
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS IN THE MERGER
Michael F. Zinn, Michael J. Daley and Frederic Zinn, executive officers
of Besicorp, will be paid bonuses of $1,000,000, $500,000 and $500,000,
respectively, by Besicorp immediately before the consummation of the Merger.
The Board and a committee thereof in November 1998 took action to be
effective on January 1, 1999 (1) allowing the executive officers and directors
who hold unvested Rights to
<PAGE>
acquire Besicorp Common Stock to exercise such Rights currently and to permit
such persons to participate in the Spin-Off and the Merger and (2) removing the
forfeiture provisions from directors' and executive officers' restricted shares
of Besicorp Common Stock (e.g., Besicorp Common Stock that would be forfeited if
the holder thereof ceases to be employed (including service as a director) by
Besicorp upon the consummation of the Merger).
Immediately before the Closing, Besicorp is required to deposit $6.5
million (the "Escrow Fund") into an escrow account pursuant to the escrow
agreement provided for by the Plan of Merger and as more fully described herein
(the "Escrow Agreement"). The Escrow Fund serves, among other things, to fund
claims for indemnity made by the Buyer pursuant to the Indemnification
Agreement. To the extent that the Escrow Fund is insufficient to fund such
claims, Newco is obligated to indemnify Buyer directly pursuant to the
Indemnification Agreement. If any proceeds remain in the Escrow Fund following
the fifth anniversary of the date of the Escrow Agreement, they shall be
released to Newco when conditions to the release have been satisfied. See "Plan
of Merger - Escrow Agreement." A portion of the Escrow Fund may be used, among
other things, to satisfy or defend certain claims made against officers and
directors of Besicorp. The Surviving Corporation's certificate of incorporation
and by-laws following the Merger will continue, subject to certain limitations,
to provide for the indemnification of Besicorp's officers and directors in a
manner consistent with the provisions of such charter documents as in effect at
the Effective Date (as defined hereafter). See "Plan of Merger - Certain
Covenants: Indemnification." Besicorp will, prior to the Effective Date, procure
officers' and directors' liability insurance covering certain persons including
current officers and directors. The consummation of the Merger may adversely
affect certain shareholder derivative lawsuits pending against certain of
Besicorp's officers and directors. It is anticipated that the directors and
executive officers of Besicorp will serve Newco in capacities in which they
currently serve Besicorp and that they will be compensated for the services they
render on behalf of Newco. Aside from the foregoing, and the shares of Newco
Common Stock that the executive officers and directors will be entitled to
receive in the Spin-Off as shareholders of Besicorp Common Stock, the executive
officers and directors will receive no benefits as a result of the Spin-Off. See
"Factors to be Considered - Interests of Executive Officers and Directors in the
Merger," "Plan of Merger - Escrow Agreement" and "Business of the Company -
Legal Proceedings."
8
CONDITIONS TO THE MERGER
Besicorp and Buyer are only obligated to complete the Merger, if, among
other things, the Plan of Merger is adopted by the shareholders of Besicorp. The
Merger also is subject to certain other closing conditions, including the
occurrence of the Spin-Off and Merger Sub's having received the Financing, that
may be waived by the parties, subject to applicable law and certain limitations
imposed by the Plan of Merger. Besicorp does not presently intend to waive any
such conditions although it reserves the right to do so. If Besicorp were to
waive a material condition, either before or after the Special Meeting, Besicorp
intends to notify the holders of Besicorp
<PAGE>
Common Stock and seek the shareholders' approval of such waiver before
consummating the Merger. See "Plan of Merger -- Conditions to the Merger."
TERMINATION
The Plan of Merger may be terminated and the Merger abandoned at any
time prior to the Effective Date by mutual written consent of Besicorp and
Buyer, or by either Besicorp or Buyer in certain other circumstances, in
accordance with the termination provisions of the Plan of Merger. Upon
termination of the Plan of Merger, depending upon the circumstances surrounding
the termination, Besicorp may be obligated to reimburse Buyer for its
out-of-pocket costs and expenses reasonably incurred and due to third parties in
connection with the Plan of Merger and the Transactions (collectively, "Covered
Expenses"), up to $600,000, to pay Buyer $1.4 million (the "Extension Fee"),
which Extension Fee Besicorp has placed in escrow, unless the Plan of Merger was
terminated by Besicorp on account of a breach by Buyer of Buyer's obligations
pursuant to the Plan of Merger and, in certain circumstances, also pay to Merger
Sub $3.5 million (the "Termination Payment"). See "Plan of Merger --
Termination."
EFFECTIVE DATE; CANCELLATION OF STOCK CERTIFICATES; AND RECEIPT OF
MERGER CONSIDERATION
Under the Plan of Merger, the required filing of the Certificate of
Merger is expected to be made as soon as practicable after the satisfaction or
waiver of all conditions to the Merger, including the adoption of the Plan of
Merger by the shareholders of Besicorp at the Special Meeting. The Merger will
be effective as of the date of filing of the Certificate of Merger with the
Secretary of State of the State of New York in accordance with the New York
Business Corporation Law (the "BCL") or at such later time as provided in such
Certificate of Merger (the "Effective Date") and as a result thereof the shares
of Besicorp Common Stock will be converted into the right to receive the Merger
Consideration. Promptly thereafter, Continental Stock Transfer & Trust Co.,
Besicorp's transfer agent, or such other person designated by the parties prior
to the Effective Date as the payment agent (the "Payment Agent"), will notify
Besicorp's shareholders of the consummation of the Merger and will provide the
shareholders with, among other things, the forms of documents (the "Letter of
Transmittal") needed to exchange their shares of Besicorp Common Stock for the
Merger Consideration. DO NOT SURRENDER YOUR CERTIFICATES OF BESICORP COMMON
STOCK UNTIL YOU RECEIVE AND COMPLETE SUCH LETTER OF TRANSMITTAL. See "Plan of
Merger -- The Merger."
9
<PAGE>
DISSENTERS' RIGHTS
Besicorp's shareholders will not have any right to dissent from the
Merger and demand appraisal rights in connection with the Merger because under
Section 910(1)(A)(iii) of the BCL, such rights are not available to the
shareholders of a New York corporation if the corporation's stock is listed on a
national securities exchange, as are the shares of Besicorp Common Stock.
See "Voting at the Special Meeting -- Dissenters' Rights."
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Each Besicorp shareholder will generally recognize gain or loss, for
federal income tax purposes, in an amount equal to the difference between the
amount of cash received by such shareholder for his or her shares of Besicorp
Common Stock pursuant to the Merger and the adjusted tax basis in such shares.
In addition, holders of Besicorp Common Stock at the record date for the
Spin-Off will generally receive dividend income equal to the value of the shares
of Newco Common Stock (which has not yet been determined, but will be determined
by the Board before the Spin-Off and is estimated to range from approximately
$1.47 to $1.80 per share of Besicorp Common Stock) or the amount of cash or both
received by such holder pursuant to the Spin-Off. Additional information
concerning the tax consequences of the Spin-Off will be provided in the
Information Statement that will be sent to shareholders of Besicorp at or about
the Effective Date of the Merger.
Management is not aware of any material claims of Besicorp's creditors
other than (i) claims arising out of the legal proceedings described under
"Business of the Company -- Legal Proceedings," (ii) accrued unpaid federal
income taxes for the current fiscal year of Besicorp through the Effective Date
and the liability of Besicorp and/or its Subsidiaries for New York State income
taxes for Besicorp's current fiscal year and (iii) the SunWize Indebtedness (as
defined below) of approximately $135,000 which Besicorp incurred in connection
with the purchase of certain assets for its photovoltaic business. See "Business
- -- SunWize Indebtedness." If the Surviving Corporation is not able to discharge
all claims of creditors existing at the Effective Date, it is possible that
creditors (including the taxing authorities) may seek to bring claims against
persons who were shareholders of Besicorp immediately prior to the Effective
Date of the Merger by asserting that such shareholders are subject to transferee
liability. Though management of Besicorp believes that it is unlikely that such
claims would be successful, if any such claims were successful, the net benefit
received by such shareholders from the Merger Consideration and the Spin-Off
could be materially reduced. The law firm of Coudert Brothers has rendered an
opinion, subject to the qualifications and limitations set forth therein, to the
effect that, if any such claims were to be made by the Internal Revenue Service,
it is more likely than not that Besicorp's shareholders would not be liable as
transferees for Besicorp's U.S. federal income tax liability for the current
fiscal year solely as a result of the receipt of the Merger Consideration.
<PAGE>
Besicorp's shareholders should read carefully the discussion under
"Factors to Be Considered -- Material Federal Income Tax Consequences" and are
urged to consult their own tax advisors as to the tax consequences of the Merger
to them under federal, state, local or any other applicable law.
SPIN-OFF
Prior to the Merger, (i) Besicorp will transfer or cause to be
transferred to Newco various subsidiaries and assets and cause Newco to assume
all of Besicorp's liabilities (other than the Permitted Liabilities), as
described in the chart set forth below, and (ii) Besicorp will authorize the
distribution of the Newco Common Stock (or cash in lieu of fractional shares of
Newco Common Stock) to persons who are shareholders of Besicorp as of the record
date for the Spin-Off (the "Spin-Off Record Date"), which is expected to be the
same day as the Effective Date. The following chart provides a general
description of the effect of the Spin-Off on Besicorp and Newco. See "Unaudited
Pro Forma Financial Information." As the Merger will be consummated promptly
following the Spin-Off, Acquisition shall, subject to the provisions of the Plan
of Merger which permit Besicorp and Newco to replace contributed assets with
retained assets of equal value, acquire the assets listed and assume the
liabilities listed under the caption "Besicorp," and Newco will own the assets
listed and be liable for the liabilities listed under the caption "Newco."
<TABLE>
<CAPTION>
<S>
<C>
Besicorp Newco
Subsidiaries (i) certain subsidiaries (primarily those all other subsidiaries
owning the interests in the Partnerships that
formerly owned the Power Plants) and
(ii) the subsidiary that owns the Corporate
Headquarters (each, a "Remaining
Subsidiary" and collectively, the "Remaining
Subsidiaries")(for a list of the subsidiaries of
Besicorp including the subsidiaries to be
contributed to Newco, see Annex C).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>
<C>
Besicorp Newco
Assets (i) its cash, cash equivalents and Niagara (i) all of Besicorp's assets
Mohawk Common Stock (except for $1.5 pertaining to the photovoltaic
million which Besicorp shall contribute to and power plant development
Newco, $6.5 million to fund the Escrow businesses (including interests
Fund, $2 million for bonuses and $2 million in power plant projects and
for the estimated expenses of the initiatives in India and Brazil
Transaction); and trade receivables,
(ii) the Corporate Headquarters (which it furniture, fixtures and
will lease to Newco); and equipment related to these
(iii) other claims of Besicorp and awards businesses (See "Unaudited
made to Besicorp (i.e., Besicorp's rights Pro Forma Financial
under a creditor's claim in a bankruptcy Information"));
proceeding of approximately $280,000, an (ii) $1.5 million in cash;
arbitration award of approximately (iii) the interests in the
$430,000, a judgment of approximately Partnerships that formerly
$140,000 and a default judgment of owned the Power Plants; and
approximately $175,000). (iv) all other assets not
retained by Besicorp.
Liabilities (i) the actual or accrued liabilities of all other liabilities (the only
Besicorp or any subsidiary that is a material liabilities that
Remaining Subsidiary for unpaid federal Besicorp is aware of are the
income taxes for the current fiscal year based contingent liabilities arising
on the consolidated net income of Besicorp out of legal proceedings to
through the Effective Date (the "Specified which Besicorp is a party (see
Current Liabilities"); "Business - Legal
(ii) the liability of Besicorp or its subsidiaries Proceedings") and
for New York State income Taxes for approximately $135,000 in
Besicorp's current fiscal year (the "Excluded indebtedness (the "SunWize
Liability"); and Indebtedness") relating to the
(iii) various intercompany liabilities between purchase of the photovoltaic
Besicorp and the remaining subsidiaries. business (see "Business --
SunWize Indebtedness")).
</TABLE>
The Information Statement that will be sent to Besicorp's shareholders in
conjunction with the Spin-Off will contain additional information regarding the
Spin-Off and Newco. See "The Spin- Off."
10
<PAGE>
TRADING MARKET FOR AND MARKET PRICE OF BESICORP COMMON STOCK
Set forth below are the high and low sales prices as reported on the
AMEX ECM for the periods indicated.
Fiscal Year Ended March 31,
High Low
---------- ----------
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
1999 First Quarter $ 39-1/2 $ 26-1/16
Second Quarter 40 29-3/4
Third Quarter 36-3/4 29-7/8
Fourth Quarter 33 29-5/16
(through February
25, 1999)
On November 20, 1998, the business day immediately prior to the date of
public announcement of the Board's adoption of the Initial Plan of Merger, the
last reported sales price of the Besicorp Common Stock was $32-7/8. As of
February 25, 1999, the last reported sales price of the Besicorp Common Stock
was $32-1/4. See "Market Information Regarding Besicorp Common Stock."
VOTING AT THE SPECIAL MEETING
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Besicorp for the Special Meeting. At the
Special Meeting, the shareholders of Besicorp will consider and vote on a
proposal to adopt the Plan of Merger.
<PAGE>
TIME, DATE AND PLACE OF MEETING
The Special Meeting will be held at 9:00 a.m. (local time) on March 19,
1999 in the Kent Room at the Warwick Hotel, 65 West 54 Street, New York, New
York.
RECORD DATE; VOTE REQUIRED
The Record Date for the determination of shareholders entitled to
notice of and to vote at the Special Meeting is February 3, 1999. Accordingly,
only shareholders of record of Besicorp at the close of business on the Record
Date have the right to receive notice of and to vote at the Special Meeting and
any postponement or adjournment thereof and each such shareholder will be
entitled to one vote for each share of Besicorp Common Stock held of record on
the Record Date. As of the Record Date, there were 3,038,935 shares of Besicorp
Common Stock outstanding.
Under the BCL, the affirmative vote of holders of at least 66 2/3% of
the shares of Besicorp Common Stock outstanding as of the Record Date is
required to adopt the Plan of Merger. Accordingly, abstentions and broker
non-votes will have the effect of votes against the Plan of Merger and
abstentions, but not broker non-votes, will be counted in determining the
presence of a quorum.
As of the Record Date, the executive officers and directors of Besicorp
owned an aggregate of 1,598,707 shares of Besicorp Common Stock, representing
52.6% of the outstanding shares of Besicorp Common Stock without giving effect
to the Conversion Shares issuable upon exercise or conversion of Rights. None of
the Conversion Shares will be eligible to vote at the Special Meeting. See
"Factors to be Considered - Interests of Executive Officers and Directors in the
Merger." In addition, as of the Record Date, The Zinn Family Charitable Trust
(the "Trust") established by Michael F. Zinn, the Chairman of the Board,
President and Chief Executive Officer of Besicorp, owned 126,984 shares of
Besicorp Common (Mr. Zinn disclaims beneficial ownership of these shares). See
"Business of the Company--Security Ownership of Certain Beneficial Owners and
Management." Accordingly, the favorable vote of only 300,266 shares (in addition
to the shares owned by the executive officers and directors and the Trust, all
of whom intend to vote such shares in favor of adopting the Plan of Merger) of
Besicorp Common Stock is required for adoption of the Plan of Merger by
Besicorp's shareholders. See "Plan of Merger -- Termination -- Damages."
The Board of Directors of Besicorp unanimously determined on November
20, 1998 and January 28, 1999, that the Plan of Merger is fair to, and in the
best interests of, Besicorp and its shareholders. The Board of Directors of
Besicorp unanimously adopted the Plan of Merger and recommends adoption of the
Plan of Merger by Besicorp's shareholders. The Board of Directors
<PAGE>
of Merger Sub and the board of managers of Acquisition, as the sole shareholder
of Merger Sub and on behalf of Acquisition, have adopted the Merger and the Plan
of Merger.
12
QUORUM
Under the BCL and Besicorp's by-laws, the presence in person or by
properly executed proxy of holders of a majority of the issued and outstanding
shares of Besicorp Common Stock is required to constitute a quorum at the
Special Meeting.
SOLICITATION, REVOCATION AND USE OF PROXIES
Shares of Besicorp Common Stock represented by a properly executed
proxy received by Besicorp will, unless such proxy is properly revoked prior to
the Special Meeting, be voted at the Special Meeting in accordance with the
instructions thereon. SHARES OF BESICORP COMMON STOCK REPRESENTED BY PROPERLY
EXECUTED PROXIES THAT DO NOT CONTAIN INSTRUCTIONS TO THE CONTRARY WILL BE VOTED
FOR ADOPTION OF THE PLAN OF MERGER AND IN THE DISCRETION OF THE PROXY HOLDER AS
TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY
ADJOURNMENT OR POSTPONEMENT THEREOF. However, shares of Besicorp Common Stock
represented by properly executed proxies which vote against the adoption of the
Plan of Merger shall not be voted for any adjournment or postponement in order
to continue to solicit proxies to adopt the Plan of Merger.
The Board knows of no business that will be presented for consideration
at the Special Meeting other than the proposal to adopt the Plan of Merger. If
other matters should properly come before the Special Meeting, the proxy holders
will vote on such matters in accordance with their best judgments. Proxies are
being solicited hereby on behalf of the Board.
Your vote is important. Whether or not you plan to attend the Special
Meeting, please complete, sign and date your proxy card and return it in the
enclosed envelope. You may also return the proxy card by facsimile transmission
to Continental. To return the card by fax, you must photocopy both sides of the
signed card so that they appear on the same page and fax the photocopy to
Continental at (212) 509-5152, Attn: Proxy Department. If you have any questions
regarding this procedure call Continental at (212) 509-4000 x520.
Any shareholder of record may revoke his or her proxy at any time
before it is voted by executing and delivering to the Secretary of Besicorp, at
Besicorp's principal executive offices as set forth under "Summary -- The
Parties", an instrument of revocation or a proxy bearing a later date, and by
delivering a written notice to the Secretary of Besicorp stating that the proxy
is revoked, or by voting in person at the Special Meeting.
<PAGE>
The cost of soliciting proxies, including the cost of preparing,
assembling, printing and mailing this Proxy Statement, the Proxy and any
additional materials furnished to shareholders, will be borne by Besicorp.
Arrangements will be made with brokerage houses and other custodians, nominees
and fiduciaries to send proxies and proxy materials to the beneficial owners of
stock, and such persons may be reimbursed for their expenses. Proxies may be
solicited by directors, officers or employees of Besicorp in person or by
telephone, telegram or other means. No additional compensation will be paid for
these services other than for their out-of-pocket expenses (which it is
anticipated will be nominal) incurred in connection therewith.
13
DISSENTERS' RIGHTS
Some states allow shareholders of corporations that are involved in a
merger to dissent from such merger, in which case, generally, a court determines
(i.e., appraises) the value of their shares which such shareholders are entitled
to receive in lieu of accepting the payment provided by the agreement or plan of
merger. Besicorp's shareholders will not have this appraisal right in connection
with the Merger because, under Section 910(1)(A)(iii) of the BCL, such rights
are not available to the shareholders of a New York corporation if the
corporation's stock is listed on a national securities exchange, as are the
shares of Besicorp Common Stock.
FACTORS TO BE CONSIDERED
PURPOSES AND EFFECTS OF THE MERGER
Besicorp held, until recently, Partnership Interests in five Power
Plants which, pursuant to the Power Purchase Agreements, provided capacity and
electrical power to Niagara Mohawk. The Partnerships which owned the Power
Plants, Niagara Mohawk and certain other independent power producers entered
into the MRA in July 1997, which became effective on June 30, 1998, and which
provided for, among other things, the termination or restructuring of the Power
Purchase Agreements at the time the MRA became effective. In connection
therewith, Besicorp has received through September 30, 1998, among other things,
Niagara Mohawk Common Stock with a value of approximately $69 million at June
30, 1998 and net cash of approximately $59 million, $8 million of which was
then subject to certain reserves. It is not likely that further payments will be
made by Niagara Mohawk to the Partnerships. (See "--Background of the
Merger," "Business of the Company" and Note 5 of Notes to Consolidated
Financial Statements of Besicorp Group Inc. for information regarding the
amount Besicorp has received and the amount reserved through December
31, 1998.) The Partnerships realized that upon the effectiveness of the MRA
they would no longer have customers for the electric power and capacity
generated by the Power Plants, and because the Power Plants could not,
under current economic conditions, provide power and capacity profitably to
other potential customers, it was decided prior to the effectiveness of the MRA,
to sell the Power Plants. Accordingly, the Partnerships sold the Power
<PAGE>
Plants in December 1998 which will result in Besicorp receiving net proceeds of
approximately $11 million from such sales. The proceeds of the MRA and the sale
of the Power Plants far exceed Besicorp's requirements for the Continuing
Businesses; moreover, in management's opinion, the risks associated with
reinvesting the Proceeds from the MRA and the Power Plant sales in such
businesses exceed the benefits that could potentially be realized from such
reinvestment. This conclusion was based upon the following considerations.
First, since independent power development businesses generally generate
significant revenues and profits only after plants become operational, but
Besicorp's power project initiatives were in very early stages, it was, in
management's estimate, unlikely that Besicorp would be significantly profitable
during the next several years. Second, Besicorp's competitors would continue to
have greater resources than Besicorp. Third, the photovoltaic business had
historically incurred losses and there could be no assurance (because of the
historical operating losses and competitive nature of such business) that the
application of the Proceeds would lead to profitability. Fourth, the Proceeds
far exceeded the amount that could prudently be reinvested in the Continuing
Businesses over the next few years. See "Opinion of Financial Advisor -
Reinvestment Alternative." Since investing the Proceeds in the Continuing
Businesses would constitute a risky investment, Besicorp concluded it would be
preferable, and safer from the perspective of the shareholders of Besicorp, not
to invest the Proceeds (other than the $1.5 million to be contributed to Newco
in the Spin-Off) in the Continuing Businesses. Therefore, Besicorp considered
how best to go forward with the Continuing Businesses that in management's
estimate would not be likely to generate significant profits, if any, for the
next several years and with the cash and shares of Niagara Mohawk Common Stock
that Besicorp received as proceeds of the MRA and the sale of the Power Plants.
Besicorp has, through December 31, 1998, used a portion of the Proceeds
to satisfy approximately $3,673,679 of its outstanding indebtedness which
constitutes most of its outstanding indebtedness. However, no consideration was
given to using the Proceeds to satisfy the indebtedness of Newco immediately
prior to the Merger inasmuch as Newco had not assumed and is not expected to
assume any material indebtedness other than the SunWize Indebtedness. It is
contemplated that Newco will (other than the SunWize Indebtedness) only assume
contingent liabilities. Besicorp concluded that in light of the fact that its
experience was limited to developing and managing independent power plants and
the solar power business (the "Historical Company Businesses"), it would be
inappropriate to invest the remainder of the Proceeds in a business new to
Besicorp (i.e., businesses unrelated to the Historical Company Businesses) in
which Besicorp had no experience. Besicorp concluded it would focus primarily on
the continued development and marketing of its photovoltaic products and systems
and on the development of independent power plants.
Therefore, Besicorp decided to sell all of Besicorp except for the
Continuing Businesses or, if appropriate, to sell all of Besicorp including the
Continuing Businesses. Prospective purchasers of Besicorp were not interested in
acquiring the Continuing Businesses. Besicorp had, during the year ended March
31, 1998 ("Fiscal 1998"), attempted to sell its power plant
<PAGE>
development business (including its rights with respect to one or more power
plant development projects and/or initiatives) but had not received any offers
with respect thereto. Besicorp had also attempted to sell its photovoltaic
business during such period and had received from a group led by the officers of
the subsidiary that operated such business (which leadership did not include any
executive officers or directors of Besicorp) two offers to acquire such
business, which offers were rejected because they did not provide for any
up-front cash payment and the total purchase price offered was deemed to be
inadequate. Besicorp concluded, after considering various alternatives, and
soliciting both cash and non-cash bids for Besicorp, that the sale of Besicorp
(other than the Continuing Businesses), for cash would be more beneficial to its
shareholders than any other viable alternative. This ultimately led Besicorp to
decide to effectuate the spin-off of these businesses to its shareholders
pursuant to the Spin-Off, and enter into the Plan of Merger. While Josephthal
conducted various quantitative analyses in connection with the Merger, and
compared the effects of the Plan of Merger with Besicorp's distributing the
Proceeds or reinvesting the Proceeds and presented these analyses to the Board
(see "--Opinion of Financial Advisor"), the Board did not conduct any
quantitative analysis in connection with selling the Continuing Businesses
rather than distributing them to the shareholders in a Spin-Off. However, for
the reasons indicated in the two previous paragraphs and for the reasons
indicated in "-- Recommendation of the Board of Directors; Fairness of the
Merger," the Board believes that it is maximizing the return to Besicorp's
shareholders on the Proceeds by effectuating the Plan of Merger and the
Spin-Off.
Accordingly, the Merger is intended to maximize the return to
Besicorp's shareholders by providing them with $34.50 in cash, subject to upward
adjustment if the Base Amount exceeds $105,275,000, for each share of Besicorp
Common Stock they hold. As a result, Acquisition, through Merger Sub, will
acquire all of the outstanding shares of Besicorp Common Stock. The factors
leading to the decision by Besicorp to adopt the Merger are set forth under the
caption "-- Background of the Merger."
If the Merger is consummated, holders of Besicorp Common Stock will no
longer have any equity interest in Besicorp. Instead, each such shareholder will
receive, upon surrender of the certificate or certificates evidencing Besicorp
Common Stock, the Merger Consideration in exchange for each share of Besicorp
Common Stock owned by such shareholder immediately prior to the Effective Date.
See "-- Certain Effects of the Merger."
14
BACKGROUND OF THE MERGER
Besicorp held, until recently, Partnership Interests in the Power
Plants which, pursuant to the Power Purchase Agreements, provided capacity and
electrical power to Niagara Mohawk. On or about October 1995, Niagara Mohawk
announced its intention to renegotiate the Power Purchase Agreements and similar
agreements it had with other independent power producers because of, among other
things, its deteriorating financial condition and competitive conditions in
<PAGE>
the electrical power generation industry. As a result of these negotiations, in
July 1997, certain independent power producers (including the Partnerships that
owned the Power Plants) entered into the MRA with Niagara Mohawk. The MRA
provided for the termination or restructuring of these power purchase
agreements, including the Power Purchase Agreements, in consideration for which
the independent power producers would receive cash or Niagara Mohawk Common
Stock or a combination of both. Recognizing that, in the aggregate, for the
fiscal years ended March 31, 1997 and 1996, all of Besicorp's net income and
more than 59% of its total revenues were derived from these Power Purchase
Agreements and the Partnership Interests and anticipating, among other things,
that (i) the proceeds to be received as a result of the MRA would substantially
exceed the operating and projected operating needs of Besicorp's remaining
businesses, and (ii) after the termination of these Power Purchase Agreements,
the power generated by the Power Plants could not be sold profitably, Besicorp,
in March 1997, retained PaineWebber which contacted more than fifty different
entities to discuss their interest in pursuing a transaction with Besicorp. Only
one entity contacted by PaineWebber entered into negotiations with Besicorp with
respect to a possible transaction; negotiations between Besicorp and that
entity, a non-regulated subsidiary of a public utility, were mutually
terminated. The PaineWebber department representing Besicorp was discontinued,
and as a result, Besicorp's relationship with PaineWebber was terminated by
PaineWebber as of November 1997. Besicorp retained Josephthal in December 1997
to assist Besicorp in formulating and consummating a strategy or transaction to
maximize the value of the MRA to Besicorp's shareholders and, in February 1998,
the Partnerships retained Josephthal to sell the Power Plants.
15
On behalf of Besicorp, Josephthal contacted approximately forty
different entities (including Acquisition or its affiliates) to discuss their
interest in pursuing some type of transaction with Besicorp such as purchasing
substantially all of its assets or making a tender offer for all of the Besicorp
Common Stock. Ultimately only three entities other than Acquisition or its
affiliates expressed serious interest but no agreement on terms and conditions
was reached with any entity other than Acquisition. An entity engaged in the
merchant power business (the "First Potential Buyer"), which had previously been
introduced to Besicorp by PaineWebber, contacted Josephthal in the fall of 1997.
These discussions ended (without being formally terminated by either party) in
or about January 1998 due to differences over the indemnities to be afforded to
such buyer and the amount required to be held in escrow by the First Potential
Buyer to satisfy Besicorp's liabilities and obligations. A private investment
group (the "Second Potential Buyer") contacted Josephthal in or about June 1998;
discussions ceased on account of a lack of interest in continuing them in August
1998 without the purchase price, the structure of a transaction or the
disposition of the Continuing Businesses having been discussed. A private
investment group (the "Third Potential Buyer") contacted Josephthal in March
1998 to discuss a cash tender offer to be followed up by a cash-out merger to
acquire shares that were not tendered. This buyer did not desire to acquire the
Continuing Businesses. These discussions were terminated by Besicorp in
September 1998 because the purchase price the Third Potential Buyer contemplated
paying (determinable in a manner similar, but not identical, to the calculation
of the Base Amount) was not as favorable to Besicorp as Acquisition's proposal.
<PAGE>
From late August through early September 1998, Besicorp and Acquisition
exchanged proposed forms of letter of intent.
On September 10, 1998, representatives of Besicorp, Josephthal and
Acquisition met. The representatives of Besicorp present at the meeting were
Michael J. Daley, Executive Vice President and Chief Financial Officer, Joyce
DePietro, Vice President/Administration, and Frederic M. Zinn, Esq., Senior Vice
President, Secretary and General Counsel, together with Besicorp's outside
counsel. Acquisition was represented by John Huber, a representative of
Acquisition's manager, together with counsel to Acquisition and its affiliates.
Josephthal was represented by Robert Wien. At the meeting, Acquisition and
Besicorp agreed to continue to negotiate a transaction and executed an agreement
to the effect that through October 10, 1998 Besicorp would not initiate, solicit
or engage in any discussion with respect to any proposals by third parties to
acquire Besicorp, and that it would pay certain of Acquisition's expenses, up to
$200,000, if, among other things, such proposals were solicited prior to such
date. The representatives also discussed the terms and conditions of the
proposed form of Initial Plan of Merger, drafts of which had previously been
circulated, and Acquisition's representatives confirmed that Acquisition was not
interested in acquiring the Continuing Businesses. This draft was expressly in a
very preliminary form and was provided by Acquisition solely as a means to set
forth in general terms a proposed structure in which Acquisition would be merged
with and into Besicorp, with Besicorp as the surviving corporation and with the
shareholders of Besicorp receiving cash for their shares. This draft also
provided for an escrow fund of $4 million and contained indemnification
provisions to be further negotiated.
From the commencement of negotiations, the parties recognized that
because of the MRA, the now-completed (but then continuing) attempt to sell the
Power Plants and Acquisition's lack of interest in acquiring the Continuing
Businesses, the Merger Consideration could not be based on historic share
prices, a multiple of earnings or a combination of the two. Instead, the
negotiations with respect to the Merger Consideration and, when the Plan of
Merger was finalized, the Merger Consideration itself were based on the value of
the assets and liabilities that would remain in Besicorp following the Spin-Off.
The valuation of the assets and liabilities that are to remain in Besicorp
following the Spin-Off was relatively straightforward inasmuch as such assets
would consist primarily of cash, cash equivalents and other assets with readily
ascertainable values and the amount of such liabilities are reflected on
Besicorp's consolidated balance sheet. The negotiations concerning value were
based in part on the attributes of such assets and liabilities for Besicorp in
light of Besicorp's options and for Acquisition if the Merger was consummated.
These negotiations culminated in the formula for the Merger Consideration which
is described below and which included agreed upon discounts on the value of the
assets and amount of liabilities. Since the Merger Consideration was to be based
on the value of such assets and liabilities, it was not necessary for purposes
of the merger negotiations to value the assets that were to be contributed to
Newco since instead of being sold they would, as a result of the Spin- Off,
continue to be owned by the current shareholders of Besicorp. Nor did the
parties focus on the trading price of the Besicorp Common Stock. During the
period beginning shortly before the
16
<PAGE>
announcement of the MRA, the Besicorp Common Stock had traded at unexpectedly
high prices that did not reflect, in the management's opinion, Besicorp's value.
The high prices appeared to reflect unrealistic expectations about the proceeds
Besicorp was likely to realize as a result of the sale of the Power Plants and
did not fully recognize the impact on Besicorp of the consequences of the MRA
and sales of the Power Plants. Management realized that any potential purchaser
would be aware of the value of Besicorp's assets and did not expect potential
purchasers' to make offers based solely on the unexpectedly high share prices.
In addition, management believed that high share prices overvalued Besicorp's
value because such share prices were based on a small trading volume.
Although at the time there was no definitive agreement on the terms of
a potential transaction, Acquisition began to conduct its due diligence
investigation of Besicorp (including the entities in which Besicorp has
ownership interests) and various representatives of Acquisition visited
Besicorp's facilities on several occasions throughout September and October
1998.
On or about October 7, 1998, Acquisition's representatives delivered a
revised draft (the "October 7 Draft") of the Initial Plan of Merger to
representatives of Besicorp. This draft reflected a number of revisions to the
initial draft based on preliminary due diligence and further discussion as to
structure. This draft also included the financing contingency required by
Acquisition and included provisions with respect to termination on behalf of
either party, as well as provisions tailoring the representations, warranties
and certain covenants more precisely to the assets that would remain as assets
of Besicorp following the completion of the transaction. The amount of the
merger consideration was not further refined in this draft, nor were the
provisions with respect to escrow and indemnification fully agreed upon.
The Board met on October 16, 1998, after having received a copy of the
October 7 Draft and a very preliminary version of a report prepared by
Josephthal with respect to its review of the proposed Merger and Initial Plan of
Merger (which preliminary report, in all material respects, paralleled the
methodologies and analyses employed by, and fairness determination reached by,
Josephthal in the report delivered to the Board on November 20, 1998). The Board
reviewed and discussed at length: (i) recent developments with respect to
Besicorp (including the proceeds received from the MRA and the terms and timing
of the contemplated power plant sales); (ii) the reasons for the Merger, the
proposed nature and amount of consideration estimated to be received by
Besicorp's shareholders in the Merger and the benefits to Besicorp's
shareholders of the Merger; (iii) the limited number of potential independent
domestic power plant development projects available to Besicorp; (iv) the
competitive nature of the unregulated domestic electrical generation industry
and, in particular, limitations on Besicorp's ability to compete in the
deregulated domestic merchant power industry due to its lack of size and
capital; (v) the inability of the Power Plants to generate electrical power
profitably following the termination of the Power Purchase Agreements and the
characteristics of such plants; (vi) the timing required to negotiate and effect
a merger; (vii) that the Merger would be structured as a cash merger whereby the
shareholders of Besicorp would have the right to receive cash for each
outstanding share of
17
<PAGE>
Besicorp Common Stock and would have no continuing interest in Besicorp or the
Surviving Corporation; and (viii) the businesses and assets that Acquisition was
not interested in acquiring and the possibility of distributing such assets to
Besicorp's shareholders by means of a spin-off. Josephthal reviewed with the
Board alternatives to the Merger including the Partial Liquidation Alternative
(as described below) and the Reinvestment Alternative (as described below) and
the Board discussed such alternatives. The Partial Liquidation Alternative
consists of liquidating the Power Plants, distributing the cash proceeds of such
liquidation and the MRA to Besicorp's shareholders, and Besicorp's continuing to
develop its photovoltaic and independent power plant development businesses. The
Reinvestment Alternative generally consists of liquidating the Power Plants,
reinvesting the proceeds of the MRA and the proceeds of the liquidation of the
Power Plants and continuing to develop Besicorp's photovoltaic and independent
power plant development businesses. See "--Opinion of Financial Advisor." The
Board did not consider formally adopting the Plan of Merger at its October 16,
1998 meeting because it had been advised that the negotiations with respect
thereto were continuing.
Representatives of Besicorp and Buyer met on October 19, 1998 to
negotiate the Initial Plan of Merger. The same persons participated at this
meeting as had participated at the meeting held on September 10, 1998, except
that Michael F. Zinn, Chief Executive Officer of Besicorp, also participated on
behalf of Besicorp and James Haber, President of Acquisition's manager, also
participated on behalf of Acquisition. As a result of such meeting, a draft of
the Initial Plan of Merger dated October 23, 1998 was prepared. This draft
introduced a formula to determine the purchase price; the formula consisted of a
base amount based upon Besicorp's cash and cash equivalents and an adjustment to
take into account certain liabilities and the escrow. The dollar amounts of the
foregoing components were not set forth and were to be negotiated further.
This draft dated October 23, 1998 was followed by a draft of the Plan
of Merger dated November 10, 1998 (the "November 10 Draft"), which reflected
further negotiations by the parties and proposed formulations of a fixed merger
price (which was not specified) and a $6 million escrow. The parties
subsequently determined that the determination of a fixed purchase price prior
to the closing of the transaction was not practicable. The November 10 Draft
also clarified the terms of Acquisition's financing contingency by providing
that Acquisition would deliver a copy of a letter from its lender setting forth
such lender's interest in providing financing in an amount necessary to fund the
merger consideration for the proposed transaction.
The Board met on November 12, 1998; contemporaneously with such
meeting, the November 10 Draft (including the proposed forms of escrow and
indemnification agreements) was circulated to all of the members of the Board.
The Board reviewed its deliberations of October 16, 1998 and the proposed terms
of the Merger and various provisions of the Initial Plan of Merger to be
executed in connection therewith, including the Spin-Off of the Continuing
Businesses. Josephthal presented an oral report (which paralleled in all
material respects, the methodologies and analyses employed by and fairness
determination reached by Josephthal in its report delivered on November 20,
1998) to the Board with respect to the analyses it performed in
<PAGE>
connection with its fairness opinion and advised the Board that, subject to,
among other things, its receipt of the final version of the Initial Plan of
Merger and the qualifications and the assumptions in its report, in its opinion
the value of the consideration to be received by Besicorp's shareholders in the
Merger was fair from a financial point of view. The Board then proceeded to
discuss at length whether the Merger and Initial Plan of Merger were in the best
interest of Besicorp and its shareholders and whether the consideration to be
received by the shareholders in the Merger was fair. In connection therewith,
the Board reviewed and discussed various aspects of, and factors pertaining to,
the Merger including those they discussed on October 16, 1998 and (i) the
various provisions contained in the Initial Plan of Merger, including the
financing contingency, provisions limiting Besicorp's ability to solicit a
competitive proposal, the obligations imposed by the indemnification agreement,
the conditions to the consummation of the Merger and the termination provisions
(including the fees payable to Buyer upon termination); (ii) the interests in
the transaction of Besicorp's executive officers and directors including the
bonuses payable to certain of such persons in connection with the Merger; (iii)
the facts that Besicorp, at Acquisition's insistence, would have to contribute
funds to be held in escrow, that a portion of the Escrow Fund may be used to
satisfy Besicorp's indemnification obligations to its current executive officers
and directors, that the balance of the Escrow Funds, if any, remaining after
application of the funds for the purposes set forth in the Escrow Agreement
would not be distributed to Besicorp's shareholders but to Newco and that the
November 10 Draft (but not the Plan of Merger, as it has been amended) provided
the Merger Consideration receivable with respect to 100,000 shares of Besicorp
Common Stock (the "Disputed Shares") subject to a dispute between Besicorp and a
former executive officer, to the extent it is determined that such Disputed
Shares belong to Besicorp (see "Plan of the Merger -- The Merger
Consideration"), would not be distributed to Besicorp's shareholders but to
Newco; (iv) the tax consequences to Besicorp and its shareholders of the Merger
and the other transactions contemplated by the Initial Plan of Merger; (v) the
potential exposure of Besicorp's shareholders to claims of creditors (to the
extent unpaid), including tax authorities, of Besicorp if the Merger is
consummated (e.g., if a taxing authority were to contest the Surviving
Corporation's tax treatment, in light of the Merger, of the proceeds from the
MRA and the sales of the Power Plants); (vi) alternatives to the Merger,
including the Reinvestment Alternative and the Partial Liquidation Alternative;
(vii) Josephthal's oral report; and (viii) the reasons for the Merger and the
benefits to Besicorp's shareholders of the Merger. The Board did not consider
formally adopting the Plan of Merger at such time because it was advised that
negotiations were continuing with respect to technical issues involving the
Initial Plan of Merger, the escrow agreement and the indemnification agreement.
18
The Board held a meeting on November 17, 1998. Contemporaneously with
such meeting, members of the Board were provided with a draft of the preliminary
proxy statement. The Board reviewed and discussed its deliberations of October
16, 1998 and November 12, 1998. The Board discussed (i) the amount to be
contributed by Besicorp to the Escrow Account and the application of the
interest payable thereon; (ii) the interests in the transaction of Besicorp's
executive officers and directors; and (iii) various provisions contained in the
Initial Plan of Merger. The Board did not consider formally adopting the Plan of
Merger at such time because it
<PAGE>
was advised that negotiations were continuing with respect to technical issues,
the plan of merger and certain ancillary documents.
The Board met on November 20, 1998. Prior to such meeting, members of
the Board were provided with a draft dated November 19, 1998 of the Initial Plan
of Merger (including the escrow agreement and the indemnification agreement), a
revised draft of the preliminary proxy statement and a letter from Rabobank, the
Buyer's lender (the "Lender"), stating its interest, subject to the satisfaction
of certain conditions, in providing the financing required by the Buyer. The
draft of the Plan of Merger dated November 1, 1998 was reviewed, which provided
for the merger consideration to be payable pursuant to a formula consisting of
an initial amount (including cash and cash equivalents, certain tax refunds and
a value for the shares of Niagara Mohawk Corporation owned by Besicorp at the
time of the Closing), less certain liabilities and for an escrow in the amount
of $6 million. This draft was substantially similar to the executed final
agreement. The Board was also provided with Josephthal's written report dated
November 20, 1998 (the "Fairness Opinion") with respect to the analyses
Josephthal had performed. In the Fairness Opinion, Josephthal advised the Board
that, subject to the qualifications and assumptions in its report, in its
opinion, the value of the consideration to be received by Besicorp's
shareholders in the Merger was fair from a financial point of view. The Board
reviewed with Josephthal the Fairness Opinion and the analyses Josephthal had
performed. The Board reviewed and discussed its deliberations of October 16,
1998, November 12, 1998 and November 17, 1998. The Board then proceeded to
discuss at length whether the Merger and Initial Plan of Merger were in the best
interest of Besicorp and its shareholders and whether the consideration to be
received by the shareholders in the Merger was fair. In connection therewith,
the Board reviewed and discussed various aspects of, and factors pertaining to
the Merger and the Initial Plan of Merger and the transactions contemplated
thereby including the factors and conditions previously discussed at the prior
Board meetings and additional matters including (i) changes to the Initial Plan
of Merger (the changes included replacing a fixed purchase price plus a payment
to Newco if the base amount were to exceed a specified amount, with a Base
Amount plus additional payments to Besicorp's shareholders if such Base Amount
exceeded a specified amount, as well as a number of technical corrections),
escrow agreement and indemnification agreement from the November 10 Draft; (ii)
the compensation paid and payable to Josephthal, including the fact that a
significant portion of such compensation was contingent upon the consummation of
the Merger; (iii) that Josephthal would not be updating its Fairness Opinion;
and (iv) the general terms and conditions of the Spin-Off.
Based upon its discussions, the Board determined that in light of the
current circumstances and future prospects of Besicorp, the Merger, the Initial
Plan of Merger and the Merger Consideration were fair to and in the best
interest of Besicorp and its shareholders. The Board unanimously adopted the
Initial Plan of Merger. The Initial Plan of Merger was executed on November 23,
1998.
<PAGE>
In January 1999, representatives of Besicorp delivered a draft of
Amendment No. 1 to the Buyer and its representatives. The material provisions of
Amendment No. 1 provide for: (i) the distribution of the proceeds of the
Disputed Shares to Besicorp's shareholders and not Newco to the extent a
determination with respect to the ownership of such shares is made in Besicorp's
favor; and (ii) the extension of the date that the Merger could be terminated
from February 15, 1999 to March 1, 1999 and the granting to Besicorp of the
right to an Extension; provided that if the Merger did not close during the
Extension, Besicorp would be obligated, unless the Plan of Merger was terminated
by Besicorp on account of a breach by Buyer of Buyer's obligations pursuant to
the Plan of Merger, to pay Buyer the Extension Fee in addition to any other
amounts, if any, Besicorp would be obligated to pay on account of the
termination of the Plan of Merger.
19
The Board held a meeting on January 28, 1999. Prior to such meeting,
members of the Board were provided with Amendment No. 1 and a draft, dated
January 26, 1999, of the revised preliminary proxy statement. The Board reviewed
and discussed its deliberations of October 16, 1998, November 12, 1998, November
17, 1998 and November 20, 1998. The Board then proceeded to discuss whether
Amendment No. 1 was in the best interest of Besicorp and its shareholders. In
connection therewith, the Board reviewed and discussed various aspects of, and
factors pertaining to the Merger and the Plan of Merger and the transactions
contemplated thereby as well as Amendment No. 1 including (i) the effects of
Amendment No. 1 which would provide a benefit directly to Besicorp's
shareholders to the extent it was determined that the Disputed Shares belong to
Besicorp and (ii) the Extension and Extension Fee.
Based upon its discussions, the Board determined that in light of the
current circumstances and future prospects of Besicorp, the Merger, the Plan of
Merger and the Merger Consideration were fair to and in the best interest of
Besicorp and its shareholders. The Board unanimously adopted Amendment No. 1 and
the Plan of Merger. Amendment No. 1 was executed on January 28, 1999.
On February 16, 1999, the members of the Board adopted by unanimous
written consent Amendment No. 2. Amendment No. 2 increases the Escrow Fund by
$500,000 and thus decreases the amount available to Besicorp's shareholders.
The Escrow Fund was increased on account of the commencement of two lawsuits
against Besicorp and the reinstatement of a third lawsuit that had previously
been dismissed. See "Business -- Legal Proceedings." Amendment No. 2 was
executed on February 16, 1999.
On February 26, 1999, Besicorp exercised its right to extend the
Termination Date until March 15, 1999, and both Besicorp and Buyer waived their
right to terminate the Plan of Merger during the period ending immediately
before 11:59 p.m. on March 22, 1999 on the grounds that the Effective Date has
not occurred. Besicorp and Buyer may still terminate the Plan of Merger if the
Effective Date does not occur after the end of such period. In connection with
the foregoing,Besicorp placed the Extension Fee in escrow.
<PAGE>
RECOMMENDATION OF THE BOARD OF DIRECTORS; FAIRNESS OF THE MERGER
The proposed Merger and the Plan of Merger were negotiated by Besicorp
and its representatives on an arms-length basis with Acquisition, which is a
third party unaffiliated with Besicorp or any member of the Board of Directors
or management of Besicorp. The Board has unanimously determined that the Plan of
Merger is fair to, and in the best interests of, Besicorp and its shareholders,
and unanimously recommends adoption of the Plan of Merger by Besicorp's
shareholders. The Board reached this determination after considering all of the
material factors as described above in "-- Background of the Merger." The Board
based its recommendation on the following:
(i) The Board determined that the Merger Consideration is fair
to Besicorp's shareholders. This determination was based on the
directors' assessment of Besicorp's value considering the following
factors taken as a whole: Besicorp's current and anticipated operations
and performance, the current and anticipated opportunities in the
industries in which Besicorp competes, the analyses performed by
Josephthal and the Fairness Opinion. The Board compared Josephthal's
estimates of the after-tax proceeds of approximately $30.70 of the
Merger Consideration (without giving effect to the possibility of an
upward adjustment) payable with respect to each share of Besicorp
Common Stock with the after-tax proceeds of approximately $25.38 per
share from liquidating the assets and distributing the proceeds to the
shareholders. The unusually high trading prices did not factor into the
Board's determinations for the reasons indicated above in "--Background
of the Merger."
(ii) The Board determined that the Merger is in the best
interest of Besicorp and its shareholders. In reaching such
determination the Board reviewed and analyzed alternatives to the
Merger, including the Partial Liquidation Alternative and the
Reinvestment Alternative. The Board noted that Josephthal's analyses
indicated that the Merger would produce greater after-tax proceeds to
the shareholders than the Partial Liquidation Alternative. The Board
further noted that, given the risks associated with reinvesting the
Proceeds in the Continuing Businesses, Josephthal's analysis indicated
that the consummation of the Merger and the ensuing distribution of the
Merger Consideration would produce a greater after tax return to
Besicorp's shareholders than the Reinvestment Alternative (assuming
equal rates of return, although Josephthal did not give any opinion
regarding the rates of return achievable either by shareholders or
Besicorp or whether Besicorp would be capable of finding investments
offering higher rates of return than investments available to
shareholders). The Board noted that despite PaineWebber's seven month
effort and Josephthal's ten month effort to maximize the value of the
proceeds of the MRA and the related transactions to Besicorp's
<PAGE>
shareholders, Besicorp had not received a combination or restructuring
alternative as favorable to Besicorp and its shareholders as the
Merger. The Board also considered some of the uncertainties and risks
associated with the Plan of Merger including the financing contingency,
the possibility of the imposition of transferee liability on Besicorp's
shareholders for unpaid creditor claims, including claims of taxing
authorities, the limitations imposed by the Plan of Merger on
Besicorp's ability to consider or engage in a business combination
other than the Merger and that Josephthal would not be issuing prior to
the consummation of the Merger any fairness opinion (other than the
Fairness Opinion dated November 20, 1998) with respect to the fairness
of the Merger Consideration to be received by Besicorp's shareholders.
(iii) The Board determined that the Merger and the other
Transactions are fair to Besicorp's shareholders, after taking into
account the Spin-Off, including the fact that as a result of the
Spin-Off, Newco will have assumed essentially all of Besicorp's
liabilities and obligations (other than the Permitted Liabilities). In
reaching this determination, the Board considered alternatives to the
Spin-Off such as the sale of the businesses and assets that are to be
contributed to Newco pursuant to the Contribution or the sale of all of
Besicorp including the businesses and assets to be contributed to
Newco. In connection therewith, the Board noted that Besicorp had
received initial inquires about purchasing the Continuing Businesses,
but had not received any actual offer to purchase all of the Continuing
Businesses of Besicorp (and no offer to purchase the independent power
plant development business and two inadequate offers to purchase the
photovoltaic business) and that none of the potential purchasers of
Besicorp were interested in acquiring all of the Continuing Businesses
as part of their purchase of Besicorp. The Board considered both the
fact that Newco will assume essentially all of Besicorp's liabilities
and obligations (other than the Permitted Liabilities) and the
financial effects of the Spin-Off: as a result of the Spin-Off,
Besicorp would have fewer liabilities which would increase Besicorp's
net worth, but Besicorp would also have fewer assets which would
decrease Besicorp's net worth and the Board noted that there was no
basis to conclude that the net effect of such increase and such
decrease to the net worth would lead to an increase in Besicorp's net
worth. The Board concluded that there was no reasonable alternative to
spinning-off Newco and selling the remainder of Besicorp for a Merger
Consideration which, for the reasons stated above, the Board had
determined was fair.
In view of the wide variety of factors considered in connection with
its evaluation of the Merger, the Board did not find it practicable to, and did
not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its decisions.
20
<PAGE>
OPINION OF FINANCIAL ADVISOR
Besicorp retained Josephthal to render an opinion regarding the
fairness, from a financial point of view, of the Merger Consideration. Neither
Besicorp's Board nor its management imposed any limits on Josephthal's
investigation or on the procedures followed by Josephthal in preparing and
rendering its opinion. Josephthal rendered the Fairness Opinion to the Board on
November 20, 1998 to the effect that, based upon and subject to the
considerations set forth in its opinion, as of November 20, 1998, the Merger
Consideration was fair to Besicorp's shareholders from a financial point of
view. Josephthal expressed no opinion on the Spin-Off (including the effect of
Newco's assumption of essentially all of Besicorp's liabilities and obligations)
or its effect on the Merger Consideration since the shareholders of Besicorp
would own approximately the same proportionate interest in the Continuing
Businesses as they did as shareholders of Besicorp prior to the Spin-Off.
Josephthal also expressed no opinion on Besicorp's decision to form Newco or on
the capital requirements of or availability of capital for Newco. Josephthal is
under no obligation to update, revise or reaffirm the Fairness Opinion even if
the value of the Besicorp Common Stock materially changes after the date of the
Fairness Opinion. As of the date of this Proxy Statement, management has not
asked Josephthal to update its opinion since management does not believe that
there has been a material change to any of the information upon which Josephthal
relied in preparing the Fairness Opinion.
The full text of the Fairness Opinion, including the assumptions made
by Josephthal and the general procedures followed by Josephthal, is set forth in
Annex B to this Proxy Statement. Each shareholder is urged to read the Fairness
Opinion in its entirety. The Fairness Opinion addresses only the fairness of the
Merger Consideration (and assumes that the Merger Consideration is $34.50 per
share) and does not constitute a recommendation to any holder of Besicorp Common
Stock as to how the holder should vote on the proposal to adopt the Plan of
Merger.
In preparing the Fairness Opinion, Josephthal reviewed and considered
those financial and other materials that it deemed relevant, including, among
others, the following: (i) the Initial Plan of Merger; (ii) a draft of the
preliminary proxy statement dated November 13, 1998; (iii) certain historical
financial, operating and other data that are publicly available or were
furnished to Josephthal by Besicorp, including, but not limited to: (a)
financial analyses prepared by management of Besicorp; (b) Besicorp's Form
10-KSB as of and for the year ended March 31, 1998; (c) a draft of Besicorp's
Form 10-QSB as of and for the period ended September 30, 1998; and (d)
internally generated operating reports of Besicorp; (iv) publicly available
financial, operating and stock market data for companies engaged in businesses
Josephthal deemed comparable to Besicorp's; (v) publicly available financial,
operating and stock market data for companies in the power industry which had
been involved in mergers or acquisitions since May 1997; and (vi) such other
factors as Josephthal deemed appropriate. Josephthal also met with senior
officers of Besicorp to discuss the prospects for Besicorp's business and their
estimates of
<PAGE>
future financial performance. The Fairness Opinion is solely and necessarily
based on economic, financial and market conditions as they existed as of the
date of its opinion.
As described in its opinion, Josephthal relied upon and assumed,
without any responsibility to independently verify, the accuracy and
completeness of the financial and other information provided or which was
publicly available, and did not attempt to verify independently any of this
information. Josephthal relied solely on the estimates provided to it by
Besicorp's management with respect to Besicorp's prospects and neither made nor
obtained any independent appraisals of Besicorp's properties, other assets or
facilities. With respect to certain financial information, including financial
analyses related to Besicorp's business and prospects provided to Josephthal by
Besicorp, Josephthal assumed that the financial information was reasonably
prepared based on management's best currently available estimates as to
Besicorp's future financial performance.
21
Partial Liquidation Alternative
Josephthal analyzed the after-tax value to the shareholders of
liquidating Besicorp's domestic power generation assets and distributing the
cash proceeds (including the after-tax proceeds of the MRA and Besicorp's share
of the estimated proceeds of the Power Plant sales which Josephthal estimated
would aggregate approximately $85.0 million)(i.e., the Partial Liquidation
Alternative) and compared the results to the Merger Consideration. Josephthal
noted that the Merger Consideration would be paid directly to the shareholders
and would not be subject to any corporate level tax and assumed that any taxes
associated with the Spin-Off paid by such shareholders would be minimal. The
analysis supported Josephthal's fairness determination since the estimated
after-tax proceeds from the Merger (approximately $30.70 per share, as explained
below) was greater than the estimated proceeds from liquidating the assets and
distributing the proceeds to the shareholders (approximately $25.38 per share,
as explained below). For purposes of evaluating the amount of cash available for
distribution after the Power Plant sales, Josephthal assumed that Besicorp would
pay federal and state corporate taxes at a combined rate of 35% with respect to
the MRA and the proceeds of the Power Plant sales. Josephthal also noted that in
the case of the Merger, Besicorp's shareholders would receive shares in Newco on
a pro rata basis according to their interests in Besicorp at the Spin-Off Record
Date; whereas in the Partial Liquidation Alternative, the shareholders would
continue to own shares in Besicorp and Besicorp would not effectuate the
Spin-Off. Josephthal assumed that in the case of the Partial Liquidation
Alternative, Besicorp would incur corporate level taxes of approximately $49.0
million resulting in cash available for distribution or reinvestment of
approximately $85.0 million (as compared to an aggregate Merger Consideration of
$105.3 million). Josephthal also assumed that each shareholder would pay capital
gains taxes on receipt of a liquidating distribution or the Merger
Consideration. For analytical purposes Josephthal estimated the amount of these
taxes by assuming that each shareholder had a basis of $15.50 per share which
represented the approximate average daily closing price of Besicorp's common
stock during the period from November 30, 1993 through September 30, 1998. Based
on the number of shares outstanding (on a fully diluted basis) as of November
20, 1998 (3,051,435), Josephthal estimated
<PAGE>
that the shareholders had an aggregate tax basis of approximately $47.3 million.
Adjusting for estimated shareholder level taxes, Josephthal estimated that the
Merger would produce after-tax proceeds to the shareholders of approximately
$93.7 million ($30.70 per share) compared to approximately $77.5 million ($25.38
per share) from liquidating the assets and distributing the proceeds to the
shareholders. Shareholders are cautioned that the actual after-tax proceeds may
differ from shareholder to shareholder since shareholders' tax basis may differ
from the basis estimated by Josephthal for purposes of its analysis.
Shareholders are urged to consult with their own tax advisors to evaluate the
tax effects of the Merger and the alternative transactions described herein. See
"--Material Federal Income Tax Consequences" below.
22
Reinvestment Alternative
Josephthal also analyzed the after-tax benefits to the shareholders of
the Merger (i.e., their receiving the Merger Consideration) and the Reinvestment
Alternative (i.e., Besicorp's reinvesting the proceeds of the MRA and the
Partnerships' sales of the Power Plants). In its analysis, Josephthal assumed,
hypothetically that shareholders would reinvest the after-tax proceeds of the
Merger Consideration at rates of returns ranging from 5% to 10% per year.
Josephthal assumed further that shareholders would not receive any interim
return on the reinvested proceeds of the Merger Consideration or pay any taxes
from year to year during the five year period. Instead, Josephthal assumed that
shareholders would receive the return at the end of year five and pay tax at
capital gain rate of 20% on the appreciation. Josephthal made the same
assumptions regarding taxes and used the same hypothetical shareholder basis
that it made in its analysis of the Partial Liquidation Alternative. The
Reinvestment Alternative analysis supported Josephthal's fairness determination
in that it suggests that Besicorp would have to earn a greater rate of return on
the Proceeds to realize the same increase in value that shareholders would
achieve at a lower rate of return. In particular, based on the above
assumptions, Josephthal projected that the Merger Consideration would increase
in value to between approximately $114 million and $139 million. Josephthal then
compared the hypothetical return earned by shareholders with (i) a Reinvestment
Alternative in which Besicorp would not incur any corporate taxes and (ii) a
Reinvestment Alternative in which Besicorp would incur federal and state
corporate taxes (at a combined rate of 35%) on the return from its investment
during a five year investment period. Josephthal noted that since Besicorp would
have to pay corporate level taxes on the after-tax proceeds from the MRA and the
Partnerships' sales of the Power Plants, the aggregate after-tax proceeds of the
Merger Consideration would be greater than the amount Besicorp would have to
invest. Assuming that Besicorp would not incur a corporate level tax, Josephthal
projected that if Besicorp earned an annual rate of return of 15% to 20%, the
proceeds would increase in value to between approximately $146 million and $179
million. Assuming that Besicorp would incur a corporate level tax, Josephthal
projected that if Besicorp earned an annual rate of 15% to 20%, the proceeds
would increase in value to between approximately $118 million and $135 million.
In each case, Josephthal assumed as part of this analysis that Besicorp would
not receive any interim
<PAGE>
return from year to year during the five-year period and that the shareholders
would pay tax at capital gain rates on any distribution. Josephthal noted in its
analysis that reinvestment would be affected by economic and financing factors
beyond Besicorp's control, including: (i) the availability of investment
opportunities within the confines of management expertise and experience; (ii)
general economic conditions and business risks; and (iii) the demand for
Besicorp's products and services. Josephthal also noted management's opinion
that the proceeds of the MRA and from the sale of the Power Plants would be
insufficient to guarantee that Besicorp will compete successfully in the
de-regulated merchant power business in the United States.
Price Volume Trading History
Josephthal also performed a price volume trading history analyzing the
trading pattern of Besicorp Common Stock over approximately the past five years.
Josephthal utilized this analysis primarily to estimate the shareholder basis as
described above and to check the reasonableness of its assumptions in
calculating the shareholder basis. The analysis did not otherwise bear
independently on its fairness determination. Josephthal calculated the
percentage of shares that traded below a specified price in a continuum of
prices and also calculated the percentage based on the same continuum of prices,
to the total number of shares outstanding during each period. Josephthal also
attempted to perform a comparable transaction analysis, but was unable to
identify a set of transactions that it believed was comparable to the Merger.
The summary above sets forth of all of the material assumptions,
factors and analyses considered by Josephthal but does not purport to be a
complete description of Josephthal's analyses. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. Josephthal believes that the summary and its
analyses must be considered as a whole and that selecting portions thereof,
without all of its analyses, could create an incomplete view of the processes
underlying its analyses and opinion. Josephthal based its analyses on
assumptions that it deemed reasonable, including assumptions concerning general
business and economic conditions. Josephthal's analyses are not necessarily
indicative of actual values or actual future results that might be achieved.
These values may be higher or lower than those indicated. Moreover, Josephthal's
analyses are not, and do not purport to be, appraisals or otherwise reflective
of the prices at which businesses or securities actually could be bought or
sold.
23
Josephthal was engaged to provide financial advisory services on
December 17, 1997 and to provide a fairness opinion such as the Fairness Opinion
delivered on November 20, 1998. Under the terms of the December 17, 1997
engagement, Besicorp has paid Josephthal a total of $852,571 for services
rendered thereunder, including the rendering of a fairness opinion with respect
to the MRA. Besicorp also agreed to reimburse Josephthal for reasonable expenses
incurred by Josephthal under the December 17, 1997 engagement not to exceed
$7,500 without
<PAGE>
Besicorp's approval and to indemnify Josephthal against certain liabilities,
including liabilities under the federal securities laws. Besicorp has also
agreed to pay Josephthal a fee of $200,000 for rendering the Fairness Opinion
and, contingent upon completion of the Merger, $800,000 for services rendered in
connection with the Merger. Josephthal was also engaged by the various
Partnerships on February 24, 1998 to provide advisory services in connection
with the sale of the Power Plants. Pursuant to these agreements, Josephthal
received an aggregate of $315,000 from the Partnerships with respect to the sale
of the Power Plants.
Josephthal has consented to the use of the Fairness Opinion in this
Proxy Statement but advised Besicorp that the Fairness Opinion is "solely for
the benefit and use of Besicorp and its Board of Directors" and, as such, may
not be relied upon by third parties, such as Besicorp's shareholders. Josephthal
believes that under the terms of its engagement letter with Besicorp, which is
governed by New York state law, Josephthal has no legal responsibility to any
other persons, including Besicorp's shareholders, as a result of the express
disclaimers described above. Josephthal has advised the Board that it intends to
assert the disclaimer as a defense to any claims that may be brought against it
by shareholders with respect to the Fairness Opinion. However, since no New York
state court or federal court applying New York law has definitively ruled on the
availability to a financial advisor, such as Josephthal, of an express
disclaimer as a defense to shareholder liability with respect to a fairness
opinion such as the Fairness Opinion, the issue necessarily would have to be
resolved by a court of competent jurisdiction. The availability or
non-availability of such a defense will have no effect on Josephthal's rights
and responsibilities under federal securities laws, or the rights and
responsibilities of the Board under governing state law or under federal
securities laws.
Josephthal was selected to provide a fairness opinion because it is a
nationally recognized investment banking firm and is familiar with Besicorp's
operations since it had been retained to assist Besicorp in formulating and
consummating a strategy or transaction to maximize the value of the MRA to
Besicorp's shareholders and to sell the Power Plants. As part of its investment
banking practice, Josephthal regularly values businesses and securities in
connection with mergers and acquisitions. In the ordinary course of business,
Josephthal actively trades the securities of Besicorp for its own account and
for the accounts of its customers, and may at any time hold a long or short
position in Besicorp's securities.
24
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS IN THE MERGER
In considering the recommendations of the Board with respect to the
Merger, shareholders should be aware that certain members of Besicorp's
management and the Board have certain interests in the Merger that are in
addition to or different from the interests of the public shareholders. The
Board was aware of these interests and considered them, among other things, in
adopting the Plan of Merger.
<PAGE>
If the Merger is consummated, Besicorp will pay, prior to the
consummation of the Merger, from its general corporate funds, Michael F. Zinn,
Michael J. Daley and Frederic Zinn bonuses of $1,000,000, $500,000 and $500,000,
respectively. No officers or employees of Besicorp are covered by employment
contracts or severance arrangements. Consequently the consummation of the Merger
will not trigger any termination provisions or give rise to any termination
payments.
Besicorp has granted options, including restricted stock options
pursuant to which restricted stock may be acquired, warrants and other rights
(collectively, "Rights") to acquire Besicorp Common Stock and issued restricted
shares of Besicorp Common Stock which were granted either pursuant to restricted
stock purchase agreements or restricted stock options that have been exercised
(collectively, the "Restricted Stock Grants") to executive officers and
directors of Besicorp. (The Rights and Restricted Stock Grants are referred to
collectively herein as the "Entitlements"). Some of these Rights originally were
not exercisable until after the contemplated Effective Date and would have been
effectively forfeited as result of the consummation of the Merger since
originally they could only be exercised so long as the holder remained an
employee and/or director of Besicorp; originally, some of the Restricted Stock
Grants, and restricted stock issuable if restricted stock options were
exercised, would have been forfeited (e.g., because the restricted shares would
be forfeited if the holder ceased to be an employee and/or director of Besicorp)
or otherwise limited at the Effective Date; nor did the terms of all of the
Rights allow the holders to participate in the Spin-Off. The Board and a
committee thereof adjusted, in November 1998, the provisions of the instruments
governing these Entitlements (the "Adjustment") so that effective January 1,
1999 (1) these Entitlements may, among other things, be exercised (or not
forfeited or otherwise limited) (which enables the holders to participate in the
Merger) and (2) holders of unexercised Rights who exercise their Rights after
the Spin-Off may participate in the Spin-Off as if they were holders of record
of Besicorp Common Stock as of the date of the Spin-Off (which permits holders
of all exercised Rights and all Entitlements to also participate in the
Spin-Off). 52,240 Rights and 21,245 Restricted Stock Grants, including 37,000
Rights and 19,200 Restricted Stock Grants held by executive officers and
directors, were so adjusted. As a result all of the Rights are exercisable and
vested, all of the shares of Restricted Stock are no longer restricted and any
shares issuable upon the exercise of Restricted Stock Options will not be
subject to any restrictions other than the restrictions imposed by the
securities laws. Set forth below is a table (i) describing the Rights (including
those that were exercised following the Adjustment) and Restricted Stock Grants
held by executive officers and directors of Besicorp which were adjusted
pursuant to the Adjustment and (ii) and the dollar value of the adjusted
Entitlements:
<PAGE>
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
Dollar Value
Name of Executive Number of Shares Nature of of Adjusted
Officer or Director Subject to Entitlements Entitlements Entitlements*
Gerald Habib 2,500 (1) Rights $13,281
Richard Rosen 2,500 (2) Rights $13,281
Melanie Norden 5,000 (3) Rights $99,281
Michael F. Zinn 41,000 (4) Rights/Restricted $1,215,500
Stock
Michael Daley 3,000 (5) Rights $94,500
Joseph P. Novarro 2,200 (6) Rights/Restricted $68,500
Stock
</TABLE>
* The difference between (i) the exercise price of the Rights and (ii)
the Merger Consideration applicable to the shares issuable upon the
exercise of such Rights, or, in the case of Restricted Stock
outstanding at the time of the Adjustment, the difference between (i)
the exercise price of the options pursuant to which such Restricted
Stock was issued and (ii) the Merger Consideration applicable to such
Restricted Stock, assuming in each case that the Merger Consideration
will be $34.50. See "Plan of Merger -- Merger Consideration" for an
explanation on how the actual Merger Consideration will be calculated.
25
(1) As a result of the Adjustment, Warrants to purchase 2,500 shares of
Besicorp Common Stock that were not previously exercisable became
exercisable.
(2) As a result of the Adjustment, Warrants to purchase 2,500 shares of
Besicorp Common Stock that were not previously exercisable became
exercisable.
(3) As a result of the Adjustment, (i) Warrants to purchase 2,500 shares of
Besicorp Common Stock that were not previously exercisable became
exercisable and (ii) exercisable Options to purchase 2,500 shares of
Restricted Stock became Options to purchase 2,500 shares of
unrestricted Besicorp Common Stock.
<PAGE>
(4) As a result of the Adjustment, (i) Options to purchase 20,000 shares of
Besicorp Common Stock that were not previously exercisable became
exercisable and (ii) 19,000 shares of Restricted Stock became vested
and ceased to be Restricted Stock. Also includes stock options held by
Valerie Zinn, Mr. Zinn's spouse, to purchase 2,000 shares of Besicorp
Common Stock (which Options were not exercisable prior to the
Adjustment).
(5) As a result of the Adjustment, Options to purchase 3,000 shares of
Besicorp Common Stock that were not previously exercisable became
exercisable.
(6) As a result of the Adjustment, (i) Options to purchase 2,000 shares of
Besicorp Common Stock that were not previously exercisable became
exercisable and (ii) 200 shares of Restricted Stock became vested and
ceased to be Restricted Stock.
Michael Zinn is the beneficial holder of 1,572,252 shares of Besicorp
Common Stock, including Entitlements (but excluding the shares owned by the
Trust). Therefore, as a result of such holdings and if he were to exercise all
of his Rights, Mr. Zinn would be entitled to receive, assuming the Merger
Consideration is not adjusted, approximately $54 million. Other members of
management beneficially hold smaller numbers of shares of Besicorp Common Stock.
See "Business of the Company -- Security Ownership of Certain Beneficial Owners
and Management."
The Plan of Merger contemplates that prior to the Effective Date,
Besicorp will procure and pay for officers' and directors' liability insurance
(the "D&O Insurance") covering certain persons, including present and former
directors, officers, employees and agents of Besicorp and its subsidiaries
(collectively, the "Covered Person"), who at the time of the execution of the
Initial Plan of Merger were covered by Besicorp's officers' and directors'
liability insurance or will be so covered on the day of the Closing (the
"Closing Date"), with respect to acts and omissions occurring on or prior to the
Closing Date. Additionally, the Plan of Merger provides that for the lesser of
six years after the Closing Date or the period the Surviving Corporation
maintains its existence, the provisions of the Certificate of Incorporation and
By-Laws of the Surviving Corporation shall provide indemnification to the
Covered Persons on terms, in a manner, and with respect to matters, which are no
less favorable than Besicorp's Certificate of Incorporation and By-Laws, as in
effect on the date of the execution of the Initial Plan of Merger; provided,
however, that the obligation of the Surviving Corporation to provide such
indemnification is limited to the D&O Insurance and that the provisions of the
Certificate of Incorporation and Bylaws of the Surviving Corporation may be
amended accordingly. See "Plan of Merger-- Indemnification." Finally, funds
deposited pursuant to the Escrow Agreement may be used to satisfy certain
obligations of Besicorp and/or the Surviving Corporation to the Covered Persons.
See "Plan of Merger -- Escrow Agreement."
Besicorp and certain of its executive officers and directors (including
former executives, officers and directors) are parties to two shareholder
derivative lawsuits. As a result of the
<PAGE>
consummation of the Merger, the plaintiffs in such suits will cease to be
shareholders which may adversely affect their ability to maintain such suits.
The only shareholder of the Surviving Corporation following the Merger will be
Acquisition which has indicated it will not pursue such suits. If such suits are
not maintained, certain of Besicorp's executive officers and directors who are
defendants in such suits, including Michael F. Zinn, Besicorp's Chairman of the
Board, President and Chief Executive Officer, may benefit. See "Business of the
Company -- Legal Proceedings."
It is not anticipated that the Surviving Corporation will, following
the Effective Date, enter into employment or similar agreements or arrangements
with Besicorp's current management. It is anticipated that the directors and
executive officers of Besicorp will serve Newco in capacities in which they
currently serve Besicorp and that they will be compensated by Newco for the
services they render on behalf of Newco. As indicated above, no officers or
employees of Besicorp are covered by employment agreements, and no officers or
employees of Newco are expected to be covered by employment agreements. Further
information regarding the compensation payable to executive officers and
directors of Newco will be set forth in the Information Statement. Aside from
the foregoing, and the shares of Newco Common Stock that the executive officers
and directors will be entitled to receive in the Spin-Off as shareholders of
Besicorp Common Stock, the executive officers and directors will receive no
benefits as a result of the Spin-Off.
26
CERTAIN EFFECTS OF THE MERGER
Upon consummation of the Merger, Merger Sub will be merged with and
into Besicorp, the separate corporate existence of Merger Sub will cease, and
Besicorp will continue as the Surviving Corporation. Acquisition will own all of
the outstanding shares of common stock of the Surviving Corporation and will be
entitled to all of the benefits and detriments resulting from that interest.
After the Effective Date, the present Besicorp shareholders will no longer have
any equity interest in Besicorp or any right to vote on corporate matters;
instead, the outstanding shares of Besicorp Common Stock will automatically be
converted into the right to receive the Merger Consideration; in addition, as a
result of the Spin-Off, the Newco Common Stock will be distributed on a pro rata
basis to the holders of such shares. As a result of the Merger, the Surviving
Corporation will become a wholly-owned subsidiary of Acquisition and there will
cease to be any public market for the Besicorp Common Stock, and after the
Effective Date, the Besicorp Common Stock will be delisted from the AMEX ECM.
Upon such event, it is anticipated that the Surviving Corporation will apply to
the SEC for the deregistration of the Besicorp Common Stock under the Exchange
Act. As a result of this deregistration certain provisions of the Exchange Act
(including the proxy solicitation provisions of Section 14(a), and the short
swing trading provisions of Section 16(b)), no longer will be applicable to the
Surviving Corporation.
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
consequences relating to the Merger based on the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), and applicable regulations,
rulings and judicial authority as in effect on the date of this Proxy Statement.
Subsequent changes in the law could alter the federal income tax consequences of
the Merger. Besicorp did not rely upon any opinion of counsel with respect to
the matters discussed in this section other than as expressly indicated below.
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW ARE BASED UPON
PRESENT LAW. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH SHAREHOLDER IS
URGED TO CONSULT SUCH SHAREHOLDER'S OWN TAX ADVISOR TO DETERMINE THE
APPLICABILITY OF THE RULES DISCUSSED BELOW TO SUCH SHAREHOLDER AND THE
PARTICULAR TAX EFFECTS OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF
STATE, LOCAL AND OTHER TAX LAWS.
The receipt by a shareholder of cash for shares of Besicorp Common
Stock pursuant to the Merger will be a taxable transaction for federal income
tax purposes under the Code and also may be a taxable transaction under
applicable state, local and other tax laws. The tax consequences of such receipt
may vary depending upon, among other things, the particular circumstances of the
shareholder. A shareholder will generally recognize gain or loss equal to the
difference between the amount of cash received by the shareholder pursuant to
the Merger in exchange for his or her shares and the shareholder's adjusted tax
basis in such shares. Such gain or loss generally will be capital gain or loss
if the shares are a capital asset in the hands of the shareholder and will be
long-term gain or loss if the shares have a holding period of more than one year
at the time of their conversion at the Effective Date. Long-term capital gain
recognized by an individual shareholder generally will be taxed at a maximum
federal income tax rate of 20%. Certain limitations apply with respect to the
deductibility of capital losses.
The receipt by a holder of Besicorp Common Stock at the Spin-Off Record
Date (an "Entitled Holder") of shares of Newco Common Stock and/or cash in lieu
of fractional shares of such stock pursuant to the Spin-Off will be a taxable
transaction for federal income tax purposes under the Code and also may be a
taxable transaction under applicable state, local and other tax laws. The tax
consequences of such receipt may vary depending upon, among other things, the
particular circumstances of the Entitled Holder. An Entitled Holder will
generally receive dividend income equal to the value of the shares of Newco
Common Stock (which has not yet been determined, but will be determined by the
Board before the Spin-Off and is estimated to range between approximately $1.47
to $1.80 per share of Besicorp Common Stock) or the amount of cash or both
received by such Entitled Holder pursuant to the Spin-Off. Additional
information regarding the federal income tax consequences of the Spin-Off will
be set forth in the Information Statement.
27
<PAGE>
The receipt of cash by a shareholder pursuant to the Merger and/or the
receipt of shares of Newco Common Stock and/or cash by an Entitled Holder
pursuant to the Spin-Off may be subject to backup withholding at the rate of 31%
unless the shareholder (i) is a corporation or comes within other exempt
categories, or (ii) provides a certified taxpayer identification number on Form
W-9 and otherwise complies with the backup withholding rules. Backup withholding
is not an additional tax; any amounts so withheld may be credited against the
federal income tax liability of the shareholder subject to the withholding.
This discussion applies only to shareholders holding shares of Besicorp
Common Stock as capital assets, and to shareholders holding shares of Besicorp
Common Stock received pursuant to the exercise of employee stock options or
otherwise as compensation. This discussion does not apply to Besicorp's
shareholders who are not citizens or residents of the United States, to
Besicorp's shareholders who are tax-exempt or to other shareholders of Besicorp
of special status.
Pursuant to the BCL, claims of Besicorp's creditors, including claims
of such creditors as taxing authorities, are not extinguished by the Merger and,
accordingly, the Surviving Corporation will be liable for the claims of both
Merger Sub and Besicorp immediately prior to the Merger. Furthermore, as former
members of the Besicorp consolidated group, Newco and the other members of such
group would be jointly and severally responsible for the U.S. federal income tax
liability of such group for the years during which they were members of such
group. Management is not aware of any material claims of Besicorp's creditors
other than (i) the legal proceedings described under "Business of the Company --
Legal Proceedings," (ii) the accrued unpaid federal income taxes for the current
fiscal year based on the consolidated net income of Besicorp through the
Effective Date, (iii) the liability of Besicorp and/or its Subsidiaries for New
York State income taxes for Besicorp's current fiscal year and (iv) the SunWize
Indebtedness of approximately $135,000 which Besicorp incurred in connection
with the purchase of certain assets for its photovoltaic business. See "Business
- -- SunWize Indebtedness." Pursuant to the Contribution Agreement (as defined
below), Newco is assuming all of Besicorp's liabilities (including the
liabilities associated with the legal proceedings referred to in (i), above)
other than the tax liabilities for the current year referred to in (ii) and
(iii), above.
To the extent that the Surviving Corporation is not able to discharge
all claims of creditors existing at the Effective Date and the Escrow Fund is
insufficient to do so, it is possible that the creditors (including the taxing
authorities) may seek to bring claims against persons who were shareholders of
Besicorp immediately prior to the Effective Date of the Merger by asserting that
such shareholders are subject to transferee liability (i.e., that such
shareholders are liable for the obligations of Besicorp by virtue of the fact
that they received the Merger Consideration or the Newco Common Stock (or cash
received in lieu of fractional shares of Newco Common Stock) or both, although
such potential liability of any shareholder would presumably be limited to the
value of the Merger Consideration or Newco Common Stock (or cash received in
lieu of fractional shares of Newco Common Stock) or both received by such
shareholder, plus any allowable
<PAGE>
interest charge). Though management believes that it is unlikely that such
claims would be successful, if any such claims were to be made and be
successful, the net benefit received by such shareholders from the Merger
Consideration and the Spin-Off could be materially reduced.
The law firm of Coudert Brothers has rendered an opinion that it is
more likely than not that, if the Internal Revenue Service (the "IRS") were to
assert that the shareholders were liable as transferees for Besicorp's U.S.
federal income tax liabilities for Besicorp's fiscal year ending March 31, 1999
(the "Current Fiscal Year") as a result of their receipt of the Merger
Consideration, such position would not be upheld if litigated. Coudert Brothers'
opinion does not consider any other federal, state, local or foreign legal or
tax implications, if any, that might affect the tax liability of the
shareholders. Furthermore, Coudert Brothers' opinion is limited to authorities
arising under the Code and the New York Debtor and Creditor Law ("NYDCL") that
involved assertions of transferee liability for unpaid federal income taxes.
Such opinion specifically does not address the potential consequences to the
shareholders of claims of transferee liability that may be brought under, or may
be subject to, other potentially applicable legal authorities, such debtor and
creditor laws (except to the limited extent indicated above), bankruptcy or
similar laws, laws relating to the duties of shareholders to their corporation,
to its creditors and to each other, and judicial decisions thereunder.
28
In rendering its opinion, Coudert Brothers has advised that the
authorities dealing with transferee liability consist almost exclusively of case
law in which the decisions are based on very specific factual findings and that,
as a result, the existing authorities do not provide clear guidance on when a
shareholder of a corporation may be liable for the corporation's liabilities in
circumstances such as those presented. Consequently, if the IRS were to assert
that some or all of the shareholders are liable as transferees for federal
income tax liabilities of Besicorp, the outcome of such challenge would be
highly dependent on the ability of the shareholders to establish critical facts
that would be necessary for the defense of such claim. No ruling will be
obtained from the IRS on the issue to which the Coudert Brothers' opinion is
addressed and, unlike a ruling, an opinion of counsel has no binding effect on
the IRS or the courts. In the absence of a ruling, there can be no assurance
that the IRS will not disagree with, or challenge in court, the opinion set
forth therein, or that it will not ultimately prevail. Furthermore, Coudert
Brothers' opinion is based on legal authorities existing at the time the opinion
was rendered, and any change in applicable law or the interpretation thereof may
affect the conclusions reached therein. There can be no assurance that the
existing legal authorities upon which the opinion is based will not be repealed,
revoked, modified or overruled, possibly with retroactive effect. Coudert
Brothers has consented to the inclusion of the foregoing discussion of their
opinion herein.
<PAGE>
REGULATORY AND OTHER APPROVALS
Besicorp is not aware of any material governmental or regulatory
requirements to be complied with in connection with the Merger, other than
obtaining the shareholders' adoption of the Plan of Merger, and the filing of a
Certificate of Merger conforming to the requirements of the BCL with the
Secretary of State of the State of New York (and certain other governmental
authorities in the State of New York) and certain other requirements that must
be satisfied in connection with the Spin-Off.
PLAN OF MERGER
The following is a discussion of all material provisions of the Plan of
Merger, a copy of which is attached as Annex A to this Proxy Statement. The
statements made herein concerning such document are not necessarily complete,
and reference is made to the full text of the Plan of Merger attached hereto as
Annex A. Each such statement is qualified in its entirety by such reference.
Capitalized terms that are not otherwise defined in this discussion have the
meanings set forth in the Plan of Merger.
THE MERGER
The Plan of Merger provides that, upon the terms and subject to the
satisfaction or waiver of certain conditions set forth therein, Merger Sub will
be merged with and into Besicorp, the separate corporate existence of Merger Sub
will cease and Besicorp will continue as the Surviving Corporation, provided
that it will change its name within 30 days after the Closing Date to a name
which does not include the word "Besicorp." The Merger will become effective
upon the filing of the Certificate of Merger with the Secretary of State of the
State of New York or, if later, the time specified in the Certificate of Merger
in accordance with the BCL (the "Effective Date").
Pursuant to the Plan of Merger, at the Effective Date (i) each share of
Besicorp Common Stock issued and outstanding immediately prior to the Effective
Date shall, by virtue of the Merger and without any action on the part of the
holder thereof, be converted into the right to receive in cash the Merger
Consideration which is described below under "--Merger Consideration," upon
surrender of the certificate evidencing such share (each, a "Certificate") in
the manner provided below and (ii) each share of Merger Sub's Common Stock
issued and outstanding immediately prior to the Effective Date will be converted
into and become one validly issued, fully paid and nonassessable share of common
stock of the Surviving Corporation.
Immediately prior to the Effective Date, Acquisition will deposit or
cause to be deposited with the Payment Agent, in trust for the benefit of the
holders of record of Besicorp Common
29
<PAGE>
Stock immediately prior to the Effective Date, cash in an aggregate amount equal
to the Merger Consideration. As soon as practicable after the Effective Date,
the Payment Agent will mail to each holder of shares of Besicorp Common Stock as
of the Effective Date a letter of transmittal and instructions (the "Letter of
Transmittal") to effect the surrender of the Certificates in exchange for the
Merger Consideration. Each holder of Besicorp Common Stock, upon surrender to
the Payment Agent of such holder's Certificates with the Letter of Transmittal,
duly and properly executed, shall be entitled to receive the portion of the
Merger Consideration represented by the Certificate as payment of the Merger
Consideration. Until so surrendered, each Certificate shall at and after the
Effective Date be deemed to represent only the right to receive upon surrender
of such Certificate the Merger Consideration with respect to the shares of
Besicorp Common Stock represented thereby. No interest will be paid or will
accrue on the cash payable upon surrender of any Certificate. BESICORP
SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES OR INSTRUMENTS UNTIL THEY
RECEIVE A LETTER OF TRANSMITTAL OR OTHER FORM.
If the Plan of Merger is adopted by the requisite vote of the
shareholders of Besicorp and certain other conditions to the Merger are
satisfied or waived (as more fully described below), the Closing will be held on
March 22, 1999.
MERGER CONSIDERATION
Each share of Besicorp Common Stock outstanding immediately prior to
the Effective Date shall be converted into the right to receive $34.50 in cash,
plus an additional amount, which is the amount equal to (1) the quotient equal
to (a) the Base Amount (as described below) divided by (b) the number of shares
of Besicorp Common Stock outstanding as of immediately prior to the Effective
Date less (2) $34.50. If the Base Amount is less than $105,275,000, Acquisition
and Merger Sub may terminate the Plan of Merger. See "-- Conditions to the
Merger." The Base Amount is determined pursuant to the following formula:
Base Amount = Initial Amount - Adjustment Amount + (Specified Current
Liabilities x .8357).
The terms set forth in this formula have the following meanings (shareholders
are encouraged to review the Plan of Merger for the exact definition of these
terms):
Initial Amount is the sum of (a) (i) $500,000, (ii) to the extent not
received in cash, the amount of a claimed tax refund for fiscal year 1998 not to
exceed $3,909, (iii) cash and cash equivalents on hand or in accounts which are
solely owned by Besicorp or a Remaining Subsidiary (as defined in the Plan of
Merger), free of all Encumbrances as of the Effective Date, and (iv) the product
of .9975 of the closing price of a share of Niagara Mohawk Common Stock as of
the trading day immediately preceding the Closing Date multiplied by the number
of shares of Niagara Mohawk Common Stock held by Besicorp as of the Effective
Date (not to exceed 50,000 shares)
<PAGE>
less (b) to the extent not already contributed pursuant to the Escrow Agreement,
$6,500,000. As an example, on February 25, 1999, based on the most recent
ascertainable financial information, Besicorp estimates that the Initial Amount
would be the sum of (a) (i) $500,000, (ii) a claimed refund of $3,909, (iii)
$126,318,051 (after deducting an additional $5,500,000 for (1) the estimated
costs of the Transactions, (2) paying bonuses and (3) contributing $1.5 million
in cash to Newco) in cash and cash equivalents and (iv) Niagara Mohawk Common
Stock with a discounted value of $729,422 less (b) $6,500,000, for a total of
$121,051,382.
Adjustment Amount is the sum of: (i) all Liabilities of Besicorp or a
Remaining Subsidiary (including the Specified Current Liabilities (as defined
below) but excluding the Excluded Liability (as defined below) and certain
intercompany liabilities) as of the Effective Date which are, in the reasonable
judgment of Acquisition, both fixed and quantifiable; (ii) all liabilities,
judgments, demands, claims, actions or causes of action, regulatory, legislative
or judicial proceedings or investigations, assessments, levies, losses, fines,
penalties, damages, costs and expenses ("Damages"), and other damages, if any,
that Besicorp and Acquisition, agree may be incurred (or reasonably likely to be
incurred) by any of the parties to the Plan of Merger and any Remaining
Subsidiary as a result of the breach by Besicorp of its representations and
warranties in the Plan of Merger; and (iii) transfer, use, stamp, real estate
and other similar taxes and fees incurred by Besicorp, its Subsidiaries,
Acquisition or Merger Sub in connection with the Transactions. As an example, on
February 25, 1999, based on the most recent ascertainable financial information,
Besicorp estimates that the Adjustment Amount would be the sum of (i)
Liabilities of $47,952,222 less an Excluded Liability of $11,500, (ii) $0 in
Damages and (iii) $0 in transfer taxes, for a total of $47,940,722.
30
Specified Current Liabilities are the Liabilities of Besicorp or any
Remaining Subsidiary (actual or accrued) for unpaid federal income taxes for the
current fiscal year based on the consolidated net income of Besicorp through the
Effective Date.
The Excluded Liability is the Liability of Besicorp or its Subsidiaries
for New York State income Taxes for Besicorp's current fiscal year.
As an example, on February 25, 1999, based on the most recent
ascertainable financial information, Besicorp estimates that the Initial Amount
would have been $121,051,382, the Adjustment Amount would have been $47,940,722
and the Specified Current Liabilities would have been $47,940,722. Therefore, as
an example, on February 25, 1999, the Base Amount in Besicorp's estimation,
would have equaled $113,174,721. Since this exceeds $105,275,000 by $7,899,721,
there would be an upward adjustment of $7,899,721 divided by 3,051,435 (the
number of shares of Besicorp Common Stock on a fully diluted basis (which is
assumed to be the number of shares outstanding on the Closing Date)), or $2.59
per share of Besicorp Common Stock so that the Merger Consideration would equal
$37.09. The aggregate amount of the payment to be made by Acquisition pursuant
to the Plan of Merger equals the Merger Consideration multiplied by the number
of shares of Besicorp Common Stock outstanding
<PAGE>
immediately prior to the Effective Date. This aggregate amount cannot be
determined at present. However, assuming that there are 3,051,435 shares
outstanding, this amount shall be no less than $105,275,000 and in the above
example would amount to $113,177,724. The aggregate amount is not likely to
exceed $117 million.
Not later than twenty days prior to Closing, Besicorp is to prepare and
deliver to Buyer a statement setting forth in reasonable detail the components
of the Base Amount. The Statement is to be prepared in accordance with the
generally accepted accounting principles applied in preparation of Besicorp's
financial statements, with items to be reflected regardless of materiality and
all accruals known or contemplated for Liabilities of Besicorp or a Remaining
Subsidiary as of the Effective Date to be reflected. Besicorp is to permit and
fully cooperate with Merger Sub in obtaining full access to Besicorp's records
and its accountant's work papers for purposes of independently verifying the
components of the Base Amount and the Additional Amount. Buyer is to notify
Besicorp of its acceptance or rejection of the Statement within five days of
receipt. In the event that Buyer rejects the Statement such notice shall set
forth a schedule detailing the disputed components of the Statement. Besicorp
and Buyer are to use their reasonable best efforts to reach agreement on such
disputed components of the Statement prior to the Closing. In the event that
Besicorp and Buyer are unable to reach an agreement on the Statement within
three days prior to Closing, the Plan of Merger will be deemed terminated.
In calculating the Merger Consideration, the parties assumed that the
100,000 Disputed Shares of Besicorp Common Stock held of record by Martin
Enowitz were outstanding even though Besicorp maintains, and is a party to a
legal proceeding seeking a determination, that he is not entitled to such
shares. See "Business of the Company -- Legal Proceedings." Because of the
uncertainty with respect to the ownership of these shares, the Plan of Merger
provides that the Merger Consideration payable in respect of such shares is to
be held in escrow pending resolution of the dispute regarding the ownership of
these shares and the rights, if any, of Acquisition, Merger Sub or the Surviving
Corporation to such Merger Consideration will be assigned without recourse to
Besicorp's shareholders. The Merger Consideration for such shares amounts to
approximately $3,450,000, subject to upward (but not downward) adjustment as
provided in the Plan of Merger. If it is determined that Mr. Enowitz was not
entitled to the Disputed Shares, Besicorp's shareholders will receive, on a pro
rata basis, such monies less Besicorp's costs (estimated to be less than
$100,000) to repurchase such shares. There can be no assurance as to when this
dispute will be resolved or whether it will be resolved to the satisfaction of
Besicorp.
REPRESENTATIONS AND WARRANTIES
The Plan of Merger contains various representations and warranties of
Besicorp as to, among other things: (i) the due organization, valid existence,
good standing and capitalization of Besicorp and/or certain subsidiaries; (ii)
the authorization of the execution and delivery of the Plan of Merger and
certain related agreements, the validity and enforceability thereof against
31
<PAGE>
Besicorp, the noncontravention thereby of the organizational documents of
Besicorp or certain subsidiaries or of any material order or judgment of a
governmental entity or any agreement or obligation applicable to Besicorp or any
of its Subsidiaries and the absence of requirements for any consents, notices or
registrations ("Authorizations") to be obtained or filed by Besicorp or any of
its Affiliates in connection with consummation of the Merger; (iii) compliance
in all material respects of Besicorp's filings with the SEC under the Securities
Act of 1933, as amended, and the Exchange Act (the "SEC Documents"), and the
accuracy of certain information and financial statements of Besicorp included in
the SEC Documents; (iv) the absence of certain undisclosed liabilities; (v)
compliance with applicable laws; (vi) the absence of certain changes or events
since June 30, 1998; (vii) certain tax matters; (viii) certain intellectual
property matters; (ix) litigation involving Besicorp or certain subsidiaries;
(x) employee benefit matters; (xi) certain labor and employment matters; (xii)
certain environmental matters; and (xiii) title to property.
The Plan of Merger also contains representations and warranties of each
of Acquisition and Merger Sub as to, among other things: (i) their due
organization, valid existence, good standing and/or capitalization; (ii) due
authorization, execution and delivery of the Plan of Merger and related
agreements, the validity and enforceability thereof against such parties and the
noncontravention thereby of the organizational documents of Acquisition and
Merger Sub or other agreements to which such parties may be bound; (iii) the
absence of conflicts and defaults and the absence of the requirement for any
Authorization; (iv) the delivery to Besicorp of a true copy of a letter from the
Lender, stating Lender's interest, subject to the negotiation and execution of
definitive documents and the fulfillment of the conditions set forth in such
letter, in providing the Financing which, together with the equity to be
obtained by the Merger Sub, will be for an amount necessary to pay the Merger
Consideration and that the Financing will not be secured by a lien on the assets
of the Surviving Corporation; and (v) the accuracy of the information provided
in writing by Acquisition and Merger Sub for use in the Proxy Statement.
CERTAIN COVENANTS
CONDUCT OF BUSINESS PENDING THE MERGER.
Besicorp, Acquisition and Merger Sub agreed that until the Effective Date, the
parties (a) would not intentionally perform or omit to perform any act which
would prevent the performance of the Plan of Merger or would result in any
representation or warranty being untrue in any material respect and (b)
would give the other parties notice of the occurrence of any event which
would make any representation or warranty in the Plan of Merger untrue or
that would otherwise prevent the closing of the Merger. The parties further
agreed to use their best efforts to consummate expeditiously the Spin-Off, the
Merger, the sale of the Power Plants by the Partnerships and the other
transactions contemplated by the Plan of Merger (collectively, the
"Transactions") provided that no party is required by such agreement to
expend funds not commercially reasonable in relation to such transactions
or to take any action that would result in a material adverse effect with
respect to such party.
<PAGE>
Besicorp also agreed that prior to the Effective Date, it shall use its
best efforts to cause certain of its affiliates to dispose of the Power Plants
and it shall, and shall cause each Remaining Subsidiary to, carry on its
business with the objective of effecting the Spin-Off and the sales of the Power
Plants and, in all other respects with the objective of winding up the remaining
business of Besicorp and the Remaining Subsidiaries so that Besicorp and the
Remaining Subsidiaries will have no assets other than cash and cash equivalents
and the Retained Assets (as defined in the Plan of Merger) and no Liabilities
other than Permitted Liabilities (as defined in the Plan of Merger) and certain
other permissible liabilities.
Furthermore, Besicorp shall cause the Spin-Off to be effectuated
immediately prior to the Effective Date by causing, among other things, (a) the
transfer to, and assumption by Newco of all of the assets, personnel, employee
benefit plans and Liabilities of Besicorp (other than the Retained Assets and
Permitted Liabilities) and the Remaining Subsidiaries and the transfer to Newco
of all of the outstanding capital stock of the Distributed Subsidiaries (as such
terms are defined in the Plan of Merger); (b) the execution and delivery by
Besicorp and Newco of such agreements and arrangements which are customary in
connection with spinoffs and which provide for, among other matters, the
provision of transition and support services to Besicorp by Newco without cost
to Besicorp, the replacement of Contributed Assets with Retained Assets of equal
value in certain circumstances, and indemnification of Besicorp by Newco and its
subsidiaries for any failure of Newco to discharge and pay in full all of the
Liabilities so assumed or the failure of any Distributed Subsidiary to discharge
and pay in full its Liabilities when due; (c) the distribution to the
shareholders of Besicorp prior to the effective time of the Merger of all of
the outstanding capital stock of Newco; and (d) Besicorp and Newco to
enter into the Indemnification Agreement and the Escrow Agreement.
Besicorp also agreed that prior to the Effective Date it shall not and
shall not permit any of the Remaining Subsidiaries to: (i) amend its Certificate
of Incorporation, By-Laws or other organizational documents; (ii) make any
change in its authorized capital stock; adjust, split, combine or reclassify its
capital stock; or, with certain exceptions, issue any shares of stock, or rights
to acquire capital stock or other similar rights; (iii) incur any indebtedness
for borrowed money or assume or otherwise become responsible for the obligations
of any other person; (iv) subject to certain exceptions, sell, transfer,
encumber or otherwise dispose of any of its material properties or assets to any
person; (v) make any investments in, or contributions to capital of, or
purchases of, any property or assets from any other person; (vi) subject to
certain exceptions, enter into or terminate any material contract or agreement,
or make any change in any of its material leases or contracts; (vii) change,
with certain exceptions, its method of accounting as in effect at December 31,
1997; (viii) subject to certain exceptions, increase the compensation payable to
any employee, or enter into any new employment agreements with new or existing
employees; (ix) subject to certain exceptions, pay any dividend or make any
distribution (other than the Spin-Off) on its securities or purchase any of its
securities; (x) make any tax election or settle or compromise any tax liability;
and (xi) enter into any business or contract not related to the Spin-Off, Power
Facility Sales or the Merger.
32
<PAGE>
Besicorp also agreed that prior to the Effective Date, it shall cause
the Distributed Subsidiaries to carry on their respective businesses only in the
ordinary course consistent with past practice and shall not and shall cause the
Distributed Subsidiaries not to create any liabilities of Besicorp or any
Remaining Subsidiary for the Liabilities of the Distributed Subsidiaries.
Pursuant to the Plan of Merger, Besicorp agreed (i) to call a meeting
of its shareholders for the purpose of voting upon adoption of the Merger; (ii)
to hold such meeting as soon as practicable following the date of the Initial
Plan of Merger; (iii) subject to the provisions regarding Acquisition Proposals
(as defined below), to recommend to its shareholders the adoption of the Merger
through its Board of Directors; and (iv) to use its best efforts to obtain the
adoption of the Plan of Merger by the shareholders of Besicorp.
Pursuant to the Plan of Merger, Besicorp agreed to prepare and file
with the SEC this Proxy Statement and a Form 10 Registration and use its
reasonable best efforts to respond to any comments of the SEC and to cause the
Form 10 Registration to be effective. Besicorp has also agreed to file all other
reports and schedules required to be filed by Besicorp with the SEC.
Pursuant to the Plan of Merger, Besicorp, Merger Sub and Acquisition
agreed to timely seek all consents, approvals, permits, authorizations or
waivers (collectively, "Consents") that are required to be obtained prior to the
Effective Date from governmental entities or other third parties in connection
with the execution and delivery of the Plan of Merger and the consummation of
the transactions contemplated thereby.
ACQUISITION PROPOSALS.
Pursuant to the Plan of Merger, Besicorp agreed
to cease immediately any activities or negotiations with respect to an
Acquisition Proposal (as defined below), and to not, and not to permit any
Subsidiary to, authorize or permit any of its officers, directors, employees or
representatives, to (i) solicit any Acquisition Proposal; (ii) facilitate the
making of an Acquisition Proposal; or (iii) enter into any agreement with
respect to any Acquisition Proposal; provided, however, that neither Besicorp
nor the Board is prohibited from furnishing non-public information to, or
entering into discussions with, any person with respect to any unsolicited
Acquisition Proposal if : (a) the Board determines reasonably and in good faith,
after due investigation and after consultation with and based upon the advice of
its outside financial advisor, that such Acquisition Proposal is a Superior
Proposal (as defined below); (b) the Board determines reasonably and in good
faith, after due investigation and after consultation with and based upon the
advice of outside counsel, that the failure to take such action would cause the
Board to violate its fiduciary duties to shareholders; and (c) Besicorp (x)
provides at least two business days' notice to Acquisition to the effect that it
is taking such action and (y) receives from such person or entity an executed
confidentiality agreement.
The term "Acquisition Proposal" means any bona fide offer or proposal
with respect to a merger or similar transaction involving Besicorp or any of its
Subsidiaries or the purchase of any
33
<PAGE>
significant portion of the assets or capital stock of Besicorp or any
significant Subsidiary or any other business combination involving Besicorp; and
"Superior Proposal" means an Acquisition Proposal which the Board believes in
good faith, after due investigation (taking into account, among other things,
the financing terms and the likelihood of consummation) and based upon the
advice of its outside legal and financial advisors, is more favorable to
Besicorp's shareholders from a financial point of view than the Merger (taking
into account the Spin-Off).
The Board shall not (i) withdraw or modify its approval or
recommendation of the Plan of Merger, the Merger or any of the Transactions,
(ii) approve, adopt or recommend or publicly propose to approve, adopt or
recommend an Acquisition Proposal, (iii) cause Besicorp to enter into any
agreement with respect to an Acquisition Proposal, or (iv) resolve to do any of
the foregoing unless Besicorp receives an unsolicited Acquisition Proposal in
accordance with the Plan of Merger and the Board determines reasonably and in
good faith, after due investigation (a) based upon the advice of its outside
financial advisor, that a pending Acquisition Proposal is more favorable to
Besicorp's shareholders than the Merger and the Spin-Off, taken as a whole, (b)
that such Acquisition Proposal is reasonably likely to be consummated, (c) that
there is a substantial probability that the approval of the Merger and the
Spin-Off will not be obtained due to the pending Acquisition Proposal, and (d)
based upon the advice of outside counsel, that the failure of the Board to
withdraw or modify its approval or recommendation of the Plan of Merger or the
Merger, or approve or recommend such Acquisition Proposal would cause the Board
to violate its fiduciary duties to its shareholders.
INDEMNIFICATION.
The Plan of Merger contemplates that prior to the Effective Date, Besicorp
will procure and pay for D&O Insurance covering the Covered Persons, who at the
time of the execution of the Initial Plan of Merger were covered by Besicorp's
officers' and directors' liability insurance or will be so covered on the
Closing Date, with respect to actions and omissions occurring on or prior
to the Closing Date. Additionally, the Plan of Merger provides that for the
lesser of six years after the Closing Date or the period the Surviving
Corporation maintains its existence, the provisions of the Certificate of
Incorporation and By-Laws of the Surviving Corporation shall provide
indemnification to the Covered Persons on terms, in a manner, and with respect
to matters, which are no less favorable than Besicorp's Certificate of
Incorporation and By-Laws, as in effect on the date of the execution of the
Initial Plan of Merger; provided, however, that the obligation of the Surviving
Corporation to provide such indemnification is limited to the D&O Insurance and
the Surviving Corporation's rights under the Escrow Agreement and that the
provisions of the Certificate of Incorporation and By-laws of the Surviving
Corporation may be amended accordingly.
<PAGE>
CONDITIONS TO THE MERGER
Financing Condition.
The obligation of Buyer to consummate the Merger is subject to Merger
Sub's having received the proceeds of the Financing at or prior to the Closing
Date. Buyer has received a letter from Lender, stating Lender's interest,
subject to the negotiation and execution of definitive documents and the
fulfillment of the conditions set forth in such letter, in providing the
Financing, and Buyer is aware of no development that will make obtaining the
proceeds less likely than it was at the time of such letter. However, Lender
will not provide the Financing until immediately prior to the Closing and
therefore there remains the risk that the Lender will not provide the Financing.
As the Closing is likely to occur immediately following the Special Meeting, it
is possible but unlikely that the Financing may be provided before the Special
Meeting.
Other Conditions to the Merger.
The obligations of each of Acquisition, Merger Sub and Besicorp to
consummate the Merger are subject to the satisfaction of certain conditions
prior to the Closing Date, including: (i) the adoption of the Plan of Merger by
the requisite vote of the shareholders of Besicorp; (ii) no governmental entity
or court shall have enacted any law or regulation or order which is then in
effect and has the effect of making the Merger or any of the Transactions
illegal; and (iii) the approval of the Plan of Merger, the Merger and, to the
extent, necessary the Transactions, by each governmental entity whose approval
is so required. The obligation of Besicorp to consummate the Merger is subject
to the satisfaction (or waiver by Besicorp) of certain additional conditions at
or prior to the Effective Date, including: (i) the accuracy of the
representations and warranties of Acquisition and Merger Sub when made and as
of the Closing Date; (ii) the performance by Acquisition and Merger Sub
of all their obligations required in the Plan of Merger to be performed by
them on or prior to the Closing Date; and (iii) immediately prior to the
Merger, Merger Sub being, and, assuming that the representations and
warranties made by Besicorp are true and correct immediately following the
effectiveness of the Merger, the Surviving Corporation being, solvent. The
obligation of Acquisition and Merger Sub to consummate the Merger is subject to
the fulfillment (or waiver by such parties) of certain additional conditions
at or prior to the Closing Date, including: (i) the accuracy of the
representations and warranties of Besicorp when made and as of the Closing
Date, except to the extent reflected in the disclosure schedule annexed to
the Initial Plan of Merger (the "Disclosure Schedule"); (ii) the performance
by Besicorp of all obligations required by the Plan of Merger to be performed b
it on or prior to the Closing Date; (iii) the absence of any changes since June
30, 1998, after taking into account the completion of the Transactions other
than the Merger, in the condition, assets, business, results of operations or
prospects of Besicorp and its Subsidiaries, taken as a whole, which has had or
would reasonably be likely to have a Material Adverse Effect on Besicorp or any
Remaining Subsidiary; (iv) Merger Sub being satisfied that the Spin-Off and the
Power Facilities Sales have been completed as provided in the Plan of Merger,
and neither the Surviving Corporation nor any
34
<PAGE>
of the Remaining Subsidiaries has any liability as a result of the Spin-Off or
Power Facilities Sales; (v) Newco shall have executed the Indemnification
Agreement and the Escrow Agreement and Besicorp shall have deposited $6,500,000
with the Escrow Agent; (vi) the Base Amount shall be no less than $105,275,000;
(vii) Besicorp shall have received all of the Consents (as defined in the Plan
of Merger) and obtained certain releases; (viii) neither Besicorp nor its
Remaining Subsidiaries have any Liabilities other than the Permitted Liabilities
and the Liabilities taken into account in determining the Adjustment Amount; and
(ix) the absence of any suit or investigation by any governmental entity seeking
to enjoin the transactions contemplated by the Plan of Merger or seeking
material damages on account of the consummation of the transactions contemplated
thereby or imposing any condition or restriction that would be commercially
unreasonable from a financial standpoint relative to the transactions
contemplated by the Plan of Merger.
If Besicorp were to waive a material condition, either before or after
the Special Meeting, Besicorp intends to notify the holders of Besicorp Common
Stock and seek the shareholders' approval of such waiver before consummating the
Merger.
TERMINATION
Right to Terminate
The Plan of Merger may be terminated and the Merger may be abandoned at
any time prior to the Effective Date, by the mutual consent of Buyer and
Besicorp.
In addition, the parties have agreed that the Plan of Merger may be
terminated and the Merger may be abandoned by action of either Buyer or Besicorp
if (a) the Merger shall not have been consummated by 11:59 P.M. on March 1, 1999
(the "Termination Date"); provided however that the Termination Date, at the
request of Besicorp (the "Extension Request"), may be extended from March 1,
1999 to March 15, 1999 (the "Extension") in which case if the Merger does not
close during the Extension, Besicorp would be obligated, unless the Plan of
Merger was terminated by Besicorp on account of a breach by Buyer of Buyer's
obligations pursuant to the Plan of Merger, to pay Buyer $1.4 million (the
"Extension Fee") in addition to any other amounts, if any, Besicorp would be
obligated to pay on account of the termination of the Plan of Merger (provided
that this termination right shall not be available to the party whose failure to
fulfill its obligations under the Plan of Merger shall have been the cause of
the failure to consummate the Merger) or (b) upon a vote at the Meeting,
Besicorp's shareholders do not adopt the Plan of Merger. On February 26, 1999,
Besicorp exercised its right to extend the Termination Date until March 15,
1999, and both Besicorp and Buyer waived their right to terminate the Plan of
Merger during the period ending immediately before 11:59 p.m. on March 22, 1999
on the grounds that the Effective Date has not occurred. Besicorp and Buyer may
still terminate the Plan of Merger if the Effective Date does not occur after
the end of such period. In connection with the exercise of the Extension Request
and the waivers, Besicorp put the Extension Fee in escrow.
<PAGE>
The Plan of Merger may be terminated and the Merger may be abandoned at
any time prior to the Effective Date by Buyer, if: (a) there has been a material
breach of any material agreement on the part of Besicorp which has not been
cured or adequate assurance of cure given, within ten business days following
notice of such breach from Merger Sub or either of the Indemnification Agreement
or the Escrow Agreement shall not be a valid, legal and binding agreement or
enforceable against Newco; (b) there has been a breach of a representation or
warranty of Besicorp, the Damages from which Merger Sub reasonably determines
would cause the Base Amount to be less than $105,275,000; (c) the Board shall
have (i) withdrawn or modified its approval, adoption or recommendation of the
Plan of Merger, the Merger or any of the Transactions, (ii) approved, adopted or
recommended or publicly proposed to approve or recommend an Acquisition
Proposal, (iii) caused Besicorp to enter into any agreement with respect to an
Acquisition Proposal, or (iv) resolved to do any of the foregoing unless certain
conditions are met; (d) a tender offer or exchange offer for 15% or more of the
shares of Besicorp Common Stock is commenced, and the Board fails to recommend
against acceptance of such tender offer or exchange offer within the time period
required by Section 14e-2 of the Exchange Act or any person acquires by any
means 20% or more of the outstanding shares of Besicorp Common Stock; (e)
Besicorp shall have breached any of its covenants or agreements with respect to
Acquisition Proposals; (f) there shall be pending or threatened any proceeding
seeking material damages on account of the Plan of Merger or the consummation of
the Merger or any of the other Transactions which Merger Sub determines could
reasonably be expected to result in Besicorp incurring a material amount of
damages or expenses, after taking into account applicable insurance coverage; or
(g) the Base Amount is less than $105,275,000.
35
In addition, the Plan of Merger may be terminated and the Merger may be
abandoned at any time prior to the Effective Date, by Besicorp, if: (a) there
has been a material breach of any agreement therein on the part of Merger Sub
which has not been cured or adequate assurance of cure given, within ten
business days following notice of such breach from Besicorp; (b) generally,
there has been a breach of a representation or warranty of Acquisition or Merger
Sub therein which could reasonably be expected to prevent Acquisition or Merger
Sub from fulfilling its obligations under the Plan of Merger; or (c) the Board
determines to enter into and enters into a definitive agreement providing for a
Superior Proposal and, among other things, Besicorp simultaneously pays to
Merger Sub the Termination Payment of $3.5 million and Covered Expenses, up to a
maximum of $600,000.
Remedies
Notwithstanding any termination right described under "--Right to
Terminate," in the event of the nonfulfillment of any condition to a party's
closing obligations, such party may elect to do one of the following: (a)
proceed to close despite the nonfulfillment of any closing condition without
waiving any claim for any breach and without waiving any right to proceed under
the Indemnification Agreement; (b) decline to close, terminate the Plan of
Merger as described under
<PAGE>
"--Right to Terminate" and thereafter seek damages to the extent described under
"--Damages"; or (c) seek specific performance of the obligations of the other
party.
Damages
If the Plan of Merger is terminated as described under "--Rights to
Terminate," no party will have any claim against the others, except as follows:
Generally, a party terminating the Plan of Merger will retain all of
such party's legal rights if the circumstances giving rise to such termination
were (i) caused by another party's willful failure to comply with a material
covenant set forth in the Plan of Merger or (ii) that a material representation
or warranty of such other party was materially false when made and that party
knew or should have reasonably known such representation or warranty was
materially false when made.
If (x) Besicorp terminates the Plan of Merger because the Board enters
into a definitive agreement providing for a Superior Proposal in accordance with
certain specified procedures or because the Board shall have breached its
agreements with respect to (i) the withdrawal or modification of its approval or
recommendation of the Plan of Merger, the Merger or any of the Transactions,
(ii) the approval or recommendation or public proposal to approve or recommend
an Acquisition Proposal, (iii) causing Besicorp to enter into any agreement
relating to an Acquisition Proposal, or (iv) resolving to do any of the
foregoing; or (y) Buyer terminates the Plan of Merger because (a) the Board
shall have (i) withdrawn or modified its approval or recommendation of the Plan
of Merger, the Merger or any of the Transactions, (ii) approved or recommended
or publicly proposed to approve or recommend an Acquisition Proposal, (iii)
caused Besicorp to enter into any such agreement with respect to an Acquisition
Proposal, or (iv) resolved to do any of the foregoing unless certain conditions
are met, (b) a tender offer or exchange offer for 15% or more of the shares of
Besicorp Common Stock is commenced, and the Board fails to recommend against
acceptance of such tender offer or exchange offer within the time period
required by Section 14e-2 of the Exchange Act or any person acquires by any
means 20% or more of the outstanding shares of Besicorp Common Stock or (c)
Besicorp shall have breached any of its covenants or agreements with respect to
Acquisition Proposals, and Acquisition and Merger Sub are ready, willing and
able to execute definitive documentation to effect the Financing or
substantially similar financing arrangements, Besicorp will pay Merger Sub the
Termination Payment, reimburse Buyer for their Covered Expenses (up to a maximum
of $600,000) and, if Besicorp has exercised its Extension Request, pay the
Extension Fee.
36
If the Plan of Merger is terminated because upon a vote at the Meeting,
Besicorp's shareholders do not adopt the Plan of Merger, (x) Besicorp will pay
Merger Sub, Buyer's Covered Expenses up to $600,000 and (y) if Michael F. Zinn
or his direct or indirect transferees have failed to vote in person or by proxy
at least 1,600,000 shares in favor of the Merger and any other matter presented
to shareholders in connection with the Merger, Besicorp shall pay the
<PAGE>
Termination Payment to Merger Sub and, if Besicorp has exercised its Extension
Request, the Extension Fee. For information regarding, Michael F. Zinn's
holdings of Common Stock see "Business of the Company--Security Ownership of
Certain Beneficial Owners and Management" If the Plan of Merger is terminated
(x) because, upon a vote at the Meeting, Besicorp's shareholders do not adopt
the Plan of Merger or (y) by Besicorp, or Acquisition and Merger Sub because the
Merger shall not have been consummated by 11:59 P.M. on March 15, 1999 (provided
that this right shall not be available to the party whose failure to fulfill its
obligations under the Plan of Merger shall have been the cause of the failure to
consummate the Merger) and Besicorp, on or before March 31, 1999 enters into a
written agreement to effect an Acquisition Proposal with, or an Acquisition
Proposal is made by, a party other than Acquisition, Merger Sub or any of their
subsidiaries, and the Acquisition Proposal is thereafter consummated, Besicorp
will pay to Merger Sub the Termination Payment plus the amount of the Covered
Expenses to the extent not paid under the immediately preceding sentence and the
Extension Fee.
If the Plan of Merger is terminated by Buyer because (a) generally
either (i) there has been a material breach of any material agreement contained
therein (with certain exceptions) on the part of Besicorp which breach has not
been cured or adequate assurance of cure given, within ten business days
following notice of such breach from Merger Sub or (ii) either of the
Indemnification Agreement or the Escrow Agreement shall not be a valid, legal
and binding agreement or enforceable against Newco, (b) there has been a breach
of a representation or warranty of Besicorp therein, the Damages from which
Merger Sub reasonably determines would cause the Base Amount to be less than
$105,275,000, (c) there shall be pending or threatened any proceeding seeking
material damages on account of the consummation of any of the Transactions which
Merger Sub determines could reasonably be expected to result in Besicorp
incurring a material amount of damages or expenses, after taking into account
applicable insurance coverage, or (d) the Base Amount is less than $105,275,000,
Besicorp shall reimburse Acquisition and Merger Sub for their Covered Expenses
up to a maximum of $600,000 and pay the Extension Fee.
If Merger Sub and Acquisition terminate the Plan of Merger solely as a
result of their having not received the proceeds of the Financing, Buyer shall
reimburse Besicorp for its Covered Expenses up to $600,000.
INDEMNIFICATION AGREEMENT
The Indemnification Agreement between Acquisition, Merger Sub and Newco
will be entered into at the Closing; all terms capitalized in this section
without being defined shall have the meanings given to them in the Plan of
Merger. The Indemnification Agreement provides that Newco shall indemnify, save
and keep Acquisition, Merger Sub, the Surviving Corporation and the Remaining
Subsidiaries and their respective affiliates and agents (the "Purchaser
Indemnitees")
<PAGE>
harmless and defend against and from all Damages sustained or incurred by any
Purchaser Indemnitee as a result of, or arising out of, by virtue of, or in
connection with:
(a) any inaccuracy in or breach of any representation and
warranty made by Besicorp in the Plan of Merger or in any closing document
delivered in connection with the Plan of Merger; (b) any breach by Besicorp of,
or failure by Besicorp to comply with, any of its covenants or obligations under
the Plan of Merger or under the Indemnification Agreement; (c) the existence of
any Liability or other obligation of Besicorp or any Subsidiary as of the
Closing Date or arising out of or relating to the Merger or any claim against a
Purchaser Indemnitee with respect to any such Liability or obligation or alleged
Liability or obligation other than the Permitted Liabilities, including, without
limitation, Liability on account of Taxes payable by Besicorp or for which
Besicorp is liable; (d) the failure of Newco or any Subsidiary to pay and
discharge in full when due any of their respective Liabilities whenever or
however arising or existing, including liability on account of Taxes other than
the Permitted Liabilities; (e) any claims for indemnification by current or
former officers, directors, employees, agents or consultants of Besicorp or any
Subsidiary; (f) any third party claim (which includes certain litigation
specified in the Indemnification Agreement (the "Existing Litigation")) to the
extent it arises out of or relates to any action or inaction of, or the conduct
of the business of Besicorp or any Subsidiary on or prior to the Closing Date
other than the Permitted Liabilities; (g) any violation of, or delinquency with
respect to, any order or arbitration award or statute, or regulation in effect
on or prior to the Closing Date of or any agreement of Besicorp (or any
Subsidiary) with, or any license, Permit or Environmental Permit granted to
Besicorp (or any Subsidiary) by any federal, state or local governmental
authority to which the properties, assets, personnel or business activities of
Besicorp (or any Subsidiary) are subject (or to which Besicorp (or any
Subsidiary) is subject as it relates to the properties, assets, personnel or
business activities of Besicorp (or any Subsidiary)); (h) any generation,
transportation, storage, treatment, disposal, release or threatened release of
any Hazardous Materials occurring on or prior to the Closing Date regardless of
when liability is asserted, at any facility of Besicorp (or any Subsidiary); (i)
certain discharges or releases to or from storm, ground or surface waters or
wetlands, and any air emissions or pollution; (j) certain exposure of and
resulting consequences to any persons, including, without limitation, employees
of Besicorp (or any Subsidiary or any agent of Besicorp or any Subsidiary), due
to any Hazardous Materials used at a facility or otherwise used by Besicorp (or
any Subsidiary); (k) certain violations or alleged violation of, or obligations
imposed by, any environmental law or environmental permit; (l) certain matters
relating to employee pension benefit plans of Besicorp or its affiliates; (m)
any federal or state taxes imposed upon Besicorp, or for which Besicorp is
liable, with respect to any taxable period or portion of a taxable period ending
on or prior to the Closing Date other than a Permitted Liability; (n) litigation
against Besicorp and/or the Subsidiaries pending or threatened as of the Closing
Date; and (o) any claims, investigations, proceedings, actions or lawsuits
asserted or initiated before or after the Closing arising out of or in
connection with pre-closing occurrences involving Besicorp and/or the
Subsidiaries.
37
<PAGE>
With certain exceptions, the Purchaser Indemnitees shall not be
entitled to indemnification (i) unless a notice of a claim has been delivered to
Newco prior to the fifth anniversary of the Closing Date; (ii) to the extent the
aggregate claims actually paid by Newco or any of its Subsidiaries to the
Purchaser Indemnitees thereunder exceeds the aggregate Merger Consideration;
(iii) for Damages to the extent such Damages were expressly included in the
Adjustment Amount pursuant to the Plan of Merger; (iv) with respect to
consequential damages relating to lost profits or punitive damages (other than
consequential damages or punitive damages paid or payable to, or claimed by
third parties); and (v) with respect to Damages arising from time spent by
Acquisition or its affiliates and their respective officers and employees, for
amounts in excess of their actual out-of-pocket costs.
The payment of any Damages to which the Purchaser Indemnitees are
entitled pursuant to the Indemnification Agreement shall first be satisfied from
funds held in the Escrow Account, pursuant to the terms of the Escrow Agreement
to the extent available, until the Escrow Account has been reduced to zero and
thereafter shall be satisfied by Newco directly.
ESCROW AGREEMENT
The Escrow Agreement between Buyer, Besicorp and Newco will be entered
into at the Closing; all terms capitalized in this section without being defined
shall have the meanings given to them in the Plan of Merger. The Plan of Merger
provides that Besicorp will deposit at Closing with the Escrow Agent an
aggregate of $6,500,000 (the "Escrow Funds"), which $6,500,000 will be obtained
from Besicorp's general corporate funds following the Spin-Off, to be
administered under the terms of the Escrow Agreement. The Escrow Fund does not
include the Merger Consideration for the Disputed Shares, which shall be paid by
Buyer and delivered to the Payment Agent along with the Merger Consideration for
the other Besicorp shareholders. The Payment Agent, not the Escrow Agent, shall
hold the Merger Consideration for the Disputed Shares and this escrow does not
fund claims of Buyer. See "Business of the Company--Legal Proceedings." The
Escrow Fund serves to fund claims for (A) indemnity made by the Buyer pursuant
to the Indemnification Agreement, including any claims of Buyer with respect to
the Existing Litigation and other matters to be prosecuted or defended by Newco
(the "Newco Assumed Matters") arising from the failure of Newco to diligently
prosecute or defend such Newco Assumed Matters, Buyer's out-of-pocket expenses
(not to exceed $40,000 per year) incurred if it is represented by counsel with
respect to the Newco Assumed Matters ("Buyer Monitoring Costs") and any payment
of fees and expenses of the Payment Agent pursuant to the Plan of Merger (all
such claims, "Buyer Indemnity Claims"); (B) certain claims for tax refunds made
by Besicorp if the refunds are not received prior to March 31, 1999 ("Tax Return
Claims") and (C) costs and expenses relating to (i) Newco Assumed Matters; (ii)
litigation arising out of or relating to any such Newco Assumed Matters; (iii)
indemnification of claims against Besicorp's directors and officers (prior to
the Merger) for actions in their official capacity preceding the date of the
<PAGE>
Merger; or (iv) in connection with matters arising out of or relating to the
Merger or the Spin-Off (collectively "Litigation Costs").
38
The Escrow Agent is to disburse Escrow Funds upon request to the Buyer,
with respect to Buyer Indemnity Claims, Buyer Monitoring Costs or Tax Return
Claims, and to Newco, with respect to Litigation Costs, unless the other party
objects to such disbursement. Newco may not object to the Tax Return Claims. If
a party objects, the Escrow Agent is not to disburse such funds until it
receives (i) the joint written direction of Newco and Buyer, (ii) a written
instrument representing a final and non-appealable order with respect to the
disposition of such amount issued by an arbitrator or (iii) a certified copy of
a final and non-appealable judgment of a court of competent jurisdiction
directing the disbursement of such funds (collectively, the "Escrow Fund
Determination Procedure"). Notwithstanding the foregoing, Newco is not to
unreasonably withhold its consent to a request by Buyer for payment of Buyer
Indemnity Claims and Acquisition is not to unreasonably withhold consent for
payment of Litigation Costs.
All remaining proceeds of the Escrow Fund, if any, will be released to
Newco at any time following the fifth anniversary of the date of the Escrow
Agreement provided that all of the following conditions have occurred and notice
has been provided by Newco to the Escrow Agent: (a) no claims are then subject
to the Escrow Fund Determination Procedure; (b) in the reasonable judgment of
Buyer, no future Buyer Indemnity Claims are foreseeable; and (c) all Newco
Assumed Matters have been finally settled through either (A) a final,
non-appealable judgment against the Surviving Corporation and all Purchaser
Indemnitees; or (B) a settlement or other conclusion to the Newco Assumed Matter
that (x) contains a release from all liability in favor of the Surviving
Corporation and Purchaser Indemnitees without any further obligation by the
Surviving Corporation or Purchaser Indemnitees to make any payment or incur any
other Liability or Obligation with respect to such matter, (y) does not
attribute by its terms liability to the Surviving Corporation or any Purchaser
Indemnitee and (z) if the scheduled matter is litigation or a proceeding,
includes as a term thereof a full dismissal of the litigation or proceeding with
prejudice. Newco and Buyer also agree they will meet no less than annually for
the purpose of examining the amounts set forth in the Escrow Fund and the
amounts of Buyer Indemnity Claims and Litigation Costs expended from the Escrow
Fund, for the purpose of determining whether the amount of the Escrow Fund is
more than sufficient to secure Buyer pursuant to the Indemnification Agreement.
The Escrow Agreement contains additional provisions including those
regarding investment of and taxation on the Escrow Fund, outlining the Escrow
Agent's duties and responsibilities, limiting the Escrow Agent's liability
except in the case of its bad faith, willful default or gross negligence,
permitting the Escrow Agent to resign, allowing the Escrow Agent to rely upon
notices it believes genuine and duly authorized without further verification and
limiting its responsibilities with respect to interest payable on the Escrow
Funds.
<PAGE>
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS
All representations, warranties and agreements set forth in the Plan of
Merger or in any document or certificate delivered pursuant thereto shall
survive the Merger for a period of five years following the Effective Date,
subject to the terms of the Indemnification Agreement.
EFFECT ON OPTIONS, WARRANTS AND RESTRICTED STOCK
Prior to the Effective Date, Besicorp will (a) cause each outstanding
option to purchase shares of Besicorp Common Stock (each, a "Stock Option")
granted under the Besicorp Group Inc. Amended and Restated 1993 Incentive Plan
(the "1993 Plan") or pursuant to any other Stock Option plan or agreement or any
restricted agreement entered into by Besicorp with any employee or director of
Besicorp or any of its affiliates, whether or not then vested or exercisable, to
become vested and exercisable, (b) cause each outstanding warrant (each, a
"Warrant") to purchase Besicorp Common Stock to become exercisable to the extent
not currently exercisable, and (c) take such action as is necessary to cause
each holder of a Stock Option or Warrant to exercise such Stock Option or
Warrant in full including paying in cash the exercise price (it being understood
that neither Besicorp nor any Remaining Subsidiary will directly or indirectly
provide or guarantee any financing or loan arrangements) so that there are not
outstanding Stock Options or Warrants at the Effective Date.
FEES AND EXPENSES
The Plan of Merger provides generally that whether or not the Merger is
consummated, all costs and expenses incurred in connection with the Plan of
Merger and the transactions contemplated thereby shall be paid by the party
incurring such expenses, except as described under "Termination."
39
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The Unaudited Pro Forma Financial Information set forth below is
intended to provide Besicorp's shareholders with a clearer understanding of
Besicorp as it will exist immediately prior to the consummation of the Merger
and, consequently, what Acquisition shall obtain pursuant to the Plan of Merger
in exchange for its payment of the Merger Consideration. As a result
shareholders will be better equipped to make an informed decision as to whether
or not to vote for the adoption of the Plan of Merger.
The following Unaudited Pro Forma Consolidated Balance Sheet of
Besicorp Group Inc. as of December 31, 1998, and the Unaudited Pro Forma
Consolidated Statements of Operations for Fiscal 1998 and the nine months ended
December 31, 1998 have been prepared to reflect the effects on the historical
results of Besicorp Group Inc. of (i) the following transactions in connection
with the Spin-Off: (a) the repayment of substantially all of Newco's debt other
than the SunWize Indebtedness by Besicorp prior to the Spin-Off, (b) the
transfer to Newco of substantially all of the assets and liabilities of the
Distributed Businesses (including the interests in the Partnerships that owned
the Power Plants) thereafter, (c) the distribution of the shares of Newco Common
Stock to the Entitled Holders, and (d) the transfer to Newco of $1.5 million,
the adjustments for which are included under the column entitled "Distributed
Business"; and (ii) the following other transactions that either have occurred
or will occur prior to the consummation of the Merger: (a) Besicorp's leasing of
the Corporate Headquarters to Newco; (b) the estimated proceeds received by
Besicorp from the sales of the Power Plants; (c) Besicorp's receipt of cash
reserves from the Partnerships; and (d) the contribution of $6.5 million by
Besicorp to the Escrow Fund in connection with the Plan of Merger, the
adjustments for which are included under the column entitled "Pro Forma
Adjustments". Such adjustments reflect the fact that immediately before the
consummation of the Merger Besicorp will no longer have interests in the Power
Plants, will no longer be participating in the operation and management of
independent domestic and foreign power plant projects, and will no longer own
the Continuing Businesses. In addition, Besicorp will have completed the
Spin-Off, including the transfer of $1.5 million in cash to Newco, and
contributed $6.5 million to the Escrow Fund. Therefore, immediately before the
Spin-Off Besicorp will own the Retained Assets and the Retained Subsidiaries,
and remain liable for the Permitted Liabilities.
The Escrow Fund serves, among other things, to fund claims for
indemnity made by the Buyer pursuant to the Indemnification Agreement. To the
extent that the Escrow Fund is insufficient to fund such claims, Newco is
obligated to indemnify Buyer directly pursuant to the Indemnification Agreement.
If any proceeds remain in the Escrow Fund following the fifth anniversary of the
date of the Escrow Agreement, they shall be released to Newco when conditions to
the release have been satisfied. See "Plan of the Merger -- Escrow Agreement."
The Merger will be consummated pursuant to the Plan of Merger that was
entered into by Besicorp, Acquisition, and Merger Sub. The Plan of Merger
provides that Merger Sub will be
<PAGE>
merged with and into Besicorp, with Besicorp being the surviving corporation and
wholly owned by Acquisition. If the Merger is consummated, Besicorp's
shareholders will be entitled to receive $34.50 in cash for each share of
Besicorp Common Stock, subject to upward adjustment if the Base Amount exceeds
$105,275,000. The $34.50 per share was based on 3,051,435 shares (the number of
shares of Besicorp Common Stock on a fully diluted basis (which is assumed to be
the number of shares outstanding as of the Effective Date)) being outstanding
and is not subject to adjustment if there are in fact fewer shares outstanding
as of the Effective Date. If the Closing had occurred on February 25, 1999,
Besicorp estimates the upward adjustment would have been $2.59 per share. It is
anticipated that if there is any upward adjustment, such adjustment will not
exceed approximately $4.00 per share. There will not be a downward adjustment to
the Merger Consideration; however, no assurance can be given that there will be
any upward adjustment to the Merger Consideration. See "Summary - The Merger
Consideration" and "Plan of Merger Merger Consideration" for a description of
the manner in which the amount to be paid to Besicorp's shareholders is subject
to upward adjustment. The aggregate amount of the payment to be made by
Acquisition pursuant to the Plan of Merger equals the Merger Consideration
multiplied by the number of shares of Besicorp Common Stock outstanding
immediately prior to the Effective Date. This aggregate amount cannot be
determined at present. However, assuming that there are 3,051,435 shares
outstanding, this amount shall be no less than $105,275,000 and in the above
example would amount to $113,177,724. The aggregate amount is not likely to
exceed $117 million. The consummation of the Merger is subject to the
satisfaction (or waiver) of various conditions, including the shareholders'
adopting the Plan of Merger, the occurrence of the Spin- Off, confirmation of
Besicorp and Buyer with respect to the calculation of the Base Amount, such Base
Amount not being less than $105,275,000 and Merger Sub's having received the
Financing. See "Plan of Merger -- Conditions to the Merger." No assurance can be
given that such transactions will be consummated.
40
The Unaudited Pro Forma Consolidated Balance Sheet has been prepared as
if the transactions occurred on December 31, 1998; the Unaudited Pro Forma
Consolidated Statements of Operations have been prepared as if the transactions
occurred on April 1, 1997. The pro forma financial information set forth below
is unaudited and not necessarily indicative of the results that would actually
have occurred if the transactions had been consummated as of December 31, 1998,
or April 1, 1997, or the results which may be obtained in the future.
The pro forma adjustments, as described in the Notes to the Unaudited
Pro Forma Consolidated Balance Sheet and Notes to the Unaudited Pro Forma
Consolidated Statements of Operations are based on available information and
upon certain assumptions that management believes are reasonable. The Unaudited
Pro Forma Financial Information should be read in conjunction with the
historical financial statements of Besicorp Group Inc., including the related
notes thereto contained herein.
41
<PAGE>
<TABLE>
<CAPTION>
<S>
BESICORP GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<C> <C> <C> <C>
December 31, 1998
________________________________________________________________
Distributed Pro Forma
ASSETS Historical Businesses Adjustments Pro Forma
Current Assets:
Cash $ 110,439,930 $ (96,133) (1) $ (1,500,000) (2) $ 123,752,000
(2,000,000) (3)
488,039 (4)
(6,500,000) (7)
(2,000,000) (5)
2,000,000 (6)
(120,853)(12)
Securities 23,041,017 - - 23,041,017
Trade accounts receivable 603,401 (599,850) (1) - 3,551
Due from affiliates 64,223 (64,223) (1) - -
Current portion of long-term notes receivable:
Others 127,919 (127,919) (1) - -
Inventories 1,166,673 (1,166,673) (1) - -
Other current assets 381,584 (146,859) (1) (141,000)(12) 93,725
-------- -------- ------
Total current assets 135,824,747 (2,201,657) (9,773,814) 123,849,276
Net Property, Plant and Equipment 1,964,878 (932,076) (1) - 1,032,802 (10)
Other Assets 5,259,201 (158,854) (1) (2,000,000)(6) 7,134,200 ( 7)
- (2,466,147) (1) 6,500,000 (7) -
----------- ---------- -
TOTAL ASSETS $ 143,048,826 $(5,758,734) $ (5,273,814) $ 132,016,278
============= ============ =========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,319,611 $(1,271,922) (1) $ (44,076) (4) $ 3,613
Current portion of long-term debt 11,700 (11,700) (1) - -
Current portion of accrued reserve and warranty expense 140,305 (140,305) (1) - -
Taxes other than income 114,541 (100,122) (1) - 14,419
Income taxes payable 47,947,538 - (800,000) (3) 45,285,908
(104,741)(12)
(800,000) (5)
(956,889 (3)
---------- ---------- -------- ---------
Total Current Liabilities 49,533,695 (1,524,049) (2,705,706) 45,303,940
Long-term Accrued Reserve and Warranty Expense 167,934 (167,934) (1) - -
Long-term Debt 123,608 (123,608) (1) - -
-------- --------- ---------- ----------
Total Liabilities 49,825,237 (1,815,591) (2,705,706) 45,303,940
----------- ----------- ---------- ----------
Shareholders' Equity
Common stock 323,495 - - 323,495
Additional paid-in capital 5,565,352 - 1,631,616 (4) 7,196,968
Retained earnings 88,948,053 (3,943,143) (1) (1,200,000) (3) 80,233,690
(1,500,000) (2)
(157,112)(12)
(714,108 (4)
------------ -- --------
94,836,900 (3,943,143) (3,139,604) 87,754,153
Less: treasury stock at cost (1,613,311) - 571,496 (4) (1,041,815)
------------ ---------- --------- -----------
Total Shareholders' Equity 93,223,589 (3,943,143) (2,568,108) 86,712,338
------------ ----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 143,048,826 $(5,758,734) $ (5,273,814) $ 132,016,278
============== ========== ============ =============
42
</TABLE>
<TABLE>
<CAPTION>
<S>
Besicorp Group Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations
<C> <C> <C>
Nine Months Ended December 31, 1998
_______________________________________________________________
Distributed Nonrecurring
Historical Businesses Operations
Revenues:
Product sales $ 3,273,495 $ (3,273,495) (8) $ -
Development and management fees 2,043,334 - (2,043,334) (9)
Other revenues 417,419 (406,841) (8) (10,578) (9)
Income from partnerships 138,938,314 - (138,938,314) (9)
Interest and other investment income 5,212,956 (18,404) (8) -
Other income - - -
- - -
----------- --------- -----------
Total Revenues 149,885,518 (3,698,740) (140,992,226)
----------- --------- -------------
Costs and Expenses:
Cost of product sales 3,121,707 (3,144,571) (8) 22,864 (9)
Selling, general and administrative expenses 8,820,244 (6,963,875) (8) (1,818,869) (9)
Interest expense 133,336 (93,685) (8) (39,651) (9)
Other expense 8,832 (8,832) (8) -
---------- --------- -----------
Total Costs and Expenses 12,084,119 (10,210,963) (1,835,656)
---------- ---------- -----------
Income Before Income Taxes 137,801,399 6,512,223 (8) (139,156,570)
Provision for Income Taxes 48,238,087 2,209,000 (8) (48,384,254) (9)
----------- --------- ------------
Net Income $ 89,563,312 $ 4,303,223 $ (90,772,316)
========== =========== =============
Fully Diluted Income Per Common
Share $ 29.52
==========
Diluted Weighted Average Shares
Outstanding 3,034,150
==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>
Besicorp Group Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations
<C> <C>
Nine Months Ended December 31, 1998
__________________________________
Pro Forma income
Adjustments Pro Forma
Revenues:
Product sales $ - $ -
Development and management fees - -
Other revenues - -
Income from partnerships - -
Interest and other investment income - 5,194,552
Other income -
101,700 (10) 101,700
-------- ---------
Total Revenues 101,700 5,296,252
-------- ---------
Costs and Expenses:
Cost of product sales - -
Selling, general and administrative expenses - 37,500
Interest expense - -
Other expense - -
--------- -
Total Costs and Expenses - 37,500
---------- ----------
Income Before Income Taxes 101,700 5,258,752
Provision for Income Taxes 40,680 (10) 2,103,513
------- ---------
Net Income $ 61,020 $ 3,155,239
========= ===========
Fully Diluted Income Per Common
Share $ 1.03 (11)
Diluted Weighted Average Shares
Outstanding 3,051,435 (11)
43
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>
Besicorp Group Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations
<C> <C> <C> <C> <C>
Year ended March 31, 1998
_____________________________________________________________________________________
Distributed Nonrecurring Pro Forma Income
Historical Businesses Operations Adjustments Pro Forma
Revenues:
Product sales $ 3,838,351 $(3,838,351) (8) $ - $ - $ -
Development and management fees 2,504,601 - (2,504,601) (9) - -
Other revenues 436,689 (426,154) (8) (10,535) (9) - -
Income from partnerships 10,058,849 - (10,058,849) (9) - -
Interest and other investment income 175,766 (35,482) (8) - - 140,284
Other income - (5,566) (8) 5,566 (9) 135,600 (10) 135,600
---------- ----------- ------ -------- -------
Total Revenues 17,014,256 (4,305,553) (12,568,419) 135,600 275,884
----------- ----------- ------------ -------- -------
Costs and Expenses:
Cost of product sales 3,899,967 (3,932,301) (8) 32,334 (9) - -
Selling, general and administrative 9,560,590 (8,536,780) (8) (973,810) (9) - 50,000
Interest expense 513,765 (451,178) (8) (62,587) (9) - -
Other expense 2,513,548 (2,508,214) (8) (5,334) (9) - -
---------- ----------- ------- ------- --------
Total Costs and Expenses 16,487,870 (15,428,473) (1,009,397) - 50,000
----------- ------------ ----------- ------- --------
Income Before Income Taxes 526,386 11,122,920 (11,559,022) 135,600 225,884
Provision for Income Taxes 331,000 3,765,900 (8) (4,040,800) (9) 54,240 (10) 110,340
-------- ---------- ----------- ------- -------
Net Income $ 195,386 $ 7,357,020 $ (7,518,222) $ 81,360 $ 115,544
========== ============ ============= ========= =========
Diluted Income Per Common
Share $ 0.06 $ 0.04 (11)
======= =======
Diluted Weighted Average Shares
Outstanding 3,009,761 3,051,435 (11)
========= =========
44
</TABLE>
<PAGE>
BESICORP GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
(1)Amounts shown under the column "Distributed Businesses" on the unaudited
pro forma consolidated balance sheet represent the assets, liabilities,
and equity of the photovoltaic and independent power development
businesses of Besicorp that are to be spun-off prior to the Merger to
Newco.
(2)Besicorp intends to contribute $1.5 million to Newco pursuant to the
Spin-Off.
(3)To reflect the payment of $2 million of bonuses to certain executive
officers of Besicorp, the bonuses will be paid by Besicorp immediately
prior to the Merger and will be recorded in the financial statements for
the fourth quarter of Fiscal 1999 as follows:
Reduction of cash $ 2,000,000
Tax effect of payment at 40% $ 800,000
_________
Reduction of retained earnings $ 1,200,000
=========
(4)To reflect (i) the issuance of shares of common stock which were issued
upon the exercise of options and warrants on January 5, 1999 and the
release of restrictions on certain of the shares so issued and (ii) the
release of restrictions on the shares of Besicorp common stock that were
outstanding at the time of the release of the restrictions. The
restrictions on shares were released on January 1, 1999, at which time the
Besicorp common stock had a fair market value of $30.375, the closing
price on December 31, 1998, the last trading date prior to January 1, 1999
(see "Factors to be Considered - Interests of Executive Officers and
Directors in the Merger"). All transactions were reflected as of January
1, 1999 (the day the restrictions were released) although the actual date
of exercise of the options and warrants was January 5, 1999 since there
was only an immaterial change in market value. The issuance of shares upon
exercise and the release of restrictions were accounted for under
provisions of APB Opinion 25 and will be reflected in the financial
statements for the fourth quarter of Fiscal 1999 as follows:
Compensation expense for difference in market value
and exercise price $ 1,190,180
Less tax effect at 40% $ 476,072
_________
Reduction of retained earnings $ 714,108
=========
Treasury stock value of shares issued $ 571,496
=========
Cash received upon exercise $ 488,039
=========
Reduction of historical deferred compensation
for compensation recognized $ 44,076
=========
Reduction of taxes payable for compensation
expense above $ 476,072
Reduction of taxes payable for additional
compensation for tax purposes not book
deduction ($1,202,043 at 40%) $ 480,817
_________
$ 956,889
=========
Addition to additional paid-in capital for fair
value of treasury stock issued $ 1,150,799
Tax benefit of tax deductible compensation above $ 480,817
_________
$ 1,631,616
=========
<PAGE>
After exercise of all options and release of restrictions recorded above,
Besicorp will have 3,051,435 shares outstanding upon which $34.50 will be
paid upon consummation of the Merger for a total consideration of
$105,274,500 before any upward adjustments.
This adjustment was not reflected on the pro forma statement of operations
because it is non-recurring and does not have an on-going effect on
operations.
(5)Payment by Besicorp of $2 million of costs relating to the Merger and the
transactions contemplated thereby.
45
(6)Receipt of $2 million from partnerships upon release of partnership
reserve funds. As a result, $2 million of reserves continues to be held by
the partnerships. If any funds are released by the partnerships to
Besicorp prior to the Merger, such funds will be included in the assets
to be acquired by the Buyer, and the amount of such released funds will be
included in the calculation of the Base Amount and increase the Merger
Consideration. The investment in partnerships to be distributed to Newco
will be reduced accordingly. If any funds are released after the Merger,
they will be distributed to Newco.
(7)Reflects the reclassification of $6.5 million Escrow Fund from cash to
other assets. The Plan of Merger provides for an Escrow Fund to cover
contingent liabilities primarily resulting from the legal proceedings in
which Besicorp is involved and future litigation costs, which along with
the $634,200 of Besicorp deferred taxes, represents the balance in other
assets on the pro forma balance sheet. See "Business-Legal Proceedings".
The amount of the Escrow Fund was determined by negotiations by the
parties to the Plan of Merger. In accordance with the escrow agreement,
any unexpended portion of the $6.5 million Escrow Fund is to be paid to
Newco after the expiration of five years and the satisfaction of the
conditions to the release of such funds to Newco. See "Plan of Merger -
Escrow Agreement." If the $6.5 million Escrow Fund is insufficient to
satisfy such liabilities and costs, Newco will be directly liable for any
indemnified costs incurred in excess of such $6.5 million Escrow Fund.
(8)Amounts shown under the column "Distributed Businesses" on the unaudited
pro forma consolidated statements of operations for the nine months ended
December 31, 1998 and the year ended March 31, 1998 represent the results
of operations of the distributed businesses that will be spun-off prior to
the Merger that are included in the historical Besicorp results of
operations.
-70-
<PAGE>
(9)Amounts shown under the column "Non-recurring Operations" on the unaudited
pro forma consolidated statements of operations for the nine months ended
December 31, 1998 and the year ended March 31, 1998 represent the
historical operations of Besicorp that were related to the partnership
operations being retained by Besicorp that are no longer operational as
a result of the conclusion of the sale of the power plants owned by the
partnerships.
(10)Pro forma adjustments reflect the straight-line rental income of $101,700
and $135,600 for the nine months ended December 31, 1998 and the year
ended March 31, 1998, respectively, net of income taxes at 40%. The PlaN
of Meger contemplates that the Surviving Corporation is to retain the
Corporate Headquarters which it will lease to Newco, which is represented
by the $1,032,802 of net property, plant and equipment in the pro forma
balance sheet. Rentals under the five year lease will be $8,500 per month
for the first 18 months and, thereafter, $12,500 per month. Newco will
have the option to purchase the premises at any time after the twelfth
month of the lease term and prior to the eighteenth month of the lease
term at a cash purchase price equal to $450,000. The Surviving
Corporation will have the option to require Newco to purchase the premises
at any time after the thirty-sixth month of the lease term at a cash
purchase price equal to $400,000. The lease will be accounted for as an
operating lease on Newco's books.
(11)Pro forma income per share is based on 3,051,435 shares, the fully diluted
number of shares of Besicorp Common Stock prior to the merger (i.e. pro
forma income per share assumes that prior to the merger all outstanding
options and warrants will be exercised).
(12)To reflect payment to be made to Michael Zinn subsequent to December
31, 1998 to reimburse him for payments previously made by him to
reimburse the Company for legal fees and other expenses, and to reflect
settlement of the net amount due to the Company from Michael Zinn as
follows:
Amounts due from Michael Zinn as of 12/31 $ 141,000
Net Payment made as reimbursement $ 120,853
_______
Total Expenses $ 261,853
Tax effect at 40% $ 104,741
_______
Reduction of Retained Earnings $ 157,112
=======
This adjustment was not reflected on the pro forma statement of operations
because it is non-recurring and does not have an on-going effect on
operations. See Note 11 of Notes to Besicorp's Consolidated Financial
Statements and "Management's Discussion and Analysis or Plan of
Operations."
46
<PAGE>
BUSINESS OF THE COMPANY
Background
Besicorp was organized as a corporation under the laws of the State of
New York in July 1976. Historically, Besicorp has been engaged in two general
lines of business - the development of and participation in the operation and
management of independent domestic and foreign power plant projects (the "Power
Plant Activities") and the development, assembly, manufacture, marketing and
resale of solar energy products and systems ("Solar Energy Activities"). The
Power Plant Activities generally have focused on the development, with the
assistance of partners, of power plants that generate electric power. However,
as a result of the MRA, the Power Purchase Agreements of the Partnerships were
terminated effective June 30, 1998 and the Partnerships sold the Power Plants in
the third quarter of the year ending March 31, 1999 ("Fiscal 1999"). As a result
Besicorp no longer has any interest in any operational power plants (other than
as a holder of Niagara Mohawk Common Stock). Instead, Besicorp is focusing its
Power Plant Activities on the development of independent power plants. The Solar
Energy Activities historically focused on solar energy products. However,
Besicorp discontinued the sale of solar thermal and heat transfer products,
effective March 31, 1998, and therefore Besicorp is not, on an on-going basis,
in the business of selling solar thermal and heat transfer products. Currently
the Solar Energy Activities focus on the development, manufacture and
installation of photovoltaic devices and systems (i.e., products that convert
light directly into electric power).
Power Plant Activities
Discontinued Operations and Recent Developments
Until recently Besicorp held interests in five completed gas-fired,
operational cogeneration plants (the "Power Plants"). Revenues and income from
the Power Plant Activities historically were generated through development fees
and the operations and management of the Power Plants, including the sale of
electrical power and capacity by the Power Plants to Niagara Mohawk pursuant to
the Power Purchase Agreements and the Partnership Interests. During the fiscal
years ended March 31, 1998 and 1997, in the aggregate, all of Besicorp's net
income and at least 70% of its total revenues were derived from the Power
Purchase Agreements and the operations and management of five Power Plants which
supplied power and capacity to Niagara Mohawk pursuant to the Power Purchase
Agreements.
Pursuant to the terms of the MRA, the Power Purchase Agreements were
terminated. A total of 323 megawatts of capacity and energy were provided to
Niagara Mohawk pursuant to the Power Purchase Agreements. As a result of the MRA
and related transactions, and the current operations of the project
partnerships, Besicorp received through December 31, 1998 (i) 4,615,770 shares
of Niagara Mohawk Common Stock and (ii) net cash of approximately $70 million
(including Besicorp's share, aggregating approximately $11 million, of the net
proceeds
<PAGE>
from the sale of the Power Plants) of which as of December 31, 1998,
approximately $4 million remained reserved at the partnership level primarily
in regard to ongoing obligations of the projects. The closing price of the
Niagara Mohawk Common Stock on June 30, 1998 was $14.94 per share for an
aggregate value of approximately $69 million. During the three and nine months
ended December 31, 1998, Besicorp recorded income, which is non-recurring,
of $2,233,382 and $138,938,314, respectively, predominantly as a result of the
MRA and, to a minimal extent, the operating results of the Partnerships.
These amounts give effect to write-downs, net to Besicorp of approximately $84
million, recorded to reflect the proceeds received from the sale of the Beaver
Falls and Syracuse Power Plants. With respect to three Partnerships which
held leasehold interests in three Power Plants, the income amounts reflect
the expensing of all costs associated with the termination of those
long-term leases reduced by the proceeds received upon the disposition of the
facilities. Besicorp's share of the cost of the lease terminations was
approximately $77 million. Since the Power Plant sales were consummated by the
end of calendar 1998, Besicorp does not expect that there will be further
significant adjustments to the recorded income.
As a result of the MRA, Niagara Mohawk ceased to purchase the
electrical capacity generated by the Power Plants. Consequently, the
Partnerships sold all five of these Power Plants in December 1998 for which
Besicorp will receive net proceeds of approximately $11 million. In addition, as
a result of a bankruptcy settlement, Besicorp no longer has any interest in a
sixth gas- fired cogeneration plant that was not operational. As a result of
these sales, Besicorp is not currently involved, directly or indirectly, in the
operation and management of any operating power plants.
47
The six power plants are described below.
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
Besicorp's Former
Ownership
Name of Facility or Project Location Interest Status
- --------------------------- -------- ---------------- ------
Carthage Cogeneration Facility Carthage, NY 50% (1)
(58 megawatts)
South Glens Falls Cogeneration South Glen Falls, 50% (1)
Facility NY
(58 megawatts)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>
<C> <C>
Besicorp's Former
Ownerhip
Name of Facility or Project Location Interest Status
- --------------------------- -------- --------------- ------
Natural Dam Cogeneration Gouverneur, 50% (1)
Facility NY
(49 megawatts)
Syracuse Cogeneration Facility Solvay, NY 35.715% (1)
(79 megawatts)
Beaver Falls Cogeneration Beaver Falls, NY 50.2% (1)
Facility
(79 megawatts)
Allegany Cogeneration Facility Rossberg, NY 50% (2)
(55 megawatts)
</TABLE>
(1) Sold.
(2) The Partnership that owns this plant filed for bankruptcy in November
1995. As part of a settlement of litigation involving this plant,
Besicorp has relinquished all its interests therein.
Current Operations
Besicorp, in conjunction with one or more partners, develops
independent power projects. Besicorp generally holds its ownership interests in
the form of partnership interests, through special-purpose entities. Usually,
financing for these entities is secured solely by their respective assets.
At present, Besicorp has an interest in a development project to build
a coal fired power plant near the village of Krishnapatnam located 120 miles
north of Chennai (Madras) on India's eastern coast. BBI Power Inc. ("BBI"), the
project company developing the power plant near Krishnapatnam, is 50% owned by
Besicorp 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, Besicorp's ownership interest will be reduced
substantially as the
<PAGE>
result of the participation of equity investors. Capital construction costs are
currently estimated to be approximately $700 million. Approval of an agency of
the Indian government is also required before the project can proceed. The May
1998 nuclear tests conducted by India have resulted in the imposition of
economic sanctions by the United States, though such sanctions have been waived
through October 1999. The ability to obtain project financing may be adversely
affected by these sanctions. Even if such sanctions are eliminated or the waiver
thereof is extended indefinitely, no assurance can be given that financing will
be obtained, that the project will be completed, or, if it is completed, that
the project will prove profitable.
Besicorp is always considering new power projects, both domestically
and internationally, and with entities that have served as Besicorp's partners
in past development projects and with entities that have never been partners of
Besicorp in any of its projects. As of the date hereof, such possible
initiatives are being discussed with several companies and Besicorp and
prospective partners had entered into letters of intent with respect to trying
to develop initiatives in Brazil and Mexico. Besicorp entered into a Master
Project Agreement with MPR Associates Inc. which calls for equal sharing in
development fees and ownership interest in all projects developed in Brazil by
such parties. No assurance can be given that any such letter of intent or the
Master Project Agreement will result in the development of any projects, or that
if any projects are developed, they will prove profitable.
Besicorp anticipates that projects would be developed with partners and
Besicorp would hold its ownership interests, primarily in the form of
partnership interests, through special-purpose entities formed to be the legal
owners of the projects. Interests in projects may also be acquired during
various stages of their development. Projects are expected to generate income
from the operation of the facilities; however, in early years of operation, the
partnership may incur significant book losses, and partners will not recognize
income until such time as the operating income of the projects exceeds
accumulated losses.
48
The developers prepare financial models of the project, document the
project and arrange appropriate development capital and construction and
long-term financing. In addition, developers negotiate power purchase
agreements, permitting arrangements, engineering and construction contracts and
financial participation and risk sharing agreements.
Construction, operation, engineering, and design of a project are
contracted to third parties. When development is substantially complete, the
projects typically obtain construction financing which is replaced with
long-term debt and/or equity financing when the construction is completed. To
the maximum extent possible, financing is arranged on a limited- recourse basis,
so that repayment is limited to the revenues generated by the particular
project(s) being financed. Except to the extent that a developer 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
developer.
<PAGE>
Besicorp would expect to earn 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
fees for services provided to the project. Other potential 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. There can be no assurance
that Besicorp will develop any power projects or that it will earn development
fees on new project opportunities.
Foreign Regulatory Compliance and Other Risks of International Operations
As a result of a decline in opportunity in the independent power
industry in the United States, Besicorp's present strategy is to emphasize
foreign project development (though Besicorp intends to pursue appropriate
domestic projects as and when they become available). Besicorp's business,
therefore, 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, the potential for expropriation, local economic
conditions, and difficulties in staffing and managing foreign operations.
Projects overseas require considerable capital. Funding for
international projects may be obtained from various sources, including the
private sector (both domestic and international), government sponsors, e.g.,
United States Trade and Development Agency, United States Agency for
International Development, the Export-Import Bank of the United States, the
Overseas Private Investment Corporation and commercial banks. Obtaining such
funding often is more time consuming than obtaining funding for domestic
projects. There can be no assurance that Besicorp will be able to secure
sufficient funding in connection with any international development project. Nor
can there be any assurance that Besicorp will be successful in international
project development. Besicorp has never consummated a financing for an
international project development.
Solar Energy Activities
Current Operations
Systems that convert sunlight directly into electricity are called
photovoltaic systems. The fundamental element of a photovoltaic system is the
semiconductor device, or cell, which generates a variable electric current that
is directly proportionate to the quantity of sunlight energy absorbed. Solar
cells are electrically interconnected to form a module unit in which the cell
groupings are formatted to achieve desired electrical power specifications, such
as voltage and current. The solar module is the power-generating component of a
complete photovoltaic
49
<PAGE>
system. Complete systems consist of one or more solar modules; controllers to
monitor, regulate and control the electric output; and, in most systems,
batteries to store the energy generated by the solar modules. Occasionally,
backup generators or invertors, which convert DC electric power to AC power, are
included as integral components of a system.
The market for photovoltaic products and systems is primarily directed
towards those electric power applications where access to utility power is
relatively expensive, inconvenient or not available. Electric power systems that
use photovoltaic technology include communications systems (e.g., satellite
earth stations, microwave relay stations, roadside emergency telephones and
cellular network repeater stations), power systems for remote areas (e.g.,
forests and parks and rural areas) and remote monitoring systems that are used
in production, consumption and the collection of scientific data (e.g., monitor
remote gas pipelines and weather stations).
Besicorp develops, assembles, markets and distributes photovoltaic
modules, power systems and related products for a variety of applications.
Besicorp has developed solar power supply products for the portable computer,
wireless electronics and telecommunications industries, solar power accessories
for motor vehicles, electric boats and telemetry, as well as a polymer
encapsulation production processes for photovoltaic modules that can be
integrated into other products for consumer, commercial and industrial use. In
addition, Besicorp markets and sells prepackaged solar electric power products
and systems, system components, and system accessories ranging from small
battery chargers, to water pumping kits, to outdoor lighting, to portable power
generators, to photovoltaic power stations.
In addition to utilizing Besicorp's resources, products are developed
using government grants, industry funded projects, and technology demonstration
contracts to the extent practicable. In connection therewith, Besicorp has
entered into various funding and development arrangements with New York State
Energy Research and Development Authority ("NYSERDA"). These arrangements
generally require Besicorp to develop, manufacture, test and deliver various
types of photovoltaic products (e.g., solar powered telephone power supply
systems, skid mounted photovoltaic systems, controllers and photovoltaic home
systems) in consideration for which NYSERDA reimburses Besicorp with respect to
a negotiated percentage of the development cost of such product. Funds advanced
by NYSERDA are recorded for financial statement purposes as "other revenues" at
the time of receipt and such advances are to be repaid, depending on the
project, from revenues or profits, if any, derived from the products developed
under these agreements.
Discontinued Operations and Recent Developments
Besicorp's non-agricultural heat transfer lines were discontinued in
November 1996. In March 1998 Besicorp discontinued its solar thermal and
remaining heat transfer technology product lines. Until their discontinuance,
the principal markets for these products were solar pool heating and heating
systems for commercial greenhouses and buildings.
<PAGE>
Sales and Distribution
In addition to direct sales to original equipment manufacturers,
industrial companies and governmental agencies, Besicorp markets and sells
products through dealers and distributors nationwide. At December 31, 1998,
approximately 143 solar energy dealers and distributors, predominantly located
in North America, offered Besicorp's products. Besicorp also employs an in-house
sales and customer support staff responsible for generating sales and assuring
customer satisfaction. The distribution market is also supported by Besicorp
through a catalog maintained by Besicorp to provide information about sizing and
installation of remote solar energy systems.
Customers and Backlog
Besicorp 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 $1,066,232, $274,260 and
$382,410 as at December 31, 1998, March 31, 1998 and March 31, 1997,
respectively. Customers for Besicorp's products include original equipment
manufacturers, governmental agencies and consumers. During the nine-month period
ended December 31, 1998, and the years ended March 31, 1998 and 1997, sales to
the same customer accounted for approximately 9%, 14% and 23%, respectively, of
photovoltaic activities sales.
Competition
Besicorp competes with approximately ten businesses engaged in the
distribution of photovoltaic products, of which four have larger market share
than Besicorp. Besicorp believes that the market is highly fragmented for
value-added solar electric products and systems. The major competitive factors
are product price, service, technical capability and delivery.
50
Suppliers
Besicorp purchases solar electric modules from several large
manufacturers, of which Siemens Solar Industries of Camarillo, California is the
principal supplier. Besicorp does not have any supply agreements with its
suppliers but does not anticipate any limitation on its ability to purchase
materials for its business. Besicorp is not currently dependant on any principal
suppliers for its power plant initiatives.
Research and Development
Expenditures for photovoltaic research and development were $499,436
for the nine months ended December 31, 1998, $697,182 in Fiscal 1998 and
$646,817 in Fiscal 1997. These expenses include personnel expenses of $176,192
for the nine months ended December 31, 1998, $330,428 in Fiscal 1998 and
$301,055 in Fiscal 1997. Of the total amounts, expenses attributable
<PAGE>
to Besicorp's agreements with NYSERDA were $270,657 in the nine months ended
December 31, 1998, $520,950 in Fiscal 1998 and $414,307 in Fiscal 1997. No
assurance can be given that funds for research and development will be available
to Besicorp from internal or external sources and the failure to obtain such
funds may have an adverse effect on Besicorp's operations.
SunWize Indebtedness
The SunWize Indebtedness was incurred in 1993 when Besicorp acquired
certain assets that are now used by its photovoltaic business. A portion of the
purchase price was deferred and Besicorp is required to pay the deferred portion
(i.e., the SunWize Indebtedness) according to a formula based on SunWize's gross
margins. $6,381 was paid in Fiscal 1997, $19,878 was paid in Fiscal 1998 and
$11,700 has been paid in Fiscal 1999. The current amount of the outstanding
SunWize Indebtedness is approximately $135,000. As payments are based on
SunWize's gross margins, it is impossible to determine when, if at all, Besicorp
will be obligated to pay the balance of the SunWize Indebtedness. Pursuant to
the Contribution, Newco will acquire the assets and assume the SunWize
Indebtedness.
Intellectual Property
While Besicorp does own certain intellectual property rights (e.g.,
patents, trademarks and trade secrets), management does not believe that these
rights are essential to Besicorp's current operations.
Government Regulation and Environmental Matters
The development and manufacture of photovoltaic products are not
subject to U.S., state, foreign and local statutes and regulations (other than
statutes and regulations generally applicable to the development and manufacture
of products).
The operations of Besicorp are also subject to various U.S., state,
foreign and local laws and regulations with respect to environmental matters,
including air and water quality and underground fuel storage tanks, and other
regulations intended to protect public health and the environment. Compliance by
Besicorp with such laws and regulations has not had a material adverse effect
upon Besicorp, and Besicorp believes it is in material compliance with all such
applicable laws and regulations. Based upon current laws and regulations and the
interpretations thereof, Besicorp has no reason to believe that the costs of
future environmental compliance would be likely to materially adversely impact
its business, results of operations, cash flows or financial position.
<PAGE>
Employees
As of December 31, 1998, Besicorp had 74 employees of which 71 were
full time employees. None of these employees are represented by a union. In the
opinion of management, its relationship with its employees is satisfactory. It
is anticipated that most of such employees will be employed by Newco following
the Spin-Off.
51
<PAGE>
<TABLE>
<CAPTION>
<S>
<C> <C>
Properties
Location of Property Nature of Ownership Use of Property
Kingston, New York Owned Besicorp's corporate
(Includes land and the 8,000 headquarters (the "Corporate
square foot building thereon) Headquarters")
Ellenville, New York Owned Previously used by a
(Includes land and the 52,000 subsidiary of Besicorp.
square foot building thereon)
Stelle, Illinois Lease, expiring April 1999, Solar Energy Activities uses
(Lease of 2,000 square feet) for $575 per month as sales office.
Kingston, New York Lease for $8,500 per month, Solar Energy Activities uses
(Lease of 17,000 square feet) expiring March 1999, subject 2,000 square feet for
to automatic renewal for administrative purposes and
successive six month periods balance is used for
warehousing, manufacturing
and assembly
Ulster, New York Owned Investment purposes
(approximately 28 acres of
unimproved property)
</TABLE>
While Besicorp is not in the business of investing in real estate, it
owns 28 acres of unimproved property which it holds primarily for the
possibility of realizing a capital gain. Besicorp has no policies regarding or
restricting investments in real estate.
The Corporate Headquarters will not be distributed to Newco in the
Contribution. Instead it will be retained by Besicorp and therefore belong to
the Surviving Corporation following the Merger. However, the consummation of the
Merger is subject to Merger Sub's satisfaction with the results of its
environmental investigation of the Corporate Headquarters and, as part of the
Spin-Off (which also is a condition to the consummation of the Merger), Newco is
required to lease the Corporate Headquarters from the Surviving Corporation
pursuant to a five year lease for $8,500 per month for the first 18 months of
such lease and thereafter for $12,500 per month. Newco has the option to
purchase the premises after the twelfth month and before the eighteenth
<PAGE>
month for $450,000 and the Surviving Corporation has the right commencing with
the 37th month of the lease to require Newco to purchase the premises for
$400,000. The other properties will be transferred to Newco pursuant to the
Contribution Agreement. See "The Spin-Off."
Legal Proceedings
In December 1998, Alan Fenster ("Fenster") commenced an action in the
New York Supreme Court, New York County, against Besicorp, Merger Sub,
Acquisition, Josephthal and each of the members of the Board. In the complaint
Fenster indicates that he is seeking class certification. The complaint alleges
that the Merger Consideration is inadequate and less than Besicorp's intrinsic
value, that in adopting the Plan of Merger the Board has been unduly influenced
by Michael F. Zinn and the Board has breached its fiduciary duty to its
shareholders; the complaint also alleges that Mr. Zinn and the other members of
the Board will receive an unlawful additional consideration that the remaining
shareholders will not receive: the Escrow Fund, that, according to the
complaint, has been established primarily to benefit them, the acceleration of
certain of their Rights and bonuses for certain members of senior management.
Fenster is seeking, among other things, to enjoin the Merger, as well as
unspecified compensatory damages and an order that the defendants shall take
appropriate measures to maximize shareholder value. Besicorp has not yet
answered the complaint. Management intends to vigorously defend this action.
Management maintains that the Merger Consideration is adequate for the reasons
set forth under "Factors to be Considered--Recommendation of the Board of
Directors; Fairness of the Merger" and that Fenster has mischaracterized the
Escrow Fund, which, according to Fenster, is a benefit that the members of the
Board will receive and that the other shareholders will not receive. As
discussed under "Plan of Merger--Escrow Agreement," the Escrow Fund funds
Besicorp's indemnification obligations and is required pursuant to the Plan of
Merger at the request of Buyer who wanted the Escrow Fund to protect it from
potential claims. Thus, the Escrow Fund primarily serves to protect the Buyer;
it only affords the members of the Board the protection to which they are
entitled by the BCL and Besicorp's by-laws, and only to the extent that they are
entitled to indemnification for actions taken by them in their official
capacities prior to the Merger. As they are already entitled to indemnification
for these matters, the establishment of the Escrow Fund only serves to ensure
their ability to collect the indemnification to which they are entitled. In
addition, the acceleration of the Rights is also mischaracterized: the Buyer
wanted to ensure that no Rights would survive the effectiveness of the
Merger and thus required Besicorp to take action to ensure that no Rights would
remain. See "Plan of Merger--Effect on Options, Warrants and Restricted Stock."
Management believes that the remaining benefits are neither unusual nor
inappropriate upon the consummation of an extraordinary transaction such as
the Merger for the chief executive officer who has served a company for more
than twenty years and other members of senior management.
53
<PAGE>
In December 1998, Energy Investment Research, Inc. ("EIR") commenced an
action in the New York Supreme Court, Westchester County, against Besicorp. The
complaint alleges among other things, that Besicorp is obligated to pay EIR 1.5%
of all net cash and/or securities received by Besicorp from its general
partnership interests in the Carthage and South Glen Falls Partnerships (the
"Projects"). EIR seeks, among other things, a declaratory judgment that it is
entitled to 1.5% of the distributions from the MRA relating to the Projects, and
has asked for payments in excess of $750,000. Besicorp has answered this
complaint and denied all of the material allegations. In addition, Besicorp
asserted various affirmative defenses, including unclean hands and asserted a
counterclaim against EIR for breach of a confidentiality agreement. In that
counterclaim, Besicorp seeks, among other things, a declaratory judgment that
EIR's breach excuses performance by Besicorp of all obligations, if any, to EIR.
In June 1997, Besicorp and Mr. Michael Zinn (then and currently the
Chairman of the Board, Chief Executive Officer and President of Besicorp), each
entered a guilty plea, in the United States District Court for the Southern
District of New York, to one count of causing a false statement to be made to
the Federal Election Commission and one count of filing a false tax return, all
in connection with contributions to the 1992 election campaign of Congressman
Maurice Hinchey (the "Proceeding"). As a result of such pleas, Besicorp was
fined $36,400, and Mr. Zinn was fined $36,673 (the "Fine") and sentenced to a
six-month term of incarceration (which commenced November 1997 and has been
completed), and a two-year term (which commenced in May 1998) of supervised
release thereafter. He resigned as Chairman of the Board, Chief Executive
Officer and President of Besicorp in November 1997 and was reappointed to such
positions in May 1998.
In August 1997, John Bansbach commenced a shareholder derivative action
in the New York Supreme Court, Ulster County, entitled John Bansbach v. Michael
F. Zinn, Michael J. Daley, Gerald A. Habib, Harold Harris, Richard E. Rosen, and
Besicorp Group Inc., Index No. 97-2573 (the "Bansbach Litigation"). Besicorp was
named as a nominal defendant in this matter and the other named defendants
either were officers and/or directors of Besicorp at the time of the alleged
acts or omissions for which relief is sought or became officers and/or directors
thereafter. The plaintiff sought to hold such persons liable to Besicorp: (a)
for all sums advanced to or on behalf of Mr. Michael F. Zinn in connection with
his defense of the Proceeding; (b) for all sums advanced to or on behalf of Mr.
Michael Daley, who was subpoenaed for information in connection with this
matter; (c) for all legal expenses, costs and fines incurred by Besicorp itself
in connection with the Proceeding; (d) for all harm to Besicorp's reputation and
goodwill resulting from the Proceeding; (e) for punitive damages; and (f) for
plaintiff's attorneys' fees, costs and expenses. The trial court dismissed the
action, stating that the plaintiff had failed to make the requisite pre-suit
demand upon the Board and had failed to demonstrate that such a demand would be
futile. The plaintiff appealed this decision. On February 4, 1999, the Appellate
Division reversed the trial court's dismissal and reinstated the action finding
that the bare allegations of the complaint sufficiently alleged that a pre-suit
demand on the board of directors would have been futile.
53
<PAGE>
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, Steven I. Eisenberg, and Martin E. Enowitz, et
al. (the "Lichtenberg Litigation"). Besicorp is named as nominal defendant in
this shareholder's derivative action and the other defendants were Directors and
officers at the time the action was filed. The complaint alleges that the
Directors breached their fiduciary duties to Besicorp 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 Besicorp's
interest in various partnerships which own and operate cogeneration facilities,
which allegedly depressed the price of Besicorp's stock. The plaintiff is
seeking an award of damages to Besicorp, including punitive damages and
interest, an accounting and the return of assets to Besicorp, the appointment of
independent members to the Board, the cancellation of shares allegedly
improperly granted, and the award to the plaintiff of costs and expenses of the
lawsuit including legal fees. The Court dismissed the action based on the
recommendation of the special litigation committee (comprised of independent
outside directors of Besicorp) that concluded that the continuation of such
litigation was not in the best interests of Besicorp. The plaintiff has appealed
this decision.
The plaintiffs in the Bansbach Litigation and Lichtenberg Litigation
may not able to maintain their actions as shareholder derivative suits if the
Merger is consummated. See "Factors to be Considered - Interests of Executive
Officers and Directors in the Merger."
On November 8, 1990 SNC, Ltd. ("SNC") commenced an action in New York
Supreme Court, New York County, against Besicorp, and certain of its partners
and their affiliates and an unaffiliated contractor (the "Contractor"). The
complaint alleges that SNC was awarded the contracts to construct two power
plants and that the contracts were subsequently awarded to the Contractor in
breach of SNC's contract. SNC seeks an award of compensatory damages in an
undetermined amount in excess of $680,000 and punitive damages. The Court
granted the defendants' motion for summary judgment in part but denied the
motion insofar as it sought dismissal of plaintiff's claims for: (1) breach of
preliminary agreement to negotiate in good faith; (2) unjust enrichment/quantum
meruit; (3) promissory estoppel; and (4) fraud and negligent misrepresentation.
The Court's decision was upheld by the Appellate Court. The case is proceeding
through the litigation process in the Supreme Court, New York County.
Besicorp is a party to a legal proceeding in New York Supreme Court,
Ulster County, that was commenced on June 20, 1995, seeking a determination that
Martin Enowitz, a former director and executive officer of Besicorp, is not
entitled to the 100,000 Disputed Shares. Besicorp believes that such shares were
forfeited when he left the employ of Besicorp prior to the scheduled vesting
dates with respect to such shares and that, as a result, he was obligated to
resell the shares to Besicorp. (Mr. Enowitz asserts, among other things, that
such vesting schedule was not applicable to him because he was disabled.
Besicorp, among other things, disputes Mr. Enowitz's allegation that he was
disabled.) Because of the uncertainty with respect to the ownership of these
shares, the Plan of Merger provides that the Merger Consideration payable in
<PAGE>
respect of such shares is to be held in escrow pending resolution of the dispute
regarding the ownership of these shares and the rights, if any, of Acquisition,
Merger Sub or the Surviving Corporation to such Merger Consideration will be
assigned without recourse to Besicorp's shareholders. Therefore, the Merger
Consideration for the Disputed Shares shall be paid by Buyer and delivered to
the Payment Agent along with the Merger Consideration for the other Besicorp
shareholders. The Payment Agent, not the Escrow Agent for the Escrow Fund (which
is separate), shall hold the Merger Consideration for the Disputed Shares and
this escrow does not fund claims of Buyer. The Merger Consideration for such
shares amounts to approximately $3,450,000, subject to upward (but not downward)
adjustment as provided in the Plan of Merger. If it is determined that Mr.
Enowitz was not entitled to the Disputed Shares, Besicorp's shareholders will
receive, on a pro rata basis, such monies less Besicorp's costs (estimated to be
less than $100,000) to repurchase such shares.
Other than as discussed above, Besicorp is party to various legal
matters in the ordinary course of business, the outcome of which Besicorp does
not believe will materially affect its operations. However, Besicorp may incur
substantial legal fees and other expenses in connection with these matters.
Besicorp's liabilities and rights with respect to the legal proceedings to which
it is a party are being assumed by and assigned to Newco pursuant to the
Contribution Agreement (as defined below). It is anticipated that the Escrow
Fund will be used to fund the legal and other costs of these proceedings. See
"Plan of Merger - Escrow Agreement" and "--Indemnification Agreement."
54
Security Ownership of Certain Beneficial Owners and Management
The following table shows the shares of Besicorp Common Stock owned as
of February 25, 1999 by each current director, the five persons currently
serving as executive officers and by all present directors and executive
officers as a group. Except as otherwise provided in the footnotes to the table,
the beneficial owners have sole voting and investment power as to all
securities.
<TABLE>
<CAPTION>
<S>
<C> <C>
Number of Shares
Name of of Common Stock Percent of Common Stock
Beneficial Owner (1) Beneficially Owned (1)(2) Beneficially Owned (1)(2)
Michael F. Zinn 1,572,252 (3) 51.7% (3)
Gerald A. Habib 7,500 (4) *
Richard E. Rosen 7,500 (4) *
Michael J. Daley 16,755 (5) *
Joseph P. Novarro 2,200 (8) *
Melanie Norden 5,000 (6) *
James Curtin 0 (7) *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>
<C> <C>
Frederic M. Zinn 0 (7) *
Current Directors and 1,611,207 (3), (4), (5), (6) 53.0% (3), (4), (5), (6), (8)
executive officers as
a group (8 persons)
* Less than 1 percent.
(1) Except as described below, such persons have the sole power to vote and
direct the disposition of such shares. The address for each of the
individuals identified above is:
1151 Flatbush Road, Kingston, New York 12401.
(2) Assumes exercise of all options and warrants exercisable within 60 days
of the date hereof. Certain of these options and warrants would not be
so exercisable if the Adjustment had not occurred. See "Factors to be
Considered -- Interests of Executive Officers and Directors in the
Merger."
(3) Includes 79,456 shares held in the name of members of Mr. Zinn's
immediate family. Mr. Zinn disclaims beneficial ownership of these
shares. Does not include 126,984 shares owned by the Trust established
by Mr. Zinn; Mr. Zinn also disclaims beneficial ownership of these
shares. Mr. Zinn is the Chairman of the Board, President and Chief
Executive Officer of Besicorp.
(4) Includes 2,500 shares that Mr. Habib and 5,000 shares that Mr. Rosen
have the right to acquire pursuant to warrants which are currently
exercisable. Such persons are directors of Besicorp.
(5) Mr. Daley is the Executive Vice President, Chief Financial Officer and
a director of Besicorp.
(6) Represents 2,500 shares that Ms. Norden has the right to acquire
pursuant to warrants which are currently exercisable and 2,500 shares
that Ms. Norden has the right to acquire pursuant to options which are
currently exercisable. She is a director of Besicorp.
(7) Messrs. J. Curtin and F. Zinn are Vice President and Controller and
Senior Vice President and General Counsel, respectively, of Besicorp.
(8) Mr. Novarro is Vice President - Project Development of Besicorp.
</TABLE>
55
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
RECENT DEVELOPMENTS
Besicorp was a party to a Master Restructuring Agreement ("MRA") which
was entered into on July 10, 1997 between Niagara Mohawk Power Corporation
("Niagara Mohawk") and 16 independent power producers ("IPPs") holding 29 Power
Purchase Agreements ("PPAs") including the five Power Purchase Agreements. On
June 30, 1998, the MRA was consummated. Pursuant to the terms of the MRA, the
five Power Purchase Agreements, which had provided a total of 323 Megawatts of
capacity and energy to Niagara Mohawk, were terminated. As a result of the MRA
and related transactions, and the operations of the project partnerships,
Besicorp has received through December 31, 1998 (i) 4,615,770 shares of Niagara
Mohawk Common Stock with an aggregate value of approximately $69 million (based
on the closing price of such stock on June 30, 1998) and (ii) net cash of
approximately $70 million (including the Company's share of the net proceeds
from the sale of the Power Plants of approximately $11 million), of which
approximately $4 million as of December 31, 1998 continued to be retained at
the partnership level primarily in regard to ongoing obligations of the
projects. See Notes 1 and 5 of Notes to Consolidated Financial Statements
of Besicorp Group Inc. for information with respect to (i) the MRA, (ii)
the Niagara Mohawk Common Stock and (iii) the sale of the Power Plants. In
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," this investment qualifies as trading securities,
which are reported at fair value, with changes in fair value included in the
statement of operations. The value of the investment in Niagara Mohawk Common
Stock of $22,161,716 reflected on the balance sheet at December 31, 1998
reflects 1,374,370 shares at a market price per share of $16.13. Through
February 24, 1999, the Company had sold 3,909,500 shares of Niagara Mohawk
Common Stock, realizing net proceeds of approximately $60.3 million for a gain
of approximately $2.0 million. The remaining 706,270 shares of Niagara Mohawk
Common Stock, based on the closing price of that date of $14.625, have an
aggregate value of approximately $10.3 million. Unrealized gains on the shares
of Niagara Mohawk Common Stock were $1,632,064 at December 31, 1998 and realized
gains for the three and nine months ended December 31, 1998 were $1,635,565
and $1,964,734, respectively. The net proceeds received by Besicorp as a result
of the MRA reflect the fact that a substantial portion of the gross proceeds
received by the partnerships from Niagara Mohawk was used to terminate most
obligations with third parties, including lenders, fuel suppliers and
transporters, thermal hosts, and others. Besicorp's share of these
termination payments was approximately $290 million.
With the exception of development fees of $1.8 million received from
the Kamine/Besicorp Beaver Falls L.P. ("Beaver Falls"), which were recognized as
revenue during the first quarter of Fiscal 1999, development fees of $.9 million
received from the Kamine/Besicorp Syracuse L.P. ("Syracuse"), which were
recorded as a receivable from the project in Fiscal 1998, and certain cost
reimbursements totaling $800,000, the MRA, operating results, and plant proceeds
were accounted for as partnership distributions.
<PAGE>
During the three and nine months ended December 31, 1998, the Company
recorded income, which is non-recurring, of $2,233,382 and $138,938,314,
respectively, predominantly as a result of the MRA and, to a minimal extent, the
operating results of the Partnerships.
These amounts give effect to write-downs, net to the Company of
approximately $84 million, recorded to reflect the proceeds received from the
sale of the Beaver Falls and Syracuse power plants. With respect to the
Kamine/Besicorp Carthage L.P. ("Carthage"), Kamine/Besicorp South Glens Falls
L.P. ("South Glens Falls"), and Kamine/Besicorp Natural Dam L.P. ("Natural Dam")
which held leasehold interests in three Power Plants, the income amounts reflect
the expensing of all costs associated with the termination of those long-term
leases reduced by the proceeds received upon the disposition of the facilities.
The Company's share of the cost of the lease terminations was approximately $77
million. Since the Power Plant sales were consummated by the end of calendar
1998, the Company does not expect that there will be further significant
adjustments to the recorded income.
In November 1998, Besicorp, Acquisition, and Merger Sub entered into
the Initial Plan of Merger that, as amended, provides that Merger Sub will be
merged with and into Besicorp, with Besicorp being the surviving corporation and
wholly owned by Acquisition. If the Merger is consummated, Besicorp's
shareholders will be entitled to receive $34.50 in cash for each share of
Besicorp Common Stock, subject to upward adjustment if the Base Amount exceeds
$105,275,000. The consummation of the Merger is subject to the satisfaction of
numerous conditions. See "Plan of Merger - Conditions to the Merger." No
assurance can be given that such transactions will be consummated.
56
RESULTS OF OPERATIONS
Three and Nine Months Ended December 31, 1998 Compared to Three and Nine Months
Ended December 31, 1997
Net income for the three months ended December 31, 1998 increased by
$416,284, to $1,105,798 from the net income of $189,514 recorded for the three
months ended December 31, 1997. Net income for the nine months ended December
31, 1998 of $89,563,312 represents an increase of $88,040,987 from the net
income of $1,522,325 for the nine months ended December 31, 1997. The factors
which contributed to these changes in net income are discussed below.
<PAGE>
REVENUES
Consolidated
Consolidated revenues increased by $2,482,221 to $5,993,275 during the
three months ended December 31, 1998, as compared to $3,511,054 during the three
months ended December 31, 1997. Consolidated revenues for the nine months ended
December 31, 1998 increased by $137,977,893 to $149,885,518, as compared to
$11,907,625 during the nine months ended December 31, 1997.
Project Segment
Development and Management Fees. There were no revenues attributable to
development and management fees for Besicorp's independent power projects
("Project Segment") during the three months ended December 31, 1998 compared to
$162,133 in revenues during the three months ended December 31, 1997.
The revenues attributable to the Project Segment during the nine months
ended December 31, 1998 increased by $973,195 to $2,043,334, as compared to
$1,070,139 for the nine months ended December 31, 1997. The increase during the
period is due primarily to a development fee of $1.8 million received from the
Beaver Falls project. Besicorp received development fees of $600,000 from the
Beaver Falls project during the nine months ended December 31, 1997. Besicorp
also earned $243,334 in management fees during the nine months ended December
31, 1998 in connection with its projects compared to $470,139 during the nine
months ended December 31, 1997. As a result of the MRA consummation and the
resulting termination of the Power Purchase Agreements, Besicorp will no longer
receive management fee or development fee income from the project partnerships
that owned the five power plants.
Income from Partnerships. During the three months ended December 31,
1998, Besicorp recognized $2,233,382 of income from partnerships, a decrease of
$185,326 compared to $2,418,708 recognized for the three months ended December
31, 1997. During the nine months ended December 31, 1998, Besicorp recognized
$138,938,314 of income from partnerships, an increase of $131,530,004 from the
$7,408,310 recognized for the nine months ended December 31, 1997. The decrease
during the current three-month period represents the winding down of the
partnership's operations as a result of the consummation of the MRA. The income
recognized during the three months ended December 31, 1998 reflects adjustments
made to value the power plants in accordance with the proceeds received upon
sale. The increase in the nine-month period was predominantly due to the
consummation of the MRA, in which five project partnerships participated, and,
to a minimal extent, the operations of the partnerships.
<PAGE>
The partnerships will generate no significant future income as a result
of the consummation of the MRA and the resulting termination of the Power
Purchase Agreements.
Interest and Other Investment Income. Interest and other investment
income during the three months ended December 31, 1998 increased by $2,348,324
to $2,388,024 compared to $39,700 for the three months ended December 31, 1997.
Interest and other investment income during the nine months ended December 31,
1998 increased by $5,078,342 to $5,212,956 compared to $134,614 for the nine
months ended December 31, 1997. The increase in both current periods is due
primarily to realized and unrealized gains on the shares of Niagara Mohawk
Common Stock and to significantly higher invested principal balances.
57
Product Segment
Product Sales. Revenues for Besicorp's energy technology products (the
"Product Segment") sales activities during the three-month period ended December
31, 1998 increased by $399,612 to $1,187,805, as compared to $788,193 for the
three months ended December 31, 1997. The increase for the period is due to an
increase of $546,380 in sales of photovoltaic products. That increase was
partially offset by a decrease of $146,768 in sales of solar thermal and heat
transfer products.
During the nine-month period ended December 31, 1998, revenues
increased by $216,636 to $3,273,495, as compared to $3,056,859 for the nine
months ended December 31, 1997. The increase for the period is due primarily to
an increase of $1,128,539 in sales of photovoltaic products as a result of
increased sales volume, which was partially offset by the decrease of $911,903
in sales of solar thermal and heat transfer products, a result of Besicorp's
decision to discontinue those product lines.
Other Revenues. Other revenues derived from the Project and Product
Segments increased by $81,744 and $179,716, respectively, for the three and nine
months ended December 31, 1998 from the corresponding periods in the prior year.
Other revenues are primarily comprised of contract revenue received from various
sources, including the New York State Energy Research and Development Authority
and Motorola, Inc. in accordance with funding agreements with Besicorp. Contract
revenue may vary from quarter to quarter based upon the degree of completion of
the various tasks outlined in the applicable agreements.
COSTS AND EXPENSES
Cost of Product Segment Sales
Cost of product sales for the three months ended December 31, 1998 and
1997 was $1,155,438 and $776,517, respectively, or 97% and 99% of revenues
attributable to product sales. During the nine months ended December 31, 1998
and 1997, cost of product sales was
<PAGE>
$3,121,707 and $2,850,416, respectively, or 95% and 93% of revenues attributable
to product sales. The decrease in the quarter ended December 31, 1998 is due
primarily to efficiencies achieved in the photovoltaic product manufacturing
process. For the nine months ended December 31, 1998, the increase in cost of
sales percentage is due primarily to the discontinuance of the solar thermal and
heat transfer product lines which had lower costs of sales historically. This
was partially offset by the effect of the manufacturing efficiencies referenced
above.
Costs of Project Segment Development and Management Fees
There are no current specific costs and expenses identified with
development and management fee revenue. Costs and expenses associated with this
segment are the selling, general, and administrative expenses of Besicorp.
Selling, General and Administrative Expenses
Consolidated. Selling, general, and administrative expenses ("SG&A")
increased by $583,723, or 24%, to $2,989,889 for the three months ended December
31, 1998, as compared to $2,406,166 for the three months ended December 31,
1997. During the nine months ended December 31, 1998, SG&A increased by
$2,329,283, or 36%, to $8,820,244, from $6,490,961 for the nine months ended
December 31, 1997. As discussed below, small decreases in the Product Segment
partially offset increases in the Project Segment.
Project Segment. For the Project Segment, SG&A for the three months
ended December 31, 1998 and December 31, 1997 was $2,334,015 and $1,644,228,
respectively, representing 78% and 68% of the total SG&A. SG&A for the nine
months ended December 31, 1998 and December 31, 1997 was $6,926,990 and
$4,331,699, respectively, representing 79% and 67% of the total SG&A. The
increase of $689,787 during the three-month period is due primarily to increased
compensation expense of $335,425 and increased legal and consulting expenses of
$534,713 which were primarily related to the Merger. These increases were
partially offset by a decrease of $147,152 in Gross Receipts Tax. The increase
of $2,595,291 in the nine-month period is primarily due to the write-off of
project costs previously deferred of $1,402,085 due to the uncertain political
and economic conditions in the countries where the projects are located
(principally India and Brazil)(see Note 3 of Notes to Consolidated Financial
Statements of Besicorp Group Inc.), increased compensation expense of
$1,567,535, primarily the result of incentive compensation paid to employees in
connection with the consummation of the MRA, and increased legal and consulting
expenses of $613,266, which were primarily related to the Merger. These
increases were partially offset by certain cost reimbursements of $613,113
received during the second quarter of Fiscal 1999 in connection with the MRA
consummation and by a decrease of $301,922 in Gross Receipts Tax.
58
<PAGE>
Product Segment. SG&A expenses for Besicorp's Product Segment for the
three months ended December 31, 1998 and 1997 were $655,874 and $761,938,
respectively, representing 22% and 32% of the total SG&A. SG&A expenses for
Besicorp's Product Segment for the nine-month periods ended December 31, 1998
and 1997 were $1,893,254 and $2,159,262, respectively, representing 21% and 33%
of the total SG&A. These decreases of $106,064 and $266,008 for the respective
three and nine months ended December 31, 1998 are due primarily to the
discontinuance of Besicorp's heat transfer product lines and to the
reclassification of certain labor charges to Cost of Product Sales.
Interest Expense
Interest expense for the three months ended December 31, 1998 decreased
by $194,381 to $13,238 from $207,619 for the three months ended December 31,
1997. Interest expense for the nine months ended December 31, 1998 decreased by
$270,798 to $133,336 from $404,134 for the nine months ended December 31, 1997.
The decrease in both the three- and nine-month periods is due primarily to
the payment on July 10, 1998 of the $3 million Working Capital Loan from Stewart
and Stevenson, Inc. and to a decrease in interest, and with respect to certain
litigation.
Provision for Income Taxes
The provision for income taxes increased during the three months ended
December 31, 1998 by $797,690 to $728,888 compared to $(68,802) for the same
period last year. During the nine-month period ended December 31, 1998, the
provision for income taxes increased by $47,606,685 to $48,238,087 compared to
$631,402 for the same period last year. The increase in the current three-month
period is due to the increase in Income Before Income Taxes which is due
primarily to the increase in Interest and Other Investment Income. The increase
in the current nine-month period is due to the increase in Income Before Income
Taxes which resulted primarily from the increase in income from partnerships.
Besicorp provides federal and state income taxes based on enacted statutory
rates adjusted for projected benefits of tax operating loss carryforwards and
other credits.
Year Ended March 31, 1998 Compared to Year Ended March 31, 1997
Besicorp's net income for Fiscal 1998 of $195,386 represents a decrease
of $978,336 from the net income of $1,173,722 for the year ended March 31, 1997
("Fiscal 1997"). The decrease in Fiscal 1998 is due primarily to the reserve of
$2.5 million for the possible uncollectibility of the combined loans to one of
the project partnerships (see Note 4(a) of the Notes to Consolidated Financial
Statements of Besicorp Group Inc.), an increase of $1,339,794 in
<PAGE>
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.
Besicorp'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 Besicorp's product sales and an
increase in the provision for income taxes of $308,400.
Besicorp's net income for Fiscal 1998 with respect to its development
of independent power projects (the "Project Segment") 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.
59
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.
Besicorp's net loss of $2,651,089 for Fiscal 1998 with respect to its
development, assembly, manufacture, marketing and resale of solar energy
products and systems (the "Product Segment") 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.
<PAGE>
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 Besicorp'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, Besicorp 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. Besicorp 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 Besicorp during Fiscal 1998.
During Fiscal 1997, Besicorp 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.
Besicorp also earned $377,675 in management fees during Fiscal 1997 in
connection with its projects.
During Fiscal 1996, Besicorp earned $328,887 in management fees in
connection with its projects. Besicorp 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 Besicorp'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 Besicorp'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 Besicorp's activities in the project development
area, results of operations from year to year may fluctuate significantly. As
noted above, Besicorp 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, Besicorp does not recognize development fee revenue until deemed
earned and payable under the applicable contract due to the significant
contingencies
<PAGE>
associated with obtaining development fees from lenders to each partnership in
which Besicorp is a partner. Due to the contingent nature of the payment of
these fees, Besicorp can not accurately project on a year-to-year basis when
such events will occur.
60
During Fiscal 1998, Besicorp 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, Besicorp recorded income from partnerships of
$7,907,393, an increase of $4,462,335 over amounts recorded for Fiscal 1996.
Product Segment
Revenues for Besicorp'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 was primarily
due to competitive pricing activity and to Besicorp'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. Besicorp had
discontinued the non-agricultural portion of 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.
<PAGE>
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 Besicorp'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 Besicorp'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.
61
Costs of Development and Management Fees
There are no specific costs and expenses identified with the
development and management fee revenue. Costs and expenses associated with the
Project Segment are included in SG&A.
Selling, General and Administrative Expenses
<PAGE>
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 Besicorp'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.
Fiscal 1998 SG&A increased by $740,006 from the prior year. 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 resolution of certain litigation, the write-down of property by
$141,468 to its estimated net realizable value in connection with the
discontinuance of Besicorp's solar thermal and heat transfer technology product
lines, and increased Board of Directors compensation and related expenses of
$241,529. The write-off of deferred project costs occurred on projects whose
completion was considered by management to be unlikely and, accordingly,
Besicorp does not intend to pursue such projects. 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 Proceeding and a reduction in
legal expenses of $186,000, representing the agreed reimbursement to Besicorp of
legal fees paid on behalf of Besicorp's Chairman, Chief Executive Officer and
President, Michael F. Zinn, in connection with the Proceeding. 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. In January
1999, after the receipt of a report from independent legal counsel addressing
the propriety under the BCL and Besicorp's by-laws of indemnifying Mr. Zinn, a
committee of the Board (composed of independent directors) determined that Mr.
Zinn was entitled to full indemnification with respect to the Proceeding and (i)
authorized the repayment to Mr. Zinn of the Fine and the refund of $45,000 he
had previously reimbursed Besicorp; (ii) acknowledged that Mr. Zinn had no
further obligations with respect to the $141,000 Mr. Zinn had, subject to a
determination as the propriety of indemnification, agreed to reimburse Besicorp;
and (iii) authorized the reimbursement of Mr. Zinn for the legal fees and
expenses (approximately $39,180) incurred by third parties in connection with
the Proceeding and which were paid by him.
During Fiscal 1997, SG&A increased by $1,587,073 from the prior year.
Factors contributing to the increase include legal fees and other expenses of
$821,066 incurred in connection with the Proceeding. Other legal fees increased
by $82,142 during Fiscal 1997, due primarily to the Lichtenberg Litigation.
Besicorp 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
<PAGE>
finders fees of $127,557 incurred in connection with Besicorp'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
write-off of deferred project costs occurred on projects whose completion was
considered by management to be unlikely and, accordingly, Besicorp does not
intend to pursue such projects.
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 Besicorp's solar electric business. Increased solar electric
advertising and promotional expenses of $73,741 and increased research and
development spending of $50,365 during the year also contributed to higher SG&A
expenses. The increase in Fiscal 1997 is due primarily to an increase in
research and development expenses of $220,578.
62
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 resolution of certain litigation 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 of the Notes to Consolidated Financial
Statements of Besicorp Group Inc. 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 Besicorp'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 Besicorp's decision to reserve for
the possible uncollectibility of the combined loan of $2,500,000 in connection
with a power project which was ultimately written off in Fiscal 1999. See Note 4
of the Notes to Consolidated Financial Statements of Besicorp Group Inc..
<PAGE>
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. Besicorp 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 of the Notes to
Consolidated Financial Statements of Besicorp Group Inc).
LIQUIDITY AND CAPITAL RESOURCES
Besicorp's working capital increased by $83,511,570 from $2,779,482 at
March 31, 1998, to $86,291,052 at December 31, 1998 primarily as a result of the
consummation of the MRA.
During the nine months ended December 31, 1998, cash of $113,699,357
was provided from operations. The net income of $89,563,312, when adjusted for
non-cash revenue/expense items of $142,140,280, including income from
partnerships of $138,938,314, resulted in a cash decrease of $52,576,968. Major
factors offsetting this cash decrease included cash distributions from the
partnerships of $134,460,210, of Niagara Mohawk Common Stock, the receipt of a
development fee receivable at March 31, 1998 of $900,000, and net changes in
assets and liabilities of $30,916,115.
During the current nine-month period, Besicorp's financing activities
resulted in a decrease in cash of $3,744,187, primarily due to the repayment of
borrowings.
Investing activities during the current nine-month period resulted in a
decrease in cash of $328,211 due to the acquisition of property, plant, and
equipment.
As previously discussed, the consummation of the MRA and related
transactions and partnership operating results through December 31, 1998,
resulted in the receipt of approximately $70 million (including Besicorp's share
of the net proceeds from the sale of the Power Plants) and the shares of Niagara
Mohawk Common Stock valued at approximately $69 million as of June 30, 1998. As
previously discussed, Besicorp has, through February 24, 1999, sold 3,909,500
shares of Niagara Mohawk Common Stock resulting in cash proceeds of
approximately $60.3 million for a gain of approximately $2.0 million. In
accordance with its established investment objectives and guidelines, Besicorp
has invested surplus cash in money market funds and commercial paper. The five
Power Purchase Agreements with Niagara Mohawk were terminated as a result of the
consummation of the MRA and, consequently, there will be no significant future
periodic distributions to Besicorp from the operations of the projects. Pending
the consummation of the Merger, Besicorp expects that capital requirements for
its operations and for repayment of long-term debt will be met by its current
cash and short-term investment position.
63
<PAGE>
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, including, among other things, a
temporary inability to process transactions, send invoices, determine whether
payments have been received or engage in similar normal business activities.
This is known as the Year 2000 issue.
Besicorp relies on computer hardware, software, and related technology
primarily in its internal operations, such as billing and accounting. During
Fiscal 1998, Besicorp formed a Year 2000 Management Committee to address the
potential financial and business consequences of Year 2000 issues, such as the
disruptions mentioned above, the failure to receive essential supplies and
services or the loss of customers, with respect to both Besicorp's hardware,
software, applications and interfaces (collectively, "IT Systems") and
non-information technology systems such as telemetry, security, power and
transportation (collectively, the "Non-IT Systems"). In general, the Year 2000
Management Committee is dividing its efforts with respect to both the IT Systems
and the Non-IT Systems into three phases: (1) inventory and assessment ("Phase
One"), (2) strategy and contingency planning ("Phase Two") and (3) upgrades,
conversions and other solutions ("Phase Three").
With respect to the IT Systems, Besicorp has completed its evaluation
of its hardware, software and other IT Systems and decided to migrate from a 486
PC environment to an Intel Pentium environment. Thus the efforts are now in
Phase Three. To date all workstations and financial software have been replaced.
Microsoft Office Suite software and back-up software has been upgraded, virus
protection software is now Year 2000 compliant, and Year 2000 compliant servers
have been installed. To complete Phase Three, Besicorp will upgrade accounting
software, e-mail exchange servers, internet proxy server, and all other servers
to NT 4.0, upgrade all workstations to Windows 98, send second notices to IT
Systems vendors that have not responded to Besicorp's request to receive written
certification and begin to seek replacement vendors, if necessary. Besicorp
expects to complete Phase Three by July 1999.
With respect to the Non-IT Systems, the Partnerships are responsible
for the day-to-day management of the Power Plants, so the Year 2000 Management
Committee restricted its efforts to the photovoltaic business, other operations
unrelated to the Power Plants, and administration. Besicorp relies on outside
providers for its basic needs such as electricity, telephone service and other
utilities. As part of its evaluation of its Non-IT Systems, the Year 2000
Management Committee contacted the utilities and other suppliers. Phase One has
been completed and the Year 2000 Management Committee is studying the results in
its efforts to determine what, if anything, will be required to prepare the
Non-IT Systems for the Year 2000 and to assure itself
<PAGE>
that utility services will not be interrupted. The Year 2000 Management
Committee expects to complete Phase Two by April 1999 and Phase Three by July
1999.
Besicorp is also communicating with its vendors, suppliers, and
customers to both monitor and encourage their respective remedial efforts
regarding Year 2000 issues. Besicorp is in the process of contacting by letter
or phone all of its significant vendors and suppliers and its largest customers
to determine the extent to which Besicorp's systems might be vulnerable as a
result of third parties' failure to resolve their own Year 2000 issues. Besicorp
is concerned about receiving all necessary utility services; in addition,
Besicorp's photovoltaic business is dependent on components provided by
photovoltaic module suppliers. Since failure by vendors and suppliers to
successfully address their Year 2000 issues could result in delays in their
providing various products and services to Besicorp, Besicorp will seek
replacement vendors as is necessary to assure availability of products and
services. Failure by customers could disrupt their ability to maximize their use
of Besicorp's products and services and lead to a reduction in revenues;
therefore, Besicorp will send a newsletter to its product customers to help
develop each customer's awareness of Year 2000 issues and their implications.
So long as Besicorp's efforts to become Year 2000 compliant continue on
schedule, the Year 2000 Management Committee believes that its internal
operations will not be affected by Year 2000 problems. Besicorp does not rely
solely on its IT Systems in order to produce products it sells or to develop
project opportunities. In fact, in July 1998, Besicorp's IT Systems temporarily
ceased to function due to a lightning strike that destroyed many components of
the system, and while inconvenienced, the business operated, deadlines were met,
and relationships were cultivated. Besicorp expects to complete its upgrade and
replacement purchases by the first half of calendar 1999. Testing is underway
and will continue through January 2000.
64
There can be no assurance that Year 2000 problems of third parties upon
which Besicorp's systems and operations rely will not have a material adverse
effect on Besicorp's operating results or financial condition. However, Besicorp
does not anticipate any adverse impact on its business due to a lack of
availability of supplies or difficulties of customers. Therefore, short of any
third party disaster that Besicorp is unable to control and for which Besicorp
cannot develop contingency plans, such as the failure of a utility providing
power or telecommunications, Besicorp does not believe its business will be
detrimentally impacted by potential Year 2000 problems.
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, Besicorp does not anticipate that the incremental expenses
related to the Year 2000 issue for Fiscal 1999 will be material. Such
incremental expenses incurred during Fiscal 1998 were not significant.
<PAGE>
MARKET INFORMATION REGARDING BESICORP COMMON STOCK
Besicorp's Common Stock has been listed since 1993 on the American
Stock Exchange Emerging Company Marketplace ("AMEX ECM") under the symbol
BGI.EC.
Set forth below are the high and low sales prices as reported on the
AMEX ECM for the period indicated.
Fiscal Year Ended March 31,
High Low
---------- ----------
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
1999 First Quarter $ 39-1/2 $ 26-1/16
Second Quarter 40 29-3/4
Third Quarter 36-3/4 29-7/8
Fourth Quarter 33 29-5/16
(through February
25, 1999)
On November 20, 1998, the day prior to the date of public announcement
of the Board's adoption of the Initial Plan of Merger, the last reported sales
price of the Besicorp Common Stock was $32-7/8. As of February 25, 1999, the
last reported sales price of the Besicorp Common Stock was $32-1/4 as reported
on AMEX ECM.
There were approximately 1,730 shareholders of record of Besicorp
Common Stock as of the Record Date. Besicorp has never paid any cash dividends
on the Besicorp Common Stock.
65
<PAGE>
THE SPIN-OFF
Background
Because Acquisition does not wish to (i) acquire Besicorp's assets
pertaining to, among other things, the photovoltaic and independent power plant
development businesses or (ii) assume, with certain limited exceptions, any of
Besicorp's liabilities, Besicorp and Acquisition determined to effect the
Contribution and the Spin-Off. The Contribution (as defined below) followed by
the Spin-Off will separate from Besicorp and all of the businesses and assets
that Acquisition does not wish to acquire. This will enable Acquisition to
acquire only the assets it desires to acquire and will leave Besicorp's
photovoltaic and independent power plant development businesses as a separate
publicly held company, owned by the holders of Besicorp Common Stock as of the
Spin-Off Record Date.
Although the Spin-Off will not be effected unless the Merger is adopted
by Besicorp's shareholders and all other conditions precedent to the Closing
(other than the Spin-Off) have been satisfied or waived, the Spin-Off is
separate from the Merger, and the shares of Newco Common Stock to be received by
holders of Besicorp Common Stock in the Spin-Off do not constitute a part of the
Merger Consideration.
The Contribution
Prior to the Spin-Off, Besicorp will transfer or cause to be
transferred to Newco various subsidiaries and assets and cause Newco to assume
certain liabilities, as described in the chart set forth below. The transfer of
the distributed subsidiaries and the contributed assets and the assumption of
the assumed liabilities is referred to herein as the "Contribution." To effect
the Contribution, Besicorp and Newco will enter into a contribution agreement
(the "Contribution Agreement").
The following chart provides a general description of the effect of the
Spin-Off on Besicorp and Newco. See "Unaudited Pro Forma Financial Information."
As the Merger will be consummated promptly following the Spin-Off, Acquisition
shall, subject to the provisions of the Plan of Merger which permit Besicorp and
Newco to replace assets to be contributed with assets to be retained of equal
value, acquire the assets listed and assume the liabilities listed under the
caption "Besicorp," and the shareholders of Besicorp entitled to shares of Newco
will indirectly, as holders of Newco Common Stock, own the assets listed and be
liable for the liabilities listed under the caption "Newco."
<PAGE>
<TABLE>
<CAPTION>
<S>
<C>
Besicorp Newco
Subsidiaries (i) certain subsidiaries (primarily those all other subsidiaries
owning the interests in the Partnerships that
formerly owned the Power Plants) and
(ii) the subsidiary that owns the Corporate
Headquarters (each, a "Remaining
Subsidiary" and collectively, the "Remaining
Subsidiaries")(for a list of the subsidiaries of
Besicorp including the subsidiaries to be
contributed to Newco, see Annex C).
Assets (i) its cash, cash equivalents and Niagara (i) all of Besicorp's assets
Mohawk Common Stock (except for $1.5 pertaining to the photovoltaic
million which Besicorp shall contribute to and power plant development
Newco, $6.5 million to fund the Escrow businesses (including interests
Fund, $2 million for bonuses and $2 million in power plant projects and
for the estimated expenses of the initiatives in India and Brazil
Transaction); and trade receivables,
(ii) the Corporate Headquarters (which it furniture, fixtures and
will lease to Newco); and equipment related to these
(iii) other claims of Besicorp and awards businesses (See "Unaudited
made to Besicorp (i.e., Besicorp's rights Pro Forma Financial
under a creditor's claim in a bankruptcy Information"));
proceeding of approximately $280,000, an (ii) $1.5 million in cash;
arbitration award of approximately (iii) the interests in the
$430,000, a judgment of approximately Partnerships that formerly
$140,000 and a default judgment of owned the Power Plants; and
approximately $175,000). (iv) all other assets not
retained by Besicorp.
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
<S>
<C>
Besicorp Newco
Liabilities (i) the actual or accrued liabilities of all other liabilities (the only
Besicorp or any subsidiary that is a material liabilities that
Remaining Subsidiary for unpaid federal Besicorp is aware of are the
income taxes for the current fiscal year based contingent liabilities arising
on the consolidated net income of Besicorp out of legal proceedings to
through the Effective Date (the "Specified which Besicorp is a party (see
Current Liabilities"); "Business - Legal
(ii) the liability of Besicorp or its subsidiaries Proceedings") and the
for New York State income Taxes for SunWize Indebtedness (see
Besicorp's current fiscal year (the "Excluded "Business -- SunWize
Liability"); and Indebtedness")).
(iii) various intercompany liabilities between
Besicorp and the remaining subsidiaries.
</TABLE>
It is anticipated that the directors and executive officers of Besicorp
will serve Newco in capacities in which they currently serve Besicorp and that
they will be compensated for the services they render on behalf of Newco. See
"Factors to be Considered -- Interests of Executive Officers and Directors in
the Merger."
The Spin-Off
After the completion of the Contribution, and assuming the other
conditions to the consummation of the Merger have been or will be waived or
satisfied the Spin-Off will be effected by the declaration of a distribution to
each holder of record of Besicorp Common Stock as of the Spin-Off Record Date of
one share of Newco Common Stock for every 25 shares of Besicorp Common Stock
held by such holder on such date. The Spin-Off Record Date is expected to be the
same day as the Effective Date. In lieu of fractional shares, cash will be
distributed. The Newco Common Stock will be deemed to be issued to such
shareholders as of the Spin-Off Record Date. Certificates representing shares of
Newco Common Stock will be distributed contemporaneously with the Merger
Consideration. Therefore, holders of Besicorp Common Stock will generally not
receive certificates for shares of Newco Common Stock until they deliver their
certificates evidencing their Besicorp Common Stock. As a result of the Spin-
Off, the shareholders of record of Besicorp at the close of business on the
Spin-Off Record Date who own 25 or more shares of Besicorp Common Stock will own
all of the outstanding shares of Newco Common Stock.
67
<PAGE>
Conditions to the Spin-Off
Besicorp will not effect the Spin-Off unless Besicorp's shareholders
adopt the Plan of Merger and all other conditions to the closing of the Merger
have been waived or satisfied.
INFORMATION REGARDING ACQUISITION AND MERGER SUB
BGI Acquisition LLC is a Wyoming limited liability company. BGI
Acquisition Corp. is a New York corporation, wholly owned by Acquisition and
recently organized in connection with the Merger. Merger Sub and Acquisition
have not carried on any activities, other than in connection with the Merger.
The principal offices of the manager of Acquisition and the principal offices of
Merger Sub are located at 950 Third Avenue, New York, New York 10022, (212) 688-
2700. Acquisition is wholly owed by Lion Gate, LLC, a limited liability company
organized under the laws of the British Virgin Islands, with administrative
offices located at P.O. Box 158, BNP House, Anley Street, St. Helier, Jersey JE4
8RB. Lion Gate, LLC is engaged in the business of trading and investments. The
sole member of Lion Gate, LLC is Mr. Thamer Bin Saeed Al- Shanfari, a citizen of
the Sultanate of Oman. His postal address is P.O. Box 18, Ruwi, Post Code 112,
Oman.
Until immediately prior to the time Acquisition and Merger Sub will
participate in the Merger, it is not anticipated that such entities will have
any significant assets or liabilities other than those incident to their
formation and capitalization and the transactions contemplated by the Merger. As
of the Record Date, neither Acquisition, Merger Sub nor any of their affiliates
owned any shares of Besicorp Common Stock. Prior to the Closing, and subject to
the conditions set forth in the Plan of Merger and other customary conditions,
Acquisition will be funded by debt and/or equity from the Lion Gate LLC and/or
committed lenders in the entire amount of the Merger Consideration. Such amount
will then be contributed by the Acquisition to Merger Sub as an equity capital
contribution immediately prior to the Closing.
OTHER MATTERS
As of the time of preparation of this Proxy Statement, the Board of
Directors knows of no matters that will be acted on at the Special Meeting other
than the adoption of the Plan of Merger. If any other matters are presented for
action at the Special Meeting or at any adjournment or postponement thereof,
it is intended that the proxies will be voted with respect thereto in accordance
with the best judgment and in the discretion of the persons named as proxies in
the accompanying proxy card.
<PAGE>
ANNUAL MEETING OF SHAREHOLDERS
If the shareholders adopt the Plan of Merger, and if all other
conditions to the Merger are satisfied or waived, it is expected that the Merger
will be consummated on or about March 22, 1999. Besicorp does not plan to hold
an annual meeting of shareholders following the Special Meeting unless the
Merger is not consummated. If the Merger is not consummated, shareholder
proposals received by the Secretary of Besicorp a reasonable time before
Besicorp begins to print and mail its proxy materials will be considered for
inclusion in the proxy materials for Besicorp's next Annual Meeting of
Shareholders.
INDEPENDENT PUBLIC ACCOUNTANTS
Besicorp's independent public accountants for the fiscal year ended
March 31, 1998 and for the current fiscal year are Citrin Cooperman & Company,
LLP. It is anticipated that representatives of such firm will be present at the
Special Meeting and that they will be available to respond to questions from
shareholders.
68
<PAGE>
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
OF BESICORP GROUP INC.
<TABLE>
<CAPTION>
<S>
<C>
Index to the Consolidated Financial Statements of Besicorp Group Inc. .................................. F-1
Independent Auditors' Report............................................................................ F-2
Consolidated Balance Sheet as of December 31, 1998 (Unaudited),
March 31, 1998 and March 31, 1997.............................................................. F-3
Consolidated Statement of Operations for the Three and Nine
Months Ended December 31, 1998 and 1997 (Unaudited)
and the Years Ended March 31, 1998, 1997 and 1996.............................................. F-5
Consolidated Statement of Cash Flows for the Nine Months
Ended December 31, 1998 and 1997 (Unaudited)
and the Years Ended March 31, 1998, 1997 and 1996.............................................. F-6
Consolidated Statement of Changes in Shareholders' Equity
for the Nine Months Ended December 31, 1998 (Unaudited)
and for the Years Ended March 31, 1998, 1997 and 1996.......................................... F-7
Notes to Consolidated Financial Statements of Besicorp Group Inc........................................ F-8
INDEX TO THE FINANCIAL STATEMENTS OF THE PARTNERSHIPS
Audited financial statements of Kamine/Besicorp Carthage L.P.
for the Years Ended December 31, 1997 and 1996............................................... F-27
Audited financial statements of Kamine/Besicorp South Glens Falls L.P.
for the Years Ended December 31, 1997 and 1996............................................... F-39
Audited financial statements of Kamine/Besicorp GlenCarthage Partnership
for the Years Ended December 31, 1997 and 1996............................................... F-51
Audited financial statements of Kamine/Besicorp Natural Dam L.P.
for the Years Ended December 31, 1997 and 1996............................................... F-59
Audited financial statements of Kamine/Besicorp Syracuse L.P.
for the Years Ended December 31, 1997 and 1996............................................... F-71
Audited financial statements of Kamine/Besicorp Beaver Falls L.P.
for the Years Ended December 31, 1997 and 1996 ............................................. F-83
</TABLE>
F-1
<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
June 23, 1998
New York, New York
F-2
<PAGE>
<TABLE>
<CAPTION>
<S>
BESICORP GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<C> <C> <C>
ASSETS December 31, March 31, March 31,
1998 1998 1997
___________ _________ _________
(Unaudited)
Current Assets:
Cash and cash equivalents $ 110,439,930 $ 812,971 $ 210,533
Short-term investments 879,301 1,056,778 1,012,814
Investment in Niagara Mohawk Power Corporation
common stock 22,161,716 0 0
Trade accounts receivable (less allowance for doubtful
accounts of $68,929 in December 1998,
$23,000 in March 1998 and $39,346 in March1997) 603,401 369,539 604,263
Due from affiliates 64,223 870,295 1,338,802
Current portion of long-term notes receivable:
Others (includes interest of $16,950 in December 1998,
$8,316 in March 1998 and $11,201 in March 1997) 127,919 102,053 97,016
Inventories 1,166,673 944,013 1,180,265
Deferred income taxes 93,600 93,600 362,600
Other current assets 287,984 485,052 316,601
___________ _________ _________
Total Current Assets 135,824,747 4,734,301 5,122,894
___________ _________ _________
Property, Plant and Equipment:
Land and improvements 237,159 237,159 279,910
Buildings and improvements 1,914,029 1,906,953 1,890,065
Machinery and equipment 1,546,587 1,226,115 961,335
Furniture and fixtures 247,364 246,701 195,941
Construction in progress 0 0 8,079
_________ _________ _________
3,945,139 3,616,928 3,335,330
Less: accumulated depreciation and amortization 1,980,261 1,769,212 1,398,576
_________ _________ _________
Net Property, Plant and Equipment 1,964,878 1,847,716 1,936,754
_________ _________ _________
Other Assets:
Patents and trademarks, less accumulated
amortization of $2,131 in December 1998,
$1,691 in March 1998 and $651,526 in March 1997 9,011 7,823 47,184
Long-term notes receivable:
Affiliate-net of allowance of 0 in December 1998,
$555,376 in March 1998 and 0 in March 1997 0 0 555,376
Others-net of allowance of 0 in December 1998,
$1,944,624 in March 1998 and 0 in March 1997 94,112 129,886 2,168,246
Due from affiliates 0 375,000 0
Investment in partnerships 4,444,233 0 0
Deferred costs 0 1,316,693 1,480,728
Deferred income taxes 634,200 916,600 369,700
Other assets 77,645 116,977 155,917
_________ _________ _________
Total Other Assets 5,259,201 2,862,979 4,777,151
___________ _________ __________
TOTAL ASSETS $ 143,048,826 $ 9,444,996 $ 11,836,799
=========== ========= ==========
See accompanying notes to consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>
BESICORP GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
<C> <C> <C>
December 31, March 31, March 31,
1998 1998 1997
___________ ________ __________
(Unaudited)
Current Liabilities:
Accounts payable and accrued expenses $ 1,319,611 $ 1,403,504 $ 1,745,142
Current portion of long-term debt 11,700 111,367 115,598
Current portion of accrued reserve and warranty expense 140,305 152,891 215,733
Taxes other than income taxes 114,541 114,811 101,786
Income taxes payable 47,947,538 172,246 366,786
__________ _________ _________
Total Current Liabilities 49,533,695 1,954,819 2,545,045
Investment in Partnerships 0 33,870 2,559,282
Long-Term Accrued Reserve and Warranty Expense 167,934 152,402 165,950
Long-Term Debt 123,608 3,766,074 3,834,483
__________ _________ _________
Total Liabilities 49,825,237 5,907,165 9,104,760
__________ _________ _________
Shareholders' Equity:
Common stock, $.10 par value: authorized
5,000,000 shares; issued 3,234,958 shares 323,495 323,495 323,495
Additional paid-in capital 5,565,352 5,492,072 4,925,524
Retained earnings (deficit) 88,948,053 (615,259) (810,645)
__________ _________ _________
94,836,900 5,200,308 4,438,374
Less: treasury stock at cost (265,023 in December 1998,
278,234 shares in March 1998 and
300,298 shares in March 1997) (1,613,311) (1,662,477) (1,706,335)
__________ _________ _________
Total Shareholders' Equity 93,223,589 3,537,831 2,732,039
__________ _________ _________
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 143,048,826 $ 9,444,996 $ 11,836,799
=========== ========= ==========
See accompanying notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C>
BESICORP GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended December 31, Nine Months Ended December 31,
1998 1997 1998 1997
(Unaudited) (Unaudited)
Revenues:
Product sales $ 1,187,805 $ 788,193 $ 3,273,495 $ 3,056,859
Development and management fees 0 162,133 2,043,334 1,070,139
Other revenues 184,064 102,320 417,419 237,703
Income from partnerships 2,233,382 2,418,708 138,938,314 7,408,310
Interest and other investment income 2,388,024 39,700 5,212,956 134,614
Other income 0 0 0 0
__________ __________ ___________ __________
Total Revenues 5,993,275 3,511,054 149,885,518 11,907,625
__________ __________ ___________ __________
Costs and Expenses:
Cost of product sales 1,155,438 776,517 3,121,707 2,850,416
Selling, general and
administrative expenses 2,989,889 2,406,166 8,820,244 6,490,961
Interest expense 13,238 207,619 133,336 404,134
Other expense 24 40 8,832 8,387
__________ __________ ___________ _________
Total Costs and Expenses 4,158,589 3,390,342 12,084,119 9,753,898
__________ __________ ___________ _________
Income (Loss) Before Income Taxes 1,834,686 120,712 137,801,399 2,153,727
Provision (Credit) for Income Taxes 728,888 (68,802) 48,238,087 631,402
__________ __________ ___________ _________
Net Income (Loss) $ 1,105,798 $ 189,514 $ 89,563,312 $ 1,522,325
========== ========== =========== =========
Basic Earnings per Common Share $ .37 $ .06 $ 30.16 $ .52
========= ========== =========== =========
Basic Weighted Average Number
of Shares Outstanding 2,969,211 2,956,720 2,967,830 2,946,189
========= ========== =========== =========
Diluted Earnings per Common Share $ .36 $ .06 $ 29.52 $ .51
========= ========== =========== =========
Diluted Weighted Average Number
of Shares Outstanding 3,035,771 3,015,516 3,034,150 3,002,904
========= ========== =========== ==========
Dividends per Common Share None None None None
========= ========== =========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
BESICORP GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended March 31,
1998 1997 1996
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 (Credit) 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
========= ========== ===========
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BESICORP GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<S>
<C> <C> <C> <C> <C>
Nine Months Ended December 31, Years Ended March 31,
1998 1997 1998 1997 1996
(Unaudited)
Operating Activities:
Net income (loss) $ 89,563,312 $ 1,522,325 $ 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 282,400 44,373 259,900 (431,800) 22,300
Amortization of discounts on notes (1,647) (1,647) (2,196) (2,196) (2,196)
Provision for uncollectibles 45,929 2,483,654 0 0
Realized and unrealized (gains)/losses (3,740,136) 9,620 61,980 10,238 (14,653)
Depreciation and amortization 211,488 216,855 421,379 355,604 388,437
Partnership income recognized (138,938,314) (7,408,310) (10,058,849) (7,907,393) (3,445,058)
Distributions from partnerships 134,460,210 5,482,429 7,533,437 7,835,800 4,768,874
Stock based compensation 0 0 152,557 70,644 17,815
Changes in assets and liabilities:
Short-term investments 316,016 (32,806) (42,426) (251,755) 725,123
Investment in Niagara Mohawk Power
Corporation common stock (18,560,119) 0 0 0 0
Accounts and notes receivable 912,838 1,495,424 435,472 (1,228,967) 289,041
Inventories (222,659) 40,100 236,252 78,925 85,752
Accounts payable and accrued expenses (83,894) (286,661) (453,813) 441,128 (111,415)
Taxes payable/refundable 47,899,522 182,298 (137,315) 207,071 97,603
Other assets and liabilities, net 1,554,411 (587,838) (43,136) (575,644) (155,229)
Net Cash Provided (Used) ___________ _________ _________ _________ _______
By Operating Activities 113,699,357 676,162 1,042,282 (224,623) 188,075
___________ _________ _________ _________ _______
Financing Activities:
Increase in borrowings 0 247,000 247,000 500,000 41,440
Repayment of borrowings (3,742,133) (209,061) (386,016) (118,933) (117,456)
Purchase of common stock (53,187) (140,077) (140,076) 0 (637,509)
Issuance of common stock 51,133 128,100 128,100 26,300 172,669
Net Cash Provided (Used) __________ _________
By Financing Activities (3,744,187) 25,962 (150,992) 407,367 (540,856)
__________ _________ ________ ________ ________
Investing Activities:
Investments in partnerships 0 0 0 (5,000) 0
Acquisition of property, plant and equipment (328,211) (262,654) (288,852) (57,790) (252,271)
Net Cash Used By Investing _________ _________ ________ ________ ________
Activities (328,211) (262,654) (288,852) (62,790) (252,271)
_________ _________ ________ ________ ________
Increase (Decrease) in Cash and Cash Equivalents 109,626,959 439,470 602,438 119,954 (605,052)
Cash and Cash Equivalents Beginning 812,971 210,533 210,533 90,579 695,631
___________ _________ _______ ________ ________
Cash and Cash Equivalents Ending $ 110,439,930 $ 650,003 $ 812,971 $ 210,533 $ 90,579
Supplemental Cash Flow Information: =========== ========= ======= ======== ========
Interest paid $ 175,226 $ 287,225 $ 510,809 $ 420,747 $ 387,143
Income taxes paid 188,740 398,426 220,571 777,429 11,022
Additions to property, plant, and
equipment which were financed
and not included above $ 0 $ 66,375 $ 66,375 $ 0 $ 70,230
See accompanying notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>
BESICORP GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) AND FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<C> <C> <C> <C>
Common Stock Additional Retained Earnings
Shares Amount Paid-in Capital (Deficit)
Balance at March 31, 1995 3,223,396 $322,340 $4,552,129 $493,952
Shares purchased
Shares issued to employees under
Incentive Stock Option Plan 5,250 525 16,006
Shares issued for warrants 4,500 450 7,988
Treasury shares issued for Incentive
Stock Options and compensation (7,654)
Tax benefit on compensatory
stock transactions 203,300
Net loss for the year (2,478,319)
_________ _______ _________ _________
Balance at March 31, 1996 3,233,146 323,315 4,771,769 (1,984,367)
Shares purchased
Shares issued for fractional shares 7
Shares issued to employees under
Incentive Stock Option Plan 1,800 180 6,120
Treasury shares issued for warrants (117,367)
Treasury shares issued for Incentive
Stock Options (6,040)
Tax benefit on compensatory stock
transactions 256,800
Compensatory non-statutory stock options 14,242
Net income for the year 1,173,722
_________ _______ _________ _________
Balance at March 31, 1997 3,234,953 323,495 4,925,524 (810,645)
Shares purchased
Shares issued for fractional shares 5
Treasury shares issued for Incentive
Stock Options (55,834)
Tax benefit on compensatory stock
transactions 582,000
Compensatory non-statutory stock options 40,382
Net income for the year 195,386
_________ _______ _________ _______
Balance at March 31, 1998 3,234,958 323,495 5,492,072 (615,259)
Shares purchased (unaudited)
Treasury shares issued for Incentive
Stock Options (unaudited) (51,220)
Tax benefit on compensatory stock
transactions (unaudited) 124,500
Net income for the nine months ended
December 31, 1998 (unaudited) 89,563,312
_________ _______ _________ __________
Balance at December 31, 1998 (Unaudited) 3,234,958 $323,495 $5,565,352 $88,948,053
========= ======= ========= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>
BESICORP GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) AND FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<C> <C> <C>
Treasury Stock
Shares At Cost Total
Balance at March 31, 1995 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 16,531
Shares issued for warrants 8,438
Treasury shares issued for Incentive
Stock Options and compensation (24,245) 173,169 165,515
Tax benefit on compensatory
stock transactions 203,300
Net loss for the year (2,478,319)
_______ ________ _________
Balance at March 31, 1996 321,212 (1,849,742) 1,260,975
Shares purchased 86 (1,250) (1,250)
Shares issued for fractional shares
Shares issued to employees under
Incentive Stock Option Plan 6,300
Treasury shares issued for warrants (20,000) 137,367 20,000
Treasury shares issued for Incentive
Stock Options (1,000) 7,290 1,250
Tax benefit on compensatory stock
transactions 256,800
Compensatory non-statutory stock options 14,242
Net income for the year 1,173,722
_______ _________ _________
Balance at March 31, 1997 300,298 (1,706,335) 2,732,039
Shares purchased 5,936 (140,076) (140,076)
Shares issued for fractional shares
Treasury shares issued for Incentive
Stock Options (28,000) 183,934 128,100
Tax benefit on compensatory stock
transactions 582,000
Compensatory non-statutory stock options 40,382
Net income for the year 195,386
_______ _________ _________
Balance at March 31, 1998 278,234 (1,662,477) 3,537,831
Shares purchased (unaudited) 2,029 (53,187) (53,187)
Treasury shares issued for Incentive
Stock Options (unaudited) (15,240) 102,353 51,133
Tax benefit on compensatory stock
transactions (unaudited) 124,500
Net income for the nine months ended
December 31, 1998 (unaudited) 89,563,312
_______ __________ __________
Balance at December 31, 1998 (Unaudited) 265,023 ($1,613,311) $93,223,589
======= ========= ==========
See accompanying notes to consolidated financial statements.
F-7
</TABLE>
<PAGE>
BESICORP GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Proposed Merger
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.
The Company, BGI Acquisition LLC ("Acquisition"), a Wyoming limited liability
company, and BGI Acquisition Corp. ("Merger Sub"), a New York corporation and a
wholly owned subsidiary of Acquisition, entered into an Agreement and Plan of
Merger dated November 23, 1998, as amended, (the "Plan of Merger"), that
provides that Merger Sub will be merged with and into the Company, with the
Company being the surviving corporation and wholly owned by Acquisition (the
"Merger"). If the Merger is consummated, the Company's shareholders will be
entitled to receive $34.50 (the "Merger Consideration") in cash for each share
of Besicorp Common Stock, subject to upward adjustment if the Base Amount (as
defined in the Plan of Merger) exceeds $105,275,000. It is anticipated that if
there is any upward adjustment, such adjustment will not exceed $4.00 per share.
There will not be a downward adjustment to the Merger Consideration; however, no
assurance can be given that there will be any upward adjustment to the Merger
Consideration. Consummation of the Merger is subject to the satisfaction of
numerous conditions, including the adoption of the Plan of Merger by the
Company=s shareholders and the Company's distributing (the "Spin-Off") to its
shareholders on a pro rata basis all of the shares of common stock (the "Newco
Common Stock") of Besicorp Ltd. ("Newco"), a subsidiary of Besicorp, which at
the time of the Spin-Off will, among other things, own Besicorp's photovoltaic
and independent power plant development businesses and have assumed
substantially all of the Company's liabilities (other than the Permitted
Liabilities, as such term is defined in the Plan of Merger). No assurance can be
given that such transactions will be consummated.
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.
The unaudited financial information set forth herein has been prepared in
accordance with the generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying
consolidated financial statements contain all adjustments (including normal
recurring adjustments) necessary to present fairly the financial position of
Besicorp Group Inc. (together with its subsidiaries, the "Company") as of
December 31, 1998; the results of operations for the three and nine months ended
December 31, 1998 and 1997; and the statements of cash flows and changes in
shareholders' equity for the corresponding nine month periods. MRA related
income has been included on the Statement of Operations in income from
partnerships pending a determination as to what portion of that item should be
reported as an extraordinary item.
F-8
<PAGE>
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.
Basic/Diluted Earnings per Common Share
Effective December 15, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (ASFAS@) 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 three months ended December
31, 1998, Diluted Earnings per Share was $.36 compared to Basic Earnings per
Share of $.37, a dilution of $.01 per share. For the nine months ended December
31, 1998, Diluted Earnings per Share was $29.52, compared to Basic Earnings per
Share of $30.16, a dilution of $.64 per share. For the three months ended
December 31, 1997, Diluted Earnings per Share and Basic Earnings per Share were
$.06, indicating no dilution. For the nine months ended December 31, 1997,
Diluted Earnings per Share was $.51 per share compared to Basic Earnings per
Share of $.52, a dilution of $.01. 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 three and nine months
ended December 31, 1998 and December 31, 1997 is due to the net incremental
effect of stock options and warrants of 81,500 and 67,000, respectively. 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.
F-9
<PAGE>
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.
Short-Term Investments
In 1995 the Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which requires that the Company's investments be
designated as trading, available for sale or held-to-maturity. The Company's
investments qualify as trading securities which are reported at fair value, with
changes in fair value included in earnings. The unrealized gains (losses) at
December 31, 1998, March 31, 1998 and March 31, 1997 were $1,638,685, $(6,360)
and $(5,735), respectively.
F-10
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 9% of sales for the nine months ended
December 31, 1998 or more than 10% of sales for the year ended March 31, 1996.
<PAGE>
NOTE 2 - INVENTORIES
Inventories consist of the following:
December 31, March 31, March 31,
1998 1998 1997
(Unaudited)
Assembly parts $ 373,336 $ 298,239 $ 479,689
Finished goods 793,333 645,774 700,576
$1,166,673 $ 944,013 $1,180,265
========= ======== =========
NOTE 3 - DEFERRED COSTS
Deferred and reimbursable costs at December 31, 1998 (unaudited), March 31, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C>
Internal Costs Third
Payroll Expenses Party Costs Total
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
Additions 75,504 11,851 43,716 131,071
Write-offs (513,375) (229,362) (659,348) (1,402,085)
Reimbursements (45,679) _ _ (45,679)
---------- --------- -------- ---------
Balance December 31, 1998
(unaudited) $0 $0 $0 $0
========== ======= ======= =========
</TABLE>
In accordance with the Company's existing policy the Company decided to write
off all deferred costs during the second quarter of Fiscal 1999 due to the
uncertain nature of the development of the projects, due to the uncertain
political and economic conditions in the countries where the projects are
located (principally India and Brazil), and the current trend in accounting
principles regarding non-deferral of development expenses.
F-11
<PAGE>
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
NOTE 4 - NOTES RECEIVABLE
Long-term notes receivable consist of the following:
December 31, March 31, March 31,
1998 1998 1997
(Unaudited)
Due from affiliate (net of allowance of 0
at December 31, 1998, $555,376 in
March 1998, and 0 in March 1997 (a) $0 $0 $555,376
======== ======== ========
Due from others:
- Greenhouse (net of allowance of 0
at December 31, 1998, $1,944,624 in
March 1998, and 0 in March 1997 (a) $0 $0 $1,944,624
- 9% notes receivable due from limited
partnerships, receivable in annual install-
ments through December, 2001 (b) 205,081 223,623 309,437
Less current portion - net of interest (110,969) (93,737) (85,815)
--------- -------- --------
TOTAL $94,112 $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. 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
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.
<PAGE>
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 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. As the Company's ability to recover this
investment was jeopardized by such proposed settlement, the Company established
reserves to cover losses that may result from the possible uncollectibility of
the loans. The Company settled the foregoing litigation during Fiscal 1999. As a
result of the settlement, the Company will be unable to recover combined loans
of $2.5 million to the project and adjacent steam host and relinquished its
interest in the greenhouse and such plant. The Company had established reserves
during the year ended March 31, 1998 to cover such losses and wrote-off the
combined loan during the quarter ended December 31, 1998.
F-12
(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. The five facilities were sold in December 1998.
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.
<PAGE>
BESICORP GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANICIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
<S>
The investment in partnerships was comprised of the following at December 31, 1998, March 31, 1998 and 1997:
<C> <C> <C>
December 31, March 31, March 31,
1998 1998 1997
---- ---- ----
(Unaudited)
Capital contributions and investments $2,976,813 $2,976,813 $2,976,813
Partnership distributions (162,611,424) (28,151,213) (20,617,776)
Recognized share of income (losses) 164,078,844 25,140,530 15,081,681
----------- ---------- ----------
$4,444,233 $(33,870) $(2,559,282)
========== ========== ==========
</TABLE>
F-13
The financial position and results of operations for the partnerships, based on
the financial statements, as at September 31, 1998 (Unaudited) and for the nine
months then ended and at December 31, 1997 and 1996 and for the years then ended
were as follows:
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
September 30, December 31, December 31,
1998 1997 1996
(Unaudited)
Total Partnerships:
Assets $48,991,660 $520,329,768 $535,270,470
Plant and equipment 27,500,000 391,492,464 400,616,762
Secured debt 0 508,289,568 516,799,694
Partners' equity (deficit) 46,007,334 (17,572,222) (22,332,572)
Revenues 99,773,839 149,469,661 150,595,750
Income (loss) 311,702,871 20,238,179 15,701,763
Company's Share:
Partners' equity (deficit) 21,771,178 (7,354,035) (9,789,803)
Income 146,359,017 10,113,516 8,393,340
</TABLE>
The income from partnerships, which has been recorded on the financial
statements for the nine months ended December 31, 1998 in the amount of
$138,938,314 has been recognized on partnerships where income has exceeded prior
unrecognized accumulated losses of $3,110,466. The recorded income also reflects
the write-down of impaired value of the investments of $4,306,848 in two
partnerships. The amounts reported above, as at September 30, 1998 and for the
nine months then ended, include adjustments made to the partnerships= financial
statements to reflect the gross amounts received by the partnerships from the
sale of the plants during December 1998.
The following schedule contains summarized financial information for each of the
partnerships as at September 30, 1998 and for the nine months then ended
(unaudited):
F-14
<PAGE>
<TABLE>
<CAPTION>
<S>
Besicorp Group Inc.
Partnership Summary Financial Information
As At September 30, 1998 and For the Nine Months Then Ended
<C> <C> <C> <C>
Kamine/Besicorp Kamine/Besicorp Kamine/Besicorp Kamine/Besicorp
Carthage L.P. So. Glens Falls L.P. Natural Dam L.P. Beaver Falls L.P.
Cash $ 721,489 $ 7,828,535 $ 368,153 $ 11,192,421
Other Current Assets 74,061 186,663 22,649 191,849
Plant & Equipment 3,200,000 4,400,000 4,400,000 7,500,000
________________________________________________________________________
Total Assets $ 3,995,550 $ 12,415,198 $ 4,790,802 $ 18,884,270
========================================================================
Current Liabilities $ 50,112 $ 587,673 $ 245,200 $ 2,061,368
Long Term Liabilities - - - -
________________________________________________________________________
Total Liabilities 50,112 587,673 245,200 2,061,368
________________________________________________________________________
Total Equity 3,945,438 11,827,525 4,545,602 16,822,902
________________________________________________________________________
Total Liabilities and Equity $ 3,995,550 $ 12,415,198 $ 4,790,802 $ 18,884,270
========================================================================
Revenues $ 11,698,106 $ 12,895,084 $ 11,128,522 $ 22,260,072
Expenses 9,727,417 10,898,588 8,531,347 15,765,589
Other Income 54,719,117 58,814,238 46,813,975 59,372,792
_________________________________________________________________________
Net Income $ 56,689,806 $ 60,810,734 $ 49,411,150 $ 65,867,275
=========================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>
Besicorp Group Inc.
Partnership Summary Financial Information
As At September 30, 1998 and For the Nine Months Then Ended
<C> <C> <C>
Kamine/Besicorp Kamine/Besicorp
Syracuse L.P. GlenCarthage L.P. Total
Cash $ 636,240 $ 4,475 $ 20,751,313
Other Current Assets 265,125 - 740,347
Property, Plant & Equipment 8,000,000 - 27,500,000
_______________________________________________________
Total Assets 8,901,365 $ 4,475 $ 48,991,660
=======================================================
Current Liabilities $ 37,973 $ 2,000 2,984,326
Long Term Liabilities - - -
_______________________________________________________
Total Liabilities 37,973 2,000 2,984,326
_______________________________________________________
Total Equity 8,863,392 2,475 46,007,334
_______________________________________________________
Total Liabilities and Equity $ 8,901,365 $ 4,475 48,991,660
=======================================================
Revenues $ 19,593,713 $ 22,198,342 $ 99,773,839
Expenses 16,218,741 10,646,876 71,788,558
Other Income 63,997,468 - 283,717,590
_______________________________________________________
Net Income $ 67,372,440 $ 11,551,466 $ 311,702,871
=======================================================
</TABLE>
F-15
<PAGE>
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. As of December 31, 1998, such pledges have been released
as a result of the repayment of all partnership debt.
The amounts pertaining to one partnership, which was 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 (AIPP's), including the five contracts held by the Compan'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
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 MRA was consummated on June
30, 1998.
<PAGE>
The Company was a party to a Master Restructuring Agreement (AMRA@) which was
entered into on July 10, 1997 between Niagara Mohawk Power Corporation ("Niagara
Mohawk") and 16 independent power producers ("IPPs") holding 29 Power Purchase
Agreements ("PPAs") including the Company's five PPAs. On June 30, 1998, the MRA
was consummated. Pursuant to the terms of the MRA, the Company's five PPAs,
which had provided a total of 323 Megawatts of capacity and energy to Niagara
Mohawk, were terminated. As a result of the MRA and related transactions, and
the operations of the project partnerships, the Company has received through
December 31, 1998 (i) 4,615,770 shares of Niagara Mohawk common stock (the
"Niagara Mohawk Common Stock") and (ii) net cash of approximately $70 million
(including the Company's share of the net proceeds from the sale of the power
plants of approximately $11 million), of which approximately $4 million
continues to be retained at the partnership level primarily in regard to ongoing
obligations of the projects. The closing price of the Niagara Mohawk Common
Stock on June 30, 1998 was $14.94 per share for an aggregate value of
approximately $69 million. In accordance with SFAS No. 115, AAccounting for
Certain Investments in Debt and Equity Securities,@ this investment qualifies as
trading securities, which are reported at fair value, with changes in fair value
included in the statement of operations. The value of the investment in Niagara
Mohawk Common Stock of $22,161,716 reflected on the balance sheet at December
31, 1998 reflects 1,374,370 shares at a market price per share of $16.13.
Through February 8, 1999, the Company had sold 3,391,500 shares of Niagara
Mohawk Common Stock, realizing net proceeds of approximately $52.7 million for a
gain of approximately $2.2 million. The remaining shares of Niagara Mohawk
Common Stock of 1,224,270, based on the closing price of that date of $15.06,
have an aggregate value of approximately $18.4 million. Unrealized gains on the
shares of Niagara Mohawk Common Stock were $1,632,064 at December 31, 1998 and
realized gains for the three and nine months ended December 31, 1998 were
$1,635,565 and $1,964,734, respectively. The net proceeds received by the
Company as a result of the MRA reflect the fact that a substantial portion of
the gross proceeds received by the partnerships from Niagara Mohawk was used to
terminate most obligations with third parties, including lenders, lessors, fuel
suppliers and transporters, thermal hosts, and others. The Company's share of
these termination payments was approximately $290 million.
F-16
With the exception of development fees of $1.8 million received from the
Kamine/Besicorp Beaver Falls L.P. ("Beaver Falls"), which were recognized as
revenue during the first quarter of Fiscal 1999, development fees of $.9 million
received from the Kamine/Besicorp Syracuse L.P. ("Syracuse"), which were
recorded as a receivable from the project in Fiscal 1998, and certain cost
reimbursements totaling $800,000, the MRA, operating results, and plant sale
proceeds were accounted for as partnership distributions.
During the three and nine months ended December 31, 1998, the Company recorded
income, which is non-recurring, of $2,233,382 and $138,938,314, respectively,
predominantly as a result of the MRA and, to a minimal extent, the operating
results of the project partnerships. These amounts give effect to write-downs,
net to the Company of approximately $84 million, recorded to reflect the
proceeds received from the sale of the Beaver Falls and Syracuse power plants.
With respect to the Kamine/Besicorp Carthage L.P. ("Carthage"), Kamine/Besicorp
South Glens Falls L.P. ("South Glens Falls"), and Kamine/Besicorp Natural Dam
L.P. ("Natural Dam") which held leasehold interests in three power plants, the
income amounts reflect the expensing of all costs associated with the
termination of those long-term leases reduced by the proceeds received upon the
disposition of the facilities. The Company's share of the cost of the lease
terminations was approximately $77 million. Since the power plant sales were
consummated by the end of calendar 1998, the Company does not expect that there
will be further significant adjustments to the recorded income.
On December 7, 1998, the Company announced it had consummated the sales of the
three leased power plants - Carthage, Natural Dam, and South Glens Falls. The
Company holds partnership interests of 50 per cent in each of the projects. The
Company's share of the net proceeds from these sales, which was received on
December 29, 1998, was approximately $1.4 million, $1.9 million, and $1.9
million, respectively.
On December 14, 1998, the Company announced it had consummated the sale of the
Syracuse power plant. The Company holds a partnership interest of 35.715 per
cent in the project. The Company's share of the net proceeds from this sale,
which was received on December 29, 1998, was approximately $2.3 million.
<PAGE>
On December 22, 1998, the Company announced it had consummated the sale of the
Beaver Falls power plant. The Company holds a partnership interest of 50.2 per
cent in the project. The Company's share of the net proceeds from this sale,
which was received on December 29, 1998, was approximately $3.2 million.
F-17
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as at March 31, 1998 and 1997 were
comprised of the following:
1998 1997
---- ----
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
========= =========
NOTE 7 - LONG-TERM DEBT
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 31, March 31, March 31,
Long-term debt consists of the following: 1998 1998 1997
---- ---- ----
(Unaudited)
- Installment loans at 0% to 10.54% maturing through
September 2000 (a) $0 $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) 0 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) 0 315,455 331,739
- 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) 0 288,646 311,667
- Obligation on SunWize asset acquisition (e) 135,308 147,021 166,899
- Working capital loan (d) 0 3,000,000 3,000,000
- --------- ---------
Total 135,308 3,877,441 3,950,081
Less: Current maturities 11,700 111,367 115,598
------ ------- -------
$123,608 $3,766,074 $3,834,483
======== ========= =========
</TABLE>
<PAGE>
Long-term debt maturities at March 31, 1998, including current maturities, are
as follows:
2000 $111,367
2001 101,180
2002 89,977
2003 285,666
2004 49,252
Thereafter 3,239,999
_________
$3,877,441
=========
F-18
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. This loan was repaid in full in
July 1998, subsequent to the consummation of the MRA.
e. Obligation payable on the acquisition of SunWize assets, payable as a
percentage of future gross margins of the SunWize division (see Note 14).
$11,700 was paid in 1999. $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.
With the exception of the obligation payable on the acquisition of SunWize
assets, which will be assumed by Newco, all long-term debt was paid off during
Fiscal 1999.
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 for the years
ended March 31,
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
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>
F-19
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 as at March 31:
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
1998 1997 1996
---- ---- ----
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>
The difference between the effective rate of the provision (credit) for income
taxes and the statutory rate for Federal income taxes is summarized as follows
for the years ended March 31,:
<PAGE>
<TABLE>
<CAPTION>
<S>
BESICORP GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANICIAL STATEMENTS
<C> <C> <C>
1998 1997 1996
____ ____ ____
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.
F-20
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
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.
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.
Date of Grant Number of Shares Exercise Price
------------- ---------------- --------------
April 26, 1988 7,000 $5.00
August 8, 1988 2,500 6.25
-----
TOTAL STOCK OPTIONS 9,500
=====
F-21
<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.
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.
F-21
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.
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.
<PAGE>
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 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:
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
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.
F-22
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.
H. With respect to the granted options, including restricted stock options,
warrants and other rights to acquire Besicorp Common Stock and issued restricted
shares of Besicorp Common Stock, the Board of Directors of the Company adjusted,
effective as of January 1, 1999, the provisions of instruments (the
"Adjustment") governing 52,240 rights and 21,245 restricted stock grants,
including 37,000 rights and 19,200 restricted stock grants held by executive
officers and directors. As a result of the Adjustment, all of the rights are
exercisable and vested, all of the shares of restricted stock are no longer
restricted and any shares issuable upon the exercise of restricted stock options
will not be subject to any restrictions other than the restrictions imposed by
securities laws.
F-23
<PAGE>
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, Michael F. Zinn, representing primarily the
balance due on $186,000 of legal fees which the President had agreed to
reimburse to the Company, subject to a determination as to whether such
reimbursement is required by the Business Corporation Law of the State of New
York (the "BCL"). These fees were incurred in connection with a legal proceeding
(the "Proceeding"). As of September 30, 1998, Mr. Zinn had reimbursed the
Company $45,000 (the "Paid Amount"). The $141,000 balance (the "Balance") did
not bear interest. In January 1999, after the receipt of a report from
independent legal counsel addressing the propriety under the BCL and the
Company's by-laws of indemnifying Mr. Zinn, a committee of the Board (composed
of independent directors) determined that Mr. Zinn was entitled to full
indemnification with respect to the Proceeding and (i) authorized the repayment
of a fine of $36,673 previously paid by Mr. Zinn and the refund of the Paid
Amount; (ii) acknowledged that Mr. Zinn had no further obligations with respect
to the Balance; and (iii) authorized the reimbursement of Mr. Zinn for the legal
fees and expenses (approximately $39,180) incurred by certain third parties in
connection with the Proceeding and which were paid by him.
F-23
NOTE 12 - SUPPLEMENTARY INCOME STATEMENT INFORMATION
Year Ended
1998 1997 1996
---- ---- ----
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
(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.
<PAGE>
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.
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 opinion that meritorious
defenses to the suit have been asserted and that the outcome of the action will
have no material adverse impact on the Company.
The Company, through partnership interests, was involved in the construction of
a cogeneration facility and an associated greenhouse. As a result of the legal
proceedings arising out of these facilities, the Company relinquished its
interest in such facilities and wrote off $2.5 million in loans (see Note 4(a).
F-24
See "Business of the Company - Legal Proceedings" for recent developments
regarding legal proceedings.
<PAGE>
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.
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, which were written off in the quarter ended December 31, 1998,
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
Company's investment in partnerships because of the lack of quoted market prices
and the inability to estimate fair value without incurring excessive costs.
F-25
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 nine months ended December 31, 1998 and 1997 and for the
years ended March 31, 1998, 1997 and 1996 is as follows:
F-26
<PAGE>
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C>
Nine Months Ended Project Product
December 31, 1998 (Unaudited) Segment Segment Eliminations Total
- ----------------- ------- ------- ------------ -----
Net revenues $146,239,294 $3,646,224 $149,885,518
Net income (loss) 90,961,135 (1,397,823) 89,563,312
Identifiable assets 300,716,924 2,532,375 $(160,200,473) 143,048,826
Capital expenditures 154,015 174,196 328,211
Depreciation and amortization 144,450 67,038 211,488
Nine Months Ended Project Product
December 31, 1997 (Unaudited) Segment Segment Eliminations Total
- ----------------- ------- ------- ------------ -----
Net revenues $8,652,649 $3,254,976 $11,907,625
Net income (loss) 3,282,348 (1,760,023) 1,522,325
Identifiable assets 42,469,708 3,574,248 $(34,514,124) 11,529,832
Capital expenditures 54,718 274,311 329,029
Depreciation and amortization 117,773 49,082 216,855
For the Year Ended Project Product
March 31, 1998 Segment Segment Eliminations Total
- -------------- ------- ------- ------------ -----
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
For the Year Ended Project Product
March 31, 1997 Segment Segment Eliminations Total
- -------------- ------- ------- ------------ -----
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
For the Year Ended Project Product
March 31,1996 Segment Segment Eliminations Total
- ------------------ ------- ------- ----------- -----
Net revenues $4,046,089 $4,033,430 $8,079,519
Net 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
F-26
</TABLE>
<PAGE>
KPMG Peat Marwick LLP
New Jersey Headquarters
150 John F. Kennedy Parkway
Short Hills, New Jersey 07078
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.
/s/ KPMG Peat Marwick LLP
February 24, 1998
F-27
<PAGE>
KAMINE/BESICORP CARTHAGE L.P.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
<S>
<C> <C>
Assets 1997 1996
---- ----
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>
F-28
<PAGE>
KAMINE/BESICORP CARTHAGE L.P.
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
1997 1996 1995
---- ---- ----
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
========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
KAMINE/BESICORP CARTHAGE L.P.
Statements of Partners' Equity (Deficiency)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
General Limited
partners partners Total
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
========= =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
KAMINE/BESICORP CARTHAGE L.P.
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
1997 1996 1995
---- ---- ----
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>
F-31
<PAGE>
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.
<PAGE>
(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
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.
F-32
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
<PAGE>
(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.
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.
F-33
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
<PAGE>
(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
allocated to such partner, any increase in such partner's share of the
liabilities of the Partnership and the amount of partnership liabilities
assumed by the partner; and (b) decreased by the amount of cash and the
fair market value of any partnership assets distributed to such partner,
the amount of losses allocated to such partner, any decrease in such
partner's share of liabilities of the Partnership and the amount of any
partner liabilities assumed by the Partnership (subject to certain
provisions).
Profits and losses for any calendar year or portion of such year 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.
<PAGE>
(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.
F-34
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.
<PAGE>
(4), Continued
At December 31, 1997, the future minimum annual lease payments for the
capital lease obligation are as follows:
1998 $ 7,651,542
1999 7,651,542
2000 7,651,542
2001 7,651,542
2002 7,651,542
Thereafter 74,821,364
-----------
113,079,074
Less interest 63,857,598
Future minimum annual
lease payments $ 49,221,476
============
(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.
F-35
The total amounts of long-term debt due under the Tranche B Term Loan
during each of the next five years are as follows:
Year ending December 31:
1998 $ 230,228
1999 255,224
2000 282,090
2001 313,562
2002 347,606
==========
<PAGE>
(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 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.
F-36
<PAGE>
(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 $1,308,000
per year plus $22.50 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 $81 to $99 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 $514,621 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.
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.
<PAGE>
(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.
F-37
(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%.
<PAGE>
(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 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.
F-38
<PAGE>
KPMG Peat Marwick LLP
New Jersey Headquarters
150 John F. Kennedy Parkway
Short Hills, New Jersey 07078
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.
/s/ KPMG Peat Marwick LLP
February 24, 1998
F-39
<PAGE>
KAMINE/BESICORP SOUTH GLENS FALLS L.P.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
<S>
<C> <C>
Assets 1997 1996
---- ----
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
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE>
KAMINE/BESICORP SOUTH GLENS FALLS L.P.
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
1997 1996 1995
---- ---- ----
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
========== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
KAMINE/BESICORP SOUTH GLENS FALLS L.P.
Statements of Partners' Equity (Deficiency)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
General Limited
partners partners Total
-------- -------- -----
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
========= ========= ========
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE>
KAMINE/BESICORP SOUTH GLENS FALLS L.P.
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
1997 1996 1995
---- ---- ----
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 B
cash paid during the year for interest $ 6,381,843 6,606,816 6,960,374
========= ============= =========
Noncash investing and financing activities B capital
lease repricing adjustment (note 4) $ - - 547,739
========== ============= ==========
See accompanying notes to financial statements.
</TABLE>
F-43
<PAGE>
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.
<PAGE>
(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.
F-44
Revenue Recognition
Revenues are recognized as earned.
Income Taxes
Income taxes have not been provided, since the Partnership is not a
taxable entity. The partners report their respective share of the
Partnership's taxable income or loss on their respective income tax
returns.
Fuel Sales
Sales of fuel and transportation associated with excess natural gas
pipeline capacity purchased by the Partnership to support peak fuel
requirements have been treated as a reduction to fuel expense. Total
sales related to disposition of such excess capacity in 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 B 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
<PAGE>
(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.
F-45
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
<PAGE>
(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.
<PAGE>
(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.
F-46
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 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.
<PAGE>
(4), Continued
At December 31, 1997, the future minimum annual lease payments for the
capital lease obligation are as follows:
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
==========
(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.
F-47
The total amounts of long-term debt due under the Tranche B Term Loan
during each of the next five years are as follows:
Year ending December 31:
1998 $ 225,684
1999 250,187
2000 276,522
2001 307,373
2002 340,746
=======
<PAGE>
(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.
F-48
<PAGE>
(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 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 $1,308,000
per year plus $22.50 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 $81 to $99 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 $514,621 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.
<PAGE>
(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.
F-49
(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 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%.
<PAGE>
(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.
F-50
<PAGE>
KPMG Peat Marwick LLP
New Jersey Headquarters
150 John F.Kennedy Parkway
Short Hills, New Jersey 07078
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.
/s/ KPMG Peat Marwick LLP
May 12, 1998
F-51
<PAGE>
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
<S>
<C> <C>
Assets 1997 1996
---- ----
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
========= =========
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE>
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
1997 1996 1995
---- ---- ----
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 income - interest - - 673
---------- ----------- ----------
Net income $ 1,588,644 1,562,122 3,243,954
========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
F-53
<PAGE>
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
Statements of Partners' Deficiency
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
1997 1996 1995
---- ---- ----
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)
=========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE>
KAMINE/BESICORP GLENCARTHAGE PARTNERSHIP
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
1997 1996 1995
---- ---- ----
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 B 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.
F-55
</TABLE>
<PAGE>
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.
<PAGE>
(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.
F-56
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:
Year ending December 31:
1998 $ 285,270
1999 323,098
2000 365,992
2001 414,268
2002 469,190
=======
<PAGE>
(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.
F-57
<PAGE>
(6) Developers' Cash Flow
The general partners have acquired an 8.5% cash flow fee from operations
in addition to their cash flow 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
F-58
<PAGE>
KPMG Peat Marwick LLP
New Jersey Headquarters
150 John F. Kennedy Parkway
Short Hills, New Jersey 07078
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.
/s/ KPMG Peat Marwick LLP
February 24, 1998
F-59
<PAGE>
KAMINE/BESICORP NATURAL DAM L.P.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
<S>
<C> <C>
Assets 1997 1996
---- ----
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>
F-60
<PAGE>
KAMINE/BESICORP NATURAL DAM L.P.
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
1997 1996 1995
---- ---- ----
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)
========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-61
<PAGE>
KAMINE/BESICORP NATURAL DAM L.P.
Statements of Partners' Deficiency
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
General Limited
partners partners Total
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>
F-62
<PAGE>
KAMINE/BESICORP NATURAL DAM L.P.
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
1997 1996 1995
---- ---- ----
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 B capital
lease repricing adjustment (note 4) $ - - 727,594
========= ========= =======
See accompanying notes to financial statements.
</TABLE>
F-63
<PAGE>
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.
<PAGE>
(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
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.
F-64
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 B 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
<PAGE>
(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.
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.
F-65
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
<PAGE>
(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 Partnership's
liabilities assumed by the partner; and (b) decreased by the amount of
cash and the fair market value of any of the Partnership's assets
distributed to such partner, the amount of losses allocated to such
partner, and any decrease in such partner's share of the liabilities of
the Partnership and the amount of any partner liabilities assumed by the
Partnership (subject to certain provisions).
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.
<PAGE>
(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.
F-66
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.
<PAGE>
(4), Continued
At December 31, 1997, the future minimum annual lease payments for the
capital lease obligation are as follows:
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
==========
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.
F-67
<PAGE>
(5), Continued
The total amounts of long-term debt due during each of the next five
years are as follows:
Year ending December 31:
1998 $ 530,502
1999 595,892
2000 668,457
2001 309,174
2002 342,742
=======
(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.
(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.
<PAGE>
(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.
F-68
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 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 $623,900 plus $90 to $110 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
$1,484,256 per year plus $750,108 to $916,798 per year for major facility
overhauls, both amounts subject to escalation for PPI.
<PAGE>
(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.
F-69
(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.
F-70
<PAGE>
KPMG Peat Marwick LLP
New Jersey Headquarters
150 John F. Kennedy Parkway
Short Hills, New Jersey 07078
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.
/s/ KPMG Peat Marwick LLP
February 24, 1998
F-71
<PAGE>
KAMINE/BESICORP SYRACUSE L.P.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
<S>
<C> <C>
Assets 1997 1996
---- ----
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
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-72
<PAGE>
KAMINE/BESICORP SYRACUSE L.P.
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
1997 1996 1995
---- ---- ----
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)
========== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-73
<PAGE>
KAMINE/BESICORP SYRACUSE L.P.
Statements of Partners' Deficiency
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
General Limited
partners partners Total
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)
========= ============ =========
</TABLE>
See accompanying notes to financial statements.
F-74
<PAGE>
KAMINE/BESICORP SYRACUSE L.P.
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
1997 1996 1995
---- ---- ----
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
========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-75
<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
Revenues are recognized as earned.
F-76
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.
<PAGE>
(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.
F-77
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 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
<PAGE>
(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.
F-78
<PAGE>
(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 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
<PAGE>
(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.
F-79
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 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.
<PAGE>
(4), Continued
The total scheduled amounts of loans payable due during each of the next
five years are as follows:
1998 $ 36,338,526
1999 7,818,000
2000 9,111,000
2001 9,111,000
2002 10,533,300
==========
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.
F-80
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
<PAGE>
(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 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 $200,000 per year plus $423,900 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 $1,108,180 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.
<PAGE>
(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.
F-81
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.
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.
<PAGE>
(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.
F-82
<PAGE>
KPMG Peat Marwick LLP
New Jersey Headquarters
150 John F. Kennedy Parkway
Short Hills, New Jersey 07078
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.
/s/ KPMG Peat Marwick LLP
February 24, 1998
F-83
<PAGE>
KAMINE/BESICORP BEAVER FALLS L.P.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
<S>
<C> <C>
Assets 1997 1996
---- ----
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 amortiza-
tion 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
=============== ===============
</TABLE>
See accompanying notes to financial statements.
F-84
<PAGE>
KAMINE/BESICORP BEAVER FALLS L.P.
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
1997 1996 1995
---- ---- ----
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)
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-85
<PAGE>
KAMINE/BESICORP BEAVER FALLS L.P.
Statements of Partners' Equity (Deficiency)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
General Limited
partners partner Total
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
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-86
<PAGE>
KAMINE/BESICORP BEAVER FALLS L.P.
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
1997 1996 1995
---- ---- ----
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>
F-87
<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.
<PAGE>
(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
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.
F-88
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.
<PAGE>
(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.
F-89
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
<PAGE>
(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
<PAGE>
(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.
F-90
(3) Plant and Equipment
The Facility was constructed under the terms of a turnkey fixed-price
Engineering, Procurement and Construction Contract by Ansaldo North
America, Inc. (Ansaldo).
Plant and equipment at December 31, 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.
<PAGE>
(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.
F-91
The Partnership entered into four interest rate protection agreements
with Deutsche Bank Capital Corporation. The first provided that the
Partnership would be reimbursed for interest paid if LIBOR exceeded 7.0%
based on an agreed-upon estimated construction loan drawdown schedule
which covered the expected construction period. This instrument expired
on June 30, 1995. The second agreement fixes the term loan interest rate
from July 1, 1995 through the entire scheduled term of the loan at a
range of 8.95% to 10.77%. The third and fourth agreements provide that
the Partnership will be reimbursed for interest paid on subordinated debt
to the extent LIBOR exceeds 8.0% during the scheduled term of the
subordinated debt.
<PAGE>
(4), Continued
The total scheduled amounts of loans payable due during each of the next
five years are as follows:
1998 $ 16,983,419
1999 11,862,500
2000 12,012,500
2001 12,887,500
2002 14,406,250
==========
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.
<PAGE>
(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.
F-92
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 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
$200,000 per year plus $423,900 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 $1,164,390 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 $779,291 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.
<PAGE>
(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.
F-93
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 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.
F-94
<PAGE>
ANNEX A-1
AGREEMENT AND PLAN OF MERGER
DATED NOVEMBER 23, 1998
BY AND AMONG
BESICORP GROUP INC.
BGI ACQUISITION CORP.
AND
BGI ACQUISITION LLC
<PAGE>
<TABLE>
<CAPTION>
<S>
Page
TABLE OF CONTENTS
Page
<C>
ARTICLE I
THE MERGER...............................................................................................A-5
1.1 The Merger...............................................................................A-5
1.2 Consummation of the Merger...............................................................A-5
1.3 Effects of the Merger....................................................................A-5
1.4 Certificate of Incorporation; Bylaws.....................................................A-5
1.5 Directors and Officers...................................................................A-6
1.6 Time and Place of Closing................................................................A-6
1.7 Further Assurances.......................................................................A-6
ARTICLE II
CONVERSION AND EXCHANGE OF SHARES........................................................................A-6
2.1 Conversion of Shares.....................................................................A-6
2.2 The Additional Amount....................................................................A-6
2.3 Exchange Procedures......................................................................A-8
2.4 Adjustment of Merger Consideration.......................................................A-9
2.5 Options, Warrants and Restricted Shares..................................................A-9
2.6 Escrow Agreement.........................................................................A-9
ARTICLE III
PRECLOSING TRANSACTIONS..................................................................................A-9
3.1 General..................................................................................A-9
3.2 The Distribution.........................................................................A-9
3.3 The Power Facility Sales.................................................................A-10
3.4 Further Assurances.......................................................................A-10
ARTICLE IV
REPRESENTATIONS AND WARRANTIES...........................................................................A-11
4.1 General Statement........................................................................A-11
4.2 Representations and Warranties of the Company............................................A-11
4.2.1 Organization and Authority....................................................A-11
4.2.2 Authority Relative to this Agreement and Related Matters......................A-11
4.2.3 Required Filings..............................................................A-12
4.2.4 No Conflicts..................................................................A-12
4.2.5 Capitalization................................................................A-12
4.2.6 Subsidiaries..................................................................A-13
4.2.7 SEC Documents.................................................................A-13
4.2.8 Financial Statements..........................................................A-13
4.2.9 Liabilities...................................................................A-13
4.2.10 Absence of Changes or Events..................................................A-14
A-2
<PAGE>
Page
4.2.11 Status of Distribution........................................................A-14
4.2.12 Ownership of Properties.......................................................A-14
4.2.13 Tax Matters Definitions.......................................................A-15
4.2.14 Returns.......................................................................A-15
4.2.15 Tax Liabilities...............................................................A-15
4.2.16 Issues with Taxing Authorities................................................A-15
4.2.17 Miscellaneous Tax Matters.....................................................A-15
4.2.18 Permits.......................................................................A-16
4.2.19 Contracts.....................................................................A-16
4.2.20 Partnership Contracts.........................................................A-17
4.2.21 ERISA Matters.................................................................A-17
4.2.22 Labor Relations...............................................................A-17
4.2.23 Absence of Litigation.........................................................A-18
4.2.24 Injunctions; Judgments........................................................A-18
4.2.25 Compliance with Law...........................................................A-18
4.2.26 Environmental Matters.........................................................A-18
4.2.27 Owned Real Estate.............................................................A-19
4.2.28 Leased Premises...............................................................A-19
4.2.29 Intellectual Property.........................................................A-19
4.2.30 Brokers.......................................................................A-19
4.2.31 Fairness Opinion..............................................................A-19
4.2.32 Form 10 Registration, Proxy Statement and Information Statement...............A-19
4.2.33 Full Disclosure...............................................................A-20
4.3 Representations and Warranties of Parent and Purchaser...................................A-20
4.3.1 Organization and Authority....................................................A-20
4.3.2 Authority Relative to this Agreement..........................................A-20
4.3.3 Required Filings..............................................................A-20
4.3.4 No Conflicts..................................................................A-20
4.3.5 Capitalization................................................................A-21
4.3.6 Investment Intent.............................................................A-21
4.3.7 Financing.....................................................................A-21
4.3.8 Proxy Statement...............................................................A-21
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER...................................................................A-21
5.1 Obligations of Each of the Parties.......................................................A-21
5.2 Access...................................................................................A-21
5.3 The Company's Obligations................................................................A-22
5.4 Proxy Statement; Other Regulatory Matters................................................A-23
5.5 Acquisition Proposals....................................................................A-24
5.6 Board Action.............................................................................A-25
5.7 Indemnification and Insurance............................................................A-25
5.8 Surviving Corporation....................................................................A-26
5.9 Parent's Financing.......................................................................A-26
5.10 Liabilities..............................................................................A-26
A-3
<PAGE>
5.11 Other Company Covenants..................................................................A-26
5.12 Parent Covenant..........................................................................A-26
ARTICLE VI
CONDITIONS TO CLOSING; CLOSING DELIVERIES; BASE AMOUNT...................................................A-26
6.1 Conditions to Each Party's Obligations...................................................A-26
6.2 Conditions to the Company's Obligations..................................................A-26
6.3 Conditions to Parent's and Purchaser's Obligations.......................................A-27
6.4 Closing Deliveries.......................................................................A-28
ARTICLE VII
TERMINATION/EFFECT OF TERMINATION........................................................................A-28
7.1 Right to Terminate.......................................................................A-28
7.2 Certain Effects of Termination...........................................................A-29
7.3 Remedies.................................................................................A-30
7.4 Right to Damages; Expense Reimbursement..................................................A-30
ARTICLE VIII
MISCELLANEOUS............................................................................................A-31
8.1 Survival of Representations, Warranties and Agreements...................................A-31
8.2 Amendment................................................................................A-31
8.3 Publicity................................................................................A-31
8.4 Notices..................................................................................A-32
8.5 Expenses; Transfer Taxes.................................................................A-32
8.6 Entire Agreement.........................................................................A-32
8.7 Non-Waiver...............................................................................A-33
8.8 Counterparts.............................................................................A-33
8.9 Severability.............................................................................A-33
8.10 Applicable Law...........................................................................A-33
8.11 Binding Effect; Benefit..................................................................A-33
8.12 Assignability............................................................................A-33
8.13 Governmental Reporting...................................................................A-33
8.14 Defined Terms............................................................................A-33
8.15 Headings.................................................................................A-35
8.16 Interpretation...........................................................................A-35
</TABLE>
A-4
<PAGE>
This AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into
this 23 day of November, 1998, by and among BGI Acquisition LLC, a Wyoming
limited liability company ("Parent"), BGI Acquisition Corp., a New York
corporation ("Purchaser"), and Besicorp Group Inc., a New York corporation
formed under the name Bio-Energy Systems Inc. (the "Company").
RECITALS:
A. The respective boards of directors of Purchaser and the Company and
the board of managers of Parent have each adopted a plan of merger as set forth
in this Agreement pursuant to which Purchaser will merge with and into the
Company on the terms and subject to the conditions set forth in this Agreement
(the "Merger") and the New York Business Corporation Law (the "NYBCL").
B. It is a condition to the consummation of the Merger by Purchaser
that, prior to the Merger, the Company distribute to its shareholders all of the
outstanding capital stock of Besicorp Ltd., a New York corporation ("BL") to
which the Company shall have transferred certain of its assets and liabilities,
and subsidiaries, as described herein.
C. Parent, Purchaser and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger.
D. It is a condition to the willingness of Parent and Purchaser to
enter into this Agreement, and to Parent and Purchaser obligations hereunder
that BL enter into the Indemnification Agreement and the Escrow Agreement and
that the Escrow Agreement be funded as herein provided.
E. Capitalized terms used in this Agreement have the meaning identified
in Section 8.14 of this Agreement.
A G R E E M E N T S
Therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. On the terms and subject to the conditions set forth in
this Agreement, at the Effective Time (as defined herein, and a cross-reference
to defined terms is set forth at Section 8.14 to this Agreement), in accordance
with this Agreement and the NYBCL, Purchaser shall merge with and into the
Company, the separate existence of Purchaser shall cease and the Company shall
continue as the surviving corporation. The Company, in its capacity as the
corporation surviving the Merger, is sometimes referred to herein as the
"Surviving Corporation," and Purchaser and the Company are sometimes referred to
collectively herein as the "Constituent Corporations."
1.2 Consummation of the Merger. In order to effectuate the Merger, on
the Closing Date (as herein defined), the parties hereto will cause a
certificate of merger (the "Certificate of Merger") to be filed with the
Secretary of State of the State of New York and such counties within the state
of New York as required by Section 904 of the NYBCL, in such form as required
by, and executed in accordance with the NYBCL.
<PAGE>
The Merger shall be effective as of the time of filing of the Certificate
of Merger or if later, the time specified in the Certificate of Merger (the
"Effective Time") in accordance with Section 906 of the NYBCL.
1.3 Effects of the Merger. At and after the Effective Time, the Merger
shall have the effects provided in this Agreement and as set forth in Section
906 of the NYBCL.
1.4 Certificate of Incorporation; Bylaws. At and after the Effective
Time, the Certificate of Incorporation and By-Laws of the Company, as in effect
immediately prior to the Effective Time, shall be adopted as the Certificate of
Incorporation and By-Laws of the Surviving Corporation, and shall thereafter
continue in effect until amended as provided therein and in accordance with the
NYBCL.
A-5
1.5 Directors and Officers. At and after the Effective Time, the
directors and officers of Purchaser holding office immediately prior to the
Effective Time shall be the directors and officers of the Surviving Corporation,
until their respective successors shall have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's Certificate of Incorporation and By-Laws.
1.6 Time and Place of Closing. Subject to the provisions of Article VI
and Section 7.1, the transactions contemplated by this Agreement shall be
consummated (the "Closing") at 10:00 a.m., prevailing business time, at the
offices of Robinson Brog Leinwand Greene Genovese & Gluck P.C., 1345 Avenue of
the Americas, New York, NY on the day which is three (3) business days after the
first date on which each of the conditions to Closing set forth in Article VI
hereof shall have been satisfied or waived (and continue to be satisfied or
waived), or on such other date, or at such other place, as shall be agreed upon
by the parties hereto, subject to Section 7.1.2(a). The date on which the
Closing shall occur in accordance with the preceding sentence is referred to in
this Agreement as the "Closing Date."
1.7 Further Assurances. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts or things are necessary,
desirable or proper (i) to vest, perfect or confirm, of record or otherwise, in
the Surviving Corporation its right, title and interest in, to or under any of
the rights, privileges, powers, franchises, properties or assets of either of
the Company or Purchaser, or (ii) otherwise to carry out the purposes of this
Agreement, the Surviving Corporation and its proper officers and directors or
their designees shall be authorized to execute and deliver, in the name and on
behalf of either the Company or Purchaser, all such deeds, bills of sale,
assignments and assurances and do, in the name and on behalf of such
corporations, all such other acts and things as may be necessary, desirable or
proper to vest, perfect or confirm the Surviving Corporation's right, title and
interest in, to and under any of the rights, privileges, powers, franchises,
properties or assets of such corporations and otherwise to carry out the
purposes of this Agreement.
ARTICLE II
CONVERSION AND EXCHANGE OF SHARES
2.1 Conversion of Shares. At the Effective Time, by virtue of the
Merger, and without any action on the part of the holders thereof:
2.1.1 Each share of common stock, $.10 par value, of the
Company (the "Common Stock") issued and outstanding immediately prior to the
Effective Time (other than Common Shares held as treasury shares by the Company
or its Subsidiaries) shall, by virtue of the Merger and without any action on
<PAGE>
the part of the holder thereof, be converted into the right to receive in cash
the sum of $34.50 plus the Additional Amount (as herein defined) without
interest (the "Merger Consideration"). Each such share of Common Stock
outstanding immediately prior to the Effective Time shall be deemed to be no
longer outstanding and shall represent solely the right to receive the Merger
Consideration upon surrender of the certificate formerly representing the Common
Stock in accordance with the provisions of this section.
2.1.2 Each share of Common Stock issued and outstanding
immediately prior to the Effective Time which is then held as a treasury share
by the Company or is held by any of the Company's Subsidiaries immediately prior
to the Effective Time shall, by virtue of the Merger and without any action on
the part of the Company, be canceled and retired and cease to exist, without any
conversion thereof.
2.1.3 Each share of common stock, par value $.01 per share
of Purchaser outstanding immediately prior to the Effective Time shall be
converted into and exchanged into one validly issued, fully-paid and
non-assessable share of common stock, $.10 par value, of the Surviving
Corporation.
2.2 The Additional Amount. In order to provide for the
determination of the Additional Amount as of the Effective Time, the parties
agree as follows:
2.2.1 Components of the Base Amount. As used herein:
A-6
(a) The "Additional Amount" is the amount by which (1) the
quotient of the Base Amount as of the Effective Time divided by the
number of shares of Common Stock outstanding as of immediately prior to
the Effective Time exceeds (2) $34.50.
(b) the "Base Amount" is the dollar amount determined by
[A less B plus C] where
A is equal to (i) $500,000 plus (ii) to the extent
not received in cash, the amount of a claimed
tax refund for fiscal year 1998 not to exceed
$82,387, (iii) the sum of the cash and cash
equivalents on hand or in accounts which are
solely owned by the Company or a Remaining
Subsidiary (free balances only) free of all
Encumbrances as of the Effective Time, plus (iv)
the product of .9975 of the closing price of a
share of Common Stock of Niagra Mohawk
Corporation ("NIMO Stock") on the New York Stock
Exchange as of the trading day immediately
preceding the Closing Date multiplied by the
number of shares of NIMO Stock held by the
Company as of the Effective Time (not to exceed
50,000 shares) less (v), to the extent not
already contributed pursuant to the Escrow
Agreement, $6,000,000.
B is the dollar amount of the Adjustment Amount
(as defined below).
C is the product of .8357 multiplied by the
Specified Current Liabilities (as defined
below).
(c) the "Adjustment Amount" is the sum of (i) all
Liabilities of the Company or a Remaining Subsidiary as of the
Effective Time (including the Specified Current Liabilities but
excluding the Excluded Liability (as defined below) and the
intercompany Liabilities described in Section 3.2.2) which are in the
reasonable judgment of Parent both fixed and quantifiable, (ii) without
<PAGE>
duplication of any item in the preceding clause (i), that amount which
Parent and the Company agree, each acting reasonably, represents the
Damages (as defined in the Indemnification Agreement) and other
damages, if any, incurred or reasonably likely to be incurred by the
Company, any Remaining Subsidiary, Purchaser or Parent, directly or
indirectly as a result of, or arising out of the breach by the Company
of any of its representations or warranties under this Agreement, and
(iii) all transfer, documentary, sales, use, stamp, real estate,
registration and other similar Taxes and similar fees (including
penalties and interest) incurred by the Company, any of its
Subsidiaries, Purchaser or Parent in connection with the Transactions.
(d) the "Specified Current Liabilities" are the
Liabilities of the Company or any Remaining Subsidiary (actual or
accrued) for unpaid federal income Taxes for the current fiscal year
based on the consolidated net income of the Company through the
Effective Time.
(e) the "Excluded Liability" is the Liability of the
Company or its Subsidiaries for New York State income Taxes for the
Company's current fiscal year.
2.2.2 Determination of Base Amount. The Base Amount will
be determined from a statement of the components of the Base Amount ( the
"Statement") as provided in this Section 2.2. Not later than twenty days prior
to Closing, the Company will prepare and deliver to Parent and Purchaser the
Statement setting forth in reasonable detail the components of the Base Amount
and the calculation of the Additional Amount. The Statement will be prepared in
accordance with generally accepted accounting principles applied in preparation
of the Financial Statements, it being understood that items will be reflected
regardless of materiality and all accruals known or contemplated for Liabilities
of the Company or a Remaining Subsidiary as of the Effective Time will be
reflected. The Company will provide appropriate evidence of the components of
the Base Amount and Additional Amount and will permit, and fully cooperate with
Purchaser in obtaining full access to the Company's records and its accountant's
work papers for purposes of independently verifying the components of the Base
Amount and Additional Amount. The Statement will be certified by the Chief
Executive Officer and Chief Financial Officer of the Company on behalf of the
Company, contain an unqualified representation and warranty of such officers
that the information set forth in the Statement is true and correct and be
reviewed by the Company's regular independent auditors. Within five days of the
receipt by Parent and Purchaser of the Statement, Parent and Purchaser shall
notify the Company in writing of their acceptance or rejection of the Statement.
In the event that Parent and Purchaser reject the Statement such notice shall
set forth a schedule detailing the disputed components of the Statement. The
Company, Parent and Purchaser shall use their reasonable best efforts to reach
agreement on such disputed components of the Statement prior to the Closing. In
the event that the Company, Parent and Purchaser are unable to reach an
agreement on the Statement within three days prior to Closing this Agreement
will be deemed terminated pursuant to Section 7.1.1 hereof.
A-7
2.3 Exchange Procedures.
2.3.1 Immediately prior to the Effective Time, Parent
will deposit or cause to be deposited with Continental Stock Transfer & Trust
Co., or another paying agent mutually acceptable to Parent and the Company (the
"Paying Agent"), in trust for the holders of record of Common Stock immediately
prior to the Effective Time (the "Company Shareholders") cash in an aggregate
amount equal to the Merger Consideration (such deposit with the Paying Agent
pursuant to this paragraph is referred to as the "Payment Fund"). The Payment
Fund shall not be used for any purpose except as provided in this Agreement.
<PAGE>
2.3.2 As soon as practicable after the Effective Time, the
Surviving Corporation shall cause the Paying Agent to mail to each Company
Shareholder a letter of transmittal and instructions for use (the "Letter of
Transmittal") in effecting the surrender of certificates representing Common
Stock outstanding immediately prior to the Effective Time ("Certificates") in
appropriate and customary form. The Letter of Transmittal shall be in customary
form, include provisions stating that delivery shall be effected, and risk of
loss and title to such Certificates shall pass, only upon delivery of the
Certificates to the Paying Agent, provide instructions for effecting the
surrender of such Certificates in exchange for the Merger Consideration and
provide such other provisions as Purchaser may reasonably specify (including
those provisions described in this Section 2.3). Upon surrender of a Certificate
for cancellation to the Paying Agent, together with such Letter of Transmittal,
duly and properly executed, the holder of such Certificate shall be entitled to
receive in exchange therefore the portion of the Merger Consideration
represented by the Certificate pursuant to Section 2.1.1 of this Agreement. If
the Merger Consideration (or any portion thereof) is to be delivered to any
person othe than the person in whose name the Certificate representing Common
Stock surrendered in exchange therefor is registered on the record books of the
Company, it shall be a condition to such exchange that the Certificate so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the person requesting such exchange shall pay to the Paying
Agent any transfer or other taxes required by reason of the payment of such
consideration to a person other than the registered holder of the Certificate
surrendered, or shall establish to the satisfaction of the Paying Agent that
such tax has been paid or is not applicable. No interest will be paid or will
accrue on the cash payable upon surrender of any Certificate. Until surrendered
as contemplated by this Section 2.3, each Certificate shall, at and after the
Effective Time, be deemed to represent only the right to receive, upon surrender
of such Certificate, the Merger Consideration with respect to the shares of
Common Stock represented thereby.
2.3.3 At and after the Effective Time, there shall be no
transfers on the stock transfer books of the Company of the Common Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation, they
shall be canceled and exchanged as provided in this Section 2.3. In the event of
a transfer of ownership of shares of Common Stock which is not registered in the
transfer records of the Company, payment may be made with respect to such Common
Stock to such a transferee only if the Certificate representing such shares of
Common Stock is presented to the Paying Agent, accompanied by all documents
required to evidence and effect such transfer and evidence that any applicable
stock transfer taxes have been paid.
2.3.4 In the event any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Surviving Corporation, upon the posting by such person of a bond in such
amount as the Surviving Corporation may reasonably direct as indemnity against
any claim that may be made against it with respect to such Certificate, the
Paying Agent will issue in respect of such lost,stolen or destroyed Certificate,
the Merger Consideration with respect to the shares of Common Stock represented
thereby.
2.3.5 Any portion of the Payment Fund which remains
unclaimed by the Company Shareholders for nine (9) months after the Effective
Time shall be delivered to the Surviving Corporation upon demand of the
Surviving Corporation, and the holders of Common Stock shall thereafter look
only to the Surviving Corporation for payment of their claim for the Merger
Consideration in respect of their Common Stock. Neither Parent, Purchaser nor
the Surviving Corporation shall be liable to any holder of Common Stock for any
such Merger Consideration delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
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<PAGE>
2.3.6 Purchaser or the Paying Agent shall be entitled to
deduct and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of a Certificate surrendered for the Merger
Consideration such amount as Purchaser or the Paying Agent is required to deduct
and withhold with respect to the making of such payment under the Internal
Revenue Code as of 1986, as amended (the "Code"), or any provision of any state
local or foreign tax law. To the extent that amounts are so deducted and
withheld, such amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of such Certificate.
2.3.7 In the case of 100,000 shares of Common Stock held
of record by Martin Enowitz or his assigns which the Company represents are the
subject of a dispute between the Company and Enowitz, appropriate provision will
be made in the Paying Agent agreement for the holding of the Merger
Consideration payable in respect of such shares in escrow pending resolution of
the dispute. Purchaser agrees that the rights of Purchaser, Parent or the
Surviving Corporation to such Merger Consideration, if any, will be assigned
without recourse to BL.
2.3.8 The fees and expenses of the Paying Agent will be
paid from earnings on the Payment Fund. To the extent earnings on the Payment
Fund are insufficient to pay such fees and expenses, such fees and expenses
shall be paid from the Escrow Fund (as defined in the Escrow Agreement) pursuant
to the Escrow Agreement. The Company and Parent and Purchaser agree that any
interest earned on the Payment Fund will be transferred to the Escrow Agent and
become part of the Escrow Fund.
2.4 Adjustment of Merger Consideration. In the event of any
reclassification, stock split, stock dividend or other general distribution of
securities, cash or other property with respect to Common Stock other than the
Distribution and related transaction (or if a record date with respect to any of
the foregoing should occur) on or after the date of this Agreement and on or
prior to the date of the Effective Time, appropriate and equitable adjustments,
if any, shall be made to the calculation of the Merger Consideration and all
references herein shall be deemed to be to the Merger Consideration as so
adjusted.
2.5 Options, Warrants and Restricted Shares. Prior to the Effective
Time, the Company will (a) cause each outstanding option to purchase Common
Stock (each, a "Stock Option") granted under the Besicorp Group, Inc. Amended
and Restated 1993 Incentive Plan (the "1993 Plan") or pursuant to any other
stock option plan or restricted agreement entered into by the Company with any
employee or director of the Company or any Subsidiary thereof, whether or not
then vested or exercisable, to become vested and exercisable, (b) cause each
outstanding warrant to purchase Common Stock (each, a "Warrant") to become
exercisable to the extent not currently exercisable, and (c) take such action as
is necessary to cause each holder of a Stock Option or Warrant to exercise such
Stock Option or Warrant in full including paying in cash the exercise price (it
being understood that neither the Company nor any Remaining Subsidiary will
directly or indirectly provide or guarantee any financing or loan arrangements
for the payment of the exercise price) so that there are no outstanding Stock
Options or Warrants at the Effective Time.
2.6 Escrow Agreement. At Closing, the Company will cause $6,000,000 in
cash to be delivered to the Escrow Agent under the Escrow Agreement.
<PAGE>
ARTICLE III
PRECLOSING TRANSACTIONS
3.1 General. The Company recognizes that the obligations of Parent and
Purchaser under this Agreement are subject to the completion by the Company of
each of the Distribution and the Power Facility Sales (each, as defined below).
The Company agrees to use its reasonable best efforts to effect the Distribution
and the Power Facility Sales in accordance with this Agreement.
3.2 The Distribution.
3.2.1 Actions. Promptly following the execution of this
Agreement, the Company will cause the following actions to be taken in
accordance with the requirements of applicable law, including the NYBCL, and the
Company's and its Subsidiaries' certificate of incorporation and bylaws with the
objective of effecting the spinoff to shareholders of the Company immediately
prior to the Effective Time of BL and the Distributed Subsidiaries and the
complete separation of BL and the Distributed Subsidiaries from the Company and
the Remaining Subsidiaries:
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(a) the due and valid formation of BL;
(b) the transfer to, and assumption by BL of all of the
assets, personnel, employee benefit plans and Liabilities of the
Company (other than the Retained Assets and Permitted Liabilities) and
the Remaining Subsidiaries and the transfer to BL of all of the
outstanding capital stock of the Distributed Subsidiaries;
(c) the execution and delivery by the Company and BL of
such agreements and arrangements which are customary in connection with
spinoffs and which provide for, among other matters, the provision of
transition, support and administrative services (including access to,
and cooperation regarding historical financial and tax information and
knowledgeable personnel) to the Company by BL without cost to the
Company and indemnification of the Company by BL and its subsidiaries
for any failure of BL to discharge and pay in full all of the
Liabilities so assumed or the failure of any Distributed Subsidiaries
to discharge and pay in full its Liabilities when due including by
means of the Indemnification Agreement and Escrow Agreement, all on
terms reasonably acceptable to Purchaser and Parent;
(d) the withdrawal of the Remaining Subsidiaries as
general or limited partners of the Partnership or the assignment to,
and assumption by a Distributed Subsidiary of all of the general and
limited partnership interests of the Remaining Subsidiary;
(e) distribute to the shareholders of the Company
immediately prior to the Effective Time all of the outstanding capital
stock of BL with a record date to be established by the Board to be
coordinated with the Closing;
(f) the establishment of the fair market value of the
BL capital stock;
(g) provide for the assumption by BL of all Employee
Benefit Plans;
<PAGE>
(h) prior to consummation of the Distribution, Reina
Distributing, Inc. and BL to enter into a written lease providing for
the building and improvements located thereon at 1151 Flatbush Avenue,
Kingston, New York on the terms set forth in Schedule 3.2.1 to this
Agreement;
(i) prior to consummation of the Distribution, the Company
and BL to execute and deliver the Indemnification Agreement in the form
of Exhibit A hereto (the "Indemnification Agreement") and the Escrow
Agreement in the form of Exhibit B hereto (the "Escrow Agreement");
(j) the preparation and distribution to its stockholders
of record prior to the Effective Time of the Information Statement and
the filing and effectiveness of the Form 10 Registration all in
accordance with applicable law including the Securities Act of 1934, as
amended (the "Exchange Act"); and
(k) all other actions necessary or appropriate to effect
the distribution of BL to the shareholders of the Company.
The foregoing transactions are collectively referred to herein as the
"Distribution."
3.2.2 Defined Terms. The "Retained Assets" are those
assets listed on Schedule 3.2.2 hereto and the "Permitted Liabilities" are the
Specified Current Liabilities and Excluded Liability and the intercompany
Liabilities of the Company to a Remaining Subsidiary as identified in Schedule
3.2.2.
3.2.3 Agreements. The Company agrees to use its best
efforts to effect the Distribution in the manner contemplated hereby and to
take, or cause to be taken, all actions necessary or appropriate so that the
Distribution will be so accomplished no later than the Closing Date.
3.3 The Power Facility Sales. The Company agrees to use its best
efforts to cause the Partnerships to dispose of the Carthage Cogeneration
Facility, South Glens Falls Cogeneration Facility, Natural Dam Cogeneration
Facility, Syracuse Cogeneration Facility and Beaver Falls Cogeneration Facility
for cash and without any Liability of any Remaining Subsidiary (the "Power
Facility Sales"). The Company will consult with Purchaser on a regular basis and
keep Purchaser reasonably informed as to the status and terms of the Power
Facility Sales.
3.4 Further Assurances. If, at any time after the Effective Time, BL
shall consider or be advised that any deeds, bills of sale, assignments or
assurances or any other acts or things are necessary, desirable or proper (i) to
vest, perfect or confirm, of record or otherwise, in BL or its Subsidiaries its
right, title and interest in, to or under any of the rights, privileges, powers,
franchises, properties or assets contributed to any of the Distributed
Subsidiaries in connection with the Distribution or (ii) otherwise carry out the
Distribution, the Surviving Corporation will upon reasonable request of BL
execute and deliver all such deeds, bills of sale, assignments and assurances
and do all such other acts and things as may be necessary, desirable or proper
to carry out the Distribution. Any expenses incurred by the Surviving
Corporation under this Section 3.4 shall be paid by BL.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
<PAGE>
4.1 General Statement. The parties make the representations and
warranties to each other which are set forth in this Article IV. All
representations and warranties of the Company are made subject to the exceptions
noted in the schedule delivered by the Company to Parent and Purchaser
concurrently herewith and identified by the parties as the "Company Disclosure
Schedule."
4.2 Representations and Warranties of the Company. The Company
represents and warrants to Parent and Purchaser that, except as set forth in the
Company Disclosure Schedule:
4.2.1 Organization and Authority. Each of the Company and
each Subsidiary: (i) is a corporation or partnership duly organized, validly
existing and in good standing under the laws of the State of its incorporation;
and (ii) has all necessary corporate or partnership power and authority to
conduct its business as now being conducted or as proposed to be conducted
through Closing. Each of the Company and each Remaining Subsidiary is duly
qualified as a foreign corporation and in good standing in each jurisdiction in
which the nature of its business or the nature or location of its assets require
such qualification. All of the Subsidiaries are listed in the Company Disclosure
Schedule.True and complete copies of the certificate of incorporation and bylaws
or agreement of limited partnership, as the case may be, of each of the Company
and each Subsidiary are set forth as exhibits to the Company SEC Documents or
have been made available to Purchaser. As used in this Agreement: "Subsidiary"
means any corporation, partnership, joint venture or other legal entity and of
which the Company or BL, as the case may be (either alone or through or together
with any other Subsidiary or Subsidiaries), either (A) owns, directly or
indirectly, 25% or more of the capital stock or other equity interests, the
holders of which are generally entitled to vote with respect to matters to be
voted on in such corporation, partnership, joint venture or other legal entity
or a 25% or more of the interest in the assets of the corporation, partnership,
joint venture or other legal entity upon its liquidation or (B) is otherwise a
Significant Subsidiary (as such term is defined in Section 1-02(w) of Regulation
S-X of the Securities Act of 1933, as amended (the "Securities Act"));
"Remaining Subsidiary" means each of Beta Carthage, Inc., a New York
corporation, Beta South Glen Falls, Inc., a New York corporation, Beta Natural
Dam, Inc., a New York corporation, Beta Syracuse Inc. a New York corporation,
Beta Beaver Falls Inc., a New York corporation, Beta Nova, Inc., a New York
corporation, Beta N Ltd., a New York corporation, Beta C&S Ltd., a New York
corporation, and Reina Distributing, Inc., a New Yor corporation, and the
"Distributed Subsidiaries" are BL and all other Subsidiaries of the Company now
or hereafter existing other than the Remaining Subsidiaries.
4.2.2 Authority Relative to this Agreement and Related
Matters. The Board of Directors of the Company (the "Board"), at a meeting duly
called and held has (A) determined that the Merger Agreement and Merger are fair
to, and in the best interests of, the Company and its shareholders, (B) adopted
and approved this Agreement and the Merger, and (C) resolved to submit to the
shareholders of the Company and recommend to the shareholders of the Company
that they adopt and authorize the Merger Agreement , the Merger and, if legally
required, the Distribution (collectively, the Merger, Distribution and Power
Facility Sales and with the other transactions contemplated hereby and thereby,
the "Transactions"). The Company has full corporate power and authority, subject
to shareholder adoption and authorization of with respect to the Merger
Agreement, to enter into and perform this Agreement and the other agreements to
be entered into in connection with this Agreement and the Transactions (the
"Transaction Agreements") to which it is a party. The execution and delivery of
this Agreement and each of the othe Transaction Agreements by the Company and
the performance by the Company of their respective obligations hereunder and
thereunder have been (or in the case of Transaction Agreements not yet entered
into, will be) duly authorized and approved by all requisite corporate action
other than the approval of the holders of at least two-thirds of the outstanding
shares of Common Stock voting at the Meeting with respect to the Merger and, if
legally required, the Distribution. This Agreement has been and, when executed,
each of the other Transaction Agreements will have been, duly executed and
delivered by duly authorized officers of the Company and constitutes, or will
constitute when
<PAGE>
so executed and delivered, a valid, legal and binding obligation of the Company
or relevant Subsidiary enforceable against it in accordance with its terms. The
affirmative vote of the holders of at least two-thirds of the outstanding shares
of Common Stock voting at the Meeting with respect to the adoption and
authorization of the Merger Agreement are the only votes of the holders of any
class or series of the Company's capital stock necessary to approve the
Transactions. None of the holders of shares of capital stock of the Company have
the right to dissent or demand appraisal of their shares under the NYBCL or
otherwise as a result of any of the Transactions.
A-11
4.2.3 Required Filings. No consent, approval or
authorization of, expiration or termination of any waiting period requirement
of, or filing, registration, qualification, declaration or designation
("Authorization") with or by, any federal, state, local or foreign court,
administrative agency, commission or other governmental authority or
instrumentality ("Governmental Entity") is required for the execution and
delivery by the Company of this Agreement or any of the other Transaction
Agreements or the consummation by any of the Company or any Subsidiary of any of
the Transactions, except for (i) the filing and recordation by the Company of
the Merger as required by the NYBCL, (ii) the filing with the United States
Securities and Exchange Commission (the "SEC") of the Proxy Statement, the Form
10 Registration and the Information Statement with respect to the Merger and
Distribution, respectively, under the Exchange Act and (iii) filings pursuant to
applicable state securities laws.
4.2.4 No Conflicts. Neither the execution and delivery
of this Agreement or the other Transaction Agreements by the Company nor the
consummation by Company of any of the Transactions, will (i) conflict with or
result in a breach of any of the terms, conditions or provisions of the
certificate, articles or other instrument of incorporation or limited
partnership or by-laws or agreement of limited partnership or other similar
instrument or of any statute, law or administrative regulation, or of any order,
writ, injunction, judgment or decree of any Governmental Entity or of any
arbitration award to which any of the Company or any Subsidiary is a party or by
which the Company or any Subsidiary is bound, or (ii) violate, conflict with,
breach, constitute a default (or give rise to an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or result in the
creation of any lien or other claims, equities, security interests, preemptive
rights, judgments and other encumbrances ("Encumbrance")upon any of the
properties or assets of the Company or any Subsidiary under, any written or oral
note, bond, mortgage, indenture, deed of trust, license, lease, contract,
agreement or other instrument or written or oral obligation to which Company is
a party or to which they or any of their respective properties or assets are
subject (each being an "Obligation"), except for such violations, conflicts,
breaches, defaults, terminations, accelerations or creations of liens or other
Encumbrances that do not and could not, individually or in the aggregate (x)
have a Material Adverse Effect (as defined herein) on the Company, or (y)
materially impair the ability of the Company to perform its obligations under
any Transaction Agreement. Without limiting the generality of the foregoing, the
Company is not subject to any Obligation pursuant to which timely performance of
this Agreement or any of the Transactions may be prohibited, prevented or
materially delayed. As used in this Agreement, with respect to a Person,
"Material Adverse Effect" means an effect which involves $10,000 or more on the
business, operations (or results of operations), condition (financial or
otherwise), properties, assets, liabilities, or prospects of such Person or its
Subsidiaries, and "Person" means an individual, partnership, corporation,
limited liability company, business, business trust, joint stock company, trust,
unincorporated association, joint venture, Governmental Entity or other entity
of whatever nature or a group, including any pension, profit sharing or other
benefit plan or trust.
4.2.5 Capitalization. The authorized capital stock of the
Company consists solely of 5,000,000 shares of Common Stock, $0.10 par value per
share, and 7,500,000 shares of Preferred Stock, par value $1.00 per share
("Preferred Stock"). As of November 16, 1998, (i) 2,969,195 shares of Common
Stock
<PAGE>
were outstanding, all of which are entitled to vote as a class, (ii) 265,763
shares of Common Stock were held in the treasury of the Company, (iii) Stock
Options or Warrants with respect to 82,240 shares of Common Stock had been
granted or issued and are outstanding under the 1993 Plan and (iv) no shares of
Preferred Stock were outstanding. There are no other shares of capital stock of
the Company authorized, issued or outstanding. The number of shares of Common
Stock outstanding is subject to increase to no more than 3,051,435 shares
outstanding upon the exercise or conversion of Stock Options and Warrants which
are set forth on Schedule 4.2.5 of the Company Disclosure Schedule. All of the
outstanding shares of Common Stock have been validly issued and are fully paid
and nonassessable. Except as set forth on Schedule 4.2.5 of the Company
Disclosure Schedule, there are no subscriptions, options, stock appreciation
rights, warrants, rights (including preemptive rights), calls, convertible
securities or other agreements or commitments of any character relating to the
issued or unissued capital stock or other securities of the Company obligating
the Company to issue, or register the sale of, any securities of any kind. There
are no agreements or obligations of any kind or character to which the Company
is a party, or as to which the Company has knowledge, with respect to the voting
of Common Stock or the election of Directors to its Board ("Directors").
Schedule 4.2.5 of the Company Disclosure Schedule sets forth the name of the
holder, number of shares underlying and exercise price of each Stock Option and
Warrant outstanding on the date hereof.
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4.2.6 Subsidiaries. All of the outstanding shares of
capital stock or other equity interests of each Remaining Subsidiary (i) are
validly issued, fully paid and nonassessable and free of any preemptive rights,
and (ii) except as disclosed in Schedule 4.2.6 to the Company Disclosure
Schedule, are owned of record and beneficially by the Company free and clear of
all Encumbrances. There are no outstanding subscriptions, options, stock
appreciation rights, warrants, rights (including preemptive rights), calls,
convertible securities or other agreements or commitments of any character
relating to the issued or unissued capital stock or other securities of any
Remaining Subsidiary obligating such Remaining Subsidiary to issue any
securities of any kind or which would otherwise affect the Distribution. There
are no agreements or obligations of any kind or character with respect to the
voting of shares of capital stock or the election of directors of any Remaining
Subsidiary. Schedule 4.2.6 lists (iii) each Subsidiary and the Company's direct
or indirect ownership interest in such Subsidiary and (iv each Subsidiary of
which the Company or one of its Subsidiaries is a general or limited partner
(each such Subsidiary of the Company, a "Partnership") and the Company's direct
or indirect ownership interest in such Partnership. Except for the Subsidiaries,
the Company does not have, directly or indirectly, any equity or ownership
interest, or any investment, in any Person.
4.2.7 SEC Documents. The Company has timely filed (and
has delivered to Purchaser a true and complete copy of) each report, schedule,
registration statement and definitive proxy statement required to be filed or
filed by the Company with the SEC (including, without limitation, reports
required to be filed pursuant to Section 13(d) or 13(g) of the Exchange Act)
since January 1, 1995 (the "SEC Documents"). As of their respective dates, the
SEC Documents comply in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the applicable rules
and regulations of the SEC thereunder, and none of the SEC Documents, as of
their respective dates, contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading. The Company has corrected and updated, prior to the date
hereof, all statements in the SEC Documents which have required correction or
updating, as the case may be, and have filed all necessary amendments to the
Company SEC Documents as required by applicable law.
4.2.8 Financial Statements. Each of the consolidated
financial statements (including the notes thereto) included in the SEC Documents
(the "Financial Statements") complies, as of their respective dates, with all
applicable accounting requirements and rules and regulations of the SEC with
respect thereto,
<PAGE>
has been prepared in accordance with generally accepted accounting principles
("GAAP") consistently applied (except as may be indicated in the notes thereto
or, in the case of unaudited statements, as permitted by Form 10-QSB of the SEC)
and presents fairly the consolidated financial position of the Company at the
dates thereof and the consolidated results of its operations, cash flows and
changes in financial position for the periods indicated therein, subject, in the
case of interim Financial Statements, to normal, recurring year-end adjustments
which are not material individually or in the aggregate. The books, accounts and
records of the Company are, and have been, maintained in such Company's usual,
regular and ordinary manner, in accordance with generally accepted accounting
practices, and all transactions to which the Company is or has been a party are
properly reflected therein.
4.2.9 Liabilities. Neither the Company nor any Remaining
Subsidiary has any obligation or liability of any kind or nature whatsoever
(direct or indirect, matured or unmatured, absolute, accrued, contingent, known
or unknown or otherwise), whether or not required by GAAP to be provided or
reserved against on a balance sheet (all the foregoing herein collectively being
referred to as the "Liabilities"), except for:
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(a) Liabilities specifically provided for or reserved
against in the balance sheet contained in the Financial Statements or
the balance sheet contained in the most recent interim financial
statement in a Company SEC Document filed prior to the date of this
Agreement (the "Interim Balance Sheet");
(b) as of the Effective Time, Permitted Liabilities and
Liabilities taken into account in determining the Adjustment Amount as
agreed to by Purchaser and Parent; and
(c) Liabilities of the Company or a Remaining Subsidiary
which have been incurred since the date of the Interim Balance Sheet,
in the ordinary course of business and consistent with past practice
which are not material.
Without limiting the generality of the foregoing, upon consummation of the
Distribution neither the Company nor any Remaining Subsidiary will have any
Liability with respect to the Liabilities of the Distributed Subsidiaries or the
business and operations of the Distributed Subsidiaries.
4.2.10 Absence of Changes or Events. Except as
specifically disclosed in the SEC Documents filed prior to the date of this
Agreement and furnished to Purchaser, since June 30, 1998: (x) neither the
Company nor any Subsidiary has suffered or been threatened with (and the Company
has no knowledge of any facts which may cause or result in) any material adverse
change in its assets, properties, liabilities, condition (financial or
otherwise) or prospects; and (y) the Company and each Subsidiary has operated
only in the usual and ordinary course of business consistent with past practice
except as contemplated by the Power Facility Sales or the Distribution. Without
limiting the generality of the foregoing, since such date, neither the Company
nor any Subsidiary has:
(a) sold, assigned, leased, exchanged, transferred or
otherwise disposed of any material portion of its assets or property,
except in the usual and ordinary course of business consistent with
past practice other than the sale of shares of common stock of Niagra
Mohawk Power Corporation ("NIMO") and the Power Facility Sales;
<PAGE>
(b) suffered any material casualty, damage or loss, or any
material interruption in use, of any material assets or property
(whether or not covered by insurance), on account of fire, flood, riot,
strike or other hazard or Act of God;
(c) paid, declared or set aside any dividends or other
distributions on its securities of any class or purchased or redeemed
any of its securities of any class;
(d) made any change in accounting methods or principles;
(e) with respect to the Remaining Subsidiaries, made or
committed to make capital expenditures;
(f) with respect to the Remaining Subsidiaries, increased
the compensation payable to any officer or employee except in the
ordinary course of business;
(g) with respect to the Remaining Subsidiaries, elected
any director or hired any officer or employee;
(h) borrowed any money or issued any bonds, notes,
debentures or other evidence of indebtedness;
(i) acquired by merger, consolidation or acquisition of
stock or assets any Person or business;
(j) adopted, amended or terminated any Employee Benefit
Plan (as defined herein) except as contemplated by Section 2.5; or
(k) agreed in writing or otherwise to take any of the
foregoing actions.
4.2.11 Status of Distribution. The Distribution will not
result in any federal or state income tax liability to the Company. In
connection with the Distribution, the Company (a) will have sufficient capital
so that upon completion of the Distribution, the fair market value of the assets
of the Company less the amount of its stated capital will exceed its Liabilities
and (b) is solvent and will be solvent prior to and immediately following the
consummation of the Distribution.
4.2.12 Ownership of Properties. The Company and each
Remaining Subsidiary has good and marketable title to its respective properties
and assets purported to be owned by them respectively (including all assets
reflected on the Financial Statements) free and clear of any Encumbrances,
except: (i) statutory liens for Taxes not yet due, (ii) statutory liens of
carriers, warehousemen, mechanics and materialmen incurred in the ordinary
course of business for sums not yet due; (iii) liens incurred or deposits made
in the ordinary course of business, in connection with workers' compensation and
unemployment insurance; and (iv) minor imperfections of title which do not in
the aggregate materially detract from the value or use of the asset in question.
The Company and its Subsidiaries have in effect insurance policies of the type
and with coverages which are customary for companies in the businesses in which
the Company and its Subsidiaries are engaged.
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4.2.13 Tax Matters Definitions. As used in this Agreement
the following terms shall have the following meanings:
<PAGE>
(a) the term "Taxes" means all federal, state, local,
foreign and other net income, gross income, gross receipts, sales, use,
ad valorem, transfer, franchise, profits, license, lease, service,
service use, withholding, payroll, employment, excise, severance,
stamp, occupation, premium, property, windfall profits, customs, duties
or other taxes, fees, assessments or charges of any kind whatever,
together with any interest and any penalties, additions to tax or
additional amounts with respect thereto, and the term "Tax" means any
one of the foregoing Taxes; and
(b) the term "Returns" means all returns, declarations,
reports, statements and other documents required to be filed in respect
of Taxes, and the term "Return" means any one of the foregoing Returns.
4.2.14 Returns. There have been properly completed and
filed on a timely basis and in correct form all Returns required to be filed by
the Company. As of the time of filing, the Returns correctly reflected the facts
regarding the income, business, assets, operations, activities, status or other
matters of such Company or any other information required to be shown thereon.
Except as disclosed in Section 4.2.14 to the Company Disclosure Schedule, an
extension of time within which to file any Return which has not been filed has
not been requested or granted.
4.2.15 Tax Liabilities. With respect to all amounts in
respect of Taxes imposed upon the Company, or for which the Company is or could
be liable, whether to taxing authorities (as, for example, under law) or to
other persons or entities (as, for example, under tax allocation agreements),
with respect to all taxable periods or portions of periods ending on or before
the Closing Date, all applicable tax laws and agreements have been fully
complied with, and all amounts required to be paid by any of the Company or any
of its Subsidiaries (other than the Permitted Liabilities), to taxing
authorities or others, on or before the date hereof have been paid. The unpaid
Taxes of the Company do not exceed the reserve for tax liability with respect to
the Company (excluding any reserve for deferred Taxes established to reflect
timing differences between book and tax income) set forth or included in the
Company Disclosure Schedule as adjusted for the passage of time through the
Closing Date, in accordance with the past practices of the Company.
4.2.16 Issues with Taxing Authorities. No issues have
been raised (and are currently pending) by any taxing authority in connection
with any of the Returns filed by the Company or any of its Subsidiaries. No
waivers of statutes of limitation with respect to such Returns have been given
by or requested from the Company or any of its Subsidiaries. The Company
Disclosure Schedule sets forth (i) the taxable years of each of the Company or
any of its Subsidiaries as to which the respective statutes of limitations with
respect to Taxes have not expired, and (ii) with respect to such taxable years
sets forth those years for which examinations have been completed, those years
for which examinations are presently being conducted, those years for which
examinations have not been initiated, and those years for which required Returns
have not yet been filed. No deficiencies have been asserted or assessments made
as a result of any such examinations.
4.2.17 Miscellaneous Tax Matters. Neither the Company
nor any Remaining Subsidiary (i) is a party to or bound by any tax indemnity,
tax sharing or tax allocation agreement; (ii) has agreed to make, or is required
to make, any adjustment under section 481(a) of the Code by reason of a change
in accounting method or otherwise. Neither the Company nor any Subsidiary is a
party to any agreement, contract, arrangement or plan that has resulted or would
result, separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of section 280G of the Code.
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4.2.18 Permits. The Company and its Remaining
Subsidiaries hold or have received all consents, permits, authorizations,
approvals, licenses and certifications of Governmental Entities (collectively,
<PAGE>
the "Permits") required in connection with the ownership and operation of their
respective properties and the conduct of their respective businesses as now
being conducted, except for such consents, permits, authorizations, approvals,
licenses and certificates which if not held or received would not have a
Material Adverse Effect on the Company.
4.2.19 Contracts. Except as filed as an exhibit to the
SEC Documents, none of the Company or any Remaining Subsidiary is a party to, or
bound by, any undischarged written or oral:
(a) employment or consulting agreement which is not
terminable by the Company at will without premium or penalty or other payment;
(b) collective bargaining agreement;
(c) lease or sublease, either as lessee or sublessee,
lessor or sublessor, of real or personal property or intangibles;
(d) loan or credit agreement, pledge agreement, note,
security agreement, mortgage, debenture, indenture, factoring
agreement, credit card agreement, letter of credit or banker's
acceptance;
(e) governmental order or directive;
(f) agreement for the treatment or disposal of
hazardous materials;
(g) partnership or joint venture agreement;
(h) architect's agreement or construction contract;
(i) lease which is required by GAAP to be classified
as a capital lease;
(j) reciprocal easement or operating agreement with
respect to any parcel of the Real Estate or any of the Leased Premises;
(k) secrecy or confidentiality agreement;
(l) rate swap transaction, basis swap, forward rate
transaction, commodity swap, commodity option, equity or equity index
swap, equity or equity index option, bond option, interest rate option,
foreign exchange transaction, cap transaction, floor transaction,
collar transaction, currency swap transaction, cross- currency rate
swap transaction, currency option or any other similar transaction
(including any option with respect to any of these transactions), or
any combination of these transactions;
(m) supply or requirements contract;
(n) agreement or arrangement not specifically enumerated
above concerning or which provides for the receipt or expenditure of
any money;
<PAGE>
(o) agreement to indemnify or pay or advance expenses of
any Person including any officer, director, employee or agent of the
Company, any Subsidiary or any ERISA Affiliate; or
(p) agreement or arrangement by which the Company or any
Remaining Subsidiary has guaranteed or otherwise has any Liability for
any Liability of any Distributed Subsidiary.
Such agreements, leases, subleases and other instruments or arrangements
required to be disclosed in response to this Section 4.2.19, the "Contracts,"
and each a "Contract". Each Contract is in full force and binding upon the
Company and, to the Company's knowledge, the other parties thereto. None of the
Company on the one hand, nor any of the other parties thereto, on the other
hand, are in default under any Contract. No event, occurrence or condition
exists which, with the lapse of time, the giving of notice, or both, or the
happening of any further event or condition, would become a default under any
Contract by the Company, on the one hand, or the other contracting party, on the
other hand. None of the Company has released or waived any of its respective
rights under any Contract. The Company is not subject to any legal obligation to
renegotiate, nor does the Company have knowledge of a claim for a legal right to
renegotiate, any contract, loan, agreement, lease, sublease or instrument to
which it is now or has been a party.
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4.2.20 Partnership Contracts. Each of the Partnerships
has settled pursuant to valid and enforceable settlement agreements all
Liabilities of each such Partnership on terms such that none of the Remaining
Subsidiaries has any Liability with respect to the Liabilities of the
Partnerships. Neither the Company nor any of the Remaining Subsidiaries has any
Liability for any of the Liabilities of any Partnership.
4.2.21 ERISA Matters.
(a) The Company, its Subsidiaries, any affiliate of the
Company or its Subsidiaries, as determined under Code Section 414(b),
(c), (m) or (o) (the "ERISA Affiliate"), severally or jointly,
maintains, administers or contributes to, and have any liability with
respect to, only those employee benefit plans (as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), whether or not excluded from coverage under specific Titles
or Subtitles of ERISA), bonus, deferred compensation, stock purchase,
stock option, stock appreciation, severance, salary continuation,
vacation, holiday, sick leave, fringe benefit, employee discount,
personnel policy, allowances, incentives, insurance, welfare or similar
plan, program, policy or arrangement which are described in the Company
Disclosure Schedule (the "Employee Benefit Plans").
(b) None of the Company, its Subsidiaries or any ERISA
Affiliate has incurred any liability to the Pension Benefit Guaranty
Corporation ("PBGC") as a result of the voluntary or involuntary
termination of any pension plan subject to Title IV of ERISA; neither
the Company nor any ERISA Affiliate has made a complete or partial
withdrawal from a multiemployer plan, as such term is defined in
Section 3(37) of ERISA, resulting in withdrawal liability, as such term
is defined in Section 4201 of ERISA (without regard to subsequent
reduction or waiver of such liability under either Section 4207 or 4208
or ERISA); neither the Company nor any ERISA Affiliate would incur any
withdrawal liability on a complete withdrawal from any Employee Benefit
Plan as of the Closing Date, under applicable law and conditions of
each such Employee Benefit Plan without regard to any limitation,
reduction or adjustment of liability under Title IV of ERISA or any
Employee Benefit Plan provision; and neither the Company nor any ERISA
Affiliate has any contingent liability under Section 4024 of ERISA.
<PAGE>
(c) The aggregate present value of all accrued benefits
pursuant to each Employee Benefit Plan subject to Title IV of ERISA,
determined on the basis of current participation and projected
compensation for active participants, and including the maximum value
of all subsidized benefits, and earnings, mortality and other actuarial
assumptions set forth in the 1994 actuarial report for the Employee
Benefit Plan does not exceed the current fair market value of such
Employee Benefit Plan's assets, and except as required by Section 4980B
of the Code, neither the Company nor any ERISA Affiliate has any
obligation to provide benefits to any individual not employed by the
Company or any ERISA Affiliate.
(d) Each Employee Benefit Plan complies with and is and
has been operated in accordance with its terms and each applicable
provision of ERISA, the Code, other federal statutes, state law and the
regulations and rules thereunder. With respect to each Employee Benefit
Plan intended to qualify under Section 401(a) of the Code, a favorable
determination as to such qualification of such Employee Benefit Plan
and each amendment thereto has been made by the Internal Revenue
Service and each such Employee Benefit Plan remains qualified under the
Code and each trust funding any Employee Benefit Plan is and has been
tax-exempt. Neither the Company nor any ERISA Affiliate has failed to
make any contributions or pay any amounts required on or before the
Closing Date by the terms of any Employee Benefit Plan, collective
bargaining agreement, ERISA or any other applicable law.
4.2.22 Labor Relations. Neither the Company nor any
Remaining Subsidiary is a party to any collective bargaining agreement or other
labor union contract applicable to persons employed by the Company and there are
no known organizational campaigns, petitions or other unionization activities
seeking recognition of a collective bargaining unit. There are no strikes,
slowdowns, work stoppages or material labor relations controversies pending or,
to the knowledge of the Company, threatened between the Company or any of its
Subsidiaries, and any of their employees, and neither the Company nor any
Subsidiary has experienced any such strike, slowdown, work stoppage or material
controversy within the past three years.
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4.2.23 Absence of Litigation. Except as set forth in the
SEC Documents filed prior to the date hereof, there is no litigation or
proceeding, in law or in equity, and there are no proceedings or governmental
investigations before or by any Governmental Entity, pending or, to the
Company's knowledge, threatened against the Company or any Remaining Subsidiary
or any of the officers, directors or employees of the Company or any Remaining
Subsidiary, which, if decided adversely to the Company or any Remaining
Subsidiary, officer, director or employee could have a Material Adverse Effect
on the Company or any Subsidiary or would materially impair the consummation of
any of the Transactions. There are no facts which, if known by a potential
claimant or governmental authority, would give rise to a claim or proceeding
which, if asserted or conducted with results unfavorable to the Company, would
have a Material Adverse Effect on the Company or any Remaining Subsidiary or
would materially impair the consummation of any of the Transactions. The Company
has not made any material oral or written warranties with respect to the quality
or absence of defects of its products or services which it has sold or performed
which are in force as of the date hereof, excep for those warranties which are
described in the Company Disclosure Schedule.
4.2.24 Injunctions; Judgments. Neither the Company nor
any Remaining Subsidiary is a party to, or bound by, any judgment, writ,
injunction, decree, order or arbitration award (or agreement entered into with
any Governmental Entity in connection with any administrative, judicial or
arbitration proceeding) with respect to or affecting the properties, assets,
personnel or business activities of the Company.
<PAGE>
4.2.25 Compliance with Law. Neither the Company nor any
Subsidiary is in violation of, in noncompliance with, or delinquent with respect
to, any judgment, writ, injunction, decree, order or arbitration award or law,
statute, or regulation of or agreement with, or any permit from, any
Governmental Entity to which the property, assets, personnel or business
activities of the Company or any of its Subsidiaries are subject, which
violation, noncompliance or delinquency could have a Material Adverse Effect on
the Company or any Remaining Subsidiary or materially impair the ability of the
Company to carry out or realize the intended benefits of the Transactions.
4.2.26 Environmental Matters. The Company and each
Subsidiary are and at all times have been, and all real property currently or
previously owned, leased, occupied, used by or under the control of the Company
or such Subsidiary, and all operations or activities of the Company or its
Subsidiaries (including those conducted on or taking place at any of such real
property) are and at all times have been, in compliance with and not subject to
any material liability or obligation under any Environmental Law or
Environmental Permit (and any monitoring agreement thereunder). The Company and
its Subsidiaries have every Environmental Permit required under Environmental
Laws for the operation of their respective businesses. As used in this
Agreement: "Environmental Laws" means all applicable federal, state or local
laws, rules, regulations, ordinances or principles of common law relating to the
generation of electricity or to the protection of health and safety, pollution,
or to environmental matters of any kind whatsoever, including with respect to
the storage, treatment, generation, transportation, spillage, use for the
generation of electricity or thermal energy, discharge, emission, leakage,
disposal or other release or threatened release of any hazardous (or otherwise
regulated under Environmental Law) material, substance or waste of any kind
whatsoever ("Hazardous Materials") and "Environmental Permits" means any
permits, licenses, notifications, certifications, consents or approvals required
under any Environmental Law from a Governmental Entity or third party. There are
no underground storage tanks on any such real property. There is no condition or
circumstance regarding the Company, any Subsidiary or their respective
businesses or any such real property or the operations or activities thereon,
which, with the passing of time or upon notice to any other party, is possible
of giving rise to a material violation of, or material liability or obligation
under, any Environmental Law or Environmental Permit. Neither the Company nor
its Subsidiaries nor any Person, the acts or omissions of which may be
attributable to, or the responsibility of, or liability to, the Company or its
Subsidiaries has, or has arranged to have, any Hazardous Materials, treated,
stored or disposed of at, or transported to, any facility or property the
remediation or cleanup of which, or the response costs related thereto, could be
attributed in any manner to, or otherwise become responsibilities of or
liabilities to, the Company or its Subsidiaries. There are no allegations,
claims, demands, citations, notices of violation, or orders of noncompliance
made against, issued to or received by the Company or its Subsidiaries within
the past (5) years relating or pursuant to any Environmental Law or
Environmental Permit except those which have been corrected or complied with to
the satisfaction of the Governmental Entity or other claimant, and no such
allegation, claim, demand, citation, notice of violation or order of
noncompliance is threatened, imminent, likely or contemplated. The Company and
its Subsidiaries have not contractually created or assumed any liabilities or
obligations or indemnifications related to Environmental Law at or related to
any real property currently or formerly owned, operated or leased by the Company
or its Subsidiaries.
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4.2.27 Owned Real Estate. All of the real estate and any
interest in real estate held by the Company or any Subsidiary is identified
(including by street address and Subsidiary owner) in the Company Disclosure
Schedule as being so owned (the "Real Estate"). Each Remaining Subsidiary so
indicated as owning Real Estate has insurable title to its Real Estate, subject
only to general real estate taxes not delinquent and to Encumbrances, covenants,
conditions, restrictions and easements of record, none of which makes title to
any of such Real Estate uninsurable and none of which are violated by the
Remaining Subsidiary or interfere with such Remaining Subsidiary's use or
occupancy thereof. None of the Real Estate held by a
<PAGE>
Remaining Subsidiary is subject to any leases or tenancies. None of the
improvements comprising the Real Estate or the businesses conducted by any of
the Company thereon, are in violation of any use or occupancy restriction,
limitation, condition or covenant of record or any zoning or building law, code
or ordinance or public utility easement. No material expenditures are required
to be made for the repair or maintenance of any improvements on any of the Real
Estate for or with respect to any period ending on or including the Closing
Date. All taxes on any Real Estate owned by the Company or any Remaining
Subsidiaries for or with respect to any period ending on or including the
Closing Date have been paid or accrued in full.
4.2.28 Leased Premises. Neither the Company nor any
Remaining Subsidiary leases (or has any commitment to lease) any real estate.
The Distributed Subsidiaries lease (or have a commitment to lease) the premises
identified in the Company Disclosure Schedule as being so leased (the "Leased
Premises"). The Leased Premises are leased to the indicated Subsidiary pursuant
to written leases, true, correct and complete copies of which have been
delivered to Purchaser prior to the date hereof or are contained in the SEC
Documents. The improvements comprising the Leased Premises, and the businesses
conducted by the Company thereon, are not in violation of any use or occupancy
restriction, limitation, condition or covenant of record or any zoning or
building law, code or ordinance or public utility or other easements.
4.2.29 Intellectual Property. No Intellectual Property
has infringed, infringes or in any material way has damaged or damages any of
the rights, title or interests of any third party (nor has any third party given
the Company notice of any claimed infringement or damage). "Intellectual
Property" means all of the following, whether owned, used or licensed by the
Company or any Remaining Subsidiary: (i) all common law, federally registered,
state registered and foreign trademarks and service marks and all applications
for federal, state or foreign registration of trademarks or service marks, (ii)
all slogans, trade dress and trade names, (iii) all proprietary know-how and
methods, (iv) all trade secrets, (v) all federal and foreign patents and patent
applications, (vi) all copyright registrations and material unregistered
copyrights, and (vii) all computer software.
4.2.30 Brokers. No broker, finder, investment banker or
other Person (other than Josephthal & Co., whose compensation arrangement is set
forth in the Company Disclosure Schedule) is entitled to a broker's commission,
finder's fee, investment banker's fee or similar payment from the Company in
connection with the Merger.
4.2.31 Fairness Opinion. The Company has received the
written opinion of Josephthal & Co. (the "Fairness Opinion") on the date of this
Agreement to the effect that, as of the date of this Agreement, the Merger
Consideration to be received by stockholders of the Company is fair from a
financial point of view. The Company has provided a true and correct copy of the
Fairness Opinion to Purchaser. The Company is authorized by Josephthal & Co. to
include a copy of such opinion in the Proxy and Information Statement.
4.2.32 Form 10 Registration, Proxy Statement and
Information Statement. None of the information (other than information provided
by Parent and Purchaser) included or incorporated by reference in the (i) Form
10 registration statement relating to the registration under the Exchange Act of
shares of common stock of BL to be distributed to shareholders of the Company in
the Distribution (as supplemented or amended, the "Form 10 Registration"), (ii)
the proxy statement relating to the Transactions to be approved at the Meeting
(as amended or supplemented, the "Proxy Statement") and the information
statement relating to the Distribution (as supplemented or amended, the
"Information Statement") will (x) in the case of the Form 10 Registration, at
the time it becomes effective, ontain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading or (iii) in the case of the
Proxy Statement and the Information Statement, at the time of the mailing
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<PAGE>
thereof, at the time of the Meeting and at the Effective Time, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The Form
10 Registration and the Proxy Statement and the Information Statement will each
comply as to form in all material respects with the provisions of the Exchange
Act and applicable law.
4.2.33 Full Disclosure. The representations, warranties
and statements of the Company in this Agreement or contained in any schedule,
list or document delivered pursuant to this Agreement do not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements contained therein, in light of the circumstances under
which such representations, warranties and statements are made, not misleading.
The copies of all documents furnished by the Company pursuant to or in
connection with this Agreement are true, complete and correct. True, complete
and accurate copies of each document referred to in the Company Disclosure
Schedule are contained therein or have been furnished to Purchaser prior to the
date hereof.
4.3 Representations and Warranties of Parent and Purchaser. Parent and
Purchaser jointly and severally represent and warrant to the Company that:
4.3.1 Organization and Authority. Parent is a limited
liability company duly organized, validly existing and in good standing under
the laws of the State of Wyoming. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of New York.
Each of Parent and Purchaser has all necessary corporate power and authority to
conduct its business as now being conducted.
4.3.2 Authority Relative to this Agreement. Each of
Parent and Purchaser has full corporate power and authority to enter into and
perform this Agreement and each of the other Transaction Agreements to which it
is a party. The execution and delivery of this Agreement and each of the other
Transaction Agreements by Purchaser and Parent and the performance by Purchaser
and Parent of their respective obligations hereunder or thereunder have been
duly authorized by all requisite corporate action. This Agreement has been, and
each of the other Transaction Agreements to which it is a party will be, duly
executed and delivered by duly authorized officers of Purchaser and Parent and
constitutes, or will constitute when so executed and delivered, a valid and
binding obligation of Purchaser and Parent enforceable against it in accordance
with its terms.
4.3.3 Required Filings. No Authorization is required by
or with respect to Purchaser in connection with the execution and delivery of
this Agreement or the other Transaction Agreements by Purchaser or the
consummation by Purchaser of the Transactions.
4.3.4 No Conflicts. Neither the execution and delivery
of this Agreement or any of the other Transaction Agreements by Parent or
Purchaser, nor the consummation by Parent or Purchaser of the Transactions, will
(i) conflict with or result in a breach of any of the terms or provision of the
Certificate of Incorporation or By-Laws of Purchaser, or Articles of
Organization of Parent or of any statute or administrative regulation, or of any
order, writ, injunction, judgment or decree of any court or governmental
authority or of any arbitration award to which Purchaser is a party or by which
Parent or Purchaser is bound; or (ii) violate, conflict with, breach, constitute
a default (or give rise to an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in the creation of any lien or
other Encumbrance upon any of the properties or assets of Parent or Purchaser
under, any note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which Parent or Purchaser is a
party or to which Parent or Purchaser or any of its
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<PAGE>
properties or assets are subject (the "Purchaser Obligations"), except for such
violations, conflicts, breaches, defaults, terminations, accelerations or
creations of liens or other Encumbrances that do not and will not, individually
or in the aggregate, (x) have a Material Adverse Effect on Parent or Purchaser
or (y) materially impair Parent or Purchaser's ability to perform its
obligations under this Agreement or any of the other Transaction Agreements.
Without limiting the generality of the foregoing, Purchaser is not subject to
any Purchaser Obligation pursuant to which timely performance of this Agreement
or any of the Transactions may be prohibited, prevented or materially delayed.
4.3.5 Capitalization. The authorized capital stock of
Purchaser consists of 10,000 shares of common stock, $.01 par value, of which
1,000 shares are outstanding. All of the outstanding shares of common stock of
Purchaser are entitled to vote as a class and are owned of record by Parent.
4.3.6 Investment Intent. Each of Parent and Purchaser is
an "accredited investor" within the meaning of Rule 501(a) of Regulation D under
the Securities Act, and is acquiring the Common Stock for its own account for
investment and with no present intention of distributing or reselling such
Common Stock or any part thereof in any transaction which would constitute a
"distribution" within the meaning of the Securities Act.
4.3.7 Financing. Purchaser has delivered to the Company
a true and correct copy of a letter from a bank (the "Lender"), stating Lender's
interest in providing debt financing ("Financing") to Parent, which, together
with equity to be contributed to Purchaser will be in an amount necessary to pay
the Merger Consideration and consummate the Merger, subject to the negotiation,
preparation and execution of binding documents with respect to the Financing,
and to the fulfillment of the conditions precedent contained in such letter.
None of the Financing will be an obligation of or secured by a lien on the
assets of the Surviving Corporation. Parent and Purchaser have no present
intention to liquidate the Surviving Corporation.
4.3.8 Proxy Statement. None of the information included
in the Proxy Statement and provided by the Parent and Purchaser in writing for
use in the Proxy Statement will, at the time of the mailing thereof, at the time
of the Meeting and at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
5.1 Obligations of Each of the Parties. From and after the date hereof
and until and including the Effective Time, the following shall apply with equal
force to the Company, on the one hand, and Parent and Purchaser, on the other
hand:
5.1.1 Each party shall promptly give the other party
written notice of the existence or occurrence of any event or condition which
would make any representation or warranty herein contained of either party
untrue or which might reasonably be expected to prevent the consummation of the
transactions contemplated hereby. In the case of the Company, such notice
shall include a reasonably detailed description of such event or condition,
the representation or warranty to which it relates and an estimate of the
damages, if any, associated therewith.
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<PAGE>
5.1.2 No party shall intentionally perform any act which,
if performed, or omit to perform any act which, if omitted to be performed,
would prevent or excuse the performance of this Agreement by any party or which
would result in any representation or warranty herein of that party being untrue
in any material respect at any time after the date hereof through and including
the Closing Date as if then originally made.
5.1.3 Subject to the terms and conditions of this
Agreement, each of the parties agrees to use their best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective the Transactions
and the other transactions contemplated by this Agreement as expeditiously as
reasonably practicable; provided, however, that nothing in this Section 5.1.3
shall in any event require any party to (i) expend funds which are not
commercially reasonable in relation to the transactions contemplated hereby or
(ii) take or cause to be taken, any action which would have a Material Adverse
Effect with respect to it.
5.2 Access. Subject to any restrictions under applicable law, the
Company shall continue to give to Purchaser's and Parent's respective officers,
employees, agents, attorneys, consultants and accountants reasonable access for
reasonable purposes in light of the transactions contemplated by this Agreement
during normal business hours to all of the properties, books, contracts,
documents, present and expired insurance policies, records and personnel of or
with respect to the Company or any Subsidiary and shall furnish to Parent and
Purchaser and such persons as Parent or Purchaser shall designate to the Company
such information as Purchaser or such persons may at any time and from time to
time reasonably request. It is expressly understood and agreed that all
information obtained pursuant to this Section 5.2 is subject to the terms and
conditions of the Confidentiality Letter dated September 2, 1998, executed by
Parent and Parent expressly reaffirms its obligations thereunder. Without
limiting the generality of the foregoing, the Company will permit Parent and
Purchaser to conduct a Phase I and Phase II environmental investigation with an
environmental consultant selected by Purchaser of the Real Estate held by Reina
Distributing, Inc. The Company will pay the costs of such investigation promptly
upon receipt of such consultant's billing statement.
5.3 The Company's Obligations. From and after the date hereof
and until and including the Effective Time:
5.3.1 The Company shall, and shall cause each Remaining
Subsidiary to, carry on its business with the objective of effecting
the Distribution and Power Facility Sales and, in all other respects
with the objective of winding up the remaining business of the Company
and the Remaining Subsidiaries so that the Company and the Remaining
Subsidiaries will have no assets other than cash and cash equivalents
and the Retained Assets and no Liabilities other than the Permitted
Liabilities and at Closing, Liabilities taken into account in the
calculation of the Adjustment Amount as reflected in the Statement as
finally agreed to by Purchaser. Without the prior written consent of
Purchaser, and without limiting the generality of any other provision
of this Agreement including the foregoing, the Company shall not, and
shall not permit any Remaining Subsidiary to:
(a) amend its Certificate of Incorporation,
By-Laws or other organizational documents;
(b) make any change in its authorized capital
stock; adjust, split, combine or reclassify any capital
stock; or, other than issuances of shares of Common Stock
pursuant to the valid exercise of Stock Options or
Warrants outstanding on the date hereof in accordance with
Section 2.4 of this Agreement, issue any shares of stock
of any class, or
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issue or become a party to any subscription, warrant,
rights, options, convertible securities or other
agreements or commitments of any character relating to its
issued or unissued capital stock, or other equity
securities, or grant any stock appreciation or similar
rights, or amend the terms of any Stock Option or Warrant
except as contemplated by Section 2.5;
(c) incur any indebtedness for borrowed money or
assume, guarantee, endorse or otherwise as an
accommodation become responsible for the obligations of
any other individual, corporation or other entity,
including the Distributed Subsidiaries;
(d) other than in connection with the Distribution
or Power Facility Sales, sell, transfer, mortgage,
encumber or otherwise dispose of any of its material
properties or assets to any individual, corporation or
other entity other than a Subsidiary, except pursuant to
contracts or agreements in force at the date of this
Agreement, the sale of the NIMO stock, or as specifically
set forth in this Agreement with respect to the
Transactions;
(e) other than in connection with the Distribution
make any (x) investments, either by purchase of stock or
securities, in (y) contributions to capital of, or (z)
purchases of any property or assets from, any other
individual, corporation or other entity;
(f) except as necessary to effect the Distribution
or eliminate a Liability of the Company or Remaining
Subsidiary (with respect to which the Company shall notify
Purchaser promptly in writing), and except for
transactions in the ordinary course of business consistent
with past practice and those transactions contemplated by
the provisions of this Agreement, enter into or terminate
any material contract or agreement, or make any change in
any of its material leases or contracts;
(g) change its method of accounting in effect at
December 31, 1997, except as may be required by changes in
GAAP upon the advice of its independent accountants;
(h) increase the compensation payable to any
employee, or enter into any new employment agreements with
new or existing employees which create other than an at
will relationship, in each case, except in the ordinary
course of business consistent with past practices other
than bonuses to officers and employees which are paid
prior to the Effective Time;
(i) pay or declare any dividend or make any
distribution (other than the Distribution) on its
securities of any class or purchase or redeem any of its
securities of any class;
(j) make any Tax election or settle or
compromise any Tax liability;
(k) fail to maintain in full force and effect
insurance coverage substantially similar to that in effect
on the date hereof; or
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(l) enter into any business or contract not
related to the Distribution, Power Facility Sales or the
Merger other than contracts which are not material and
which will be fully performed prior to the Effective Time.
5.3.2 The Company shall cause the Distributed Subsidiaries
to carry on their respective businesses only in the ordinary course
consistent with past practice and shall not and shall cause the
Distributed Subsidiaries not to create any Liabilities of the Company
or any Remaining Subsidiary for the Liabilities of the Distributed
Subsidiaries following the Effective Time.
5.3.3 The Company shall furnish to Purchaser the Company's
internal unaudited statement of condition and statement of income for
each month ending after the date of this Agreement. Such monthly
statements shall be prepared in accordance with existing practice and
shall fairly present in all material respects the consolidated
financial position and results of operation for the Company as of and
for the periods indicated therein in accordance with past practice. The
Company will advise Purchaser upon request as to the status of the
components of the Base Amount and Additional Amount and provide
reasonable evidence supporting the determination of the amount of such
components.
5.4 Proxy Statement; Other Regulatory Matters.
5.4.1 The Company will (i) call a meeting of its
shareholders (the "Meeting") for the purpose of voting upon adoption and
authorization of the Merger, (ii) hold the Meeting as soon as practicable
following the date of this Agreement, (iii) subject to Section 5.6 recommend to
its shareholders the approval of the Merger through its Board of Directors and
(iv) use its best efforts to obtain the necessary adoption and authorization of
this Agreement by the shareholders of the Company.
5.4.2 The Company will (i) as soon as practicable
following the date of this Agreement, prepare in correct and appropriate form
and file with the SEC the Form 10 Registration and a preliminary Proxy Statement
and Information Statement and (ii) use its reasonable best efforts to respond to
any comments of the SEC or its staff and to cause the Form 10 Registration to be
effective and each of the Proxy and the Information Statement to be cleared by
the SEC. The Company will notify Purchaser of the receipt of any comments from
the SEC or its staff and of any request by the SEC or its staff for amendments
or supplements to the Form 10 Registration, the Proxy or the Information
Statement or for additional information and will supply Purchaser with copies of
all correspondence between the Company or any of its representatives, on the one
hand, and the SEC or its staff, on the other hand, with respect to the Form 10
Registration or the Proxy Statement and Information Statement or any of the
Transactions. The Company shall give Purchaser and its counsel (who shall
provide any comments thereon as soon as practicable) the opportunity to review
the Form 10 Registration, the Proxy Statement and the Information Statement
prior to being filed with the SEC and shall give Purchaser and its counsel (who
shall provide any comments thereon as soon as practicable) the opportunity to
review all amendments and supplements to the Form 10 Registration, the Proxy and
the Information Statement and all responses to requests for additional
information and replies to comments prior to their being filed with, or sent to,
the SEC. Each of the Company and Purchaser agrees to use its reasonable best
efforts, after consultation with the other parties hereto, to respond promptly
to all such comments of and requests by the SEC. As promptly as practicable
after the Proxy Statement and the Information Statement have been cleared by the
SEC, the Company shall mail the Proxy Statement and the Information Statement,
respectively, to the stockholders of the Company. The Purchaser and the Parent
shall supply to the Company on a timely basis in connection with the preparation
of the Proxy Statement and the Information Statement all information necessary
to be included therein with respect to the Purchaser and the Parent.
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5.4.3 Each party agrees to notify the other of, and to
correct, any information contained in the Form 10 Registration, the Proxy
Statement and Information Statement furnished by such party to the other for
inclusion therein, which information shall be, at the time of furnishing, or
become, prior to the Meeting, false or misleading in any material respect. If at
any time prior to the Meeting or any adjournment thereof there shall occur any
event that should be set forth in an amendment to the Form 10 Registration Proxy
Statement or the Information Statement, the Company will prepare and mail to its
stockholders such an amendment or supplement.
5.4.4 The Company will file all reports, schedules and
definitive proxy statements (including the Proxy Statement and the Information
Statement) (the "Company Filings") required to be filed by the Company with the
SEC (including reports required by Section 13(d) or 13(g) of the Exchange Act
and will provide copies thereof to the Company promptly upon the filing thereof.
As of its respective date, the Company represents, warrants and covenants that
each the Company Filing will comply in all material respects with the
requirements of the Exchange Act and the applicable rules and regulations of the
SEC thereunder and none of the Company Filings will contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading. Upon learning of any
such false or misleading information, the Company will cause all required the
Company Filings (including the Proxy Statement and the Information Statement) to
be corrected, filed with the SEC and disseminated to holders of the Common
Stock, in each case as and to the extent required by applicable law.
5.4.5 Subject to the terms and conditions herein
provided, the Company and Parent and Purchaser will cooperate and consult with
one another in (a) determining which consents, approvals, Permits,
authorizations or waivers (collectively, "Consents") are required to be obtained
prior to the Effective Time from Governmental Entities or other third parties in
connection with the execution and delivery of this Agreement (including those
Consents with respect to those matters disclosed as a result of Section 4.2.4 of
this Agreement or with respect to any of the Transactions or the Transaction
Agreements and the consummation of the transactions contemplated hereby or
thereby, (b) preparing all Consents and all other filings, submissions and
presentations required or prudent to obtain all Consents, including by providing
to the other party drafts of such material reasonably in advance of the
anticipated filing or submission dates, and (c) timely seeking all such Consents
(it being understood that the parties will make or seek to Consents, whether
mandatory or voluntary and that each party will be responsible and pay for the
costs, penalties and expenses associated with the Consents required with respect
to it). The Company will obtain and deliver to Purchaser at or prior to Closing
originals of full and complete releases of the Company and each Remaining
Subsidiary from any and all Liabilities of the Company or such Remaining
Subsidiary (x) fo Liabilities (other than Permitted Liabilities) of any
Distributed Subsidiary (the "Third Party Releases") (y) to provide
indemnification by contract, law or otherwise to any current director, officer,
employee agent or affiliates except to the extent of the Surviving Corporation
rights under the Escrow Agreement or the D&O Insurance, the form and substance
of which shall be reasonably acceptable to Purchaser and Parent ("D&O
Releases").
5.5 Acquisition Proposals.
----------------------
5.5.1 From and after the date hereof and until and
including the Effective Time (or earlier termination of this Agreement), the
Company shall immediately cease and cause to be terminated any activities,
discussions or negotiations with respect to an Acquisition Proposal (as defined
herein), and the Company shall not, nor shall it permit any Subsidiary, or
authorize or permit any of its officers, directors or employees or holders of
more than five percent of its outstanding shares of Common Stock or any
investment banker, financial advisor, attorney, accountant or other
representative or agent of the Company or any
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Subsidiary, to, directly or indirectly, (i) solicit, initiate, or encourage
(including by way of furnishing or otherwise providing, or providing access to
nonpublic information) any Acquisition Proposal; (ii) participate in any
discussions or negotiations relating to any Acquisition Proposal (or any inquiry
relating to an Acquisition Proposal) or take any other action to facilitate any
inquiries or the making of any proposal that constitutes an Acquisition
Proposal; or (iii) enter into any letter of intent, agreement in principle or
definitive agreement with respect to any Acquisition Proposal; provided,
however, that nothing contained in this Section 5.5 shall prohibit the Company
or the Board from furnishing nonpublic information to, or entering into
discussions or negotiations with, any person or entity with respect to any
unsolicited Acquisition Proposal if (but only if): (a) the Board determines
reasonably and in good faith, after due investigation and after consultation
with and based upon the advice of its outside financial advisor, that such
Acquisition Proposal is a Superior Proposal (as defined below); (b) the Board
determines reasonably and in good faith, after due investigation and after
consultation with and based upon the advice of outside counsel, that the failure
to take such action would cause the Board to violate its fiduciary duties to
stockholders under applicable law in the context of the Transactions; and (c)
the Company (x) provides at least two business days' notice to Acquiror to the
effect that it is taking such action and (y) receives from such person or entity
an executed confidentiality agreement substantially similar to the
Confidentiality Agreement. Notwithstanding the foregoing, nothing in this
Section 5.5 will restrict the Company from effecting the Power Facility Sales as
contemplated hereby.
5.5.2 Notwithstanding anything in this Agreement to the
contrary, the Company shall promptly advise Parent orally and in writing of the
receipt by it (or by any of the other entities or persons referred to above)
after the date hereof of any Acquisition Proposal or any inquiry which could
reasonably lead to an Acquisition Proposal, the material terms and conditions of
such Acquisition Proposal or inquiry, and the identity of the person or entity
making any such Acquisition Proposal. The Company agrees that it will fully
enforce (including by way of obtaining an injunction), and not waive any
provision of, any confidentiality agreement to which it is a party.
5.5.3 For purposes of this Agreement: "Acquisition
Proposal" means any bona fide offe or proposal with respect to a merger,
consolidation, share exchange or similar transaction involving the Company or
any Subsidiary or any purchase of all or any significant portion of the assets
or capital stock of the Company or any significant Subsidiary or any other
business combination (including the acquisition of any equity interest therein)
involving the Company excluding, however, any proposal or transaction with
respect to the Power Facilities; and "Superior Proposal" means an Acquisition
Proposal which the Board believes in good faith, after due investigation (taking
into account, among other things, the financing terms and the likelihood of
consummation) and based upon the advice of its outside legal and financial
advisors, is more favorable to the Company's stockholders from a financial point
of view than the Merger (taking into account the Distribution).
5.6 Board Action. The Board shall not (i) withdraw or modify its
approval, adoption or recommendation of this Agreement, the Merger or any of the
Transactions , (ii) approve, adopt or recommend or publicly propose to approve,
adopt or recommend an Acquisition Proposal, (iii) cause the Company to enter
into any letter agreement, agreement in principle or definitive agreement with
respect to an Acquisition Proposal, or (iv) resolve to do any of the foregoing
unless the Company receives an unsolicited Acquisition Proposal in accordance
with Section 5.5 and the Board determines reasonably and in good faith, after
due investigation (a) based upon the advice of its outside financial advisor
that a pending Acquisition Proposal is more favorable to the Company
Stockholders than the Merger and the Distribution, taken as a whole, (b) such
Acquisition Proposal is reasonably likely to be consummated, (c) there is a
substantial probability that the approval of the Merger and the Distribution
will not be obtained due to the pending Acquisition Proposal, and (d) based upon
the advice of outside counsel, that the failure of the Board to withdraw or
modify its approval,
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adoption or recommendation of this Agreement or the Merger, or approve or
recommend such Acquisition Proposal would cause the Board to violate its
fiduciary duties to stockholders under applicable law in the context of the
Transactions. In such case, the Board may withdraw or modify its recommendation,
and approve and recommend such Acquisition Proposal, provided the Board provides
to Parent and Purchaser written notice of the Company's intention to accept the
Superior Proposal at least two business days prior to taking such action and, at
the end of such two business day period (x) simultaneously terminates this
Agreement, (y) concurrently causes the Company to enter into a definitive
acquisition agreement with respect to such Superior Proposal and (z)
concurrently pays to Purchaser the Termination Payment and Covered Expenses
pursuant to Section 7.4.2. Nothing contained in this Section 5.6 shall prohibit
the Company from taking and disclosing to its stockholders a position
contemplated by Rule 14e-2(a) promulgated under the Exchange Act; provided that
the Company does not withdraw or modify its position with respect to the Merger
or approve or recommend an Acquisition Proposal, except under the circumstances
described in the immediately preceding sentence and on two business days' notice
to Purchaser to the effect that it is taking such action.
5.7 Indemnification and Insurance.
-----------------------------
5.7.1 Purchaser and the Company agree that prior to the
Effective Time, the Company will procure and pay for officers' and directors'
liability insurance ("D&O Insurance") covering each present and former director,
officer, employee and agent of the Company and each Subsidiary and each present
and former director, officer, employee, agent or trustee of any employee benefit
plan for employees of the Company (individually, an "Indemnified Person", and
collectively, the "Indemnified Persons"), who is currently covered by the
Company's officers' and directors' liability insurance or will be so covered on
the Closing Date with respect to actions and omissions occurring on or prior to
the Closing Date (including, without limitation, any which arise out of or
relate to the transaction contemplated by this Agreement). Purchaser shall not
be required to provide or cause the Surviving Corporation to provide any such
insurance for the Indemnified Persons.
5.7.2 Purchaser and the Surviving Corporation hereby
jointly and severally agree that, for the lesser of (a) six (6) years after the
Closing Date, or (b) the period during which the Surviving Corporation maintains
its existence, the provisions of the Certificate of Incorporation and By-Laws of
the Surviving Corporation shall provide indemnification to the Indemnified
Persons on terms, in a manner, and with respect to matters, which are no less
favorable (in favor of persons indemnified) than the Company Certificate of
Incorporation and By-Laws, as in effect on the date hereof, and further agree
that such indemnification provisions shall not be modified or amended except as
required by law, unless such modification or amendment expands the rights of the
Indemnified Persons to indemnification. Notwithstanding the foregoing, it is
expressly understood and agreed that the obligation of the Surviving Corporation
to provide such indemnification is limited to the D&O Insurance and the
Surviving Corporation's rights under the Escrow Agreement and that the
provisions of the Certificate of Incorporation and By-laws of the Surviving
Corporation may be amended accordingly.
5.8 Surviving Corporation. The Surviving Corporation or its successors
will maintain its or their existence until at least March 31, 2003.
5.9 Parent's Financing. Parent will use its reasonable best
efforts to obtain the proceeds of the Financing.
5.10 Liabilities. The Company agrees to use its best efforts so that
neither the Company nor any Remaining Subsidiary will have as of the Effective
Time any Liability other than the Permitted Liabilities and Liabilities, if any,
included in the calculation of the Adjustment Amount as agreed to by Parent and
Purchaser.
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5.11 Other Company Covenants. Prior to the Effective Time, the Company
will (a) as soon as practicable, obtain from General Electric Capital
Corporation ("GECC") a release from pledge of all of the outstanding shares of
any Remaining Subsidiary which have been pledged to GECC, and (b) cause to be
paid in full at or prior to the Closing all expenses associated with the
transactions contemplated hereby including fees and expenses of investment
bankers, counsel, accountants, consultants and other advisors to the Company,
all severance, bonus and other compensation payable in connection with or as a
result of the Merger and all other expenses of the Company and each of the
Remaining Subsidiaries.
5.12 Parent Covenants. Parent agrees to cause the Surviving Corporation
to amend its Certificate of Incorporation within thirty (30) days after the
Closing Date to change the name of the Surviving Corporation to a name which
does not include the word "Besicorp". The Surviving Corporation agrees to (a)
quitclaim without recourse to BL the net proceeds of any recovery under a
derivative claim against its officers or directors and (b) file all income Tax
Returns for the current fiscal year and pay all Taxes shown to be due thereon.
ARTICLE VI
CONDITIONS TO CLOSING; CLOSING DELIVERIES; BASE AMOUNT
6.1 Conditions to Each Party's Obligations. The respective obligations
of each party to effect the transactions contemplated hereby shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
6.1.1 The Merger Agreement and, to the extent required
under the NYBCL, the Distribution shall have been adopted and authorized by th
requisite vote of the stockholders of the Company.
6.1.2 This Agreement, the Merger and (to the extent
approval thereof is necessary to consummate the Transactions) the Transactions
shall have been approved by each Governmental Entity whose approval is required
for the consummation of the Merger or such Transactions, such approvals shall
remain in full force and effect and all waiting periods relating to such
approvals shall have expired.
6.1.3 No Governmental Entity or court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
law, rule, regulation, executive order, judgment, decree, injunction or other
order (whether temporary, preliminary or permanent)which is then in effect and
has the effect of making the Merger or any of the Transactions illegal.
6.2 Conditions to the Company's Obligations. The obligation of the
Company to consummate the transactions contemplated hereby is subject to the
fulfillment (or waiver) of all of the following conditions prior to the
Effective Time, upon the non-fulfillment (and non-waiver) of any of which this
Agreement may, at the Company's option, be terminated pursuant to and with the
effect set forth in Article VII:
6.2.1 Each and every representation and warranty made by
Parent and Purchaser shall be true and correct when made and as if originally
made on and as of the Closing Date.
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6.2.2 All obligations of Parent and Purchaser to be
performed hereunder through, and including on, the Closing Date (including,
without limitation, all obligations which Purchaser would be required to perform
at the Closing if the transaction contemplated hereby was consummated shall have
been fully performed.
6.2.3 Purchaser shall have delivered to the Company the
written opinion of Altheimer & Gray, counsel for Purchaser, dated as of the
Closing Date, in substantially the form of Exhibit C attached hereto.
6.2.4 Immediately prior to the Merger Purchaser is, and
assuming that the condition set forth in Section 6.3.1 is satisfied, immediately
following the effectiveness of the Merger the Surviving Corporation shall be,
solvent.
6.3 Conditions to Parent's and Purchaser's Obligations. The obligations
of Parent and Purchaser to consummate the transactions contemplated hereby is
subject to the fulfillment (or waiver) of all of the following conditions on or
prior to the Closing Date, upon the non-fulfillment (and non-waiver) of any of
which this Agreement may, at Purchaser's option, be terminated pursuant to and
with the effect set forth in Article VII:
6.3.1 The representations and warranties made by the
Company shall be true and correct when made and as if originally made on and as
of the Closing Date, except to the extent reflected in the Statement as finally
agreed to by Parent and Purchaser.
6.3.2 All obligations of the Company to be performed
hereunder through, and including on, the Closing Date (including, without
limitation, all obligations which the Company would be required to perform at
the Closing if the transaction contemplated hereby was consummated)shall have
been fully performed.
6.3.3 No suit, proceeding or investigation shall have been
commenced (to Purchaser's knowledge) by any Governmental Entity on any grounds
to restrain, enjoin or hinder, or seek material damages on account of, the
consummation of any of the Transactions or the other transactions contemplated
hereby.
6.3.4 The Company shall have delivered to Purchaser the
written opinion of Robinson Brog Leinwand Greene Genovese & Gluck P.C., counsel
to the Company, dated as of the Closing Date, in substantially the form of
Exhibit D attached hereto.
6.3.5 Since June 30, 1998 there shall have been no
changes, either individually or in the aggregate, taking into account the
completion of the Transactions other than the Merger, in the results of
operations, condition (financial or otherwise), properties, assets, business or
prospects of the Company or any Subsidiary which has had or would be reasonably
likely to have a Material Adverse Effect on the Company or any Remaining
Subsidiary.
6.3.6 There shall not be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, by any Governmental Entity which imposes any condition
or restriction upon Purchaser, the Surviving Corporation or its Subsidiaries
which would in Purchaser's opinion be commercially unreasonable from a financial
standpoint relative to the transactions contemplated by this Agreement.
6.3.7 Purchaser shall be satisfied in its reasonable
discretion that each of the Distribution and the Power Facility Sales shall have
been completed as provided in this Agreement and that neither the
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Surviving Corporation nor any of the Remaining Subsidiaries has any Liability as
a result of or arising out of the Distribution or Power Facility Sales.
6.3.8 The Indemnification Agreement and the Escrow
Agreement shall have been executed and delivered by BL and shall each be valid,
legal, binding and enforceable obligations of BL, and the Company shall have
deposited $6,000,000 in cash with the Escrow Agent under the Escrow Agreement.
6.3.9 The Base Amount shall be no less than $ 105,275,000.
6.3.10 Purchaser shall have received the proceeds of the
Financing.
6.3.11 Neither the Company nor any Remaining Subsidiary
shall have any Liabilities other than the Permitted Liabilities and the
Liabilities taken into account in determining the Adjustment Amount as agreed to
by Purchaser and Parent.
6.3.12 The Company shall have received all of the Consents
and obtained the Third Party Releases and DB&O Releases (it being understood
that this condition with respect to the Third Party Releases will be satisfied
if Third Party Releases with respect to Liabilities aggregating no more than
$50,000 are not obtained).
6.3.13 The number of shares of Common Stock outstanding
immediately prior to the Effective Time does not exceed 3,051,435.
6.3.14 Purchaser shall have received the results of a
Phase I and, if reasonably requested by Purchaser, Phase II environmental
investigation of the Real Estate held by Reina Distributing, Inc. with results
satisfactory to Parent and Purchaser in their sole discretion.
6.4 Closing Deliveries.
------------------
6.4.1 At the Closing, the Company shall cause to be
executed and delivered to Parent and Purchaser all of the following:
(a) a closing certificate dated the Closing Date and
executed on behalf of the Company by a duly authorized officer of the
Company to the effect set forth in Sections 6.3.1, 6.3.2, 6.3.5, 6.3.6,
6.3.10(g), 6.3.11, 6.3.12 and 6.3.13;
(b) certified copies of such corporate records of the
Company and the Subsidiaries and copies of such other documents as
Purchaser or its counsel may reasonably have requested in connection
with the consummation of the transactions contemplated hereby;
(c) D&O Releases and resignations of all of the officers
and directors of each of the Remaining Subsidiaries and the Company in
form satisfactory to Purchaser and Parent;
(d) the Indemnification Agreement and Escrow Agreement;
and
(e) the minute books and corporate records of the Company
and the Remaining Subsidiaries and originals of the stock certificates
evidencing all of the outstanding capital stock of each of the
Remaining Subsidiaries free of all Encumbrances.
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6.4.2 At the Closing, Parent and Purchaser shall cause
to be delivered to the Company all of the following:
(a) a closing certificate dated the Closing Date and
executed on behalf of Parent and Purchaser by a duly authorized officer
of Parent and Purchaser to the effect set forth in Sections 6.2.1,
6.2.2 and 6.2.4; and
(b) certified copies of such corporate records of Parent
and Purchaser and copies of such other documents as the Company or its
counsel may reasonably have requested in connection with the
consummation of the transactions contemplated hereby.
ARTICLE VII
TERMINATION/EFFECT OF TERMINATION
7.1 Right to Terminate. Anything to the contrary herein
notwithstanding, this Agreement and the transaction contemplated hereby may be
terminated at any time prior to the Effective Time by prompt notice given in
accordance with Section 8.4:
7.1.1 by the mutual written consent of Parent and
Purchaser and the Company (with the approval of their respective Boards of
Directors);
7.1.2 by Purchaser and Parent, or the Company (with the
approval of the Board) if:
(a) the Effective Time shall not have
occurred at or before 11:59 p.m. on February 15, 1999 (the "Termination
Date"); provided, however, that the right to terminate this Agreement
under this Section 7.1.2 shall not be available to any party whose
failure to fulfill any of its obligations under this Agreement has been
the cause of the failure of the Effective Time to have occurred as of
such time; or
(b) upon a vote at the Meeting any of this Agreement
or any of the Transactions required to be adopted or authorized by the
shareholders of the Company shall fail to be adopted and authorized.
7.1.3 by Parent and Purchaser, by giving written notice
of such termination to the Company, if:
(a) there has been a material breach of any
material agreement or covenant on the part of the Company which has not
been cured or adequate assurance of cure given, in either case within
ten (10) business days following notice of such breach from Purchaser
or either of the Indemnification Agreement or the Escrow Agreement
shall not be a valid, legal and binding agreement or enforceable
against BL;
(b) there has been a breach of a
representation or warranty of the Company the Damages from which Purchaser
reasonably determines would cause the Base Amount to be less than $105,275,000;
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(c) the Board shall have taken any action
contemplated by clause (i), (ii), (iii) or (iv) of Section 5.6;
(d) a tender offer or exchange offer for 15%
or more of the shares of Common Stock of the Company is commenced, and
the Board fails to recommend against acceptance of such tender offer or
exchange offer by its stockholder within the time period required by
Section 14e-2 of the Exchange Act (the taking of no position by the
expiration of such period with respect to the acceptance of such tender
offer or exchange offer by its shareholders constituting such a
failure) or any Person acquires by any means 20% or more of the
outstanding shares of Common Stock;
(e) the Company shall have breached any of
its covenants or agreements in Section 5.5;
(f) there shall be pending or threatened any
proceeding seeking material damages on account of this Agreement or the
consummation of the Merger or any of the other Transactions which
Purchaser determines in good faith, after due investigation and
consultation with counsel representing the Company in such proceeding,
could reasonably be expected to result in the Company incurring a
material amount of damages or expenses relative to the protections to
Parent afforded by the Escrow Agreement, after taking into account
applicable insurance coverage; or
(g) the Base Amount is less than $105,275,000.
7.1.4 by the Company (with the approval of the Board ), by
giving written notice of such termination to Parent and Purchaser, if:
(a) there has been a material breach of any
agreement herein on the part of Purchaser which has not been cured or
adequate assurance of cure given, in either case within ten (10)
business days following notice of such breach from the Company;
(b) there has been a breach of a
representation or warranty of Parent or Purchaser herein which could
reasonably be expected to prevent Parent or Purchaser from fulfilling
their obligations under this Agreement and which, in the reasonable
opinion of the Company, by its nature cannot be cured within twenty
(20) days (or, if sooner, the Closing Date);
(c) if the Board determines to enter into and
enters into a definitive agreement providing for a Superior Proposal
which was obtained consistent with Section 5.5; provided, however, that
the Company shall have no right to terminate this Agreement under this
Section 7.1.4(c) unless (i) the Company has provided Purchaser with
written notice of the material terms of the Superior Proposal at least
two business days prior to such termination, and (ii) the Company
simultaneously pays to Purchaser the Termination Payment and Covered
Expenses required under Section 7.4.2.
7.2 Certain Effects of Termination. In the event of the
termination of this Agreement as provided in Section 7.1:
7.2.1 each party, if so requested by the other party, will
return promptly every document furnished to it by or on behalf of the other
party in connection with the transaction contemplated hereby, whether so
obtained before or after the execution of this Agreement, and any copies thereof
(except for copies of documents publicly available) which may have been made,
and will use reasonable efforts to cause its
32
<PAGE>
representatives and any representatives of financial institutions and investors
and others to whom such documents were furnished promptly to return such
documents and any copies thereof any of them may have made; and
7.2.2 the obligation of Purchaser under the
Confidentiality Letter referred to in Section 5.2 shall continue indefinitely
(subject to its terms) notwithstanding any termination of this Agreement.
This Section 7.2 shall survive any termination of this Agreement.
7.3 Remedies. Notwithstanding any termination right granted in Section
7.1, in the event of the nonfulfillment of any condition to a party's closing
obligations, in the alternative, such party may elect to do one of the
following:
(a) proceed to close despite the nonfulfillment of any
closing condition without waiving any claim for any breach and
specifically in the case of Parent and Purchaser without waiving any
right to proceed under the Indemnification Agreement;
(b) decline to close, terminate this Agreement as provided
in Section 7.1, and thereafter exercise the remedies provided, or seek
damages to the extent permitted in Section 7.4; or
(c) seek specific performance of the obligations of the
other party. Each party hereby agrees that, in the event of any breach
of this Agreement by such party, the remedies available to the other
party at law would be inadequate and that such party's obligations
under this Agreement may be specifically enforced.
7.4 Right to Damages; Expense Reimbursement.
---------------------------------------
7.4.1 If this Agreement is terminated in accordance with
Section 7.1, neither party will have any claim against the other, subject to the
following sentence and, if applicable, the remaining provisions of this Section
7.4. A party terminating this Agreement in accordance with Section 7.1 (other
than Section 7.1.1) will retain any and all of such party's legal and equitable
rights and remedies if, but only if, the circumstances giving rise to such
termination were (i) caused by the other party's willful failure to comply with
a material covenant set forth herein or (ii) that a material representation or
warranty of the other party was materially false when made and that party knew
or should have reasonably known such representation or warranty was materially
false when made. In either of such events, termination shall not be deemed or
construed as limiting or denying any legal or equitable right or remedy of said
party, and said party shall also be entitled to recover its costs and expenses
which are incurred in pursuing its rights and remedies (including reasonable
attorneys' fees).
7.4.2 If (x) the Company terminates this Agreement
pursuant to Section 7.1.4(c) or 5.6 or (y) Purchaser and Parent terminate this
Agreement pursuant to 7.1.3(c), (d)or (e), and Parent and Purchaser are ready,
willing and able to execute or have executed definitive documentation to effect
the Financing or substantially similar financing arrangements, with an able
financing source, the Company will (a) pay Purchaser $3,500,000 in cash
immediately upon such termination (the "Termination Payment"), by wire transfer
of same-day funds to an account designated by Purchaser and (b) reimburse Parent
and Purchaser for their out-of-pocket costs and expenses reasonably incurred and
due to third parties in connection with this Agreement and the Transactions
(including fees and disbursements of counsel, accountants, financial advisors
and consultants, commitment fees, due diligence expenses, travel costs, filing
fees, and similar fees and
33
<PAGE>
expenses, all of which shall be conclusively established by Purchaser's good
faith statement therefor) (collectively, "Covered Expenses"), up to a maximum of
$600,000, by wire transfer of same-day funds to an account designated by
Purchaser, immediately following receipt of Purchaser's statement evidencing the
Covered Expenses.
7.4.3 If this Agreement is terminated pursuant to Section
7.1.2(b), (x) the Company will pay to Purchaser immediately upon such
termination Parent and Purchaser's Covered Expenses up to a maximum of $600,000
by wire transfer of same day funds to an account designated by Purchaser and (y)
if Michael Zinn or his direct or indirect transferees have failed to vote in
person or by proxy at least 1,600,000 shares in favor of the Merger and any
other matter presented to stockholders in connection with the Merger, the
Company shall pay the Termination Payment to Purchaser immediately upon such
termination by wire transfer of same day funds to an account designated by
Purchaser. If this Agreement is terminated pursuant to (x) Section 7.1.2(b) or
(y) by the Company, or Parent and Purchaser pursuant t Section 7.1.2(a) and the
Company, on or before March 31, 1999, enters into a written agreement to effect
an Acquisition Proposal with, or an Acquisition Proposal is or has been made by,
a party other than Parent, Purchaser or any of their Subsidiaries, and the
Acquisition Proposal is thereafter consummated the Company will pay to Purchaser
the Termination Payment plus the amount of Parent's and Purchaser's Covered
Expenses (to the extent not paid under the first sentence of this Section
7.4.3). The Termination Payment contemplated by the prior sentence shall be paid
in same-day funds by wire transfer to an account designated by Purchaser
immediately prior to consummation of such Acquisition Proposal.
7.4.4 If this Agreement is terminated by Parent and
Purchaser pursuant to Section 7.1.3(a) (other than by virtue of a breach of
Sections 5.5 or 5.6), (b), (f), or (g) the Company shall reimburse Parent and
Purchaser for their Covered Expenses up to a maximum of $600,000, by wire
transfer of same-day funds to an account designated by Parent and Purchaser,
immediately following receipt of Purchaser's statement evidencing such expenses.
If this Agreement is terminated as provided in the immediately preceding
sentence and the Company, on or before March 31, 1999, enters into a written
agreement to effect an Acquisition Proposal with, or an Acquisition Proposal is
or has been made by, a party other than Parent, Purchaser or any of their
Subsidiaries, and the Acquisition Proposal is thereafter consummated the Company
will pay to Purchaser the Termination Payment plus the amount of Parent's and
Purchaser's Covered Expenses (to the extent not paid under the first sentence of
this Section 7.4.4). The Termination Payment contemplated by the prior sentence
shall be paid in same-day funds by wire transfer to an account designated by
Purchaser immediately prior to consummation of such Acquisition Proposal.
7.4.5 If Purchaser and Parent terminate this Agreement
solely as a result of the failure of the conditions set forth in to Section
6.3.10, Parent and Purchaser shall reimburse the Company for its Covered
Expenses up to $600,000 by wire transfer of same day funds to an account
designated by the Company, immediately following receipt of the Company's
statement evidencing such expenses.
7.4.6 If the Company or Parent and Purchaser fail to
promptly pay any amounts owing pursuant to this Section 7.4. when due, the
Company or Parent and Purchaser, as the case may be, shall in addition to paying
such amounts pay all costs andexpenses (including, fees and disbursements of
counsel) incurred in collecting such amounts, together with interest on such
amounts (or any unpaid portion thereof) from the date such payment was required
to be made until the date such payment is received by the Company or Parent and
Purchaser, as the case may be, at the rate of 9% per annum as in effect from
time to time during such period. This Section 7.4 shall survive the termination
of this Agreement.
34
<PAGE>
ARTICLE VIII
MISCELLANEOUS
8.1 Survival of Representations, Warranties and Agreements. All of the
representations, warranties, and agreements contained in this Agreement or in
any certificate or other document delivered pursuant to this Agreement shall
survive the Merger for a period of five years following the Effective Time,
subject to the terms of the Indemnification Agreement.
8.2 Amendment. This Agreement may be amended by the parties hereto,
with the approval of their respective Boards of Directors, at any time prior to
the Effective Time, whether before or after approval hereof by the stockholders
of the Company, but, after such approval by the stockholders of the Company, no
amendment shall be made without the further approval of such stockholders if
such amendment would violate Section 903 of the NYBCL. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
8.3 Publicity. Except as otherwise required by law or applicable stock
exchange rules, press releases and other publicity concerning the transactions
contemplated by this Agreement shall be made only with the prior agreement of
the Company and Purchaser.
8.4 Notices. All notices required or otherwise given hereunder shall be
in writing and may be delivered by hand, by facsimile, by nationally recognized
private courier, or by United States mail. Notices delivered by mail shall be
deemed given three (3) business days after being deposited in the United States
mail, postage prepaid, registered or certified mail, return receipt requested.
Notices delivered by hand by facsimile, or by nationally recognized private
courier shall be deemed given on the day of receipt (if such day is a business
day or, if such day is not a business day, the next succeeding business day);
provided, however, that a notice delivered by facsimile shall only be effective
if and when confirmation is received of receipt of the facsimile at the number
provided in this Section 8.4. All notices shall be addressed as follows:
If to the Company:
Besicorp Group Inc.
1151 Flatbush Road
Kingston, New York 12401
Attention: Frederic M. Zinn, Esq., General Counsel
Fax: 914-336-7172
with a copy to:
Robinson Brog Leinwand Greene Genovese & Gluck P.C.
1345 Avenue of the Americas
New York, New York 10105
Attention: A. Mitchell Greene, Esq.
Fax: (212) 956-2164
35
<PAGE>
If to Purchaser or the Surviving Corporation:
BGI Acquisition LLC
950 Third Avenue, 23rd Floor
New York, New York 10022
Attention: President
Fax: 212-688-7908
with a copy to:
Altheimer & Gray
10 South Wacker Drive, Suite 4000
Chicago, Illinois 60606
Attention: Paul M. Daugerdas, Esq.
Fax: (312) 715-4800
and/or to such other respective addresses and/or addressees as may be designated
by notice given in accordance with the provisions of this Section 8.4.
8.5 Expenses; Transfer Taxes. Except as set forth in Section 7.4
herein, each party hereto shall bear all fees and expenses incurred by such
party in connection with, relating to or arising out of the negotiation,
preparation, execution, delivery and performance of this Agreement and the
consummation of the transaction contemplated hereby, including, without
limitation, financial advisors', attorneys', accountants' and other professional
fees and expenses.
8.6 Entire Agreement. This Agreement, the Confidentiality Agreement
referred to in Section 5.2 and the instruments to be delivered by the parties
pursuant to the provisions hereof constitute the entire agreement between the
parties and shall be binding upon and inure to the benefit of the parties hereto
and their respective legal representatives, successors and permitted assigns.
Each Exhibit and schedule (including the Company Disclosure Schedule) shall be
considered incorporated into this Agreement.
8.7 Non-Waiver. The failure in any one or more instances of a party to
insist upon performance of any of the terms, covenants or conditions of this
Agreement, to exercise any right or privilege in this Agreement conferred, or
the waiver by said party of any breach of any of the terms, covenants or
conditions of this Agreement, shall not be construed as a subsequent waiver of
any such terms, covenants, conditions, rights or privileges, but the same shall
continue and remain in full force and effect as if no such forbearance or waiver
had occurred. No waiver shall be effective unless it is in writing and signed by
an authorized representative of the waiving party.
8.8 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original, and all such
counterparts shall constitute but one instrument.
8.9 Severability. The invalidity of any provision of this Agreement or
portion of a provision shall not affect the validity of any other provision of
this Agreement or the remaining portion of the applicable provision.
36
<PAGE>
8.10 Applicable Law. This Agreement shall be governed and controlled as
to validity, enforcement, interpretation, construction, effect and in all other
respects by the internal laws of the State of New York applicable to contracts
made in that State.
8.11 Binding Effect; Benefit. This Agreement shall inure to the benefit
of and be binding upon the parties hereto, and their successors and permitted
assigns. Except as expressly provided herein, nothing in this Agreement, express
or implied, shall confer on any person other than the parties hereto, and their
respective successors and permitted assigns, any rights, remedies, obligations
or liabilities under or by reason of this Agreement, including, without
limitation, third party beneficiary rights.
8.12 Assignability. This Agreement shall not be assignable by either
party without the prior written consent of the other party.
8.13 Governmental Reporting. Anything to the contrary in this Agreement
notwithstanding, nothing in this Agreement shall be construed to mean that a
party hereto or other person must make or file, or cooperate in the making or
filing of, any return or report to any Governmental Entity in any manner that
such person or such party reasonably believes or reasonably is advised is not in
accordance with law.
8.14 Defined Terms. The following terms are defined in the
following sections of this Agreement:
Defined Term Where Found
Acquisition Proposal 5.5.3
Additional Amount 2.2.2(a)
Adjustment Amount 6.5.2
Agreement Preamble
Authorization 4.2.3
BL Preamble
Base Amount 2.2.1(a)
Board 4.2.2
Certificate of Merger 1.2
Certificates 2.3.2
Closing 1.6
Closing Date 1.6
Code 2.3.6
Common Stock 2.1.1
Company Preamble
Company Disclosure Schedule 4.1
Company Filings 5.4.3
Company Shareholders 2.3.1
Consents 5.4.4
Constituent Corporation 1.1
Contract 4.2.19
Contracts 4.2.19
Covered Expenses 7.4.2
D&O Insurance 5.7.1
D&O Releases 5.4.5
37
<PAGE>
Defined Term Where Found
efined Term Where Found
Directors 4.2.5
Distributed Subsidiaries 4.2.1
Distribution 3.2.1
Effective Time 1.2
Employee Benefit Plans 4.2.21(a)
Encumbrance 4.2.4
Environmental Laws 4.2.26
Environmental Permits 4.2.26
ERISA 4.2.21(a)
ERISA Affiliate 4.2.21(b)
Escrow Agreement 3.2.1((i)
Exchange Act 3.2.1(j)
Excluded Liability 2.2.1(e)
Fairness Opinion 4.2.31
Financial Statements 4.2.8
Financing 4.3.7
Form 10 Registration 4.2.32
GAAP 4.2.8
GECC 5.11
Governmental Entity 4.2.3
Hazardous Material 4.2.26
Indemnification Agreement 3.2.1(i)
Indemnified Person 5.7.1
Indemnified Persons 5.7.1
Information Statement 4.2.32
Intellectual Property 4.2.29
Interim Balance Sheet 4.2.9(a)
Leased Premises 4.2.28
Lender 4.3.7
Letter of Transmittal 2.3.2
Liabilities 4.2.9
Material Adverse Effect 4.2.4
Meeting 5.4.1
Merger Preamble
Merger Consideration 2.1.1
1993 Plan 2.5
NIMO 4.2.10(a)
NYBCL Preamble
NYSERDA 5.4.4
Obligation 4.2.4
Parent Preamble
Partnership 4.2.6
Paying Agent 2.3.1
Payment Fund 2.3.1
PBGC 4.2.21(b)
Permits 4.2.18
38
<PAGE>
Defined Term Where Found
efined Term Where Found
Permitted Liabilities 3.2.2(b)
Person 4.2.4
Plans 2.5
Power Facility Sales 3.3
Preferred Stock 4.2.5
Proxy Statement 4.2.32
Purchaser Preamble
Purchaser Obligations 4.3.4
Real Estate 4.2.27
Remaining Subsidiary 4.2.1
Retained Assets 3.2.1(a)
Return 4.2.13(b)
Returns 4.2.13(b)
SEC 4.2.3
SEC Documents 4.2.7
Securities Act 4.2.1
Special Account 6.5.1
Specified Current Liabilities 6.5.1(b)
Statement 3.2.2
Stock Option 2.4
Subsidiary 4.2.1
Superior Proposal 5.5.3
Surviving Corporation 1.1
Tax 4.2.13(a)
Taxes 4.2.13(a)
Termination Date 7.1.2(a)
Termination Payment 7.4.2
Third Party Releases 5.4.5
Transaction Agreements 4.2.2
Transactions 4.2.2
Warrants 2.5
8.15 Headings. The headings contained in this Agreement and the
Agreement's Table of Contents are for convenience of reference only and shall
not affect the meaning or interpretation of this Agreement.
8.16 Interpretation. Whenever the term "including" is used in this
Agreement it shall mean "including, without limitation," (whether or not such
language is specifically set forth) and shall not be deemed to limit the range
of possibilities to those items specifically enumerated. All joint obligations
herein shall be deemed to be joint and several whether or not specifically so
specified.
39
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and Plan
of Merger on the date first above written.
PARENT:
BGI ACQUISITION LLC
By: /s/ James Haber
-----------------------------------
James Haber, President of the
Sole Manager of BGI Acquisition LLC
PURCHASER:
BGI ACQUISITION CORP.
By: /s/ James Haber
-----------------------------------
James Haber
Its: President
THE COMPANY:
BESICORP GROUP, INC.
By: /s/ Michael F. Zinn
-----------------------------------
Name: Michael F. Zinn
Its: President and Chief Executive
Officer
40
<PAGE>
Annex A-2
This AMENDMENT NO. 1 TO THE AGREEMENT AND PLAN OF MERGER (this
"Amendment") is entered into this 28th day of January, 1999, by and among BGI
Acquisition LLC, a Wyoming limited liability company ("Parent"), BGI Acquisition
Corp., a New York corporation ("Purchaser"), and Besicorp Group Inc., a New York
corporation formed under the name Bio-Energy Systems Inc. (the "Company").
RECITALS:
A. Parent, Purchaser and the Company are parties to an Agreement and
Plan of Merger (the "Initial Plan") dated November 23, 1998.
B. Capitalized terms used in this Amendment have the meanings ascribed
to them by the Initial Plan.
A G R E E M E N T S
Therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Base Amount. Clause (ii) of Section 2.2.1(b)(A) of the Initial Plan
is hereby amended to read in its entirety as follows:
to the extent not received in cash, the amount of a claimed tax
refund for fiscal year 1998 not to exceed $3,909,
2. Enowitz Shares. Section 2.3.7 of the Initial Plan is hereby amended
to read in its entirety as follows:
In the case of 100,000 shares of Common Stock held of record
by Martin Enowitz or his assigns which the Company represents are the
subject of a dispute between the Company and Mr. Enowitz (the "Disputed
Shares"), appropriate provision will be made in the Paying Agent
Agreement, or another agreement with the Paying Agent, for the holding
in escrow pending resolution of the dispute of (1) the Disputed Shares,
(2) the Merger Consideration payable in respect of such Disputed Shares
and (3) any shares of capital stock of BL distributable with respect to
such Disputed Shares. Purchaser agrees that the rights, if any, of
Purchaser, Parent and the Surviving Corporation to the Disputed Shares,
the Merger Consideration payable in respect of such Disputed Shares and
any shares of capital stock of BL distributable with respect to such
Disputed Shares, if any, will be assigned without recourse to the
Paying Agent for the benefit of the holders of Common Stock issued and
outstanding immediately prior to the Effective Time on a pro rata
basis.
<PAGE>
3. Further Assurances and Related Matters. Section 3.4 of the Initial
Plan is hereby amended to read in its entirety as follows:
Further Assurances and Related Matters. If, at any time after
the Effective Time, BL shall consider or be advised that any deeds,
bills of sale, assignments or assurances or any other acts or things
are necessary, desirable or proper (i) to vest, perfect or confirm, of
record or otherwise, in BL or its Subsidiaries its right, title and
interest in, to or under any of the rights, privileges, powers,
franchises, properties or assets contributed to any of the Distributed
Subsidiaries in connection with the Distribution or (ii) otherwise
carry out the Distribution, the Surviving Corporation will upon
reasonable request of BL execute and deliver all such deeds, bills of
sale, assignments and assurances and do all such other acts and things
as may be necessary, desirable or proper to carry out the Distribution.
If, at any time prior to the Distribution, Purchaser or the Company
shall consider or be advised that the composition of the Retained
Assets would be unduly expensive or impractical to, the Surviving
Corporation, assets of equal value that were to be distributed to BL
pursuant to the Distribution may be substituted for such of the
Retained Assets as may be necessary in order to prevent the composition
of the Retained Assets from having such an effect on the Surviving
Corporation, subject to the approval of Parent and the Company, which
approval will not be reasonably refused, in which case the Retained
Assets shall be deemed to include the assets so excluded from the
Distribution and the Retained Assets shall be deemed to exclude the
assets so substituted and the parties hereto shall execute any
agreements, instruments, waivers or assurances or any take any other
actions as are necessary, desirable or proper in connection with such
substitution. Any expenses incurred by the Surviving Corporation under
this Section 3.4 shall be paid by BL.
4. Right to Terminate. Section 7.1.2 (a) of the Initial Plan is hereby
amended to read in its entirety as follows:
subject to Section 7.5 hereof, the Effective Time shall not
have occurred at or before 11:59 p.m. on March 1, 1999 (the
"Termination Date"); provided, however, that the right to terminate
this Agreement under this Section 7.1.2 shall not be available to any
party whose failure to fulfill any of its obligations under this
Agreement has been the cause of the failure of the Effective Time to
have occurred as of such time; or
<PAGE>
5. Right to Change Termination Date. The Plan of Merger is hereby
amended inserting Section 7.5 as follows:
7.5 Right to Change Termination Date. The Company has the
right (the "Extended Right"), in its sole discretion, exercisable at
any time prior to 11:59 pm on February 26, 1999, by written notice to
Parent, to extend the Termination Date to 11:59 pm on March 15, 1999,
in which case for all purposes pursuant to the Agreement the
Termination Date shall be deemed to mean March 15, 1999; provided,
however, that if the Company exercises the Extended Right and the
Agreement is terminated thereafter prior to the Effective Time pursuant
to Section 7.1.1, Section 7.1.2 (unless the failure of Parent or
Purchaser to fulfill any of their obligations under this Agreement has
been the cause of the failure of the Effective Time to have occurred as
of such time), Section 7.1.3 or Section 7.1.4(c), the Company shall be
obligated to pay to Parent immediately, in addition to any amounts, if
any, owing pursuant to Section 7.4 hereof, a sum of $1,400,000 in cash
by wire transfer of same-day funds to an account designated by Parent.
6. Effect of Amendment. Except as amended by this Amendment, the
Initial Plan shall remain in full force and effect. This Amendment shall not
constitute a waiver or amendment of any provision of the Initial Plan not
referred to herein.
7. Entire Agreement. This Amendment, the Initial Plan, the
Confidentiality Agreement referred to in Section 5.2 to the Initial Plan and the
instruments to be delivered by the parties pursuant to the provisions of the
Initial Plan constitute the entire Initial Plan between the parties and shall be
binding upon and inure to the benefit of the parties hereto and their respective
legal representatives, successors and permitted assigns.
8. Counterparts. This Amendment may be executed in multiple
counterparts, each of which shall be deemed to be an original, and all such
counterparts shall constitute but one instrument.
9. Applicable Law. This Amendment shall be governed and controlled as
to validity, enforcement, interpretation, construction, effect and in all other
respects by the internal laws of the State of New York applicable to contracts
made in that State.
10. Assignability. This Amendment shall not be assignable by either
party without the prior written consent of the other party.
IN WITNESS WHEREOF, the parties have executed this Amendment on the
date first above written.
PARENT:
BGI ACQUISITION LLC
By: /S/ James Haber
------------
James Haber, President of the
Sole Manager of BGI Acquisition LLC
PURCHASER:
BGI ACQUISITION CORP.
By: /s/ James Haber
-----------
James Haber
Its: President
THE COMPANY:
BESICORP GROUP, INC.
By: /s/ Michael J. Daley
----------------
Michael J. Daley
Its: Executive Vice President
<PAGE>
Annex A-3
This AMENDMENT NO. 2 TO THE AGREEMENT AND PLAN OF MERGER (this
"Amendment") is entered into this 16th day of February, 1999, by and among BGI
Acquisition LLC, a Wyoming limited liability company ("Parent"), BGI Acquisition
Corp., a New York corporation ("Purchaser"), and Besicorp Group Inc., a New York
corporation formed under the name Bio-Energy Systems Inc. (the "Company").
RECITALS:
A. Parent, Purchaser and the Company are parties to an Agreement and
Plan of Merger (the "Initial Plan") dated November 23, 1998, as amended by that
certain Amendment No. 1 to the Initial Plan dated January 28, 1999 (the Initial
Plan, as amended, is the "Amended Plan").
B. Capitalized terms used in this Amendment have the meanings ascribed
to them by the Amended Plan.
A G R E E M E N T S
Therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Base Amount. Clause (v) of Section 2.2.1(b)(A) of the Amended
Plan is hereby amended to read in its entirety as follows:
"to the extent not already contributed pursuant to the Escrow Agreement
, $6,500,000."
2. Escrow Agreement. Section 2.6 of the Amended Plan is hereby amended
to read in its entirety as follows:
"At Closing, the Company will cause $6,500,000 in cash to be delivered
to the Escrow Agent under the Escrow Agreement."
3. Conditions to Parent's and Purchaser's Obligations. Section 6.3.8 of
the Amended Plan is hereby amended to read in its entirety as follows:
"The Indemnification Agreement and the Escrow Agreement shall have been
executed and delivered by BL and shall each be valid, legal, binding
and enforceable obligations of BL, and the Company shall have deposited
$6,500,000 in cash with the Escrow Agent under the Escrow Agreement."
<PAGE>
4. Exhibit B to the Amended Plan. The first sentence of Section 2(b) of
Exhibit B to the Amended Plan is hereby amended to read in its entirety as
follows:
"Simultaneously with the execution of this Agreement, Besicorp shall
deposit with the Escrow Agent the sum of six million five hundred
thousand dollars ($6,500,000) ("the Escrow Fund")."
5. Entire Agreement. This Amendment, the Amended Plan, the
Confidentiality Agreement referred to in Section 5.2 to the Amended Plan and the
instruments to be delivered by the parties pursuant to the provisions of the
Amended Plan constitute the entire Amended Plan between the parties and shall be
binding upon and inure to the benefit of the parties hereto and their respective
legal representatives, successors and permitted assigns.
6. Counterparts. This Amendment may be executed in multiple
counterparts, each of which shall be deemed to be an original, and all such
counterparts shall constitute but one instrument.
7. Applicable Law. This Amendment shall be governed and controlled as
to validity, enforcement, interpretation, construction, effect and in all other
respects by the internal laws of the State of New York applicable to contracts
made in that State.
8. Assignability. This Amendment shall not be assignable by either
party without the prior written consent of the other party.
<PAGE>
IN WITNESS WHEREOF the parties have executed this Amendment on the date
first above written.
PARENT:
BGI ACQUISITION LLC
By: /s/ James Haber
_____________________________
James Haber, President of
the Sole Manager of BGI
Acquisition LLC
PURCHASER:
BGI ACQUISITION CORP.
By: /s/ James Haber
_____________________________
James Haber
Its: President
THE COMPANY
BESICORP GROUP INC.
By: /s/ Michael J. Daley
____________________
Michael J. Daley
Its: Executive Vice
President
<PAGE>
ANNEX B
November 20, 1998
PRIVATE AND CONFIDENTIAL
The Board of Directors
Besicorp Group Inc.
1151 Flatbush Road
Kingston, New York 12401
Dear Board Member:
Josephthal & Co. Inc. ("Josephthal") understands that BGI Acquisition
LLC ("Parent"), its wholly owned subsidiary, BGI Acquisition Corp. ("Purchaser")
and Besicorp Group, Inc. ("Besicorp") are considering a proposed transaction in
which Purchaser will merge with and into Besicorp (the "Merger") pursuant to the
Agreement and Plan of Merger presented to Besicorp's Board of Directors on
November 20, 1998 (the "Agreement") by and among Besicorp, Parent and Purchaser.
As more specifically set forth in the Agreement, and subject to the terms and
conditions thereof, each share of common stock, $0.10 par value, of Besicorp
(the "Common Shares") issued and outstanding immediately prior to the Effective
Time of the Merger (other than Common Shares held as treasury shares by Besicorp
or its subsidiaries) shall, by virtue of the Merger be converted into the right
to receive the Merger Consideration. Unless otherwise defined herein,
capitalized terms used herein shall have the meaning ascribed to such terms in
the Agreement.
Josephthal further understands that prior to the Effective Time: (i)
Besicorp will form BL for the purpose of holding substantially all of the
operating assets and all Liabilities of Besicorp and the Remaining Subsidiaries
and all the outstanding capital stock of the Subsidiaries other than the
Remaining Subsidiaries; and (ii) Besicorp will distribute to each of its
stockholders all of the outstanding capital stock of BL ("the Distribution").
Josephthal has not been involved in forming BL or the Distribution and has
not assumed any responsibility for making or obtaining an independent
evaluation or appraisal of BL's properties or other assets nor does Josephthal
opine on the capital requirements or availability of capital for BL.
You have requested our opinion as to the fairness from a financial point of
view to Besicorp and its stockholders of the consideration to be paid by
the Purchaser to the holders of Common Shares in the Merger.
In conducting our analyses and arriving at the opinion expressed
herein, we have reviewed those materials and considered those financial and
other factors that we deemed relevant under the circumstances, including, among
others, the following: (i) the Agreement; (ii) a draft of the Proxy Statement
dated November 13, 1998; (iii) certain historical financial, operating and other
data that are publicly available or were furnished to us by Besicorp including,
but not limited to: (a) financial analyses prepared by management of Besicorp;
(b) Besicorp's Form 10-KSB for the period ended and as of March 31, 1998; (c)
Besicorp's Form 10-QSB for the period ended and as of June 30, 1998; (d)
Besicorp's Draft Form 10-QSB for the period ended and as of September 30, 1998
and e) Besicorp's internally generated operating reports; (iv) publicly
available financial, operating and stock market data for companies engaged in
businesses we deemed comparable to Besicorp; (v) publicly available financial,
operating and stock market data for companies in the power industry which had
been involved in a merger or acquisition since May 1997; and (vi) such other
factors as we deemed appropriate. We have met with senior officers of Besicorp
to discuss the prospects for Besicorp's business and their estimates of future
financial performance, and such other matters as we believed relevant. Our
opinion is solely and necessarily based on economic, financial and market
conditions as they exist and can be evaluated as of the date hereof.
We assume no responsibility to update or revise our opinion upon circumstances
or events occurring after the date hereof.
In our review and analysis and in arriving at our opinion, we have
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided us or publicly available and have neither
attempted independently to verify nor assumed responsibility for verifying any
of this information. We have not conducted a physical inspection of Besicorp's
properties or facilities, nor have we made or obtained or assumed any
responsibility for making or obtaining any independent evaluations or appraisals
of any of these properties or facilities. We have assumed that management's
financial analyses have been prepared on a good faith reasonable basis
reflecting the best currently available estimates and judgments of Besicorp's
management. We have also assumed that the Pre closing Transactions described in
Article III of the Agreement as well as the Conditions to Closing in Article VI
of the Agreement will be completed or satisfied as the case may be. We do not
perform legal services or render legal advice.
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In conducting our analysis and arriving at our opinion as expressed
herein, we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following: (i)
the historical and current financial position and results of operations of
Besicorp; (ii) the business prospects of Besicorp; (iii) the historical and
current market for the Common Shares and (iv) the nature and terms of other
acquisition transactions that we believe to be relevant. We have also taken into
account our assessment of general economic, market and financial conditions as
well as our experience in connection with similar transactions and securities
valuation generally. Our opinion necessarily is based upon conditions as they
exist and can be evaluated on the date hereof and we assume no responsibility to
update or revise our opinion based upon circumstances or events occurring after
the date hereof. In that regard, we have not considered any acquisition or
similar transaction to which Besicorp might become a party whether announced or
not, that has not closed prior to the date hereof. Our opinion is limited to the
fairness, from a financial point of view, of the Merger Consideration to be paid
to the holders of Common Shares of Besicorp in the Merger. Our opinion does not
address the Distribution or the potential trading value or trading volume of BL
nor does it address in any way Besicorp's underlying business decision to
effect the Merger, the Distribution or to form BL.
Josephthal has been retained by Besicorp to render this opinion and
provide other financial advisory services, and will receive fees for these
services. In addition, Besicorp has agreed to indemnify Josephthal for certain
liabilities arising out of our engagement. In the ordinary course of our
business, Josephthal may actively trade the Common Shares for its own account
and for the accounts of customers, and, accordingly, may at any time hold a long
or short position in these securities.
This opinion is solely for the use of the Besicorp (including its Board
of Directors) and is not to be publicly-disclosed, used, excerpted, reproduced
or disseminated, quoted or referred to at any time, in any manner or for any
purpose, without the prior written consent of Josephthal provided that Besicorp
may include this opinion as an annex to the Proxy Statement to be filed with the
Securities and Exchange Commission and delivered to the stockholders of
Besicorp. This opinion does not constitute a recommendation to any holder of
Besicorp Common Shares as to how any such stockholder should vote on any aspect
of the Merger including the Distribution, nor does this opinion address the
relative merits of the Merger, the Distribution or any other transactions or
business strategies discussed by the Board of Directors of Besicorp as
alternatives to the Merger or the decision of the Board of Directors of Besicorp
to proceed with the Merger.
Based upon and subject to the foregoing it is our opinion as investment bankers
that, as of the date hereof, the Merger Consideration to be received by the
holders of Common Shares of Besicorp in the Merger is fair from a financial
point of view.
Very truly yours,
/s/ JOSEPHTHAL & CO. INC.
<PAGE>
Annex C
OWNED BY NEWCO OR ITS SUBSIDIARIES FOLLOWING THE SPIN-OFF
<TABLE>
<CAPTION>
<S>
<C>
Name of Subsidiary Description
SunWize Technologies, Inc. All activities of the photovoltaic business
Bio-Energy Systems, Inc. Had been involved in activities of the solar thermal business.
As of March 1998 ceased operations
Bio-Hydroponics, Inc. Inactive - no material assets or liabilities
Bio-Energy Services Corp. Sold or held interests in very small cogeneration and solar thermal
projects in NY, NJ, CA
Beta Allegany, Inc. Holds the partnership interest in the limited partnership that
owned the Allegany power plant in NY
Beta Hydroponics, Allegany, Inactive - no material assets or liabilities
Inc.
Beta Partnerships, Inc. Newly formed. Will own the limited partnership and general
partnership interests in the limited partnerships that owned
five power projects in NY
Besicorp Development Inc. Newly formed. Start-up development company
Besicorp Services Inc. Newly formed. Will own equipment and furniture. Will also
be the common paymaster for all employees. Will provide
services to the other subsidiaries
Besicorp International
Power Corp. Inactive - no material assets or liabilities
Beta International Power Inactive - no material assets or liabilities
Corp.
Beta Worldwide Power Inc. Owns Beta Global Development, which owns 50% of the
company that is developing the Krishnapatnam India project
and 50% of the company exploring development opportunities
in Brazil. Also owns 100% of Beta Global Development II
which owns 50% of the company exploring development opportunities in Brazil
</TABLE>
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<TABLE>
<CAPTION>
<S>
<C>
Beta Mexico Inc. Owns a 79% interest in a company that is exploring
development opportunities in Mexico
Beta Brasil Inc. Inactive - no material assets or liabilities
Beta BGE Inc. Inactive - no material assets or liabilities
OWNED BY SURVIVING CORPORATION
FOLLOWING THE SPIN-OFF AND THE MERGER
Name of Subsidiary Description
Beta Beaver Falls, Inc. Held the general partnership interest in the limited partnership
that owned the Beaver Falls power plant in NY
Beta Carthage, Inc. Held the general partnership interest in the limited partnership
that leased the Carthage power plant in NY
Beta C&S Limited Held limited partnership interests in the limited partnerships
that leased the Carthage and South Glens Falls power plants in NY
Beta "N"Limited Held the limited partnership interest in the limited partnership
that leased the Natural Dam power plant in NY
Beta Natural Dam, Inc. Held the general partnership interest in the limited partnership
that leased the Natural Dam power plant in NY
Beta Nova, Inc. Held the general partnership interest in the limited partnership
that owned the right to receive development payments in
certain power projects.
Beta South Glens Falls, Inc. Held the general partnership interest in the limited partnership
that leased the South Glens Falls power plant in NY
</TABLE>
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<TABLE>
<CAPTION>
<S>
<C>
Beta Syracuse, Inc. Held the general partnership interest in the limited partnership
that owned the Syracuse power plant in NY
Reina Distributing, Inc. Owns the real property that comprises the corporate headquarters
and rental storage units
</TABLE>
<PAGE>
Besicorp Group Inc.
1151 Flatbush Road
Kingston, New York 12401
-----------------------------
PROXY
For Special Meeting of Shareholders of Besicorp Group Inc. to be held on
March 19, 1999
--------------------------------
This Proxy is solicited on behalf of the Board of Directors.
The undersigned hereby appoints Frederic Zinn and Michael J. Daley as
Proxies, each with the power of substitution, and hereby authorizes each of them
to represent and to vote, as designated below, all the shares of common stock of
Besicorp Group Inc. held of record by the undersigned on February 3, 1999 at the
Special Meeting of Shareholders to be held on March 19, 1999, or any adjournment
or postponement thereof.
1. TO ADOPT THE AGREEMENT AND PLAN OF MERGER DATED NOVEMBER 23,
1998, AS AMENDED BY AMENDMENT NO. 1 AND AMENDMENT NO. 2, BY AND
AMONG BESICORP GROUP INC., BGI ACQUISITION LLC AND BGI ACQUISITION
CORP. AND THE MERGER PROVIDED FOR THEREIN.
{ } FOR { } AGAINST { } ABSTAIN
2. TO CONSIDER AND ACT UPON ANY OTHER BUSINESS AS MAY COME BEFORE THE
SPECIAL MEETING OF SHAREHOLDERS OR ANY ADJOURNMENT OR POSTPONEMENT
THEREOF.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY TO
CONTINENTAL STOCK TRANSFER & TRUST COMPANY, THE COMPANY'S TRANSFER
AGENT.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder. (IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED
<PAGE>
FOR PROPOSAL 1 and in the discretion of the named proxies with respect to any
other matter that may properly come before the meeting or any adjournment or
postponement thereof.)
---------------------------------
Signature
---------------------------------
Signature, if held jointly
Dated _____________________, 1999
Please date and sign exactly as name appears on your stock certificate. Joint
owners should each sign personally. Trustees, custodians, executors and others
signing in a representative capacity should indicate the capacity in which they
sign.
NOTE: YOU MAY ALSO RETURN THIS PROXY CARD BY FACSIMILE TRANSMISSION TO
CONTINENTAL STOCK TRANSFER & TRUST COMPANY ("CONTINENTAL"). TO RETURN THIS CARD
BY FAX, YOU MUST PHOTOCOPY BOTH SIDES OF THE SIGNED PROXY CARD SO THAT THEY
APPEAR ON THE SAME PAGE AND FAX THE PHOTOCOPY TO CONTINENTAL AT (212) 509-5152,
Attn: Proxy Department. IF YOU HAVE ANY QUESTIONS REGARDING THIS PROCEDURE CALL
CONTINENTAL AT (212) 509-4000 x520.
