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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE OF 1934
For the transition period from to
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Commission File Number 0-15472
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Environmental Power Corporation
(Exact name of registrant as specified in its charter)
Delaware 04-2782065
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
500 Market Street, Suite 1-E, Portsmouth, New Hampshire 03801
(Address of principal executive offices)
(Zip code)
(603) 431-1780
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1)has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [_]
State the aggregate market value for the voting stock held by non-affiliates of
the registrant: The aggregate market value, computed by reference to the closing
price of such stock on March 23, 1999 was $2,761,960.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the last practicable date: On March 23, 1999 there were
11,406,783 outstanding shares of Common Stock, $.01 par value, of the
registrant.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be filed with the Securities and
Exchange Commission and delivered to shareholders in connection with the Annual
Meeting of Shareholders to be held on June 28, 1999 are incorporated by
reference into Part III of this Annual Report filed on Form 10-K. The portions
of the Proxy Statement under the headings "Report of the Compensation Committee"
and the "Stock Performance Graph" are not incorporated by reference and are not
a part of this Form 10-K Report.
TABLE OF CONTENTS
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<CAPTION>
Description of Contents Page #
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PART I:
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Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II:
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Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 15
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36
Item 8. Financial Statements and Supplementary Data 37
Item 9. Disagreements on Accounting and Financial Disclosure 37
PART III:
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Item 10. Directors and Executive Officers 38
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
PART IV:
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Item 14. Index to Financial Statements, Exhibits, and Reports on Form 8-K 40
Signature Page 45
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CAUTIONARY STATEMENT
This Annual Report on Form 10K contains "forward-looking statements", as
defined by the Private Securities Litigation Reform Act of 1995, in order to
provide investors with prospective information about the Company. For this
purpose, any statements which are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors which could cause the Company's actual results to differ
materially from those indicated by the forward looking statements. These
factors include, without limitation, those set forth below under the caption
"Item 7.--Certain Factors That May Affect Future Results".
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PART I
Item 1. BUSINESS
Environmental Power Corporation (individually "EPC" or consolidated "the
Company") owns a 22 year leasehold interest in an approximately 83 Mw (net)
waste coal-fired electric generating facility (the "Scrubgrass Project") located
in Pennsylvania, the lease for which commenced on June 30, 1994. Until December
31, 1994 the Company had varying ownership interests (100% to approximately 40%)
in, and oversaw the operation of, an approximately 51 Mw (net) waste coal-fired
electric generating facility located in Utah. Both facilities sell power under
long-term contracts to specified utility companies whose contracts have been
approved by the respective Public Utility Commission. In the case of these two
projects, the Company, either acting alone or in conjunction with others, has
selected and arranged for the acquisition of the site, obtained control over a
portion of their waste coal fuel sources, negotiated contracts for the design
and construction of the facilities and the sale of their output to the utilities
purchasing the power, arranged for financing, and negotiated contracts for the
operation and maintenance of the projects. Until December 5, 1997, the Company
had one additional project (the "Milesburg Project") which had been in the
development stage since 1987 and involved in significant contract litigation
since the early stages of its development activities. On August 26, 1997, the
Company entered into a Buy-Out Agreement with the utility company which had
contracted to purchase electricity from the Milesburg Project. On December 5,
1997, pursuant to the Buy-Out Agreement, the Company sold substantially all of
the assets of the Milesburg project to this utility company and the ongoing
litigation was terminated. The Company's projects are discussed in more detail
in the following sections.
Scrubgrass
The Scrubgrass Project located on a 600 acre site in Venango County,
Pennsylvania, is an approximately 83 Mw (net) waste coal-fired electric
generating station (the "Facility") which has been constructed by Bechtel Power
Corporation. The construction contract provided for a guaranteed net electrical
output of 82.85 Mw. Final completion was achieved by the contractor in June
1994.
On June 30, 1994, Buzzard Power Corporation ("Buzzard"), a subsidiary of
EPC, entered into an agreement to lease the Facility from Scrubgrass Generating
Company, L.P. (the "Lessor"), a joint venture of certain wholly-owned
subsidiaries of PG&E Corporation and Bechtel Generating Company, Inc. On
October 20, 1998, Bechtel Generating Company, Inc. transferred its interest in
the Lessor to a wholly-owned subsidiary of Cogentrix Energy, Inc. The lease
provides for an initial term of 22 years with a renewal option for up to 3
years. Pursuant to the lease, the Lessor assigned to Buzzard all principal
project agreements and its rights and obligations thereunder including, but not
limited to the power purchase agreement, operations and maintenance agreement,
limestone agreements, ground lease agreements, fuel agreements and
transportation and materials handling agreements. EPC has pledged Buzzard's
common stock to the Lessor as security for Buzzard's performance of its
obligations as lessee. The Scrubgrass Project is managed by U.S. Generating
Company ("U.S. Gen"), a wholly-owned indirect subsidiary of U.S. Generating
Company, LLC ("USGenLLC"), which in turn is a wholly-owned indirect subsidiary
of PG&E Corporation.
Electric output is being sold to Pennsylvania Electric Company ("PENELEC")
pursuant to a 25-year agreement, which commenced in 1993, at fixed rates
initially averaging approximately 4.68 cents/Kwh and escalating at 5% per year
for the calendar years' 1994-1999. Commencing in the year 2000 and through
2012, the agreement provides for a rate equal to the greater of a scheduled rate
or a rate based on the PJM Billing Rate (the monthly average of the hourly rates
for purchases by the General Public Utilities Group ("GPU") from, or sale by GPU
to, the Pennsylvania-New Jersey-Maryland Interconnection). For the years 2013
through 2015 and 2016 through 2018, if the lease renewal term option is
exercised, the agreement provides for a rate equal to the lower of the average
monthly PJM Billing Rate or the rate paid for the calendar year 2012 adjusted
annually by the percentage change in the Gross National Product Deflator less
1%. On June 8, 1993, the Facility reached commercial operation. Since October
1995, the Company has been involved in a legal proceeding with PENELEC whereby,
among other complaints, the Company alleges that PENELEC has failed to pay the
Lessor and Buzzard
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contract rates for power in excess of 80 MW produced by the Scrubgrass facility.
The Company is presently involved in discussions with PENELEC to settle this
litigation which, if settled, could significantly improve the Company's results
of operations and financial position. See "Item 3. Legal Proceedings" for a
further discussion of this litigation.
The Facility is being operated by U.S. Operating Services Company (the
"Operator"), a wholly-owned indirect subsidiary of USGenLLC, pursuant to a 15-
year Operations and Maintenance Agreement (the "O & M"). The Operator prepares a
budget for all operational expenses, including a fixed management fee and
certain targeted output performance levels, which is approved annually. The
Operator's failure to achieve approved annual budgets can result in operator
liability not to exceed its management fees and/or termination of the O & M.
Buzzard, as assignee, entered into a Limestone Purchase and Sale Agreement
with Quality Aggregates, Inc. to supply the Scrubgrass Project with limestone
for an initial term of five years which, in December 1995, was extended through
the year 2000 and which may be extended up to 15 additional years. The
Scrubgrass Project also maintains an agreement with an initial term of 15 years
for the transportation of fuel, ash and limestone with Savage Industries, Inc.
The costs established under this agreement will escalate at partially fixed and
partially indexed rates.
Revenues earned by the Scrubgrass Project are deposited into an account
administered by a disbursement agent. Before Buzzard can receive cash generated
by the Scrubgrass Project, all operating expenses, base lease payments (which
include the Lessor's debt as described below), certain maintenance reserve
payments (See Note B to the Consolidated Financial Statements) and other
subordinated payments must be satisfied. Buzzard, as lessee, is required to pay
the Lessor, in addition to a specified base rent, consisting of all of the
Lessor's debt service and related fees and expenses, an additional rent of 50
percent of the net cash flows Buzzard receives from project operations. Buzzard
is not required to fund operating losses, or otherwise invest further, from
sources outside of the Scrubgrass Project.
On December 22, 1995, the Lessor restructured certain of the Scrubgrass
Project's debt, the primary effect of which was to extend the term of its demand
debt through 2004 and extend a portion of its junior subordinated debt through
1999. In connection with the Lessor's debt restructuring, Buzzard was able to
refinance a portion of its own current liabilities and establish a capital
improvements fund with a note payable of $300,000 which was paid in January
1996, and a variable note payable of $2,487,813 which matures through 2004.
During the second quarter of 1997, the Lessor assumed primary responsibility for
the disbursement of funds and repayment of debt related to the capital
improvements fund of the Scrubgrass Project. Accordingly, restricted cash and
secured borrowings of approximately $1,220,000 were transferred from the
financial statements of the Company to the financial statements of the Lessor
which reduced Buzzard's note payable. Since the Lessor's debt restructuring,
Buzzard has continued to fund the Lessor's debt service obligations as a base
lease payment and its own term obligation resulting from this restructuring
which are described in the following table:
<TABLE>
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Balance at Balance at Matures
Description of the Obligation 12/31/98 12/31/97 Interest Rate Through
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Lessor's term debt obligations:
Variable rate tax exempt bonds $135,600,000 $135,600,000 Quoted Bond Rates 2012
Variable rate term loan 16,623,087 18,621,663 Fixed swap rate of 6.4225% 2005
Variable rate term loan 10,575,218 10,732,189 LIBOR rate plus 1.250% 2004
Junior subordinated debt 318,796 556,630 Fixed rate of 8% 1999
Buzzard's term debt obligation:
Variable rate term loan 1,249,268 1,267,811 LIBOR rate plus 1.250% 2004
</TABLE>
On December 22, 1995, the Lessor entered into interest rate swaps which had
the effect of fixing the interest rate on the variable rate tax exempt bonds
until May 18, 1996 at approximately 3.72% and fixing the
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interest rate over the life of its variable rate term loan which matures in 2005
at 6.4225%. After May 18, 1996, the Lessor's tax-exempt bonds incurred interest
at floating rates ranging from 2.95% to 4%. The remainder of the term debt
obligations incur interest at either fixed rates or variable rates which are
based on the London Interbank Offering Rate (LIBOR).
In March 1996, the Company received proceeds of $900,000 from Bechtel Power
Corporation in final settlement of certain warranty and start-up matters which
is included in other income in the accompanying 1996 Consolidated Statement of
Operations.
During the fourth quarter of 1996, after learning about a generator failure
at an electric generating facility with an identical generator to the Scrubgrass
facility, the manufacturer asked the Company to perform certain tests to
determine the Scrubgrass generator's condition. Based on the results of these
tests, which became available during the first quarter of 1997, the Company
believed that the Scrubgrass facility's generator exhibited certain conditions
which indicated that a similar failure might occur at some time in the future.
As a result, the Scrubgrass facility was shutdown for a period of six days in
February 1997 to consider matters pertaining to the generator. In light of the
results of these generator tests, the generator manufacturer recommended that
the Company perform a complete rewind on the Scrubgrass facility's generator
during its 1997 annual plant outage which began in April, and which caused the
Scrubgrass plant to be inoperative for a period of 37 days during the second
quarter of 1997. Originally, without knowledge of the necessary generator
repair, the Company had planned that the Scrubgrass plant would be inoperative
in 1997 for a total of only 18 days to perform normal maintenance during
scheduled spring and fall outages. As such, because the Scrubgrass plant was
inoperative for a total of 43 days as a result of the maintenance outages, the
Scrubgrass facility was inoperative for 25 days longer in 1997 than the
Company's original plans. At an average of $80,000 of net revenues per day,
this accounted for an approximate reduction in 1997 power generation revenues,
net of estimated variable fuel expenses not incurred, of approximately $2
million by comparison to previous expectations. As a result of the extended
plant outage, the Company incurred $660,000 to have the manufacturer repair the
generator, incurred approximately $700,000 in additional maintenance expenses
which were not originally scheduled during this outage and incurred
approximately $300,000 in related costs such as legal fees, management costs,
bank fees, etc. As such, the Company believes that the financial impact of this
outage aggregated approximately $3.7 million. During 1997, the Company's
Consolidated Statement of Operations reflects the effect of the lost net
revenues of approximately $2,000,000, the additional maintenance expenses of
approximately $700,000 and the related expenses of approximately $300,000
pertaining to the generator matter. During 1996, the Company had recorded the
present value of the future installments to finance the generator rewind,
discounted at the Scrubgrass Project's incremental borrowing rate (6.75%), which
amounted to $564,000, and was recognizing the $96,000 remaining balance as an
interest cost over the term of the financing agreement.
The Scrubgrass extended outage also created a significant cash flow
deficiency because of the loss of revenues plus associated costs and expenses.
The Company addressed this cash deficiency by securing debt financing,
negotiating agreements with the generator manufacturer and utilizing available
maintenance cash reserves which are each discussed as follows:
Term Credit Facility: In June 1997, the Lessor entered into a three year
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credit facility with the lenders of the Scrubgrass Project to provide up to $3
million to fund general debt service expenses. The maximum allowable
borrowings under this credit facility were $3,000,000 through July 1, 1998. On
July 1, 1998, the maximum allowable borrowings under this credit facility
began reducing in $600,000 increments every six months through July 3, 2000 at
which time the credit facility will be payable in full. As of December 31,
1998 and 1997, the outstanding borrowings under this credit facility, which
were advanced to the Company by the Lessor, amounted to $2,150,000 and
$3,000,000, respectively.
Agreements with Generator Manufacturer: Prior to the 1997 outage, the Company
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negotiated extended financing terms with GEC Alsthom ("GEC"), the manufacturer
of the Scrubgrass generator, which allowed the Company to pay the $660,000
cost of the generator repair in six annual installments of $110,000, without
interest, beginning in May 1997. On April 15, 1998, the Company reached an
agreement with GEC which modified the terms of its original financing
contract. Under the terms of the original contract, the Company had yet to pay
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five installments of $110,000 and had also agreed to pay an additional $75,000
bonus to GEC for completing its work ahead of a pre-established schedule.
Furthermore, the Company had engaged GEC to perform certain maintenance
procedures to the generator during the 1998 scheduled outage at the Scrubgrass
plant. Under the terms of the revised agreement with GEC, as payment in full
for GEC's work performed during the 1998 outage and for the five remaining
installments of $110,000 and $75,000 bonus owed under the original contract,
the Company agreed to pay GEC a total of $450,000 over a four year period. The
revised agreement provides that $50,000 was payable upon the completion of
their work during the scheduled 1998 plant outage and that $100,000 is payable
upon each of the first four anniversaries of the first payment thereof. As of
December 31, 1998, the Company has recorded in its Consolidated Balance Sheet
the next installment of $100,000 in its accounts payable and accrued expenses
and the present value of the remaining three installments, discounted at the
Scrubgrass Project's incremental borrowing rate (6.75%), which amounted to
approximately $257,000, in its maintenance reserve. The $43,000 balance of the
$300,000 revised generator rewind cost is being recognized as interest expense
over the remaining three year term of the financing contract with GEC. As of
December 31, 1997, the Company had recorded on its Consolidated Balance Sheet
in accounts payable and accrued expenses for $185,000 and in maintenance
reserves for $364,000, the present value of the remaining obligations under
the previous agreement. During 1998, the Company recognized, through a
reduction of its operating expenses, the reduction of the present value of the
future installments due to GEC, which amounted to approximately $169,000. The
Company also recognized interest expense of approximately $27,000 and $20,000
during 1998 and 1997, respectively under the agreements with GEC.
Utilization of Maintenance Reserves: The Company was able to utilize its
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restricted cash reserves to finance most of its additional maintenance
expenditures incurred during the 1997 outage since substantially all of such
expenditures were deemed to be major overhauls. Under the terms of its
project agreements, the Company will be able to replenish these restricted
funds over a seven year period beginning in 1998.
Sunnyside
The Sunnyside Project is an approximately 51 Mw (net) waste coal-fired
facility at a site located adjacent to the Sunnyside Coal Mine in Carbon County,
Utah which was constructed by Parsons Main, Inc., ("PMI"). The facility reached
commercial operation on November 19, 1993. The Sunnyside Project is owned by
Sunnyside Cogeneration Associates ("SCA"), a joint venture in which the Company
owned varying majority interests from 100% to approximately 70% until September
28, 1994 and thereafter an approximate 40% interest until December 31, 1994 at
which time the Company sold its remaining interest in SCA to B&W Sunnyside, Inc.
and NRG Sunnyside, Inc. (collectively, "the Purchasers").
In connection with the sale, the Company received total consideration of
$6,042,294 which included cash of $2,792,294 received on January 5, 1995 and
promissory notes aggregating $3,250,000, bearing interest at 10% per annum,
received on December 31, 1994. In addition, after audits were performed to
verify certain financial information for SCA, the Purchasers were required to
pay a purchase price closing adjustment of $1,061,107 in 1995. Under the terms
of the promissory notes, interest is payable quarterly to the Company and
aggregate principal payments of $312,500, $1,187,500 and $1,750,000 were due on
September 30, 1995, December 31, 1996 and December 31, 1997, respectively. To
date, the Purchasers have made principal payments aggregating $312,500 and
quarterly interest payments through March 31, 1996 pursuant to the promissory
notes. The Purchasers have also made aggregate payments of $708,000 toward the
purchase price closing adjustment. However, as more fully described in "Item 3.
Legal Proceedings", the Purchasers commenced a legal proceeding with the Company
on May 3, 1996. Pending the resolution of the legal proceeding, the Purchasers
have withheld all payments of principal and interest due on the promissory notes
since June 1996. The Purchasers are also disputing the balance of the purchase
price closing adjustment in the legal proceeding. As of December 31, 1998, in
addition to the balance of the purchase price closing adjustment, the purchasers
have principal and interest payments in arrears under the promissory notes of
$2,937,500 and $808,818, respectively (collectively the "Purchasers'
Obligations"). The Company also retained certain inchoate rights, including
potential refundable sales taxes and certain legal settlements arising out of
activities prior to the date of the sale. The retained rights were fully
satisfied after the Company received sales tax refunds aggregating $1.1 million
and $42,078 in 1995 and
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1996, respectively, and a litigation settlement of $540,000 during 1996. The
sales tax refunds aggregating $42,078 and litigation settlement of $540,000 are
included in other income in the accompanying 1996 Consolidated Statement of
Operations.
As discussed further in "Item 3. Legal Proceedings", the litigation with
the Purchasers includes claims for alleged breaches by the Company of the
agreement to sell its interest in SCA to the Purchasers. The alleged breaches
of contract are numerous and the litigation continues in discovery where it has
been for almost three years. In November 1998, the Company presented to the
Seventh District Court for Carbon County, State of Utah (the "Court") a motion
for Partial Summary Judgment concerning one of the numerous claims by the
Purchasers. To date, the Court has not ruled on this matter. If successful in
this motion and considering the possibility of further similar motions, the
Company hopes over time to eliminate or limit the matters that might be
presented in a jury trial or discourage the Purchasers from continuing the
litigation if the anticipated costs exceed the benefits from litigating the
remaining matters. After this initial Court appearance, the Company continues
to feel optimistic about the strength of its position in the litigation.
However, the Company perceives that the Purchasers are unlikely to settle these
matters unless required through Court proceedings, there currently being little
economic incentive for them to do so. Accordingly, in view of the length and
inherent risk of the litigation process and a jury trial, the Company at this
time cannot predict how long it will take to enforce its rights and collect the
Purchasers' Obligations. The Purchasers' Obligations have been in arrears for
almost three years now and are expected to remain in arrears for the foreseeable
future. Pursuant to Statement of Financial Accounting Standards ("SFAS") No.
114, as amended by SFAS No. 118, the Company is required to recognize impairment
losses on loans whenever changes in circumstances indicate that the carrying
amounts of the loans exceed their fair market values. In the case of the
Purchasers' Obligations, because there are no quoted market values, the best
indication of fair market value is the present value of the expected future cash
flows from the Purchasers' Obligations. Given the uncertainty surrounding the
timing of collecting the Purchasers' Obligations, the Company cannot reasonably
estimate a fair market value for such obligations. As such, the Company opted
to take a conservative position and write-off the Purchasers' Obligations in its
1998 Consolidated Financial Statements. The write-off was reported as a charge
to other expense for $3,508,498 in the accompanying 1998 Consolidated Statement
of Operations. The charge represents the aggregate balance before the write-off
for the notes receivable of $2,937,500 and the receivable from sale of affiliate
of $570,998. Notwithstanding, the Company maintains its entitlement to the
Purchasers' Obligations and continues to vigorously pursue such amounts, as well
as punitive damages for abuse of the litigation process, in the Court. Should
the Company prevail in the litigation in a future period and collect the
Purchasers' Obligations, or a portion thereof, and/or punitive damages, the
Company would report such collections as other income in the period received.
See Note B to the Consolidated Financial Statements for the Company's accounting
policies for reporting income on the Purchasers' Obligations.
Milesburg
On April 30, 1987, the Company purchased, for an aggregate purchase price of
$5,400,000, all of the outstanding capital stock of Milesburg Energy, Inc.
("MEI"), the company which controlled the development rights to an existing 43
Mw (net) oil-fired facility, which was retired from service in 1984. In
connection with the stock purchase, the Company paid $100,000 in cash and issued
promissory notes totaling $5,120,000 (the "MEI Notes") and a subsidiary of the
Company assumed pre-acquisition MEI liabilities totaling $180,000. The MEI
Notes, pre-acquisition liabilities and certain other liabilities incurred
subsequent to the purchase were to become payable only under certain conditions,
the most significant of which related to the closing of construction financing
and commencement of construction for the Milesburg Project.
In 1987, MEI executed a 30 year power purchase agreement with West Penn Power
Company ("West Penn") for the sale of all of the facility's electrical output
with a fixed capacity rate component and an additional fluctuating rate
component which is derived from West Penn's avoided energy cost. The power
purchase agreement was approved by the Public Utilities Commission of the State
of Pennsylvania ("PUC"), and was subsequently appealed to the Commonwealth Court
of Pennsylvania by certain industrial intervenors. During the lengthy appeals
process, which extended beyond certain contract milestone dates in the power
purchase agreement, West Penn requested that its original petition to approve
the power purchase agreement be dismissed by the PUC since the power purchase
agreement had expired by its own terms. In September 1989, in response to MEI's
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efforts to preserve its contractual rights, the PUC, by court order, ordered
West Penn to execute a new power purchase agreement with MEI. The new power
purchase agreement was to include extended contract milestone dates and rates
which would be recalculated due to the later start-up date for this project
necessitated by the delays caused by the appeal. This order had been appealed
by the same industrial intervenors and West Penn through various courts,
including the United States Supreme Court, and upheld in every case in favor of
MEI. In August 1995, the PUC issued a tentative order for final contract rates.
The order had been temporarily stayed by mutual agreement of MEI and West Penn
pending discussions pertaining to a buy-out of the power purchase agreement
which began in October 1995.
Despite ongoing efforts to reach a buy-out arrangement with West Penn, the
Company had continued to invest its financial resources during 1996 and 1997 to
protect its legal and contractual interests and to support its ability to
commence construction in the event that a settlement under mutually agreeable
terms could not be reached with West Penn. In July 1996, in furtherance of
those objectives, the Company entered into a joint development agreement with
U.S. Gen, a wholly-owned subsidiary of PG&E Enterprises, to increase the
financial and technical resources available to pursue development activities and
continue ongoing discussions with West Penn concerning a buy-out of the power
purchase contract. During 1996 and 1997, the Company's development efforts for
the Milesburg Project increased considerably and the Company, along with its
development partner, was able to establish a significant value for the Milesburg
Project as a result of successful development efforts.
On August 26, 1997, following discussions which lasted almost two years,
MEI and West Penn reached a Buy-Out Agreement concerning the Milesburg project.
Pursuant to the Buy-Out Agreement, West Penn purchased Milesburg's rights to the
Electric Energy Purchase Agreement between the parties dated February 25, 1987
for the sum of $15 million plus 8% interest from the date the Buy-Out Agreement
was filed for Pennsylvania Public Utility Commission approval. Furthermore,
West Penn also assumed ownership of and responsibility for the Milesburg project
facility, which consisted of land along with a decommissioned oil-fired
electric-generating facility erected thereon, for a stated consideration of $1.
On December 5, 1997, the date of the asset disposition, MEI received aggregate
proceeds of $15,328,768 from West Penn as consideration under the Buy-Out
Agreement. At the date of the asset disposition, before consideration of any
settlements of contingent obligations, the Company had Milesburg project
development costs included in its property, plant and equipment of $9,670,788
and Milesburg project borrowings included in its secured promissory notes and
other borrowings of $5,858,767. Shortly before the date of the asset
disposition, the Company entered into a settlement agreement pertaining to
certain Milesburg project contingent obligations, including the MEI Notes. As a
result of the settlement agreement, the Company's Milesburg project development
costs and Milesburg project borrowings were reduced to $6,170,788 and
$2,358,767, respectively. In addition, because certain other Milesburg
obligations were payable only upon the occurrence of events related to project
development, Milesburg project obligations of $558,767 and accrued interest of
$63,650 were released from liabilities during 1997 and reported as other income
of $622,417 in the accompanying Consolidated Statement of Operations. As a
result of the sale of the Milesburg Project, the Company realized net proceeds
before taxes of $10,960,120 which were derived as follows:
<TABLE>
<S> <C>
Proceeds from the disposal of Milesburg project assets $15,000,001
Project costs:
Development costs 6,170,788
Fee paid to development partner 1,405,746
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Total project costs 7,576,534
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Gain on sale of project $ 7,423,467
Adjustments to arrive at net proceeds before taxes from the disposal
of Milesburg project assets:
Development cost reimbursements to the Company for
obligations which had already been paid 2,585,469
Development costs released from liabilities 622,417
Interest income from West Penn 328,767
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Net proceeds before taxes from the disposal of Milesburg project assets $10,960,120
=======================
</TABLE>
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The Company estimated that, after giving effect to the payment of corporate
taxes related to the Milesburg transaction which are accrued as of December 31,
1997, the Company would have available in excess of $10 million from the
Milesburg proceeds. In light of this projected availability of cash, the
Company's Board of Directors on December 10, 1997 declared a special dividend on
the issued and outstanding shares of Company`s Common Stock in the amount of 87
cents per share payable on January 7, 1998 to Stockholders of record on December
30, 1997 out of the proceeds received from the Company's sale of its Milesburg
project assets.
On December 31, 1997, because MEI did not expect to carry on further
business activities after the sale of the Milesburg Project, EPC adopted a Plan
of Liquidation to dissolve MEI. Under the Plan of Liquidation, MEI ceased to
carry on business activities except to the extent necessary to liquidate its
assets, pay its liabilities and distribute its assets remaining after the
payment of its liabilities to EPC. During 1998, MEI's assets remaining after the
payment of its liabilities were distributed to EPC.
Energy Markets
United States
Historically in the United States, regulated and government-owned utilities
had been the only significant producers of electricity for sale to third
parties. The energy crisis of the 1970's led to the enactment of the Federal
Public Utility Regulatory Policies Act of 1978 ("PURPA"), which encouraged
companies other than utilities to enter the electric energy business by reducing
regulatory constraints. In addition, PURPA, as implemented by Federal Energy
Regulatory Commission regulations, created unique opportunities for the
development of cogeneration facilities by requiring utilities to purchase
electricity generated in cogeneration plants meeting certain requirements
(referred to as "Qualifying Facilities"). See "Energy Regulation" below. As a
result of PURPA, a significant market for electricity produced by independent
power producers like the Company developed in the United States. In 1992,
Congress enacted the Energy Policy Act of 1992 ("Energy Act"), which amended the
Public Utility Holding Company Act of 1935 ("PUHCA"), to create new exemptions
from PUHCA for independent power producers selling electric energy on a
wholesale basis, to increase electricity transmission access for independent
power producers and to reduce the burdens of complying with PUHCA's restrictions
on corporate structures for owning or operating generating or transmission
facilities in the United States or abroad. The Energy Act has enhanced the
development of independent power projects and has further accelerated the
changes in the electric utility industry that were initiated by PURPA. The
implementation of federal and state policies, which have increased the
availability of transmission access for wholesale and retail transactions, could
create additional markets and competition for electric energy sales.
International
As a result of increasing demand for power generating capacity around the
world, the fastest growing area of the electric industry is the international
sector. This increase in demand has led to an increased emphasis by foreign
governments toward privatization of state-owned utilities. Many energy experts
believe that the international market represents a significant percentage of the
world's new and replacement power needs. At the same time, the national,
provincial and local laws of each host country, unique political and currency
exchange requirements, and the application of new world-wide environmental
standards to international projects, create significant risks and obligations
which may be difficult to manage. Presently, the Company is not involved in the
international sector and has no immediate plans to become involved in the
international sector. However, the Company continues to evaluate any business
opportunities, as they arise, in the international sector.
Competition
The Company generates electricity using alternative energy sources which is
sold on a wholesale basis under long-term contracts to utilities under rates
established in power purchase agreements and approved by regulatory agencies.
The independent power industry has grown rapidly over the past twenty years.
There are a large number of suppliers in the wholesale market and a surplus of
capacity which has led to intense competition in
9
<PAGE>
this market. The principal sources of competition in this market include
traditional regulated utilities who have excess capacity, unregulated
subsidiaries of regulated utilities, energy brokers and traders, energy service
companies in the development and operation or energy-producing projects and the
marketing of electric energy, equipment suppliers and other non-utility
generators like the Company. Competition in this industry is substantially based
on price with competitors discovering lower cost alternatives for providing
electricity. The electric industry is also characterized by rapid changes in
regulations which the Company expects could continue to increase competition.
For instance, as discussed under the caption "Energy Markets", the electric
industry has been previously affected by legislation such as PURPA and the
Energy Act which have encouraged companies other than utilities to enter the
electric power business by reducing regulatory constraints. More recently, as
discussed under the caption "Energy Regulation", there has been new state
legislation to deregulate the generation component of the electric business.
Furthermore, proposed changes to repeal or modify PUHCA and PURPA could reduce
regulatory restrictions placed on electric utilities and encourage them to seek
new sources of electric power. Any of these regulatory matters, among others,
could increase competition for electric power. Other than the risk that PENELEC
would seek to renegotiate the terms of the Scrubgrass power purchase agreement
(see further discussion under the caption "Energy Regulation"), the Company does
not believe the Scrubgrass Project would be significantly impacted by
competition in the wholesale energy market since its revenues are subject to
contracted rates which are substantially fixed for several years. However, the
contracted rates in the later years of the Scrubgrass power purchase agreement
switch to rates which vary more closely with existing market conditions. Should
ensuing competition in the later years of the Scrubgrass power purchase
agreement create downward pressure on wholesale energy rates, the Company's
profitability could be impacted.
The Company also competes in the market to develop power generation
facilities. The primary bases of competition in this market are the quality of
development plans, the ability of the developer to finance and complete the
project and the price. In certain cases, competitive bidding for a development
opportunity is required. Competition for attractive development opportunities
is expected to be intense as there are a number of competitors in the industry
interested in the limited number of such opportunities. Many of the companies
competing in this market have substantially greater resources than the Company.
The Company believes its project development experience and its experience in
creating strategic alignments with other development firms with greater
financial and technical resources could enable it to continue to compete
effectively in the development market if and when opportunities arise.
Presently, the Company believes there are limited opportunities for additional
project development in the United States for projects similar to those
previously developed by the Company. However, the Company is currently
evaluating whether it should seek development opportunities in new areas.
Presently, there is significant merger and consolidation activity occurring
in the electric industry. From time to time, the Company considers merger and
acquisition proposals when they appear to present an opportunity to enhance
shareholder value.
Energy Regulation
The Company's projects are subject to regulation under federal and state
energy laws and regulations. The Company's facilities are either self-certified
as a Qualifying Facility under the PURPA, or formally certified as a Qualifying
Facility by the Federal Energy Regulatory Commission ("FERC"). Pursuant to
PURPA, FERC has promulgated regulations which exempt certain Qualifying
Facilities from the Federal Power Act of 1920, PUHCA, and, except under certain
limited circumstances, state laws regulating the rates charged by electric
utilities. In order to qualify under PURPA, the Company's facilities must meet
certain size, fuel and ownership requirements and/or co-generate. In addition
to the regulation of Qualifying Facilities, PURPA requires that electric
utilities purchase electric energy produced by qualifying facilities at
negotiated rates or at a price equal to the incremental or avoided cost that
would have been incurred by the utility if it were to generate the power itself
or purchase it from another source. The Company is not presently subject to
regulation under PUHCA and does not presently intend to engage in any activities
that would cause it to be so regulated.
The Company believes that changes in PURPA, PUHCA and other related federal
statutes could occur in the next several years. The nature and impact of such
changes on the Company's projects is unknown at this time.
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<PAGE>
Presently, there are several legislative proposals pending in Congress which
propose amendments to certain regulations promulgated by PURPA. If Congress
amends PURPA, the statutory requirement that electric utilities purchase
electricity from Qualifying Facilities at full avoided cost could be repealed or
modified. While current legislative proposals specify the honoring of existing
contracts, the repeal or modification of these statutory purchase requirements
under PURPA in the future could increase pressure for electric utilities to
renegotiate existing contracts. Should there be changes in statutory purchase
requirements under PURPA, and should these changes result in amendments which
reduce the contracted rates under the Scrubgrass power purchase agreement, the
Company's results of operations and financial position could be negatively
impacted.
State public utility commissions, pursuant to state legislative authority,
may have jurisdiction over how any new federal initiatives are implemented in
each state. Although the FERC generally has exclusive jurisdiction over the
rates charged by an independent power project to its wholesale customers, state
public utility commissions have the practical ability to influence the
establishment of such rates by asserting jurisdiction over the purchasing
utility's ability to pass through the resulting cost of purchased power to its
retail customers. In addition, although thought to be unlikely, states may
assert jurisdiction over the siting and construction of independent power
projects and, among other things, the issuance of securities and the sale and
transfer of assets. The actual scope of jurisdiction over independent power
projects by state public utility regulatory commissions varies from state to
state. Presently, through its power purchase agreement with PENELEC, the
Scrubgrass Project is indirectly subject to state legislation in the
Commonwealth of Pennsylvania.
On December 3, 1996, in response to changes in the electric industry, the
Commonwealth of Pennsylvania passed new legislation known as the Electricity
Generation Customer Choice and Competition Act (Customer Choice Act) which
became effective on January 1, 1997. The Customer Choice Act provides for the
deregulation of the generation portion of electric business by permitting all
Pennsylvania retail electric customers to choose their electric generation
supplier over a phase-in period which expires December 31, 2000. The Customer
Choice Act required that all electric utilities file restructuring plans with
the PUC which, among other things, included unbundled prices for electric
generation, transmission and distribution and a competitive transition charge
("CTC") for the recovery of "stranded costs" which would be paid by all
customers receiving distribution service and certain customers that increase
their own generation of electricity. "Stranded costs" generally are electric
generation-related costs that traditionally would be recoverable in a regulated
environment but may not be recoverable in a competitive electric generation
market. As such, PENELEC filed a proposed restructuring plan in 1997 with the
PUC which was heavily contested by a number of affected parties. Eventually,
the litigation resulted in a settlement which was approved by the PUC on October
20, 1998, and which satisfied all but one of the litigants. This settlement set
forth a comprehensive plan for restructuring PENELEC's service and for ensuring
there would be competition for electric generation for all of PENELEC's
customers beginning on January 1, 1999. The settlement is currently being
appealed in the Commonwealth Court of Pennsylvania by the party which opposed
such settlement. However, the Company presently does not anticipate that such
appeal will have a significant effect, if any, on PENELEC's restructuring plan
as far as that plan affects the Scrubgrass Project. Most pertinently, the
restructuring plan, as approved by the PUC, provided for PENELEC to maintain a
separate non-utility generator cost recovery mechanism for accounting purposes.
Therefore, the restructuring plan is designed, in pertinent part, to enable
PENELEC to recover all of its costs from non-utility generators such as the
Scrubgrass plant and should serve to decrease the pressure on PENELEC to
renegotiate existing power contracts with non-utility generators.
Presently, neither the Customer Choice Act (and PENELEC's restructuring
plan filed thereunder), nor proposed legislation directly impacts the Company,
since the legislation and restructuring plan pertain to the retail market or new
contracts in the wholesale market. However, as discussed above, the Company
could possibly be impacted in the future by, among other things, increases in
competition as a result of deregulation, or the chance that PENELEC would
attempt to renegotiate the existing power contract. The Company is actively
monitoring these developments in energy proceedings in order to evaluate the
impact on its projects and also to evaluate new business opportunities created
by the restructuring of the electric industry.
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<PAGE>
Environmental Regulation
The Company's projects are subject to regulation under federal, state and
local environmental and mining laws and regulations and must also comply with
the applicable federal, state and local laws pertaining to the protection of the
environment, primarily in the areas of water and air pollution. These laws and
regulations in many cases require a lengthy and complex process of obtaining and
maintaining licenses, permits and approvals from federal, state and local
agencies. As regulations are enacted or adopted in any of these jurisdictions,
the Company cannot predict the effect of compliance therewith on its business.
The Company's failure to comply with all applicable requirements could result in
delays in proceeding with any projects under development or require
modifications to operating facilities. During periods of non-compliance, the
Company's operating facilities may be forced to shutdown until the non-
compliances are corrected. The Company is responsible for ensuring compliance
of its facilities with all applicable requirements and, accordingly, attempts to
minimize these risks by dealing with reputable contractors and using appropriate
technology to measure compliance with the applicable standards.
Employees
As of December 31, 1998, and at the time of making this filing, the Company
had four full-time employees and one part-time employee, including three
executive officers. The loss of any of its executive officers could have a
material adverse effect on the Company. None of the Company's employees is
represented by a collective bargaining agreement. The Company considers
relations with its employees to be good.
Item 2. PROPERTIES
The Company, through a subsidiary, leases the Scrubgrass waste coal-fired
electric generating facility located on approximately 600 acres in Venango
County, Pennsylvania. Until February 16, 1999, the Company, owned through a
subsidiary approximately 80 acres in Fayette County, Pennsylvania for which it
had abandoned efforts to develop electric generating facilities utilizing
coal mine-fire technology. The land was sold pursuant to a written contract
executed on December 31, 1998. Until December 5, 1997, the Company owned
through a subsidiary, the decommissioned Milesburg oil-fired electric generating
facility located on approximately 10 acres in Centre County, Pennsylvania. The
Milesburg facility was sold to West Penn pursuant to a Buy-Out Agreement dated
August 26, 1997. (See "Item 1. Business" for a further discussion of the
Company's projects).
Since February 1996, the Company has been a tenant pursuant to a three-year
lease at its corporate headquarters in Portsmouth, New Hampshire. The lease,
which was renewed in January 1999 for three additional years, currently requires
monthly payments of $1,520.
Item 3. LEGAL PROCEEDINGS
On October 11, 1995, Scrubgrass Generating Company L.P. and Buzzard Power
Corporation (collectively the "Plaintiffs") filed a complaint against
Pennsylvania Electric Company ("PENELEC") in the Court of Common Pleas of
Venango County, Pennsylvania (the "Court") seeking damages for certain alleged
breaches of the power purchase agreement entered into between Scrubgrass Power
Corporation, a predecessor to the Plaintiffs, and PENELEC on August 7, 1987. In
its complaint, the Plaintiffs allege that PENELEC has failed to pay contract
rates for energy produced by the Scrubgrass facility in excess of 80 MW in any
hour, that PENELEC has misused certain automatic regulation equipment and that
PENELEC has caused the Plaintiffs to incur losses from its late payment for
energy purchased from the Scrubgrass facility. As a result of PENELEC's alleged
failure to pay contract rates for energy produced by the Scrubgrass facility in
excess of 80 MW in any hour, the Plaintiffs estimate that as of December 31,
1998, after giving effect to certain payments made by PENELEC which are
discussed below, they have incurred damages of approximately $3 million. Should
the Plaintiffs prevail in this litigation and be awarded all of these damages,
the Company, as Lessee, would expect to retain 50% of these damages because of
its requirement to pay 50% of any net proceeds retained by the Scrubgrass
Project to the Lessor as additional rent. The Plaintiffs have yet to quantify
their damages from PENELEC's alleged late payments for energy purchased from the
Scrubgrass facility but do not expect that these damages would be material
relative to the other allegations. The Plaintiffs are unable to quantify the
damages they have incurred from PENELEC's
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<PAGE>
alleged misuse of certain automatic regulation equipment. From October 1995 to
September 1996, this legal proceeding was stayed informally by a letter
agreement between the parties. Pursuant to the letter agreement, PENELEC, which
had previously not made any payments for the energy it received in excess of 80
MW in any hour, agreed to pay for all energy in excess of 80 MW in any hour,
both previously received and to be received in the future, at a rate equal to
90% of a market based rate, subject to reimbursement based on the ultimate
determination of PENELEC's responsibility to pay for such energy and the
applicable rate therefor. Through December 31, 1998, the Scrubgrass Project has
recognized cumulative power generation revenues of approximately $1,678,247
million for energy in excess of 80 MW in any hour based on the terms established
in the letter agreement. On September 27, 1996, the Plaintiffs provided written
notice of their intention to resume the litigation. Consequently, on October 24,
1996, PENELEC filed preliminary objections to the complaint to the Court which
principally suggested that the primary jurisdiction for this dispute lies with
the Pennsylvania Public Utility Commission ("PUC"). On November 12, 1996, the
Plaintiffs filed a response to PENELEC's preliminary objections. The Court heard
oral arguments on this matter on January 31, 1997 for which the Court ultimately
decided in favor of the Plaintiffs on September 9, 1997 by denying PENELEC's
motion to transfer the jurisdiction of this dispute to the PUC. On January 8,
1998, as a result of this ruling by the Court, PENELEC filed its response to the
allegations made in the Plaintiffs' complaint. On February 4, 1998, the
Plaintiffs filed a Motion for Partial Judgment on the Pleadings which was heard
by the Court on March 30, 1998. On June 8, 1998, the Venango County Court of
Common Pleas ruled in favor of the Plaintiffs that, under the terms and
conditions of the Scrubgrass power purchase agreement, "PENELEC is required to
purchase all energy produced in good faith, so long as the quantity is not
unreasonably disproportionate to estimate of 80 MW". Presently, pending the
ultimate determination of its responsibility under the power purchase agreement,
PENELEC continues to pay for energy in excess of 80 MW at a rate equal to 90% of
a market based rate. The Plaintiffs had been in discussions with PENELEC
concerning a proposal made by PENELEC to settle the litigation. However, because
the Plaintiffs and PENELEC could not come to a mutual agreement on all of the
terms of the proposal, PENELEC withdrew its proposal offer in July 1998 and
settlement discussions dissipated. On July 7, 1998, PENELEC filed an appeal to
the Court's order dated June 8, 1998 with the Superior Court of Pennsylvania. On
July 27, 1998, the Plaintiffs filed with the Superior Court of Pennsylvania a
Motion to Quash the Appeal. On September 4, 1998, the Superior Court of
Pennsylvania granted the Plaintiff's Motion to Quash the Appeal. Since the
decision of the Superior Court of Pennsylvania, PENELEC has indicated its desire
to resume settlement discussions. On November 12, 1998, the Plaintiffs and
PENELEC met to discuss possible settlement scenarios. At the time of the
meeting, the parties were in essential agreement on the amount currently due
assuming the correctness of the Court's Order of June 8, 1998. The primary
matter discussed at the meeting was the manner of calculating future payments
for power in excess of 80 MW. At the meeting, PENELEC made a proposal which was
taken into consideration by the Plaintiffs. On December 21, 1998, the Plaintiffs
counterproposed with an alternative to the PENELEC proposal. To date, the
Plaintiffs have not received a response from PENELEC regarding their
counterproposal. The Company is unable to predict whether a settlement will
ultimately be reached. However, because PENELEC's November 12, 1998 calculation
of the amount due to the Plaintiffs pursuant to the court's ruling was similar
to the Plaintiffs' calculation, it is currently believed that the prospect of a
final settlement of all outstanding issues is good. In the event such a
settlement is not reached, the litigation will resume, and a final adjudication
of the of the amount due from PENELEC to the Plaintiffs will be sought.
On May 3, 1996, B&W Sunnyside L.P., Babcock & Wilcox Investment Company,
NRG Sunnyside Inc., NRG Energy Inc., and Sunnyside Cogeneration Associates
(collectively the "Plaintiffs") filed a complaint, which was amended on June 27,
1996 and December 21, 1998, against EPC and three of its wholly-owned
subsidiaries (collectively hereafter in this Item 3 "the Company") in Seventh
District Court for Carbon County, State of Utah (the "Court"). The second
amended complaint alleges that the Company breached the purchase and sale
agreement by which the Company transferred all of its interest in Sunnyside
Cogeneration Associates ("SCA"), a joint venture which owned and operated a
nominal 51 megawatt waste coal fired facility located in Carbon County, Utah.
The second amended complaint also alleges that the Company made certain
misrepresentations in connection with the purchase and sale agreement. As a
result of the alleged breaches of contract and misrepresentations, the
Plaintiffs allege that they suffered damages in an unspecified amount that
exceed the aggregate outstanding principal and interest balances due to the
Company by B&W Sunnyside L.P. and NRG Sunnyside, Inc. under certain notes
receivable, which amounted to $2,937,500 and $808,818, respectively at December
31, 1998. In addition to alleging unspecified damages, the Plaintiffs also
request rescission of the purchase and sale agreement. On January 21, 1999, in
response to the Plaintiffs' second amended complaint, the Company filed an
answer and restatement of its earlier counterclaim dated July 26, 1996. In the
answer to the second amended complaint, the Company denied all material
allegations of the second amended complaint and asserted
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numerous affirmative defenses. In the restated counterclaim, the Company alleges
numerous causes of action against the Plaintiffs which include breach of
contract, breach of the promissory notes, intentional, malicious and willful
breach of contract, intentional tort, interference and misrepresentation.
Through the restated counterclaim, the Company seeks remedies which include: (1)
compensatory, consequential and punitive damages; (2) acceleration and immediate
payment in full of the promissory notes; and (3) injunctions which require the
Plaintiffs to continue making payments under the promissory notes during the
pendency of this action and until the promissory notes are paid in full and
which enjoin the Plaintiffs from continuing certain malicious and intentional
actions that are alleged in the counterclaim, together with interest, reasonable
attorney's fees, costs and other such relief as the court deems proper. On
February 12, 1999, the Plaintiffs responded to the restated counterclaim whereby
they denied all material allegations of the restated counterclaim and asserted
numerous affirmative defenses. The Company plans to vigorously defend against
the second amended complaint and vigorously pursue the causes of action in the
restated counterclaim. On April 15, 1998, the Company filed a Motion for Summary
Judgment with Respect to Claims Regarding the Power Purchase Agreement, seeking
dismissal of a portion of the Plaintiffs' claims. On June 5, 1998, the Company
received the Plaintiffs' response to its Motion for Summary Judgment with
Respect to Claims Regarding the Power Purchase Agreement wherein the Plaintiffs
stated their opposition to such motion. The Company and the plaintiffs appeared
in Court on November 19, 1998 to present oral arguments on the Company's Motion
for Summary Judgment with Respect to Claims Regarding the Power Purchase
Agreement. The Court has not yet rendered a decision on such motion. On February
12, 1999, the Plaintiffs moved for leave of the Court to file an amended third
complaint which would omit rescission of the purchase and sale agreement as a
remedy to their second amended complaint. On February 25, 1999, the Company
filed a stipulation with the Court accepting the Plaintiffs motion to file an
amended third complaint. The parties are presently awaiting the Court's grant of
the leave. On February 12, 1999, the Plaintiffs also filed a Motion for Partial
Summary Judgment wherein the Plaintiffs allege that the Company misrepresented
whether SCA had a basis to make legal claims as of December 31, 1994 against
Pacificorp, the utility purchasing energy from the Sunnyside facility.
Presently, the Company is preparing a response to the Plaintiffs' Motion for
Partial Summary Judgment. Discovery remains ongoing.
Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Stock Market Trading:
Until March 12, 1999, the Common Stock of the Company (the "Common Stock")
traded on The Nasdaq Stock Market ("Nasdaq") under the symbol POWR. As of March
23, 1999 there were approximately 260 record holders and approximately 1,100
beneficial holders of the Company's Common Stock. The Company had been
designated as a SmallCap issuer on Nasdaq.
The following table shows the quarterly high and low sales prices during
1997 and 1998 as reported to the Company by Nasdaq:
<TABLE>
<CAPTION>
Year Period High Low
---- ------ ---- ---
<S> <C> <C> <C>
1997 First Quarter 1 3/4
Second Quarter 7/8 9/16
Third Quarter 1-1/2 11/16
Fourth Quarter 2-1/4 1-1/16
1998 First Quarter 1-13/16 3/4
Second Quarter 1-7/8 15/16
Third Quarter 1-5/8 11/16
Fourth Quarter 1-1/8 5/8
</TABLE>
On August 22, 1997, the Securities Exchange Commission approved new listing
standards for companies who are designated as SmallCap issuers on Nasdaq. These
changes, which became effective on February 23, 1998, strengthened the
quantitative threshold criteria necessary to qualify for initial entry and
continued listing on Nasdaq. In addition, the corporate governance requirements
previously applicable only to companies designated as National Market issuers on
Nasdaq now extend to SmallCap issuers on Nasdaq. Prior to February 23, 1998,
SmallCap issuers whose securities traded below a $1 minimum bid price (such as
the Company) could remain listed if they met an alternative test based on the
market value of public float and capital and surplus. However, this
alternative to the $1 minimum bid price standard was eliminated under the new
listing standards. As such, SmallCap issuers whose securities trade below a $1
minimum bid price for a period of 30 consecutive trading days are now subject to
delisting from Nasdaq. However, SmallCap issuers who fail to meet this $1
minimum bid price standard are given a grace period of 90 calendar days in which
to regain compliance by reporting a minimum bid price of $1 for greater than 10
consecutive trading days during this 90 day grace period.
On October 27, 1998, the Company's stock began consistently trading below a
$1 minimum bid price. As a result, on December 11, 1998, the Company was
notified by Nasdaq that its stock would be subject to delisting from Nasdaq
unless the Company's stock would resume trading with a minimum bid price of $1
for greater than 10 consecutive trading days during a 90 day grace period which
expired on March 11, 1999. On March 12, 1999, because the Company's stock
failed to regain compliance during the 90 day grace period, the Company's stock
was delisted from Nasdaq. After delisting from Nasdaq, the Company's Common
Stock began trading on the NASD OTC Bulletin Board ("OTC-BB") under the symbol
POWR.
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Dividends:
The Company has a quarterly dividend program which is subject to review and
consideration by the Board of Directors each quarter. In respect of this
dividend program, the Company declared dividends in each quarter during 1996,
1997 and 1998 as follows:
<TABLE>
<CAPTION>
Dividends
Dividends Declared
Year Period Declared per Share
---- ------ --------- ---------
<S> <C> <C> <C>
1996 First Quarter $ 330,805 $.030
Second Quarter 332,303 .030
Third Quarter 332,303 .030
Fourth Quarter 553,839 .050
---------------- -------------
$ 1,549,250 $.140
================ =============
1997 First Quarter $ 332,303 $.030
Second Quarter 332,303 .030
Third Quarter 335,153 .030
Fourth Quarter 10,266,105 .900
---------------- -------------
$11,265,864 $.990
================ =============
1998 First Quarter $ 342,203 $.030
Second Quarter 342,204 .030
Third Quarter 171,102 .015
Fourth Quarter 171,102 .015
---------------- -------------
$ 1,026,611 $.090
================ =============
</TABLE>
Historically, in addition to special dividends which have been declared
from time to time, the Company has declared quarterly dividends of 3 cents per
share during each of the ten quarters through June 30, 1998. However, during
each of the two quarters through December 31, 1998, the Company reduced its
dividend to 1.5 cents per share to preserve its cash resources to address
certain sudden changes in its financial position and changes to its projected
cash requirements. These changes are discussed further in "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources". The Company continues to
investigate business strategies to increase the cash which may become available
from its operations for future dividends. In addition to its quarterly
dividends, the Company also declared a special dividend of 2 cents per share in
1996 out of operating profits and a special dividend of 87 cents per share in
1997 out of the proceeds from the Milesburg buy-out (See "Item 1. Business--
Milesburg") which resulted in aggregate dividends declared of 14 cents per share
in 1996 and 99 cents per share in 1997.
The recent reduction in dividend amount reflects the Company's policy of
seeking to distribute the maximum funds available each quarter to shareholders.
The maximum funds available for distribution is determined by the Board each
quarter and represents the amount the Company does not expect it will need for
ongoing operations and any planned projects assuming expected operating results
are achieved. In addition, the Board considers the level of reserves and
determines what is reasonable as a buffer against surprises, variations from
expectations and reasonable contingencies in the upcoming periods. Behind all of
these considerations is the philosophy that the Company should not be holding
reserves that it does not expect are reasonably needed for continuing operations
and contingencies. The downside of this approach is the risk that dividends
need to be reduced when cash flow is reduced and/or projected expenses and
contingencies are greater than foreseen. Historically, the Company has not
operated using a philosophy of holding reserves for future dividends since such
a philosophy would represent the Company's investment of its shareholder's money
which would be given out later if the Company was not generating sufficient cash
at that time to continue the dividend. The Board's position has been that the
Company's shareholders acquired their shares in the Company for its management
of power generation facilities and that shareholders would be better served
investing for themselves the money that the Company can distribute.
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As of December 31, 1997, the Company had dividends payable of $10,266,105
which were declared on December 10, 1997 and paid on January 7, 1998.
Distributions are taxed to shareholders when they are received as ordinary
dividends to the extent that the distributing corporation has earnings and
profits during the tax year in which the dividend is paid. The portion of the
distribution which is in excess of the distributing corporation's earnings and
profits is treated as a tax-free return of capital and reduces the shareholder's
basis in the stock. Once the shareholder's basis in the distributing
corporation's stock is reduced to zero, any remaining excess distribution is
treated as a payment for the stock or capital gain if the stock is a capital
asset in the shareholder's hand. Due to the substantial earnings and profits
incurred during 1997 primarily from the sale of the Milesburg project, the
Company deferred the payment of its dividend declared on December 10, 1997 to
1998 so that the dividend would receive a more favorable tax treatment. By
deferring the payment of the dividend declared on December 10, 1997 to 1998,
distributions of $11,166,752 paid in 1998 were characterized as a return of
capital.
Under the laws of its state of incorporation, EPC may pay dividends out of
its surplus, as defined by statute, on an unconsolidated basis. As of December
31, 1998, although the Company's consolidated capital position reflected a
deficit of $6,558,923, EPC maintained a surplus on an unconsolidated basis. As
discussed under the caption "Item 1. Business -- Scrubgrass", after satisfying
certain reserves required by Scrubgrass Project agreements, Buzzard retains 50
percent of the net cash flows from the operations of the Scrubgrass Project and
is not required to reinvest such proceeds to finance operating losses of the
project. To date, Buzzard has retained cumulative cash distributions of
$5,671,087 from the Scrubgrass Project which have all been distributed as
dividends to EPC. Furthermore, as discussed under the caption "Item 1. Business
Milesburg", the Company sold the Milesburg project at a substantial gain and
adopted a Plan of Liquidation of MEI which resulted in significant liquidating
distributions to EPC. As a result of the dividend income received from Buzzard
and the liquidating distributions received from MEI, EPC's surplus determined on
an unconsolidated basis has been sufficient to support the dividends declared
and paid to date. The payment of any future dividends will depend on the Board
of Directors' evaluation, made on a quarterly basis, based on the Company's then
current and projected operating performance and capital requirements. See "Item
7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations".
17
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December 31,
1998 is derived from the audited Consolidated Financial Statements of the
Company. The data should be read in conjunction with the Consolidated Financial
Statements and other financial information included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ----------- ------------
(000's omitted except per share data)
<S> <C> <C> <C> <C> <C>
Results of Operations Data:
Power generation revenues $ 45,721 $ 43,763 $ 47,854 $ 40,693 $ 30,705
---------- ---------- ---------- ----------- ------------
Costs and expenses:
Operating expenses 19,215 17,756 18,190 16,975 16,123
Lease expenses 22,971 24,488 24,793 23,020 10,538
General and administrative expenses 2,197 1,995 3,062 3,668 2,998
Reversal of provision for nonrecovery of
project development costs (940) ----- ----- -----
Depreciation and amortization 285 258 205 167 3,018
---------- ---------- ---------- ----------- ------------
44,668 43,557 46,250 43,830 32,677
---------- ---------- ---------- ----------- ------------
Operating income (loss) 1,053 206 1,604 (3,137) (1,972)
Other income (expense):
Other income 8 622 484 1,285 5,311
Interest income 156 581 499 468 695
Interest expense (461) (424) (336) (107) (8,830)
Amortization of deferred gain 308 308 308 308 154
Warranty income ----- ----- 900 ----- -----
Write-off of receivables in litigation (3,508) ----- ----- ----- -----
Gain on sale of affiliate/project ----- 7,424 ----- ----- 3,946
Minority interest ----- ----- ----- ----- 1,866
Equity in net loss of affiliate ----- ----- ----- ----- (84)
--------- --------- --------- ---------- -----------
(3,497) 8,511 1,855 1,954 3,058
---------- ---------- ---------- ----------- ------------
Income (loss) before income taxes (2,444) 8,717 3,459 (1,183) 1,086
Income tax (expense) benefit 795 (4,103) (1,894) 448 (416)
---------- ---------- ---------- ----------- ------------
Net income (loss) $ (1,649) $ 4,614 $ 1,565 $ (735) $ 670
========== ========== ========== =========== ============
Basic and diluted earnings (loss) per common share $ (0.14) $ 0.41 $ 0.14 $ (0.07) $ 0.06
Dividends paid or payable per common share $ 0.09 $ 0.99 $ 0.14 $ 0.08 $ -----
Weighted average number of shares outstanding 11,424 11,260 11,286 11,197 11,321
Balance Sheet Data:
Total assets $ 55,163 $ 61,362 $ 52,503 $ 45,226 $ 35,962
Working capital (1,190) 536 1,406 3,224 1,212
Long-term obligations 46,511 40,032 35,331 24,405 11,533
Deferred gain (1) 5,397 5,706 6,014 6,322 6,631
Deferred revenue (1) ----- ----- ----- 3,065 2,826
Shareholders' (deficit) equity (6,559) (3,878) 2,680 2,797 4,443
</TABLE>
___________
(1) See Notes A and B of Notes to Consolidated Financial Statements.
18
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview of the Company
The Company owns a 22 year leasehold interest in an approximately 83 Mw
(net) waste coal-fired electric generating facility (the "Scrubgrass Project")
located in Pennsylvania, the lease for which commenced on June 30, 1994. In
recent years, the Company also held varying ownership interests (100% to 40%) in
an approximately 51 Mw (net) waste coal-fired electric generating facility (the
"Sunnyside Project") located in Utah and owned the development rights to an
existing 43 Mw (net) coal-fired electric generating facility (the "Milesburg
Project") located in Pennsylvania which was retired from service in 1984. The
Company sold its remaining interest in the Sunnyside Project on December 31,
1994 and is presently involved in a litigation with the Purchasers to collect
the balance of the Purchaser's obligations for the sale. The Company sold its
development rights for the Milesburg Project on August 26, 1997 to the utility
which had contracted to purchase electricity from such project pursuant to an
agreement which was finalized on December 5, 1997. The Company's projects are
discussed further in "Item 1. Business". The following Management's Discussion
and Analysis of Financial Condition and Results of Operations compares the
Company's results of operations for the years ending December 31, 1998, 1997 and
1996 and should be read in conjunction with the Consolidated Financial
Statements and notes thereto, and the comparative summary of selected financial
data appearing elsewhere in this report. Historical results and trends which
might appear should not be taken as indicative of future operations.
Cautionary Statement
This Annual Report on Form 10-K contains "forward-looking statements", as
defined by the Private Securities Litigation Reform Act of 1995, in order to
provide investors with prospective information about the Company. For this
purpose, any statements which are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors which could cause the Company's actual results and events to
differ materially from those indicated by the forward looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results".
Results of Operations
Year ended December 31, 1998 ("1998") compared with the year ended December 31,
1997 ("1997")
Net loss in 1998 amounted to $1,649,186 or 14 cents per share as compared
to net income of $4,613,863 or 41 cents per share in 1997. The overall decrease
in net results during 1998 is primarily attributable to a write-off of certain
receivables in litigation, the absence in 1998 of the gain and other income
related to the sale of the Milesburg Project, the absence in 1998 of the
reversal of the provision for non-recovery of Milesburg project development
costs, an increase in operating expenses and a decrease in interest income.
The Company's overall decrease in net results during 1998 was offset in part by
an increase in power generation revenues and a decrease in lease expenses. The
reasons for the decrease in the Company's 1998 net results are discussed in more
detail in the following paragraphs.
Power generation revenues in 1998 amounted to $45,721,473 as compared to
$43,763,223 in 1997 and all pertained to the Scrubgrass Project. The overall
increase in power generation revenues during 1998 is primarily attributable to a
5% increase in certain rates billed to the utility under the terms of the power
purchase agreement and an increase in the capacity rate billed during 1998.
During 1998, the Scrubgrass Project operated at 87.9% of its capacity as
compared to 85.6% for the same period in 1997. The following factors contributed
principally to the differences in the Scrubgrass Project's capacity factors
billed for 1998 and 1997. First, the Scrubgrass project had its annual
maintenance outages during the second quarters in 1998 and 1997. During the 1998
outage, the Scrubgrass plant was inoperative for approximately 14 days to
perform scheduled maintenance procedures whereas the 1997 maintenance outage was
extended
19
<PAGE>
from 12 days to approximately 37 days to perform more extensive repairs to the
Scrubgrass generator. Second, the Scrubgrass plant was inoperative for
approximately six days during the first quarter of 1997 to consider matters
related to the generator. Third, the Scrubgrass project incurred numerous
unscheduled shutdowns during 1998 to respond to equipment malfunctions which
necessitated that the Scrubgrass plant be inoperative for an aggregate of
approximately 11 days during the second quarter, seven days during the third
quarter and five days during the fourth quarter outside of the scheduled outage
timeframe. As such, other than normal curtailments of output from the utility
which occurred from time to time, the Scrubgrass plant did not operate for an
aggregate of approximately 37 days and 43 days as a result of scheduled and
unscheduled shutdowns during 1998 and 1997, respectively. The aforementioned
increase in 1998 power generation revenues was offset in part by a decrease in
the revenue recorded as a result of the straight-line accounting treatment of
certain revenues under the power purchase agreement which amounted to
$8,024,111 and $8,905,911 in 1998 and 1997, respectively.
Operating expenses in 1998 amounted to $19,215,459 as compared to
$17,755,882 in 1997 and all pertain to the Scrubgrass Project. The overall
increase during 1998 is primarily attributable to the following reasons. First,
the Company incurred higher fuel costs and higher operator fees in 1998 as a
result of cost escalations in certain operating and supply agreements. Second,
the Company incurred higher fuel expenses because the Scrubgrass plant achieved
a higher capacity rate during 1998 and realized lower average heat rates from
fuel consumption in 1998 by comparison to 1997. Third, because the Scrubgrass
plant achieved a higher capacity rate during 1998, the Company accrued higher
year-end operator bonuses during 1998 than were recorded in 1997. Fourth,
although maintenance expenses incurred during the 1997 extended outage were
higher than the Company's original expectations, the Company incurred higher
maintenance expenses in 1998 to make the necessary repairs related to the 1998
equipment malfunctions and to accelerate its reserves for future maintenance
which the Company now expects will be performed earlier than its previous
schedule. Finally, due to salary increases and increases in the number of
personnel at the Scrubgrass project, the Company incurred higher labor and
related costs in 1998. However, the aforementioned increases in 1998 operating
expenses were offset in part because certain operating expenses were higher
during 1997 by comparison to 1998 primarily for the following reasons. First, as
a result of enhancements made during 1997 to the fuel processing system at the
Scrubgrass Project, the Company realized a savings in certain routine
maintenance expenses during 1998. Second, the Company entered into
modifications to the financing contract with the manufacturer of the Scrubgrass
generator which reduced certain long-term liabilities and operating expenses
during 1998. See a further discussion of these modifications under the captions
"Item 1. Business--Scrubgrass" and "-Liquidity and Capital Resources--Cash Flow
Outlook".
Lease expenses in 1998 amounted to $22,971,201 as compared to $24,488,005
in 1997 and all pertain to the Scrubgrass Project. The overall decrease in lease
expenses during 1998 is primarily due to the following three reasons. First,
because there was less cash available from the Scrubgrass Project during 1998
(see a further discussion under "--Liquidity and Capital Resources"), the
Company realized a decrease in additional rent paid to the Lessor. Second, the
scheduled principal and interest payments under the Lessor's junior subordinated
debt obligations were lower in 1998 which reduced the Lessor's loan costs that
were passed through to the Company in its facility lease expenses. Third, the
Company had a decrease in the lease expense recorded as a result of the
straight-line accounting treatment of certain lease expenses under the
Scrubgrass lease which amounted to $8,024,111 and $8,905,911 in 1998 and 1997,
respectively. The overall decrease was offset in part by an increase in the
principal payments under the Scrubgrass Project term loan which increased the
Lessor's loan costs that were passed through to the Company in its facility
lease expenses.
General and administrative expenses in 1998 amounted to $2,196,929 as compared
to $1,995,491 in 1997. The overall increase in general and administrative
expenses during 1998 is primarily attributable to the following four reasons.
First, certain labor and overhead expenses, which were capitalized in 1997 as a
result of development activities for the Milesburg project, were redirected to
operating activities during 1998. Second, the management fees for the Scrubgrass
Project increased primarily because the project manager passed along increases
in its labor costs to the Company. Third, the Company incurred pension expense
for a defined benefit pension plan which was established in 1998. Fourth, the
Scrubgrass project received a sales tax refund during 1997 which reduced general
and administrative expenses by comparison to 1998. However, the aforementioned
increases in 1998 general and administrative expenses were substantially offset
because certain general and administrative expenses were lower during 1998 by
comparison to 1997 primarily for the following five reasons. First, two
executive officers, who are also significant shareholders of the Company,
elected to repay their 1998 salaries in an amount equal to the cash benefit they
20
<PAGE>
would receive from the Company's 1998 contribution to the defined benefit
pension plan. Second, the Company incurred significant legal expenses in 1997
to review documents in the discovery phase of the Sunnyside project litigation,
which expenses were incurred to a much lesser extent during 1998. Third, while
overall management costs were higher in 1998 as discussed above, the Company
incurred significant management fees during 1997 to address the Scrubgrass
generator matter and to consider other contract related matters, which matters
either did not recur or recurred to a lesser extent in 1998. Fourth, the
Company restructured its insurance programs at its corporate office and at the
Scrubgrass Project in April 1997 which resulted in lower insurance premiums in
1998. Lastly, the Company reduced the amount of certain professional fees
during 1998 because it used such professional services to a lesser extent during
1998.
Reversal of provision for nonrecovery of project development costs relates
to the Company's Milesburg project and amounted to $940,144 in 1997. As
discussed under "Item 1. Business--Milesburg", the Company sold the Milesburg
project to West Penn pursuant to a Buy-Out Agreement dated August 26, 1997. In
light of this Buy-Out Agreement, which established a value significantly in
excess of the Company's recorded carrying value for its investment in the
Milesburg project, the Company removed its reserve for the impairment in value
of this investment during 1997. The reserve was established in 1990 by a charge
against earnings due to the uncertainties surrounding whether the Company would
realize value from its investment in this project. The reversal of provision for
nonrecovery of project development costs pertains to an event which occurred in
1997 and did not recur in 1998.
Interest income in 1998 amounted to $156,546 as compared to interest income
of $581,336 in 1997. The decrease in interest income is primarily attributable
to the absence in 1998 of interest income related to the sale of the Milesburg
Project. During 1997, pursuant to the terms of the Buy-Out Agreement dated
August 26, 1997, the Company earned 8% interest on the $15 million selling price
from August 27, 1997 until the closing date (December 5, 1997). The Company's
interest income also decreased in 1998 primarily due to lower investments in
cash and cash equivalents and less interest recognized on the Company's notes
receivable related to the 1994 sale of SCA.
Interest expense in 1998 amounted to $460,812 as compared to interest
expense of $424,395 in 1997. Interest expense increased during 1998 primarily
because of the additional long-term debt obligations for the Scrubgrass Project
which were incurred during the second quarter of 1997. The additional long-term
debt obligations, which were outstanding for a full year in 1998, consist of a
$3 million term credit facility which is discussed further in the section "--
Liquidity and Capital Resources--Financing Activities" and installment debt
which financed the generator repair that is discussed further in the section "--
Liquidity and Capital Resources--Cash Flow Outlook". Due to lower average
outstanding borrowings in 1998, the aforementioned increase in interest expense
was offset in part by a decrease in interest incurred on the Lessee Working
Capital Loan.
Write-off of receivables in litigation amounted to $3,508,498 in 1998 and
represents the aggregate balances as of December 31, 1998 of the notes
receivable of $2,937,500 and the receivable from sale of affiliate of $570,998
related to the 1994 sale of SCA. This write-off was discussed further in "Item
1. Business--Sunnyside".
Gain on sale of project amounted to $7,423,467 in 1997 and pertains to a
gain recognized as a result of the Company's sale of the Milesburg project.
This gain, which is discussed further in "Item 1. Business--Milesburg", pertains
to an event which occurred in 1997 and did not recur in 1998.
Other income amounted to $7,810 in 1998 and consisted primarily of a gain
on the sale of the Company's land in Fayette County, Pennsylvania. Other income
in 1997 amounted to $622,417 and consisted of revenue recorded as a result of
the release of certain Milesburg obligations which were payable only upon the
occurrence of events related to project development.
Income tax benefit in 1998 amounted to $794,945, or 32.5% of loss
before income taxes, as compared to income tax expense of $4,103,684, or 47.1%
of income before income taxes, in 1997. The 1997 effective tax rate was higher
by comparison to the 1998 rate primarily because of the following reasons.
First, the 1997 income tax expense includes the effect of a permanent difference
between the gain for financial reporting purposes and the gain for tax reporting
purposes on the sale of the Milesburg project. Second, due to a second layer of
state income tax incurred on distributions received by EPC from the Scrubgrass
Project, the Company was not able to realize the full benefit
21
<PAGE>
of its 1998 net loss for tax reporting purposes. A significant portion of the
Company's income tax expense during 1997 resulted in a decrease in the Company's
deferred tax asset rather than in cash outlays. See "Liquidity and Capital
Resources" for a further discussion.
Year ended December 31, 1997 ("1997") compared with the year ended December 31,
1996 ("1996")
Net income in 1997 amounted to $4,613,863 or 41 cents per share as
compared to net income of $1,565,279 or 14 cents per share in 1996. The overall
increase in net income during 1997 is primarily attributable to the gain on the
sale of the Milesburg project, the reversal of the provision for non-recovery of
Milesburg project development costs, and a reduction in general and
administrative expenses primarily as a result of both the Company's efforts to
reduce its corporate overhead expenses and the capitalization of labor and
overhead expenses related to the Milesburg project. The Company's overall
increase in net income during 1997 was offset in part by an operating loss from
the Scrubgrass project primarily as a result of the generator repair discussed
under "Item 1. Business--Scrubgrass" which reduced the Company's power
generation revenues and affected certain of the Company's expenses. In
comparing the Company's net income for 1997 to 1996, it is important to point
out that the Company's results of operations during 1996 were beneficially
effected by certain non-recurring revenues which included the recognition of
certain revenues of $3,064,965 which were previously deferred under the
Scrubgrass power purchase agreement, the settlement of a warranty issue related
to the Scrubgrass Project for $900,000 and the settlement of a legal proceeding
for approximately $340,000, net of legal fees. In light of the Company's
favorable earnings and available cash, the Company declared dividends on its
Common Stock in 1997 of $11,265,865 or 99 cents per share as compared to
dividends in 1996 of $1,549,250 or 14 cents per share.
Power generation revenues in 1997 amounted to $43,763,223 as compared to
$47,853,639 in 1996 and all pertained to the Scrubgrass Project. The overall
decrease in power generation revenues during 1997 is largely attributable to the
extended maintenance outage to repair the Scrubgrass generator and a reduction
of power generation revenues recorded as a result of the straight-line
accounting treatment of certain revenues under the power purchase agreement
($8,905,911 in 1997 as compared to $9,294,789 in 1996). In addition, the 1996
power generation revenues were higher by comparison to 1997 because the Company
recognized certain revenues of $3,064,965 during 1996 which were previously
deferred under the Scrubgrass power purchase agreement. With reference to the
impact of the extended maintenance outage, the Scrubgrass plant was inoperative
for approximately 6 days during the first quarter of 1997 to consider generator
matters. During the second quarter of 1997, the Scrubgrass annual outage also
extended approximately 31 days longer than the 6 day outage in May 1996 due
primarily to the generator repair. At an average of $100,000 of revenues per
day, the 37 additional outage days in 1997 account for an approximate reduction
in power generation revenues for the year ended year ended December 31, 1997 of
$3.7 million by comparison to the same period in 1996. However, the impact of
the lost revenues from the Scrubgrass outage was mitigated by a 5% increase in
certain rates charged to the utility under the terms of the power purchase
agreement and improvements in the performance of the Scrubgrass plant after the
1997 extended outage. Specifically, the Scrubgrass plant operated at a 97.5%
average capacity for the six months ended December 31, 1997 versus 90.9% for the
six months ended December 31, 1996.
Operating expenses in 1997 amounted to $17,755,882 as compared to
$18,190,037 in 1996. The overall decrease is primarily attributable to lower
fuel costs and operator bonuses because the overall capacity rate in 1997 was
lower by comparison to 1996 as a result of the extended maintenance outage to
repair the generator. However, the decrease was offset in part by higher
maintenance costs to complete the extended maintenance outage at the Scrubgrass
plant, an increase in contracted rates for certain fuel costs and higher
personnel costs incurred under the O&M.
Lease expense in 1997 amounted to $24,488,005 as compared to $24,792,248 in
1996. The overall decrease in lease expense during 1997 is primarily due to a
decrease in the lease expense recorded as a result of the straight-line
accounting treatment of lease expenses ($8,905,911 in 1997 as compared to
$9,294,789 in 1996) and the lowering of average interest rates which occurred in
1997 and which reduced the Lessor's loan costs that were passed through to the
Company in its facility lease expenses. The decrease was offset in part by an
increase in the principal payments under the Scrubgrass Project term loan which
increased the Lessor's loan costs that were passed through to the Company in its
facility lease expenses.
22
<PAGE>
General and administrative expenses in 1997 amounted to $1,995,491 as
compared to $3,061,931 in 1996. The overall decrease in general and
administrative expenses during 1997 is primarily due to the Company's efforts to
reduce its corporate overhead expenses and the capitalization of labor and
overhead expenses aggregating to $327,583 for development efforts related to the
Milesburg project. The Company's major steps to reduce its corporate overhead
included a consolidation of its Vermont and New Hampshire offices into one
office in New Hampshire (completed by May 1996), a reduction in its executive
officer compensation, a reduction in its employee headcount by an equivalent of
two full-time employees, and a reduction of its 1997 insurance costs by
restructuring insurance programs. In addition, the Company has realized
reductions in 1997 management costs for the Scrubgrass project due to additional
experience of the Manager's employees and because the negotiation of certain
contractual matters required less effort in 1997. The Company continues to
incur substantial management and professional fees to defend its position in
certain legal matters. Accordingly, the full effect of the Company's efforts to
reduce its corporate overhead expenses still has not yet been shown in its
recent operating results.
Reversal of provision for nonrecovery of project development costs relates
to the Company's Milesburg project and amounted to $940,144 in 1997. This item
was discussed in more detail in the comparison of 1998 and 1997 results above.
Other income amounted to $622,417 in 1997 and consisted of revenue recorded
as a result of the release of certain Milesburg obligations which were payable
only upon the occurrence of events related to project development. Other income
in 1996 consisted primarily of proceeds from a legal settlement of $540,000 and
Sunnyside Project sales tax refunds of approximately $42,000 arising out of
activities prior to the date of sale. Other income in 1996 was offset in part
by a provision made for the continued decline in value of the Company's
preferred stock investment in Hamilton Technologies, Inc., a privately held
Massachusetts developer of computer aided software engineering (CASE) software.
Interest income in 1997 amounted to $581,336 as compared to interest income
of $498,975 in 1996. The increase in interest income is primarily attributable
to interest of $328,767 received from West Penn because the proceeds of $15
million committed pursuant to the Buy-Out Agreement dated August 26, 1997 were
not received until December 5, 1997. Excluding the aforementioned interest
received from West Penn, the Company's interest income decreased in 1997
primarily due to lower investments in cash and cash equivalents, lower
investments in restricted cash and less interest recognized on the Company's
notes receivable related to the sale of its interest in the Sunnyside Project.
Interest expense in 1997 amounted to $424,395 as compared to interest
expense of $336,449 in 1996. The increase in 1997 is primarily attributable to
additional long-term debt for the Scrubgrass Project amounting to $3,000,000.
Gain on sale of project amounted to $7,423,467 in 1997 and pertains to a
gain recognized as a result of the Company's sale of the Milesburg project. The
sale of the Milesburg project and the calculation of the gain is discussed
further under the caption "Item 1. Business--Milesburg".
Warranty income in 1996 amounted to $900,000 and resulted from a settlement
with an engineering and construction contractor for the Scrubgrass plant which
was received in March 1996. There was no warranty income in 1997.
Income tax expense in 1997 amounted to $4,103,684, or 47.1% of income
before income taxes, as compared to an income tax expense of $1,894,035, or
54.8% of income before income taxes, in 1996. The increase in income tax expense
resulted primarily from higher earnings during 1997. The 1996 effective tax
rate was higher by comparison to the 1997 rate primarily as a result of the
additional charges to deferred state tax expense and because the taxability of
temporary differences reversing in 1996 occurred in states with higher tax
rates. The overall decrease in the 1997 effective tax rate was offset in part
by a difference between the gain for financial reporting purposes and the gain
for tax reporting purposes on the sale of the Milesburg project which
contributed to a higher effective tax rate in 1997. A significant portion of
the Company's income tax expense during 1997 and 1996 resulted in a decrease in
the Company's deferred tax asset rather than in cash outlays. See "Liquidity
and Capital Resources" for a further discussion.
23
<PAGE>
1999 Outlook
With a view towards 1999, the Company expects to achieve continuing operating
earnings as a result of profits from Scrubgrass project operations and
management of its corporate general and administrative expenses. The Company
offers the following prospective information concerning significant components
of its 1999 results of operations which are being compared to historical results
of operations in 1998:
Power generation revenues - Power generation revenues are expected to
increase in 1999 as a result of a 5% increase in certain contracted rates
under the Scrubgrass power purchase agreement and improvements in the
performance of the Scrubgrass facility. During 1998, the Scrubgrass facility
was inoperative for approximately 23 days for unscheduled shutdowns to
respond to equipment malfunctions. While the Company expects that the
Scrubgrass facility will incur equipment malfunctions from time to time, the
Company does not believe that 1998 results are necessarily indicative of
results expected for 1999.
Operating expenses - Operating expenses are expected to increase in 1999 as a
result of a 4% average increase in certain contracted rates under fuel supply
agreements, a 5% increase in certain contracted rates under the O&M and
anticipated increases in personnel costs at the Scrubgrass plant. In
addition, because the Company expects improvements in the performance of the
Scrubgrass facility in 1999, operating expenses are expected to further
increase as a result of additional fuel consumption and higher operator
bonuses which are primarily based on Scrubgrass operating profits. However,
because the Company is not projecting it will respond to as many equipment
malfunctions in 1999, the Company would expect to incur lower maintenance
expenses in 1999.
Lease expenses - Lease expenses are expected to increase significantly in
1999 for the following reasons. First, the Company expects that higher
contracted principal payments on the Lessor's term loans will increase the
Lessor's loan costs that are expected to be passed through to the Company in
its facility lease expenses. Second, the Company expects to incur scheduled
increases in equity rents for the Scrubgrass Project in 1999. Third, due to
projected increases in cash from Scrubgrass Project operations (See further
discussion under "Liquidity and Capital Resources--1999 Outlook"), the
Company expects its additional rent paid to the Lessor, which amounts to 50
percent of the net cash flows from the Scrubgrass Project, would also
increase in 1999. However, the Company has experienced improvements in its
variable interest rates in recent months. Should recent interest rates remain
consistent during 1999, the Company would expect to incur a decrease in lease
expense due to reductions in the Lessor's loan costs that would be passed
through to the Company in its facility lease expenses.
General and administrative expenses - General and administrative expenses are
expected to remain fairly consistent during 1999. The principal
administrative costs which are subject to considerable variation pertain to
the Company's two legal proceedings. Depending on the demands of these legal
proceedings, the Company can incur significant fluctuations in its
professional fees and management costs.
Other expense - In 1998, the Company wrote-off its aggregate balances as of
December 31, 1998 of the notes receivable of $2,937,500 and the receivable
from sale of affiliate of $570,998 related to the 1994 sale of SCA. This
charge against operating results will not recur in 1999. See "Item 1.
Business--Sunnyside"
Other income - The Company entered into contracts to sell a portion of its
anticipated future Nitrogen Oxide Ozone Transport Region Budget Allowances
(`NOx Credits"). The Company expects to generate other income from sales of
its NOx Credits beginning in 1999. The sales of NOx credits are discussed
further in Note O to the Consolidated Financial Statements and "-Liquidity
and Capital Resources--1999 Outlook".
Litigation recoveries - As of December 31, 1998, the Company is seeking to
recover approximately $4.1 million owed by the Purchasers of SCA and
approximately $3 million (of which 50% or approximately $1.5 million would be
retained by the Lessor) by PENELEC which are the subject of legal
proceedings. See "Item 1. Business--Sunnyside" and "Item 3. Legal
Proceedings". Furthermore, should these legal proceedings resolve or settle
in favor of the Company, the Company could also receive additional financial
recoveries
24
<PAGE>
which include interest, punitive damages and reimbursements for attorney's
expenses. Any future recoveries from either of these legal proceedings would
be recorded as additional income in the Company's Consolidated Statement of
Operations.
Recently Issued Accounting Standards
See Note B to the Consolidated Financial Statements for recently issued
accounting standards which are required to be adopted in 1999.
Liquidity and Capital Resources
Operating Activities
The Company had cash provided by operating activities of $635,735 in 1998,
cash used by operating activities of $1,202,561 in 1997 and cash provided by
operating activities of $1,324,158 in 1996. During all of these periods, the
Company's only sources of cash from operating activities were operating profits
from the Scrubgrass Project and investment earnings. During 1997, primarily
because of the financial impact of the generator repair at the Scrubgrass
project which is discussed further under "Part I - Item 1. Business --
Scrubgrass", the Company incurred a significant decrease in cash from its
operating activities. The Scrubgrass Project was profitable during 1998 and
1996 and contributed cash to the Company's operating activities.
While the Company reported an overall net loss of $1,649,186 during 1998,
the Company generated significant cash from its operating activities. The
following adjustments, which did not impact the Company's cash flows, need to be
considered in order to reconcile the Company's 1998 net loss to its net cash
provided by operating activities.
Depreciation and amortization - During 1998, the Company recognized
depreciation and amortization for its lease rights of $149,004, deferred
financing costs of $96,090, machinery and equipment modifications of $30,612
and equipment and furniture of $9,765.
Write-off of receivables in litigation As of December 31, 1997, the Company
had recorded on its Consolidated Balance Sheet notes receivable of $2,937,500
and receivable from sale of affiliate of $570,998 related to the 1994 sale of
SCA. As discussed further in "Item 1. Business--Sunnyside", the Company is
involved in a litigation with the Purchasers of SCA and wrote off the notes
receivable and receivable from sale of affiliate during 1998 to present its
financial statements conservatively.
Deferred income tax asset - The Company's net deferred income tax asset
amounted to $1,826,561 as of December 31, 1998 as compared to $817,755 as of
December 31, 1997. As discussed in the previous paragraph, the Company wrote
off receivables of $3,508,498 associated with the 1994 sale of SCA. Since
the Company was reporting the income from this sale for tax purposes using
the installment method, the Company's also reversed its deferred income tax
liability of $1,198,801 associated with this sale. The reversal of this
deferred income tax liability was the primary reason for the increase in the
net deferred income tax asset as of December 31, 1998.
Deferred gain, net - The Company's deferred gain, net amounted to $5,397,187
as of December 31, 1998 as compared to $5,705,598 as of December 31, 1997.
The decline is due to the amortization of the deferred gain related to the
Scrubgrass Project, which is being amortized on a straight-line basis over 22
years.
The Company also offers the following information to discuss changes in its
operating assets and liabilities which most notably impacted its cash position
during 1998:
Receivable from utility - The Company's receivable from utility relates to
the Scrubgrass Project and amounted to $6,598,864 as of December 31, 1998 as
compared to $6,538,645 as of December 31, 1997. The increase in receivable
from utility as of December 31, 1998 is primarily due to an approximate 5%
increase in rates billed during 1998 under the power purchase agreement.
However, primarily due to several unscheduled short
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maintenance outages during the fourth quarter of 1998, the rate increase was
substantially offset by a lower capacity rate billed during the fourth
quarter of 1998 by comparison to the same period in 1997.
Other current assets - The Company's other current assets amounted to
$821,462 as of December 31, 1998 as compared to $881,938 as of December 31,
1997. The decrease is largely due to lower interest receivable as of December
31, 1998. As of December 31, 1997, interest receivable was unusually high
since the Company was investing the net proceeds retained from the sale of
the Milesburg Project.
Accounts payable and accrued expenses - The Company's accounts payable and
accrued expenses amounted to $5,873,689 as of December 31, 1998 as compared
to $6,325,062 as of December 31, 1997. The decrease in 1998 is primarily
attributable to a reduction in corporate taxes payable which amounted to
$156,682 and $1,120,639 as of December 31, 1998 and 1997, respectively. As
of December 31, 1997, the Company's corporate tax liabilities were
significantly higher primarily because of taxes associated with the gain on
the sale of the Milesburg project. The overall decrease was offset in part
primarily by the following three factors which increased accounts payable and
accrued expenses in 1998. First, the Company established a defined benefit
pension plan in 1998 for which the Company recognized an accrued pension
expense of $165,342 as of December 31, 1998. Second, due to improvements in
the profitability of the Scrubgrass Project in 1998, the Company accrued a
higher year end bonus to the Operator as of December 31, 1998. Third, the
Company realized cost escalations in various operating and administrative
contracts which increased its operating and administrative costs in 1998.
Maintenance reserve - The Company records the expense of major equipment
overhauls related to the Scrubgrass Project to a maintenance reserve on a
straight-line basis using management's best estimate of when the Company will
incur future cash outlays for the major equipment overhauls. When the
Company incurs cash outlays for major equipment overhauls, they reduce
maintenance reserves and are funded substantially from scheduled deposits to
a restricted major maintenance fund which have been set aside to ensure that
the funds are available for these maintenance procedures (see further
discussion under the caption "Investing Activities-Restricted Cash"). The
maintenance reserve increased to $2,258,049 as of December 31, 1998 from
$1,995,818 as of December 31, 1997 primarily due to scheduled reserves
provided for the ongoing maintenance of the plant. The scheduled reserves
were offset in part by cash outlays of $384,100 for major equipment overhauls
and the settlement with GEC for approximately $169,000 (See "Item 1. Business
--Scrubgrass").
Investing Activities
The Company used $277,331 in investing activities during 1998, received
$12,206,487 from investing activities during 1997 and used $388,939 in investing
activities during 1996. The Company's investing activities are concentrated
primarily in the following areas:
Notes receivable - The Company presently has notes receivable related to the
1994 sale of the Sunnyside Project and related to fees earned in 1995 for the
Scrubgrass Project. The Company collected $39,128, $36,129 and $482,681 from
notes receivable related to the Scrubgrass Project in 1998, 1997 and 1996,
respectively. The notes receivable related to the Sunnyside Project, with a
principal balance of $2,937,500 and accrued interest balance of $808,818 as
of December 31, 1998, are the subject of a legal proceeding. See "Item 1.
Business Sunnyside", "Item 3. Legal Proceedings" and Note P to the Company's
Consolidated Financial Statements for further information about the Sunnyside
Project and this litigation.
Restricted cash - The Company is presently required to make scheduled
deposits to a restricted major maintenance fund relating to the Scrubgrass
Project to ensure that funds are available in the future for scheduled major
equipment overhauls. The Company is also allowed to spend restricted cash to
fund the cost of major equipment overhauls subject to certain restrictions.
During 1998, 1997 and 1996, the Company made scheduled deposits to the
restricted major maintenance fund of $682,275, $644,500 and $600,000,
respectively. During 1998 and 1996, such deposits and interest thereon
exceeded the payments for major equipment overhauls by $311,263 and $614,561,
respectively. In 1997, the payments for major equipment overhauls exceeded
the deposits and interest thereon by $158,238. The Company's cost of major
equipment overhauls in 1997 were significant by
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comparison to the other periods primarily because of extensive maintenance
performed during the 1997 extended outage.
Proceeds from sale of project - On December 5, 1997, the Company received
$15,000,001 for the sale of the Milesburg project. The Company's sale of the
Milesburg project is discussed further under the caption "Item 1. Business--
Milesburg".
Property, plant and equipment - The Company invested $5,196, $2,987,881 and
$257,059 in property, plant and equipment expenditures during 1998, 1997 and
1996, respectively. The 1998 expenditures were primarily purchases of
computer equipment for the Company's corporate office. The 1997 and 1996
expenditures primarily pertain to development activities for the Company's
Milesburg Project for which development efforts were accelerated during the
latter part of 1997. During 1997, the Company also made expenditures of
$125,000 for machinery and equipment modifications at the Scrubgrass
facility.
Financing Activities
The Company utilized $12,088,261, $90,177 and $768,517 in financing
activities during the years ended December 31, 1998, 1997 and 1996,
respectively. The Company's financing activities are concentrated primarily in
the following areas:
Dividends - During 1996, the Company initiated a quarterly dividend program
which is subject to review and consideration by the Board of Directors each
quarter. In respect of this dividend program, the Company declared dividends
of 3 cents per share during each of the quarters during 1996 and 1997.
During 1998, the Company declared dividends of 3 cents per share during the
first and second quarters and dividends of 1.5 cents per share during the
third and fourth quarters. The Company also declared special dividends of 2
cents per share in 1996 out of operating profits and 87 cents per share in
1997 out of the proceeds from the Milesburg settlement (See "Item 1. Business
--Milesburg"). Therefore, the Company declared aggregate dividends of 14
cents per share in 1996, 99 cents per share in 1997 and 9 cents per share in
1998. During 1997 and 1998, the Company also paid dividends to its
subsidiary's preferred stockholder of $30,178 and $5,000, respectively. The
preferred stockholder, entitled to cumulative dividends of $5,000 per year
since December 1991, was paid its dividends up to date during the second
quarter of 1997.
Working Capital Loan - The Company may borrow up to $4 million under a Lessee
Working Capital Loan Agreement with the Lessor for ongoing working capital
requirements of the Scrubgrass Project. The Company increased its outstanding
borrowings under the Lessee Working Capital Loan Agreement from $2,311,666 as
of December 31, 1997 to $2,389,664 as of December 31, 1998 primarily as a
result of cost escalations in various operating and administrative contracts
which increased certain costs in 1998. The Scrubgrass Project pays its
accounts payable according to a date schedule which is fixed by certain
operating contracts. As a result, the outstanding balances under the Lessee
Working Capital Loan Agreement can occasionally vary slightly due to the
timing of receiving and paying vendor invoices. The outstanding balances
under the Lessee Working Capital Loan Agreement were fairly consistent as of
December 31, 1998 and 1997.
Term Credit Facility - In June 1997, the Lessor entered into a three year
credit facility with the lenders of the Scrubgrass Project which made $3
million available to the Scrubgrass Project to cover the cash deficiency
which resulted from the extended annual outage of the Scrubgrass Project and
associated costs and expenses. On July 1, 1998, the maximum allowable
borrowings under this credit facility began reducing in $600,000 increments
every six months through July 3, 2000 when the credit facility will be
payable in full. During 1998, the Company paid $850,000 which reduced this
obligation from $3,000,000 as of December 31, 1997 to $2,150,000 as of
December 31, 1998.
Notes payable - In addition to the term credit facility described previously,
the Company has other long-term obligations related to its Sunnyside Project
and Scrubgrass Project in the amounts of $1,017,316 and $1,249,268,
respectively as of December 31, 1998. The Sunnyside Project long-term
obligations are payable
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based on a schedule which relates directly to the amount of proceeds received
from the collection of the outstanding notes receivable from the sale of the
Company's interest in the Sunnyside Project, which are the subject of a
litigation described in "Item 3. Legal Proceedings". The Scrubgrass Project
obligation has scheduled annual maturities which began in 1998 and continue
through 2005. The Company paid its initial installment of $18,543 for the
Scrubgrass Project obligation in 1998 and will be required to make its next
installment of $60,695 in 1999. Until August 26, 1997, the Company had long-
term obligations related to the Milesburg project aggregating to $5,858,767.
As a result of a settlement agreement dated August 26, 1997, the Milesburg
project obligations were reduced to $2,358,767. In addition, because certain
Milesburg obligations were payable only upon the occurrence of events related
to project development, Milesburg project obligations of $558,767 and accrued
interest of $63,650 were released from liabilities during 1997 and reported
as other income of $622,417 in the accompanying Consolidated Statement of
Operations. The remainder of the Milesburg project obligations, which
amounted to $1,800,000, were paid during 1997. The Company had short-term
installment obligations related to its Sunnyside Project and Milesburg
Project which were fully satisfied during 1996 with aggregate payments of
$139,517.
Common Stock - The Company received proceeds from the issuance of its Common
Stock aggregating $0, $124,238 and $14,437 during 1998, 1997 and 1996,
respectively. The Common Stock was issued solely pursuant to exercises of
stock options.
Treasury Stock - The Company from time to time makes purchases of its own
common stock. During 1996, the Company purchased 520,540 shares of common
stock from a resigning executive officer for $287,876 representing all of the
officer's holdings in the Company. The Company's note receivable from the
officer in the amount of $72,876 was collected by reducing the proceeds paid
to the officer for the common stock. The Company did not purchase any
treasury stock during 1998 or 1997.
Cash Flow Outlook
During 1999, the Company expects that its principal sources of cash to fund
its business activities will be from available cash balances, investment
earnings and cash which may become available from the Scrubgrass Project. As
discussed in "Item 1. Business--Scrubgrass", the Company is not able to receive
cash from the Scrubgrass Project until all operating expenses, base lease
payments (which include the Lessor's debt service), certain maintenance reserve
payments and other subordinated payments of the Scrubgrass Project are first
satisfied.
As discussed under the caption "Results of Operations--1999 Outlook", the
Company expects that the Scrubgrass Project will be profitable in 1999 and will
generate cash flows from its operating activities. Due to an approximate 5%
increase in the contracted rates under the Scrubgrass power purchase agreement
and expected improvements in the performance of the Scrubgrass facility, the
Company believes that such expected cash flows would exceed previous 1998
levels. Nevertheless, the Company anticipates that its expected cash flows in
1999 would continue to be affected by debt and maintenance reserve repayments.
According to the terms of certain Scrubgrass Project obligations, the Company
will be required to reduce the outstanding balance of its term credit facility
in 1999 by $1,550,000 and will be required to make an installment payment in
1999 of $60,695 under the $1.3 million Scrubgrass Project note. Furthermore,
pursuant to the provisions of certain Scrubgrass Project agreements, the Company
will be required to make additional scheduled deposits of $82,275 in 1999 to
replenish restricted cash balances which were used to finance certain 1997
maintenance expenses. However, as discussed under "Item 1. Business--
Scrubgrass", Buzzard is required to pay the Lessor, in addition to a specified
base rent, an additional rent of 50 percent of the net cash flows Buzzard
receives from the Scrubgrass Project. Therefore, the Company would expect to
realize a savings in its additional rent expense to the extent of 50 percent of
any required debt and maintenance reserve repayments. As such, the Company
expects that the cash flows which may become available in 1999 from the
Scrubgrass Project would only be reduced by 50 percent of any required debt and
maintenance reserve repayments.
In April 1998, the Company improved its financial position by revising the
terms of its installment contract to finance the 1997 repair of the Scrubgrass
generator. Under the terms of the revised agreement with the
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manufacturer of the Scrubgrass generator ("GEC"), as payment in full for GEC'S
work performed during the 1998 outage and for the five remaining installments of
$110,000 and $75,000 bonus owed under the original contract, the Company will
pay GEC a total of $450,000 over a four year period. The revised agreement
provides that $50,000 was payable upon the completion of GEC'S work during the
scheduled 1998 plant outage and that $100,000 is payable upon each of the first
four anniversaries of the first payment thereof.
During December 1998 and January 1999, the Company entered into contracts
to sell a portion of its anticipated future Nitrogen Oxide Ozone Transport
Region Budget Allowances ("NOx Credits"). Each year, the Environmental
Protection Agency and the Pennsylvania Department of Environmental Protection
grant NOx Credits to Buzzard based on numerous factors which pertain to the
design and operation of the Scrubgrass facility. The NOx Credits establish the
quantity (in tons) of nitrogen oxide that the Scrubgrass facility can emit into
the environment before Buzzard will be fined by the EPA. During 1999, Buzzard
plans to install machinery, with a cost of approximately $600,000, which is
expected to significantly lower the quantity of nitrogen oxide which the
Scrubgrass facility would emit into the environment. As such, Buzzard
anticipates that it may not require a portion of its future NOx Credits to
maintain its compliance with EPA standards. Because NOx Credits are
transferable and marketable, Buzzard contracted to sell 839 tons of its
projected available NOx Credits which it anticipates may not be required to
comply with EPA standards. Under the terms of the contracts, Buzzard currently
expects to receive aggregate proceeds from sales of anticipated NOx Credits of
$2,240,933 through 2000, from which $600,000 would be utilized to purchase and
install the machinery discussed above. The sales of NOx Credits are discussed
further in Note O to the Consolidated Financial Statements.
As of December 31, 1998, the Company is seeking to recover approximately
$4.1 million owed by the Purchasers of SCA and approximately $3 million (of
which 50% or approximately $1.5 million would be retained by the Lessor) owed by
PENELEC which are the subject of legal proceedings. See "Item 1. Business
Sunnyside" and "Item 3. Legal Proceedings". In addition, the Company is seeking
financial recoveries which include interest, punitive damages and/or
reimbursements for attorney's expenses. The Company believes its positions in
both of these litigations are meritorious and, should they resolve or settle in
favor of the Company, they could materially enhance the Company's financial
position in the future. Recently, the Company has been in discussions with
PENELEC regarding a settlement of that legal proceeding. The Company currently
believes that the prospect of a final settlement of all outstanding issues with
PENELEC is good. However, there can be so assurance if or when the Company will
resolve or settle either of these legal proceedings.
In September 1998, the Company filed its 1997 corporate tax returns which
clarified its corporate tax position. Prior to 1997, the Company had
substantial net operating loss carryforwards which sheltered the Company from
paying Federal and certain state corporate taxes during its profitable periods.
However, primarily as a result of the 1997 Milesburg project sale, the Company
had substantial taxable income in 1997 which utilized all of the Company's
previous net operating loss carryforwards. As such, for tax years beginning in
1997, the Company's cash flows have been negatively effected by the payment of
significant Federal and state corporate taxes. Presently, the Company is
reviewing its corporate tax position and is considering tax strategies which
could mitigate the effect that corporate taxes are expected to have on its
future cash flows.
The Company is optimistic about the future performance of the Scrubgrass
Project which is currently expected to achieve earnings on an annual basis for
the foreseeable future. The Scrubgrass power purchase agreement has contracted
rate escalations which, assuming the Scrubgrass Project meets its targeted
capacity rates, would ensure a material increase in revenues in future years.
Furthermore, as discussed above, the Company is involved in settlement
discussions with PENELEC regarding its legal proceeding and has entered into
contracts for the sale of NOx Credits which could both materially enhance the
anticipated increases in the Company's cash flows. Notwithstanding, the
Scrubgrass Project will obviously bear the burden of repaying the debt
obligations relating to the extended outage of the Scrubgrass Project in the
near term. Nevertheless, the Company believes that the cash flows which may
become available from the Scrubgrass Project, together with existing cash
reserves, would be sufficient to fund the Company's business activities on a
long-term basis. However, the payment of any future dividends will depend on
the Board of Directors' evaluation, made on a quarterly basis, based on its
dividend policy and the Company's then current and projected operating
performance and capital requirements.
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See the further discussions under "Item 5.- Dividend Program" and "--Certain
Factors That May Affect Future Results" below.
Year 2000 Readiness
General
The Company continues to address the issue of Year 2000 Readiness ("the Y2K
Project") and is proceeding on a schedule designed to complete the Y2K Project
by June 1999. In 1997, the Company began establishing procedures to assess the
risks associated with the Y2K Project. The Company's procedures to assess the
risks of the Y2K Project have included an inventory of stand-alone hardware and
software ("IT Systems"), an inventory of all system components embedded in the
Scrubgrass plant operating control systems ("Non-IT Systems"), the
identification of critical vendors, customers and business partners, the testing
of both IT Systems and Non-IT systems and a solicitation of responses from all
critical vendors, customers and business partners indicating their readiness for
the Year 2000.
Presently, the Company has completed its testing of IT Systems and Non-IT
Systems. Based on the results of these tests, the Company has identified IT
Systems and components of Non-IT Systems which are not Year 2000 compliant.
With respect to IT systems, the Company has either already upgraded such systems
or has placed orders to upgrade such systems in the near future. As far as Non-
IT Systems, the Company has received recommendations from third parties
regarding solutions to either upgrade or replace non-compliant system
components. At this time, the Company has received assurances from such third
parties that solutions to remedy the non compliant system components are readily
available and could be implemented within the Company's time parameters for the
Y2K Project. The upgrades and/or replacements of non-compliant system
components are expected to be performed during the Scrubgrass Project annual
outage which is scheduled to begin in April 1999.
The Company has made substantial progress in securing responses from most
critical vendors, and business partners indicating their readiness for Year
2000. Based on the responses received to date, the Company has not identified
any conditions of potential non-compliance which the Company estimates would
materially impact its business.
Costs
The Company does not expect that the total costs to remediate Year 2000
issues would be material to its financial position. The Company has incurred
cumulative costs to remediate Year 2000 issues of approximately $139,000 through
December 31, 1998. The Company estimates that it will incur additional costs of
approximately $95,000 to remediate Year 2000 issues. The Company expects to
fund such costs from its operating cash flows.
Risks and Contingency Plans
The Company believes that it has established a viable plan designed to ensure
that the Y2K Project is completed prior to the year 2000. However, in
connection with its Y2K Project, the Company is also developing a contingency
plan which describes the steps the Company would take if the Y2K Project is not
completed as planned. The Y2K Project efforts are ongoing and the Company will
endeavor to update the Y2K Project activities and its contingency plans as new
information becomes available.
The Year 2000 problem is a world-wide concern and there is a tremendous
amount of uncertainty about the effect this problem will have on any business.
The Company is endeavoring to understand the impact that failures of third
parties could have on its business. However, even with a diligent effort, the
Company may not be able to conceive every scenario in which a third party
failure could impact its business. However, through direct solicitation, the
Company has taken steps to assess the risk that known third parties with whom it
has significant business relationships are sufficiently prepared for the Year
2000.
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The Company has key relationships with numerous vendors and business
partners. Presently, the Company has received responses from most key vendors
and business partners indicating their readiness for the Year 2000. Based on
the responses received to date, the Company has not identified any conditions of
potential non-compliance which the Company estimates would materially impact its
business. The Company has considered its relationships with the vendors and
business partners who have not yet indicated their readiness for Year 2000.
Based on this review, the Company does not believe that its business would be
materially effected if any of these vendors or key business partners failed to
ensure that they were Year 2000 compliant.
The Company has one customer, PENELEC, a public utility which is
contractually obligated to purchase all of the power supplied by the Scrubgrass
facility. While the Company believes that PENELEC is taking the appropriate
steps to ensure that it is ready for the Year 2000, the Company has received no
formal correspondence which indicates that PENELEC expects to be ready. While
the computer systems at Scrubgrass are not directly connected to those at
PENELEC, it is conceivable that the Company could still experience business
interruptions if PENELEC fails to ensure that its systems are Year 2000
compliant. Because the Company is dependent on this one customer, any business
interruptions could have a material impact on the Company's financial position
and results of operations.
The Company has taken steps it deems prudent to understand its Year 2000
risks, to estimate the costs to complete its Y2K Project and to understand the
extent to which it could be impacted by third parties who fail to ensure they
are ready for the Year 2000. However, there can be no assurance that all non-
compliant systems or system components will be identified, that the Company's
systems will be Year 2000 compliant, that the Company will achieve its estimated
remediation costs or timetable, or that a failure by a third party to be Year
2000 compliant would not have a material adverse affect on the Company's
business. However, by completing its Y2K Project, the Company believes it will
have taken appropriate steps to mitigate the risk that any of the aforementioned
items would have a material adverse affect on its business.
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this Annual Report on Form 10-K.
Ownership of Single Operating Asset
The Company owns a 22 year leasehold interest in the Scrubgrass Project, an
approximate 83 Mw (net) waste-coal fired electric generating facility located in
Pennsylvania, the lease for which commenced on June 30, 1994. Presently, all
the Company's operating revenues are attributable to power generation from the
Scrubgrass Project. Accordingly, the Company's operations are largely dependent
upon the successful and continued operation of the Scrubgrass Project. In
particular, if the Scrubgrass Project experiences unscheduled shutdowns of
significant duration, the Company's results of operations will be materially
adversely affected.
Dependence Upon Key Employees
The success of the Company is largely dependent upon a staff of four full-
time employees and one part-time employee, including three executive officers.
The loss of any of these employees could adversely effect the Company's
operations.
Third Party Project Management
The Company has entered into a management services agreement with U.S. Gen
to manage the Scrubgrass Project and a 15-year operations and maintenance
agreement with U.S. Operating Services to operate the facility. Under the terms
of these agreements, there are provisions which limit the Company's
participation in the management and operation of the Scrubgrass Project, and
provisions which provide for recourse against the manager and operator for
unsatisfactory performance. However, the Company does not exercise control over
the
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operation or management of the Scrubgrass Project. As such, decisions may be
made affecting the Scrubgrass Project, notwithstanding the Company's opposition,
which may have an adverse effect on the Company.
Scheduled and Unscheduled Shutdowns
The Scrubgrass Project from time to time experiences both scheduled and
unscheduled shutdowns. Periodically, the Scrubgrass Project incurs scheduled
shutdowns in order to perform maintenance procedures to equipment that cannot be
performed while the equipment is operating. Occasionally, the Scrubgrass
Project may also incur unscheduled shutdowns or may be required to operate at
reduced capacity levels following the detection of equipment malfunctions, or
following minimum generation orders received by the utility. During periods
when the Scrubgrass Project is shutdown or operating at reduced capacity levels,
the Company may incur losses due to the loss of its operating revenues and/or
due to additional costs which may be required to complete any maintenance
procedures. It is not possible for the Company to predict the frequency of
future unscheduled shutdowns or to predict the extent of maintenance which may
be required during shutdowns related to equipment maintenance.
Legal Proceedings
As discussed in Item 1. Business--Sunnyside and Item 3. Legal Proceedings,
the Company is involved in a legal proceeding with the purchasers of the
Company's interest in the Sunnyside Project which was sold in 1994. Pending the
resolution of the legal proceeding, the purchasers have withheld scheduled
payments of principal and interest due on the promissory notes since June 1996,
which amounted to $2,937,500 and $808,818, respectively as of December 31, 1998.
The balance of a purchase price closing adjustment is also being disputed in the
legal proceeding with the purchasers. Although the Company's available cash and
cash provided by operating activities has been sufficient to fund the Company's
investing and financing activities, the withholding of scheduled principal and
interest payments has adversely affected the Company's cash flow. At this time,
while management believes the Company's position in this litigation is
meritorious, the Company cannot predict whether it will prevail in the
litigation and to what extent it will incur professional fees to defend its
position in the litigation. An unfavorable resolution and/or extensive
professional fees to defend the litigation could adversely affect the Company's
results of operations.
As discussed in Item 1. Business--Scrubgrass and Item 3. Legal Proceedings,
the Company has been involved in a legal proceeding with PENELEC since October
1995 whereby, among other complaints, the Company alleges that PENELEC has
failed to pay the Lessor and Buzzard contract rates for power in excess of 80 MW
produced by the Scrubgrass facility. The Company is presently involved in
discussions with PENELEC to settle this litigation which, if settled, could
significantly improve the Company's results of operations and financial
position. However, there can be no assurance that the Company would be
successful in settling this litigation.
Financial Results
To date the Company has incurred substantial losses, primarily due to its
development activities, which have resulted in an accumulated deficit of
$5,418,275 as of December 31, 1998. While the Company was profitable from
operating activities during 1998, the Company incurred a net loss from the
operation of the Scrubgrass Project during 1997 due to an unforeseen repair to
the generator at the Scrubgrass facility. The Company also had an overall net
loss during 1998 largely due to the write-off of the Sunnyside project
receivables. Financial results can be affected by numerous factors, including
without limitation general economic conditions, cyclic industry conditions, the
amount and rate of growth of expenses, transportation and quality of raw
materials, inflation, levels of energy rates, uncertainties relating to
government and regulatory policies, the legal environment and volatile and
unpredictable developments like the generator repair. The Company believes it
is well positioned to handle such matters as they may arise during the course of
its future business activities. However, there can be no assurance that the
Company will be profitable in the future.
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Development Uncertainties
From time to time, the Company invests its resources to develop power
generating facilities or invest in other projects of a development nature. The
successful development of power generating facilities or similar projects
typically require the Company to obtain all of the necessary site agreements,
fuel supply contracts, design/build agreements, power sales contracts, licenses,
environmental and other permits, local government approvals or financing
commitments required to complete such projects. However, the failure to
accomplish any of the aforementioned steps could materially increase the cost or
prevent the successful completion of projects under development, or cause the
Company to abandon the pursuit of such development projects and incur the loss
of its investment to date, which could materially impact the Company's business
and results of operations.
Potential Liability, Damages and Insurance
The Company's power generation activities involve significant risks to the
Company for environmental damage, equipment damage and failures, personal injury
and fines and costs imposed by regulatory agencies. In the event a liability
claim is made against the Company, or if there is an extended outage or
equipment failure or damage at the Company's power plant for which it is
inadequately insured or subject to a coverage exclusion, and the Company is
unable to defend such claim successfully or obtain indemnification or warranty
recoveries, there may be a material adverse effect on the Company.
Circulating Fluidized Bed Technology
The Company's Scrubgrass Project employs circulating fluidized bed
technology to produce electricity. Certain aspects of this technology, as well
as the conversion of waste products into electricity, are relatively new areas
being explored by the alternative energy market in the last ten years.
Accordingly, this technology carries greater risk than more established methods
of power generation such as hydropower. As such, the long-term costs and
implications of maintaining this technology have not been established by
historical industry data.
Customer Concentration
The Company's power generation revenues are earned under a long-term power
purchase agreement with one customer, Pennsylvania Electric Company. The
Company expects that the concentration of its revenues with this customer will
continue for the foreseeable future.
Interest Rates
The Company's subsidiary, as a lease cost of the Scrubgrass facility, is
required to fund the Lessor's debt service which consists of variable rate and
fixed rate debt obligations. The Company's subsidiary also has a variable rate
working capital loan, a variable rate term loan and a variable rate term credit
facility all of which were advanced from the Lessor under various Scrubgrass
project agreements. The Company offers the following information about these
debt obligations:
<TABLE>
<CAPTION>
Balance at Matures
Description of the Obligation 12/31/98 Interest Rate Through
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lessor debt obligations:
Variable-rate tax exempt bonds $135,600,000 Quoted Tax Exempt Bond Rate 2012
Variable rate term loan 16,623,087 Fixed swap rate of 6.4225% 2005
Variable rate term loan 10,575,218 LIBOR rate plus 1.250% 2004
Fixed rate junior subordinated debt 318,796 8% 1999
Buzzard debt obligations:
Variable rate working capital loan 2,389,664 LIBOR rate plus 1.125% Revolving
Variable rate term loan 1,249,268 LIBOR rate plus 1.250% 2004
Variable rate term credit facility 2,150,000 LIBOR rate plus 1.125% 2000
</TABLE>
33
<PAGE>
The Lessor entered into interest rate swaps which had the effect of fixing
the interest rate on the tax-exempt bonds until May 18, 1996 at approximately
3.72% and fixing the interest rate for its term loan which matures in 2005 at
6.4225%. After May 18, 1996, the Company's specified base rent was incurred
based on floating rates on the Lessor's tax-exempt bonds which ranged from 2.95%
to 4%. As such, except for the Lessor's term loan which matures in 2005 and the
Lessor's junior subordinated debt obligations, the Company will be required to
fund debt service consisting of rates which will vary with market conditions.
Presently, the Company is not able to predict how future interest rates will
affect its lease expense or debt service. Should market interest rates rise
significantly, the Company's operating results may be significantly impacted.
Notwithstanding, the Company believes the Lessor has good relationships with the
project lenders who would continue to support lending terms which would not have
a material adverse affect on the operating results of the Scrubgrass Project.
However, there can be no assurance that the Lessor could renegotiate its credit
facilities under terms which would ensure continuing profitable operating
results of the Scrubgrass Project. See Notes H, I and M of the Consolidated
Financial Statements for further information about the Company's debt and lease
obligations.
Fuel Quality
The Company obtains waste coal primarily from coal mining companies on a long-
term basis because waste coal is plentiful and generally creates environmental
hazards, such as acid drainage, when not disposed of properly. The waste coal
is burned in the Scrubgrass facility using a circulating fluidized bed
combustion system. During the circulating fluidized bed combustion process, the
waste coal is treated with other substances such as limestone. Depending on the
quality of the waste coal, the facility operator may need to add additional
waste coal or other substances to create the appropriate balance of substances
which would result in the best fuel or sorbent consistency for power generation
and compliance with air quality standards. Therefore, the cost of generating
power is directly impacted by the quality of the waste coal which supplies the
Scrubgrass power generation facility. The facility operator maintains certain
controls over obtaining higher quality waste coal. However certain conditions,
such as poor weather, can create situations where the facility operator has less
control over the quality of the waste coal. The Company cannot predict the
extent to which poor fuel quality may impact its future operating results.
Competition
The Company generates electricity using alternative energy sources which is
sold on a wholesale basis under long-term contracts to utilities under rates
established in power purchase agreements and approved by regulatory agencies.
The independent power industry has grown rapidly over the past twenty years.
There are a large number of suppliers in the wholesale market and a surplus of
capacity which has led to intense competition in this market. The principal
sources of competition in this market include traditional regulated utilities
who have excess capacity, unregulated subsidiaries of regulated utilities,
energy brokers and traders, energy service companies in the development and
operation of energy-producing projects and the marketing of electric energy,
equipment suppliers and other non-utility generators like the Company.
Competition in this industry is substantially based on price with competitors
discovering lower cost alternatives for providing electricity. The electric
industry is also characterized by rapid changes in regulations which the Company
expects could continue to increase competition. For instance, as discussed
under the caption "Energy Markets", the electric industry has been previously
affected by legislation such as PURPA and the Energy Act which have encouraged
companies other than utilities to enter the electric power business by reducing
regulatory constraints. More recently, as discussed under the caption "Energy
Regulation", there has been new state legislation to deregulate the generation
component of the electric business. Furthermore, proposed changes to repeal or
modify PUHCA and PURPA could reduce regulatory restrictions placed on electric
utilities and encourage them to seek new sources of electric power. Any of these
regulatory matters, among others, could increase competition for electric power.
Other than the risk that PENELEC would seek to renegotiate the terms of the
Scrubgrass power purchase agreement (see further discussion under the caption
"Energy Regulation"), the Company does not believe the Scrubgrass Project would
be significantly impacted by competition in the wholesale energy market since
its revenues are subject to contracted rates which are substantially fixed for
several years. However, the contracted rates in the later years of the
34
<PAGE>
Scrubgrass power purchase agreement switch to rates which vary more closely with
existing market conditions. Should ensuing competition in the later years of
the Scrubgrass power purchase agreement create downward pressure on wholesale
energy rates, the Company's profitability could be impacted.
The Company also competes in the market to develop power generation
facilities. The primary bases of competition in this market are the quality of
development plans, the ability of the developer to finance and complete the
project and the price. In certain cases, competitive bidding for a development
opportunity is required. Competition for attractive development opportunities
is expected to be intense as there are a number of competitors in the industry
interested in the limited number of such opportunities. Many of the companies
competing in this market have substantially greater resources than the Company.
The Company believes its project development experience and its experience in
creating strategic alignments with other development firms with greater
financial and technical resources could enable it to continue to compete
effectively in the development market if and when opportunities arise.
Presently, the Company believes there are limited opportunities for additional
project development in the United States for projects similar to those
previously developed by the Company. However, the Company is currently
evaluating whether it should seek development opportunities in new areas.
Presently, there is significant merger and consolidation activity occurring
in the electric industry. From time to time, the Company considers merger and
acquisition proposals when they appear to present an opportunity to enhance
shareholder value.
Energy Regulation
The Company's projects are subject to regulation under federal and state
energy laws and regulations. The Company's facilities are either self-certified
as a Qualifying Facility under the PURPA, or formally certified as a Qualifying
Facility by the Federal Energy Regulatory Commission ("FERC"). Pursuant to
PURPA, FERC has promulgated regulations which exempt certain Qualifying
Facilities from the Federal Power Act of 1920, PUHCA, and, except under certain
limited circumstances, state laws regulating the rates charged by electric
utilities. In order to qualify under PURPA, the Company's facilities must meet
certain size, fuel and ownership requirements and/or co-generate. In addition
to the regulation of Qualifying Facilities, PURPA requires that electric
utilities purchase electric energy produced by qualifying facilities at
negotiated rates or at a price equal to the incremental or avoided cost that
would have been incurred by the utility if it were to generate the power itself
or purchase it from another source. The Company is not presently subject to
regulation under PUHCA and does not presently intend to engage in any activities
that would cause it to be so regulated.
The Company believes that changes in PURPA, PUHCA and other related federal
statutes could occur in the next several years. The nature and impact of such
changes on the Company's projects is unknown at this time. Presently, there are
several legislative proposals pending in Congress which propose amendments to
certain regulations promulgated by PURPA. If Congress amends PURPA, the
statutory requirement that electric utilities purchase electricity from
Qualifying Facilities at full avoided cost could be repealed or modified. While
current legislative proposals specify the honoring of existing contracts, the
repeal or modification of these statutory purchase requirements under PURPA in
the future could increase pressure for electric utilities to renegotiate
existing contracts. Should there be changes in statutory purchase requirements
under PURPA, and should these changes result in amendments which reduce the
contracted rates under the Scrubgrass power purchase agreement, the Company's
results of operations and financial position could be negatively impacted.
State public utility commissions, pursuant to state legislative authority,
may have jurisdiction over how any new federal initiatives are implemented in
each state. Although the FERC generally has exclusive jurisdiction over the
rates charged by an independent power project to its wholesale customers, state
public utility commissions have the practical ability to influence the
establishment of such rates by asserting jurisdiction over the purchasing
utility's ability to pass through the resulting cost of purchased power to its
retail customers. In addition, although thought to be unlikely, states may
assert jurisdiction over the siting and construction of independent power
projects and, among other things, the issuance of securities and the sale and
transfer of assets. The actual scope of jurisdiction over independent power
projects by state public utility regulatory commissions varies from state to
35
<PAGE>
state. Presently, through its power purchase agreement with PENELEC, the
Scrubgrass Project is indirectly subject to state legislation in the
Commonwealth of Pennsylvania.
On December 3, 1996, in response to changes in the electric industry, the
Commonwealth of Pennsylvania passed new legislation known as the Electricity
Generation Customer Choice and Competition Act (Customer Choice Act) which
became effective on January 1, 1997. The Customer Choice Act provides for the
deregulation of the generation portion of electric business by permitting all
Pennsylvania retail electric customers to choose their electric generation
supplier over a phase-in period which expires December 31, 2000. The Customer
Choice Act required that all electric utilities file restructuring plans with
the PUC which, among other things, included unbundled prices for electric
generation, transmission and distribution and a competitive transition charge
("CTC") for the recovery of "stranded costs" which would be paid by all
customers receiving distribution service and certain customers that increase
their own generation of electricity. "Stranded costs" generally are electric
generation-related costs that traditionally would be recoverable in a regulated
environment but may not be recoverable in a competitive electric generation
market. As such, PENELEC filed a proposed restructuring plan in 1997 with the
PUC which was heavily contested by a number of affected parties. Eventually,
the litigation resulted in a settlement which was approved by the PUC on October
20, 1998, and which satisfied all but one of the litigants. This settlement set
forth a comprehensive plan for restructuring PENELEC's service and for ensuring
there would be competition for electric generation for all of PENELEC's
customers beginning on January 1, 1999. The settlement is currently being
appealed in the Commonwealth Court of Pennsylvania by the party which opposed
such settlement. However, the Company presently does not anticipate that such
appeal will have a significant effect, if any, on PENELEC's restructuring plan
as far as that plan affects the Scrubgrass Project. Most pertinently, the
restructuring plan, as approved by the PUC, provided for PENELEC to maintain a
separate non-utility generator cost recovery mechanism for accounting purposes.
Therefore, the restructuring plan is designed, in pertinent part, to enable
PENELEC to recover all of its costs from non-utility generators such as the
Scrubgrass plant and should serve to decrease the pressure on PENELEC to
renegotiate existing power contracts with non-utility generators.
Presently, neither the Customer Choice Act (and PENELEC's restructuring
plan filed thereunder), nor proposed legislation directly impacts the Company,
since the legislation and restructuring plan pertain to the retail market or new
contracts in the wholesale market. However, as discussed above, the Company
could possibly be impacted in the future by, among other things, increases in
competition as a result of deregulation, or the chance that PENELEC would
attempt to renegotiate the existing power contract. The Company is actively
monitoring these developments in energy proceedings in order to evaluate the
impact on its projects and also to evaluate new business opportunities created
by the restructuring of the electric industry.
Environmental Regulation
The Company's projects are subject to regulation under federal, state and
local environmental and mining laws and regulations and must also comply with
the applicable federal, state and local laws pertaining to the protection of the
environment, primarily in the areas of water and air pollution. These laws and
regulations in many cases require a lengthy and complex process of obtaining and
maintaining licenses, permits and approvals from federal, state and local
agencies. As regulations are enacted or adopted in any of these jurisdictions,
the Company cannot predict the effect of compliance therewith on its business.
The Company's failure to comply with all applicable requirements could result in
delays in proceeding with any projects under development or require
modifications to operating facilities. During periods of non-compliance, the
Company's operating facilities may be forced to shutdown until the non-
compliances are corrected. The Company is responsible for ensuring compliance
of its facilities with all applicable requirements and, accordingly, attempts to
minimize these risks by dealing with reputable contractors and using appropriate
technology to measure compliance with the applicable standards.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's most significant market risk exposure is changing interest rates
which may affect its short-term investments, its debt and certain of its lease
expenses. The Company offers the following information about these market risks:
36
<PAGE>
Short-term investments - The Company invests cash balances which are in excess
----------------------
of its normal operating requirements in short term investments generally with
maturities of 3 months of less. Because of the short duration of these
investments, the Company does not believe its short-term investments are
subject to material market risk.
Debt - The Company has borrowings which bear interest at variable rates which
----
are based on the London Interbank Offering Rate (LIBOR). The Company monitors
market conditions for interest rates and, from time to time, enters into
interest rate swaps to manage its interest payments. The interest rate swaps
have the effect of converting the variable rate borrowings to fixed rate
borrowings for specified time periods. For further information on the
Company's interest rate risk, refer to "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Certain Factors
That May Impact Future Results -- Interest Rates".
Lease Expense- The Company, as a lease cost of the Scrubgrass facility, is
-------------
required to fund the Lessor's debt service which consists of fixed rate
borrowings and borrowings which bear interest at variable rates based on
either quoted bond rates or the London Interbank Offering Rate (LIBOR). U.S
Gen monitors market conditions for interest rates and, from time to time,
enters into interest rate swaps to manage the interest payments for the
Scrubgrass facility. The interest rate swaps have the effect of converting
the variable rate borrowings to fixed rate borrowings for specified time
periods. For further information on the Company's interest rate risk, refer
to "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Factors That May Impact Future Results --
Interest Rates".
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in the following Index to Financial
Statements are filed as a part of this annual report under Item 14 - Exhibits,
Index to Financial Statements, and Reports on Form 8-K.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 F-3
Consolidated Statements of Shareholders' (Deficit) Equity for the Years Ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
</TABLE>
37
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the directors of the Company may be found in the
section captioned "Occupations of Directors" appearing in the definitive Proxy
Statement to be delivered to shareholders in connection with the Annual Meeting
of Shareholders to be held on June 28, 1999. Such information is incorporated
herein by reference.
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Joseph E. Cresci 56 Chairman and Chief Executive Officer
Donald A. Livingston 56 President and Chief Operating Officer
William D. Linehan 33 Treasurer, Secretary and Chief Financial Officer
</TABLE>
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board.
Joseph E. Cresci, a founder of the Company, has served as Chairman and Chief
Executive Officer since the Company's inception in 1982, as Treasurer of the
Company from its inception until September 1987 and as President from inception
until September 1991. From 1976 to 1982, Mr. Cresci was President and Chief
Executive Officer of G.E. Stimpson Co., Inc. and Stimpson Systems, Inc., a
distributor of office and printing products. From 1972 to 1975, Mr. Cresci was
President of Ogden Recreation, Inc., a subsidiary of Ogden Corp. (NYSE) where he
was responsible for the operation of racing facilities, a hotel/resort, a
parking company and a promotions company providing services to large crowd
facilities. Mr. Cresci was Executive Vice President and Chief Operating Officer
of Garden State Racing Association from 1969 to 1972. From 1967 to 1969, he was
an associate lawyer with the Philadelphia law firm of Townsend, Elliott and
Munson. Mr. Cresci holds a B.A. degree from Princeton University and a law
degree from Cornell Law School and is a member of the Pennsylvania and
Massachusetts Bar Associations.
Donald A. Livingston, a founder of the Company, has served as President and
Chief Operating Officer since September 1991, and as Executive Vice President
from the Company's inception until September 1991. From 1974 to 1982, Mr.
Livingston was President and Chief Executive Officer of Green Mountain
Outfitters, Inc., a manufacturer and distributor of large plastic parts. During
the three previous years, he was a partner in the financial services firm of
Capital Resources, Inc., where he was involved in obtaining debt and equity
funds, and negotiating mergers and acquisitions. Mr. Livingston was a
registered representative in the retail stock brokerage business with Baxter,
Blyden and Selheimer from 1967 to 1971 and Bellamah, Neuhauser & Barrett from
1965 to 1967.
William D. Linehan has served as Treasurer, Secretary and Chief Financial
Officer of the Company since March 29, 1996. Prior to his employment with the
Company, Mr. Linehan was most recently employed since 1993 as manager in the
audit and consulting practice of Moody, Cavanaugh and Company, where he
specialized in providing audit, tax advisory and business consulting services to
closely-held corporations. From 1991 to 1993, Mr. Linehan was the Controller of
Technology Procurement, Inc. and later the Secretary and Treasurer of Computer
Finance and Rental, Inc., a corporation formed in 1993 after a corporate
reorganization of Technology Procurement, Inc., where he was responsible for
managing the accounting and financial activities of these corporations, which
both were distributors and lessors of computer equipment and related peripheral
products. From 1987 to 1991, Mr. Linehan was employed in the middle market
audit and consulting practice of KPMG Peat Marwick, where he advanced to the
position of supervisor and specialized in providing audit and management
advisory services to publicly-traded and privately-held growth companies. Mr.
Linehan, who received a Bachelor
38
<PAGE>
of Science Degree in Accountancy from Bentley College in 1987, is a Certified
Public Accountant in the Commonwealth of Massachusetts and a member of the
American Institute of Certified Public Accountants.
Item 11. EXECUTIVE COMPENSATION
Information with respect to this item may be found in the section captioned
"Compensation and Other Information Concerning Directors and Officers" appearing
in the definitive Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held on June 28, 1999. Such
information is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item may be found in the sections captioned
"Principal Holders of Voting Securities" and "Election of Directors" appearing
in the definitive Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held on June 28, 1999. Such
information is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item may be found in the section captioned
"Compensation and Other Information Concerning Directors and Officers" appearing
in the definitive Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held on June 28, 1999. Such
information is incorporated herein by reference.
39
<PAGE>
PART IV
Item 14. INDEX TO FINANCIAL STATEMENTS, EXHIBITS, AND REPORTS ON FORM 8-K
The following documents are filed as part of this annual report:
(a) 1. Consolidated Financial Statements
<TABLE>
<CAPTION>
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
Page
----
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 F-3
Consolidated Statements of Shareholders' (Deficit) Equity for the Years Ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
(a) 2. Financial Statement Schedules
The Company is not required to file any financial statement schedules which
are outlined in Article 5 of the Securities and Exchange Commission regulations.
(a) 3. Exhibits
The following Exhibits are included in this report:
<TABLE>
<CAPTION>
Exhibit Incorporation
Number Description Reference
------ ----------- ---------
<S> <C> <C>
3.01 Certificate of Incorporation, as amended. A
4.02 Bylaws of the Registrant, as amended. B
10.01 Joint Development Agreement among Milesburg Energy, Inc., E
U.S. Gen and Environmental Power Corporation dated July 30,
1996 (a written request for confidential treatment of certain
proprietary information in this agreement has been filed with
the United States Securities and Exchange Commission)
10.12 Stock Purchase Agreement for 20,000 shares of common stock of F
Milesburg Energy, Inc., between Environmental Power
Corporation and Neil W. Hedrick, Richard Mase and Sylvia B.
Mase, dated April 30, 1987.
10.13 Non-resource Secured Note of Environmental Power Corporation F
to Neil W. Hedrick, Richard Mase and Sylvia B. Mase for
$220,000, dated April 30, 1987.
10.14 Non-resource Secured Note of Environmental Power Corporation F
to Neil W. Hedrick, Richard Mase and Sylvia B. Mase for
$4,900,000, dated April 30, 1987.
10.15 Note of Milesburg Energy, Inc., to Antrim Mining, Inc., for F
$41,000, dated April 30, 1987.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.16 Note of Milesburg Energy, Inc., to Richard Mase and Sylvia B. F
Mase for $139,000, dated April 30, 1987.
10.17 Electric Energy Purchase Agreement between West Penn Power F
Company and Milesburg Energy, dated February 25, 1987.
10.18 Agreement for the Sale of Electric Energy from the Scrubgrass F
Generating Plant by and between Pennsylvania Electric Company
and Scrubgrass Power Corporation dated August 7, 1987 which
was assigned by Scrubgrass Power Corporation to Scrubgrass
Generating Company, L.P. on December 15, 1990 and assigned by
Scrubgrass Generating Company, L.P. to Buzzard Power
Corporation on June 17, 1994.
10.19 Supplemental Agreement for the Sale of Electric Energy from F
the Scrubgrass Generating Plant by and between Pennsylvania
Electric Company and Scrubgrass Power Corporation dated
February 22, 1989, as amended by letter agreement dated March
28, 1989, which was assigned by Scrubgrass Power Corporation
to Scrubgrass Generating Company, L.P. on December 15, 1990
and assigned by Scrubgrass Generating Company, L.P. to
Buzzard Power Corporation on June 17, 1994.
10.20 Second Supplemental Agreement for the Sale of Electric Energy F
from the Scrubgrass Generating Plant by and between
Pennsylvania Electric Company and Scrubgrass Power
Corporation dated September 27, 1989 which was assigned by
Scrubgrass Power Corporation to Scrubgrass Generating
Company, L.P. on December 15, 1990 and assigned by Scrubgrass
Generating Company, L.P. to Buzzard Power Corporation on June
17, 1994.
10.21 Third Supplemental Agreement for the Sale of Electric Energy F
from the Scrubgrass Generating Plant by and between
Pennsylvania Electric Company and Scrubgrass Power
Corporation dated August 13, 1990 which was assigned by
Scrubgrass Power Corporation to Scrubgrass Generating
Company, L.P. on December 15, 1990 and assigned by Scrubgrass
Generating Company, L.P. to Buzzard Power Corporation on June
17, 1994.
10.22 Amendment to the Third Supplemental Agreement for the Sale of F
Electric Energy from the Scrubgrass Generating Plant by and
between Pennsylvania Electric Company and Scrubgrass Power
Corporation dated November 27, 1990 which was assigned by
Scrubgrass Power Corporation to Scrubgrass Generating
Company, L.P. on December 15, 1990 and assigned by Scrubgrass
Generating Company, L.P. to Buzzard Power Corporation on June
17, 1994.
10.23 Letter Agreement dated December 20, 1990 amending the F
Agreement for the Sale of Electric Energy from the Scrubgrass
Generating Plant by and between Pennsylvania Electric Company
and Scrubgrass Power Corporation dated August 7, 1987, as
amended and supplemented from time to time through November
27, 1990, which was assigned by Scrubgrass Power Corporation
to Scrubgrass Generating Company, L.P. on December 15, 1990
and assigned by Scrubgrass Generating Company, L.P. to
Buzzard Power Corporation on June 17, 1994.
10.57 1990 Stock Plan with forms of Incentive Stock Option F
Agreement and Non-Qualified Stock Option Agreement.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.60 Management Services Agreement by and between Scrubgrass F
Generating Company, L.P. and PG&E-Bechtel Generating Company
dated December 15, 1990 which was assigned by Scrubgrass
Generating Company, L.P. to Buzzard Power Corporation on June
17, 1994. PG&E-Bechtel Generating Company has assigned its
rights to this agreement ultimately to U.S. Gen. Exhibit A
to this agreement was omitted because it was previously filed
as Exhibit 10.67.
10.61 Agreement for Operation and Maintenance of the Scrubgrass F
Cogeneration Plant between Scrubgrass Generating Company,
L.P. and Bechtel Power Corporation dated December 21, 1990
which was assigned by Scrubgrass Generating Company, L.P. to
Buzzard Power Corporation on June 17, 1994. Bechtel Power
Corporation has assigned its rights to this agreement
ultimately to U.S. Operating Services Company.
10.62 First Amendment to the Agreement for Operation and F
Maintenance of the Scrubgrass Cogeneration Plant between
Buzzard Power Corporation and U.S. Operating Services Company
dated December 22, 1995.
10.67 Appendix I to the Amended and Restated Participation D
Agreement, dated as of December 22, 1995, among Buzzard Power
Corporation, Scrubgrass Generating Company, L.P.,
Environmental Power Corporation, Bankers Trust Company and
Credit Lyonnais, which Appendix defines terms used and not
otherwise defined in other contracts.
10.70 Stock Pledge Agreement, dated December 19, 1991, between J
Environmental Power Corporation and Scrubgrass Generating
Company, L.P.
10.71 Amended and Restated Participation Agreement, dated as of D
December 22, 1995, among Buzzard Power Corporation,
Scrubgrass Generating Company, L.P., Environmental Power
Corporation, Bankers Trust Company and Credit Lyonnais.
10.72 Amendment No. 1, dated as of May 22, 1997, to the Amended and G
Restated Participation Agreement, dated as of December 22,
1995, among Buzzard Power Corporation, Scrubgrass Generating
Company, L.P., Environmental Power Corporation, Bankers Trust
Company and Credit Lyonnais.
10.73 Director Option Plan. B
10.80 Amended and Restated Lease Agreement between Scrubgrass F
Generating Company, L.P., a Delaware limited partnership, as
Lessor, and Buzzard Power Corporation, a Delaware
corporation, as Lessee, dated as of December 22, 1995.
Schedules and similar attachments listed in the Lease have
been omitted and the Company agrees to furnish supplementally
a copy of any omitted schedule or attachment to the
Securities and Exchange Commission upon request.
10.81 Purchase and Sale Agreement by and among NRG Sunnyside Inc. C
and B&W Sunnyside L.P. and Kaiser Systems, Inc., Kaiser Power
of Sunnyside, Inc., Sunnyside Power Corporation and
Environmental Power Corporation, dated December 31, 1994.
Schedules and similar attachments of the Purchase and Sale
Agreement have been omitted; the Company agrees to furnish
supplementally a copy of any omitted schedule to the
Securities and Exchange Commission upon request.
10.82 Lease between Meadow Holdings Corporation and Environmental F
Power Corporation, dated February 20, 1996.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.83 Amended and Restated Disbursement and Security Agreement F
between Scrubgrass Generating Company, L.P., as Lessor,
Buzzard Power Corporation, as Lessee, Bankers Trust Company
as Disbursement Agent and Credit Lyonnais acting through its
New York Branch as Agent, dated as of December 22, 1995.
Schedules and similar attachments listed in this agreement
have been omitted and the Company agrees to furnish
supplementally a copy of any omitted schedule or attachment
to the Securities and Exchange Commission upon request.
10.84 Amended and Restated Lessee Working Capital Loan Agreement F
between Scrubgrass Generating Company, L.P., as Lender, and
Buzzard Power Corporation, as Lessee, dated as of December
22, 1995.
10.85 Amendment No. 1, dated as of May 22, 1997, to the Amended and G
Restated Disbursement and Security Agreement between
Scrubgrass Generating Company, L.P., as Lessor, Buzzard Power
Corporation, as Lessee, Bankers Trust Company as Disbursement
Agent and Credit Lyonnais acting through its New York Branch
as Agent, dated as of December 22, 1995.
10.86 Debt Service (Tranche A) Loan Note, dated June 3, 1997, to G
Credit Lyonnais acting through its New York Branch, as Bank,
from Scrubgrass Generating Company, L.P., as Borrower.
10.87 Debt Service (Tranche B) Loan Note, dated June 3, 1997, to G
Credit Lyonnais acting through its New York Branch, as Bank,
from Scrubgrass Generating Company, L.P., as Borrower.
10.88 Debt Service (Tranche B) Loan Note, dated June 3, 1997, to G
National Westminster Bank acting through its New York Branch,
as Bank, from Scrubgrass Generating Company, L.P., as
Borrower.
10.89 Buy-Out Agreement, dated as of August 26, 1997, between West H
Penn Power Company and Milesburg Energy, Inc.
10.90 Letter Agreement, dated as of August 26, 1997, among I
Environmental Power Corporation, Richard Mase, Sylvia B.
Mase, Neil W. Hedrick and Antrim Mining, Inc.
10.91 Amendment No. 2, dated as of September 2, 1998, to the
Amended and Restated Participation Agreement, dated as of
December 22, 1995, among Buzzard Power Corporation,
Scrubgrass Generating Company, L.P., Environmental Power
Corporation, Bankers Trust Company and Credit Lyonnais.
10.92 Amendment No. 1, updated as of October 9, 1998, to the
Amended and Restated Disbursement and Security Agreement
between Scrubgrass Generating Company, L.P., as Lessor,
Buzzard Power Corporation, as Lessee, Bankers Trust Company
as Disbursement Agent and Credit Lyonnais acting through its
New York Branch as Agent, dated as of December 22, 1995.
10.93 Amendment No. 1, dated as of June 1, 1996, but not executed
until July 24, 1998, to the Amended and Restated Lease
Agreement between Scrubgrass Generating Company, L.P., a
Delaware limited partnership, as Lessor, and Buzzard Power
Corporation, a Delaware corporation, as Lessee, dated as of
December 22, 1995.
10.94 Lease between Adams Realty Trust and Environmental Power
Corporation, dated January 26, 1999.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.95 Settlement Agreement and Release between GEC Alsthom
International, Inc. and Buzzard Power Corporation dated May
28, 1998.
10.96 Purchase and Sale Agreements, dated as of December 16, 1998,
January 4, 1999 and January 8, 1999, between PG&E Energy
Trading Power, L.P. and Buzzard Power Corporation pertaining
to Nitrogen Oxide Ozone Transport Region (NOx) Budget
Allowances
10.97 Environmental Power Corporation Medical Expense Reimbursement
Plan effective as of September 1, 1998 and dated as of
December 18, 1998
10.98 Environmental Power Corporation Defined Benefit Pension Plan
effective as of January 1, 1998 and dated as of December 23,
1998
11 Computation of Earnings per Share
21 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
99.01 Order of Pennsylvania Public Utility Commission in connection F
with Milesburg Energy, Inc., adopted September 21, 1989.
</TABLE>
Incorporation References:
<TABLE>
<S> <C>
A Previously filed as part of Registration Statement No. 33-9808 (the
"Registration Statement"), filed with the Securities and Exchange
Commission on October 28, 1986.
B Previously filed as part of the Company's Report on Form 10-K for the year
ended December 31, 1993.
C Previously filed as part of the Company's Report on Form 10-K for the year
ended December 31, 1994.
D Previously filed as part of the Company's Report on Form 10-K for the year
ended December 31, 1995.
E Previously filed as part of the Company's Report on Form 10-Q for the
period ended September 30, 1996.
F Previously filed as part of the Company's Report on Form 10-K for the year
ended December 31, 1996.
G Previously filed as part of the Company's Report on Form 10-Q for the
period ended June 30, 1997.
H Previously filed as part of the Company's Report on Form 8-K dated as of
September 8, 1997.
I Previously filed as part of the Company's Report on Form 8-K dated as of
December 19, 1997.
J Previously filed as part of the Company's Report on Form 10-K for the year
ended December 31, 1997.
</TABLE>
(b) Reports on Form 8-K
None
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: ENVIRONMENTAL POWER CORPORATION
March 29, 1999 By /s/ Joseph E. Cresci
-----------------------------
Joseph E. Cresci, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act 1934, this report
has been signed below by the following persons on behalf of registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Joseph E. Cresci Chairman, Chief March 29, 1999
- ---------------------------- Executive Officer,
Joseph E. Cresci & Director (Principal
Executive Officer)
/s/ Donald A. Livingston President & Chief March 29, 1999
- ---------------------------- Operating Officer
Donald A. Livingston
/s/ William D. Linehan Treasurer, Chief March 29, 1999
- ---------------------------- Financial Officer
William D. Linehan & Secretary (Principal
Financial Officer)
/s/ Peter J. Blampied Director March 29, 1999
- ----------------------------
Peter J. Blampied
/s/ Edward E. Koehler Director March 29, 1999
- ----------------------------
Edward E. Koehler
/s/ Robert I. Weisberg Director March 29, 1999
- ----------------------------
Robert I. Weisberg
</TABLE>
45
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
Environmental Power Corporation
We have audited the accompanying consolidated balance sheets of Environmental
Power Corporation and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of operations, shareholders' (deficit) equity,
and cash flows for each of the three years in the period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on the
consolidated 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, these consolidated financial statements present fairly, in all
material respects, the financial position of Environmental Power Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 19, 1999
F-1
<PAGE>
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 December 31
1998 1997
----------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 362,416 $ 12,092,273
Restricted cash 797,922 486,659
Receivable from utility 6,598,864 6,538,645
Notes receivable 42,376 39,128
Other current assets 821,462 881,938
----------------- -----------------
TOTAL CURRENT ASSETS 8,623,040 20,038,643
PROPERTY, PLANT AND EQUIPMENT, NET 94,755 129,936
DEFERRED INCOME TAX ASSET 1,826,561 817,755
LEASE RIGHTS, NET 2,608,515 2,757,519
RECEIVABLE FROM SALE OF AFFILIATE --- 570,998
NOTES RECEIVABLE 3,686 2,983,562
ACCRUED POWER GENERATION REVENUES 41,386,500 33,362,389
OTHER ASSETS 619,693 701,437
----------------- -----------------
TOTAL ASSETS $ 55,162,750 $ 61,362,239
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 5,873,689 $ 6,325,062
Dividends payable on common stock --- 10,266,105
Other current liabilities 3,939,664 2,911,666
----------------- -----------------
TOTAL CURRENT LIABILITIES 9,813,353 19,502,833
DEFERRED GAIN, NET 5,397,187 5,705,598
SECURED PROMISSORY NOTES PAYABLE
AND OTHER BORROWINGS 2,866,584 4,673,727
ACCRUED LEASE EXPENSES 41,386,500 33,362,389
MAINTENANCE RESERVE 2,258,049 1,995,818
----------------- -----------------
TOTAL LIABILITIES 61,721,673 65,240,365
SHAREHOLDERS' DEFICIT:
Preferred Stock ($.01 par value; 1,000,000 shares authorized; no shares
issued at December 31, 1998 and December 31, 1997, respectively) -- --
Preferred Stock (no par value, 10 shares authorized; 10 shares
issued at December 31, 1998 and December 31, 1997, respectively) 100 100
Common Stock ($.01 par value; 20,000,000 shares authorized;
12,525,423 shares issued at December 31, 1998 and
December 31, 1997, respectively; 11,406,783 shares outstanding
at December 31, 1998 and December 31, 1997, respectively) 125,254 125,254
Accumulated deficit (5,418,275) (2,737,478)
----------------- -----------------
(5,292,921) (2,612,124)
Treasury stock (1,118,640 common shares, at cost, as of
December 31, 1998 and December 31, 1997, respectively) (456,271) (456,271)
Notes receivable from officers and board members (809,731) (809,731)
----------------- -----------------
TOTAL SHAREHOLDERS' DEFICIT (6,558,923) (3,878,126)
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 55,162,750 $ 61,362,239
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
------------------- ------------------- -------------------
<S> <C> <C> <C>
POWER GENERATION REVENUES $ 45,721,473 $ 43,763,223 $ 47,853,639
COSTS AND EXPENSES:
Operating expenses 19,215,459 17,755,882 18,190,037
Lease expenses 22,971,201 24,488,005 24,792,248
General and administrative expenses 2,196,929 1,995,491 3,061,931
Reversal of provision for nonrecovery of
project development costs --- (940,144) ---
Depreciation and amortization 285,471 257,677 205,341
------------------- ------------------- -------------------
44,669,060 43,556,911 46,249,557
------------------- ------------------- -------------------
OPERATING INCOME 1,052,413 206,312 1,604,082
OTHER INCOME (EXPENSE):
Interest income 156,546 581,336 498,975
Interest expense (460,812) (424,395) (336,449)
Amortization of deferred gain 308,410 308,410 308,411
Write-off of receivables in litigation (3,508,498) --- ---
Gain on sale of project --- 7,423,467 ---
Warranty income --- --- 900,000
Other income 7,810 622,417 484,295
------------------- ------------------- -------------------
(3,496,544) 8,511,235 1,855,232
------------------- ------------------- -------------------
INCOME (LOSS) BEFORE INCOME TAXES (2,444,131) 8,717,547 3,459,314
INCOME TAX (EXPENSE) BENEFIT 794,945 (4,103,684) (1,894,035)
------------------- ------------------- -------------------
NET INCOME (LOSS) $ (1,649,186) $ 4,613,863 $ 1,565,279
=================== =================== ===================
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE $ (0.14) $ 0.41 $ 0.14
=================== =================== ===================
DIVIDENDS PAID OR PAYABLE:
Common shares $ 1,026,611 $ 11,265,865 $ 1,549,250
Preferred shares 5,000 30,178 25,178
------------------- ------------------- -------------------
$ 1,031,611 $ 11,296,043 $ 1,574,428
=================== =================== ===================
DIVIDENDS PAID OR PAYABLE PER
COMMON SHARE $ 0.090 $ 0.990 $ 0.140
=================== =================== ===================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
Preferred Common
Stock Stock Additional
(No Par ($.01 Par Paid-in Unearned
Value) Value) Capital Compensation
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 $ 100 $ 121,454 $ 12,592,808 $ (66,941)
Net income
Exercise of stock options 500 13,937
Purchase of common shares
Dividends paid (1,549,250)
Amortization of unearned compensation 66,941
------------- -------------- ------------- --------------
BALANCE AT DECEMBER 31, 1996 100 121,954 11,057,495 0
Net income
Exercise of stock options 3,300 169,513
Dividends paid (11,227,008)
------------- -------------- ------------- --------------
BALANCE AT DECEMBER 31, 1997 100 125,254 0 0
Net loss
Dividends paid
------------- -------------- ------------- --------------
BALANCE AT DECEMBER 31, 1998 $ 100 $ 125,254 $ 0 $ 0
============= ============== ============= ==============
Notes
Receivable Total
from Officers Stockholders'
Accumulated Treasury and Board (Deficit)
Deficit Stock Members Equity
------------- -------------- ------------- --------------
BALANCE AT JANUARY 1, 1996 $ (8,847,585) $ (168,395) $ (834,032) $ 2,797,409
Net income 1,565,279 1,565,279
Exercise of stock options 14,437
Purchase of common shares (287,876) 72,876 (215,000)
Dividends paid (1,549,250)
Amortization of unearned compensation 66,941
------------- -------------- ------------- --------------
BALANCE AT DECEMBER 31, 1996 (7,282,306) (456,271) (761,156) 2,679,816
Net income 4,613,863 4,613,863
Exercise of stock options (48,575) 124,238
Dividends paid (69,035) (11,296,043)
------------- -------------- ------------- --------------
BALANCE AT DECEMBER 31, 1997 (2,737,478) (456,271) (809,731) (3,878,126)
Net loss (1,649,186) (1,649,186)
Dividends paid (1,031,611) (1,031,611)
------------- -------------- ------------- --------------
BALANCE AT DECEMBER 31, 1998 $ (5,418,275) $ (456,271) $ (809,731) $ (6,558,923)
============= ============== ============= ==============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
---------------- ---------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,649,186) $ 4,613,863 $ 1,565,279
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 285,471 257,677 205,341
Gain on sale of project --- (7,423,467) ---
Deferred income taxes (1,008,806) 3,014,660 1,703,124
Amortization of deferred gain (308,411) (308,410) (308,411)
Write-off of receivables in litigation 3,508,498 --- ---
Reversal of provision for nonrecovery of project
development costs --- (940,144) ---
Amortization of unearned compensation --- --- 66,941
Accrued power generation revenues (8,024,111) (8,905,911) (9,294,789)
Accrued lease expenses 8,024,111 8,905,911 9,294,789
Other (income) expense --- (622,417) 100,000
Changes in operating assets and liabilities:
(Increase) decrease in receivable from utility (60,219) (645,766) 643,627
Decrease (increase) in other current assets 60,476 29,535 (37,645)
Increase in receivable from sale of affiliate --- (73,236) (86,606)
(Increase) decrease in other assets (14,346) (192,873) 45,869
(Decrease) increase in accounts payable and
accrued expenses (451,373) 614,469 (54,385)
Decrease in deferred revenue --- --- (3,064,965)
Decrease in other current liabilities --- --- (300,000)
Increase in long-term liabilities 11,400 11,559 11,589
Increase in maintenance reserve 262,231 461,989 834,400
---------------- ---------------- -----------------
Net cash provided by (used in)
operating activities 635,735 (1,202,561) 1,324,158
---------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the collection of notes receivable 39,128 36,129 482,681
(Increase) decrease in restricted cash (311,263) 158,238 (614,561)
Proceeds from sale of project --- 15,000,001 ---
Property, plant and equipment expenditures (5,196) (2,987,881) (257,059)
---------------- ---------------- -----------------
Net cash (used in) provided by
investing activities (277,331) 12,206,487 (388,939)
---------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend payments (11,297,716) (1,029,938) (1,549,250)
Net borrowings (repayments) under working capital loan 77,998 (384,477) 1,068,000
Borrowings under long-term credit facility --- 3,000,000 ---
Repayment of secured promissory notes payable and
other borrowings (868,543) (1,800,000) (139,517)
Proceeds from the issuance of common stock --- 124,238 14,437
Purchase of treasury stock --- --- (287,876)
Proceeds from the collection of notes receivable from officers --- --- 72,876
Proceeds from other borrowings --- --- 52,813
---------------- ---------------- -----------------
Net cash used in financing activities (12,088,261) (90,177) (768,517)
---------------- ---------------- -----------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (11,729,857) 10,913,749 166,702
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,092,273 1,178,524 1,011,822
---------------- ---------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 362,416 $ 12,092,273 $ 1,178,524
================ ================ =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
NOTE A--BUSINESS AND ORGANIZATION
Environmental Power Corporation (individually "EPC" or consolidated "the
Company") owns a 22 year leasehold interest in an approximately 83 Mw (net)
waste coal-fired electric generating facility (the "Scrubgrass Project") located
in Pennsylvania, the lease for which commenced on June 30, 1994. Until December
31, 1994 the Company had varying ownership interests (100% to approximately 40%)
in, and oversaw the operation of, an approximately 51 Mw (net) waste coal-fired
electric generating facility located in Utah. Both facilities sell power under
long-term contracts to specified utility companies whose contracts have been
approved by the respective Public Utility Commission. In the case of these two
projects, the Company, either acting alone or in conjunction with others, has
selected and arranged for the acquisition of the site, obtained control over a
portion of their waste coal fuel sources, negotiated contracts for the design
and construction of the facilities and the sale of their output to the utilities
purchasing the power, arranged for financing, and negotiated contracts for the
operation and maintenance of the projects. Until December 5, 1997, the Company
had one additional project (the "Milesburg Project") which had been in the
development stage since 1987 and involved in significant contract litigation
since the early stages of its development activities. On August 26, 1997, the
Company entered into a Buy-Out Agreement with the utility company which had
contracted to purchase electricity from the Milesburg Project. On December 5,
1997, pursuant to the Buy-Out Agreement, the Company sold substantially all of
the assets of the Milesburg project to this utility company and the ongoing
litigation was terminated. The Company's projects are discussed in more detail
in the following sections.
Scrubgrass
The Scrubgrass Project located on a 600 acre site in Venango County,
Pennsylvania, is an approximately 83 Mw (net) waste coal-fired electric
generating station (the "Facility") which has been constructed by Bechtel Power
Corporation. The construction contract provided for a guaranteed net electrical
output of 82.85 Mw. Final completion was achieved by the contractor in June
1994.
On June 30, 1994, Buzzard Power Corporation ("Buzzard"), a subsidiary of
EPC, entered into an agreement to lease the Facility from Scrubgrass Generating
Company, L.P. (the "Lessor"), a joint venture of certain wholly-owned
subsidiaries of PG&E Corporation and Bechtel Generating Company, Inc. On
October 20, 1998, Bechtel Generating Company, Inc. transferred its interest in
the Lessor to a wholly-owned subsidiary of Cogentrix Energy, Inc. The lease
provides for an initial term of 22 years with a renewal option for up to 3
years. Pursuant to the lease, the Lessor assigned to Buzzard all principal
project agreements and its rights and obligations thereunder including, but not
limited to the power purchase agreement, operations and maintenance agreement,
limestone agreements, ground lease agreements, fuel agreements and
transportation and materials handling agreements. EPC has pledged Buzzard's
common stock to the Lessor as security for Buzzard's performance of its
obligations as lessee. The Scrubgrass Project is managed by U.S. Generating
Company ("U.S. Gen"), a wholly-owned indirect subsidiary of U.S. Generating
Company, LLC ("USGenLLC"), which in turn is a wholly-owned indirect subsidiary
of PG&E Corporation.
Electric output is being sold to Pennsylvania Electric Company ("PENELEC")
pursuant to a 25-year agreement, which commenced in 1993, at fixed rates
initially averaging approximately 4.68 cents/Kwh and escalating at 5% per year
for the calendar years' 1994-1999. Commencing in the year 2000 and through
2012, the agreement provides for a rate equal to the greater of a scheduled rate
or a rate based on the PJM Billing Rate (the monthly average of the hourly rates
for purchases by the General Public Utilities Group ("GPU") from, or sale by GPU
to, the Pennsylvania-New Jersey-Maryland Interconnection). For the years 2013
through 2015 and 2016 through 2018, if the lease renewal term option is
exercised, the agreement provides for a rate equal to the lower of the average
monthly PJM Billing Rate or the rate paid for the calendar year 2012 adjusted
annually by the percentage change in the Gross National Product Deflator less
1%. On June 8, 1993, the Facility reached commercial operation. Since October
1995, the Company has been involved in a legal proceeding with PENELEC whereby,
among other complaints, the Company alleges that PENELEC has failed to pay the
Lessor and Buzzard contract rates for power in excess of 80 MW produced by the
Scrubgrass facility. The Company is presently
F-6
<PAGE>
involved in discussions with PENELEC to settle this litigation which, if
settled, could significantly improve the Company's results of operations and
financial position. See Note P for a further discussion of this litigation.
The Facility is being operated by U.S. Operating Services Company (the
"Operator"), a wholly-owned indirect subsidiary of USGenLLC, pursuant to a 15-
year Operations and Maintenance Agreement (the "O & M"). The Operator prepares a
budget for all operational expenses, including a fixed management fee and
certain targeted output performance levels, which is approved annually. The
Operator's failure to achieve approved annual budgets can result in operator
liability not to exceed its management fees and/or termination of the O & M.
Buzzard, as assignee, entered into a Limestone Purchase and Sale Agreement
with Quality Aggregates, Inc. to supply the Scrubgrass Project with limestone
for an initial term of five years which, in December 1995, was extended through
the year 2000 and which may be extended up to 15 additional years. The
Scrubgrass Project also maintains an agreement with an initial term of 15 years
for the transportation of fuel, ash and limestone with Savage Industries, Inc.
The costs established under this agreement will escalate at partially fixed and
partially indexed rates.
Revenues earned by the Scrubgrass Project are deposited into an account
administered by a disbursement agent. Before Buzzard can receive cash generated
by the Scrubgrass Project, all operating expenses, base lease payments (which
include the Lessor's debt as described below), certain maintenance reserve
payments (See Note B) and other subordinated payments must be satisfied.
Buzzard, as lessee, is required to pay the Lessor, in addition to a specified
base rent, consisting of all of the Lessor's debt service and related fees and
expenses, an additional rent of 50 percent of the net cash flows Buzzard
receives from project operations. Buzzard is not required to fund operating
losses, or otherwise invest further, from sources outside of the Scrubgrass
Project.
On December 22, 1995, the Lessor restructured certain of the Scrubgrass
Project's debt, the primary effect of which was to extend the term of its demand
debt through 2004 and extend a portion of its junior subordinated debt through
1999. In connection with the Lessor's debt restructuring, Buzzard was able to
refinance a portion of its own current liabilities and establish a capital
improvements fund with a note payable of $300,000 which was paid in January
1996, and a variable note payable of $2,487,813 which matures through 2004.
During the second quarter of 1997, the Lessor assumed primary responsibility for
the disbursement of funds and repayment of debt related to the capital
improvements fund of the Scrubgrass Project. Accordingly, restricted cash and
secured borrowings of approximately $1,220,000 were transferred from the
financial statements of the Company to the financial statements of the Lessor
which reduced Buzzard's note payable. Since the Lessor's debt restructuring,
Buzzard has continued to fund the Lessor's debt service obligations as a base
lease payment and its own term obligation resulting from this restructuring
which are described in the following table:
<TABLE>
<CAPTION>
Balance at Balance at Matures
Description of the Obligation 12/31/98 12/31/97 Interest Rate Through
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lessor's term debt obligations:
Variable rate tax exempt bonds $135,600,000 $135,600,000 Quoted Bond Rates 2012
Variable rate term loan 16,623,087 18,621,663 Fixed swap rate of 6.4225% 2005
Variable rate term loan 10,575,218 10,732,189 LIBOR rate plus 1.250% 2004
Junior subordinated debt 318,796 556,630 Fixed rate of 8% 1999
Buzzard's term debt obligation:
Variable rate term loan 1,249,268 1,267,811 LIBOR rate plus 1.250% 2004
</TABLE>
On December 22, 1995, the Lessor entered into interest rate swaps which had
the effect of fixing the interest rate on the variable rate tax exempt bonds
until May 18, 1996 at approximately 3.72% and fixing the interest rate over the
life of its variable rate term loan which matures in 2005 at 6.4225%. After May
18, 1996, the Lessor's tax-exempt bonds incurred interest at floating rates
ranging from 2.95% to 4%. The remainder of the
F-7
<PAGE>
term debt obligations incur interest at either fixed rates or variable rates
which are based on the London Interbank Offering Rate (See Notes H and I).
In March 1996, the Company received proceeds of $900,000 from Bechtel Power
Corporation in final settlement of certain warranty and start-up matters which
is included in other income in the accompanying 1996 Consolidated Statement of
Operations.
During the fourth quarter of 1996, after learning about a generator failure
at an electric generating facility with an identical generator to the Scrubgrass
facility, the manufacturer asked the Company to perform certain tests to
determine the Scrubgrass generator's condition. Based on the results of these
tests, which became available during the first quarter of 1997, the Company
believed that the Scrubgrass facility's generator exhibited certain conditions
which indicated that a similar failure might occur at some time in the future.
As a result, the Scrubgrass facility was shutdown for a period of six days in
February 1997 to consider matters pertaining to the generator. In light of the
results of these generator tests, the generator manufacturer recommended that
the Company perform a complete rewind on the Scrubgrass facility's generator
during its 1997 annual plant outage which began in April, and which caused the
Scrubgrass plant to be inoperative for a period of 37 days during the second
quarter of 1997. Originally, without knowledge of the necessary generator
repair, the Company had planned that the Scrubgrass plant would be inoperative
in 1997 for a total of only 18 days to perform normal maintenance during
scheduled spring and fall outages. As such, because the Scrubgrass plant was
inoperative for a total of 43 days as a result of the maintenance outages, the
Scrubgrass facility was inoperative for 25 days longer in 1997 than the
Company's original plans. At an average of $80,000 of net revenues per day,
this accounted for an approximate reduction in 1997 power generation revenues,
net of estimated variable fuel expenses not incurred, of approximately $2
million by comparison to previous expectations. As a result of the extended
plant outage, the Company incurred $660,000 to have the manufacturer repair the
generator, incurred approximately $700,000 in additional maintenance expenses
which were not originally scheduled during this outage and incurred
approximately $300,000 in related costs such as legal fees, management costs,
bank fees, etc. As such, the Company believes that the financial impact of this
outage aggregated approximately $3.7 million. During 1997, the Company's
Consolidated Statement of Operations reflects the effect of the lost net
revenues of approximately $2,000,000, the additional maintenance expenses of
approximately $700,000 and the related expenses of approximately $300,000
pertaining to the generator matter. During 1996, the Company had recorded the
present value of the future installments to finance the generator rewind,
discounted at the Scrubgrass Project's incremental borrowing rate (6.75%), which
amounted to $564,000, and was recognizing the $96,000 remaining balance as an
interest cost over the term of the financing agreement.
The Scrubgrass extended outage also created a significant cash flow
deficiency because of the loss of revenues plus associated costs and expenses.
The Company addressed this cash deficiency by securing debt financing,
negotiating agreements with the generator manufacturer and utilizing available
maintenance cash reserves which are each discussed as follows:
Term Credit Facility: In June 1997, the Lessor entered into a three year
---------------------
credit facility with the lenders of the Scrubgrass Project to provide up to $3
million to fund general debt service expenses. The maximum allowable
borrowings under this credit facility were $3,000,000 through July 1, 1998. On
July 1, 1998, the maximum allowable borrowings under this credit facility
began reducing in $600,000 increments every six months through July 3, 2000 at
which time the credit facility will be payable in full. As of December 31,
1998 and 1997, the outstanding borrowings under this credit facility, which
were advanced to the Company by the Lessor, amounted to $2,150,000 and
$3,000,000, respectively.
Agreements with Generator Manufacturer: Prior to the 1997 outage, the Company
---------------------------------------
negotiated extended financing terms with GEC Alsthom ("GEC"), the manufacturer
of the Scrubgrass generator, which allowed the Company to pay the $660,000
cost of the generator repair in six annual installments of $110,000, without
interest, beginning in May 1997. On April 15, 1998, the Company reached an
agreement with GEC which modified the terms of its original financing
contract. Under the terms of the original contract, the Company had yet to
pay five installments of $110,000 and had also agreed to pay an additional
$75,000 bonus to GEC for completing its work ahead of a pre-established
schedule. Furthermore, the Company had engaged GEC to perform certain
F-8
<PAGE>
maintenance procedures to the generator during the 1998 scheduled outage at
the Scrubgrass plant. Under the terms of the revised agreement with GEC, as
payment in full for GEC's work performed during the 1998 outage and for the
five remaining installments of $110,000 and $75,000 bonus owed under the
original contract, the Company agreed to pay GEC a total of $450,000 over a
four year period. The revised agreement provides that $50,000 was payable upon
the completion of their work during the scheduled 1998 plant outage and that
$100,000 is payable upon each of the first four anniversaries of the first
payment thereof. As of December 31, 1998, the Company has recorded in its
Consolidated Balance Sheet the next installment of $100,000 in its accounts
payable and accrued expenses and the present value of the remaining three
installments, discounted at the Scrubgrass Project's incremental borrowing
rate (6.75%), which amounted to approximately $257,000, in its maintenance
reserve. The $43,000 balance of the $300,000 revised generator rewind cost is
being recognized as interest expense over the remaining three year term of the
financing contract with GEC. As of December 31, 1997, the Company had recorded
on its Consolidated Balance Sheet in accounts payable and accrued expenses for
$185,000 and in maintenance reserves for $364,000, the present value of the
remaining obligations under the previous agreement. During 1998, the Company
recognized, through a reduction of its operating expenses, the reduction of
the present value of the future installments due to GEC, which amounted to
approximately $169,000. The Company also recognized interest expense of
approximately $27,000 and $20,000 during 1998 and 1997, respectively under the
agreements with GEC.
Utilization of Maintenance Reserves: The Company was able to utilize its
------------------------------------
restricted cash reserves to finance most of its additional maintenance
expenditures incurred during the 1997 outage since substantially all of such
expenditures were deemed to be major overhauls. Under the terms of its
project agreements, the Company will be able to replenish these restricted
funds over a seven year period beginning in 1998.
Sunnyside
The Sunnyside Project is an approximately 51 Mw (net) waste coal-fired
facility at a site located adjacent to the Sunnyside Coal Mine in Carbon County,
Utah which was constructed by Parsons Main, Inc., ("PMI"). The facility reached
commercial operation on November 19, 1993. The Sunnyside Project is owned by
Sunnyside Cogeneration Associates ("SCA"), a joint venture in which the Company
owned varying majority interests from 100% to approximately 70% until September
28, 1994 and thereafter an approximate 40% interest until December 31, 1994 at
which time the Company sold its remaining interest in SCA to B&W Sunnyside, Inc.
and NRG Sunnyside, Inc. (collectively, "the Purchasers").
In connection with the sale, the Company received total consideration of
$6,042,294 which included cash of $2,792,294 received on January 5, 1995 and
promissory notes aggregating $3,250,000, bearing interest at 10% per annum,
received on December 31, 1994. In addition, after audits were performed to
verify certain financial information for SCA, the Purchasers were required to
pay a purchase price closing adjustment of $1,061,107 in 1995. Under the terms
of the promissory notes, interest is payable quarterly to the Company and
aggregate principal payments of $312,500, $1,187,500 and $1,750,000 were due on
September 30, 1995, December 31, 1996 and December 31, 1997, respectively. To
date, the Purchasers have made principal payments aggregating $312,500 and
quarterly interest payments through March 31, 1996 pursuant to the promissory
notes. The Purchasers have also made aggregate payments of $708,000 toward the
purchase price closing adjustment. However, as more fully described in Note P,
the Purchasers commenced a legal proceeding with the Company on May 3, 1996.
Pending the resolution of the legal proceeding, the Purchasers have withheld all
payments of principal and interest due on the promissory notes since June 1996.
The Purchasers are also disputing the balance of the purchase price closing
adjustment in the legal proceeding. As of December 31, 1998, in addition to the
balance of the purchase price closing adjustment, the purchasers have principal
and interest payments in arrears under the promissory notes of $2,937,500 and
$808,818, respectively (collectively the "Purchasers' Obligations"). The Company
also retained certain inchoate rights, including potential refundable sales
taxes and certain legal settlements arising out of activities prior to the date
of the sale. The retained rights were fully satisfied after the Company received
sales tax refunds aggregating $1.1 million and $42,078 in 1995 and 1996,
respectively, and a litigation settlement of $540,000 during 1996. The sales tax
refunds aggregating $42,078 and litigation settlement of $540,000 are included
in other income in the accompanying 1996 Consolidated Statement of Operations.
F-9
<PAGE>
As discussed further in Note P, the litigation with the Purchasers includes
claims for alleged breaches by the Company of the agreement to sell its interest
in SCA to the Purchasers. The alleged breaches of contract are numerous and the
litigation continues in discovery where it has been for almost three years. In
November 1998, the Company presented to the Seventh District Court for Carbon
County, State of Utah (the "Court") a motion for Partial Summary Judgment
concerning one of the numerous claims by the Purchasers. To date, the Court has
not ruled on this matter. If successful in this motion and considering the
possibility of further similar motions, the Company hopes over time to eliminate
or limit the matters that might be presented in a jury trial or discourage the
Purchasers from continuing the litigation if the anticipated costs exceed the
benefits from litigating the remaining matters. After this initial Court
appearance, the Company continues to feel optimistic about the strength of its
position in the litigation. However, the Company perceives that the Purchasers
are unlikely to settle these matters unless required through Court proceedings,
there currently being little economic incentive for them to do so. Accordingly,
in view of the length and inherent risk of the litigation process and a jury
trial, the Company at this time cannot predict how long it will take to enforce
its rights and collect the Purchasers' Obligations. The Purchasers' Obligations
have been in arrears for almost three years now and are expected to remain in
arrears for the foreseeable future. Pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 114, as amended by SFAS No. 118, the Company
is required to recognize impairment losses on loans whenever changes in
circumstances indicate that the carrying amounts of the loans exceed their fair
market values. In the case of the Purchasers' Obligations, because there are no
quoted market values, the best indication of fair market value is the present
value of the expected future cash flows from the Purchasers' Obligations. Given
the uncertainty surrounding the timing of collecting the Purchasers'
Obligations, the Company cannot reasonably estimate a fair market value for such
obligations. As such, the Company opted to take a conservative position and
write-off the Purchasers' Obligations in its 1998 Consolidated Financial
Statements. The write-off was reported as a charge to other expense for
$3,508,498 in the accompanying 1998 Consolidated Statement of Operations. The
charge represents the aggregate balance before the write-off for the notes
receivable of $2,937,500 and the receivable from sale of affiliate of $570,998.
Notwithstanding, the Company maintains its entitlement to the Purchasers'
Obligations and continues to vigorously pursue such amounts, as well as punitive
damages for abuse of the litigation process, in the Court. Should the Company
prevail in the litigation in a future period and collect the Purchasers'
Obligations, or a portion thereof, and/or punitive damages, the Company would
report such collections as other income in the period received. See Note B for
the Company's accounting policies for reporting income on the Purchasers'
Obligations.
Milesburg
On April 30, 1987, the Company purchased, for an aggregate purchase price of
$5,400,000, all of the outstanding capital stock of Milesburg Energy, Inc.
("MEI"), the company which controlled the development rights to an existing 43
Mw (net) oil-fired facility, which was retired from service in 1984. In
connection with the stock purchase, the Company paid $100,000 in cash and issued
promissory notes totaling $5,120,000 (the "MEI Notes") and a subsidiary of the
Company assumed pre-acquisition MEI liabilities totaling $180,000. The MEI
Notes, pre-acquisition liabilities and certain other liabilities incurred
subsequent to the purchase were to become payable only under certain conditions,
the most significant of which related to the closing of construction financing
and commencement of construction for the Milesburg Project.
In 1987, MEI executed a 30 year power purchase agreement with West Penn Power
Company ("West Penn") for the sale of all of the facility's electrical output
with a fixed capacity rate component and an additional fluctuating rate
component which is derived from West Penn's avoided energy cost. The power
purchase agreement was approved by the Public Utilities Commission of the State
of Pennsylvania ("PUC"), and was subsequently appealed to the Commonwealth Court
of Pennsylvania by certain industrial intervenors. During the lengthy appeals
process, which extended beyond certain contract milestone dates in the power
purchase agreement, West Penn requested that its original petition to approve
the power purchase agreement be dismissed by the PUC since the power purchase
agreement had expired by its own terms. In September 1989, in response to MEI's
efforts to preserve its contractual rights, the PUC, by court order, ordered
West Penn to execute a new power purchase agreement with MEI. The new power
purchase agreement was to include extended contract milestone dates and rates
which would be recalculated due to the later start-up date for this project
necessitated by the delays
F-10
<PAGE>
caused by the appeal. This order had been appealed by the same industrial
intervenors and West Penn through various courts, including the United States
Supreme Court, and upheld in every case in favor of MEI. In August 1995, the PUC
issued a tentative order for final contract rates. The order had been
temporarily stayed by mutual agreement of MEI and West Penn pending discussions
pertaining to a buy-out of the power purchase agreement which began in October
1995.
Despite ongoing efforts to reach a buy-out arrangement with West Penn, the
Company had continued to invest its financial resources during 1996 and 1997 to
protect its legal and contractual interests and to support its ability to
commence construction in the event that a settlement under mutually agreeable
terms could not be reached with West Penn. In July 1996, in furtherance of
those objectives, the Company entered into a joint development agreement with
U.S. Gen to increase the financial and technical resources available to pursue
development activities and continue ongoing discussions with West Penn
concerning a buy-out of the power purchase contract. During 1996 and 1997, the
Company's development efforts for the Milesburg Project increased considerably
and the Company, along with its development partner, was able to establish a
significant value for the Milesburg Project as a result of successful
development efforts.
On August 26, 1997, following discussions which lasted almost two years,
MEI and West Penn reached a Buy-Out Agreement concerning the Milesburg project.
Pursuant to the Buy-Out Agreement, West Penn purchased Milesburg's rights to the
Electric Energy Purchase Agreement between the parties dated February 25, 1987
for the sum of $15 million plus 8% interest from the date the Buy-Out Agreement
was filed for Pennsylvania Public Utility Commission approval. Furthermore,
West Penn also assumed ownership of and responsibility for the Milesburg project
facility, which consisted of land along with a decommissioned oil-fired
electric-generating facility erected thereon, for a stated consideration of $1.
On December 5, 1997, the date of the asset disposition, MEI received aggregate
proceeds of $15,328,768 from West Penn as consideration under the Buy-Out
Agreement. At the date of the asset disposition, before consideration of any
settlements of contingent obligations, the Company had Milesburg project
development costs included in its property, plant and equipment of $9,670,788
and Milesburg project borrowings included in its secured promissory notes and
other borrowings of $5,858,767. Shortly before the date of the asset
disposition, the Company entered into a settlement agreement pertaining to
certain Milesburg project contingent obligations, including the MEI Notes. As a
result of the settlement agreement, the Company's Milesburg project development
costs and Milesburg project borrowings were reduced to $6,170,788 and
$2,358,767, respectively. In addition, because certain other Milesburg
obligations were payable only upon the occurrence of events related to project
development, Milesburg project obligations of $558,767 and accrued interest of
$63,650 were released from liabilities during 1997 and reported as other income
of $622,417 in the accompanying Consolidated Statement of Operations. As a
result of the sale of the Milesburg Project, the Company realized net proceeds
before taxes of $10,960,120 which were derived as follows:
<TABLE>
<S> <C>
Proceeds from the disposal of Milesburg project assets $15,000,001
Project costs:
Development costs 6,170,788
Fee paid to development partner 1,405,746
-------------------
Total project costs 7,576,534
-------------------
Gain on sale of project $ 7,423,467
Adjustments to arrive at net proceeds before taxes from the disposal
of Milesburg project assets:
Development cost reimbursements to the Company for
obligations which had already been paid 2,585,469
Development costs released from liabilities 622,417
Interest income from West Penn 328,767
-------------------
Net proceeds before taxes from the disposal of Milesburg project assets $10,960,120
===================
</TABLE>
F-11
<PAGE>
The Company estimated that, after giving effect to the payment of corporate
taxes related to the Milesburg transaction which are accrued as of December 31,
1997, the Company would have available in excess of $10 million from the
Milesburg proceeds. In light of this projected availability of cash, the
Company's Board of Directors on December 10, 1997 declared a special dividend on
the issued and outstanding shares of Company`s Common Stock in the amount of 87
cents per share payable on January 7, 1998 to Stockholders of record on December
30, 1997 out of the proceeds received from the Company's sale of its Milesburg
project assets.
On December 31, 1997, because MEI did not expect to carry on further
business activities after the sale of the Milesburg Project, EPC adopted a Plan
of Liquidation to dissolve MEI. Under the Plan of Liquidation, MEI ceased to
carry on business activities except to the extent necessary to liquidate its
assets, pay its liabilities and distribute its assets remaining after the
payment of its liabilities to EPC. During 1998, MEI's assets remaining after
the payment of its liabilities were distributed to EPC.
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The Consolidated Financial Statements include
the accounts of Environmental Power Corporation and its wholly-owned or majority
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Flows: The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents. In
1997, the Lessor of the Scrubgrass Project assumed primary responsibility for
the disbursement of funds and repayment of debt related to the capital
improvements fund of the Scrubgrass Project. Accordingly, restricted cash and
secured borrowings in the amount of $1,220,000 were transferred from the
financial statements of the Company to the financial statements of the Lessor in
a non-cash investing and financing activity. The Company also settled a
contingent obligation for the Milesburg project which resulted in a non-cash
financing and investing activity reducing secured promissory notes payable and
property plant and equipment by $3,500,000 during 1997 (see Note A). There were
no non-cash financing and investing activities in 1998 and 1996.
Concentrations of Credit Risk: The Company's financial instruments that are
exposed to concentrations of credit risk consist primarily of cash equivalents,
notes receivable and receivable from utility. The Company's cash equivalents
represent certificates of deposit which are issued from reputable financial
institutions and which are substantially backed by U.S. Treasury or U.S. Agency
securities with maturities of not more than five years. Notes receivable
represent amounts due from the acquirers of the Company's interest in the
Sunnyside Project. The Company believes these acquirers are credit worthy
entities which have the ability to pay the scheduled note obligations (See Note
P regarding the Company's legal proceeding with the acquirers of the Sunnyside
Project). Receivable from utility represents amounts due from the Company's
sole customer PENELEC, a public utility with a credit rating of A by Standard &
Poors, pursuant to the terms of the 25 year power purchase agreement.
Restricted Cash: Restricted cash includes all cash held by the disbursement
agent for the Scrubgrass Project pursuant to project agreements which require
requisition and/or certification by the Lessor or bank to withdraw (See Note A).
The Company makes scheduled deposits to restricted cash accounts which are
restricted primarily for scheduled maintenance procedures.
Fuel Inventory: Fuel inventory consists primarily of handling and hauling
costs and is recorded on a lower of cost or market basis with cost determined on
a monthly weighted average basis.
F-12
<PAGE>
Property, Plant and Equipment: Property, plant and equipment are stated at
cost less accumulated depreciation. The Company capitalizes significant
renewals and betterments that increase the useful lives of assets while repairs
and maintenance are expensed when incurred. The cost and accumulated
depreciation for property, plant and equipment disposals are removed from the
balance sheet and any resulting gains or losses are reported in the statement of
operations at the time of the asset disposition. The Company depreciates its
property plant and equipment using straight-line and accelerated methods over
the estimated useful lives of the assets. The Company records depreciation for
office equipment and furniture using the straight-line method over five years
and for machinery and equipment modifications using the double declining balance
method over seven years. The Company previously capitalized facility under
development costs in its property plant and equipment which represented
acquisition costs and development costs for the Milesburg project. The
development costs included expenditures for professional services, salaries,
other direct costs and certain allocated indirect costs related to the Milesburg
project. During 1997, the Company expensed its facility under development costs
when it sold the assets of the Milesburg project (See Note A). The Company
periodically reviews its property plant and equipment and other long-term assets
for impairment and recognizes impairment losses in situations where the Company
estimates that it will not recover the carrying value of these assets.
Receivable from Sale of Affiliate: Receivable from sale of affiliate
represents the recognized portion of interest income and the purchase price
closing adjustment which remain uncollected from the Purchasers of SCA.
Beginning in April 1997, in order to present its financial statements
conservatively, the Company stopped recognizing interest income on the
Purchasers' notes receivable until the litigation with the Purchasers is
resolved (See Note P). Furthermore, as discussed in Note A, the Company wrote
off the Purchasers' notes receivable and the remaining balance of the receivable
from sale of affiliate during 1998 to present its financial statements
conservatively. As of December 31, 1998 and 1997, the Company had aggregate
uncollected balances for interest and the purchase price closing adjustment due
from the Purchasers of $1,161,925 and $868,175, respectively. The recognized
portion of such amounts which remained on the Company's Consolidated Balance
Sheets as of December 31, 1998 and 1997 was $-0- and $570,998, respectively.
During 1998, 1997 and 1996, the Company was entitled to interest income from the
Purchasers of $293,750, $293,750 and $293,750, respectively. However, in light
of the Company's interest income reporting policy, the Company recorded interest
income from the Purchasers of $0, $73,236 and $293,750 during 1998, 1997 and
1996, respectively.
Deferred Financing Costs: In 1997 and 1995, the Company incurred deferred
financing costs of $139,925 and $300,000, respectively in connection with
restructuring certain debt related to the Scrubgrass Project. Deferred
financing costs are being amortized over the respective lives of the related
debt which range from three to nine years (See Note E). Accumulated
amortization related to deferred financing costs was $206,579 and $110,489 at
December 31, 1998 and 1997, respectively.
Lease Rights: Lease rights are recorded at cost and are being amortized over
the 22 year lease term related to the Scrubgrass facility. Accumulated
amortization related to the lease rights was $670,545 and $521,541 at December
31, 1998 and 1997, respectively.
Accrued Power Generation Revenue and Accrued Lease Expense: As discussed in
Note A, the Company has entered into a long term agreement, to provide
electricity to PENELEC, which provides for scheduled rate increases. In
accordance with generally accepted accounting principles, revenue has been
recorded on the straight-line basis over the 22 year lease term. The accrual
for power generation revenue is limited to the amount of accrued lease expense,
as described below. Therefore, no amount for the straight-lining of future
revenues, which would result in profits, has been provided for in the
Consolidated Financial Statements. Accrued power generation revenue was
$41,386,500 and $33,362,389 at December 31, 1998 and 1997, respectively, and
represents that portion of revenue earned that has not yet been received.
As discussed in Note A, the Company has entered into a long term lease
agreement for the Scrubgrass Project which provides for scheduled lease expense
increases. In accordance with generally accepted accounting principles, the
scheduled lease expense has been recorded on the straight-line basis over the 22
year lease term.
F-13
<PAGE>
Accrued lease expense was $41,386,500 and $33,362,389 at December 31, 1998 and
1997, respectively, and represents that portion of lease expense that has not
yet been paid.
Deferred Gain: The sale of the Scrubgrass Project by the Company on December
28, 1990 was not treated as a sale for financial accounting purposes. This was
originally due to the existence of an option which enabled the Company to
reacquire Buzzard and to lease the Scrubgrass Project for a substantial portion
of its commercial operation. This option constituted a significant continuing
involvement by the Company which provided evidence that it had retained
substantial risks or rewards of ownership of the Scrubgrass Project. In
December 1993, the Company agreed to a modification to the proposed form of
lease thereby relinquishing the fair market value purchase option. Accordingly,
the Company removed from the Consolidated Balance Sheet the gross assets and
liabilities of the Scrubgrass Project and recorded a deferred gain of $6,785,035
arising from the original sale of the Scrubgrass Project in 1990. The deferred
gain is being amortized over the 22 year minimum lease term, which commenced on
June 30, 1994. Accumulated amortization of the deferred gain at December 31,
1998 and 1997 was $1,387,848 and $1,079,437, respectively.
Deferred Revenue: Deferred revenue represents amounts received for power
generation from the Scrubgrass Project at rates in excess of forecasted rates as
set forth in the power sales agreement which are being deferred until earned.
As of January 1, 1996, the Company had deferred revenue of $3,064,965 which was
all earned during 1996. There was no deferred revenue as of December 31, 1998
and December 31, 1997.
Maintenance Reserve: The Company records the expense of major equipment
overhauls related to the Scrubgrass Project to a maintenance reserve on a
straight-line basis using management's best estimate of when the Company will
incur future cash outlays for the major equipment overhauls. When the Company
incurs cash outlays for major equipment overhauls, they reduce maintenance
reserves and are funded substantially from scheduled deposits to restricted cash
accounts.
Income Taxes: The Company accounts for income taxes in accordance SFAS No.
109, "Accounting for Income Taxes". This standard requires, among other things,
recognition of future tax benefits, measured by enacted tax rates, attributable
to deductible temporary differences between the financial statement and income
tax bases of assets and liabilities, and net operating loss carryforwards to the
extent that realization of such benefits is more likely than not.
Earnings (Loss) Per Common Share: In the fourth quarter of 1997, the Company
adopted SFAS No. 128, "Earnings per Share", which established new standards for
computing and presenting earnings per share ("EPS"). SFAS No. 128 replaced the
presentation of primary EPS with a presentation of basic EPS and fully diluted
EPS with diluted EPS. The EPS data for all prior periods has been restated in
accordance with the provisions of SFAS No. 128. The adoption of this statement
did not have a material impact on the Consolidated Financial Statements
presented herein. The Company computes basic earnings (loss) per share by
dividing net income (loss) for the period by the weighted average number of
shares of common stock outstanding during the period. For purposes of
calculating diluted earnings (loss) per share, the Company considers its shares
issuable in connection with stock options to be dilutive common stock
equivalents when the exercise price is less than the average market price of the
Company's common stock for the period. The following table outlines the
calculation of basic earnings (loss) per share and diluted earnings (loss) per
share for the years ended December 31, 1998, 1997 and 1996.
F-14
<PAGE>
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amounts
------------------ -------------------- ---------------
<S> <C> <C> <C>
Year Ended December 31, 1998:
- -----------------------------
Loss available to shareholders $(1,649,186) 11,406,783 $(.14)
Effect of dividends to preferred stockholders (5,000)
------------------ -------------------- ---------------
Basic EPS - loss available to common shareholders (1,654,186) 11,406,783 (.14)
Effect of dilutive securities:
Assumed exercise of dilutive stock options
------------------ -------------------- ---------------
Diluted EPS - loss available to common shareholders $(1,654,186) 11,406,783 $(.14)
================== ==================== ===============
Year Ended December 31, 1997:
- -----------------------------
Income available to shareholders $ 4,613,863 11,120,893 $ .41
Effect of dividends to preferred stockholders (30,178)
------------------ -------------------- ---------------
Basic EPS - income available to common shareholders 4,583,685 11,120,893 .41
Effect of dilutive securities:
Assumed exercise of dilutive stock options 138,972
------------------ -------------------- ---------------
Diluted EPS - income available to common shareholders $ 4,583,685 11,259,865 $ .41
================== ==================== ===============
Year Ended December 31, 1996:
- -----------------------------
Income available to shareholders $ 1,565,279 11,159,966 $ .14
Effect of dividends to preferred stockholders (25,178)
------------------ -------------------- ---------------
Basic EPS income available to common shareholders 1,540,101 11,159,966 .14
Effect of dilutive securities:
Assumed exercise of dilutive stock options 126,320
------------------ -------------------- ---------------
Diluted EPS - income available to common shareholders $ 1,540,101 11,286,286 $ .14
================== ==================== ===============
</TABLE>
As of December 31, 1998, there were outstanding options to purchase 20,000
shares of the Company's common stock which were not included in the computation
of diluted EPS because the Company had a loss in 1998. The options expire in
2008.
Stock Options: Effective January 1, 1996, the Company adopted the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 defines a fair value method of accounting for the
issuance of stock options and other equity instruments. Under the fair value
method, compensation is measured at the grant date based on the fair value of
the award and is recognized over the service period, which is usually the
vesting period. Pursuant to SFAS No. 123, companies are encouraged, but not
required, to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", but would be required to disclose in a note to the
financial statements pro forma net income and per share amounts as if the
company had applied the new method of accounting. SFAS No. 123 also requires
increased disclosures for stock-based compensation arrangements regardless of
the method chosen to measure and recognize compensation for employee stock-based
arrangements. The Company has elected to continue to account for its stock
option transactions under the principles of Accounting Principles Board Opinion
No. 25 and has disclosed in Note L of its Consolidated Financial Statements the
pro forma net income and per share amounts as if the Company had applied the
provisions of SFAS No. 123.
Segment Information: Effective January 1, 1998 the Company adopted SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information",
which modified current segment reporting requirements and established, for
public companies, criteria for reporting disclosures about their products and
services, geographic areas and major customers in annual and interim financial
statements. Under the guidelines established by SFAS No. 131, the Company
operates only in one business segment which pertains to the development and
operation of independent power facilities.
F-15
<PAGE>
New Accounting Standards: In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS No. 133 requires that
entities recognize all derivative instruments as either assets or liabilities in
the statement of financial position and measure those instruments at fair value.
If certain conditions are met, a derivative instrument may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of an
asset or liability or an unrecognized firm commitment, or (b) a hedge to the
exposure to variable cash flows of a forecasted transaction. The Lessor of the
Scrubgrass Project has entered into certain interest rate swaps with financial
institutions that may meet the definition of derivative instruments under SFAS
No. 133. The Company will be required to adopt SFAS No. 133 by January 1, 2000
and is presently assessing whether the adoption of SFAS No. 133 will have any
impact on its Consolidated Financial Statements.
Reclassifications: The Company made certain reclassifications to its 1997 and
1996 consolidated financial statements to conform to the presentation of the
1998 consolidated financial statements.
NOTE C -- OTHER CURRENT ASSETS
Other current assets consists of the following as of December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
<S> <C> <C>
Interest receivable $ 307 $ 42,482
Fuel inventory 711,727 730,060
Prepaid expenses 102,261 101,605
Deposits 1,300 1,675
Other 5,867 6,116
---------------------- ----------------------
$821,462 $881,938
====================== ======================
</TABLE>
NOTE D -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost less accumulated
depreciation and consists of the following as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Power generating facilities:
<S> <C> <C>
Machinery and equipment modifications - Scrubgrass $ 125,000 $125,000
Less: Accumulated depreciation (48,475) (17,863)
---------------------- ----------------------
76,525 107,137
---------------------- ----------------------
Office:
Equipment and furniture 122,599 117,403
Less: Accumulated depreciation (104,369) (94,604)
---------------------- ----------------------
18,230 22,799
---------------------- ----------------------
$ 94,755 $129,936
====================== ======================
</TABLE>
On December 5, 1997, the Company disposed of its investment in the
Milesburg project prior to the construction phase of its development activities.
Prior to the asset disposition, the Company capitalized its Milesburg project
development costs in its property, plant and equipment. See Note A for a
further discussion of the Milesburg project.
During 1997 and 1996, the Company capitalized salary costs and indirect
costs aggregating $327,583 and $48,983, respectfully, for Milesburg project
development activities. The indirect costs were allocated to the project
development activities based on overhead rates applied to direct salary costs
incurred for such activities.
F-16
<PAGE>
NOTE E -- OTHER ASSETS
Other assets consists of the following as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
<S> <C> <C>
Scrubgrass Project receivables $268,125 $258,648
Deferred financing costs - Note B 233,346 329,436
Note receivable and accrued interest due from officer 118,222 113,353
---------------------- ----------------------
$619,693 $701,437
====================== ======================
</TABLE>
Scrubgrass Project receivables are deposits in connection with fuel reserves
under long term leases (See Note M).
NOTE F -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
<S> <C> <C>
Accounts payable $3,011,216 $2,647,807
Accrued expenses 2,705,791 2,556,616
Corporate taxes payable 156,682 1,120,639
---------------------- ----------------------
$5,873,689 $6,325,062
====================== ======================
</TABLE>
Accounts payable at December 31, 1998 and 1997 includes $2,765,184 and
$2,424,236, respectively which are related to Scrubgrass Project operations.
Accrued expenses at December 31, 1998 and 1997 includes $2,501,222 and
$2,502,583, respectively which are related to Scrubgrass Project operations.
NOTE G -- RETIREMENT PLAN
Effective January 1, 1998 the Company established a non-contributory
defined benefit pension plan (the "Plan") covering all of its employees who are
at least 21 years of age and who have completed at least one year of service.
Under the Plan, the benefits payable to each employee at normal retirement age
are based on years of service and compensation during the three consecutive
years of the latest 10 years immediately preceding retirement which would yield
the highest monthly benefit payment. Employees who have at least 20 years of
service at the time of their retirement would receive the maximum retirement
benefit. The Company's general funding policy is to contribute annually to the
Plan the maximum amount that can be deducted for Federal income tax purposes.
As of January 1, 1998, the commencement date for the Plan, the Company had
a projected benefit obligation of $871,130. The projected benefit obligation as
of January 1, 1998 is being amortized as a prior service cost over 19 years
which represents the average future years of service for the participants in the
Plan at that date.
The following table sets forth the changes during 1998 in the projected benefit
obligation for the Plan:
<TABLE>
<CAPTION>
1998
----------------------
<S> <C>
Projected benefit obligation, beginning of the year $871,130
Service cost 67,225
Interest cost 52,268
----------------------
Projected benefit obligation, end of the year $990,623
======================
</TABLE>
F-17
<PAGE>
The following table sets forth a reconciliation of the funded status of the Plan
as of December 31, 1998:
<TABLE>
<CAPTION>
1998
----------------------
<S> <C>
Projected benefit obligation $ 990,623
Plan assets at fair value --
----------------------
Unfunded projected benefit obligation 990,623
Unrecognized prior service cost (825,281)
----------------------
Accrued pension cost $ 165,342
======================
</TABLE>
The amounts recognized in the balance sheet as of December 31, 1998 for the Plan
consist of:
<TABLE>
<CAPTION>
1998
----------------------
<S> <C>
Accumulated benefit obligation $213,081
Intangible asset (47,739)
----------------------
Accrued pension cost $165,342
======================
</TABLE>
As of December 31, 1998, there were no assets in the Plan. The Company
expects to make a contribution of $255,062 to the Plan prior to the due date for
filing its 1998 Federal income tax return.
The Company's net periodic pension cost for 1998 is comprised of the following
components.
<TABLE>
<CAPTION>
1998
----------------------
<S> <C>
Service cost $ 67,225
Interest cost 52,268
Amortization of prior service cost 45,849
----------------------
Net periodic pension cost $165,342
======================
</TABLE>
As of December 31, 1998, the projected benefit obligation, accumulated
benefit obligation and fair value of plan assets with accumulated benefit
obligations in excess of plan assets were $990,623, $213,081 and $0,
respectively.
The actuarial assumptions used in 1998 to determine the pension benefits for the
Plan were:
<TABLE>
<CAPTION>
1998
----------------------
<S> <C>
Weighted average discount rate 5.5%
Expected long-term return on plan assets 5.0%
Weighted average rate of increase in compensation levels 0.0%
</TABLE>
NOTE H -- OTHER CURRENT LIABILITIES
Other current liabilities consists of the following as of December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
<S> <C> <C>
Scrubgrass working capital loan $2,389,664 $2,311,666
Scrubgrass Project long-term credit facility - Note I 1,550,000 600,000
---------------------- ----------------------
$3,939,664 $2,911,666
====================== ======================
</TABLE>
The Scrubgrass working capital loan represents outstanding borrowings under
a Lessee Working Capital Loan Agreement with the Lessor whereby the Lessor has
provided Buzzard with a $4 million line of credit for the ongoing working
capital requirements of the Scrubgrass Project. The outstanding borrowings
under the Lessee Working Capital Loan Agreement incur interest at the LIBOR rate
plus 1.125% (6.19% as of December 31, 1998 and ranging from 6.19% to 7.26%
during 1998 and 6.56% to 7.12% during 1997).
F-18
<PAGE>
NOTE I -- SECURED PROMISSORY NOTES PAYABLE AND OTHER BORROWINGS
Secured promissory notes payable and other borrowings consists of the following
as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
<S> <C> <C>
Scrubgrass Project note payable $1,249,268 $1,267,811
Scrubgrass Project long-term credit facility 600,000 2,400,000
Sunnyside Project obligations 1,017,316 1,005,916
---------------------- ----------------------
$2,866,584 $4,673,727
====================== ======================
</TABLE>
The Scrubgrass Project note payable represents the non-current portion of
an obligation which was incurred as part of the Lessor's debt restructuring in
December 1995, when Buzzard established a capital improvements fund and extended
the term of certain current liabilities through 2004. The outstanding
borrowings under the Scrubgrass Project note payable incur interest at the LIBOR
rate plus 1.25% (6.31% as of December 31, 1998 and ranging from 6.31% to 7.38%
during 1998 and 6.69% to 7.25% during 1997). During the second quarter of 1997,
the Lessor of the Scrubgrass Project assumed primary responsibility for the
disbursement of funds and repayment of debt related to the capital improvements
fund of the Scrubgrass Project. Accordingly, restricted cash and secured
borrowings of approximately $1,220,000 were transferred from the financial
statements of the Company to the financial statements of the Lessor which
reduced the Scrubgrass Project note payable to $1,267,811. The scheduled
aggregate annual repayments for the Scrubgrass Project note payable are $60,695
in 1999, $0 in 2000, $202,826 in 2001, $148,310 in 2002, $447,902 in 2003 and
$389,535 in 2004.
On June 3, 1997, the Lessor of the Scrubgrass Project entered into a long-
term credit facility with its agent bank to provide the Scrubgrass Project with
up to $3 million to fund general debt service expenses when operating revenues
became unavailable as a result of the extended facility outage to perform a
complete rewind of the Scrubgrass generator. On July 1, 1998, the maximum
allowable borrowings under this credit facility began reducing in $600,000
increments every six months through July 3, 2000 when the credit facility will
expire. The loan type (LIBOR-based, Certificate of Deposit rate-based or prime
rate based) and the interest period are elected by the Company. As of December
31, 1998 and 1997, the Company had outstanding borrowings of $2,150,000 and
$3,000,000, respectively from the Lessor under this long-term credit facility
which incurred interest at LIBOR rates plus a 1.125% margin (6.19% as of
December 31, 1998 and ranging from 6.19% to 7.26% during 1998 and 6.56% to 7.12%
during 1997). The maximum loan amount available to the Company during the term
of this agreement is the following:
July 1, 1998 though January 3, 1999 2,400,000
January 4, 1999 through June 30, 1999 1,800,000
July 1, 1999 through December 30, 1999 1,200,000
December 31, 1999 through July 2, 2000 600,000
The Company considers reductions in the outstanding borrowings under this
long-term credit facility which are required within one year to be current
liabilities. As such, the Company has classified $1,550,000 and $600,000 of
this obligation in its current liabilities as of December 31, 1998 and 1997,
respectively (See Note H).
The Sunnyside Project obligations principally represent selling expenses in
connection with the sale of the Sunnyside Project which are payable upon receipt
of the principal proceeds from the notes receivable which were due by December
31, 1997. The repayment of these obligations is contingent upon the outcome of
the litigation with the purchasers of the Sunnyside Project (See Notes A and P).
F-19
<PAGE>
NOTE J -- INTEREST CAPITALIZED
Interest costs consists of the following for the years ended December 31, 1998,
1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Total interest costs incurred $460,812 $437,948 $347,954
Amounts included in operations 460,812 424,395 336,449
--------------- --------------- --------------
Amounts capitalized in development and construction of projects $ 0 $ 13,553 $ 11,505
=============== =============== ==============
</TABLE>
Total interest paid during the years ended December 31, 1998, 1997 and 1996
amounted to $455,146, $407,110 and $319,211, respectively.
Interest costs incurred for each period presented do not include debt
service related to the Scrubgrass Project which is included in lease expense.
NOTE K -- INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ----------------- -----------------
<S> <C> <C> <C>
Current:
Federal $ 594 $ 316,136 $ 22,229
State 213,268 772,888 168,682
-------------------- ----------------- -----------------
Total current tax expense 213,862 1,089,024 190,911
-------------------- ----------------- -----------------
Deferred:
Federal (838,439) 2,925,237 879,370
State (170,368) 89,423 823,754
-------------------- ----------------- -----------------
Total deferred tax expense (benefit) (1,008,807) 3,014,660 1,703,124
$ (794,945) $4,103,684 $1,894,035
==================== ================= =================
</TABLE>
A reconciliation between the actual income tax expense (benefit) and the
income tax expense (benefit) computed by applying the statutory federal income
tax rate to the income (loss) before income taxes, for the years ended December
31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ----------------- -----------------
<S> <C> <C> <C>
Federal tax expense at 34% $(831,005) $2,963,966 $1,176,167
State tax expense, net of federal tax benefit 28,315 569,124 655,008
Tax basis difference related to original investment in
Milesburg project assets --- 568,311 ---
Deferred compensation --- --- 60,471
Nondeductible portion of meals and entertainment 3,525 1,659 1,873
Other 4,220 624 516
------------------- ----------------- -----------------
$(794,945) $4,103,684 $1,894,035
=================== ================= =================
</TABLE>
In 1997, the Company's state income tax expense was substantially all
current because the Company's taxable income was incurred in states where the
Company did not have available net operating loss carryforwards. In 1996, the
Company's deferred state income tax expense includes a charge of $205,382
related to state net operating loss carryforwards which had expired. In
addition, as of December 31, 1996, the Company had estimated that it would not
realize all of the recorded tax benefits of its state net operating loss
carryforwards and
F-20
<PAGE>
accordingly, had provided a valuation allowance in the amount of $299,745 in its
1996 provision for deferred state income taxes.
Total income taxes paid during the years ended December 31, 1998, 1997 and
1996 amounted to $1,187,057, $159,906 and $91,527, respectively.
The components of the net deferred income tax asset as of December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- ---------------------
Deferred tax assets:
<S> <C> <C>
Accrued lease expense $16,800,187 $13,542,928
Accrued expenses 733,947 631,559
Deferred tax effect of the sale of the Scrubgrass Project for
which the gain was deferred for financial reporting purposes 1,076,985 1,138,548
Capital loss carryforwards 96,550 96,550
State net operating loss carryforwards 20,509 10,788
Federal alternative minimum tax credit carryforwards 26,182 161,362
Reserve for non-recovery of certain project costs not currently
deductible for income tax purposes --- 70,711
-------------------- ---------------------
18,754,360 15,652,446
-------------------- ---------------------
Deferred tax liabilities:
Accrued power generation revenue 16,800,187 13,542,928
Defined benefit pension plan contribution 34,650 ---
Installment sale-Sunnyside --- 1,198,801
Other 92,962 92,962
-------------------- ---------------------
16,927,799 14,834,691
-------------------- ---------------------
$ 1,826,561 $ 817,755
==================== =====================
</TABLE>
As of December 31, 1998, the Company has remaining state net operating loss
carryforwards of $621,473 which expire in 2013 and alternative minimum tax
credit carryforwards of $26,182 which do not expire and can be credited against
future regular taxes to the extent they exceed alternative minimum taxes.
NOTE L -- SHAREHOLDERS' EQUITY
Stock Options
The Company has reserved 405,000 shares of common stock for issuance upon
exercise of stock options which are outstanding or may be granted under the
Company's 1993 Director Plan. The options granted under the 1993 Director Plan
were intended to constitute non-qualified options principally at an option price
of 100 percent of the fair market value of the common stock on the date of the
grant. All options are fully vested at the date of grant and expire on the 10th
anniversary of the date of grant. As of December 31, 1998, the Company has
options for 385,000 shares available for grant under the 1993 Director Plan.
The following table summarizes information about the Company's options
outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Weighted-Average
Exercise and Remaining
Price Exercisable Contractual Life
- ---------------------------------------------------------------------------
<S> <C> <C>
$ 1.688 10,000 9.42 years
1.500 10,000 9.50 years
- ---------------------------------------------------------------------------
$ 1.594 20,000 9.46 years
===========================================================================
</TABLE>
F-21
<PAGE>
Stock option transactions during 1998, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------
Shares Price
--------------- -----------------
<S> <C> <C>
Balance at January 1, 1996 340,000 $ .14 - .5625
Options granted 60,000 .6875 - 1.00
Options exercised (50,000) .14 - .4375
--------------- -----------------
Balance at December 31, 1996 350,000 .25 - 1.00
Options granted 30,000 .6875 - .8125
Options exercised (330,000) .25 - .9375
--------------- -----------------
Balance at December 31, 1997 50,000 .25 - 1.00
Options granted 30,000 1.50 - 1.688
Option surrendered (60,000) .25 - 1.625
--------------- -----------------
Balance at December 31, 1998 20,000 $1.50 - 1.688
=============== =================
</TABLE>
Under the provisions of Accounting Principles Board Opinion ("APB") No. 25,
the Company does not recognize compensation expense for stock option awards
since the underlying options have exercise prices equal to 100 percent of the
fair market value of the common stock on the date of grant (110 percent of the
fair market value in the case officers or other employees holding 10% or more of
the Company's common stock for the 1990 plan). However, pursuant to the
provisions of SFAS No. 123, the Company is required to calculate the fair market
value of its stock options using different criteria from the provisions of APB
No. 25. Using the fair market value criteria required by SFAS No. 123 to
calculate compensation expense on stock options granted during 1998, 1997 and
1996, the Company would have incurred proforma net loss of $1,657,178 and
proforma net loss per share of $.15 in 1998, proforma net income of $4,608,669
and proforma net earnings per share of $.41 in 1997, and proforma net income of
$1,549,676 and proforma net income per share of $.14 in 1996.
The estimated fair market values of the Company's options granted during
1998, 1997 and 1996 were $.59 per share, $.33 per share and $.43 per share,
respectively. The fair market values were calculated using the Binomial Option
Pricing Model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Dividend yield 8% 12% 12%
Risk free rate of return 5.99% 5.99% 5.99%
Expected useful life 5 years 5 years 5 years
Expected stock volatility rate 59.27% 52.54% 104.65%
</TABLE>
Dividends
During 1996, the Company initiated a quarterly dividend program which is
subject to review and consideration by the Board of Directors each quarter. In
respect of this dividend program, the Company declared dividends of 3 cents per
share during each of the quarters during 1996 and 1997. During 1998, the
Company declared dividends of 3 cents per share during the first and second
quarters and dividends of 1.5 cents per share during the third and fourth
quarters. The Company also declared special dividends of 2 cents per share in
1996 out of operating profits and 87 cents per share in 1997 out of the proceeds
from the Milesburg settlement (See Note A). Therefore, the Company declared
aggregate dividends of 14 cents per share in 1996, 99 cents per share in 1997
and 9 cents per share in 1998.
During 1997 and 1998, the Company also paid dividends to its subsidiary's
preferred stockholder in the amount of $30,178 and $5,000, respectively. The
preferred stockholder, entitled to cumulative dividends of $5,000 per year since
December 1991, was paid its cumulative dividends through 1996 of $25,178 during
the second quarter of 1997. Beginning in 1997, the Company paid its
subsidiary's preferred stockholder dividends at a rate of
F-22
<PAGE>
$1,250 per quarter. Upon dissolution or liquidation of the Company, the
preferred stockholder has a liquidation preference to receive $500 per share,
plus any cumulative unpaid dividends, prior to the distribution of any remaining
assets to common shareholders.
Other Equity Transactions
During 1993 the Company issued 594,356 shares of restricted common stock to
executive officers. The shares were subject to a three year vesting period
based upon continued employment through November, 1996. The Company incurred
unearned compensation for the market value of the restricted common stock when
the shares were issued and amortized the unearned compensation ratably over the
restricted period. During 1996, the Company amortized unearned compensation of
$66,941 in the Consolidated Statement of Operations. There was no amortization
of unearned compensation in 1997 and 1998.
The Company has notes receivable from officers and directors for shares
purchased in connection with the Company's 1990 Stock Plan and 1993 Directors'
Plan which amounted to $809,731 at both December 31, 1998 and 1997,
respectively, and which are classified as a reduction of shareholders' equity.
The notes are payable upon demand and bear interest at a floating rate which is
payable monthly. The Company has collected all of the interest payable by the
officers and directors on these notes receivable through December 31, 1998.
In March 1996, the Company purchased 520,540 shares of common stock from a
resigning executive officer for $287,876 representing all of the officer's
holdings in the Company. The Company's note receivable from the officer in the
amount of $72,876 was collected by reducing the proceeds paid to the officer for
the common stock.
NOTE M -- COMMITMENTS
Corporate
The Company is obligated to make payments under various operating leases
for office space and automotive vehicles. The Company is also obligated under
leases or other agreements relating to the Scrubgrass Project (see Note A).
Future minimum payments due under non-cancelable leases in effect at
December 31, 1998, are as follows:
1999 $ 50,594
2000 50,834
2001 30,585
2002 1,560
--------------
Total $ 133,573
==============
Rent expense totaled $42,787, $38,844 and $44,868 in 1998, 1997 and 1996,
respectively.
F-23
<PAGE>
Scrubgrass Project
Pursuant to the lease agreement for the Scrubgrass Project the Company is
obligated to make estimated minimum lease payments at December 31, 1998, over
the remaining 17.5 year base term of the lease as follows:
1999 $ 13,662,000
2000 14,392,000
2001 13,967,000
2002 14,884,000
2003 16,306,000
Thereafter 343,160,000
----------------
Total $416,371,000
================
Lease expense in 1998, 1997 and 1996 was $22,971,201, $24,488,005 and
$24,792,248, respectively.
In addition, the Company has been assigned various long-term noncancelable
obligations under contractual agreements for fuel handling and excavation,
limestone supply, and waste disposal. The contractual terms are generally for 5
to 15 years and provide for renewal options.
Future minimum payments due under these noncancelable obligations at December
31, 1998 are as follows (See Notes A and E):
1999 $ 715,000
2000 744,000
2001 773,000
2002 165,000
2003 171,000
Thereafter 958,000
-------------------
Total $ 3,526,000
===================
NOTE N -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments primarily consist of cash and cash
equivalents, restricted cash, receivable from utility, receivable from sale of
affiliate, note receivable from the Scrubgrass Project, notes receivable from
the Sunnyside Project, accounts payable, Lessee working capital loan and several
long-term debt obligations. As of December 31, 1998 and 1997, the carrying
amounts for cash and cash equivalents, restricted cash, receivable from utility,
note receivable from the Scrubgrass Project, accounts payable and Lessee working
capital loan approximate fair value because of the short maturity of these
instruments. As of December 31, 1998 and 1997, the carrying amounts for the
long-term debt obligations also approximate fair value because such obligations
incur interest at variable rates. As of December 31, 1998, as discussed in Note
A, the receivable from sale of affiliate and the notes receivable from the
Sunnyside Project were written-off since the Company cannot reasonably estimate
their fair market values. As of December 31, 1997, the fair market values for
the receivable from sale of affiliate and the notes receivable from the
Sunnyside Project approximated their carrying values.
NOTE O -- SUBSEQUENT EVENTS
During December 1998 and January 1999, Buzzard entered into contracts to
sell a portion of its anticipated future Nitrogen Oxide Ozone Transport Region
Budget Allowances ("NOx Credits"). Each year, the Environmental Protection
Agency and the Pennsylvania Department of Environmental Protection (the
"Regional Authorities") grant NOx Credits to Buzzard based on numerous factors
which pertain to the design and operation of the Scrubgrass facility. The NOx
Credits establish the quantity (in tons) of nitrogen oxide that the Scrubgrass
facility can emit into the environment before Buzzard will be fined by the EPA.
During 1999, Buzzard plans to install machinery, with a cost of
F-24
<PAGE>
approximately $600,000, which is expected to significantly lower the quantity of
nitrogen oxide which the Scrubgrass facility would emit into the environment. As
such, Buzzard anticipates that it may not require a portion of its future NOx
Credits to maintain its compliance with EPA standards. Because NOx Credits are
transferable and marketable, Buzzard has contracted to sell 839 tons of its
projected available NOx Credits which it anticipates may not be required to
comply with EPA standards. Under the terms of the contracts, Buzzard would
receive payment for the NOx Credits within 15 business days from the date the
NOx Credits become certified and allocated by the Regional Authorities and
delivered by Buzzard to the buyers. The contracts also have provisions which
protect Buzzard in the event the NOx Credits are not certified and allocated by
the Regional Authorities.
The following table sets forth the details of NOx Credits which are subject to
sales contracts:
<TABLE>
<CAPTION>
Allowance Expected Allowance Net Selling Net Selling
Year Allocation Date Quantity Price per Ton Price
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 Early 1999 182 tons $3,460 $ 629,720
1999 Mid to Late 1999 86 tons 4,075 350,450
1999 Mid to Late 1999 25 tons 3,955 98,875
2000 Late 1999/Early 2000 182 tons 2,128 387,296
2001 Late 1999/Early 2000 182 tons 2,128 387,296
2002 Late 1999/Early 2000 182 tons 2,128 387,296
------------------------------------------------------
839 tons $2,671 $2,240,933
======================================================
</TABLE>
In February 1999, the Regional Authorities certified and allocated 182 tons
of NOx Credits to Buzzard at which time Buzzard received and reported as revenue
$629,720. Buzzard has designated that $600,000 of such proceeds be used to
purchase and install the machinery discussed above.
In February 1999, Duquesne Light Company ("Duquesne") filed an appeal with
the Pennsylvania Environmental Hearings Board pertaining to the NOx Credits
allocated to Buzzard and several other Pennsylvania waste coal independent power
producers. In this appeal, Duquesne alleges that the Pennsylvania Department of
Environmental Protection ("PADEP") inappropriately allocated certain NOx Credits
to Buzzard and the other waste coal independent power producers. If Duquesne is
successful in this matter, the PADEP could change its methodology for allocating
NOx Credits to waste coal independent power producers in the future. Presently,
Buzzard is participating with the other waste coal independent power producers
in a joint rebuttal to this matter.
NOTE P -- LEGAL PROCEEDINGS
On October 11, 1995, the Lessor and Buzzard (collectively the "Plaintiffs")
filed a complaint against PENELEC in the Court of Common Pleas of Venango
County, Pennsylvania (the "Court") seeking damages for certain alleged breaches
of the power purchase agreement entered into between Scrubgrass Power
Corporation, a predecessor to the Plaintiffs, and PENELEC on August 7, 1987. In
its complaint, the Plaintiffs allege that PENELEC has failed to pay contract
rates for energy produced by the Scrubgrass facility in excess of 80 MW in any
hour, that PENELEC has misused certain automatic regulation equipment and that
PENELEC has caused the Plaintiffs to incur losses from its late payment for
energy purchased from the Scrubgrass facility. As a result of PENELEC's alleged
failure to pay contract rates for energy produced by the Scrubgrass facility in
excess of 80 MW in any hour, the Plaintiffs estimate that as of December 31,
1998, after giving effect to certain payments made by PENELEC which are
discussed below, they have incurred damages of approximately $3 million. Should
the Plaintiffs prevail in this litigation and be awarded all of these damages,
the Company, as Lessee, would expect to retain 50% of these damages because of
its requirement to pay 50% of any net proceeds retained by the Scrubgrass
Project to the Lessor as additional rent. The Plaintiffs have yet to quantify
their damages from PENELEC's alleged late payments for energy purchased from the
Scrubgrass facility but do not expect that these damages would be material
relative to the other allegations. The Plaintiffs are unable to quantify the
damages they have incurred from PENELEC's alleged misuse of certain automatic
regulation equipment. From October 1995 to September 1996, this legal
proceeding was stayed informally by a letter agreement between the parties.
Pursuant to the
F-25
<PAGE>
letter agreement, PENELEC, which had previously not made any payments for the
energy it received in excess of 80 MW in any hour, agreed to pay for all energy
in excess of 80 MW in any hour, both previously received and to be received in
the future, at a rate equal to 90% of a market based rate, subject to
reimbursement based on the ultimate determination of PENELEC's responsibility to
pay for such energy and the applicable rate therefor. Through December 31, 1998,
the Scrubgrass Project has recognized cumulative power generation revenues of
approximately $1,678,247 million for energy in excess of 80 MW in any hour based
on the terms established in the letter agreement. On September 27, 1996, the
Plaintiffs provided written notice of their intention to resume the litigation.
Consequently, on October 24, 1996, PENELEC filed preliminary objections to the
complaint to the Court which principally suggested that the primary jurisdiction
for this dispute lies with the Pennsylvania Public Utility Commission ("PUC").
On November 12, 1996, the Plaintiffs filed a response to PENELEC's preliminary
objections. The Court heard oral arguments on this matter on January 31, 1997
for which the Court ultimately decided in favor of the Plaintiffs on September
9, 1997 by denying PENELEC's motion to transfer the jurisdiction of this dispute
to the PUC. On January 8, 1998, as a result of this ruling by the Court, PENELEC
filed its response to the allegations made in the Plaintiffs' complaint. On
February 4, 1998, the Plaintiffs filed a Motion for Partial Judgment on the
Pleadings which was heard by the Court on March 30, 1998. On June 8, 1998, the
Venango County Court of Common Pleas ruled in favor of the Plaintiffs that,
under the terms and conditions of the Scrubgrass power purchase agreement,
"PENELEC is required to purchase all energy produced in good faith, so long as
the quantity is not unreasonably disproportionate to estimate of 80 MW".
Presently, pending the ultimate determination of its responsibility under the
power purchase agreement, PENELEC continues to pay for energy in excess of 80 MW
at a rate equal to 90% of a market based rate. The Plaintiffs had been in
discussions with PENELEC concerning a proposal made by PENELEC to settle the
litigation. However, because the Plaintiffs and PENELEC could not come to a
mutual agreement on all of the terms of the proposal, PENELEC withdrew its
proposal offer in July 1998 and settlement discussions dissipated. On July 7,
1998, PENELEC filed an appeal to the Court's order dated June 8, 1998 with the
Superior Court of Pennsylvania. On July 27, 1998, the Plaintiffs filed with the
Superior Court of Pennsylvania a Motion to Quash the Appeal. On September 4,
1998, the Superior Court of Pennsylvania granted the Plaintiff's Motion to Quash
the Appeal. Since the decision of the Superior Court of Pennsylvania, PENELEC
has indicated its desire to resume settlement discussions. On November 12, 1998,
the Plaintiffs and PENELEC met to discuss possible settlement scenarios. At the
time of the meeting, the parties were in essential agreement on the amount
currently due assuming the correctness of the Court's Order of June 8, 1998. The
primary matter discussed at the meeting was the manner of calculating future
payments for power in excess of 80 MW. At the meeting, PENELEC made a proposal
which was taken into consideration by the Plaintiffs. On December 21, 1998, the
Plaintiffs counterproposed with an alternative to the PENELEC proposal. To date,
the Plaintiffs have not received a response from PENELEC regarding their
counterproposal. The Company is unable to predict whether a settlement will
ultimately be reached. However, because PENELEC's November 12, 1998 calculation
of the amount due to the Plaintiffs pursuant to the Court's ruling was similar
to the Plaintiffs' calculation, it is currently believed that the prospect of a
final settlement of all outstanding issues is good. In the event such a
settlement is not reached, the litigation will resume, and a final adjudication
of the of the amount due from PENELEC to the Plaintiffs will be sought.
On May 3, 1996, B&W Sunnyside L.P., Babcock & Wilcox Investment Company,
NRG Sunnyside Inc., NRG Energy Inc., and Sunnyside Cogeneration Associates
(collectively the "Plaintiffs") filed a complaint, which was amended on June 27,
1996 and December 21, 1998, against EPC and three of its wholly-owned
subsidiaries (collectively hereafter "the Company") in Seventh District Court
for Carbon County, State of Utah (the "Court"). The second amended complaint
alleges that the Company breached the purchase and sale agreement by which the
Company transferred all of its interest in Sunnyside Cogeneration Associates
("SCA"), a joint venture which owned and operated a nominal 51 megawatt waste
coal fired facility located in Carbon County, Utah. The second amended
complaint also alleges that the Company made certain misrepresentations in
connection with the purchase and sale agreement. As a result of the alleged
breaches of contract and misrepresentations, the Plaintiffs allege that they
suffered damages in an unspecified amount that exceed the aggregate outstanding
principal and interest balances due to the Company by B&W Sunnyside L.P. and NRG
Sunnyside, Inc. under certain notes receivable, which amounted to $2,937,500 and
$808,818, respectively at December 31, 1998. In addition to alleging
unspecified damages, the Plaintiffs also request rescission of the purchase and
sale agreement. On January 21, 1999, in response to the Plaintiffs' second
amended complaint, the Company filed an answer and restatement of its earlier
counterclaim dated July 26, 1996. In the answer to the second amended
complaint, the Company denied all material allegations of the second amended
complaint and asserted numerous affirmative defenses. In the restated
counterclaim, the Company alleges numerous causes of action against the
Plaintiffs which include breach
F-26
<PAGE>
of contract, breach of the promissory notes, intentional, malicious and willful
breach of contract, intentional tort, interference and misrepresentation.
Through the restated counterclaim, the Company seeks remedies which include: (1)
compensatory, consequential and punitive damages; (2) acceleration and immediate
payment in full of the promissory notes; and (3) injunctions which require the
Plaintiffs to continue making payments under the promissory notes during the
pendency of this action and until the promissory notes are paid in full and
which enjoin the Plaintiffs from continuing certain malicious and intentional
actions that are alleged in the counterclaim, together with interest, reasonable
attorney's fees, costs and other such relief as the court deems proper. On
February 12, 1999, the Plaintiffs responded to the restated counterclaim whereby
they denied all material allegations of the restated counterclaim and asserted
numerous affirmative defenses. The Company plans to vigorously defend against
the second amended complaint and vigorously pursue the causes of action in the
restated counterclaim. On April 15, 1998, the Company filed a Motion for Summary
Judgment with Respect to Claims Regarding the Power Purchase Agreement, seeking
dismissal of a portion of the Plaintiffs' claims. On June 5, 1998, the Company
received the Plaintiffs' response to its Motion for Summary Judgment with
Respect to Claims Regarding the Power Purchase Agreement wherein the Plaintiffs
stated their opposition to such motion. The Company and the plaintiffs appeared
in Court on November 19, 1998 to present oral arguments on the Company's Motion
for Summary Judgment with Respect to Claims Regarding the Power Purchase
Agreement. The Court has not yet rendered a decision on such motion. On February
12, 1999, the Plaintiffs moved for leave of the Court to file an amended third
complaint which would omit rescission of the purchase and sale agreement as a
remedy to their second amended complaint. On February 25, 1999, the Company
filed a stipulation with the Court accepting the Plaintiffs motion to file an
amended third complaint. The parties are presently awaiting the Court's grant of
the leave. On February 12, 1999, the Plaintiffs also filed a Motion for Partial
Summary Judgment wherein the Plaintiffs allege that the Company misrepresented
whether SCA had a basis to make legal claims as of December 31, 1994 against
Pacificorp, the utility purchasing energy from the Sunnyside facility.
Presently, the Company is preparing a response to the Plaintiffs' Motion for
Partial Summary Judgment. Discovery remains ongoing.
F-27
<PAGE>
Exhibit 10.91
SECOND AMENDMENT TO AMENDED AND RESTATED
PARTICIPATION AGREEMENT
This SECOND AMENDMENT TO AMENDED AND RESTATED PARTICIPATION
AGREEMENT, dated as of September 2, 1998 (this "Amendment"), is made and entered
---------
into by and among SCRUBGRASS GENERATING COMPANY, L.P., a Delaware limited
partnership ("Lessor"), BUZZARD POWER CORPORATION, a Delaware corporation
------
("Lessee"), ENVIRONMENTAL POWER CORPORATION, a Delaware corporation ("EPC"),
- -------- ---
BANKERS TRUST COMPANY as trustee under the Indenture ("Bond Trustee"), BANKERS
------------
TRUST COMPANY as disbursement agent ("Disbursement Agent"), and CREDIT
------------------
LYONNAIS, acting through its New York Branch ("Credit Lyonnais") as agent for
---------------
the Bond LOC Issuer, the Contract LOC issuer, and the Banks (Credit Lyonnais
acting in such capacity, the "Agent").
-----
WHEREAS, Lessor, Lessee, EPC, Bond Trustee, Disbursement Agent and Agent
are parties to that certain Amended and Restated Participation Agreement (the
"Participation Agreement") dated December 22, 1995, which sets forth certain
- ------------------------
agreements and re1ationships between and among themselves relating to the
construction, financing, leasing, and operation of a coal and coal-waste fired
approximately 85 megawatt (net) small power production plant located in Vanango
County, Pennsylvania (the "Project"); and
WHEREAS, Section 12.2 of the Participation Agreement provides that a
general partner in Lessor, including Pine Power Leasing, Inc. ("Pine"), may not,
----
with certain exceptions, make any transfer or assignment of all or any portion
of its general partnership interest in Lessor and certain corresponding rights
and obligations except in a Permitted Transfer (as defined in the Participation
Agreement); and
WHEREAS, Appendix 1 of the Participation Agreement defines the term
"Permitted Transfer" to include (a) sales, transfers or other dispositions which
(i) are to Persons approved by the Majority Banks (which approval shall not be
unreasonably withheld), who assume all obligations of Lessor and under the Loan
Documents and (ii) after giving effect thereto, do not result in the occurrence
of any Default or Event of Default under any Transaction Document or (b) any
sale, transfer, assignment or other disposition of a general partner interest
permitted by Section 10.02 of the Amended and Restated Reimbursement Agreement;
and
WHEREAS, simultaneously herewith, Lessor, the Consenting Banks, the Agent,
National Westminster Bank Plc. acting through its New York Branch, in its
capacity as the Bond LOC issuer, and Landesbank Hessen-Thuringen Girozentrale,
New York Branch, in its capacity as the Contract LOC Issuer will execute that
certain Amendment Number 4 to the Reimbursement Agreement ("Agreement No 4")
---------------
setting forth the terms and conditions under which the Consenting Banks are
willing to consent to the Proposed Transfer, such consent to be effective upon
satisfaction of such terms and conditions (the "Effective Date"), as defined in
--------------
Amendment No. 4; and
WHEREAS, subject to the terms and conditions set forth in that certain
Purchase
1
<PAGE>
Agreement dated as of March 6, 1998 (the "Purchase Agreement"), between
------------------
Bechtel Generating Company, Inc. ("BGCI") and Cogentrix Energy, Inc.
----
("Cogentrix"), BGCI has agreed to cause Pine to sell and transfer to
---------
Cogentrix/Scrubgrass, Inc., a Delaware corporation and an indirect subsidiary of
Cogentrix ("Substitute Partner"), and Substitute Partner has agreed to purchase
------------------
and accept, Pine's twenty percent (20%) general partnership interest (the
"Interest") in Lessor (the "Proposed Transfer"); and
-----------------
WHEREAS, Lessor, Lessee, EPC, Bond Trustee, Disbursement Agent and Agent
desire to amend the Participation Agreement as set forth below:
NOW THEREFORE, in consideration of the premises and of the mutual covenants
and agreements herein, and of other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto, intending
to be legally bound, agree as follows:
1. Definitions. Unless otherwise defined herein, capitalized terms have
-----------
the meanings ascribed to them in the Participation Agreement.
2. Amendments to the Participation Agreement. Effective on the Effective
-----------------------------------------
Date, the Participation Agreement shall be amended as follows:
a. Section 1.1 of the Participation Agreement is hereby amended and
replaced in its entirety by a new Section 1.1 as follows:
"Definitions; Rules of Construction. Capitalized terms used herein shall,
----------------------------------
unless the context otherwise requires or they are otherwise defined herein,
have the meanings set forth in Appendix I hereto. References in this
Agreement to articles, sections, paragraphs and clauses are to articles,
sections, paragraphs and clauses of this Agreement unless otherwise
indicated. At any time, all references herein to any agreement or appendix,
schedule or exhibit to such agreement shall be to such agreement, appendix,
schedule or exhibit as such Agreement, Appendix, Schedule or Exhibit shall
have been properly amended through such time. All references to a
particular entity shall include a reference to such entity's successors and
permitted assigns. Except as otherwise required by the context, such
definitions shall be equally applicable to the singular or plural forms of
the terms defined. The words "herein," "hereof" and "hereunder" shall
refer to this Agreement as a whole and not to any particular section or
subsection of this Agreement."
b. Appendix I of the Participation Agreement shall be amended to
include the following terms:
"Clearfield Fuel Purchase Agreement" shall mean the Amended and Restated
----------------------------------
Fuel Purchase Agreement dated as of June 1, 1996 between Lessor and
Clearfield Properties, Inc.
"Cogentrix/Scrubgrass" shall mean Cogentrix/Scrubgrass, Inc., a Delaware
--------------------
corporation.
"Fuel Services Agreement" shall mean the Fuel Services Agreement dated as
-----------------------
of June 1,
2
<PAGE>
1996 by and between Lessor and Fuel Site Operator.
"Fuel Site Operator" shall mean U. S. Operating Services Company, a
------------------
California general partnership, in its status as operator under the Fuel
Services Agreement, and any successor operator.
"Leechburg Waste Disposal Agreement" shall mean the Amended and Restated
----------------------------------
Waste Disposal Agreement dated as of June 1, 1996 between Lessor and
Leechburg Properties, Inc.
c. Appendix I of the Participation Agreement shall be amended to
delete the terms "Pine" and "Bechtel Power".
d. The definition of "General Partners" set forth in Appendix I of
the Participation Agreement shall be amended and restated in its entirety
as follows:
"General Partners" shall mean Cogentrix/Scrubgrass, Falcon, SPC and all
----------------
other Persons admitted as general partners of Lessor pursuant to the terms
of the Partnership Agreement."
3. Governing Law. This Amendment shall be governed by and construed in
-------------
accordance with the laws of the State of New York, without regard to any other
applicable conflict of law provisions.
4. Amendments. This Amendment may not be amended, altered, modified or
----------
revoked without the prior written consent of all parties hereto, except in
accordance with the requirements under the Reimbursement Agreement for
modifications thereto.
5. Headings. All headings in this Amendment are included only for
--------
convenience and ease of reference and shall not be considered in the
construction and interpretation of any provision hereof.
6. Binding Nature and Benefit. This Amendment shall be binding upon and
--------------------------
inure to the benefit of each party hereto and their respective successors and
assignors.
7. Counterparts. This Amendment may be executed in multiple counterparts,
------------
each of which shall be deemed an original for all purposes, but all of which
together shall constitute one and the same instrument.
8. Omnibus Consent. All of the undersigned parties consent to this
---------------
Amendment and each and every action to be taken hereunder and as described
herein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed and delivered as of the day and year first above written.
SCRUBGRASS GENERATING COMPANY, L.P.
a Delaware limited partnership
By: illegible
------------------------
Name: illegible
----------------------------
Title: illegible
---------------------------
BUZZARD POWER CORPORATION
a Delaware corporation
By: /s/ William D. Linehan
-------------------------
Name: William D. Linehan
---------------------------
Title: Chief Financial Officer
--------------------------
ENVIRONMENTAL POWER CORPORATION,
a Delaware corporation
By: /s/ William D. Linehan
-------------------------
Name: William D. Linehan
----------------------------
Title: Treasurer
----------------------------
CREDIT LYONNAIS,
acting through its New York branch,, as Agent
By: illegible
--------------------------
Name: illegible
----------------------------
Title: illegible
----------------------------
BANKERS TRUST COMPANY,
as trustee under the Indenture
By: illegible
---------------------------
Name: illegible
----------------------------
Title: illegible
----------------------------
BANKERS TRUST COMPANY,
as disbursement agent
By: illegible
---------------------------
Name: illegible
----------------------------
Title: illegible
----------------------------
4
<PAGE>
Exhibit 10.92
FIRST AMENDMENT TO THE AMENDED AND
RESTATED DISBURSEMENT AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO THE AMENDED AND RESTATED DISBURSEMENT AND
SECURITY AGREEMENT, dated as of October 9, 1998 (this "Amendment"), is entered
by and among Buzzard Power Corporation, a Delaware corporation ("Lessee"),
------
Scrubgrass Generating Company, L.P, a Delaware limited partnership ("Lessor"),
------
Credit Lyonnais, acting through its New York branch, as agent for the Banks, the
Bond LOC Issuer and the Contract LOC Issuer (in such capacity, the "Agent"),
-----
Bankers Trust Company, a New York banking corporation, as security agent for the
Agent on behalf of the Banks, the Bond LOC Issuer and the Contract LOC Issuer
(in such capacity, the "Disbursement Agent"), and Bankers Trust Company, a New
--------------------
York banking corporation as securities intermediary (in such capacity, the
"Securities Intermediary"). Each of Lessee, Lessor, the Disbursement Agent, the
- ------------------------
Securities Intermediary and the Agent shall hereinafter be referred to as a
"Party," and collectively as the "Parties."
----- -------
WITNESSETH
WHEREAS, Lessee, Lessor, the Disbursement Agent and the Agent have
entered into that certain Amended and Restated Disbursement and Security
Agreement, dated as of December 22, 1995 (as herein and hereafter amended, the
"Disbursement and Security Agreement," all capitalized terms used but not
- -------------------------------------
otherwise defined in this Amendment shall have the meaning assigned to such
terms in the Disbursement and Security Agreement);
WHEREAS, Lessee, Lessor, the Disbursement Agent and the Agent desire
to amend the Disbursement and Security Agreement to bring the account and
security arrangements provided for in such agreement, including but not limited
to the security interest created thereby, into compliance with the 1994 Official
Text of Article 8 of the Uniform Commercial Code of the State of New York (as in
effect from time to time, the "UCC"); and
---
WHEREAS, in connection with bringing the account and security
arrangements provided for in the Disbursement and Security Agreement into
compliance with the 1994 Official Text of Article 8 of the UCC, Lessee, Lessor,
the Disbursement Agent and the Agent desire that Bankers Trust Company, a New
York banking corporation, act as a "securities intermediary" as defined in the
UCC for purposes of the Disbursement and Security Agreement as amended by this
Amendment.
NOW, THEREFORE, in consideration of the promises and the mutual
covenants and agreements contained herein and other valuable consideration, the
sufficiency of which is hereby acknowledged, the Parties intending to be legally
bound agree as follows:
Section 1. Amendments to the Disbursement and Security Agreement.
-----------------------------------------------------
(a) Section 2.01 of the Disbursement and Security Agreement is
amended by adding the following language at the end of the last sentence
thereof:
"The Securities Intermediary shall, at the direction of the
Disbursement Agent, promptly credit to the appropriate Account all
property delivered to it pursuant to the provisions hereof. The
Securities Intermediary hereby agrees that each item of such
<PAGE>
property (whether investment property, financial asset, security,
instrument or cash) and all rights related thereto, now or hereafter
deposited in or credited to any of the Accounts shall be treated as a
"financial asset" within the meaning of Section 8-102(a)(9) of the UCC
to be held by the Securities Intermediary, acting as a "securities
intermediary" (as defined in the UCC). The Securities Intermediary
shall comply with 'entitlement orders' (within the meaning of Section
8-102(a)(8) of the UCC), including, without limitation, any order or
notification to the Securities Intermediary directing transfer or
redemption of any financial assets in the Accounts, issued by the
Disbursement Agent and relating to the Accounts without the
requirement of further consent by Lessee, Lessor or any other person."
(b) Section 2.02(a) of the Disbursement and Security Agreement is
amended by replacing the language "entitled the 'Construction Account"' with the
language "entitled 'Scrubgrass Generating Company, L.P., Construction Account,
Bankers Trust Company as Disbursement Agent, as Secured Party"'.
(c) Section 2.02(b) of the Disbursement and Security Agreement is
amended by replacing the language "entitled the 'Amortization Account"' with the
language "entitled 'Scrubgrass Generating Company, L.P., Amortization Account,
Bankers Trust Company as Disbursement Agent, as Secured Party"'.
(d) Section 2.02(b) of the Disbursement and Security Agreement is
amended by replacing the language "entitled the 'Amortization Sub-Account"' with
the language "entitled 'Scrubgrass Generating Company, L.P., Amortization Sub-
Account, Bankers Trust Company as Disbursement Agent, as Secured Party"'.
(e) Section 2.02(c) of the Disbursement and Security Agreement is
amended by replacing the language "entitled the 'Insurance Account"' with the
language "entitled 'Scrubgrass Generating Company, L.P., Insurance Account,
Bankers Trust Company as Disbursement Agent, as Secured Party"'.
(f) Section 2.02(d) of the Disbursement and Security Agreement is
amended by replacing the language "entitled the 'Lessor Revenues Account"' with
the language "entitled 'Scrubgrass Generating Company, L.P., Lessor Revenues
Account, Bankers Trust Company as Disbursement Agent, as Secured Party"'.
(g) Section 2.02(e) of the Disbursement and Security Agreement is
amended by replacing the language "entitled the 'Rent Suspense Account"' with
the language "entitled 'Scrubgrass Generating Company, L.P., Rent Suspense
Account, Bankers Trust Company as Disbursement Agent, as Secured Party"'.
(h) Section 2.02(f) of the Disbursement and Security Agreement is
amended by replacing the language "entitled the 'Borrower Environmental
Liability Reserve Account"' with the language "entitled 'Scrubgrass Generating
Company, L.P., Borrower Environmental Liability Reserve Account, Bankers Trust
Company as Disbursement Agent, as Secured Party"'.
(i) Section 2.02(g) of the Disbursement and Security Agreement is
amended by replacing the language "entitled the 'Hedge Account"' with the
language "entitled 'Scrubgrass
<PAGE>
Generating Company, L.P., Hedge Account, Bankers Trust Company as Disbursement
Agent as Secured Party"'.
(j) Section 2.03(a) of the Disbursement and Security Agreement is
amended by replacing the language "entitled the 'Operating Account"' with the
language "entitled 'Buzzard Power Corporation, Operating Account, Bankers Trust
Company as Disbursement Agent, as Secured Party
(k) Section 2.03(b) of the Disbursement and Security Agreement is
amended by replacing the language "entitled the 'Maintenance Reserve Account"'
with the language "entitled 'Buzzard Power Corporation, Maintenance Reserve
Account, Bankers Trust Company as Disbursement Agent, as Secured Party"'.
(l) Section 2.03(b) of the Disbursement and Security Agreement is
amended by replacing the language "entitled the 'Maintenance Reserve Sub-
Account"' with the language "entitled 'Buzzard Power Corporation, Maintenance
Reserve Sub-Account, Bankers Trust Company as Disbursement Agent, as Secured
Party"'.
(m) Section 2.03(c) of the Disbursement and Security Agreement is
amended by replacing the language "entitled the 'Available Cash Flow Account"'
with the language "entitled 'Buzzard Power Corporation, Available Cash Flow
Account, Bankers Trust Company as Disbursement Agent, as Secured Party"'.
(n) Section 2.03(d) of the Disbursement and Security Agreement is
amended by replacing the language "entitled the 'Lessee Environmental Liability
Reserve Account"' with the language "entitled 'Buzzard Power Corporation, Lessee
Environmental Liability Reserve Account, Bankers Trust Company as Disbursement
Agent, as Secured Party".
(o) Article 2 of the Disbursement and Security Agreement is
amended by adding the following new Section 2.05 at the end thereof:
"SECTION 2.05 Administration of the Accounts.
------------------------------
(a) The Securities Intermediary shall not change the name or
account number of any of (i) the Lessor Accounts without the prior
written consent of the Disbursement Agent, Lessor and the Agent and
(ii) the Lessee Accounts without the prior written consent of the
Disbursement Agent, Lessee and the Agent.
(b) All securities or other property underlying any financial
assets credited to the Accounts shall be registered in the name of the
Securities Intermediary, indorsed to the Securities Intermediary or in
blank or credited to another securities account maintained in the name
of the Securities Intermediary and in no case will any financial asset
credited to the Accounts be registered in the name of the Agent, the
Disbursement Agent, Lessor or Lessee, payable to the order of the
Agent, the Disbursement Agent, Lessor or Lessee or specially indorsed
to Lessor or Lessee except to the extent the foregoing have been
specially indorsed to the Securities Intermediary or in blank.
<PAGE>
(c) Each of the Accounts is a "securities account" as such term
is defined in Section 8-501(a) of the UCC."
(p) The second sentence of Section 3.01 of the Disbursement and
Security Agreement is amended by restating such sentence as follows:
"Lessee acknowledges that, except after the Disbursement Agent's
receipt of an Agent Release Notice, the Disbursement Agent is the
agent solely of the Agent and hereby irrevocably relinquishes to the
Disbursement Agent as security agent for the Agent on behalf of the
Secured Parties, all right, title and interest which Lessee has in the
Lessee Account Collateral, subject to the terms and conditions of this
Disbursement Agreement and grants the Disbursement Agent sole dominion
and control over such Lessee Account Collateral."
(q) Article 14 of the Disbursement and Security Agreement is
amended by (i) replacing the words "Disbursement Agent" each time they appear in
Section 14.01 with the words "Disbursement Agent and Securities Intermediary",
(ii) adding in paragraph (a) of Section 14.01 after the word "sufficiency", the
parenthetical phrase "(except with respect to the Securities Intermediary, as
provided in Section 8-504 of the UCC)" and (iii) adding the following new
Sections 14.02, 14.03, 14.04, 14.05 and 14.06 at the end thereof:
"SECTION 14.02 Conflict with Other Agreements. The Securities
------------------------------
Intermediary hereby confirms and agrees that:
(a) There are no other agreements entered into between the
Securities Intermediary and either Lessor, Lessee, the Agent or the
Disbursement Agent with respect to any of the Accounts;
(b) It has not entered into, and until the termination of this
Disbursement Agreement will not enter into, any agreement with any
other person relating to the Accounts or any financial assets credited
thereto pursuant to which it has agreed to comply with entitlement
orders (as defined in Section 8-102(a)(8) of the UCC) of such other
person; and
(c) It has not entered into, and until the termination of this
Disbursement Agreement will not enter into, any agreement with either
Lessor, Lessee, the Agent or the Disbursement Agent purporting to
limit or condition the obligation of the Securities Intermediary to
comply with entitlement orders as set forth in Section 2.01 hereof.
SECTION 14.03 Adverse Claims. Except for the claims and interests
--------------
of Lessor, Lessee, the Disbursement Agent and the Agent on behalf of
the Banks, the Bond LOC Issuer and the Contract LOC Issuer, in the
Accounts, the Securities Intermediary does not know of any claim to,
or interest in, the Accounts or in any "financial asset" (as defined
in Section 8-102(a) of the UCC) credited thereto. If any person
asserts any lien, encumbrance or adverse claim (including any writ,
garnishment, judgment, warrant of attachment, execution or similar
process) against
<PAGE>
the Accounts or in any financial asset carried therein, the Securities
Intermediary will promptly notify the Agent, the Disbursement Agent,
Lessor and Lessee thereof.
SECTION 14.04 Subordination of Lien. In the event that the
---------------------
Securities Intermediary has or subsequently obtains by agreement, by
operation of law or otherwise a security interest in any of the
Accounts or any security entitlement credited thereto, the Securities
Intermediary hereby agrees that such security interest shall be
subordinate to the security interest of the Disbursement Agent in the
Accounts under this Disbursement Agreement.
SECTION 14.05 Right of Set-off. The financial assets and other
-----------------
items deposited to the Accounts will not be subject to deduction, set-
off; banker's lien, or any other right in favor of any person other
than the Disbursement Agent; provided, however, that the Securities
--------- -------
Intermediary may set off (i) all amounts due to the Securities
Intermediary in respect of customary fees and expenses for the routine
maintenance and operation of the Accounts and (ii) the face amount of
any checks which have been credited to the Accounts but are
subsequently returned unpaid because of uncollected or insufficient
finds.
SECTION 14.06 Actions by Securities Intermediary. The Lessor,
----------------------------------
Lessee and Agent agree that if the Disbursement Agent is required by
the terms of this Disbursement Agreement to perform any action or
obligation which can only be performed by the Securities Intermediary,
then if and to the extent that the Disbursement Agent has instructed
or caused the Securities Intermediary to perform such action or
obligation the Disbursement Agent shall be deemed to have performed
such action or obligation under this Disbursement Agreement."
(r) Section 16.07 of the Disbursement and Security Agreement is
amended by adding the following sentence at the end thereof:
"No waiver of any right hereunder shall be binding on any party hereto
unless it is in writing and is signed by all of the parties hereto."
(s) Section 16.08 of the Disbursement and Security Agreement is
amended by restating such section in its entirety as follows:
SECTION 16.08 Applicable Law. Both this Disbursement Agreement
--------------
and the Accounts shall be governed by the laws of the State of New
York (without giving effect to the principles thereof relating to
conflicts of law other than section 5-1401 of the New York General
Obligations Law). Regardless of any provision in any other agreement,
for purposes of the UCC, New York shall be deemed to be the Securities
Intermediary's jurisdiction and the Accounts (as well as the
securities entitlements related thereto) shall be governed by the laws
of the State of New York (without giving effect to the principles
thereof relating to conflicts of law other than section 5-1401 of the
New York General Obligations Law).
(t) Article 16 of the Disbursement and Security Agreement is
amended by adding the following Section at the end thereof:
<PAGE>
(u) Paragraph (b) of Section 16.01 is amended by replacing the
words "Disbursement Agent" each time they appear therein with the words
"Disbursement Agent, Securities Intermediary".
SECTION 16.08 Conflicting Agreements. In the event of any
----------------------
conflict between this Disbursement Agreement (or any portion thereof)
and any other agreement now existing or hereafter entered into, the
terms of this Disbursement Agreement shall prevail.
Section 2. Disbursement and Security Agreement. Effective on the date
-----------------------------------
hereof the Disbursement and Security Agreement shall automatically, without any
further notice, consent or other act, be hereby amended; provided, that the
--------
security interests granted by Lessor and Lessee, respectively, pursuant to, and
the liens created by, the Disbursement and Security Agreement in favor of the
Disbursement Agent for the benefit of the Persons specified therein, shall be
ratified and continued (but not be terminated) upon the effectiveness of this
Amendment.
Section 3. Reference to and Effect on the Transaction Documents.
----------------------------------------------------
(a) On and after the date of this Amendment, each reference in
the Disbursement and Security Agreement to "this Disbursement Agreement",
"hereunder", "hereof', "herein" or words of like import, and each reference in
any other agreement including but not limited to the Amended and Restated
Participation Agreement, the Amended and Restated Reimbursement Agreement, the
Amended and Restated Lease and any other Transaction Documents, to the
Disbursement and Security Agreement shall mean a reference to the Disbursement
and Security Agreement as amended hereby.
(b) Except as specifically amended above, the Disbursement and
Security Agreement, and all other related agreements including but not limited
to the Amended and Restated Participation Agreement, the Amended and Restated
Reimbursement Agreement, the Amended and Restated Lease and any other
Transaction Documents, shall remain in lull force and effect and are hereby
ratified and confirmed. Without limiting the generality of the foregoing, the
Amended and Restated Reimbursement Agreement and the Amended and Restated Lease
and all collateral described therein do and shall continue to secure the payment
of all obligations of Lessor and Lessee under such agreements respectively.
(c) The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of any party to the Disbursement and Security Agreement
or any related agreements including but not limited to the Amended and Restated
Participation Agreement, the Amended and Restated Reimbursement Agreement, the
Amended and Restated Lease and any other Transaction Documents, nor constitute a
waiver of any provision of any of such agreement.
Section 4 Representations and Warranties. Each of Lessor and Lessee
------------------------------
represents and warrants to each other party to this Amendment that:
(a) it is a limited partnership, in the case of Lessor, and a
corporation, in the case of Lessee, duly formed, validly existing and in good
standing under the laws of the State of
<PAGE>
Delaware and has all requisite power and authority, partnership, corporate or
otherwise, to conduct its business, to own its properties and to execute and
deliver, and to perform all of its obligations under this Amendment;
(b) the execution and performance by it of this Amendment have
been duly authorized by all necessary partnership or corporate action, as the
case may be, and do not and will not (i) in the case of Lessor only, require any
further consent or approval of the partners of Lessor, (ii) violate any
provision of its organizational documents or, to the best of its knowledge, of
any law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to it, (iii)
result in a breach of or constitute a default under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which it is a
party or by which it or its property may be bound or affected, or (iv) result
in, or require, the creation or imposition of any mortgage, deed of trust,
pledge, lien, security interest or encumbrance of any nature upon or with
respect to any of the properties now owned or hereafter acquired by it;
(c) no authorization, consent, approval or license of, or filing
or registration with, any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, or any specifically
granted exemption from any of the foregoing, is or will be necessary to the
valid execution, delivery or performance by it of this Amendment or the
transactions contemplated hereby which have not been duly made or obtained, are
not in full force and effect and which are not subject to appeal or judicial
governmental or other review;
(d) this Amendment has been duly and validly executed and
delivered by it; and
(e) assuming the due authorization, execution and delivery
thereof by the parties other than it, this Amendment constitutes its legal,
valid and binding obligation, enforceable against it in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency or similar laws from time to time in effect that affect creditors'
rights generally or by limitation on the availability of equitable remedies.
Section 5. Miscellaneous
-------------
(a) Governing Law. This Amendment and the rights and obligations
-------------
of the Parties hereunder shall be construed in accordance with and be governed
by the laws of the State of New York (without giving effect to the principles
thereof relating to conflicts of law other than section 5-1401 of the New York
General Obligations Law). Regardless of any provision in any other agreement,
for purposes of the UCC, New York shall be deemed to be the Securities
Intermediary's jurisdiction and the Accounts (as well as the securities
entitlements related thereto) shall be governed by the laws of the State of New
York (without giving effect to the principles thereof relating to conflicts of
law other than section 5-1401 of the New York General Obligations Law).
(b) Counterparts Delivery by Fax. This Amendment may be executed
----------------------------
and delivered in any number of counterparts and by the different Parties hereto
on separate counterparts, each of which when so executed and delivered shall be
an original, but all of which shall together constitute one and the same
instrument. This Amendment may be delivered by facsimile transmission.
(c) Further Assurances. Each Party hereto agrees that, from time
------------------
to time
<PAGE>
upon the written request of any other Party, it will take any such actions
and execute any such instruments as such other Party may reasonably request in
order fully to carry out the provisions and intentions of this Amendment.
(d) Severability. In case any provision in or obligation under
------------
this Amendment shall be invalid, illegal or unenforceable in any jurisdiction,
the validity, legality and enforceability of the remaining provisions or
obligations, or of such provision or obligation in any other jurisdiction, shall
not in any way be affected or impaired thereby.
(e) Headings. The section headings of this Amendment are inserted
--------
for convenience only and shall not in any way affect the meaning or construction
of any provision of this Amendment.
[THE NEXT PAGE IS THE SIGNATURE PAGE]
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Amendment to
be executed by their duty authorized officers and attested on the date first
above written.
LESSOR: SCRUBGRASS GENERATING COMPANY, L.P.,
a Delaware limited partnership
By: /s/ Brian Sedar
--------------------------------
Name: Brian Sedar
Title: Secretary
AGENT: CREDIT LYONNAIS, acting through its New York Branch as
Agent
By: /s/ Robert G. Colvin
--------------------
Name: Robert G. Colvin
Title: Vice President
LESSEE: BUZZARD POWER CORPORATION, a Delaware corporation
By: /s/ William D. Linehan
________________________________________
Name: William D. Linehan
Title: Chief Financial Officer
DISBURSEMENT
AGENT: BANKERS TRUST COMPANY, as Disbursement Agent
By: /s/ Thomas Moskie
----------------------------------------
Name: Thomas Moskie
Title: Vice President
SECURITIES
INTERMEDIARY: BANKERS TRUST COMPANY, as Securities Intermediary
By: /s/ Thomas Moskie
---------------------------------------
Name: Thomas Moskie
Title: Vice President
<PAGE>
Exhibit 10.93
FIRST AMENDMENT TO
AMENDED AND RESTATED LEASE AGREEMENT
THIIS FIRST AMENDMENT TO AMENDED AND RESTATED LEASE AGREEMENT effective as
of June 1, 1996, is made and entered into by and between SCRUBGRASS GENERATING
COMPANY, L.P., a Delaware limited partnership, as Lessor ("Lessor"), and BUZZARD
POWER CORPORATION, a Delaware corporation, as Lessee ("Lessee").
WHEREAS, Lessor and Lessee entered into a certain Amended and Restated
Lease Agreement, dated December 22, 1995 (the "Lease"); and
WHEREAS, Lessor And Lessee desire to amend certain provisions of the Lease
and to add a provision to the Lease;
NOW, THEREFORE, in consideration of the mutual agreements herein contained
and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
1. Section 2.03.
------------
(a) Subparagraph (iii) in the first paragraph of Section 2.03(a) of
the Lease shall be deleted in its entirety and the following shall be inserted
in its place:
(iii) Lessor's right to replace, remove or appoint a successor to
Operator under the O&M Agreement, the Project Manager under the
Project Management Agreement, and the Fuel Site Operator under the
Fuel Services Agreement; and
(b) The following shall be inserted immediately following subparagraph
(iii) in the first paragraph of Section 2.03(a) of the Lease:
(iv) Lessor's right to exercise remedies against the Fuel
Site Operator upon default by the Fuel Site Operator under the
Leechburg Waste Disposal Agreement or the Clearfield Fuel
Purchase Disposal Agreement;
2. Section 3.06. The following shall be added to the Lease as Section
------- ----
3.06:
SECTION 3.06 Credit During each month that the Clearfield Fuel
------
Purchase Disposal Agreement is in effect, Lessee shall receive a rebate
of the Basic Rent (Equity) otherwise paid by Lessee pursuant to Section
3.0l of this Lease and permitted pursuant to the Reimbursement Agreement
in an amount equal to the payment made by Lessee to Clearfield
Properties, Inc. for such month pursuant to Section 4.2 of the Clearfield
Fuel Purchase Agreement
3. Appendix I. The following definitions shall be added to Appendix I to
-----------
the Lease in the proper alphabetical order:
Clearfield Fuel Purchase Agreement" shall mean the Amended
----------------------------------
and Restated Fuel Purchase Agreement, dated as of June 1, 1996,
between
<PAGE>
Lessor and Clearfield Properties, Inc.
"Fuel Services Agreement" shall mean the Fuel Services
------------------------
Agreement, dated as of June 1, 1996, by and between Lessor and
Fuel Site Operator.
"Fuel Site Operator" shall mean U.S. Operating Services
------------------
Company, a California general partnership, in its status as
operator under the Fuel Services Agreement, and any successor
operator.
"Leechburg Waste Disposal Agreement" shall mean the Amended
----------------------------------
and Restated Waste Disposal Agreement, dated as of June 1, 1996,
between Lessor and Leechburg Properties, Inc.
4. Reference to and Effect on the Lease.
------------------------------------
(a) On and after the date of this Amendment, each reference in
the Lease to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the
other Transaction Documents to the Lease, shall mean a
reference to the Lease as amended hereby.
(b) Except as specifically amended above, the Lease shall
remain in full force and effect and are hereby ratified and
confirmed.
(c) The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as
a waiver of any right, power or remedy of any party under
the Lease, nor constitute a waiver of any provision of any
of the Lease.
5. Miscellaneous.
-------------
(a) Governing Law. This Amendment shall be governed by, and
-------------
construed and enforced in accordance with the laws of the State of New
York.
(b) Counterparts. The parties may execute this Amendment in two
-------------
or more counterparts, which shall, in the aggregate, be signed by all the
parties, and each counterpart shall be deemed an original instrument as
against any party who has signed it
(c) Headings. The headings of the paragraphs of this Amendment
--------
are for convenience only and do not constitute a part of this Amendment.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have each caused this Amendment to
be executed by their duly authorized officers attested on the date first above
written.
SCRUBGRASS GENERATING COMPANY, L.P.
By: /s/ Brian Sedar
----------------------------------
Name: Brian Sedar
Title: Vice President
BUZZARD POWER CORPORATION
By: /s/ William D. Linehan
----------------------------------
Name: William D. Linehan
Title: Chief Financial Officer
<PAGE>
Exhibit 10.94
LEASE
This Lease is entered into this 26th day of January, 1999 by and between
ADAMS REALTY TRUST (hereinafter called "Lessor") and ENVIRONMENTAL POWER
CORPORATION (hereinafter called "Lessee")
1. Description of Premises. The Lessor hereby agrees to lease to the Lessee,
-----------------------
and the Lessee hereby agrees to lease from the Lessor, subject to the terms and
conditions hereinafter set forth, the following premises: Condominium Unit lE of
the Noble's Island Condominium situated at 500 Market Street, Portsmouth, New
Hampshire, consisting of 1,028 square feet, together with appurtenant rights
thereto, including without limitation the right to use the portion of the common
parking area of the Condominium described in Exhibit A hereto (all of the
foregoing being hereinafter referred to as the "Leased Premises").
2. Term. The term of this Lease shall be three (3) years commencing February
----
20, 1999 and ending February 19, 2002.
3. Rent. The base rent for the term of this Lease is One Thousand Five Hundred
----
Twenty Dollars ($1,520.00) per month for year one, One Thousand Five Hundred
Forty Dollars ($1,540.00) per month for year two, and One Thousand Five Hundred
Sixty Dollars ($1,560.00) per month for year three. The Lessee shall pay rent
in these equal monthly installments, each such installment being due by the 20th
day of the month for the following month.
5. Real Estate Taxes. The Lessor shall pay all real estate taxes assessed
-----------------
against the Leased Premises at the time of execution of this Lease. Any tax
increases during the term of the Lease shall be allocated to and payable by the
Lessee.
6. Heat, Water, Utility Charges. The Lessee shall pay all charges for
----------------------------
electricity, telephone service and water and sewer utility service, and the
Lessor shall pay all condominium association assessments and other fees with
respect to the Leased Premises.
7. Use of Premises. The Lessee shall use the Leased Premises only for the
---------------
following purposes: offices for the transaction of Lessee's professional
activities; provided, however, the Lessee shall not carry on any trade or
occupation, or make any use of the Leased Premises, which will be unlawful,
improper, noisy, offensive, or contrary to the Noble's Island Condominium
Declaration, By-Laws or Rules ("Condominium Documents") as they now exist or are
hereafter amended, which Condominium Documents are hereby incorporated by
reference, or contrary to any law, ordinance, or regulation of the United States
government or any agencies thereof, the State of New Hampshire, or any
municipality or other subdivision thereof authorized to make regulations, or
which will be injurious to any personal or property, or which will make void or
voidable any insurance on the Leased Premises, or which may cause an increased
or extra premium to be payable for such insurance.
8. Condition of Premises. The Lessee is fully familiar with the physical
---------------------
condition of the Leased Premises and the building which is part thereof. The
Lessor and its agent have made no representation in connection with the
condition of the building or of the remainder of the Leased Premises and shall
not be liable for any latent defects therein; provided, however,
<PAGE>
that if the Lessor renders the Leased Premises untenantable for the purpose of
the Lessee, the Lessee may at its own option terminate this Lease.
9. Repairs. Subject to the terms and conditions of the Noble's Island
-------
Condominium Documents, as they now exist or are hereafter amended, the Lessee,
during the term of the Lease, shall at its expense maintain in good repair and
state of cleanliness the Leased Premises and in connection therewith, shall
perform all normal maintenance, and all repairs of conditions caused by Lessee's
use or occupancy of the Leased Premises not otherwise performed by the
Condominium Owners Association, including without limitation all clearing of
snow and ice, and shall make all interior and exterior repairs, not otherwise
made by the Condominium Owners Association, to the Leased Premises necessary to
keep the Leased Premises, and at the end of the term of the Lease, the Lessee
shall surrender the Leased Premises in such repair, order and condition as the
same are in at the commencement of the term, or, if better, as they may be put
into during the continuance thereof, together with any alterations or additions
made with the Lessor's consent, reasonable wear and tear since the last
necessary repair made by the Lessee excepted.
10. Fixture and Improvement. Any improvements or fixtures installed by the
-----------------------
Lessee which are affixed to the real estate by nails, screws, or some other
detachable means may be removed upon the termination of his Lease, provided all
damage or defacement of the Leased Premises caused by such removal is repaired
by the Lessee to the satisfaction of the Lessor. Any such improvements or
fixtures not so removable, or which are not removed prior to the termination of
this Lease, shall become the property of the Lessor.
11. Alterations and Improvements The Lessee shall not, without the written
----------------------------
consent of the Lessor, make any alterations, or additions to or upon the Leased
Premises, except minor alterations which do not materially alter the design or
layout of the Leased Premises, or reduce the available usable space, or weaken
the structure thereof. Any alterations or additions shall be constructed in
accordance with all applicable laws, regulations and the Condominium Documents,
with a proper permit and in a workmanlike manner.
12. Risk of Loss. All persons and property of every kind in or on the Leased
------------
Premises shall be at the sole risk of the Lessee and the Lessor shall not be
liable to the Lessee or any other person for any injury, loss, damage, or
inconvenience occasioned by any cause whatsoever to said persons or property
except the willful or negligent acts or omission of the Lessor.
13. Indemnity. The Lessee agrees to indemnity the Lessor against all loss,
---------
damage, liability, or expense arising out of injury to third parties or their
property in or on the Leased Premises and Lessee shall at its expense procure
and maintain at all times public liability insurance on the Leased Premises in
the name and for the benefit of Lessor and Lessee providing coverage of at least
---
$1,000,000 with respect to each occurrence and deposit annually certificates
thereof with Lessor. The Lessee shall actually name the Lessor as an insured,
and insure the Lessor received a copy of the endorsement naming the Lessor of
same. The Lessee's insurance company is required to notify the Lessor in case
of cancellation of any such insurance.
14. Insurance. The Lessee shall, at all times during the term hereof or any
---------
renewal or extension thereof, keep the contents of the Leased Premises,
including all impermanent improvements, alterations and additions that may be
made, insured against fire with extended
<PAGE>
coverage in amounts, with insurers, and subject to terms and conditions to the
satisfaction of Lessor and/or as required by the Condominium Documents.
15. Insurance Rights. Neither party will assign, transfer, or set over to its
----------------
insurer any rights of subrogation against the other because of any payment
required to be made under any policy of insurance on the Leased Premises or the
contents thereof and each agrees that a waiver of such subrogation rights will
be procured and written into any such insurance policies issued to either party.
16. Subletting and Assignment The Lessee shall not assign this Lease or
-------------------------
sublet the whole or any portion of the Leased Premises without the consent of
the Lessor, in writing, first obtained. This Lease may be assigned at any time
by the Lessor.
17. Inspection. The Lessor or its agent shall have the right to enter the
----------
Leased Premises at reasonable times for the purpose of inspecting its condition
subject to a twenty-four (24) hour notice with Lessee present, or for making
repairs.
18. Right to Show Premises. Lessee acknowledges that property is available for
----------------------
sale and agrees that the Lessor or Lessor's agent, upon twenty-four (24) hour
notice to the Lessee, may show the Leased Premises to prospective buyers.
19. Quiet Possession. The Lessor covenants and warrants that the Lessor has
----------------
full right and lawful authority to enter into this Lease for the full term
hereof, and for all extensions herein provided, and that the Lessor is lawfully
seized of the entire premises hereby leased and has good title thereto free and
clear of all tenancies, liens and encumbrances. The Lessor further covenants
and warrants that if the Lessee shall discharge the obligations herein set forth
to be performed by the Lessee, then the Lessee shall have the right to enjoy,
during the term hereof, the quiet and undisturbed possession of the Leased
Premises for the uses herein described, together with all appurtenances thereof.
20. Default. If the rent hereby reserved shall be in arrears for a period of
-------
more than fifteen (15) days, or if the Lessee shall violate any of the
covenants, conditions, warranties or provisions contained herein and such
violations shall continue for more than fifteen (15) days after notice in
writing, or if the Lessee shall be declared insolvent, or shall be adjudicated a
bankrupt, or shall assign for the benefit of creditors, or if the Leased
Premises shall be taken on execution, the Lessor may immediately, or at any time
thereafter, and without demand or notice upon the Lessee to quit, elect to enter
upon said Leased Premises and take possession thereof whereupon this Lease shall
absolutely terminate, and it shall be no defense to the Lessee that previous
violations of any covenants have been waived by the Lessor, either expressly or
by implication. In the event of any such election by the Lessor, Lessee shall
be liable for Lessor's expenses and costs including attorney's fees and the
Lessor shall further have all of its rights in law or equity to re-let the
Leased Premises and to seek damages or other relief if resulting from such
default.
21. Re-delivery of Premises. The Lessee shall peaceably and quietly quit and
-----------------------
deliver up to the Lessor, or its duly authorized agent, the Leased Premises at
the expiration or other termination of this Lease or any renewal thereof,
leaving the Leased Premises in such condition as required by Paragraph 9 hereof.
Such delivery shall include all keys to the Leased Premises and failure to
deliver such keys shall make the Lessee responsible for the expense of lock
changes.
<PAGE>
22. Waiver. The Lessee covenants with the Lessor that the failure of the
------
Lessor to insist in any one or more instances upon the strict and literal
performance of any of the covenants, terms or conditions of this Lease, or to
exercise any option of the Lessor herein contained, shall not be construed as a
waiver or a relinquishment for the future, of such covenant, term, condition or
option, but the same shall continue and remain in full force and effect.
Acceptance by the Lessor of rent or other payment, with knowledge of breach by
Lessee of any covenant, term, or condition or provision of this Lease, shall not
constitute a waiver by the Lessor of such breach, unless expressly so stated in
writing by the Lessor over its signature
23. Successors. The obligations and benefits of this Lease and shall inure to
----------
the benefit of, the of the Lessor, and the successors and shall be binding upon,
successors and assigns of the Lessee.
IN WITNESS WHEREOF, the parties have hereunto set their hands on the date above
stated.
ADAMS REALTY TRUST
/s/ Joyce E. Bowden By: /s/ Jane M. Man
- ------------------- -------------------------------
Witness Jane M. Man, Trustee
ENVIRONMENTAL POWER CORPORATION
/s/ Kate Dolan By: /s/ William D. Linehan
- ------------------- -------------------------------
Witness William D. Linehan, Treasurer
STATE OF NEW HAMPSHIRE
Rockingham, SS.
The foregoing instrument was acknowledged before me this 30th day of
January, 1999 by Jane M. Man, Trustee of Adams Realty Trust to be her free act
and deed duly authorized to do so.
/s/ Joyce E. Bowden
----------------------------------
Notary/Justice of the Peace
STATE OF NEW HAMPSHIRE Joyce E. Bowden, Notary Public
Rockingham, SS. My Commission Expires April 6, 1999
The foregoing instrument was acknowledged before me this 26th day of January,
1999 by William D. Linehan, Treasurer of Environmental Power Corporation, to be
her free act and deed duly authorized to do so.
/s/ Mary K. Doty
----------------------------------
Notary/Justice of the Peace
Mary K. Doty, Notary Public
My Commission Expires June 24, 2003
<PAGE>
Exhibit 10.95
SETTLEMENT AGREEMENT AND RELEASE
WHEREAS, differences have arisen between GEC Alsthom International, Inc.
("GEC Alsthom"), which was the supplier of generator and certain related
equipment at the Scrubgrass Power Plant, and Scrubgrass Generating Co., L.P.,
and Buzzard Power Corp. (collectively "Scrubgrass"), who own and operate the
Scrubgrass Power Plant.
WHEREAS, Scrubgrass and GEC Alsthom wish to settle their differences
amicably, it is hereby agreed that:
1. REPAIR. GEC Alsthom shall repair the circuit ring at no charge
-------
over and above the agreed upon payments for the 1997 rewind.
2. PAYMENTS. In full and final settlement of all outstanding issues and
--------
claims, except as noted below with respect to vibration issues,
Scrubgrass shall pay to GEC Alsthom the sum of $450,000, as follows:
$50,000 Upon completion of the Circuit Ring Modification.
$100,000 On the anniversary date of the Circuit Ring Modification
beginning on the first anniversary of the completion of the
Circuit Ring Modification and on each of the next three (3)
succeeding anniversary dates.
3. WARRANTY. GEC Alsthom warrants the work on the circuit ring repair
--------
for a period of three years from completion. If notified during that
three year period, GEC Alsthom will repair or replace any defective
work or defective component of the repair, which shall be Scrubgrass'
sole remedy under this warranty. In no event will GEG Alsthom be
liable for consequential damages. There are no other warranties,
express or implied, concerning the repair. Scrubgrass warrants that it
will inform any person or entity who has or in the future may have an
interest in the Power Plant of GEC Alsthom's limitations and
disclaimers of warranties.
4. RELEASE OF GEC ALSTHOM. Scrubgrass, for itself, its predecessors,
----------------------
successors, parents, subsidiaries, affiliates, and assigns, (referred
to in this section as "Releasors"), does hereby release and forever
discharge GEC Alsthom and any of its predecessors, successors,
parents, subsidiaries, affiliates, agents and employees, from any and
all past, present or future claims, demands, or causes of action, in
law or in equity, including but not limited to any express or implied
warranty claim, arising out of or related to any defect in, damage to,
or failure of the generator and other equipment provided by GEC
Alsthom at the Scrubgrass Power Plant, with the exception of the
following three categories of present or future claims which survive
this release.
(a) claims arising out of the written warranty for the 1997 rewind
(b) claims arising out of this Settlement Agreement and Release,
including but not limited to any claims under the warranty set
forth in paragraph 2, above.
(c) claims related to the rotor vibrations recently detected at
the generator.
<PAGE>
The preservation of certain categories of claims in this paragraph shall not be
any evidence of the validity or timeliness of any such claim. Scrubgrass shall
dismiss with prejudice the civil action it has commenced against GEC Alsthom in
Venango County Common Pleas Court, No. 301, 1997.
5. RELEASE OF SCRUBGRASS. GEC Alsthom, for itself, its predecessors,
----------------------
successors, parents, subsidiaries, affiliates, and assigns, (referred
to in this section as "Releasors"), does hereby release and forever
discharge Scrubgrass and any of its predecessors, successors, parents,
subsidiaries, affiliates, agents and employees, from any and all past,
present or future claims, demands, or causes of action, in law or in
equity, including but not limited to any obligations arising under a
certain Proposal dated April 30, 1996 and related documents.
6. EXECUTION AND INTERPRETATION. This Settlement Agreement may be
-----------------------------
executed in multiple counterparts and shall be construed according to
the law of Pennsylvania.
/s/ Donald Sturmer 9/1/98
- ---------------------------------- ------
Scrubgrass Generating Company, L.P. Date
/s/ William D. Linehan 8/25/98
- ---------------------------------- -------
Buzzard Power Corp. Date
/s/ William F. Van Wurt 5/28/98
- ---------------------------------- -------
GEC Alsthom International, Inc. Date
<PAGE>
Exhibit 10.96
December 18, 1998
Buzzard Power Corporation
c/o Scrubgrass Generating Company
RE: OTC NOx Budget Allowance Stream Purchase
Attn: Martin Kreft
This letter shall confirm the agreement reached between PG&E Energy Trading --
Power, L.P. ("PGET") and Buzzard Power Corporation ("Buzzard") regarding the
transaction set forth below (the "Transaction").
Seller: Buzzard
Buyer: PGET
Introduction: Seller currently leases an electric generating facility
(the "Facility") in the state of Pennsylvania from
Scrubgrass Generating Company, L.P. ("SGC"). Buyer wishes
to purchase Nitrogen Oxide Ozone Transport Region Budget
Allowances for the years 1999-2002 ("Allowances" or "NOx
Allowances") certified by the Environmental Protection
Agency and the Pennsylvania Department of Environmental
Protection (the "Regional Authorities") from Seller, and
Seller wishes to sell such Allowances.
Contract Quantity: 182 tons per year of Allowances for the years 1999
through 2002, totaling 728 tons of Allowances, the
("Contract Quantity").
<TABLE>
<CAPTION>
Purchase Price: Purchase Price
(per ton of
Allowance Year Allowances)
-------------- -----------
<S> <C>
1999 $3,500
2000 $2,168
2001 $2,168
2002 $2,168
</TABLE>
Initial Delivery: Within five (5) business days following the 1999
allocation of Allowances (the "Initial Allocation") to
Seller's National Allowance Tracking System ("NATS")
account (expected early Q1 1999), Seller shall file all
documents required to transfer the Initial Allocation of
Allowances from Seller's NOx account to Buyer's NOx
account with the Regional Authority, with copies of all
documents sent to Buyer at the time of submission
thereof. In particular, Seller shall execute a NOx Budget
Program Allowance Transfer Form (the "ATF") and deliver
such form to the Regional Authority to transfer the
Initial Allocation of Allowances. Seller shall notify
Buyer when transfer of the Initial Allocation of
Allowances is posted on the NATS on the Internet. The
effective date of the transfer of the Initial Allocation
of Allowances (the "Initial Transfer") shall be the date
the transfer is posted on the NATS indicating the Initial
Allocation of Allowances appear in Buyer's NOx account;
provided, however, if Buyer has not established a NATS
account on or before the date that Seller files the ATF
for the transfer of the Initial Allocation of Allowances
with the Regional Authority, the Initial Transfer shall
be deemed to have been effective on the date that is five
business days after the submission of such ATF.
Initial Payment: Within ten (10) business days following the Initial
Transfer Buyer shall pay to Seller an amount equal to the
Price multiplied by the 1999 Contract Quantity (182 tons
per year x 1 year x $3,500 per ton, totaling $637,000).
Final Delivery: Seller and Buyer expect that the Allowances for years
2000 through 2002 will be allocated by the Regional
Authority to the NATS in late 1999 or early 2000 (the
"Final
<PAGE>
Allocation"). On or before the later of (i) five (5)
business days of Final Allocation, or (ii) December 29,
1999, Seller shall file all documents required to
transfer the Final Allocation of Allowances from Seller's
NOx account to Buyer's NOx account with the Regional
Authority, with copies of all documents sent to Buyer at
the time of submission thereof. The effective date of the
transfer of the Final Allocation (the "Final Transfer")
shall be the date this transfer is posted on the NATS
indicating the Final Allocation of Allowances appear in
Buyer's NOx account; provided, however, if Buyer has not
established a NATS account on or before the date that
Seller files the ATF for the transfer of the Final
Allocation of Allowances with the Regional Authority, the
Final Transfer shall be deemed to have been effective on
the date that is five business days after the submission
of such ATF.
Final Payment: Within ten (10) business days following the Final
Transfer, Buyer shall pay to Seller an amount equal to
the Price multiplied by the 2000, 2001 and 2002 Contract
Quantity (182 tons per year x 3 years x $2,168 per ton,
totaling $1,183,728). If the Regional Authority allocates
the Allowances for 2000, 2001 and 2002 at a later
date(s), payment(s) for these allocations shall occur
within ten (10) business days of transfer to the Buyer's
NATS account.
Service Charges: Seller shall pay to Buyer a fee of $40 per ton. This fee
shall be deducted from the Initial and Final Payments.
Payments: Buyer shall pay to Seller all payments due hereunder by
wire transfer of immediately available funds (U.S.
Dollars) to the account identified below:
Bankers Trust Company N.Y.
Corporate Trust Agency Group
ABA 021001033
Credit Account: 01419647
Ref: Venango (Scrubgrass) Operating - A/C
All overdue payments shall bear interest from, and
including, the due date to, but excluding, the date of
payment at a rate equal to two percent (2%) over the per
annum rate of interest equal to the prime lending rate as
may from time to time be published in the Wall Street
Journal under "Money Rates"; provided, the interest rate
shall never exceed the maximum rate permitted by
applicable law.
Taxes: Each party shall be responsible for any taxes or other
fees associated with its respective purchase and sale of
the Allowances hereunder.
Liability Limitation: FOR BREACH OF ANY PROVISION OF THIS AGREEMENT, THE
OBLIGOR'S LIABILITY, SHALL BE LIMITED TO DIRECT ACTUAL
DAMAGES ONLY. SUCH DIRECT ACTUAL DAMAGES SHALL BE THE
SOLE AND EXCLUSIVE REMEDY HEREUNDER, AND ALL OTHER
REMEDIES OR DAMAGES ARE WAIVED. IN NO EVENT SHALL EITHER
PARTY BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, PUNITIVE,
EXEMPLARY, OR INDIRECT DAMAGES, IN TORT, CONTRACT OR
OTHERWISE. THIS LIMITATION SURVIVES EXPIRATION OR
TERMINATION OF THIS AGREEMENT.
Event of Default: If an Event of Default (as defined below) occurs with
respect to either party (the "Affected Party"), the other
party (the "Notifying Party") may: (i) upon two business
days' written notice to the Affected Party, terminate
this Agreement (provided, however, that upon the
occurrence of any Event of Default listed in clause (d)
of its definition, this Agreement shall automatically be
deemed terminated, without notice, immediately prior to
such event), (ii) withhold any payments due in respect of
this Agreement to the extent of its damages (see "Buyer's
Liability" and "Seller's Liability" below), and/or (iii)
exercise such other remedies as may be available at law
or in equity.
<PAGE>
"Event of Default" means, with respect to either party:
(a) The failure by the Affected Party to make, when due,
any payment required under this Agreement if such failure
is not remedied within five business days after written
notice of such failure is received by the Affected Party;
or
(b) The Affected Party fails to perform any covenant or
agreement set forth in this Agreement (including its
obligations to make any payment)in any material respect,
and such failure is not cured within five (5) business
days after written notice thereof is received by the
Affected Party;
(c) The Affected Party:
(i) applies for or consents to the appointment of,
or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or a substantial part of
its property;
(ii) makes a general assignment for the benefit of
its creditors;
(iii) files a petition or otherwise commences,
authorizes, or acquiesces in the commencement of a
proceeding or cause under any bankruptcy or similar law
for the protection of creditors, or has such petition
filed against it and such proceeding remains undismissed
for thirty (30) days;
(iv) otherwise becomes bankrupt or insolvent
(however evidenced); or
(v) admits in writing its inability to pay its
debts as they fall due.
Buyer's Liability: In the event of a Buyer's Event of Default and Seller's
resulting election to terminate this Agreement, then
Buyer shall be obligated to pay Seller direct damages for
any Allowances that have been transferred to Seller an
amount equal to the price for such Allowances set forth
in this Agreement, and direct damages for any Allowances
that have not been transferred to Seller an amount equal
to the difference between the price for such Allowances
set forth in this Agreement and the amount that Seller is
able to sell such Allowances for to a third party. If
Buyer has not paid such amount to Seller within two (2)
business days after the Event of Default, Buyer shall
file an ATF with the Regional Authority to transfer to
Seller such Allowances as have been previously
transferred by Seller to Buyer and not paid for by
Buyer.
Seller's Liability: In the event of a Seller's Event of Default and Buyer's
resulting election to terminate this Agreement, Seller
shall pay Buyer direct damages equal to the cost to Buyer
of purchasing Allowances (including transaction costs)
equivalent to all remaining Allowances to be delivered
under this Agreement, less the cost Buyer would have had
to pay Seller for the same number of Allowances. For
purposes of this section, Buyer shall identify the cost
of purchasing from the market within 10 business days of
Seller's failure to deliver.
Force Majeure: Neither party shall be considered to be in default in the
performance of any obligations in this Agreement when a
failure of performance is due to an event of Force
Majeure. The term "Force Majeure" means any event that is
beyond the reasonable control of the party affected,
including, without limitation: flood, earthquake,
tornado, storm, fire, civil disobedience, labor disputes,
labor or material shortage, sabotage, restraint by court
order or public authority, and the action or failure to
act of a governmental authority, including, without
limitation, the failure of the Regional Authorities to
certify the Allowances or transfer the Allowances. No
party shall be relieved of its obligation to perform if
such failure is due to causes arising out of its own
negligence or due to removable or remediable causes which
it failed to remove or remedy within a reasonable time
period. Either party rendered unable to fulfill any of
its obligations under this Agreement by
<PAGE>
reason of an event of Force Majeure shall give prompt
written notice of such fact to the other party and shall
exercise due diligence to remove such inability with all
reasonable dispatch.
Assignment: Neither party shall assign this Agreement or its rights
hereunder without the prior written consent of the other
party. Upon any assignment made in compliance with this
Section, this Agreement shall inure to and be binding
upon the successors and assigns of the assigning party.
Notwithstanding the foregoing, Seller may transfer,
pledge or assign this Agreement to SGC pursuant to the
terms of the lease for the Facility and either party may,
without the need for consent from the other party (and
without relieving itself from liability hereunder), (a)
transfer, pledge or assign this Agreement as security for
any financing with financial institutions; (b) transfer
or assign this Agreement to an affiliate of such party
provided that such assignee has substantially equivalent
financial capability to the assignor; or (c) transfer or
assign this Agreement to any person or entity succeeding
to all or substantially all of the assets of such
assignor; provided, however, in the case of any
assignment pursuant to subparagraphs (b) and (c), that
any such assignee shall agree to be bound by the terms
and conditions thereof.
Notices: All notices, certificates, or other communications
hereunder shall be in writing. All written notices are
deemed sufficiently given when mailed by United States
registered or certified mail, postage prepaid, return
receipt requested ("Mailed"), or hand-delivered, or sent
by facsimile transmission with the original document
Mailed to confirm or by recognized overnight courier
service, addressed as follows:
To Buyer:
PG&E Energy Trading - Power, L.P.
Attn: Authorized Emissions Account Representative
7500 Old Georgetown Road, Bethesda, MD 20814
Telephone No.: 301-280-6600
Fax No.:301-280-6601
To Seller:
Buzzard Power Corporation
c/o Scrubgrass Generating Plant
P.O. Box 39, Kennerdell, PA 16374
Attn: Project Director
Telephone No.: 814-385-6661
Fax No.: 814-385-6704
with a copy to:
Scrubgrass Generating Company, L.P.
7500 Old Georgetown Road, 13th Floor
Bethesda, MD, 20814
Attn: General Counsel
Governing Law: THIS AGREEMENT IS GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF PENNSYLVANIA.
Please confirm that the terms stated herein accurately reflect the agreement
reached between PGET and Buzzard by returning an executed copy of this
Transaction Letter via facsimile to PGET at (301) 280-6601. Your response
should reflect the appropriate party in your organization who has the authority
to enter into the Transaction.
PG&E ENERGY TRADING -- POWER, L.P.
By: PG&E Energy Trading - Power Holdings Corporation,
its sole general partner
<PAGE>
By: /s/ Sarah M. Barpoulis
-------------------------------------------------
Sarah M. Barpoulis, Senior Vice President
ACCEPTED AND AGREED:
BUZZARD POWER CORPORATION
By: /s/ William D. Linehan
-------------------------------------------------
William D. Linehan, Chief Financial Officer
ACKNOWLEDGED AND AGREED TO:
SCRUBGRASS GENERATING COMPANY, L.P
By: /s/Gary Weidinger
-------------------------------------------------
Gary Weidinger, Senior Vice President
<PAGE>
January 13, 1999
Buzzard Power Corporation
c/o Scrubgrass Generating Company
RE: NOx Early Reduction Credit (OTC Budget Allowance) Purchase
Attn: Martin Kreft
This letter shall confirm the agreement reached between PG&E Energy Trading -
Power, L.P. ("PGET") and Buzzard Power Corporation ("Buzzard") regarding the
transaction set forth below (the "Transaction).
Seller: Buzzard
Buyer: PGET
Trade Date: January 4, 1999
Introduction: Seller currently leases an electric generating facility (the
"Facility") in the state of Pennsylvania from Scrubgrass Generating Company,
L.P. ("SGC"). Buyer wishes to purchase Nitrogen Oxide Ozone Transport Region
Early Reduction Credits usable as NOx Budget Allowances for the year 1999
("Al1owances" or NOx Allowances") certified by the Environmental Protection
Agency and the Pennsylvania Department of Environmental Protection (the
"Regional Authorities") from Seller, and Seller wishes to sell such Allowances.
Special Condition: If the Regional Authorities fail to certify the Allowances
on or prior to October 1, 1999, or a mutually agreed upon extension date, this
Transaction shall terminate.
Contract Quantity: 25 tons of Allowances ("Contract Quantity").
Purchase Price: $3,955 per Allowance
Delivery: Within five (5) business days following the 1999
allocation of Allowances (the "Allocation") to Seller's National Allowance
Tracking System ("NATS") account, Seller shall file all documents required to
transfer the Allowances from Seller's NOx account to Buyer's NOx account with
the Regional Authority, with copies of all documents sent to Buyer at the time
of submission thereof. In particular, Seller shall execute a NOx Budget Program
Allowance Transfer Form (the "ATF") and deliver such form to the Regional
Authority to transfer the Allowances. Seller shall notify Buyer when transfer of
the Allowances is posted on the NATS on the Internet. The effective date of the
transfer of Allowances (the "Transfer") shall be the date the transfer is posted
on the NATS indicating the Allowances appear in Buyer's NOx account; provided,
however, if Buyer has not established a NATS account on or before the date that
Seller files the ATF for the transfer of Allowances with the Regional Authority,
the Transfer shall be deemed to have been effective on the date that is five
business days after the submission of such ATF.
Payment: Within ten (10) business days following the transfer of
Allowances into Buyer's name, Buyer shall pay to Seller an amount equal to the
Purchase Price multiplied by the Contract Quantity (25 tons x $3,955 per ton,
totaling $98,875).
Buyer shall pay to Seller all payments due hereunder by wire
transfer of immediately available funds (U.S. Dollars) to the account identified
below:
Bankers Trust Company N.Y
Corporate Trust Agency Group
ABA 021001033
<PAGE>
Credit Account: 01419647
Ref: Venango (Scrubgrass) Operating -- A/C
All overdue payments shall bear interest from, and
including, the due date to, but excluding, the date of payment at a rate equal
to two percent (2%) over the per annum rate of interest equal to the prime
lending rate as may from time to time be published in the Wall Street Journal
under "Money Rates"; provided, the interest rate shall never exceed the maximum
rate permitted by applicable law.
Taxes: Each party shall be responsible for any taxes or other fees
associated with its respective purchase and sale of the Allowances hereunder.
Liability Limitation: FOR BREACH OF ANY PROVISION OF THIS AGREEMENT, THE
OBLIGOR'S LIABILITY, SHALL BE LIMITED TO DIRECT ACTUAL DAMAGES ONLY. SUCH
DIRECT ACTUAL DAMAGES SHALL BE THE SOLE AND EXCLUSIVE REMEDY HEREUNDER, AND ALL
OTHER REMEDIES OR DAMAGES ARE WAIVED. IN NO EVENT SHALL EITHER PARTY BE LIABLE
FOR CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY, OR INDIRECT DAMAGES, IN TORT
CONTRACT OR OTHERWISE. THIS LIMITATION SURVIVES EXPIRATION OR TERMINATION
OF THIS AGREEMENT.
Warranties: Seller hereby warrants that, subject to the terms hereof
upon transfer to Buyer, Seller shall convey the Allowances to Buyer free from
all liens and defects of title. SELLER EXPRESSLY NEGATES ANY OTHER
REPRESENTATION OR WARRANTY, WRITTEN OR ORAL, EXPRESS OR IMPLIED. INCLUDING
WITHOUT LIMITATION, ANY REPRESENTATION OR WARRANTY WITH RESPECT TO CONFORMITY TO
MODELS OR SAMPLES, OR MERCHANTABILITY. This section survives expiration or
termination of this Agreement.
Event of Default: If an Event of Default (as defined below) occurs with
respect to either party (the "Affected Party"), the other party (the "Notifying
Party") may: (i) upon two business days' written notice to the Affected Party,
terminate this Agreement (provided, however, that upon the occurrence of any
Event of Default listed in clause (d) of its definition, this Agreement shall
automatically be deemed terminated, without notice, immediately prior to such
event), (ii) withhold any payments due in respect of this Agreement to the
extent of its damages (see "Buyer's Liability" and "Seller's Liability" below),
and/or (iii) exercise such other remedies as may be available at law or in
equity.
"Event of Default" means, with respect to either party (the "Affected Party"):
(a) The failure by the Affected Party to make, when due, any payment required
under this Agreement if such failure is not remedied within five business days
after written notice of such failure is given to the Affected Party; or
(b) Any representation or warranty made by the Affected Party in this
Agreement proves to have been false or misleading in any material respect when
made;
(c) The Affected Party fails to perform any covenant or agreement set forth in
this Agreement (including its obligations to make any payment). and such failure
is not cured within five (5) business days after written notice thereof to the
Affected Party;
(d) The Affected Party:
(i) makes an assignment or any general arrangements for
the benefit of creditors;
(ii) files a petition or otherwise commences, authorizes,
or acquiesces in the commencement of a proceeding or cause under
any bankruptcy or similar law for the protection of creditors, or
has such petition filed against it and such proceeding remains
undismissed for thirty (30) days;
(iii) otherwise becomes bankrupt or insolvent (however
evidenced); or
<PAGE>
(iv) is unable to pay its debts as they fall due.
Buyer's Liability: In the event of a Buyer's Event of Default and Seller's
resulting election to terminate this Agreement, then Buyer shall be obligated to
pay Seller direct damages for any Allowances that have been transferred to Buyer
an amount equal to the price for such Allowances set forth in this Agreement,
and direct damages for any Allowances that have not been transferred to Buyer an
amount equal to the difference between the price for such Allowances set forth
in this Agreement and the amount that Seller is able to sell such Allowances for
to a third party. If Buyer has not paid such amount to Seller within two (2)
business days after the identification of the price, Buyer shall file an ATF
with the Regional Authority to transfer to Seller such Allowances as have been
previously transferred by Seller to Buyer and not paid for by Buyer. For
purposes of this section, Seller shall identify the cost of selling to the
market within 10 business days of Buyer's Event of Default.
Seller's Liability: In the event of a Seller's Event of Default and Buyer's
resulting election to terminate this Agreement, Seller shall pay Buyer direct
damages equal to the cost to Buyer of purchasing Allowances (including
transaction costs) equivalent to all remaining Allowances to be delivered under
this Agreement less the cost Buyer would have had to pay Seller for the same
number of Allowances within two (2) business days of the Buyer's identification
of the price. For purposes of this section, Buyer shall identify the cost of
purchasing from the market within 10 business days of Seller's failure to
deliver.
Force Majeure: Neither party shall be considered to be in default in the
performance of any obligations in this Agreement when a failure of performance
is due to an event of Force Majeure. The term "Force Majeure" means any event
that is beyond the reasonable control of the party affected, including, without
limitation: flood, earthquake, tornado, storm, fire, civil disobedience, labor
disputes, labor or material shortage, sabotage, restraint by court order or
public authority, and the action or failure to act of a governmental authority,
including, without limitation, the failure of the Regional Authorities to
certify the Allowances or transfer the Allowances. No party shall be relieved of
its obligation to perform if such failure is due to causes arising out of its
own negligence or due to removable or remediable causes which it failed to
remove or remedy within a reasonable time period. Either party rendered unable
to fulfill any of its obligations under this Agreement by reason of an event of
Force Majeure shall give prompt written notice of such fact to the other party
and shall exercise due diligence to remove such inability with all reasonable
dispatch.
Assignment: Neither party shall assign this Agreement or its rights
hereunder without the prior written consent of the other party. Upon any
assignment made in compliance with this Section, this Agreement shall inure to
and be binding upon the successors and assigns of the assigning party. Not
withstanding the foregoing, Seller may transfer, pledge or assign this Agreement
to SGC pursuant to the terms of the lease for the Facility and either party may,
without the need for consent from the other party (and without relieving itself
from liability hereunder), (a) transfer, pledge or assign this Agreement as
security for any financing with financial institutions; (b) transfer or assign
this Agreement to an affiliate of such party provided that such assignee has
substantially equivalent financial capability to the assignor; or (c) transfer
or assign this Agreement to any person or entity succeeding to all or
substantially all of the assets of such assignor; provided, however, in the case
of any assignment pursuant to subparagraphs (b) and (c), that any such assignee
shall agree to be bound by the terms and conditions thereof.
Notices: All notices, certificates, or other communications hereunder
shall be in writing. All written notices are deemed sufficiently given when
mailed by United States registered or certified mail, postage prepaid, return
receipt requested ("Mailed"), or hand-delivered, or sent by facsimile
transmission with the original document Mailed to confirm or by recognized
overnight courier service, addressed as follows:
To Buyer:
PG&E Energy Trading - Power, L.P.
Attn: Authorized Emissions Account Representative
7500 Old Georgetown Road, Bethesda, MD 20814
Telephone No.: 301-280-6600
Fax No: 301-280-6601
<PAGE>
To Seller:
Buzzard Power Corporation
c/o Scrubgrass Generating Plant
P.O. Box 39, Kennerdell, PA 16374
Attn: Project Director
Telephone No.: 814-385-6661
Fax No: 814-385-6704
with a copy to:
Scrubgrass Generating Company, L.P.
7500 Old Georgetown Road, 13th Floor
Bethesda, MD, 20814
Attn: General Counsel
Governing Law: THIS AGREEMENT IS GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF PENNSYLVANIA.
Confidentiality: Neither party shall publish, disclose, or otherwise divulge
Confidential Information to any person, at any time during or after the term of
this Agreement. without the other party's prior express written consent:
provided that the terms of this transaction may be disclosed to governmental
agencies with jurisdiction over this matter without prior consent. Each party
may permit knowledge of and access to the Confidential Information only to those
of its affiliates, attorneys. accountants, representatives, agents, lenders,
lessors, board members, officers and employees who have a need to know, For
purposes of this Agreement. "Confidential Information" shall mean non-public,
confidential or proprietary information that is designated by the disclosing
party as confidential. The term "Confidential Information" does not include any
information which (i) at the time of disclosure or thereafter is generally
available to the public (other than as a result of a disclosure by any Party in
violation of this Agreement), (ii) was available to any Party on a non-
confidential basis from a source other than the Party hereto providing the
Confidential Information, provided that such source is not and was not known by
the recipient Party to be bound by a confidentiality agreement that was
applicable to the Confidential Information or (iii) has been independently
acquired or developed by any Party without violating any of its obligations
under this Agreement. In the event that any Party receiving the Confidential
Information becomes legally compelled (by deposition, interrogatory,
request for documents, subpoena, civil investigative demand or similar process)
to disclose any of the Confidential Information, the legally compelled Party
shall give the other Party providing the Confidential Information prompt prior
written notice of such requirement so that the providing Party may seek a
protective order or other appropriate remedy and/or waive compliance with the
terms of this Agreement. In the event that such protective order or other remedy
is not obtained, or that the providing Party waives compliance with the terms
hereof, the Party legally compelled to disclose the Confidential Information
agrees to provide only that limited portion of the Confidential Information that
it is advised by written opinion of counsel is legally required and to exercise
reasonable efforts to obtain assurance that confidential treatment will be
accorded such Confidential Information. The Parties agree that in the event of a
breach of this Confidentiality provision the Party providing the Confidential
Information shall be entitled to equitable relief, including injunction and
specific performance, in addition to all other remedies available at law or
equity.
Please confirm that the terms stated herein accurately reflect the agreement
reached between PGET and Buzzard by returning an executed copy of this
Transaction Letter via facsimile to PGET at (301) 280-6601. Your response should
reflect the appropriate party in your organization who has the authority to
enter into the Transaction.
PG&E ENERGY TRADING - POWER, L.P.
By: PG&E Energy Trading Power Holdings Corporation, its sole general partner
By: /s/ Sarah M. Barpoulis,
-------------------------------------------------
Sarah M. Barpoulis, Senior Vice President
<PAGE>
ACCEPTED AND AGREED:
BUZZARD POWER CORPORATION
By: /s/ William D. Linehan,
----------------------------------------------
William D. Linehan, Chief Financial Officer
ACKNOWLEDGED AND AGREED TO:
SCRUBGRASS GENERATING COMPANY, L.P
By: /s/ Gary Weidinger
----------------------------------------------
Gary Weidinger, Senior Vice President
<PAGE>
January 13, 1999
Buzzard Power Corporation
c/o Scrubgrass Generating Company
RE: NOx Early Reduction Credit (OTC Budget Allowance) Purchase
Attn: Martin Kreft
This letter shall confirm the agreement reached between PG&E Energy Trading -
Power, L.P. ("PGET") and Buzzard Power Corporation ("Buzzard") regarding the
transaction set forth below (the "Transaction).
Seller: Buzzard
Buyer: PGET
Trade Date: January 8, 1999
Introduction: Seller currently leases an electric generating facility
(the "Facility") in the state of Pennsylvania from Scrubgrass Generating
Company, L.P. ("SGC"). Buyer wishes to purchase Nitrogen Oxide Ozone Transport
Region Early Reduction Credits usable as NOx Budget Allowances for the year 1999
("Al1owances" or NOx Allowances") certified by the Environmental Protection
Agency and the Pennsylvania Department of Environmental Protection (the
"Regional Authorities") from Seller, and Seller wishes to sell such Allowances.
Special Condition: If the Regional Authorities fail to certify the Allowances
on or prior to October 1, 1999, or a mutually agreed upon extension date, this
Transaction shall terminate.
Contract Quantity: 86 tons of Allowances ("Contract Quantity").
Purchase Price: $4,075 per Allowance
Delivery: Within five (5) business days following the 1999 allocation
of Allowances (the "Allocation") to Seller's National Allowance Tracking System
("NATS") account, Seller shall file all documents required to transfer the
Allowances from Seller's NOx account to Buyer's NOx account with the Regional
Authority, with copies of all documents sent to Buyer at the time of submission
thereof. In particular, Seller shall execute a NOx Budget Program Allowance
Transfer Form (the "ATF") and deliver such form to the Regional Authority to
transfer the Allowances. Seller shall notify Buyer when transfer of the
Allowances is posted on the NATS on the Internet. The effective date of the
transfer of Allowances (the "Transfer") shall be the date the transfer is posted
on the NATS indicating the Allowances appear in Buyer's NOx account; provided,
however, if Buyer has not established a NATS account on or before the date that
Seller files the ATF for the transfer of Allowances with the Regional Authority,
the Transfer shall be deemed to have been effective on the date that is five
business days after the submission of such ATF.
Payment: Within ten (10) business days following the transfer of
Allowances into Buyer's name, Buyer shall pay to Seller an amount equal to the
Purchase Price multiplied by the Contract Quantity (86 tons x $4.075 per ton,
totaling $350,450).
Buyer shall pay to Seller all payments due hereunder by
wire transfer of immediately available funds (U.S. Dollars) to the account
identified below:
Bankers Trust Company N.Y
Corporate Trust Agency Group
ABA 021001033
<PAGE>
Credit Account: 01419647
Ref: Venango (Scrubgrass) Operating -- A/C
All overdue payments shall bear interest from, and
including, the due date to, but excluding, the date of payment at a rate equal
to two percent (2%) over the per annum rate of interest equal to the prime
lending rate as may from time to time be published in the Wall Street Journal
under "Money Rates"; provided, the interest rate shall never exceed the maximum
rate permitted by applicable law.
Taxes: Each party shall be responsible for any taxes or other fees
associated with its respective purchase and sale of the Allowances hereunder.
Liability Limitation: FOR BREACH OF ANY PROVISION OF THIS AGREEMENT, THE
OBLIGOR'S LIABILITY, SHALL BE LIMITED TO DIRECT ACTUAL DAMAGES ONLY. SUCH
DIRECT ACTUAL DAMAGES SHALL BE THE SOLE AND EXCLUSIVE REMEDY HEREUNDER, AND ALL
OTHER REMEDIES OR DAMAGES ARE WAIVED. IN NO EVENT SHALL EITHER PARTY BE LIABLE
FOR CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY, OR INDIRECT DAMAGES, IN TORT
CONTRACT OR OTHERWISE. THIS LIMITATION SURVIVES EXPIRATION OR TERMINATION
OF THIS AGREEMENT.
Warranties: Seller hereby warrants that, subject to the terms hereof upon
transfer to Buyer, Seller shall convey the Allowances to Buyer free from all
liens and defects of title. SELLER EXPRESSLY NEGATES ANY OTHER REPRESENTATION OR
WARRANTY, WRITTEN OR ORAL, EXPRESS OR IMPLIED. INCLUDING WITHOUT
LIMITATION, ANY REPRESENTATION OR WARRANTY WITH RESPECT TO CONFORMITY TO MODELS
OR SAMPLES, OR MERCHANTABILITY. This section survives expiration or termination
of this Agreement.
Event of Default: If an Event of Default (as defined below) occurs with
respect to either party (the "Affected Party"), the other party (the "Notifying
Party") may: (i) upon two business days' written notice to the Affected Party,
terminate this Agreement (provided, however, that upon the occurrence of any
Event of Default listed in clause (d) of its definition, this Agreement shall
automatically be deemed terminated, without notice, immediately prior to such
event), (ii) withhold any payments due in respect of this Agreement to the
extent of its damages (see "Buyer's Liability" and "Seller's Liability" below),
and/or (iii) exercise such other remedies as may be available at law or in
equity.
"Event of Default" means, with respect to either party (the "Affected Party"):
(a) The failure by the Affected Party to make, when due, any payment required
under this Agreement if such failure is not remedied within five business days
after written notice of such failure is given to the Affected Party; or
(b) Any representation or warranty made by the Affected Party in this
Agreement proves to have been false or misleading in any material respect when
made;
(c) The Affected Party fails to perform any covenant or agreement set forth in
this Agreement (including its obligations to make any payment) and such failure
is not cured within five (5) business days after written notice thereof to the
Affected Party;
(d) The Affected Party:
(i) makes an assignment or any general arrangements for
the benefit of creditors;
(ii) files a petition or otherwise commences, authorizes,
or acquiesces in the commencement of a proceeding or
cause under any bankruptcy or similar law for the
protection of creditors, or has such petition filed
against it and such proceeding remains undismissed for
thirty (30) days;
(iii) otherwise becomes bankrupt or insolvent (however
evidenced); or
<PAGE>
(iv) is unable to pay its debts as they fall due.
Buyer's Liability: In the event of a Buyer's Event of Default and Seller's
resulting election to terminate this Agreement, then Buyer shall be obligated to
pay Seller direct damages for any Allowances that have been transferred to Buyer
an amount equal to the price for such Allowances set forth in this Agreement,
and direct damages for any Allowances that have not been transferred to Buyer an
amount equal to the difference between the price for such Allowances set forth
in this Agreement and the amount that Seller is able to sell such Allowances for
to a third party. If Buyer has not paid such amount to Seller within two (2)
business days after the identification of the price, Buyer shall file an ATF
with the Regional Authority to transfer to Seller such Allowances as have been
previously transferred by Seller to Buyer and not paid for by Buyer. For
purposes of this section, Seller shall identify the cost of selling to the
market within 10 business days of Buyer's Event of Default.
Seller's Liability: In the event of a Seller's Event of Default and Buyer's
resulting election to terminate this Agreement, Seller shall pay Buyer direct
damages equal to the cost to Buyer of purchasing Allowances (including
transaction costs) equivalent to all remaining Allowances to be delivered under
this Agreement less the cost Buyer would have had to pay Seller for the same
number of Allowances within two (2) business days of the Buyer's identification
of the price. For purposes of this section, Buyer shall identify the cost of
purchasing from the market within 10 business days of Seller's failure to
deliver.
Force Majeure: Neither party shall be considered to be in default in the
performance of any obligations in this Agreement when a failure of performance
is due to an event of Force Majeure. The term "Force Majeure" means any event
that is beyond the reasonable control of the party affected, including, without
limitation: flood, earthquake, tornado, storm, fire, civil disobedience, labor
disputes, labor or material shortage, sabotage, restraint by court order or
public authority, and the action or failure to act of a governmental authority,
including, without limitation, the failure of the Regional Authorities to
certify the Allowances or transfer the Allowances. No party shall be relieved of
its obligation to perform if such failure is due to causes arising out of its
own negligence or due to removable or remediable causes which it failed to
remove or remedy within a reasonable time period. Either party rendered unable
to fulfill any of its obligations under this Agreement by reason of an event of
Force Majeure shall give prompt written notice of such fact to the other party
and shall exercise due diligence to remove such inability with all reasonable
dispatch.
Assignment: Neither party shall assign this Agreement or its rights
hereunder without the prior written consent of the other party. Upon any
assignment made in compliance with this Section, this Agreement shall inure to
and be binding upon the successors and assigns of the assigning party. Not
withstanding the foregoing, Seller may transfer, pledge or assign this Agreement
to SGC pursuant to the terms of the lease for the Facility and either party may,
without the need for consent from the other party (and without relieving itself
from liability hereunder), (a) transfer, pledge or assign this Agreement as
security for any financing with financial institutions; (b) transfer or assign
this Agreement to an affiliate of such party provided that such assignee has
substantially equivalent financial capability to the assignor; or (c) transfer
or assign this Agreement to any person or entity succeeding to all or
substantially all of the assets of such assignor; provided, however, in the case
of any assignment pursuant to subparagraphs (b) and (c), that any such assignee
shall agree to be bound by the terms and conditions thereof.
Notices: All notices, certificates, or other communications
hereunder shall be in writing. All written notices are deemed sufficiently given
when mailed by United States registered or certified mail, postage prepaid,
return receipt requested ("Mailed"), or hand-delivered, or sent by facsimile
transmission with the original document Mailed to confirm or by recognized
overnight courier service, addressed as follows:
To Buyer:
PG&E Energy Trading - Power, L.P.
Attn: Authorized Emissions Account Representative
7500 Old Georgetown Road, Bethesda, MD 20814
Telephone No.: 301-280-6600
Fax No: 301-280-6601
<PAGE>
To Seller:
Buzzard Power Corporation
c/o Scrubgrass Generating Plant
P.O. Box 39, Kennerdell, PA 16374
Attn: Project Director
Telephone No.: 814-385-6661
Fax No: 814-385-6704
with a copy to:
Scrubgrass Generating Company, L.P.
7500 Old Georgetown Road, 13th Floor
Bethesda, MD, 20814
Attn: General Counsel
Governing Law: THIS AGREEMENT IS GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF PENNSYLVANIA.
Confidentiality: Neither party shall publish, disclose, or otherwise divulge
Confidential Information to any person, at any time during or after the term of
this Agreement. without the other party's prior express written consent:
provided that the terms of this transaction may be disclosed to governmental
agencies with jurisdiction over this matter without prior consent. Each party
may permit knowledge of and access to the Confidential Information only to those
of its affiliates, attorneys. accountants, representatives, agents, lenders,
lessors, board members, officers and employees who have a need to know, For
purposes of this Agreement. "Confidential Information" shall mean non-public,
confidential or proprietary information that is designated by the disclosing
party as confidential. The term "Confidential Information" does not include any
information which (i) at the time of disclosure or thereafter is generally
available to the public (other than as a result of a disclosure by any Party in
violation of this Agreement), (ii) was available to any Party on a non-
confidential basis from a source other than the Party hereto providing the
Confidential Information, provided that such source is not and was not known by
the recipient Party to be bound by a confidentiality agreement that was
applicable to the Confidential Information or (iii) has been independently
acquired or developed by any Party without violating any of its obligations
under this Agreement. In the event that any Party receiving the Confidential
Information becomes legally compelled (by deposition, interrogatory,
request for documents, subpoena, civil investigative demand or similar process)
to disclose any of the Confidential Information, the legally compelled Party
shall give the other Party providing the Confidential Information prompt prior
written notice of such requirement so that the providing Party may seek a
protective order or other appropriate remedy and/or waive compliance with the
terms of this Agreement. In the event that such protective order or other remedy
is not obtained, or that the providing Party waives compliance with the terms
hereof, the Party legally compelled to disclose the Confidential Information
agrees to provide only that limited portion of the Confidential Information that
it is advised by written opinion of counsel is legally required and to exercise
reasonable efforts to obtain assurance that confidential treatment will be
accorded such Confidential Information. The Parties agree that in the event of a
breach of this Confidentiality provision the Party providing the Confidential
Information shall be entitled to equitable relief, including injunction and
specific performance, in addition to all other remedies available at law or
equity.
Please confirm that the terms stated herein accurately reflect the agreement
reached between PGET and Buzzard by returning an executed copy of this
Transaction Letter via facsimile to PGET at (301) 280-6601. Your response should
reflect the appropriate party in your organization who has the authority to
enter into the Transaction.
PG&E ENERGY TRADING - POWER, L.P.
By: PG&E Energy Trading - Power Holdings Corporation, its sole general partner
By: /s/ Sarah M. Barpoulis,
-----------------------------------------------
Sarah M. Barpoulis, Senior Vice President
<PAGE>
ACCEPTED AND AGREED:
BUZZARD POWER CORPORATION
By: /s/ William D. Linehan,
------------------------------------------------
William D. Linehan, Chief Financial Officer
ACKNOWLEDGED AND AGREED TO:
SCRUBGRASS GENERATING COMPANY, L.P
By: /s/ Gary Weidinger
------------------------------------------------
Gary Weidinger, Senior Vice President
<PAGE>
Exhibit 10.97
THE ENVIRONMENTAL POWER CORPORATION MEDICAL EXPENSE REIMBURSEMENT PLAN
PLAN NUMBER 501
From the law office of:
PETER L. KNOX, Esq.
222 Walnut Street
Brookline, Massachusetts
(617) 738-1118
December 18, 1998
<PAGE>
TABLE OF CONTENTS
ARTICLE I DEFINITIONS
-----------
1.01 Code
1.02 Compensation
1.03 Dependent(s)
1.04 Employee
1.05 Employer
1.06 Medical Care
1.07 Medicines and Drugs
1.08 Plan
1.09 Plan Administrator
ARTICLE II ELIGIBILITY
-----------
2.01 Eligibility
2.02 Duration
2.03 Benefits
2.04 Elections
ARTICLE III BENEFITS
--------
3.01 Reimbursement for Medical Expenses
3.02 Health Insurance
ARTICLE IV MISCELLANEOUS
-------------
4.01 Plan Administrator's Powers
4.02 Claim Review Procedure
4.03 Amendment and Termination
4.04 Spendthrift Clause
4.05 Insurance Contracts
4.06 Construct ion
4.07 Multiple Originals
<PAGE>
THE ENVIRONMENTAL POWER CORPORATION MEDICAL EXPENSE REIMBURSEMENT PLAN
PLAN NUMBER 501
ENVIRONMENTAL POWER CORPORATION hereby declares and establishes, effective
September 1, 1998, a flexible benefit plan for the benefit of its employees in
order to permit each participant to have an election to voluntarily reduce his
pay and to have such amounts used to provide benefits hereunder.
This Plan is for the exclusive benefit of the Employees of the Employer and
their beneficiaries and it shall be interpreted and administered in a manner
consistent with the applicable requirements of the Code and ERISA.
ARTICLE I
DEFINITIONS
1.01 "Code" shall mean the Internal Revenue Code of 1986.
1.02 "Compensation" shall mean wages, salaries, tips, bonuses, overtime, and
other employee compensation.
1.03 "Dependent(s)" shall mean a participant's spouse and dependents within the
meaning of Section 152 of the Code. "Spouse" shall mean the person to whom the
participant is legally married, however a participant who is legally separated
from his spouse under a decree of separate maintenance is not considered married
for the purposes of this Plan.
1.04 "Employee" shall mean any person who is carried on the payroll records of
the Employer as employed by the Employer, excluding independent contractors.
1.05 "Employer" shall mean ENVIRONMENTAL POWER CORPORATION, a New Hampshire
corporation, and its successors and assigns.
1.06 "Medical Care" shall mean amounts paid for the diagnosis, cure,
medication, treatment, or prevention of disease, or for the purpose of affecting
any structure or function of the body, or for transportation primarily for and
essential to such Medical Care. Amounts paid for operations or treatments
affecting any portion of the body, including obstetrical expenses
<PAGE>
and expenses of therapy or X-ray treatments, are included in the term Medical
Care, but expenditures for illegal operations or treatments are not. Medical
Care includes: hospital services, nursing services (including nurses' board
where paid by the participant), medical, laboratory, surgical, dental and other
healing services, Medicine and Drugs, artificial teeth or limbs, and ambulance
hire. However, an expenditure which is merely beneficial to the general health
of an individual, such as an expenditure for a vacation, is not an expenditure
for Medical Care. Capital expenditures cannot qualify as Medical Care.
Expenses paid for transportation primarily for and essential to the
rendition of the Medical Care are expenses paid for Medical Care. However, such
expenses shall not include the cost of any meals and lodging while away from
home receiving medical treatment.
The cost of in-patient hospital care (including the cost of meals and
lodging therein) is an expenditure for Medical Care. The extent to which
expenses for care in an institution other than a hospital shall constitute
Medical Care is primarily a question of fact which depends upon the condition of
the individual and the nature of the services he receives (rather than the
nature of the institution). Where an individual is in an institution because
his condition is such that the availability of Medical Care in such institution
is a principal reason for his presence there, and meals and lodging are
furnished as a necessary incident to such care, the entire cost of Medical Care
and meals and lodging at the institution, which are furnished while the
individual requires continual Medical Care, shall constitute an expense for
Medical Care. Where an individual is in an institution, and his condition is
such that the availability of Medical Care in such institution is not a
principal reason for his presence there, only that part of the cost of care in
the institution as is attributable to Medical Care shall be considered as a cost
of Medical Care; meals and lodging at the institution in such a case are not
considered a cost of Medical Care.
However, the term "Medical Care" shall not include any expense that would
not be considered to be medical care within the meaning of Section 213 of the
Internal Revenue Code of 1986.
1.07 "Medicines and Drugs" shall include only items which are legally procured
and which are generally accepted as falling within the category of medicines and
drugs, and which require a prescription.
1.08 "Plan" shall mean THE ENVIRONMENTAL POWER CORPORATION MEDICAL EXPENSE
REIMBURSEMENT PLAN as set forth herein, together with any and all amendments
hereto.
1.09 "Plan Administrator" shall mean ENVIRONMENTAL POWER CORPORATION.
<PAGE>
ARTICLE II
ELIGIBILITY
2.01 ELIGIBILITY
Each Employee who works an average of twenty (20) or more hours per week
shall become a Participant after thirty (30) calendar days of employment.
2.02 DURATION
Participation shall cease when the Employee: ceases to be carried on the
Employer's payroll records as an Employee; is accused of dishonestly submitting
claims; must include the fringe benefits provided hereunder in his gross income,
but only if the Plan Administrator, in his unfettered discretion, directs that
participation shall cease; fails to promptly, completely, and accurately comply
with any requests for documents or information that the Plan Administrator feels
are necessary for the proper operation of the Plan or for proper compliance with
government reporting and disclosure rules; or is an officer of the Employer, a
five percent (5%) or more shareholder of the Employer or a Dependent of such a
person, or highly compensated Employee of the Employer, and the Plan
Administrator determines that such Employee must cease participating in the Plan
in order to preserve the income tax exclusions under the Plan for such other
Employees. The Plan Administrator, in his unfettered discretion, shall choose
one or more such Employees to be removed from participation or to have his
election reduced.
2.03 BENEFITS
Each participant shall have an election to have his Compensation for a
calendar year either paid to him as Compensation or, in lieu thereof, be
eligible to receive an equal amount of benefits otherwise available hereunder.
Unless a different limit is specifically set forth for a benefit, the maximum
salary reduction permitted shall be 100% of compensation.
Any benefits not used by the end of the calendar year or the termination of
participation shall be forfeited. A reimbursable expense incurred by the end of
such period is deemed to be used even though a claim for reimbursement is not
made until a later period.
If the Plan Administrator determines that a participant must include in his
gross income some or all of the fringe benefits provided hereunder, then the
Plan Administrator, in his unfettered discretion, may restrict the amount of
benefits which are otherwise electable so as to prevent such inclusion.
<PAGE>
2.04 ELECTIONS
Elections may be made or changed only for the following reasons and only
during the following periods:
(a) For any reason before the beginning of the next calendar year effective
for the that calendar year.
(b) For any reason until thirty (30) days after the participant's date of
participation.
(c) On account of and consistent with and until thirty (30) days after a
change in family status such as:
(1) Change in marital status, including marriage, annulment,
separation, or divorce of the Participant, or the death of a spouse.
(2) Change in the number of Dependents.
(3) Change in employment status, including termination or commencement
of his employment or that of his spouse or dependent.
(4) Change in hours of employment by the Participant or his spouse or
Dependent, including the taking of an unpaid leave of absence by the Participant
or his spouse or Dependent.
(5) Change in residence or worksite of the Participant or his spouse or
Dependent.
(6) Change in eligibility of a Dependent under the Participant's
accident or health plan.
(7) Certain judicial decrees or orders consistent with Reg. Sl.125-
4T(d).
(8) Eligibility of the Participant or his spouse or Dependent for
Medicare or Medicaid consistent with Reg. Sl.125-4T(e).
(d) On account of a separation from the service of the Employer the
Participant may revoke any elections and terminate receipt of any benefits for
the duration of the coverage period, but he shall not be eligible to elect new
benefits during the remainder of that coverage period.
(e) For any reason until thirty (30) days after the later of date of the
Plan or the date the Plan was signed.
(f) On account of a change in the cost of a health care plan provided by an
independent, third-party provider. If this happens then Participants will have
their salary reductions automatically and correspondingly changed, however if
the change is a significant increase in health care costs, then the Participant
will have an election to either make the corresponding change in salary
reduction, or elect different coverage for the remainder of the coverage period.
(g) On account of a significant curtailment of coverage under a health care
plan provided by an independent, third-party provider. If this happens, then
Participants will have an opportunity to revoke their elections and to elect
similar coverage under another plan.
(h) On account of the Participant's failure to make any required premium
payments, but he shall not be eligible to
<PAGE>
elect new benefits during the remainder of that coverage period.
To the extent that non-cash benefits are not affirmatively elected, the
participant shall be deemed to have elected cash. Elections or changes in
elections will only be effective after the election period closes.
<PAGE>
ARTICLE III
BENEFITS
3.01 REIMBURSEMENT FOR MEDICAL EXPENSES
The Employer shall reimburse each participant who elects to have (up to a
maximum of $5,000) benefits provided to him under the medical expense
reimbursement plan for expenses incurred by him for Medical Care of the
participant and his Dependents, except as otherwise provided herein.
The maximum reimbursement paid to any participant for Medical Care
expenses incurred in any calendar year, even though claimed or reimbursed during
a different calendar year, shall be the amount of benefits elected by the
participant to be received under the medical expense reimbursement plan.
Reimbursement will be made only for expenses incurred while a participant in
this Plan. A participant does not incur an expense for Medical Care for someone
other than himself unless that person was his Dependent at the time the Medical
Care expense was incurred. A claim may be denied unless it is substantiated by
actual proof of payment submitted in a manner and form satisfactory to the Plan
Administrator. A claim not made by the end of the calendar year following the
calendar year during which the participant incurred the expense may be denied as
untimely, unless the Plan Administrator, in his unfettered discretion, finds
that there was reasonable cause for the delay in filing the claim. Reimbursement
will not be made for any expenses which are paid or reimbursed under any other
self-insured or insured plan of the Employer, or another employer, or for any
benefits paid under Medicare or other Federal or State law.
Reimbursements need not be made sooner than the end of each quarter of the
calendar year and, to the extent year-to-date reimbursements exceed one-fourth
(1/4) of the annual benefits elected multiplied by the number of quarters that
have elapsed during that calendar year, may be delayed. Benefit reimbursements
that are so delayed will, in all events, be reimbursed by the end of the
calendar year following the calendar year during which the participant submitted
the expense.
Reimbursements will be paid by the Employer as needed solely from its
general assets.
In consideration of the receipt of any medical expense reimbursement
hereunder, the recipient agrees to subrogate the Plan or the Employer to any
right or rights he may have of recovery against any person or thing for any loss
which occasioned any reimbursement by the Employer.
<PAGE>
3.02 HEALTH INSURANCE
The Employer shall pay health and dental insurance premiums in any
calendar year under such policy or policies as it may from time to time select
in an amount elected by a participant to be received under the health insurance
plan.
Premiums will be paid by the Employer as needed solely from its general
assets.
Any refund of premiums shall inure to the benefit of the Employer and
shall not be credited nor returned to the participant.
<PAGE>
ARTICLE IV
MISCELLANEOUS
4.01 PLAN ADMINISTRATOR'S POWERS
The Plan Administrator shall administer the Plan in accordance with its
terms and shall have all powers necessary to carry out the provisions of the
Plan, including the power to determine all questions relating to the eligibility
of employees to participate in the Plan; to compute and certify the amount and
kind of benefits to which any participant shall be entitled; to maintain all
necessary records for the administration of the Plan; to interpret the
provisions of the Plan and to make and publish such rules for the regulation of
the Plan as are not inconsistent with its terms; to advise, counsel and assist
any participant regarding any rights, benefits, or elections available under the
Plan; to prepare and file all annual disclosure reports and forms as may be
required from time to time; to furnish to each participant and beneficiary such
information and reports as may be required by law or by the Plan provisions; to
request such variances, deferrals, extensions, exemptions, or to make such other
elections for the Plan as may be available under the law; to appoint or employ
agents, including legal counsel, to assist in the administration of the Plan;
and to establish and implement a procedure for allocating or delegating the Plan
Administrator's fiduciary responsibilities among named fiduciaries or to persons
other than named fiduciaries. The Plan Administrator's determination on all
questions and controversies regarding the operation and interpretation of the
Plan shall be binding and conclusive upon all parties.
4.02 CLAIM REVIEW PROCEDURE
(a) Any claim for benefits shall be made in writing to the Plan
Administrator, who shall make all determinations as to the right of any person
to a benefit under the Plan.
<PAGE>
(b) If a claim is wholly or partially denied the Plan Administrator shall
give the claimant written notice of the denial setting forth in a manner
calculated to be understood by the claimant the specific reason(s) for the
denial, specific reference to the pertinent Plan provisions on which the denial
is based, a description of any additional material or information necessary for
the claimant to perfect the claim and an explanation of why such material is
necessary, and appropriate information as to the steps to be taken to submit the
claim for review, if desired. Such notice of denial shall be given within a
reasonable period of time after receipt of the claim. Generally ninety (90)
days will not be unreasonable, however, if special circumstances require an
additional ninety (90) days, the Plan Administrator shall give the claimant
written notice of this extension prior to the extension. The extension notice
shall indicate the special circumstances necessitating the extension and the
date by which a final decision is expected. If written notice of the denial is
not given to the claimant in accordance with this subsection, then the claim
shall be deemed denied.
(c) If a claim is denied, the claimant or his duly authorized
representative shall have a reasonable opportunity to appeal and to receive a
full and fair review of the claim and its denial. The claimant or his duly
authorized representative may request, upon written application, a review of his
claim, may review pertinent documents, and may submit issues and comments in
writing. A request for review must be received by the Plan Administrator within
sixty (60) days after receipt by the claimant of notice of denial.
(d) A decision upon review shall be rendered in writing within sixty (60)
days after receipt of the request for review, unless special circumstances
require an extension of sixty (60) days, which notice of extension shall be
given prior to the extension. The decision upon review shall be in writing and
<PAGE>
include specific reasons for the decision written in a manner calculated to be
understood by the claimant, and shall include specific references to the
pertinent Plan provisions on which the decision is based. If a decision on
review is not furnished within the time provided in this subsection, it shall be
deemed denied.
4.03 AMENDMENT and TERMINATION
Although the Employer established this Plan with the intention of
maintaining it for an indefinite period of time, the Employer reserves the right
at any time and from time to time to amend the Plan to any extent and in any
manner that it may deem advisable and/or to terminate or partially terminate the
Plan at any time and/or to discontinue its contributions hereunder at any time,
and all participants and other persons claiming any interest hereunder shall be
bound thereby.
4.04 SPENDTHRIFT CLAUSE
Benefits provided under the Plan may not be anticipated, assigned (either
at law or in equity), alienated or subject to attachment, garnishment, levy,
execution, or other legal or equitable process.
4.05 INSURANCE CONTRACTS
Neither the Employer nor the Plan Administrator shall have any
responsibility for the validity, sufficiency, or effect of any policy or
contract issued by any insurance company or for the act of any person or persons
which may render such policy or contract null or void, or for the failure of any
such insurance company to pay the proceeds and profits of any such policy or
contract as and when the same shall become due and payable, or for any delay
occasioned by reason of any restriction or provision contained in any such
policy or contract.
<PAGE>
4.06 CONSTRUCTION
(a) The table of contents and the headings in this instrument are inserted
merely for convenience of reference and shall not control or affect the meaning,
construction, or effect of this Plan. Whenever any words herein are used in the
masculine, feminine, or neuter gender they shall be construed as though they
were also used in all other applicable genders, whenever that would be
appropriate, and whenever any words herein are used in the singular or plural
form they shall be construed as though they were also used in the opposite form
whenever that would be appropriate.
(b) The adoption and maintenance of the Plan is not an employment contract
between the Employer and any employee and nothing contained herein shall be
deemed to give any employee the right to be retained in the employ of the
Employer or to interfere with the right of the Employer to discharge any
employee at any time, nor shall it be deemed to give the Employer the right to
require any employee to remain in its employ, nor shall it interfere with the
employees' right to terminate his employment at any time. All benefits payable
under the Plan shall be paid or provided for solely from the general assets of
the Employer.
(c) In the event any term, condition, right, power, privilege, or other
provision of this Plan is adjudicated invalid by a court of competent
jurisdiction, the remaining provisions of this Plan shall not be affected in any
way by reason of such adjudication.
(d) The numbered sections are divided into SUBSECTIONS designated (a),
(b), (c), etc. The subsections are further divided into PARAGRAPHS designated
(1), (2), (3), etc. The paragraphs are further subdivided into SUBPARAGRAPHS
designated (A), (B), (C), etc. The subparagraphs may yet be further subdivided
into CLAUSES designated (i), (ii), (iii), etc.
(e) This Plan shall be construed and enforced according to the laws of New
Hampshire, to the extent not pre-empted by ERISA.
<PAGE>
4.07 MULTIPLE ORIGINALS
This instrument may be executed in any number of counterparts, each of
which, when duly executed, shall constitute an original.
IN WITNESS WHEREOF, the Employer has caused this agreement to be executed
and the seal of the Employer to be hereunder affixed on December 18, 1998.
ENVIRONMENTAL POWER CORPORATION
By: /s/ William D. Linehan
------------------------
WILLIAM D. LINEHAN, Corporate Officer
<PAGE>
Exhibit 10.98
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REGIONAL PROTOTYPE
STANDARDIZED
NON-INTEGRATED DEFINED BENEFIT PLAN
ADOPTION AGREEMENT #03-002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Sponsored by
COLEMAN CONSULTING CORPORATION
Adopted by
ENVIRONMENTAL POWER CORPORATION
12/23/98
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<PAGE>
Regional Prototype Standardized
Non-Integrated Defined Benefit Plan Adoption Agreement #03-002
Table of Contents
I. Basic Information Page-1
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I.A. Plan Information ......................................... Page-1
I.B. Information Relating to Plan Officials .................... Page-2
II. Plan Definitions Page-4
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II.A. Compensation ............................................ Page-4
II.B. Service Definitions ..................................... Page-5
II.C. Retirement ........................................ Page-7
II.D. Actuarial Assumptions ................................... Page-8
III. Operative Plan Provisions Page-8
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III.A. Eligibility ............................................ Page-8
III.B. Normal Retirement Benefit................................ Page-10
III.C. Early/Late Retirement, Disability and Death Benefits..... Page-13
III.D. Maintenance of Other Plans............................... Page-14
III.E. Vesting Provisions ..................................... Page-15
III.F. Benefits may be paid in the following forms.............. Page-16
III.G. Life Insurance ..................................... Page-17
III.H. Timing of Distributions ................................ Page-18
IV. Miscellaneous Provisions Page-20
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IV.A. Transfers (and rollovers) from Qualified Plans:........... Page-20
IV.B. Life Expectancies for Minimum Distributions............... Page-20
IV.C. Loans to Participants ................................... Page-20
IV.D. Special Option for Lump Sum Distributions ...... . ....... Page-21
IV.E. Treatment of Excess Assets Upon Plan Termination ......... Page-21
IV.F. Reserved ................................................ Page-22
IV.G. Controlling State Law ................................... Page-22
V. Adoption Page-22
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<PAGE>
REGIONAL PROTOTYPE STANDARDIZED
NON-INTEGRATED DEFINED BENEFIT PLAN
ADOPTION AGREEMENT #03-002
The Employer referred to in Section I.B hereof, hereby adopts this Plan and
Trust, a copy of which is attached hereto, as of the Effective Date specified
herein, to provide retirement and pre-retirement benefits for its Employees.
Note to Employer: Failure to complete the Adoption Agreement properly may
result in disqualification of the plan.
I. Basic Information
I. A. Plan Information
1. This Plan shall be known as the ENVIRONMENTAL POWER CORPORATION
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RETIREMENT PLAN.
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2. This Trust shall be known as the ENVIRONMENTAL POWER CORPORATION
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RETIREMENT TRUST.
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3. This Plan is:
[x] a. A newly adopted Plan effective as of January 1, 1998.
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[ ] b. An Amendment and restatement of a previously qualified Plan
which was originally effective _________________________________.
Except as specifically provided in the Plan, the Effective Date of
this restatement is __________________________________________.
(For TRA '86 amendments, enter the first day of the first Plan
Year beginning in 1989.)
4. The Plan number shall be 001.
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5. The Plan Year shall be:
[x] a. the 12 consecutive month period ending on each December 31.
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[ ] b. initially the period commencing on __________________________
and ending on ______________________, and thereafter the
12 consecutive month period ending on each _________________.
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I. A. Plan Information Page 1
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Standardized Non-Integrated Defined Benefit Plan #03-002
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I. B. Information Relating to Plan Officials
1. The name of the Employer is ENVIRONMENTAL POWER CORPORATION.
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a. Address 500 MARKET STREET SUITE 1E
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PORTSMOUTH, NH 03801-
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b. Telephone No. (603)431-1780
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c. Business Code No. 8999
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d. Date Business Started November 26, 1982
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e. Type of Entity: [x] Corporation [ ] Partnership
[ ] Sole Proprietorship [ ] S Corporation
[ ] Other
2. The following additional Employers adopt the Plan as Participating
Employers:
a.
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b.
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c.
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d.
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e.
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f.
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g.
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h.
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i.
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j.
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3. Employer is a member of:
[ ] Controlled Group [ ] Affiliated Service Group [x] Not Applicable
4. Employer's Fiscal Year is 12 consecutive months ending: December 31.
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month & day
5. Employer's I.D. No.: 04-2782065.
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I. B. Information Relating to Plan Officials Page 2
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Standardized Non-Integrated Defined Benefit Plan #03-002
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6. The Employer hereby designates the following Trustee(s):
a. JOSEPH E CRESCI
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b. DONALD A LIVINGSTON
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c.
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d.
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e.
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f.
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g.
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h.
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i.
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j.
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7. The Employer hereby designates the following as Plan Administrator:
[x] a. Employer
[ ] b. Name:
(If not completed, the Employer shall be designated.)
Address: 500 MARKET STREET SUITE 1E
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PORTSMOUTH, NH 03801-
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Telephone No.: (603) 431-1780
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8. The Employer hereby designates the following as the Retirement
Committee, to act on behalf of the Plan Administrator (leave blank
if no Retirement Committee is appointed):
a.
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b.
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c.
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d.
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e.
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I. B. Information Relating to Plan Officials Page 3
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Standardized Non-Integrated Defined Benefit Plan #03-002
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II. Plan Definitions
II. A. Compensation
1. Compensation additions and exclusions:
a. Compensation which is not includable in the gross income of the
Participant under Sections 125, 402(a)(8), 402(h) or 403(b) of
the Code
[x] i. shall be included.
[ ] ii. shall NOT be included.
b. As this is a standardized Plan, no items (such as bonuses,
overtime or commissions) may be excluded from Compensation.
2. Compensation shall mean all of each Participant's wages as defined in
Section 7.4(c) of the Plan:
a. [ ] i. Section 3121(a) wages.
[ ] ii. Section 3401(a) wages.
[x] iii. 415 Safe-Harbor Compensation.
which is actually paid to the Participant during the following
compensation period:
b. [ ] i. The Plan Year.
[x] ii. The Employer's fiscal year ending with or within the Plan
Year.
[ ] iii. The Limitation year ending with or within the Plan Year.
[ ] iv. The Calendar Year ending with or within the Plan Year.
3. For plan purposes, maximum Annual Compensation shall be:
[ ] a. $ ___________(not to exceed maximum allowed under Code
Section 401(a)(17), i.e. $200,000 in 1989 and adjusted by
the Secretary of the Treasury for cost of living increases).
[x] b. Maximum allowed under Section 401(a)(17).
4. Average Annual Compensation.
Average Annual Compensation shall be averaged over:
[ ] a. __________ (not less than 3) consecutive compensation periods
as selected in II.A.2.b. which produce the highest average
within the last 10 years of service.
[x] b. 3.00 (not less than 3) highest consecutive compensation
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periods as selected in II.A.2.b.
[ ] c. Not Applicable. Benefit formula is Unit Credit Career
Average.
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I. A. Compensation Page 4
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Standardized Non-Integrated Defined Benefit Plan #03-002
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5. Annualization (Optional).
If a Participant works less than a full twelve month period, his
Compensation for the partial year may be annualized for benefit
accrual purposes. If Compensation is annualized, the method of
annualization will be to multiply the actual Compensation
for the twelve month period by the ratio of:
[ ] a. maximum hours of Credited Service necessary to earn a full
year of Credited Service over the Participant's actual
Hours of Credited Service.
[ ] b. total working days in the twelve month period over the
Participant's actual day worked.
[ ] c. 52 over the number of weeks in which any Hours of Credited
Service were completed by the Participant.
[ ] d. 12 over the number of months in which any Hours of Credited
Service were completed by the Participant.
II. B. Service Definitions
1. The Limitation Year of the Plan shall be:
[x] a. Plan Year
[ ] b.
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2. The Computation Period for vesting and Breaks-in-Service shall be:
[x] a. Plan Year
[ ] b.
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(If no period is specified in either of the above two
options, the Plan Year shall be selected).
3. If this option is selected then Section 2.23 of the Plan is
applied so that the Computation Period for eligibility purposes shall
be successive anniversaries of the Employee's Employment Commencement
Date.
[x] This option is selected.
4. The Employer elects pursuant to Section 2.45(g) of the Plan to count
Hours of Service based on the following:
[x] a. Actual hours of employment.
[ ] b. Forty-five (45) hours for weekly pay period.
[ ] c. Ninety (90) hours for each biweekly pay period.
[ ] d. One hundred ninety (190) hours for each monthly pay period.
[ ] e. On the basis of the elapsed time method. For vesting purposes
where partial years are included, a full year credit will
be given for:
[ ] i. weeks of elapsed time.
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II. B. Service Definitions Page 5
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Standardized Non-Integrated Defined Benefit Plan #03-002
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[ ] ii. months of service.
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[ ] iii. not applicable.
(If no option is selected actual hours of employment shall be
counted.)
5. The Anniversary Date shall be: December 31
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(If not specified, the Anniversary Date shall be the first day of
Plan Year.)
6. Service for vesting and eligibility purposes with the following
predecessor Employers shall be:
[ ] a. Excluded.
[ ] b. Included from (fill in date)
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[ ] c. Included for such years a qualified retirement plan was
maintained by such from (fill in date)
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Name of predecessor employer(s):
(i)
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(ii)
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(iii)
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7. Definition of Year of Credited Service for Accrual of Benefits
a. For purposes of computing a Participant's Accrued benefits, choose
one of the following provisions:
[ ] i. Full Year Accrual - Each Participant who completes either
more than (not more than 500) Hours of Service during the
Plan Year or is employed on the last day of the Plan Year
shall be credited with a full Year of Service for Accrued
Benefit purposes.
[x] ii. Partial Year Accrual - Each Participant who completes 1000
----
(not greater than 2,000) Hours of Service during the Plan
Year shall be credited with a full Year of Service for
Accrued Benefit purposes (Required Hours).
If the Participant either completes more than 500 Hours of
Service during the Plan Year or is employed on the last day
of the Plan Year but has less than the hours required for a
full year of credit specified above, each Participant shall
receive an accrual for such year which bears the same ratio
to a full accrual for such year as the number of hours the
Participant actually completes bears to the required hours
for full accrual.
If the Participant completes less than 501 Hours of Service
during the Plan Year and is not employed on the last day of
the Plan Year he shall not receive any accrual for the Plan
Year.
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II. B. Service Definitions Page 6
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Standardized Non-Integrated Defined Benefit Plan #03-002
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b. Accrual of Benefits for Plan Years prior to 1990. (Optional)
If a Participant completes less than (not more than
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1,000) Hours of Service for a Plan Year beginning before
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(not later than the first day of the Plan Year beginning in
1990) or such later date as allowed by the IRS, he shall not
receive any accrual for that Plan Year.
II. C. Retirement
1. The Normal Retirement Age shall be:
[ ] a. Age ________ (not to exceed age 65).
[x] b. The later of age 62 (not to exceed 65) or the 5th
-- ------
anniversary of the participation commencement date. Except as
specified in Section 2.55 of the Plan, the Normal Retirement
Age shall not be later than the later of Age 65 or the fifth
(5th) anniversary of the participation commencement date.
The participation commencement date is the first day of the
first Plan Year in which the Participant commenced
participation in the plan.
2. The Early Retirement Date shall be:
[ ] a. _____ Years prior to Normal Retirement Date, but not prior to
the Participant's original Entry Date.
[ ] b. The later of: Age ______; or the completion of:
[ ] Years of Service;
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[ ] Years of Participation.
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[ ] c. Age .
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[x] d. There shall be no Early Retirement Date.
3. Normal Retirement Date Rounding. A Participant shall become eligible
to receive his normal retirement benefits on the:
[x] a. FIRST DAY OF THE MONTH FOLLOWING the attainment of his Normal
Retirement Age.
[ ] b. EXACT DATE the Participant actually attains his Normal
Retirement Age (e.g. his 65th birthday or exactly 5 years
from his initial plan participation).
[ ] c. FIRST DAY OF THE MONTH COINCIDENT WITH OR FOLLOWING the
attainment of his Normal Retirement Age.
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II. C. Retirement Page 7
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Standardized Non-Integrated Defined Benefit Plan #03-002
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II. D. Actuarial Assumptions
1. Actuarial Equivalencies
For determining benefits payable in a form other than the
Normal Form:
a. Interest Rate per Year
i. Pre-Retirement: 6.00%
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ii. Post Retirement: 5.50%
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b. Mortality Table
i. Post Retirement: 1983 IAM
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ii. Pre Retirement:
[x] (a) None
[ ] (b) Same as Post Retirement
[ ] (c)
2. Top Heavy
For determining present value of benefits for Top Heavy purposes:
a. Interest Rate per Year
i. Pre-Retirement: 6.00%
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ii. Post Retirement: 5.50%
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b. Mortality Table
i. Post Retirement: 1983 IAM
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ii. Pre Retirement:
[x] (a) None
[ ] (b) Same as Post Retirement
[ ] (c)
III. Operative Plan Provisions
III. A. Eligibility
1. Classes of Employees eligible to participate shall be all Employees
of an Affiliated Employer with the following exclusions:
[ ] a. Employees whose employment is covered by a collective
bargaining agreement between the Employer and Employee
representatives for which retirement benefits have been the
subject of good faith bargaining and if two (2) percent or
less of the Employees of the Employer who are covered pursuant
to that agreement
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II. D. Actuarial Assumptions Page 8
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Standardized Non-Integrated Defined Benefit Plan #03-002
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are professionals as defined in Section 1.401(b)-9(g) of the
regulations. For this purpose, the term "Employee
representatives" does not include any organization more than
half of whose members are Employees who are owners, officers
or executives of the Employer.
[ ] b. Non-Resident Aliens with no United States Income.
2. Employees shall be eligible to participate after attaining the
following age:
[x] a. 21 (Not to exceed Age 21)
[ ] b. No minimum age requirement.
3. Service Requirements shall be:
[x] a. Completion of 1 Year(s) of Service not to exceed two
-
(2) years.
[ ] b. Completion of months of employment, not to exceed
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twenty-four (24) months, regardless of number of hours
worked and computed from the Employee's Employment
Commencement Date.
Note: 1. If more than one (1) Year of Service or 12
consecutive months of employment is required, 100%
immediate vesting is required.
Note: 2. If the year(s) of service selected is or includes a
fractional year, an employee will not be required to
complete any specified number of hours of service to
receive credit for such fractional year.
4. Entry Date(s) shall be:
[x] a. SINGLE ENTRY FOLLOWING. The first day of the Plan Year
following satisfaction of the requirements of Section III.A
hereof (use only with six month service requirement and
minimum age requirement cannot exceed 20-1/2).
[ ] b. SINGLE ENTRY NEAREST. The first day of the Plan Year nearest
satisfaction of the requirements of III.A hereof.
[ ] c. SINGLE ENTRY RETROACTIVE. The first day of the Plan Year
coincident with or preceding the date on which an Employee
satisfies the requirements of Section III.A. hereof.
[ ] d. DUAL ENTRY. The earlier of the first day of the Plan Year and
the six (6) month anniversary thereof following the date on
which an Employee satisfies the requirements of Section III.A.
hereof.
[ ] e. MONTHLY ENTRY. The first day of the Plan Year and each
calendar month following the date on which an Employee
satisfies the requirements of Section III.A. hereof.
[ ] f. QUARTERLY ENTRY. The first day of the Plan Year and the
quarterly anniversaries thereof following the date on which an
Employee satisfies the requirements of Section III.A. hereof.
NOTE: Satisfaction of the requirements of Section III.A. above means
having completed the actual number of years or months of service
specified in Section III.A.3 in addition to all other
requirements of Section III.A.
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III. A. Eligibility Page 9
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Standardized Non-Integrated Defined Benefit Plan #03-002
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5. Special Entry Rule (omit if inapplicable) - all persons who are:
[x] a. Employees on JANUARY 1,1998 shall commence participation
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hereunder on January 1, 1998
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[ ] b. Participants in the Plan
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on shall commence participation hereunder on .
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(This provision will not be used to exclude Employee otherwise
eligible to participate.)
III. B. Normal Retirement Benefit
1. Normal Form of Pension
The normal retirement benefit of a Participant shall be payable on a
monthly basis as a:
[x] 1. life annuity only
[ ] 2. life annuity with ________ (not more than 10) years certain
[ ] 3. life and __________% (not less than 50 nor more than 100)
survivor annuity
2. Normal Retirement Benefit Formulae
Each Participant will receive at normal retirement an annual
benefit of:
UNIT CREDIT WITH 133-1/3 ACCRUAL METHOD
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[ ] a. Unit Credit Dollar Amount
$ _________ for each Year of Credited Service.
[ ] b. Unit Credit Percent of Pay
________ % of Average Annual Compensation for each Year of
Credited Service.
[ ] c. Unit Credit Career Average
________ % of actual Annual Compensation for each Year of
Credited Service.
[ ] d. Step Rate Unit Credit Percent of Pay
________ % of Average Annual Compensation for each of the
first _____ Years of Credited Service and ______ % of the
next ____ Years of Credited Service.
FLAT BENEFIT WITH FRACTIONAL ACCRUAL
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[x] e. Flat Benefit; 55.0000% of Average Annual Compensation.
The benefit will be reduced on a pro-rated basis if the
Participant at his Normal Retirement Date has less than
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III. B. Normal Retirement Benefit Page 10
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Standardized Non-Integrated Defined Benefit Plan #03-002
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[x] i. 20 Years of Credited Service.
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[ ] ii. No reduction Applies.
NOTE: A Participant's Accrued Benefit at any time equals the
product of the Normal Retirement Benefit multiplied by a
fraction, the numerator of which is the number of years of
Credited Service at such time, and the denominator of which
is the greater of 25 or the number of years of Credited
Service the Participant would have at Normal Retirement Age.
When determining the Accrued Benefit, the Normal Retirement
Benefit is the annual benefit to which the Participant will
be entitled if he or she continued to earn annually until
Normal Retirement Age the same rate of Compensation upon
which his or her Normal Retirement Benefit would be
computed. This rate of Compensation is computed on the basis
of Compensation taken into account under the Plan (but not to
exceed the ten years of service immediately preceding the
determination).
3. Years of Credited Service
a. For calculating the Normal Retirement Benefit (NRB), Accrued
Benefit (AB), and the Accrual Fraction (AF) (if applicable), Years
of Credited Service shall be based on:
NRB AB AF
[x] [ ] [ ] i. Years of Service from employment date or
[ ] [x] [x] ii. Years of Service as a Plan Participant.
b. In calculating Years of Credited Service with respect to past
service credit, service prior to November 26, 1982 shall be
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excluded. (Must be a date not earlier than 5 years before the
later of the Effective Date or the Restatement date).
Note: If this Plan initially or upon Plan amendment credits or
increases benefits for service prior to the current year, the
period for which such credit or increase is granted shall be
limited to the 5 years preceding the current year. Such credit or
increase must be granted on a uniform basis to all current
Employees under the Plan.
c. For Unit Credit Plans, the maximum years of Credited Service that
may be taken into account shall be:
[ ] i. _______ Years
[ ] ii. No limit on Years of Credited Service.
4. This section is applicable only if the benefit formula selected is
the Flat Benefit with Fractional Accrual Method.
In calculating the Accrued Benefit at any point in time, the
Section 415 limits shall be applied:
[x] a. before
[ ] b. after multiplying the Flat Benefit by the accrual fraction.
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III. B. Normal Retirement Benefit Page 11
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Standardized Non-Integrated Defined Benefit Plan #03-002
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5. Limitations on Normal Retirement Benefit
a. Minimum Dollar Limit.
The minimum monthly benefit at normal retirement age shall be:
[ ] i. $ ____________.
[x] ii. No minimum.
b. Maximum Dollar Limit.
The maximum monthly benefit at Normal Retirement Age shall be:
[ ] i. $ ____________ x per month.
[x] ii. Not applicable. (Only Section 415 limits apply.)
c. Minimum Benefit under Top Heavy Plan.
Pursuant to Article IX of the Plan, Key Employees shall be:
[ ] i. excluded from the Top Heavy minimum.
[x] ii. included for the Top Heavy minimum.
d. Cost of Living Increases
[ ] If checked, benefits payable upon retirement (normal or
late) shall be increased each year in proportion to the
Consumer Price Index for all Urban Consumers, but in any
event, not to exceed:
[ ] a._______ % per year
[ ] b. annual Section 415(d) increases announced by the
Internal Revenue Service.
6. Transitional Rules
(This section must be completed if this is a restatement of a
prior integrated plan which is in existence before January 1,
1989.)
The following transitional rule shall apply to all Participants
who have accrued a benefit under the Plan as of the close of the
Plan Year beginning before ______________ (Freeze Date), and who
have at least one Hour of Service in a Plan Year beginning after
the Freeze Date:
Note: The Freeze Date must be December 31, 1988 for Integrated
Plans in existence on or before December 31, 1988.
Each Participant's Accrued Benefit under the Plan shall be equal
to the sum of:
(1) The Participant's Accrued Benefit determined under the
Plan as of the close of the last Plan Year beginning before
one day after the Freeze Date, as if the Participant
terminated employment with the Employer (Frozen Accrued
Benefit), and
(2) The Participant's Accrued Benefit with respect to Years of
Credited Service for Plan Years beginning after the Freeze
Date, determined in accordance with the provisions of this
Plan, as amended effective for the Plan Years beginning on
or after one day before the Freeze Date, except that
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III. B. Normal Retirement Benefit Page 12
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Standardized Non-Integrated Defined Benefit Plan #03-002
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the number of Years of Credited Service taken into account
under the Plan if this is a unit credit plan, or the factor
of 35 in the maximum excess (or offset) allowance, if this
is a flat benefit plan, shall be limited to 35 minus the
number of Years of Credited Service completed by the
Participant as of the close of the Plan Year beginning
before one day after the Freeze Date.
7. Restatements for TRA 86 Compliance of Plans pending termination.
If this option is selected, the accrual of benefits under this
Plan shall cease as of ____________; except that any required
minimum benefit under the Top Heavy provisions shall not cease
until the date the Plan is terminated.
[ ] This option is selected.
III. C. Early/Late Retirement, Disability and Death Benefits
1. EARLY RETIREMENT BENEFITS payable upon Early Retirement shall be
equal to the:
[ ] a. Present Value of Accrued Benefits.
[ ] b. Accrued Benefit reduced as follows: for the first five (5)
years that the Early Retirement Date precedes the Normal
Retirement Date, 1/15 for each year of service and then 1/30
for each of the next five (5) years and reduced actuarially
thereafter.
[ ] c. Accrued Benefit reduced by 1/2 of 1% for each month Early
Retirement Date precedes the Normal Retirement Date.
[ ] d. Accrued Benefit reduced as follows: for the first three (3)
years that the Early Retirement Date precedes the Normal
Retirement Date, 1/13 for each year of service and then 1/26
for each of the next five (5) years and reduced actuarially
thereafter.
[ ] e. Accrued Benefit actuarially reduced.
[x] f. No Early Retirement Benefits under the plan.
2. LATE RETIREMENT BENEFITS shall be equal to:
[ ] a. The greater of-
i. Accrued Benefits taking into account service and
compensation after Normal Retirement Date, and
ii. the actuarial equivalent of the benefit the Participant
would have been entitled at Normal Retirement date.
[ ] b. Benefit Payments, including any allowable lump sum
benefits, begin at Normal Retirement Date with increases
granted as additional benefits are accrued.
[x] c. The present value of the Accrued Benefit of the Participant
shall be segregated in a Segregated 414(k) Account in
accordance with Section 16.18 of the Plan.
[ ] d. Option a.,b. or c. above at the Participant's election.
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III. C. Early/Late Retirement, Disability and Death Benefits Page 13
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Standardized Non-Integrated Defined Benefit Plan #03-002
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3. DISABILITY BENEFITS shall be equal to the:
[x] a. Present Value of Accrued Benefits.
[ ] b. Early Retirement Benefits without regard to the age and
service requirements.
[ ] c. No Disability Benefits under the Plan. Disabled
Participants' benefits are the same as terminated
Participants' benefits.
4. PRE-RETIREMENT DEATH BENEFITS shall be equal to:
[ ] a. None, except for the Qualified Pre-Retirement Survivor's
Annuity.
[x] b. Present Value of Accrued Benefits.
[ ] c. Insured Death Benefit Options: (Applicable to insured Plans
only.)
[ ] i. Present Value of Accrued Benefits or insurance face
amount, whichever is greater.
[ ] ii. Present Value of Accrued Benefits plus the insurance
face amount net of insurance cash value, but in no
event less than the insurance face amount.
III. D. Maintenance of Other Plans.
(If you maintain or ever maintained another qualified Plan in which
any Participant in this Plan is (or was) a Participant or could become
a Participant, the Employer must complete this section. The Employer
must also complete this section if it maintains a welfare benefit
fund, as defined in Section 419(e) of the Code, or an individual
medical account, as defined in Section 415(l)(2) of the Code, under
which amounts are treated as Annual Additions with respect to any
Participant in the Plan).
1. The following shall apply with respect to Code Section 415 and
shall supercede any contrary provisions of the Plan or this
Adoption Agreement:
[ ] a. The rate of accrual in this Defined Benefit Plan shall be
reduced to the extent necessary to prevent violation of
Code Section 415.
[ ] b. Benefits under such other Defined Benefit Plan shall be
restricted to the extent necessary to prevent a violation
of Code Section 415.
[ ] c. The following language shall apply:
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2. In the event the Employer also maintains a Defined Contribution
Plan,
(1) the following shall apply with respect to Code Section 415(e)
and shall supercede any contrary provisions of the Plan or
this Adoption Agreement:
[ ] a. The rate of accrual in this Defined Benefit Plan shall be
reduced to the extent necessary to prevent violation of
Code Section 415(e).
[ ] b. The following language shall apply:
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III. D. Maintenance of Other Plans. Page 14
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Standardized Non-Integrated Defined Benefit Plan #03-002
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(2) the following shall apply with respect to Code Section 416
and shall supercede any contrary provisions of the Plan or
this Adoption Agreement:
[ ] a. Top heavy minimum accruals shall be made under this
plan at the rate of _________% (not less than 2%) per
Year of Service as a Participant in the Plan for up
to a total of _____ % (not less than 20%) of Average
Monthly Compensation.
[ ] b. Top heavy minimum contributions shall be made under
such other defined contribution plan maintained by
the employer.
[ ] c. The following language shall apply:
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III.E. Vesting Provisions:
1. Benefits under the Plan shall vest according to the following schedule:
[CAPTION]
a. [ ] 100% immediate vesting
b. [ ] Completed Years ______________________________ Percentage
of Service.................................... Vested
Seven-Year less than three (3) ............................. 0%
Graded three (3) but less than four (4) ................. 20%
Vesting four (4) but less than five (5) .................. 40%
five (5) but less than six (6) ................... 60%
six (6) but less than seven (7) .................. 80%
after seven (7) years ............................ 100%
c. [x] Completed Years _____________________________ Percentage
of Service................................... Vested
Two-Twenty less than two (2) ............................... 0%
Vesting two (2) but less than three (3) .................. 20%
three (3) but less than four (4) ................. 40%
four (4) but less than five (5) .................. 60%
five (5) but less than six (6) ................... 80%
after six (6) years .............................. 100%
d. [ ] Completed Years _____________________________ Percentage*
of Service................................... Vested
Roll Your less than one (1) ............................... %
Own one (1) but less than two (2) ................... %
Vesting two (2) but less than three (3) ................. %
three (3) but less than four (4) ................ %
four (4) but less than five (5) ................. %
five (5) but less than six (6) .................. %
six (6) but less than seven (7) ................. %
after seven (7) years ........................... 100%
* must be at least as rapid as each year in the Seven-year graded schedule as in
III.E.1.b.
- --------------------------------------------------------------------------------
III. E. Vesting Provisions Page 15
<PAGE>
Standardized Non-Integrated Defined Benefit Plan #03-002
- --------------------------------------------------------
e. [ ] Completed Years ____________________________ Percentage
of Service ................................. Vested
Five-Year less than one (1) .......................... %
Vesting one (1) but less than two (2) .............. %
two (2) but less than three (3) ............ %
three (3) but less than four (4) ........... %
four (4) but less than five (5) ............ %
after five (5) years ....................... 100%
2. In years in which the Plan is a Top Heavy Plan, benefits shall vest
according to the following schedule (unless the Employer has
already elected a faster vesting schedule):
[ ] a. 100% vesting after ______ (not to exceed 3) years of
service.
[x] b. The Two-twenty vesting schedule in Section III.E.1.c.
3. Years of Service to be excluded for vesting purposes (leave blank
if no exclusions for vesting purposes):
[ ] a. Years of Service prior to age eighteen (18).
[ ] b. Years of Service prior to the effective date of the Plan
or a predecessor plan.
[ ] c. Years of Service after five (5) or more consecutive one-year
Breaks-in-Service (which exceeds the Participant's aggregate
Years of Service) in calculating vesting before such Breaks-
in-Service where such Participant had no non-forfeitable
interest in his Accrued Benefit at the time of separation
from service.
NOTE: If this is a plan that was maintained by a predecessor
Employer, service must include service with such
predecessor Employer.
III. F. Benefits may be paid in the following forms:
[ ] 1. Installments not to exceed:
[ ] a. ____ years
[ ] b. life expectancy of the Participant and/or designated
beneficiary.
[x] 2. A lump sum payment.
[x] 3. An annuity for the life of the Participant.
[ ] 4. An annuity for the life of the Participant with a ____ year term
certain guarantee.
[x] 5. An annuity for the life of the Participant with survivorship
payments, i.e.:
[x] a. Joint & 100% survivor annuity
[ ] b. Joint & 75% survivor annuity
[x] c. Joint & 50% survivor annuity
- --------------------------------------------------------------------------------
III. F. Benefits may be paid in the following forms: Page 16
<PAGE>
Standardized Non-Integrated Defined Benefit Plan #03-002
- --------------------------------------------------------
[ ] d. Joint & 66-2/3% survivor annuity
[ ] e. Joint & ______% survivor annuity (not less than 50% or
more than 100%).
III. G. Life Insurance
1. Life insurance shall be purchased in the following amounts:
[x] a. None.
[ ] b. Multiple of Monthly Pension.
The insurance face amount is up to _______ (not to
exceed 100) times the projected monthly benefit. (If this
is a restatement of a prior plan with insurance and no
more new insurance purchases will be made, enter a zero,
provided that existing policies will remain in force.)
[ ] c. Percent of theoretical contribution.
The insurance face amount is the amount purchasable by
a premium equal to ____ % (not to exceed 66% if whole
life, or 33% if term or universal life) of the
theoretical contribution.
2. The following Participants shall be eligible to receive life
insurance:
[ ] a. Participants who have completed;
[ ] i. ______ Years of Service, or
[ ] ii. _____ Years of Participation.
[ ] b. Participants who have attained Age ____, but who have not
attained Age ____.
[ ] c. All Participants.
3. Insurance purchased hereunder shall contain the following
additional features and limits:
a. Type:
[ ] i. Term or Universal Life
[ ] ii. Whole Life
b. Minimum insurance adjustment.
The minimum increase or decrease in insurance face
amount that will be recognized shall be $ ____________
(not more than $5,000).
c. Maximum insurance amount.
The total amount of insurance for any participant shall
not exceed $ __________.
d. Waiver of Premium.
[ ] If checked, waiver of premium will be included.
- --------------------------------------------------------------------------------
IIII. G. Life Insurance Page 17
<PAGE>
Standardized Non-Integrated Defined Benefit Plan #03-002
- --------------------------------------------------------
e. Insurance purchase date.
[ ] If checked, all new insurance will be issued as
of _____________________.
f. Substandard Insurance Premium.
(Applicable only when insurance is a multiple of
monthly pension)
[ ] If checked, the payment of substandard insurance
premiums is acceptable and will be paid for by the
Plan up to _____ % in excess of the standard premiums
for the new insurance being purchased. (Without this
option, the face amount is reduced when a Participant
is rated substandard.)
g. Freeze on new insurance.
[ ] If checked, no new insurance is purchased for a
Participant who is within _____ years (not to
exceed 10) of his normal retirement date.
h. Treatment of insurance on late retirement. The
insurance of a Participant who is beyond his normal
retirement date shall be:
[ ] i. placed on a paid up basis.
[ ] ii. surrendered.
[ ] iii. continued on a premium paying basis.
III. H. Timing of Distributions
1. Subject to the requirements of Article X of the Plan, distribution
commencement date to terminated Participants
[ ] a. will depend
[x] b. will NOT depend
on the amount of the present value of vested Accrued
Benefits (e.g. $3,500.00).
2. The cut-off amount for present value of vested Accrued Benefits
shall be $_________ .
(If option 1b above is selected, do not fill-in amount above
and skip section 4 below).
3. For amounts less than or equal to the specified cut-off amount
above, distributions to terminated Participants shall commence:
(If option 1b above is selected, the following applies to all
distributions regardless of amount.)
[ ] a. As soon as practicable after the Participant's termination
of employment.
[ ] b. After the Participant has incurred ___ (not to exceed 5)
year Breaks-in-Service.
[ ] c. After the ___ month anniversary of the date on which the
Participant terminated employment.
[x] d. As soon as practicable following the end of the Plan Year in
which the Participant terminated employment.
- --------------------------------------------------------------------------------
III. H. Timing of Distributions Page 18
<PAGE>
Standardized Non-Integrated Defined Benefit Plan #03-002
- --------------------------------------------------------
[ ] e. Within ___ days (not to exceed 75) following the end of
the Plan Year in which the Participant terminated
employment.
[ ] f. Within ___ days (not to exceed 75) after the valuation date
immediately following the Participant's termination of
employment.
[ ] g. After the Participant has reached his Normal Retirement
Date.
[ ] h. After the Participant has reached his Early Retirement Date.
[ ] i.
----------------------------------------------------------
----------------------------------------------------------
4. For amounts greater than the specified cut-off amount above,
distributions to terminated Participants shall commence:
[ ] a. As soon as practicable after the Participant's termination
of employment.
[ ] b. After the Participant has incurred ___ (not to exceed 5)
year Breaks-in-Service.
[ ] c. After the ____ month anniversary of the date on which the
Participant terminated employment.
[ ] d. As soon as practicable following the end of the Plan Year in
which the Participant terminated employment.
[ ] e. Within ____ days (not to exceed 75) following the end of
the Plan Year in which the Participant terminated.
[ ] f. Within ____ days (not to exceed 75) after the valuation date
immediately following the Participant's termination of
employment.
[ ] g. After the Participant has reached his Normal Retirement
Date.
[ ] h. After the Participant has reached his Early Retirement Date.
[ ] i.
------------------------------------------------------
------------------------------------------------------
NOTE: For purposes of Section III.H.3 and 4, unless the
participant elects otherwise, distribution of benefits will
begin no later than the 60th day after the latest of the
close of the plan year in which:
(1) the participant attains age 65 (or normal retirement
age, if earlier).
(2) occurs on the 5th anniversary of the year in which
the participant commenced participation in the plan; or,
(3) the participant terminates service with the employer.
Notwithstanding the foregoing, the failure of a participant
and spouse to consent to a distribution while a benefit is
immediately distributable, within the meaning of this
section, shall be deemed to be an election to defer
commencement of payment of any benefit sufficient to satisfy
this section.
- --------------------------------------------------------------------------------
III. H. Timing of Distributions Page 19
<PAGE>
Standardized Non-Integrated Defined Benefit Plan #03-002
- --------------------------------------------------------
5. Distribution on behalf of Participants who have died or have become
disabled shall:
[ ] a. become payable immediately.
[x] b. become payable in the same manner as applied to terminated
employees.
IV. Miscellaneous Provisions.
IV. A. Transfers (and rollovers) from Qualified Plans:
[ ] 1. Shall be permitted.
[x] 2. Shall NOT be permitted.
IV. B. Life Expectancies for Minimum Distributions
Pursuant to Code Section 401(a)(9), life expectancies shall:
[x] 1. NOT be recalculated.
[ ] 2. be recalculated.
[ ] 3. be recalculated at the Participant's election.
(If no election has been made by the time distributions must
commence, then the Life Expectancies shall not be
recalculated.)
IV. C. Loans to Participants.
[x] 1. Shall not be permitted.
2. [ ] a. Shall be permitted up to the maximum specified in
Section 11.3(d)(iv) of the Plan.
[ ] b. Shall be permitted up to the following limit:
For a participant with a present value of vested
Accrued Benefit (vested balance):
[ ] (i) in excess of $20,000, up to ______%
(not to exceed 50%) of his vested balance,
and
[ ] (ii) of $20,000 or less, up to ______% (not
to exceed 100%) his vested balance.
NOTE: A Participant with a vested balance in excess of
$20,000 may NOT have an outstanding loan of more than
$50,000 while a Participant with a vested balance of
$20,000 or less may NOT have an outstanding loan of
more than $10,000.
[ ] 3. As long as his total outstanding loan will not exceed the
limits specified in Section IV.C.2.a and b. above, the
minimum loan a Participant may apply for is $___________
(not to exceed $1,000).
- --------------------------------------------------------------------------------
IV. A. Transfers (and rollovers) from Qualified Plans: Page 20
<PAGE>
Standardized Non-Integrated Defined Benefit Plan #03-002
- --------------------------------------------------------
4. The loan interest rate shall be modified to reflect the current
economic conditions:
[ ] a. every quarter.
[ ] b. every month.
[ ] c. every time a new loan is granted.
5. Loan repayments will be made:
[ ] a. every quarter.
[ ] b. every month.
[ ] c. every pay period through salary reduction.
IV. D. Special options for lump sum distributions.
[ ] 1. If checked and if a lump sum distribution is allowed and the
normal form of pension is other than a life annuity, the lump
sum will be calculated based on an annuity for the life of the
Participant. (Hence, even if the Normal Form is a joint and
survivor, with this option, the lump sum will be calculated
based on a life only annuity.)
[ ] 2. For purposes of determining the present value of a lump sum
distribution (per Code Section 417(e)(3)(B)), the "applicable
interest rate" which is the interest rate that would be used by
the Pension Benefit Guaranty Corporation for Plan termination
will be the rate in effect as of:
[ ] a. The beginning of the Plan Year during which the benefit is
payable.
[ ] b. The actual date the benefit is payable.
IV. E. Treatment of Excess Assets Upon Plan Termination
1. Upon termination of the Plan, any assets of the Plan which remain
after allocations are made in accordance with Section 15.5 of the
Plan, and after all liabilities of the Plan are satisfied, shall be
distributed in the following manner:
[ ] a. Returned to Participating Employers to be allocated among
them in any equitable manner, as determined by the Trustees,
to the extent that such return of funds does not violate any
provision of law;
[x] b. Allocated among the Participants (or their Beneficiaries) in
any non-discriminatory manner as determined by the Plan
Administrator;
[ ] c. _______________% of such excess assets shall be allocated
among the Participants (or their Beneficiaries) in any non-
discriminatory manner as determined by the Plan
Administrator, and the balance of such excess assets shall
be returned to the participating Employers to be allocated
among them in any equitable manner, as determined by the
Trustees, to the extent that such return of funds does not
violate any provision of law;
- --------------------------------------------------------------------------------
IV. D. Special options for lump sum distributions Page 21
<PAGE>
Standardized Non-Integrated Defined Benefit Plan #03-002
- --------------------------------------------------------
[ ] d. Allocated among the Participants (or their Beneficiaries)
in any non-discriminatory manner as determined by the Plan
Administrator until any Participant first reaches his
maximum benefit under IRC Section 415(b) or 415(e), and the
balance of such excess assets shall be returned to
Participating Employers to be allocated among them in any
equitable manner, as determined by the Trustees, to the
extent that such return of funds does not violate any
provision of law.
2. If this option is selected, then the present value of the Accrued
Benefit of each electing Participant shall be segregated in a
Segregated 414(k) Account as of the termination date of the plan
in accordance with Section 16.18 of the Plan.
[ ] This option is selected.
IV. F. Reserved
IV. G. Controlling State Law:
The laws of the state of NEW HAMPSHIRE shall control this plan,
-------------
except as preempted by Federal law.
V. Adoption
A. An Employer who has ever maintained or who later adopts any plan
(including a welfare benefit fund, as defined in section 419(e) of
the Code) which provides post-retirement medical benefits allocated
to separate accounts for key employees, as defined in section
419A(d)(3) of the Code, or an individual medical account, as
defined in section 415(1)(2) of the Code in addition to this plan
may not rely on the notification letter issued by the National or
District Office of the Internal Revenue Service as evidence that
this plan is qualified under section 401 of the Internal Revenue
Code. In addition, the employer may not rely on the notification
letter issued by the National or District Office of the Internal
Revenue Service as evidence that the plan is qualified under
section 401 of the Code if the employer employs a leased employee
who receives or has ever received contributions, forfeitures, or
benefits under a plan maintained or ever maintained by a leasing
organization, other than a safe-harbor money purchase plan
described in section 414(n)(5) of the Code, that are attributable
to services performed for the employer. If the employer who adopts
or maintains multiple plans or who may not rely on this notifi-
cation letter pursuant to the preceding sentence wishes to obtain
reliance that his or her plan(s) is/are qualified, application for
a determination letter should be made to the appropriate Key
District Director of Internal Revenue.
B. The Employer after consultation with his attorney hereby adopts
this Plan and Trust by its execution of this Adoption Agreement and
agrees to be bound by its terms. The Employer agrees to the
adoption of the Plan by the Participating Employers set forth in
Section I.B.2. hereof.
C. In Addition, the Employer may rely upon the notification letter
issued by the National or District Office of the Internal revenue
Service only if the Plan adopted by the Employer satisfies one of
the safe-harbors provided in regulations under Section 401(a)(26)
of the Code with respect to its prior benefit structure or is
deemed to satisfy Section 401(a)(26) under such regulations.
IN WITNESS WHEREOF, the parties have set their hands this 23rd day of
----
December, 1998.
Signed for the Employer By: William D. Linehan, Treasurer
-------------------------------
Signature: /s/ William D. Linehan
------------------------
- --------------------------------------------------------------------------------
IV. F. Reserved Page 22
<PAGE>
Standardized Non-Integrated Defined Benefit Plan #03-002
- --------------------------------------------------------
IN WITNESS WHEREOF, the parties have set their hands this 23rd day of
----
December, 1998.
- -------- --
Signed for the Employer By: William D. Linehan
-----------------------
Signature: /s/ William D. Linehan Title: Treasurer
------------------------ -------------
TRUSTEE(S):
a. Trustee's Signature: /s/ Joseph E. Cresci
__________________________________________
JOSEPH E CRESCI
b. Trustee's Signature: /s/ Donald A. Livingston
__________________________________________
DONALD A LIVINGSTON
c. Trustee's Signature:
__________________________________________
d. Trustee's Signature:
__________________________________________
e. Trustee's Signature:
__________________________________________
f. Trustee's Signature:
__________________________________________
g. Trustee's Signature:
__________________________________________
h. Trustee's Signature:
__________________________________________
i. Trustee's Signature:
__________________________________________
j. Trustee's Signature:
__________________________________________
PARTICIPATING EMPLOYER(s):
a. Signature: ________________________________________, Title: ____________
b. Signature: ________________________________________, Title: ___________
c. Signature: ________________________________________, Title: ___________
d. Signature: ________________________________________, Title: ___________
e. Signature: ________________________________________, Title: ___________
f. Signature: ________________________________________, Title: ___________
g. Signature: ________________________________________, Title: ___________
h. Signature: ________________________________________, Title: ___________
i. Signature: ________________________________________, Title: ___________
j. Signature: ________________________________________, Title: ___________
- --------------------------------------------------------------------------------
V. ADOPTION Page 23
<PAGE>
Standardized Non-Integrated Defined Benefit Plan #03-002
- --------------------------------------------------------
This Adoption Agreement may only be used in conjunction with the Defined
Benefit Basic Plan Document #03.
This plan is a Regional Prototype sponsored by:
COLEMAN CONSULTING CORPORATION (212)629-8940
Attn: CYRIL J. COLEMAN, III.
ONE PENN PLAZA
NEW YORK, NY 10119-
Use of this Prototype is subject to the Sponsor's approval who will notify
the Employer of any amendments or the termination of this plan. The Employer
agrees to notify the Sponsor of any change in address.
Sponsor hereby approves Employer's use of this Regional Prototype.
Signed for the Sponsor By: JOSEPH P MACKESY
----------------------------------------
Signature: /s/ Joseph P. Mackesy, Title: CONSULTANT
-------------------------- -----------------------
Date: December 23, 1998
-----------------
- --------------------------------------------------------------------------------
V. Adoption Page 24
<PAGE>
REGIONAL PROTOTYPE
DEFINED BENEFIT
PLAN AND TRUST AGREEMENT
Basic Plan Document #03
Sponsored By
<PAGE>
Basic Plan Document #03 - Plan & Trust Agreement /DB
-----------------------------------------------------
Table of Contents
ARTICLE I - NATURE OF THE PLAN Page 1
- ------------------------------
1.1 Statement of Purpose........................................... Page 1
1.2 Intention to Conform to Statute................................ Page 1
1.3 Effective Date................................................. Page 1
ARTICLE II - DEFINITIONS Page 2
- ------------------------
2.1 "Accrued Benefit".............................................. Page 2
2.2 "Actuarial Equivalent"......................................... Page 2
2.3 "Administrator"................................................ Page 2
2.4 "Adoption Agreement"........................................... Page 2
2.5 "Affiliated Employer".......................................... Page 2
2.6 "Age".......................................................... Page 2
2.7 "Aggregation Group"............................................ Page 3
2.8 "Alternate Payee".............................................. Page 3
2.9 "Anniversary Date"............................................. Page 3
2.10 "Annual Addition".............................................. Page 3
2.11 "Annuity Starting Date"........................................ Page 3
2.12 "Applicable Factor"............................................ Page 3
2.13 "Average Compensation"......................................... Page 3
2.14 "Average Annual Compensation".................................. Page 4
2.15 "Average Compensation for High Five Years"..................... Page 4
2.15A "Basic Benefit Percentage"..................................... Page 4
2.16 "Beneficiary".................................................. Page 4
2.17 "Board of Directors"........................................... Page 4
2.18 "Breaks-In-Service"............................................ Page 4
2.19 "Code" or "IRC"................................................ Page 4
2.20 "Collective Bargaining Agreement".............................. Page 5
2.21 "Committee".................................................... Page 5
2.22 "Compensation"................................................. Page 5
2.23 "Computation Period"........................................... Page 6
2.24 "Covered Compensation"......................................... Page 6
2.25 "Defined Benefit Fraction"..................................... Page 7
2.26 "Defined Contribution Fraction"................................ Page 7
2.27 "Determination Date"........................................... Page 7
2.28 "Determination Year"........................................... Page 8
2.29 "Early Retirement Date"........................................ Page 8
2.30 "Earliest Retirement Age"...................................... Page 8
2.31 "Earned Income"................................................ Page 8
2.32 "Effective Date"............................................... Page 8
2.33 "Elapsed Time"................................................. Page 8
2.34 "Eligible Employee"............................................ Page 9
2.35 "Employee"..................................................... Page 9
2.36 "Employer"..................................................... Page 9
2.37 "Employment Commencement Date"................................. Page 10
2.38 "Entry Date"................................................... Page 10
2.39 "ERISA"........................................................ Page 10
2.39A "Excess Benefit Percentage".................................... Page 10
<PAGE>
Basic Plan Document #03 - Plan & Trust Agreement/DB
---------------------------------------------------
ARTICLE II - DEFINITIONS Page 10
- ------------------------
2.40 "Excess Compensation"......................................... Page 10
2.41 "Family Member"............................................... Page 10
2.42 "Final Average Compensation".................................. Page 11
2.43 "Reserved".................................................... Page 11
2.44 "Highly Compensated Employee"................................. Page 11
2.45 "Hours of Service............................................. Page 12
2.46 "Insurer"..................................................... Page 14
2.47 "Investment Fund"............................................. Page 14
2.48 "Key Employee"................................................ Page 14
2.49 "Leased Employee"............................................. Page 14
2.50 "Limitation Year"............................................. Page 15
2.51 "Look-Back Year".............................................. Page 15
2.52 "Named Fiduciary"............................................. Page 15
2.53 "Non-Key Employee"............................................ Page 15
2.54 "Normal Form"................................................. Page 15
2.55 "Normal Retirement Age"....................................... Page 15
2.56 "Normal Retirement Date"...................................... Page 16
2.57 "Owner Employee".............................................. Page 16
2.58 "Participant"................................................. Page 16
2.59 "Participating Employer"...................................... Page 16
2.60 "Period of Severance"......................................... Page 16
2.61 "Plan or Plan and Trust"...................................... Page 16
2.62 "Plan Administrator".......................................... Page 17
2.63 "Plan Year"................................................... Page 17
2.64 "Policy"...................................................... Page 17
2.65 "Qualified Domestic Relations Order".......................... Page 17
2.66 "Qualified Joint and Survivor Annuity"........................ Page 17
2.67 "Qualified Pre-Retirement Survivor Annuity"................... Page 17
2.68 "Reserved".................................................... Page 18
2.69 "Restatement Effective Date".................................. Page 18
2.70 "Self Employed Person"........................................ Page 18
2.71 "Social Security Retirement Age".............................. Page 18
2.72 "Spouse"...................................................... Page 18
2.73 "Super Top Heavy Plan"........................................ Page 18
2.73A "Taxable Wage Base"........................................... Page 18
2.74 "Top Heavy Plan".............................................. Page 18
2.75 "Total Disability"............................................ Page 18
2.76 "Trustees".................................................... Page 19
2.77 "Trust Fund".................................................. Page 19
2.78 "Valuation Date".............................................. Page 19
2.79 "Year of Credited Service".................................... Page 19
2.80 "Year of Service"............................................. Page 19
ARTICLE III - ELIGIBILITY AND PARTICIPATION Page 20
- -------------------------------------------
3.1 Eligible Employee Status...................................... Page 20
3.2 Commencement of Participation................................. Page 20
3.3 Administrative Requirements................................... Page 20
3.4 Re-Employment Participant..................................... Page 20
3.5 Change in Employment Status................................... Page 20
<PAGE>
Basic Plan Document #03 - Plan & Trust Agreement /DB
----------------------------------------------------
ARTICLE III - ELIGIBILITY AND PARTICIPATION Page 20
- -------------------------------------------
3.6 Inactive Participants......................................... Page 20
3.7 Waiver of Participation....................................... Page 20
ARTICLE IV - HOURS AND YEARS OF SERVICE Page 22
- ---------------------------------------
4.1 Year of Service Eligible for Credit........................... Page 22
4.2 Credit for Hours of Service................................... Page 23
4.3 Predecessor Employers......................................... Page 23
ARTICLE V - CONTRIBUTIONS Page 24
- -------------------------
5.1 Amount of Employer Contributions.............................. Page 24
5.2 Payment of Contributions...................................... Page 24
5.3 Duty of Trustees.............................................. Page 24
5.4 Contingent Nature of Contributions............................ Page 24
5.5 Refund of Company Contribution................................ Page 24
5.6 Employee Contributions........................................ Page 25
5.7 Rollover Contributions........................................ Page 25
ARTICLE VI - CALCULATION OF BENEFITS Page 28
- ------------------------------------
6.1 Normal Form of Benefits....................................... Page 28
6.2 Calculation of Normal Retirement Benefit...................... Page 28
6.3 Calculation of Accrued Benefits............................... Page 28
6.4 Transitional Rules............................................ Page 30
6.5 Non-Duplication of Accrued Benefits........................... Page 31
6.6 Pre-Erisa Accruals............................................ Page 31
6.7 Present Value of Accrued Benefits............................. Page 32
6.8 Permitted Disparity........................................... Page 33
6.9 Adjustment to Benefits Frozen as of Fresh Start Date.......... Page 33
ARTICLE VII - LIMITATION ON BENEFITS Page 35
- ------------------------------------
7.1 Maximum Benefit Limitations................................... Page 35
7.2 Participants Covered by Another Plan of the Employer.......... Page 35
7.3 Reserved...................................................... Page 36
7.4 Definitions................................................... Page 36
7.5 Super Top-Heavy Plan.......................................... Page 43
ARTICLE VIII - ENTITLEMENT TO BENEFITS Page 44
- --------------------------------------
8.1 Normal Retirement Benefit..................................... Page 44
8.2 Early Retirement Benefits..................................... Page 44
8.3 Late Retirement Benefits...................................... Page 44
8.4 Disability Retirement Benefits................................ Page 44
8.5 Death Benefits................................................ Page 44
8.6 Benefits Payable upon Termination............................. Page 46
8.7 Payment of Benefits........................................... Page 47
8.8 Reinstatement of Benefit...................................... Page 47
8.9 Vesting Breaks-In-Service--One Year Holdout................... Page 48
8.10 Cash-outs and Plan Repayment.................................. Page 48
<PAGE>
Basic Plan Document #03 - Plan & Trust Agreement/DB
---------------------------------------------------
ARTICLE IX - TOP HEAVY PROVISIONS Page 49
- ---------------------------------
9.1 Generally..................................................... Page 49
9.2 Top-Heavy Definitions......................................... Page 49
9.3 Minimum Accrued Benefit....................................... Page 51
9.4 Benefit Form Other Than Life Annuity at Normal Retirement Age. Page 53
9.5 Nonforfeitability of Minimum Accrued Benefit.................. Page 53
9.6 Minimum Vesting Schedules..................................... Page 53
ARTICLE X - FORM AND MANNER OF BENEFIT DISTRIBUTIONS Page 54
- ----------------------------------------------------
10.1 Standard Form of Distribution................................. Page 54
10.2 Optional Forms of Benefit .................................... Page 54
10.3 Statutory Restriction on Lump Sum Payments.................... Page 55
10.4 Joint and Survivor Annuity Requirements....................... Page 56
10.5 Commencement of Benefits...................................... Page 62
10.6 Retirement With Age and Service Requirement................... Page 63
10.7 Annuity Contracts............................................. Page 63
10.8 Distribution Requirements..................................... Page 63
10.9 Payments Prior to Breaks-In-Service........................... Page 70
10.10 Payments Pursuant to Qualified Domestic Relations Orders...... Page 71
ARTICLE XI - TRUST PROVISIONS Page 72
- -----------------------------
11.1 Establishment of Trust........................................ Page 72
11.2 Rights, Duties and Obligations of the Trustees................ Page 73
11.3 Investment of the Trust Fund.................................. Page 75
11.4 Accounts to be Kept and Rendered by the Trustees.............. Page 82
11.5 Exclusive Benefit............................................. Page 83
ARTICLE XII - POLICIES Page 84
- ----------------------
12.1 Purchase of Policies.......................................... Page 84
12.2 Procedure for Purchase........................................ Page 84
12.3 Requirements Concerning the Purchase of Policies.............. Page 84
12.4 Non-Insurable Participants.................................... Page 85
12.5 Protection of Insurer......................................... Page 85
12.6 Conflict With Insurance Contracts............................. Page 86
ARTICLE XIII - ADMINISTRATION OF THE PLAN Page 87
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13.1 Appointment of Plan Administrator............................. Page 87
13.2 Manner of Acting.............................................. Page 87
13.3 Disqualification to Act....................................... Page 87
13.4 Authority and Responsibility of Plan Administrator............ Page 87
13.5 Request for Documentation..................................... Page 88
13.6 Removal or Resignation........................................ Page 88
13.7 Failure to Appoint Plan Administrator......................... Page 88
13.8 Compensation.................................................. Page 88
13.9 Allocation of Responsibilities................................ Page 88
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Basic Plan Document #03 - Plan & Trust Agreement /DB
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ARTICLE XIII - ADMINISTRATION OF THE PLAN Page 89
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13.10 Delegation to Retirement Committee............................ Page 89
13.11 Bonding....................................................... Page 89
13.12 Indemnification............................................... Page 89
ARTICLE XIV - CLAIMS AND PROCEDURES Page 90
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14.1 Claim for Benefits............................................ Page 90
14.2 Disposition of Claim.......................................... Page 90
14.3 Claims Review Procedure....................................... Page 90
14.4 Conclusiveness of Determination............................... Page 91
ARTICLE XV - AMENDMENT, TERMINATION AND MERGER Page 92
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15.1 Employer's Right Reserved..................................... Page 92
15.2 Amendments to Cover Additional Employers...................... Page 93
15.3 Effect of Terminations........................................ Page 93
15.4 Restrictions on Benefits to Highly Paid Employees............. Page 94
15.5 Allocation Upon Termination of Trust.......................... Page 96
15.6 Merger and Consolidation...................................... Page 98
15.7 Withdrawal of a Participating Employer........................ Page 98
15.8 Failure to Attain Qualification............................... Page 98
15.9 Amendment by Sponsor.......................................... Page 98
15.10 Dissolution of All Participating Employers.................... Page 98
ARTICLE XVI - MISCELLANEOUS PROVISIONS Page 100
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16.1 Controlling State Law......................................... Page 100
16.2 Disputes...................................................... Page 100
16.3 Gender and Number............................................. Page 100
16.4 Heading and Subheadings....................................... Page 100
16.5 Heirs, Assigns and Representatives............................ Page 100
16.6 No Contract of Employment..................................... Page 100
16.7 Treatment of Owner-Employees Under the Plan................... Page 100
16.8 Non-Alienation of Benefits.................................... Page 101
16.9 Notices and Deliveries........................................ Page 102
16.10 Payments to Persons under Legal Disability.................... Page 102
16.11 Severability of Provisions.................................... Page 102
16.12 Service of Process............................................ Page 102
16.13 Title to Trust Assets......................................... Page 102
16.14 Inalienability of benefits.................................... Page 102
16.15 Exclusive Benefit............................................. Page 102
16.16 Failure of Qualification...................................... Page 103
16.17 Control of Trades or Businesses by Owner-employees............ Page 103
16.18 Segregated 414(k) Account..................................... Page 103
16.19 Segregated 414(k) Account on Plan Termination................. Page 103
<PAGE>
REGIONAL PROTOTYPE
DEFINED BENEFIT
PLAN AND TRUST AGREEMENT
Basic Plan Document #03
Sponsored By
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
ARTICLE I - NATURE OF PLAN
1.1 Statement of Purpose
This Plan has been prepared for the purpose of providing a retirement plan
for the exclusive benefit of Eligible Employees of any Participating
Employer. Any Employer may adopt this Plan and Trust, provided that such
Employer and the Trustee designated by such Employer executes an Adoption
Agreement and agrees to conform to and abide by all of the terms and
provisions of this Plan and Trust.
1.2 Intention to Conform to Statute
The Plan and Trust are intended to qualify as a Defined Benefit Pension
Plan and Trust under Sections 401(a) and 501(a) of the Internal Revenue
Code of 1986 as those sections may be amended from time to time.
1.3 Effective Date
The Effective Date of this Plan shall be the date set forth in Section
I.A.3.a. of the Adoption Agreement. The Restatement Effective Date, if
any, shall be the date set forth in Section I.A.3.b.e. of the Adoption
Agreement.
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ARTICLE 1 -- Nature of Plan Page 1
<PAGE>
Basic Plan Document #03 - Defined Benefit
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ARTICLE II - DEFINITIONS
2.1 "Accrued Benefit"
shall mean the amount of monthly (or other periodic) pension payable in
the normal form earned as of any date in reference, calculated in
accordance with Article VI hereof, as modified by Article VIII hereof, if
applicable.
2.2 "Actuarial Equivalent"
shall mean the value or amount of the benefits which differ in time,
period, or manner of payment from a periodic pension payable in the Normal
Form (as provided in Section III.B.1. of the Adoption Agreement)
commencing on a Participant's Normal Retirement Date, computed in
accordance with the assumptions set forth in Section II.D. of the Adoption
Agreement, or if use of the Section 417 interest rates as set forth in
Section 6.7 of Plan would provide a greater benefit, computed in
accordance with those rates.
2.3 "Administrator"
shall mean the Plan Administrator as defined in Article II, Section 2.62
hereof.
2.4 "Adoption Agreement"
shall mean the agreement entered into by the Employer and the Trustee
adopting this Plan and Trust and setting forth certain provisions of this
Plan as specified therein.
2.5 "Affiliated Employer"
shall mean:
(a) in the event the Plan provides benefits on behalf of an Owner-
Employee (within the meaning of Section 401(c) of the Code): the
Employer and any unincorporated entity or partnership under common
control with the Employer within the meaning of Section 401(d)(1)(B)
of the Code and as further described in Article XVI, Section 16.7,
and
(b) in all other events: the Employer and any corporation,
partnership or other unincorporated entity which forms a controlled
group of corporations, a group of trades or businesses under common
control, or an affiliated service group with the Employer, within the
meaning of Sections 414(b), 414(c) and 414(m) of the Code and, where
applicable, Sections 415(h) and 414(o) of the code.
2.6 "Age"
shall mean actual age attained by a person as of his most recent birthday.
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ARTICLE II -- Definitions Page 2
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Basic Plan Document #03 - Defined Benefit
-----------------------------------------
2.7 "Aggregation Group"
shall mean each plan of the Affiliated Employer, whether or not
terminated, in which a Key Employee is a participant and each other plan
of the Affiliated Employer which enables any plan in which a Key Employee
is a participant to meet the requirements of Sections 401(a)(4) or 410 of
the Code. The Employer may treat any other Affiliated Employer as being
part of the Aggregation Group if such group would continue to meet the
requirements of Sections 401(a)(4) and 410 (permissive Aggregation Group)
with such plan being taken into account.
2.8 "Alternate Payee"
shall mean any spouse, former spouse, child or other dependent of a
Participant who is recognized as having a right to receive all or any
portion of the benefits payable hereunder with respect to such Participant
in accordance with Articles X and XVI hereof.
2.9 "Anniversary Date"
shall mean the first day of the Plan Year unless otherwise specified in
Section II of the Adoption Agreement.
2.10 "Annual Addition"
shall mean for each Participant, in any Limitation Year, an amount
determined in accordance with Article VII of this Plan.
2.11 "Annuity Starting Date"
shall mean the first day of the first period for which an amount is
payable as an annuity, or in the case of a benefit not payable in the form
of an annuity, the first day on which all events have occurred which
entitle the Participant to such benefit.
2.12 "Applicable Factor"
shall mean the factors described in Section III.B.8 of the Integrated
Defined Benefit Adoption Agreements #03-003 and #03-004 which are used to
determine the limits of permitted disparity.
2.13 "Average Compensation"
shall mean the average of a Participant's Compensation over the number of
consecutive Plan Years as elected in Section II.A.4 of the Adoption
Agreement (but not less than three) which produce the highest average; if
the Participant has less than said number of Years of Service,
compensation shall be averaged over the Participant's total period of
Service.
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ARTICLE II -- Definitions Page 3
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Basic Plan Document #03 - Defined Benefit
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2.14 "Average Annual Compensation"
means the average of a Participant's Annual Compensation, as defined in
Section 7.4(c) of the Plan, over the three or more consecutive years, as
specified in Section II.A.4. of the Adoption Agreement, which produce the
highest average. If a Participant's entire period of service for the
Employer is less than the specified number of consecutive years,
Compensation is averaged on annual basis over the Participant's entire
period of service.
2.15 "Average Compensation for High Five Years"
shall mean, for any Plan Year in which the Plan is a Top Heavy Plan, an
amount so determined in accordance with Article IX of this Plan.
2.15.A. "Base Benefit Percentage"
is the rate, expressed as a percentage of Compensation, at which Employer
derived benefits are accrued with respect to Compensation of Participants
at or below the Integration Level for the Plan Year.
2.16 "Beneficiary"
shall mean any individual, individuals, estate or trust designated by a
Participant, Plan Administrator or pursuant to Section 206(d)(93)(J) of
ERISA and in the case of a "designated beneficiary" an individual who is
designated as the beneficiary under the Plan pursuant to Section 401(a)(9)
and the regulations thereunder to receive benefits on behalf of a
Participant.
2.17 "Board of Directors"
shall mean:
(a) in the case of a corporation: the Board of Directors (or sole
director) of the Employer, or of a Participating Employer, as the
case may be; and
(b) in the case of a partnership or sole proprietor: the general
partners or the sole proprietor, as the case may be.
2.18 "Break-In-Service"
unless Elapsed Time is selected in Section II.B.4.e. of the Adoption
Agreement, shall mean an applicable Computation Period in which an
Employee fails to complete and aggregate a total of more than five hundred
(500) Hours of Service with any Affiliated Employer. If Elapsed Time is
selected, Break-In-Service is a Period of Severance of at least twelve
(12) consecutive months.
2.19 "Code or IRC"
shall mean the Internal Revenue Code of 1986 as amended from time to time.
- -------------------------------------------------------------------------------
ARTICLE II -- Definitions Page 4
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Basic Plan Document #03 - Defined Benefit
-----------------------------------------
2.20 "Collective Bargaining Agreement"
shall mean an agreement between the Employer and Employee representatives
if retirement benefits were the subject of good faith bargaining and if
two percent or less of the employees of the employer who are covered
pursuant to that agreement are professionals as defined in Section
1.401(b)-9(g) of the Regulations. Employee representatives does not
include any organization more than half of whose members are employees who
are owners, officers and executives of the Employer.
2.21 "Committee"
shall mean the committee members appointed pursuant to Article XIII,
Section 13.10 hereof and specified in Section I.B.8. of the Adoption
Agreement.
2.22 "Compensation"
shall mean compensation as that term is defined in section 7.4(c) of the
Plan. For any Self-Employed Person covered under the Plan, compensation
will mean Earned Income. Compensation shall include only that compensation
which is actually paid to the Participant during the applicable period.
Except as provided elsewhere in this Plan, the applicable period shall be
the period elected by the Employer in the Adoption Agreement. If the
Employer makes no election the applicable period shall be the Plan Year.
Notwithstanding the above, if elected by the Employer in the Adoption
Agreement, compensation shall include any amount which is contributed by
the Employer pursuant to a salary reduction agreement and which is not
includable in the gross income of the Employee under sections 125,
402(a)(8), 402(h) or 403(b) of the Code.
For years beginning after December 31, 1988, the annual compensation of
each participant taken into account under the Plan for any year shall not
exceed $200,000. This limitation shall be adjusted by the Secretary at the
same time and in the same manner as under section 415(d) of the Code,
except that the dollar increase in effect on January 1 of any calendar
year is effective for years beginning in such calendar year and the first
adjustment to the $200,000 limitation is effective on January 1, 1990. If
a Plan determines compensation on a period of time that contains fewer
than 12 calendar months, then the annual compensation limit is an amount
equal to the annual compensation limit for the calendar year in which the
compensation period begins multiplied by the ratio obtained by dividing
the number of full months in the period by 12. Fifteen days in a month or
more shall be considered a full month.
In determining the compensation of a participant for purposes of this
limitation, the rules of Section 414(q)(6) of the Code shall apply, except
in applying such rules, the term "family" shall include only the spouse of
the participant and any lineal descendants of the participant who have not
attained age 19 before the close of the year. If, as a result of the
application of such rules the
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ARTICLE II -- Definitions Page 5
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
adjusted $200,000 limitation is exceeded, then (except for purposes of
determining the portion of compensation up to the integration level if
this plan provides for permitted disparity), the limitation shall be
prorated among the affected individuals in proportion to each such
individual's compensation as determined under this section prior to the
application of this limitation, but subsequent to any limitation imposed
by Section II.A.3(a) of The Adoption Agreement.
If compensation for any prior Plan Year is taken into account in
determining an Employee's contributions or benefits for the current year,
the compensation for such prior year is subject to the applicable annual
compensation limit in effect for that prior year. For this purpose, for
years beginning before January 1, 1990, the applicable annual compensation
limit is $200,000.
(d) In addition to other applicable limitations set forth in the plan, and
notwithstanding any other provision in the plan to the contrary, for plan
years beginning on or after January 1,1994, the annual compensation of
each employee taken into account under the plan shall not exceed the OBRA
'93 annual compensation limit. The OBRA '93 annual compensation limit is
$150,000, as adjusted by the Commissioner for increases in the cost of
living in accordance with section 401(a)(17)(B) of the Internal Revenue
Code. The cost-of-living adjustment in effect for a calendar year applies
to any period, not exceeding 12 months, over which compensation is
determined (determination period) beginning in such calendar year. If a
determination period consists of fewer than 12 months, the OBRA '93 annual
compensation limit will be multiplied by a fraction, the numerator of
which is the number of months in the determination period, and the
denominator of which is 12.
For plan years beginning on or after January 1, 1994, any reference in
this plan to the limitation under section 401(a)(17) of the Code shall
mean the OBRA '93 annual compensation limit set for in this provisions.
If compensation for any prior determination period is taken into account
in determining an employee's benefits accruing in the current year, the
compensation for that prior determination period is subject to the OBRA
'93 annual compensation limit in effect for that prior determination
period. For this purpose, for determination periods beginning before the
first day of the first plan year beginning on or after January 1, 1994,
the OBRA '93 annual compensation limit is $150,000.
2.23 "Computation Period"
shall mean:
(a) with respect to eligibility:
(i) the initial twelve (12) consecutive months beginning on the
Employee's Employment Commencement Date; and
(ii) subsequent Plan Years beginning with the Plan Year which
begins in the period specified in (i) above regardless of
whether the Employee is entitled to be credited with 1,000
hours of service during the period specified in (i) above. An
Employee who is credited with 1,000 hours
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ARTICLE II -- Definitions Page 6
<PAGE>
Basic Plan Document #03 - Defined Benefit
- -----------------------------------------
of service in both the initial eligibility computation period
and the first Plan Year which commences prior to the first
anniversary of the Employee's initial eligibility computation
period will be credited with two years of service for purposes
of eligibility to participate.
(iii) successive anniversaries of the Employee's Employment
Commencement Date if specified in Section II.B.3. of the
Adoption Agreement; and
(b) with respect to vesting, Breaks-In-Service and accruals: the Plan
Year unless otherwise specified in Section II.B.2. of the Adoption
Agreement.
(c) Notwithstanding the above, if a short Plan Year is elected in
accordance with Section I.A.5.b. of the Adoption Agreement,
"Computation Period" with respect to vesting shall be the twelve
month period ending of the last day of the short Plan Year and on the
last day of each subsequent Plan year.
2.24 "Covered Compensation"
shall mean, for a Plan Year, the average (without indexing) of the taxable
wage bases in effect for each calendar year during the 35-year period
ending with the last day of the calendar year in which the Participant
attains (or will attain) Social Security Retirement Age. No increase in
Covered Compensation shall decrease a Participant's Accrued Benefit under
the Plan.
In determining a Participant's Covered Compensation for a Plan Year, the
taxable wage base in effect for the current Plan Year and any subsequent
Plan Year will be assumed to be the same as the taxable wage base in
effect as of the beginning of the Plan Year for which the determination is
being made.
A Participant's Covered Compensation for a Plan Year before 35-year period
ending with the last day of the calendar year in which the Participant
attains Social Security Retirement Age is the taxable wage base in effect
as of the beginning of the Plan Year. A Participant's Covered Compensation
for a Plan Year after such 35-year period is the Participant's Covered
Compensation for the Plan Year during which the Participant attained
Social Security Retirement Age.
2.25 "Defined Benefit Fraction"
shall mean for each Participant, for any Limitation Year, a fraction so
determined in accordance with Article VII of this Plan.
2.26 "Defined Contribution Fraction"
shall mean for each Participant, for any Limitation Year, a fraction so
determined in accordance with Article VII of this Plan.
2.27 "Determination Date"
shall mean, for any Plan Year, that date determined in accordance with
Article IX of this Plan.
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ARTICLE II -- Definitions Page 7
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
2.28 "Determination Year"
shall mean the applicable Plan Year.
2.29 "Early Retirement Date"
shall mean the date specified in Section II.C.2. of the Adoption
Agreement.
2.30 "Earliest Retirement Age"
shall mean the earliest date on which, under the Plan, the Participant
could elect to receive retirement benefits.
2.31 "Earned Income"
shall mean the net earnings from self-employment in the trade or business
with respect to which the Plan is established, for which personal services
of the individual are a material income-producing factor. Net earnings
will be determined without regard to items not included in gross income
and the deductions allocable to such items. Net earnings are reduced by
contributions by the employer to a qualified plan to the extent deductible
under section 404 of the Code.
Net earnings shall be determined with regard to the deduction allowed to
the taxpayer by Section 164(f) of the Code for taxable years beginning
after December 31, 1989.
2.32 "Effective Date"
shall have the meaning set forth in Section I.A.3. of the Adoption
Agreement.
2.33 "Elapsed Time"
The following definitions should replace the otherwise required Year of
Service, Break-In-Service and Hour of Service definitions if the Employer
has selected the use of the Elapsed Time method of credited service in
Section II.B.4.e. of the Adoption Agreement.
For purposes of determining an Employee's initial or continued eligibility
to participate in the Plan or the nonforfeitable interest in the
Participant's account balance derived from Employer contributions, an
Employee will receive credit for the aggregate of all time period(s)
commencing with the Employee's first day of employment or reemployment and
ending on the date a Break-In-Service begins. The first day of employment
or reemployment is the first day the Employee performs an Hour of Service.
An employee will also receive credit for any period of severance of less
than 12 consecutive months. Fractional periods of a year will be expressed
in terms of days.
For purposes of this section, Hour of Service shall mean each hour for
which an
- -------------------------------------------------------------------------------
ARTICLE II -- Definitions Page 8
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
employee is paid or entitled to payment for the performance of duties for
the Employer.
Break-In-Service is a period of severance of at least 12 consecutive
months.
Period of severance is a continuous period of time during which the
Employee is not employed by the Employer. Such period begins on the date
the Employee retires, quits or is discharged, or if earlier, the 12 month
anniversary of the date on which the Employee was otherwise first absent
from service.
In the case of an individual who is absent from work for maternity or
paternity reasons, the 12-consecutive month period beginning on the first
anniversary of the first date of such absence shall not constitute a
Break-In-Service. For purposes of this paragraph, an absence from work for
maternity or paternity reasons means an absence
(1) by reason of the pregnancy of the individual,
(2) by reason of the birth of a child of the individual,
(3) by reason of the placement of a child with the individual in
connection with the adoption of such child by such individual, or
(4) for purposes of caring for such child for a period beginning
immediately following such birth or placement.
Each Employee will share in Employer contributions for the period
beginning on the date the Employee commences participation under the Plan
and ending on the date on which such Employee severs employment with the
Employer or is no longer a member of an eligible class of Employees.
If the Employer is a member of an Affiliated Service Group (under section
414(m)), a controlled group of corporations (under section 414(b)), or a
group of trades or businesses under common control (under section 414(c)),
or any other entity required to be aggregated with the Employer pursuant
to section 414(o), service will be credited for any employment for any
period of time for any other member of such group. Service will also be
credited for any individual required under section 414(n) or section
414(o) to be considered an Employee of any Employer aggregated under
section 414(b), (c), or (m).
2.34 "Eligible Employee"
shall mean an Employee who has satisfied the requirements set forth in
Sections III.A.1., III.A.2. and III.A.3. of the Adoption Agreement.
2.35 "Employee"
shall mean either:
(a) a person who performs services for an Affiliated Employer in the
Employer-employee relation;
- -------------------------------------------------------------------------------
ARTICLE II -- Definitions Page 9
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
(b) a person who is a Leased Employee with respect to an Affiliated
Employer within the meaning of Code Sections 414(n) and 414(o) and
this Article II; or
(c) a person who is a Self-employed individual (as defined in Section
2.70 of the Plan) with respect to an Affiliated Employer.
2.36 "Employer"
shall mean the corporation, partnership, association or sole
proprietorship set forth in Section I.B.1. of the Adoption Agreement.
2.37 "Employment Commencement Date"
shall mean the date on which an Employee first performs an Hour of Service
on behalf of an Affiliated Employer, or if applicable, the date on which
an Employee first performs an Hour of Service after his most recent Break-
In-Service that has resulted in cancellation of his previous Years of
Service.
2.38 "Entry Date"
shall mean each date set forth in Section III.A.4. of the Adoption
Agreement which shall be the date on which the Employee commences
participation.
2.39 "ERISA"
shall mean the Employee Retirement Income Security Act of 1974 (P.L. 93-
406) as it presently exists or as it may hereafter be amended from time to
time.
2.39.A "Excess Benefit Percentage"
is the rate, expressed as a percentage of Compensation, at which Employer
derived benefits are accrued with respect to Compensation of Participants
above the Integration Level for the Plan Year.
2.40 "Excess Compensation"
shall mean that portion of a Participant's Average Compensation that
exceeds the integration level specified in Section III.B.7. of the
Adoption Agreement (only applicable to Integrated Defined Benefit Plans
#03-003 and #03-004).
2.41 "Family Member"
shall mean family member as defined in Section 414(q)(6) of the Code.
- -------------------------------------------------------------------------------
ARTICLE II -- Definitions Page 10
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
2.42 "Final Average Compensation"
shall mean the average of the Participant's annual Compensation from the
Employer for the 3 consecutive year period ending with or within the Plan
Year. If a Participant's service with the Employer is less than 3
consecutive years, Final Average Compensation shall be determined by
averaging on an annual basis the Compensation received during service with
the Employer. Compensation for any year in excess of the taxable wage base
in effect at the beginning of such year shall not be taken into account.
2.43 "Reserved"
2.44 "Highly Compensated Employee"
means:
(a) An Employee who performs services for an Affiliated Employer
during the applicable Determination Year and who during the Look-Back
Year either
(i) Received Compensation from an Affiliated Employer in excess of
$75,000 (as adjusted pursuant to Code Section 415(d)).
(ii) Received Compensation from an Affiliated Employer in excess of
$50,000 (as adjusted pursuant to Code Section 415(d)) and such
Employee was among the twenty percent (20%) who received the
highest Compensation from an Affiliated Employer, or
(iii) Was an officer of an Affiliated Employer and either received
Compensation in excess of fifty percent (50%) of the
current limitation imposed by Code Section 415(b)(1)(A), or in
the event no officers of any Affiliated Employer received
Compensation in excess of the foregoing limit, the most
highly compensated officer, or
(b) Employees who are five percent (5%) owners (within the meaning of
Code Section 415(i)) of an Affiliated Employer at any time during the
Look-Back Year or the Determination Year or Employees described in
Section 2.44(a) who are one of the 100 Employees who received the
most compensation from
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ARTICLE II -- Definitions Page 11
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
the Employer during the Determination Year, or
(c) A former Employee who:
(i) separated from the service of all Affiliated Employers prior
to the Determination Year;
(ii) performed no services for an Affiliated Employer during the
Determination Year, and was a Highly Compensated Employee (who
was actively employed) during either his year of separation
from service, or any Determination Year ending on or after his
fifty fifth (55th) birthday.
(d) Any other Employee deemed to be highly compensated under Code
Section 414(q) and the Treasury Regulation thereunder.
(e) If an Employee is, during a determination year or look-back year,
a family member of either a 5 percent owner who is an active or
former Employee or a highly compensated Employee who is one of the 10
most highly compensated Employees ranked on the basis of compensation
paid by the Employer during such year, then the family member and the
5 percent owner or top-ten highly compensated employee shall be
aggregated. In such case, the family member and 5 percent owner or
top-ten highly compensated employee shall be treated as a single
employee receiving compensation and plan contributions or benefits
equal to the sum of such compensation and contributions or benefits
of the family member and the 5 percent owner or top-ten highly
compensated employee. For purposes of this section, family member
includes the spouse, lineal ascendants and descendants of the
employee or former employee and the spouses of such lineal ascendants
and descendants.
The determination of who is a highly compensated Employee, including
the determinations of the number and identity of Employees in the
top-paid group, the top 100 employees, the number of Employees
treated as officers and the compensation that is considered, will be
made in accordance with section 414(q) of the Code and the
regulations thereunder.
2.45 "Hour of Service"
shall mean:
(a) Each hour for which an Employee (including those persons treated
as employees pursuant to Code Section 414(n)) is paid or entitled to
be paid currently or as a back pay award irrespective of mitigation
of damages, by any Affiliated Employer (including any other entity
required to be aggregated pursuant to Code Section 414(o) and
regulations thereunder) for the performance of duties provided,
however, that all hours shall be credited in the Computation Period
in which the work was performed or to which the back pay award
relates; and
(b) Each hour for which an Employee is paid or is entitled to payment
due to
- -------------------------------------------------------------------------------
ARTICLE II -- Definitions Page 12
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
vacation, holiday, illness, incapacity, disability, lay off, jury duty,
military duty, maternity or paternity leave or leave of absence, but not
periods for which payments are made due:
(i) Under a plan maintained solely for the purpose of compliance
with Worker's Compensation, Unemployment Compensation,
disability insurance laws; or
(ii) Solely as reimbursement for medical expenses incurred by the
Employee provided, however, that no more than five hundred one
(501) Hours of Service be credited to an Employee during a
single continuous period during which the Employee performs no
duties, except in the case where the Employee is on leave of
absence due to illness, injury or disability;
(c) Each hour for which an Employee is absent from work because of
(i) pregnancy,
(ii) the birth of a child of the Employee,
(iii) the placement of a child with the Employee in connection with
the adoption of the child by the Employee, or
(iv) the need for care of the child during the period immediately
following the birth or placement for adoption, but solely for
the purpose of determining whether a Break-In-Service has
occurred for participation and vesting.
(d) (1) The Employee shall be credited with the number of hours which
otherwise would have been credited but for such absence under
subsection (c), unless said number of hours cannot be
determined, in which case eight (8) hours per working day shall
be credited.
(2) Total hours credited pursuant to subsections (c) and (d) shall
not exceed five hundred one (501) hours.
(3) Hours pursuant to subsection (c) and (d) shall be credited in
the Computation Period in which the absence pursuant to
subsections (c) and (d) begins if such hours would prevent an
Employee from incurring a Break-In-Service, or in any other
case in the following Computation Period.
(4) No credit shall be given pursuant to subsections (c) and (d)
unless the Employee furnishes the Plan Administrator with
information, as it may reasonably be required, to established
the length of or reasons for the absence, or the Plan
Administrator has access to such relevant information.
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(e) Hours of Service shall be determined in accordance with Department
of Labor Regulations, Sections 2530.200 b-2 and b-3 which are
incorporated herein by reference;
(f) Hours of Service may be credited at the rate of forty-five (45)
hours for each week, ninety-five (95) hours for each semi-monthly pay
period or one hundred ninety (190) hours for each monthly pay period
in which an Employee is credited with one (1) Hour of Service, if so
elected by the Employer in Section II.B.4. of the Adoption Agreement.
(g) Notwithstanding the above, if an Employer has selected use of the
elapsed time method of credited service in Section II.B.4.e. of the
Adoption Agreement, Hour of Service shall mean each hour for which an
Employee is paid or entitled to payment for the performance of duties
with the Employer.
(h) Hours of Service will be credited for employment with other
members of an Affiliated Service Group (under Section 414(m)), a
controlled group of corporations (under Section 414(b)), or a group
of trades or businesses under common control (under Section 414(c)),
of which the adopting Employer is a member and any other entity
required to be aggregated with the Employer pursuant to section
414(o).
2.46 "Insurer"
shall mean any legal reserve insurance company from which any policies may
be acquired in accordance with the terms of the Plan.
2.47 "Investment Fund"
shall mean that portion of the Trust Fund consisting of all monies not
applied under Policies.
2.48 "Key Employee"
shall mean, for any Plan Year, a Participant or Beneficiary so determined
in accordance with Article IX of this Plan.
2.49 "Leased Employee"
shall mean any person (not otherwise an employee of an Affiliated
Employer) who pursuant to an agreement between the Affiliated Employer (as
recipient) and any other person (as "leasing organization") has performed
services for an Affiliated Employer or other "related person" (within the
meaning of Code Section 414(n)(6)) on a substantially full-time basis for
at least one year of a type historically performed by employees in the
business field of the Affiliated Employer, except if all of the following
conditions are satisfied:
(a) Such employee is covered by a money purchase pension plan
providing:
(i) a non-integrated employer contribution of not less than ten
percent (10%) of Compensation (as defined in Code Section
415(c)(3) and
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ARTICLE II -- Definitions Page 14
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without regard to any salary reduction agreement);
(ii) immediate participation; and
(iii) immediate nonforfeitability of Employer contribution;
(b) Leased Employees do not constitute more than twenty percent (20%)
of the non-highly compensated work force of the Affiliated Employer.
Contributions or benefit provided a leased Employee by the leasing
organization which are attributable to services performed for the
recipient Employer shall be treated as provided by the recipient Employer.
2.50 "Limitation Year"
shall mean the consecutive twelve (12) month period selected in Section
II.B.1. of the Adoption Agreement unless otherwise elected by resolution
of the Board of Directors of the Employer. If the Limitation Year is
amended to a different twelve (12) consecutive month period, the new
Limitation Year must begin on a date within the Limitation Year in which
the amendment is made.
2.51 "Look-Back Year"
shall mean the twelve (12) month period immediately preceding the
applicable Determination Year.
2.52 "Named Fiduciary"
shall mean the Employer, the Trustees and the Plan Administrator,
provided, however, that the above named (or any member of a group
constituting fiduciaries) to the extent of each of their powers, duties
and responsibilities as set forth under the terms of this Plan.
2.53 "Non-Key Employee"
shall have the meaning so ascribed in Article IX of this Plan.
2.54 "Normal Form"
shall mean the form of benefit selected by the Employer in the Adoption
Agreement.
2.55 "Normal Retirement Age "
shall mean the age selected in the Adoption Agreement. If the Employer
enforces a mandatory retirement age, the Normal Retirement Age is the
lesser of that mandatory age or the age specified in the Adoption
Agreement.
If, for Plan Years beginning before January 1, 1988, Normal Retirement Age
was determined with reference to the tenth (10th) anniversary of the
Participant's initial plan participation (or any anniversary more than 5
but not to exceed
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ARTICLE II -- Definitions Page 15
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10 years), the Normal Retirement Age for Participants whose initial plan
participation date is before the 1988 Plan Year shall be the earlier of:
(a) the tenth anniversary of the Participant's initial plan
participation (or such anniversary as had been elected by the
Employer, if less than 10), or
(b) the fifth anniversary of the first day of the first Plan Year
beginning on or after January 1, 1988.
2.56 "Normal Retirement Date"
shall mean the date specified in Section II.C.3. of the Adoption
Agreement. If the Employer enforces a mandatory retirement age, the Normal
Retirement Date shall be the lesser of that mandatory age or the age
specified in the Adoption Agreement.
2.57 "Owner Employee"
shall mean an individual who is a sole proprietor or who is a partner
owning more than ten percent (10%) of either the capital or profits of the
partnership.
2.58 "Participant"
shall mean any person who is or was an Eligible Employee and who has been
admitted to participation in accordance with the terms of the Plan.
2.59 "Participating Employer"
shall mean the Employer and any Affiliated Employer who, with the consent
of the Employer, formally adopts the Plan by completing Section I.B.2. of
the Adoption Agreement.
2.60 "Period of Severance"
shall mean a continuous period of time during which the Employee is not
employed by the Employer beginning when the Employee retires, quits or is
discharged, or if earlier, the 12 month anniversary of the date on which
the Employee was otherwise first absent from service, provided that in the
case of an individual who is absent from work for maternity or paternity
reasons, the twelve (12) consecutive month period beginning on the first
anniversary of the first date of such absence shall not constitute a
Break-In-Service. For purposes of this paragraph, an absence from work for
maternity or paternity reasons shall have the same meaning as in Section
2.44(c) of the Plan.
2.61 "Plan or Plan and Trust"
shall mean the Plan as herein set forth, as it may be amended from time to
time which shall be known by the name set forth in Section I.A.1. of the
Adoption Agreement.
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2.62 "Plan Administrator"
shall mean any individual, individuals, corporate entity, or other
organization or combination of any of the above designated in Section
I.B.7. of the Adoption Agreement, or in the absence of such designation,
the Employer.
2.63 "Plan Year"
shall mean the twelve (12) consecutive month period set forth in
Section I.A.5. of the Adoption Agreement.
2.64 "Policy"
shall mean any ordinary life, universal life, term or annuity policy
issued by an Insurer and providing benefits under the Plan.
2.65 "Qualified Domestic Relations Order"
shall mean any judgment, decree or order (including approval of a property
settlement agreement) made pursuant to a state domestic relations law:
(a) which relates to the provision of child support, alimony payments
or marital property rights;
(b) which creates or recognizes the existence of an Alternate Payee's
right to receive all or any portion of the benefits payable with
respect to a Participant; and
(c) which otherwise satisfies the requirements of Section 414(p) of
the regulations thereunder.
2.66 "Qualified Joint and Survivor Annuity"
shall mean, in the case of a married Participant, the amount of an
immediate annuity for the life of the Participant with a survivor's
annuity for the life of the Participant's spouse which is not less than
50% nor greater than 100% of the annuity payable during the joint lives of
the Participant and the spouse. The Joint and Survivor Annuity will be the
actuarial equivalent of the Participant's Present Value of Vested Accrued
Benefit, or, if greater, the actuarial equivalent of any optional form of
benefit. In the case of an unmarried Participant and the Qualified Joint
and Survivor Annuity is not applicable, his annuity shall be an immediate
annuity for life.
2.67 "Qualified Pre-Retirement Survivor Annuity"
shall mean an immediate annuity form of payment for the life of the
surviving spouse of a Participant who dies prior to his Annuity Starting
Date.
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ARTICLE II -- Definitions Page 17
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2.68 "Reserved"
2.69 "Restatement Effective Date"
shall have the meaning ascribed in Section I.A.3. of the Adoption
Agreement.
2.70 "Self Employed Person"
shall mean an individual who has Earned Income (within the meaning of Code
Section 401(c)(2)) from the trade or business for which the Plan is
established, or would have such income if such trade or business had net
profits.
2.71 "Social Security Retirement Age"
shall mean age 65 if the Participant attains age 62 before January 1, 2000
(i.e., born before January 1, 1938), age 66 if the Participant attains age
62 after December 31, 1999, but before January 1, 2017 (i.e., born after
December 31, 1937, but before January 1, 1955), and age 67 if the
Participant attains age 62 after December 31, 2016 (i.e., born after
December 31, 1954).
2.72 "Spouse"
shall mean the Spouse or the Surviving Spouse of the Participant, provided
that a former Spouse will be deemed the Spouse and the current Spouse will
not be deemed the Spouse to the extent provided under a Qualified Domestic
Relations Order.
2.73 "Super Top Heavy Plan"
The plan is a Super Top-Heavy Plan in any Plan Year in which the Top-Heavy
Ratio (so determined in accordance with Section 9.2.C. of the Plan) is in
excess of ninety (90%) percent.
2.73.A " Taxable Wage Base "
is the contribution and benefit base in effect under Section 230 of the
Social Security Act at the beginning of the Plan Year.
2.74 "Top Heavy Plan"
shall mean, for any Plan Year, a Plan so determined in accordance with
Article IX hereof.
2.75 "Total Disability"
shall mean a medically determinable physical or mental impairment which is
expected to result in death or to be of a long continued duration and
which prevents the Participant from engaging in his normal and customary
duties.
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2.76 "Trustees"
shall mean the individual, individuals, corporate entity or other group
designated pursuant to Section I.B.6. of the Adoption Agreement.
2.77 "Trust Fund"
shall mean assets or property held by the Trustees (or any nominee
thereof) under the terms of the Plan and Trust.
2.78 "Valuation Date:"
shall mean the close of business on:
(a) the last day of the Plan Year;
(b) the first day of the Plan Year, or
(c) any other date selected by the Plan Administrator.
2.79 "Year of Credited Service"
shall mean each year with the Employer with respect to which benefits are
treated as accruing on behalf of the Participant according to the
selection made in Section II.B.7. of the Adoption Agreement.
2.80 "Year of Service"
shall mean a 12-consecutive month period (Computation Period) during which
the employee completes the required hours described in Section 4.1 of the
Plan, unless the Employer has elected the use of Elapsed Time in which
event the provisions of Section 2.33 of the Plan shall control.
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ARTICLE II -- Definitions Page 19
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Basic Plan Document #03 - Defined Benefit
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ARTICLE III - ELIGIBILITY AND PARTICIPATION
3.1 Eligible Employee Status
An Employee shall be an Eligible Employee on the date on which he
satisfies the requirements set forth in Sections III.A.2. and III.A.3. of
the Adoption Agreement.
If this is a restatement of an existing Plan, every individual
participating under the prior provisions of the Plan as of the date of the
execution of the Adoption Agreement shall continue to participate in
accordance with the terms hereof unless said individual is in an excluded
classification.
3.2 Commencement of Participation
An Eligible Employee shall enter the Plan, subject to any administrative
requirements set forth herein, on the Entry Date specified in Section
III.A.4. of the Adoption Agreement. Notwithstanding the foregoing, all
Employees on the date specified in Section III.A.5. of the Adoption
Agreement shall commence their participation hereunder on the date
specified therein.
3.3 Administrative Requirements
The Plan Administrator shall require the Employee to supply information
and to complete such forms as reasonably required and, shall delay an
Employee's entrance into the Plan until his compliance with this
requirement.
3.4 Re-Employment of Participant
If a Participant experiences an interruption in his employment with all
Affiliated Employers and is subsequently re-employed he shall be eligible
to re-enter the Plan immediately upon re-employment.
3.5 Change in Employment Status
An Employee otherwise eligible who was previously not eligible to enter
the Plan because he was not an Eligible Employee shall enter participation
immediately upon becoming an Eligible Employee.
3.6 Inactive Participants
If a Participant subsequently becomes ineligible under Section 3.1
hereunder, but is still employed by an Affiliated Employer he shall become
an inactive Participant and shall continue to accrue credit for Years of
Service for purposes of vesting but not benefit accrual.
3.7 Waiver of Participation
Every Eligible Employee shall become a Participant provided in this
Article III
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ARTICLE III -- Eligibility and Participation Page 20
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Basic Plan Document #03 - Defined Benefit
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unless prior to his Entry Date or, if applicable, the date on which he
shall have first accrued a benefit under the Plan he shall have filed with
the Plan Administrator on the form prescribed by him, a duly executed full
or partial waiver of all present and prospective accruals which would
otherwise inure to him under the Plan and the Plan Administrator
determines that the acceptance of such waiver may not adversely affect the
tax qualification of the Plan. An Employee who waives participation or
accruals may later become a Participant as of the Date he re-elects to
join this Plan, provided that as of such Date he shall meet the
requirements for participation. His Normal Retirement benefit shall then
be permanently reduced by the amount so waived.
This waiver of participation does not apply to the standardized
Adoption Agreements (03-002 and 03-004).
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ARTICLE III -- Eligibility and Participation Page 21
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ARTICLE IV - HOURS AND YEARS OF SERVICE
4.1 Years of Service Eligible for Credit
A Participant will receive credit for all Hours and Years of Service with
all Affiliated Employers except as otherwise provided in this Section 4.1.
(a) Eligibility
For purposes of eligibility, an Employer who has not selected Section
II.B.3. of the Adoption Agreement will credit an Employee who accrues
one thousand (1,000) Hours of Service during both the initial twelve
month Computation Period and the Plan Year beginning in the initial
twelve month Computation Period, with two (2) Years of Service.
Years of Service and Breaks-In-Service will be measured on the same
eligibility Computation Period. Furthermore, a Year of Service is not
completed until the end of each consecutive 12-month period without
regard to when during the period 1,000 Hours of Service are
completed.
All Years of Service with the Affiliated Employer are counted toward
eligibility Computation Period.
(i) If the Employer elected to require the completion of two Years
of Service for eligibility and provide 100% immediate vesting
upon plan participation, Years of Service before a one year
Break-In-Service may be disregarded if an Employee incurs a one
year Break-In-Service prior to meeting the two year
requirement.
(ii) In the case of a Participant who does not have any
nonforfeitable right to the Accrued Benefit, Years of Service
before a period of consecutive 1-year breaks in service will
not be taken into account in computing eligibility service if
the number of consecutive 1-year breaks in service in such
period equals or exceeds the greater of 5 or the aggregate
number of Years of Service. Such aggregate number of Years of
Service will not include any Years of Service disregarded under
the preceding sentence by reason of prior Breaks-in-Service.
If a Participant's Years of Service are disregarded pursuant to
the preceding paragraph such Participant will be treated as a
new employee for eligibility purposes. If a Participant's Years
of Service may not be disregarded pursuant to the preceding
paragraph, such participant shall continue to participate in
the plan, or, if terminated, shall participate immediately upon
re-employment.
(b) Vesting
For purposes of determining the vested percentage of a Participant's
Accrued Benefit, the following Years of Service shall be disregarded:
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ARTICLE IV -- Employer Contributions Page 22
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(i) Years of Service completed prior to the Participant attaining
the age, if any, elected in the Adoption Agreement.
(ii) Years of Service completed prior to any period during which
the Affiliated Employers maintained this Plan or a plan which
is a predecessor to this Plan, if so elected in the Adoption
Agreement.
(iii) Years of Service disregarded pursuant to Section 4.1(a)(i) and
(ii) above.
(c) Accrual of Benefits
For purposes of Accrual of Benefits, a Year of Service shall mean a
Plan Year during which a Participant either completes the required
Hours of Service as selected in Section II.B.7. of the Adoption
Agreement or is employed on the last day of the Plan Year.
In determining the Years of Service for which benefits are to accrue
(for purposes of the definition of Accrued Benefit and/or the benefit
formula) the following Years of Service shall be disregarded:
(i) Years of Service completed prior to the commencement of Plan
participation, if so elected in the Adoption Agreement.
(ii) Years of Service disregarded pursuant to Section 4.1(a)(i).
(iii) Years of Service excluded pursuant to Section III.B.6.
(Transition Rule) of the Adoption Agreement.
4.2 Credit for Hours of Service
Hours of Service will be determined on the basis of the method elected in
the Adoption Agreement.
4.3 Predecessor Employers
Service with a predecessor of the Company shall be treated as Hours and/or
Years of Service with the Company if the Plan was or includes a plan of
such predecessor, or is so elected in the Adoption Agreement.
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ARTICLE IV -- Employer Contributions Page 23
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ARTICLE V - CONTRIBUTIONS
5.1 Amount of Employer Contributions
Each Participating Employer shall contribute to the Plan an amount
sufficient to satisfy the minimum funding requirements of Section 412 of
the Code and Part 3 of Title I of ERISA on account of its Employees.
5.2 Payment of Contributions
Each Participating Employer shall make full payment of its contribution to
the Trustees for the Plan year with respect to which such contribution is
made.
5.3 Duty of the Trustees
The Trustees shall have no duty to enforce payment of any contribution of
any Participating Employer.
5.4 Contingent Nature of Contributions
Employer contributions made to the Trust Fund are expressly contingent
upon their deductibility for federal income tax purposes and the
maintenance of the qualified status of the Plan to the extent that loss of
said qualified status would deprive a Participating Employer of the
deduction taken for said contribution.
5.5 Refund of Company Contribution
In the event of:
(a) initial disqualification of the Plan;
(b) disallowance of a deduction under Section 404 of the Code; or
(c) mistake of fact,
that portion of contributions which is disallowed or contributed by
mistake of fact may be returned to the Participating Employer which made
said contribution to the extent permitted under Section 403(c) of ERISA
and Section 401(a)(2) of the Code.
Return of contributions pursuant to (b) or (c) of this section shall be
made within one (1) year of the date of disallowance of deduction, or date
of payment of the mistaken portion of the contribution, as the case may
be. If the Commissioner of Internal Revenue determines that the Plan is
not initially qualified under the code, any contribution made incident to
that initial qualification by the Employer must be returned within one
year of the date of denial of initial qualification, but only if the
application for qualification is made by the time prescribed for filing
the Employer's return for the taxable year in which the Plan is adopted,
or such later date as the Secretary of the Treasury may prescribe.
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ARTICLE V -- Contributions Page 24
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Basic Plan Document #03 - Defined Benefit
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5.6 Employee Contributions
Employee Contributions shall not be permitted under this Plan. In the case
of a restatement, previously made Employee contributions and earnings
thereon shall be fully vested at all times and subject to the following:
(a) All Employee contributions shall be separately accounted for in a
Participant's Contribution Account.
(b) Participant may at any time withdraw all or any portion of his
Contribution, no forfeitures will occur solely as a result thereof.
(c) Subject to the right of withdrawal in (b) above, a Participant's
Contribution Account shall be payable at the same time, in the same
manner, and, in the event of death, to the same Beneficiaries as his
Accrued Benefit.
Beginning with the Plan Year in which this Plan is adopted by the
Employer, this Plan will no longer accept Employee contributions
which are allocated to a separate account. Employee contributions for
Plan Years beginning after December 31, 1986, together with any
matching contributions as defined in Section 401(m) of the Code, will
be limited so as to meet the non-discrimination test of Section
401(m).
5.7 Rollover Contributions
(a) Permissibility
Rollover contributions may be accepted if such option is selected
pursuant to Section IV.A. of the Adoption Agreement only upon such
terms and conditions as may be provided under administrative
regulations set forth by the Plan Administrator, provided, however,
that no funds shall be accepted as a rollover contribution if
acceptance of said funds adversely affects the qualified status of
the Plan or Trust Fund under the Code.
(b) Evidence of Source of Rollover Funds
The Plan Administrator, at its sole discretion, may require the
Participant to provide such evidence as it deems necessary to
determine that the rollover funds originate from a source which may
be rolled over to the Plan without adversely affecting its qualified
status.
(c) Types of Rollovers Accepted
Subject to the requirements of this section, rollover contributions
from the following types of plans may be accepted:
(i) those received by a Participant directly from a plan which is
qualified under Section 401(a) of the Code;
(ii) those received by a Participant from an Individual Retirement
Account which consists only of rollover contributions as
provided in Section 408(d)(3) of the Code;
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(iii) those received by a Participant from an employee annuity
described in Section 403(b) of the Code;
(iv) a transfer of funds directly from the trustee of a plan which
is qualified under Section 401(a) of the code; provided,
however, that such direct transfers shall be accepted only if
so specified in Section III.B. of the Adoption Agreement.
(d) Withdrawal
A Participant may withdraw his rollover contributions (including
earnings and appreciation) in the same manner provided for the
withdrawal of Employee contributions.
(e) Direct Rollover of Eligible Distributions. General Rule.
The subsection applies to distributions made on or after January 1,
1993. Notwithstanding any provision of the plan to the contrary that
would otherwise limit a distributee's election under this Article, a
distributee may elect, at the time and in the manner prescribed by
the plan administrator, to have any portion of an eligible rollover
distribution paid directly to an eligible retirement plan specified
by the distributee in a direct rollover.
(f) Direct Rollover of Eligible Distributions. Definitions.
(i) Eligible rollover distribution: An eligible rollover
distribution is any distribution of all or any portion of the
balance to the credit of the distributee, except that an
eligible rollover distribution does not include: any
distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the distributee or the joint
lives (or joint life expectancies) of the distributee and the
distributee's designated beneficiary, or for a specified period
of ten years or more; any distribution to the extent such
distribution is required under section 401(a)(9) of the Code;
and the portion of any distribution that is not includable in
gross income (determined without regard to the exclusion for
net unrealized appreciation with respect to employer
securities).
(ii) Eligible retirement plan: An eligible retirement plan is an
individual retirement account described in section 408(a) of
the Code, an individual retirement annuity described in section
408(b) of the Code, an annuity plan described in section 403(a)
of the Code, or a qualified trust described in section 401(a)
of the Code, that accepts the distributee's eligible rollover
distribution. However, in the case of an eligible rollover
distribution to the surviving spouse, an eligible retirement
plan is an individual retirement account or individual
retirement annuity.
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(iii) Distributee: A distributee includes an employee or former
employee. In addition, the employee's or former employee's surviving
spouse and the employee's or former employee's spouse or former
spouse who is the alternate payee under a qualified domestic
relations order, as defined in section 414(p) of the Code, are
distributees with regard to the interest of the spouse or former
spouse.
(iv) Direct rollover: A direct rollover is a payment by the plan
to the eligible retirement plan specified by the distributee.
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ARTICLE V -- Contributions Page 27
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ARTICLE VI - CALCULATION OF BENEFITS
6.1 Normal Form of Benefits
All benefits payable hereunder shall be payable as a monthly annuity
commencing on the Participant's Normal Retirement Date payable in the
Normal Form specified in Section III.B.1. of the Adoption Agreement.
6.2 Calculation of Normal Retirement Benefit
The normal retirement benefit is the monthly retirement benefit to be
provided for each Participant on his Normal Retirement Date payable in the
Normal Form.
Subject to the maximum benefit limitation and the One Point Four
limitations in Article VII, any Participant who reaches his Normal
Retirement Date shall be entitled to receive a monthly pension based on
the formula selected in Section III.B.2. of the Adoption Agreement.
The normal retirement benefit of each Participant shall not be less than
the largest periodic benefit that would have been payable to the
Participant upon separation from service at or prior to Normal Retirement
Age under the Plan exclusive of social security supplements, premiums on
disability or term insurance, and the value of disability benefits not in
excess of the normal retirement benefit. For purposes of comparing
periodic benefits in the same form, commencing prior to and at Normal
Retirement Age, the greater benefit is determined by converting the
benefit payable prior to Normal Retirement Age into the same form of
annuity, payable at Normal Retirement Age and comparing the amount of such
annuity payments. In the case of a Top Heavy Plan, the normal retirement
benefit shall not be smaller than the minimum benefit to which the
employee is entitled under Article IX.
For a Standardized Plan (Adoption Agreements #03-002 or #03-004) that
allows past service credit, Section III.B.3.b of the Adoption Agreement
shall apply and past service credits shall be limited to the 5 years
preceding the Effective Date or the date of the restatement. Such credit
or increase must be granted on a uniform basis to all current Employees
under the Plan.
6.3 Calculation of Accrued Benefits
The formula to determine Accrued Benefit will be one of the following
methods as elected in conjunction with the benefit formula pursuant to
Section III.B.4. of the Adoption Agreement.
a. Fractional Rule
A Participant's Accrued Benefit at any time equals the product of the
Normal Retirement Benefit multiplied by a fraction, the numerator of
which is the number of Years of Credited Service at such time, and
the denominator of which is the number Years of Credited Service the
Participant would have at Normal Retirement Age.
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ARTICLE VI -- Calculation of Benefits Page 28
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If the number of Years of Credited Service required for full benefit
at retirement in Section III.B.2. of the Adoption Agreement is less
than 25 years or if no reduction applies, then in applying the
fractional method, the denominator in the fraction shall be the
greater of 25 or the number of years of Credited Service the
Participant would have at Normal Retirement Age.
When determining the Accrued Benefit, the Normal Retirement Benefit
is the monthly benefit to which the Participant would be entitled if
he continued to earn annually until such Normal Retirement Age the
same rate of Compensation upon which his normal retirement benefit
would be computed. This rate of Compensation is computed on the basis
of Compensation taken into account under the Plan, (but not to exceed
the ten years of service immediately preceding the determination).
b. 133 1/3 Rule
A Participant's Accrued Benefit as of any date in reference shall be
the benefit obtained by applying the Unit Credit formula elected
pursuant to Section III.B.2. of the Adoption Agreement to his years
of Credited Service. The normal retirement benefit is the total
Benefit accrued at Normal Retirement Age.
c. Fully insured Accrual
Regardless of the benefit formula selected, this method applies if
the Plan is funded exclusively by the purchase of individual
insurance contracts.
All contracts will provide for level annual premium payments to be
paid extending not later than the retirement age for each individual
participating in the Plan, and commencing with the date the
individual became a Participant in the Plan (or, in the case of an
increase in benefits, commencing at the time such increase becomes
effective).
Increases in a Participant's monthly retirement benefits due to a
change in Compensation shall be recognized as of each Anniversary
Date. Decreases in monthly retirement benefits shall not be
recognized until the decrease in Compensation has been in effect for
two Plan Years.
Benefits provided by the Plan are equal to the benefits provided
under each insurance contract at Normal Retirement Age and are
guaranteed by an insurance carrier (licensed under the laws of a
state to do business with the Plan) to the extent premiums have been
paid.
Each Participant's Accrued Benefit as of any applicable date is the
cash surrender value his insurance contracts would have had on such
applicable date if
i. premiums payable for the Plan Year, and all prior plan Years,
under such contract had been paid before lapse or there was
reinstatement of the policy, and
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ARTICLE VI -- Calculation of Benefits Page 29
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Basic Plan Document #03 - Defined Benefit
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ii. no rights under such contracts had been subject to a security
interest at any time during the Plan Year, and
iii. no policy loan were outstanding at any time during the Plan
Year.
6.4 Transitional Rules
If this Plan is a restatement of a prior Plan, the Participant's Accrued
Benefit shall be as elected in Section III.B.6 of the Adoption Agreement.
For purposes of Section 6.3, the terms years of participation and Years of
Credited Service shall include all earned service by a Participant under
the terms of a prior Plan this Plan has superceded. Such service shall be
credited to the extent included for benefit accrual purposes under the
superceded prior Plan sponsored by an Affiliated Employer, provided,
however, that no more than one (1) Year of Participation shall be credited
for each Year of Credited Service.
Notwithstanding the above election, and regardless of whether or when the
same election shall become effective, the designation of a transitional
rule at Section III.B.6 of the Adoption Agreement shall also apply, as
follows:
(A) if (a) is designated, then apply: Option 1 (formula with wear-away):
Notwithstanding any other provision in the plan, each section 401(a)(17)
employee's accrued benefit under this plan will be the greater of:
(a) the employee's accrued benefit as of the last day of the last plan
year beginning before January 1, 1994, frozen in accordance with Section
1.401(a)(4)-13 of the regulations, or
(b) the employee's accrued benefit determined with respect to the benefit
formula applicable for the plan year beginning on or after January 1,
1994, as applied to the employee's total years of service taken into
account under the plan for purposes of benefit accruals.
A section 401(a)(17) employee means an employee whose current accrued
benefit as of a date on or after the first day of the first plan year
beginning on or after January 1, 1994, is based on compensation for a year
beginning prior to the first day of the first plan year beginning on or
after January 1, 1994, that exceeded $ 150,000.
(B) if (b) is designated, then apply: Option 2 (formula without wear-
away):
Notwithstanding any other provision in the plan, each section 401(a)(17)
employee's accrued benefit under this plan will be the sum of:
(a) the employee's accrued benefit as of the last day of the last plan
year beginning before January 1, 1994, frozen in accordance with section
1.401(a)(4)-13 of the regulations, and (b) the employees accrued benefit
determined under the benefit formula applicable for the plan year
beginning on or after January 1, 1994, as applied to the employee's years
of service credited to the employee for plan years beginning on or after
January 1, 1994, for the purposes of the benefit accruals.
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ARTICLE VI -- Calculation of Benefits Page 30
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A section 401(a)(17) employee means an employee whose current accrued
benefit as of a date on or after the first day of the first plan year
beginning on or after January 1, 1994, is based on compensation for a year
beginning prior to the first day of the first plan year beginning on or
after January 1, 1994, that exceeded $ 150,000.
(C) if (c) is designated, then apply: Option 3 (formula with extended
wear-away):
Unless otherwise provided under the plan, each section 401(a)(17)
employee's accrued benefit under this plan will be the greater of the
accrued benefit determined for the employee under 1 or 2 below:
(1) the employee's accrued benefit determined with respect to the benefit
formula applicable for the plan year beginning on or after January 1,
1994, as applied to the employee's total years of service taken into
account under the plan for purposes of benefit accruals, or
(2) the sum of:
(a) the employee's accrued benefit as of the last day of the last plan
year beginning before January 1, 1994, frozen in accordance with
section 1.401(a)(4)-13 of the regulations, and
(b) the employee's accrued benefit determined under the benefit formula
applicable for the plan year beginning on or after January 1, 1994, as
applied to the employee's years of service credited to the employee for
the plan years beginning on or after January 1, 1994, for purposes of
benefit accruals.
A section 401(a)(17) employee means an employee whose current accrued
benefit as of a date on or after the first day of the first plan year
beginning on or after January 1, 1994, is based on compensation for a year
beginning prior to the first day of the first plan year beginning on or
after January 1, 1994, that exceeded $ 150,000.
6.5 Non-Duplication of Accrued Benefits
In the event a former Participant again becomes a Participant, any
benefits payable with respect to his subsequent employment shall be
reduced if and as necessary to avoid duplication of any benefits payable
or paid with respect to his prior employment.
If a former Participant has received a distribution of vested Accrued
Benefits which has not been repaid in accordance with Article X, his
Normal Retirement date of the distribution) of the present value of the
previously distributed vested Accrued Benefit as of the date of the
Distribution.
6.6 Pre-Erisa Accruals
For Plan Years beginning before Section 411 of the Internal Revenue Code
is applicable hereto, the Participant's Accrued Benefit shall be the
greater of that provided by the Plan, or one-half the benefit which would
have been Accrued had the provisions of Section 6.3 been in effect. In the
event the Accrued Benefit as of the Effective Date of Section 411 of the
Code is less than that provided by Section 6.3, such difference shall be
Accrued in accordance with Section 6.3.
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ARTICLE VI -- Calculation of Benefits Page 31
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6.7 Present Value of Accrued Benefits
The present value of any benefit under the terms of this Plan will be the
actuarial equivalent of the normal form of benefit. Actuarial equivalence
shall be determined on the basis of the mortality rates specified in
Section II.D.1 of the Adoption Agreement, and either the interest rate(s)
specified in the Adoption Agreement or the Section 417 interest rates
whichever produces the greater benefit.
The above paragraph shall not apply to the extent it would cause the Plan
to fail to satisfy the requirements of Article VII of the Plan.
The Section 417 interest rates(s) are:
a. the applicable interest rate if the present value of the benefit
(using such rate(s)) is not in excess of $25,000; or
b. 120 percent of the applicable interest rate if the present value of
the benefit exceeds $25,000 (as determined under Section a. above). In
no event shall the present value determined under this section b. be
less than $25,000.
The applicable interest rate is the interest rate(s) which would be used
by the Pension Benefit Guaranty Corporation for a trusteed single-employer
plan to value a benefit upon termination of an insufficient trusteed
single-employer plan.
Such interest rate will be the rate(s) in effect as of:
(1) the beginning of the Plan Year during which the benefit is
payable, or
(2) the actual date the benefit is payable
depending on the option selected in Section IV.C.2 of the Adoption
Agreement.
The Section 417 interest rate limitations shall apply to distributions in
Plan Years beginning after December 31, 1984. Notwithstanding the
foregoing, the Section 417 interest rate limitations shall not apply to
any distributions commencing in Plan Years beginning before January 1,
1987, if such distributions were determined in accordance with the
interest rate(s) as required by the regulations Section 1.417(e)-1T(e)
(including the PBGC immediate interest rate).
The Section 417 interest rate limitations shall not apply to annuity
contracts distributed to or owned by a Participant prior to September 17,
1985, unless additional contributions are made under the Plan by the
Employer with respect to such contracts. In addition, the Section 417
interest rate limitations shall not apply to annuity contracts owned by
the Employer or distributed to or owned by a Participant prior to the
first Plan Year after December 31, 1988, if the annuity contracts
satisfied the requirements in Sections 1.401(a)-11T and 1.417(e)-1T of the
regulations. The preceding sentence shall not apply if
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ARTICLE VI -- Calculation of Benefits Page 32
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additional contributions are made under the Plan by the Employer with
respect to such contracts on or after the beginning of the first Plan Year
beginning after December 31, 1988.
Notwithstanding the above, if a benefit is distributed in a form other
than a non-decreasing annuity payable for a period not less than the life
of a Participant (or in the case of a qualified pre-retirement survivor
Annuity, the life of the surviving Spouse), the interest rate used in
determining actuarial equivalence of the portion of the excess benefit
percentage that exceeds the base benefit percentage (in an excess plan) or
the offset (in an offset plan), shall be the Section 417 interest rate(s).
6.8 Permitted Disparity
The provisions of Section III.B.6. shall apply with respect to plan years,
and benefits attributable to plan years, beginning after December 31,
1988.
The retirement benefit shall be determined in accordance with the formula
elected by the Employer in Section III.B.2. of the Adoption Agreement.
6.9 Adjustment to Benefits Frozen as of Fresh Start Date.
If this plan satisfies the requirements of section 1.401(a)(4)-13(d) of
the regulations for a fresh-start as of the last day of the last plan year
beginning before January 1, 1994, then, notwithstanding any other
provisions of the plan, any section 401(a)(17) employee's accrued benefit,
frozen in accordance with section 1.401(a)(4)- 13 of the regulations as of
the fresh-start date, is adjusted to reflect increases in the employee's
compensation after the fresh-start date. However, this adjustment may be
made only if the adjustment will not cause the plan to fail to satisfy the
consistency requirement of section 1.401(a)(4)-13(c), as modified by
section 1.401(a)(17)-1(a) of the proposed regulations. In determining a
section 401(a)(17) employee's accrued benefit in any plan year beginning
on or after January 1, 1994, the portion of employee's frozen accrued
benefit attributable to plan years beginning before January 1, 1994, will
be determined in accordance with Method A for statutory Section 401(a)(17)
employees and Method B for employees other than statutory section
401(a)(17) employees. A statutory section 401(a)(17) employee means an
employee whose accrued benefit as of a date on or after January 1, 1994,
is based on compensation for a year beginning prior to January 1, 1989,
that exceeded $200,000. A Section 401(a)(17) employee means an employee
whose current accrued benefit as of date on or after January 1, 1994, is
base on compensation for a year beginning prior to January 1, 1994, that
exceeded $150,000.
Method A (statutory section 401(a)(17) employees):
Step 1: Determine each statutory section 401(a)(17) employee's accrued
benefit as of the last day of the last plan year beginning before January
1, 1989, frozen in accordance with section 1.401(a)(4)-13 of the
regulations.
Step 2: Adjust the amount in Step 1 up through the last day of the last
plan year beginning
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ARTICLE VI -- Calculation of Benefits Page 33
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-----------------------------------------
before the first plan year beginning on or after January 1, 1994, under
the method provided under the plan for increasing the amount in step 1 to
take into account increases in compensation in plan years beginning on or
after January 1, 1989. However, if the plan does not provide for such
increases, the amount in step 2 shall be equal to the amount in step 1.
Step 3: Determine the statutory section 401(a)(17) employee's accrued
benefit as of the last day of the last plan year beginning before January
1, 1994, frozen in accordance with section 1.401(a)(4)-13 of the
regulations.
Step 4: Subtract the amount determined in step 2 from the amount
determined in step 3.
Step 5: Adjust the amount in step 4 by multiplying it by the following
fraction (not less than 1). The numerator of the fraction is the statutory
section 401(a)(17) employee's average compensation determined for the
current year as limited by section 401(a)(17), using the same definition
and compensation formula in effect as of the last day of the last plan
year beginning before January 1, 1994. The denominator of the fraction is
the employee's average compensation for the last day of the last plan
beginning before January 1, 1994, using the definition and compensation
formula in effect as of the last day of the last plan year beginning
before January 1, 1994.
Step 6: Adjust the amount in step 1 by multiplying it by the following
fraction (not less than 1). The numerator of the fraction is the statutory
section 401(a)(17) employee's average compensation for the current year
(as limited by section 401(a)(17)), using the same definition of
compensation and compensation formula in effect as of the last day of the
last plan year beginning before January 1, 1989. The denominator of the
fraction is employee's average compensation for the last day of the last
plan year beginning before January 1, 1989, using the definition and
compensation formula in effect as of the last day of the last plan year
beginning before January 1, 1989.
Step 7: Add the amounts determined in step 5, and the greater of step 6
or 2.
2. Method B (section 401(a)(17) employees other than statutory Section
401(a)(17) employees):
Step 1: Determine the accrued benefit of each section 401(a)(17) employee
other than statutory section 401(a)(17) employees as of the last day of
the plan year beginning before January 1, 1994, frozen in accordance with
section 1.401(a)(4)-13 of the regulations.
Step 2: Adjust the amount in step 1 by multiplying it by the following
fraction (not less than 1). The numerator of the fraction is the average
compensation of the section 401(a)(17) employee who is not a statutory
section 401(a)(17) employee determined for the current year as limited by
section 401(a)(17), using the same definition and compensation formula in
effect as of the last day of the last plan year beginning before January
1, 1994. The denominator of the fraction is the employee's average
compensation for the last day of the last plan year beginning before
January 1, 1994, using the definition and compensation formula in effect
as of the last day of the last plan year beginning before January 1, 1994.
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ARTICLE VI -- Calculation of Benefits Page 34
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ARTICLE VII - LIMITATION ON BENEFITS
7.1 Maximum Benefit Limitations
This Article, except for Section 7.1(c), applies regardless of whether any
Participant is or has ever been a Participant in another qualified plan
maintained by the Employer. If any Participant is or has ever been a
Participant in another qualified plan maintained by the Employer, or a
welfare benefit fund, as defined in Section 419(e) of the Code, maintained
by the Employer, or an individual medical account, as defined in Section
415(l)(2) of the Code, which provides an Annual Addition as defined in
Section 7.4(a), Section 7.2 is also applicable to that Participant's
benefits.
(a) General Limitation
The annual benefit otherwise payable to a Participant at any time
will not exceed the maximum permissible amount. If the benefit the
Participant would otherwise accrue in a Limitation Year would produce
an annual benefit in excess of the maximum permissible amount, the
rate of accrual will be reduced so that the annual benefit will equal
the maximum permissible amount.
(b) Non-Deductible Employee Contributions
If a Participant has made nondeductible employee contributions under
the terms of this Plan, the amount of such contributions is treated
as an Annual Addition to a qualified defined contribution plan, for
purposes of Sections 7.1(a) and 7.2(b) of this article.
(c) Small Benefit Limitation
The limitation in Section 7.1(a) is deemed satisfied if the annual
benefit payable to a Participant is not more than $1,000 multiplied
by the Participant's number of years of service or parts thereof (not
to exceed 10) with the Employer, and the Employer has not at any time
maintained a defined contribution plan, a welfare benefit plan as
defined in Section 419(e) of the Code, or an individual medical
account as defined in Section 415(l)(2) of the Code in which such
Participant participated.
7.2 Participants Covered by Another Plan of the Employer
This Section applies if any Participant is covered, or has ever been
covered, by another plan maintained by the Employer, including a qualified
plan, or a welfare benefit fund, as defined in Section 419(e) of the Code,
or an individual medical account, as defined in Section 415(l)(2) of the
Code, which provides an Annual Addition as described in Section 7.4.(a).
(a) Coverage Under Another Defined Benefit Plan
If a Participant is, or has ever been, covered under more than one
defined benefit plan maintained by the Employer, the sum of the
Participant's annual benefits from all such plans may not exceed the
maximum permissible amount.
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ARTICLE VII -- Limitation on Benefits Page 35
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The Employer will choose in Section III.D.1 of the Adoption Agreement
the method by which the plans will meet this limitation.
(b) Coverage Under Another Plan
If the Employer maintains, or at any time maintained, one or more
qualified defined contribution plans covering any Participant in this
Plan, a welfare benefit fund, as defined in Section 419(e) of the
Code, or an individual medical account as defined in Section
415(l)(2) of the Code, the sum of the Participant's defined
contribution fraction and defined benefit fraction will not exceed
1.0 in any limitation year, and the annual benefit otherwise payable
to the Participant under this Plan will be limited in accordance with
Section III.D.2 of the Adoption Agreement.
(c) Transitional Rule
In the case of an individual who was a Participant in one or more
defined benefit plans of the Employer as of the first day of the
first limitation year beginning after December 31, 1986, the
application of the limitations of this article shall not cause the
maximum permissible amount for such individual under all such benefit
plans to be less than the individual's current Accrued Benefit. The
preceding sentence applies only if such defined benefit plans met the
requirements of Section 415 of the Code, for all limitations years
beginning before January 1, 1987.
7.3 Reserved
7.4 Definitions
(a) Annual additions
The sum of the following amounts credited to a Participant's account
for the Limitation Year:
(i) Employer contributions;
(ii) employee contributions,
(iii) forfeitures, and
(iv) Amounts allocated to an individual medical account, as defined
in Section 415(l)(2) of the Code, which is part of a pension or
annuity plan maintained by the Employer are treated as Annual
Additions to a defined contribution plan. Also, amounts derived
from contributions paid or accrued after December 31, 1985, in
taxable years ending after such date, which are attributable to
post-retirement medical benefits allocated to the separate
account of a Key Employee, as defined in Section 419A(d)(3) of
the Code, under a welfare benefit fund, as defined in Section
419(e) of the Code, maintained by the Employer, are treated as
Annual Additions to a defined contribution plan.
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ARTICLE VI -- Limitation on Benefits Page 36
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(b) Annual Benefit
A retirement benefit under the Plan which is payable annually in the
form of a straight life annuity. Except as provided below, a benefit
payable in a form other than a straight life annuity must be adjusted
to an actuarially equivalent straight life annuity before applying
the limitations of this article. The interest rate assumption used to
determine actuarial equivalence will be the greater of the interest
rate specified in Section II.C.1 of the Adoption Agreement or 5
percent. The annual benefit does not include any benefits
attributable to Employee contributions or rollover contributions, or
the assets transferred from a qualified plan that was not maintained
by the Employer. No actuarial adjustment to the benefit is required
for:
(i) the value of a Qualified Joint and Survivor Annuity,
(ii) the value of benefits that are not directly related to
retirement benefits (such as the qualified disability benefit,
pre-retirement death benefits, and post-retirement medical
benefits), and
(iii) the value of post-retirement cost-of-living increases made in
accordance with Section 415(d) of the Code and Section 1.415-
3(c)(2) (iii) of the Federal Income Tax Regulations.
(c) Compensation
Unless otherwise elected by the Employer under the Adoption
Agreement, Compensation is defined as wages within the meaning of
section 3401(a) of the Code and all other payments of compensation to
the employee by the employer (in the course of the employer's trade
or business) for which the employer is required to furnish the
employee a written statement under sections 6041(d), 6051(a)(3) and
6052 of the Code, determined without regard to any rules under
section 3401(a) that limit the remuneration included in wages based
on the nature or location of the employment or the services
performed. As elected by the Employer in the Adoption Agreement,
compensa-tion shall mean all of a Participant's:
(i) Section 3121 Wages
Wages as defined in Section 3121(a), for purposes of
calculating social security taxes, but determined without
regard to the wage base limitation in Section 3121(a)(1), the
limitations on the exclusions from wages in Section
3121(a)(5)(C) and (D) for elective contributions and payments
by reason of salary reduction agreements, the special rules in
Section 3121(v), any rules that limit covered employment based
on the type or location of an employee's Employer, and any
rules that limit the remuneration included in wages based on
familial relationship or based on the nature or location of the
employment or the services performed (such as the exceptions to
the definition of employment in Section 3121(b)(1) through
(20)).
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(ii) Section 3401(a) Wages
Wages as defined in Section 3401(a) for the purposes of income tax
withholding at the source but determined without regard to any rules
that limit the remuneration included in wages based on the nature or
location of the employment or the services performed (such as the
exception for agricultural labor in Section 3401(a)(2)).
(iii) 415 Safe-harbor Compensation
Wages, salaries, and fees for professional services and other amounts
received (without regard to whether or not an amount is paid in cash)
for personal services actually rendered in the course of employment
with the Employer maintaining the Plan to the extent that the amounts
are includable in gross income (including, but not limited to,
commissions paid salesmen, compensation for services on the basis of
a percentage of profits, commissions on insurance premiums, tips
bonuses, fringe benefits, reimbursements, and expense allowances),
and excluding the following:
i. Employer contributions to a plan of deferred compensation
which are not includable in the employee's gross income for the
taxable year in which contributed, or Employer contributions
under a simplified employee pension plan to the extent such
contributions are deductible by the Employee, or any
distributions from a plan of deferred compensation;
ii. Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by the
employee either becomes freely transferable or is no longer
subject to a substantial risk of forfeiture;
iii. Amounts realized from the sale, exchange or other disposition
of stock acquired under a qualified stock option; and
iv. Other amounts which received special tax benefits, or
contributions made by the Employer (whether or not under a
salary reduction agreement) towards the purchase of an annuity
described in Section 403(b) of the Internal Revenue Code
(whether or not the amounts are actually excludable from the
gross income of the employee).
For any Self-Employed individual Compensation will mean earned
income.
For Limitation Years beginning after December 31, 1991, for purposes
of applying the limitations of this article, Compensation for a
Limitation Year is the Compensation actually paid or includable in
gross income during such Limitation Year.
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ARTICLE VII -- Limitation on Benefits Page 38
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(d) Current Accrued Benefit
A Participant's Current Accrued Benefit is the Accrued Benefit under
the Plan, determined as if the Participant had separated from service
as of the close of the last Limitation Year beginning before
January 1, 1987, when expressed as an annual benefit within the
meaning of 415(b)(2) of the Code. In determining the amount of a
Participant's current Accrued Benefit, the following shall be
disregarded:
(i) any change in the terms and conditions of the plan after May 5,
1986; and
(ii) any cost of living adjustments occurring after May 5, 1986.
(e) Defined Benefit Dollar Limitation: $90,000.
The Defined Benefit Dollar Limitation shall be Ninety Thousand
($90,000) Dollars. Effective on January 1, 1988, and each January
thereafter, the Ninety Thousand ($90,000) limitation will be
automatically adjusted by multiplying such limit by the cost of
living adjustment factor prescribed by the Secretary of the Treasury
under Section 415(d) of the Code in such manner as the Secretary
shall prescribe. The new limitation will apply to Limitation Years
ending within the calendar year of the date of the adjustment.
(f) Defined Benefit Fraction
A fraction, the numerator of which is the sum of the Participant's
projected annual benefits under all the defined benefit plans
(whether or not terminated) maintained by the Employer, and the
denominator of which is the lesser of 125 percent of the Dollar
Limitation determined for the limitation year under Sections 415(b)
and (d) of the Code and in accordance with Section 7.4.(k) below or
140 percent of the Highest Average Compensation, including any
adjustments under Section 415(b) of the Code.
Notwithstanding the above, if the Participant was a Participant as of
the first day of the first Limitation Year beginning after December
31, 1986, in one or more defined benefit plans maintained by the
Employer which were in existence on May 6, 1986, the denominator of
this fraction will not be less than 125 percent of the sum of the
annual benefits under such plans which the Participant had accrued as
of the close of the last Limitation Year beginning before January 1,
1987, disregarding any changes in the terms and conditions of the
plans after May 5, 1986. The preceding sentence applies only if the
defined benefit plans individually and in the aggregate satisfied the
requirements of Section 415 for all Limitation Years beginning before
January 1, 1987.
(g) Defined Contribution Fraction
A fraction, the numerator of which is the sum of the Annual Additions
to the Participant's account under all the defined contribution plans
(whether or
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ARTICLE VII -- Limitation on Benefits Page 39
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
not terminated) maintained by the Employer for the current and all
prior Limitation years, (including the Annual Additions attributable
to the Participant's nondeductible employee contributions to this and
all other defined benefit plans (whether or not terminated)
maintained by the Employer, and the Annual Additions attributable to
all welfare benefit funds, as defined in Section 419(e) of the Code
or individual medical accounts, as defined in Section 415(l)(2) of
the Code, maintained by the Employer), and the denominator of which
is the sum of the maximum aggregate amounts for the current and all
prior limitation Years of Service with the Employer (regardless of
whether a defined contribution plan was maintained by the Employer.
The maximum aggregate amount in any Limitation Year is the lesser of
125 percent of the dollar limitation determined under Sections 415(b)
and (d) of the Code in effect under Section 415(c)(1)(A) of the Code
or 35 percent of the Participant's compensation for such year.
If the employee was a Participant as of the first day of the first
Limitation Year beginning after December 31, 1986, in one or more
defined contribution plans maintained by the Employer which was in
existence on May 6, 1986, the numerator of this fraction will be
adjusted if the sum of this fraction and the defined benefit fraction
would otherwise exceed 1.0 under the terms of this Plan. Under the
adjustment, an amount equal to the product of (1) the excess of the
sum of the fractions over 1.0 times (2) the denominator of this
fraction, will be permanently subtracted from the numerator of this
fraction. The adjustment is calculated using the fractions as they
would be computed as of the end of the last Limitation Year beginning
before January 1, 1987, and disregarding any changes in the terms and
conditions of the plans made after May 5, 1986, but using the Section
415 limitation applicable to the first Limitation Year beginning on
or after January 1, 1987. In addition to the foregoing, the numerator
of the Defined Contribution fraction shall be adjusted pursuant to
Section 1.415-7(d)(1) of the federal Income Tax Regulations and
questions T-6 and T-7 of IRS Notice 83-10.
The Annual Addition for any Limitation Year beginning before January
1, 1987, shall not be recomputed to treat all employee contributions
as Annual Additions.
(h) Employer
For purposes of this article, Employer shall mean the Affiliated
Employer that adopts this Plan, and all members of a controlled group
of corporations (as defined in Section 414(b) of the Code, as
modified by Section 415(h)), all commonly controlled trades or
businesses (as defined in Section 414(c) as modified by Section
415(h)), or affiliated service groups (as defined in Section 414(m))
of which the adopting Employer is a part, and any other entity
required to be aggregated with the Employer pursuant to Section
414(o) of the Code.
(i) Highest Average Compensation
The average compensation for the three consecutive years of service
with the Employer that produces the highest average. A year of
service with the
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Employer is the 12-consecutive month period defined in Section
II.A.2.b. of the Adoption Agreement.
(j) Limitation Year
Limitation year means a calendar year, or the 12-consecutive month
period elected by the Employer in Section II.B.1 of the Adoption
Agreement. All qualified plans maintained by the Employer must use
the same Limitation Year. If the Limitation Year is amended to a
different 12-consecutive month period, the new Limitation Year must
begin on a date within the Limitation Year on which the amendment is
made.
(k) Maximum Permissible Amount
(i) The lesser of the Defined Benefit Dollar Limitation or 100
percent of the Participant's highest average compensation.
(ii) If the Participant has less than 10 years of participation with
the Employer, the Defined Benefit Dollar Limitation is reduced
by one-tenth for each year of participation (or part thereof)
less than ten. To the extent provided in regulations or in
other guidance issued by the Internal Revenue Service, the
preceding sentence shall be applied separately with respect to
each change in the benefit structure of the Plan. The preceding
sentence shall not apply upon termination of the Plan if excess
assets are allocated on a non-discriminatory basis. If the
participant has less than ten years of service with the
Employer, the Compensation limitation is reduced by one-tenth
for each year of service (or part thereof) less than ten. For
purposes of Section 415(e), the adjustments of this section
shall be applied in the denominator of the Defined Benefit
Fraction based upon Years of Service. Years of Service shall
include future years occurring before the Participant's Normal
Retirement Age. Such future years shall include the year which
contains the date the Participant reaches Normal Retirement
Age, only if it can be reasonably anticipated that the
Participant will receive a Year of Service for such year.
(iii) If the Annual Benefit of the Participant commences before the
Participant's Social Security Retirement Age, but on or after
age 62, the defined benefit dollar limitation as reduced above,
if necessary, shall be determined as follows:
A. If a Participant's Social Security Retirement Age is 65,
the dollar limitation for benefits commencing on or after
age 62 is determined by reducing the defined benefit dollar
limitation by 5/9 of one percent for each month by which
benefits commence before the month in which the Participant
attains age 65.
B. If a Participant's Social Security Retirement Age is
greater than 65, the dollar limitation for benefits
commencing on or after age 62 is determined by reducing the
defined benefit dollar limitation by 5/9 of one percent for
each of the first 36 months and 5/12 of
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one percent for each of the additional months (up to 24
months) by which benefit commence before the month of the
Participant's Social Security Retirement Age.
(iv) If the Annual Benefit of a Participant commences prior to age
62, the Defined Benefit Dollar Limitation shall be the
actuarial equivalent of an annual benefit beginning at age 62,
as determined above, reduced for each month by which benefits
commence before the month in which the Participant attains age
62. To determine actuarial equivalence, the interest rate
assumption is the greater of the rate specified in Section
II.D.1. of the Plan or 5 percent. Any decrease in the Defined
Benefit Dollar Limitation determined in accordance with this
provision shall not reflect the mortality decrement to the
extent that benefits will not be forfeited upon the death of
the Participant.
(v) If the annual benefit of a Participant commences after the
Participant's Social Security Retirement Age, the defined
benefit dollar limitation as reduced in (ii) above, if
necessary, shall be adjusted so that it is the actuarial
equivalent of an annual benefit of such dollar limitation
beginning at the Participant's Social Security Retirement Age.
To determine actuarial equivalence, the interest rate
assumption used is the lesser of the rate specified in Section
II.D.1. of the Plan or 5 percent.
(l) Projected Annual Benefit
The annual benefit as defined in Section 7.4(b) of this article, to
which the Participant would be entitled under the terms of the Plan
assuming:
(i) the participant will continue employment until Normal
Retirement Age under the Plan (or current age, if later), and
(ii) the Participant's Compensation for the current Limitation Year
and all other relevant factors used to determine benefits under
the plan will remain constant for all future limitation years.
(m) Year of Participation
The Participant shall be credited with a year of participation
(computed to fractional parts of a year) for each accrual computation
period for which the following conditions are met:
(i) the Participant is credited with at least the number of Hours
of Service (or period of service if the Elapsed Time method is
used) for benefit accrual purposes, required under the terms of
the Plan in order to accrue a benefit for the accrual
computation period, and
(ii) the Participant is included as a Participant under the
eligibility provisions of the Plan for at least one day of the
accrual computation period.
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If these two conditions are met, the portion of a year of
participation credited to the Participant shall equal the amount of
benefit accrual service credited to the Participant for such accrual
computation period. A Participant who is permanently and totally
disabled within the meaning of Section 415(c)(3)(C)(i) of the Code
for an accrual computation period shall receive a year of
participation or (part thereof) for an accrual computation period.
The plan must be established no later that the last day of such
accrual computation period. In no event will more than one year of
participation be credited for any 12-month period.
7.5 Super Top-Heavy Plan
In any Plan Year in which the Top-Heavy Ratio is in excess of ninety (90%)
percent (which means that the Plan is a Super-Top Heavy Plan), or in any
Plan Year in which the Plan is Top Heavy and does not provide a minimum
benefit of at least 3% for each Year of Service as a Participant in a Top-
Heavy Plan Year (maximum 30%), which means that the Plan is a Super Top-
Heavy Plan, the denominators of the Defined Benefit Fraction as defined
in Section 7.4(f) of the Plan and the Defined Contribution Fraction as
defined in Section 7.4 (g) of the Plan shall be computed using one hundred
(100%) percent of the dollar-limitation instead of one hundred twenty-five
(125%) percent.
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ARTICLE VII -- Limitation on Benefits Page 43
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ARTICLE VIII - ENTITLEMENT TO BENEFITS
8.1 Normal Retirement Benefit
A Participant shall be fully vested in his Accrued Benefit as of his
Normal Retirement Age.
8.2 Early retirement Benefits
If the Plan provides for an early retirement benefit as elected in Section
II.C.2. of the Adoption Agreement, a Participant may elect to retire on
any date on or after the first date which qualifies as an Early Retirement
Date. In the event a Participant makes such an election, he shall be
entitled to receive the early retirement benefit equal to the amount
selected in Section III.C.1. of the Adoption Agreement.
8.3 Late Retirement Benefits
In the event a Participant, with the consent of the Employer (which
consent shall be reviewed annually and granted in a non-discriminatory
manner), or as required by law, continues employment beyond his Normal
Retirement Date, his retirement benefit shall be equal to the amount
specified in Section III.C.2. of the Adoption Agreement.
8.4 Disability Retirement Benefits
If the Plan provides for a disability benefit as elected in
Section II.C.3. of the Adoption Agreement, a Participant who becomes
totally disabled as defined in Section 2.75 of the Plan prior to
retirement and separation of service shall be entitled to receive the
benefit specified in the Adoption Agreement.
The Plan Administrator shall have the sole authority to determine a
Participant's eligibility for a Total Disability and, in its discretion,
may require submission of appropriate medical evidence by the Participant
as may be necessary to make said determination.
8.5 Death Benefits
(a) Pre-Retirement Death Benefit
Upon the death of a Participant employed by the Employer on the date
of his death which is prior to Normal Retirement Date, his Spouse
shall be entitled to receive a death benefit as elected by the
Employer in Section III.C.4. of the Adoption Agreement.
If an insured death benefit option is provided as elected in
Section III.C.4.c. of the Adoption Agreement, life insurance
contracts will be purchased for each Participant based on the
elections made in Section III.G. of the Adoption Agreement.
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If a Participant, who is entitled to insurance coverage, dies before
the insurance is issued and effective, his death benefit from such
insurance coverage shall be limited to the premium which was or
should have been used to purchase the insurance contract.
(b) Post-Retirement Death Benefit
Upon the death of a former Participant who has retired under the
terms of the Plan there shall be no death benefit payable to his
Beneficiary except for the balance of payments yet to be made in
accordance with previously selected method of payment by the
Participant prior to his death.
In the event of the death of a Participant who was eligible to retire
on his Normal Retirement Date, but who had not yet retired under the
provisions of the Plan or has not yet made a valid election regarding
his retirement benefits, the death benefit shall be payable in the
form of a Qualified Joint and Survivor Annuity unless the Participant
had validly elected, pursuant to the provisions of Article X hereof,
to have his pension payable in another form. In such event, the death
benefit shall be payable in accordance with the Participant's
election.
(c) Death Benefits of Terminated Participants
There shall be no death benefit payable on account of the death of a
terminated Participant. The Plan Administrator, however, may cause
said Participant's termination benefit (determined in accordance with
Section 8.6 hereof) to be payable to his Beneficiary as soon as
practicable after his death.
(d) Beneficiary Designations
Subject to the provisions hereof, each Participant shall have the
right to designate one or more direct and/or contingent
Beneficiaries. Said designation shall not be effective unless it is
made on a form provided by the Plan Administrator, duly executed by
the Participant and received by the Plan Administrator. A Participant
may change his beneficiary from time to time by executing an amended
beneficiary designation.
(e) Qualified Pre-Retirement Survivor Annuity
Death benefits which become payable under the Plan shall be paid as
follows: a married Participant's Vested Accrued Benefit, shall be
paid the Participant's surviving Spouse in the form of a Qualified
Pre-Retirement Survivor Annuity as more particularly set forth in
Section 10.5 hereof, regardless of any contrary designation of
Beneficiaries made by the Participant, provided however, that the
Participant may designate a Beneficiary other than his Spouse or
another form of payment if such designation complies with the
requirements of Section 417(a)(2)(A) of the Code and Article X
Section 10.5 hereof.
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(f) Failure of Beneficiary Designation
In the event that a Participant fails to deliver a properly executed
beneficiary designation to the Plan Administrator or in the event
that all the designated Beneficiaries predecease the Participant, the
Plan Administrator shall direct the Trustees to pay any benefit due
according to the following priorities:
(i) Surviving Spouse;
(ii) Lineal Descendants, per stirpes;
(iii) Surviving parents;
(iv) Participant's estate.
Each priority class shall share equally among other members of the
class but to the exclusion of the members of the subsequent class.
8.6 Benefits Payable Upon Termination
(a) A Participant who voluntarily or involuntarily terminates his
employment with all Affiliated Employers for any reason other than
his Normal or Early Retirement, or by reason of death or disability
in accordance with the terms of the Plan, shall be entitled to
receive a percentage of his Accrued Benefit determined as of the date
of his termination of employment with the Affiliated Employer in
accordance with the schedule selected in Section III.E. of the
Adoption Agreement.
(b) Determination of Years of Service for Vesting Purposes
For vesting purposes, the term Years of Service shall include all
periods of employment with the Affiliated Employer except for the
periods specifically excluded in Section III.E.3. of the Adoption
Agreement but shall include such predecessor service specified in
II.B.6. of the Adoption Agreement.
(c) Forfeiture of Non-Vested Benefits
After a Participant terminates service and receives a distribution of
his vested Accrued Benefit, he shall forfeit the non-vested portion
of his Accrued Benefit. Where a Participant who is zero percent
vested in his Accrued Benefit terminates service, a distribution of
his vested Accrued Benefit shall be deemed as of his date of
termination and he shall forfeit the non-vested portions of his
Accrued Benefit. Notwithstanding the foregoing, a non-vested
Participant who incurs less than five (5) consecutive one-year breaks
in service and who subsequently returns to the employ of an
Affiliated Employer shall be recredited with any amount forfeited in
accordance with Article X, Section 10.9.
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(d) Accelerated Vesting for Top Heavy Plans
In the event the Plan is a Top Heavy Plan during a Plan Year, a
Participant's non-forfeitable interest shall be no less favorable
than the Top Heavy vesting schedule selected in Section III.E.2. of
the Adoption Agreement.
(e) Amendment of Vesting Schedule
Except as may be specifically permitted under law, no amendment of
the vesting schedule shall cause a Participant to be deprived of any
current portion of his Accrued Benefit.
If the vesting schedule of this Plan is directly or indirectly
amended by any subsequent amendment, the Plan Administrator shall
give each Participant who has completed five (5) Years of Service (or
three (3) Years of Service for Participants who have completed one
(1) or more Hours of Service in a Plan Year beginning after December
31, 1988) an opportunity to have his vested percentage determined
without regard to said amendment. Said election shall be in writing
and shall be irrevocable. The period during which the election may be
made shall commence with the date the amendment is adopted or deemed
to be made and shall end on the latest of:
(i) 60 days after the amendment is adopted;
(ii) 60 days after the amendment becomes effective; or
(iii) 60 days after the Participant is issued written notice of the
Amendment by the Employer or Plan Administrator.
If the vesting schedule under the Plan shifts in or out of the Top-
Heavy vesting schedule for any Plan Year because of the Plan's top
heavy status, such shift shall be considered an amendment within the
meaning of this Section.
8.7 Payment of Benefits
Benefits will be paid only on death, disability, termination of
employment, plan termination, attainment of Early Retirement or Normal
Retirement Age, except to the extent required pursuant to a Qualified
Domestic Relations Order permitted under the provisions of Internal
Revenue Code Section 414(p).
8.8 Reinstatement of Benefit
If a benefit is forfeited because the Participant or beneficiary cannot be
found, such benefit will be reinstated if a claim is made by the
Participant or beneficiary.
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8.9 Vesting Break-In-Service--One Year Holdout
In the case of any Participant who has incurred a 1-year Break-In-Service,
Years of Service before such break will not be taken into account until
the Participant has completed a Year of Service after such Break-In-
Service.
8.10 Cash-outs and Plan Repayments
If an Employee terminates service, and the present value of the Employee's
vested Accrued Benefit derived from Employer and Employee contribution is
not greater than $3,500, the Employee will receive a distribution of the
present value of the entire vested portion of such Accrued Benefit and the
nonvested portion will be treated as a forfeiture. For purposes of this
section, if the present value of an Employee's vested Accrued Benefit is
zero, the Employee shall be deemed to have received a distribution of such
vested Accrued Benefit.
If an Employee terminates service, and the present value of the Employee's
vested Accrued Benefit derived from Employer and Employee contributions
exceeds $3,500, the Employee may elect, in accordance with Section 10.3 of
the plan, to receive a distribution of the present value of the entire
vested portion of such Accrued Benefit and the nonvested portion will be
treated as a forfeiture.
A participant's vested Accrued Benefit shall not include accumulated
deductible Employee contributions within the meaning of Section
72(o)(5)(B) of the Code for plan years beginning prior to January 1, 1989.
For the purpose of the foregoing provisions, present value shall be
calculated using the interest rate specified in Section 6.7 of the Plan.
If an Employee receives a distribution pursuant to this section and the
Employee resumes covered employment under the Plan, he or she shall have
the right to restore his or her Employer-derived Accrued Benefit
(including all optional forms of benefits and subsidies relating to such
benefits) to the extent forfeited upon the repayment to the Plan of the
full amount of the distribution plus interest, compounded annually from
the date of distribution at the rate determined for purposes of Section
411(c)(2)(C) of the Code. Such repayment must be made before the earlier
of five years after the first date on which the Participant is
subsequently reemployed by the Employer, or the date the Participant
incurs 5 consecutive 1-year Breaks-in-Service following the date of
distribution.
If an Employee is deemed to receive a distribution pursuant to this
section, and the Employee resumes employment covered under this plan
before the date the Participant incurs 5 consecutive 1-year Breaks-in-
Service, upon the reemployment of such Employee, the Employer-derived
Accrued Benefit will be restored to the amount of such Accrued Benefit on
the date of such deemed distribution.
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ARTICLE IX - TOP-HEAVY PROVISIONS
9.1 Generally
If the Plan is or becomes top-heavy in any Plan Year beginning after
December 31, 1983, the provisions of this Article will supersede any
conflicting provisions in the Plan or Adoption Agreement.
9.2 Top-Heavy Definitions
a. Key Employee
shall mean any Employee or former Employee (and the beneficiaries of
such Employee) who at any time during the Determination period was:
i. an officer of the Employer or any Affiliated Employer if such
individual's annual Compensation exceeds 50 percent of the
dollar limitation under Section 415(b)(1)(A) of the Code,
ii. an owner (or considered an owner under Section 318 of the Code)
of one of the ten largest interests in the Employer or
Affiliated Employer if such individual's Compensation exceeds
100 percent of dollar limitation, under Section 415(c)(1)(A) of
the Code, or
iii. a five (5) percent owner of the Employer or Affiliated
Employer, or
iv. a one (1) percent owner of the Employer or Affiliated Employer
who has an annual compensation of more than $150,000.
The determination period is the Plan Year containing the
Determination Date and the four (4) preceding Plan Years. The
determination of who is a Key Employee will be made in accordance
with Section 416(i)(1) of the Code and the regulations thereunder.
Annual Compensation means Compensation as defined in Section
415(c)(3) of the Code, but including amounts contributed by the
Employer pursuant to a salary reduction agreement which are
excludable from the Employee's gross income under Section 125,
Section 402(a)(8), Section 402(h) or Section 403(b) of the Code. The
determination period is the Plan Year containing the determination
date and the 4 preceding Plan Years. The determination of who is a
Key Employee will be made in accordance with Section 416(i)(1) of the
Code and the regulations thereunder.
b. Top-heavy Plan
For any Plan Year beginning after December 31, 1983, this Plan is
Top-heavy if any of the following conditions exists:
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i. If the top-heavy ratio for this plan exceeds 60 percent and
this Plan is not part of any required aggregation group or
permissive aggregation group of plans.
ii. If this Plan is a part of a required aggregation group of plans
but not part of a permissive aggregation group and the top-
heavy ratio for the group of plans exceeds 60 percent.
iii. If this Plan is a part of a required aggregation group and part
of a permissive aggregation group of plans and the top-heavy
ratio for the permissive aggregation group exceeds 60 percent.
c. Top-Heavy Ratio
i. If the Employer maintains one or more defined benefit plans and
the Employer has not maintained any defined contribution plan
(including any Simplified Employee Pension Plan) which during
the five (5) year period ending on the Determination Date(s)
has or has had Account Balances, the top-heavy ratio for this
Plan alone or for the required or permissive aggregation group
as appropriate is a fraction, the numerator of which is the sum
of the present value of Accrued Benefits of all Key Employees
as of the Determination Date(s), and the denominator of which
is the sum of the present value of Accrued Benefits (including
any part of any Accrued Benefits distributed in the five (5)
year period ending on the Determination Date(s)), determined in
accordance with Section 416 of the Code and the regulations
thereunder.
ii. If the Employer maintains one or more defined benefit plans and
the Employer maintains or has maintained one or more defined
contribution plans (including any Simplified Employee Pension
Plan) which during the five-year period ending on the
Determination date(s) has or has had any Account Balances, the
top-heavy ratio for any required or permissive aggregation
group as appropriate is a fraction, the numerator of which is
the sum of the present value of Accrued Benefits under the
aggregated defined benefit plan or plans for all Key Employees,
determined in accordance with i. above, and the sum of Account
Balances under the aggregated defined contribution plan or
plans for all key Employees as of the Determination Date(s),
and the denominator of which is the sum of the present value of
Accrued Benefits under the defined benefit plan or plans for
all Participants, determined in accordance with i. above, and
the Account Balances under the aggregated defined contribution
plan or plans for all Participants as of the Determination
Date(s), all determined in accordance with Section 416 of the
Code and the regulations thereunder. The Account Balances under
a defined contribution in both the numerator and denominator of
the top-heavy ratio are increased for any distribution of an
Account Balance made in the five-year period ending on the
Determination Date.
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iii. For purposes of i. and ii. above, the value of Account Balances
and the present value of Accrued Benefits will be determined as
of the most recent Valuation Date that falls within or ends
with the 12-month period ending on the Determination Date,
except as provided in Section 416 of the Code and the
regulations thereunder for the first and second Plan Years of a
defined benefit plan. The account balance and Accrued Benefits
of a Participant who is not a Key Employee but who was a key
employee in a prior year, or who has not been credited with at
least one Hour of Service with any Employer maintaining the
plan at any time during the five-year period ending on the
Determination Date will be disregarded. The calculation of the
Top-heavy Ratio, and the extent to which distributions,
rollovers, and transfers are taken into account will be made in
accordance with Section 416 of the Code and the regulations
thereunder. Deductible employee contributions will not be taken
into account for purposes of computing the Top-heavy Ratio.
When aggregating plans, the value of Account Balances and
Accrued Benefits will be calculated with reference to the
Determination Dates that fall within the same calendar year.
The Accrued Benefit of a Participant other than a Key Employee
shall be determined under the method, if any, that uniformly
applies for Accrued purposes under all defined benefit Plans
maintained by the Employer, or if there is no such method, as
if such benefit accrued not more rapidly than the slowest
accrual rate permitted under the fractional rule of Section
411(b)(1)(C) of the Code.
d. Permissive Aggregation Group
shall mean the required aggregation group of plans plus any other
plan or plans of the Employer which, when considered as a group with
the required aggregation group, would continue to satisfy the
requirements of Sections 401(a)(4) and 410 of the Code.
e. Required Aggregation Group
shall mean:
i. Each qualified plan of the Employer in which at least one Key
Employee participates or participated at any time during the
determination period (regardless of whether the plan has
terminated), and
ii. any other qualified plan of the Employer which enables a plan
described in i. to meet the requirements of Sections 401(a)(4)
or 410 of the Code.
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f. Determination Date
shall mean for any Plan Year subsequent to the first Plan Year, the
last day of the preceding Plan Year and for the first Plan Year of
the Plan, the last day of that year.
g. Valuation Date
shall mean the date elected by the Employer in the Adoption Agreement
as of which Account Balances or Accrued Benefits are valued for
purposes of calculating the Top-Heavy Ratio.
h. Present Value
Present value shall be based only on the interest and mortality rates
specified in Adoption Agreement.
9.3 Minimum Accrued Benefit
a. Notwithstanding any other provision in this Plan except c. d., and e.
below, for any Plan Year in which this Plan is Top-Heavy, the Accrued
Benefit of each Participant who is not a Key Employee shall not be
less than two (2) percent of average compensation for the five
consecutive years for which the Participant had the highest
compensation multiplied by the Participant's Years of Service as a
non-Key Participant in the Plan while the Plan was Top Heavy, but no
more than twenty (20) percent. This minimum benefit shall be provided
solely by Employer contributions and shall be payable as a life
annuity commencing at Normal Retirement Age.
The aggregate compensation for the years during such five-year period
in which the Participant was credited with a year of service will be
divided by the number of such years in order to determine average
annual compensation. The minimum accrual is determined without regard
to any Social Security contribution. The minimum accrual applies even
though under other plan provisions the Participant would not
otherwise be entitled to receive an accrual, or would have received a
lesser accrual for the year because
(i) the non-Key Employee fails to make mandatory contributions to
the Plan,
(ii) the non-Key Employee's compensation is less than a stated
amount,
(iii) the non-Key Employee is not employed on the last day of the
accrual computation period, or
(iv) the Plan is integrated with Social Security.
b. For purposes of computing the minimum accrued benefit, compensation
shall mean compensation as defined in the Adoption Agreement.
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c. No additional benefit accruals shall be provided pursuant to a. above
to the extent that the total accruals on behalf of the Participant
attributable to employer contributions will provide a benefit
expressed as a life annuity commencing at normal retirement age that
equals or exceeds 20 percent of the Participant's highest average
compensation for the five consecutive years for which the participant
had the highest compensation.
d. The provision in a. above shall not apply to any Participant to the
extent the Participant is covered under any other plan or plans of
the Employer and the Employer has provided in the Adoption Agreement
that the minimum allocation or benefit requirement applicable to top-
heavy plans will be met in the other plan or plans.
e. All accruals of employer derived benefit, whether or not attributable
to years for which the Plan is Top-heavy, may be used in computing
whether the minimum accrual requirements of paragraph c. above are
satisfied, and the minimum benefit shall be reduced in accordance
with Section IV.F. of the Adoption Agreement if selected.
9.4 Benefit Form Other Than Life Annuity at Normal Retirement Age
If the form of benefit is other than a single life annuity, the Employee
must receive an amount that is the actuarial equivalent of the minimum
single life annuity benefit. If the benefit commences at a date other that
at Normal Retirement Age, the employee must receive at least an amount
that is the actuarial equivalent of the minimum single life annuity
benefit commencing at Normal Retirement Age.
9.5 Nonforfeitability of Minimum Accrued Benefit
The minimum accrued benefit required (to the extent required to be
nonforfeitable under Section 416(b)) may not be forfeited under Section
411(a)(3)(B) or 411(a)(3)(D).
9.6 Minimum Vesting Schedules
For any Plan Year in which this Plan is Top-heavy, one of the minimum
vesting schedules as elected by the Employer in the Adoption Agreement
will automatically apply to the Plan. The minimum vesting schedule applies
to all benefits within the meaning of Section 411(a)(7) of the Code except
those attributable to employee contributions, including benefits Accrued
before the effective date of Section 416 and benefits accrued before the
Plan becomes Top-heavy. Further, no decrease in a Participant's
nonforfeitable percentage may occur in the event the Plan's status as Top-
heavy changes for any Plan Year. However, this section does not apply to
the Account Balances of any Employee who does not have an Hour of Service
after the Plan has initially become Top-heavy and such Employee's Account
Balance attributable to Employer contributions and forfeitures will be
determined without regard to this section.
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ARTICLE X - FORM AND MANNER OF BENEFIT DISTRIBUTIONS
10.1 Standard Form of Distribution
The standard form of distribution shall be in the form of a Qualified
Joint and Survivor Annuity or a Qualified Preretirement Survivor Annuity,
which shall be paid in the Normal Form or Actuarial Equivalent of the
Normal Form of benefit computed in accordance with Article VI of the Plan.
10.2 Optional Forms of Benefit Payments
(a) Generally
Subject to the requirements of Section 10.5 and Section 10.6 hereof, a
Participant or Beneficiary shall be permitted to receive benefits in an
alternate form as selected in the Adoption Agreement, subject to any
regulations set forth by the Plan Administrator.
(b) Options Permitted
Subject to the requirements of Section 10.5 and 10.6, the following
options shall be permitted if so designated in the Adoption Agreement:
i. periodic payments of substantially equal amounts for a period
which does not exceed the Participant's life expectancy;
ii. a lump sum payment which may include policies in lieu of cash;
iii. a Qualified Joint and Survivor Annuity;
iv. a monthly annuity for the Participant's life and/or the life of
his designated beneficiary;
v. a monthly annuity for the Participant's life, with a fixed
number of guaranteed payments;
vi. a monthly annuity for the Participant's life with a
survivorship pension to the Participant's Beneficiary;
vii. a combination of currently available forms of payment.
(c) Options Not Permitted
The following payment options shall not be permitted by the Plan
Administrator:
i. an option which permits a Participant or Beneficiary to receive
only interest earned on the lump sum value of his Accrued
Benefit ("interest only" option);
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ii. for calendar years beginning before January 1, 1989, where the
Participant's Spouse is not designated as beneficiary or
contingent annuitant, any option under which more than fifty
percent (50%) of the actuarial value (determined as of the date
benefits commence) is paid to a person other than the
Participant.
10.3 Statutory Restriction on Lump Sum Payments
(a) If the present value of a participant's vested Accrued Benefit
derived from Employer and Employee contributions exceeds (or at the
time of any prior distribution exceeded) $3,500, and the Accrued
Benefit is immediately distributable, the Participant and the
Participant's Spouse (or where either the Participant or the Spouse
has died, the survivor) must consent to any distribution of such
Accrued Benefit. The consent of the participant and the participant's
Spouse shall be obtained in writing within the 90-day period ending
on the Annuity Starting Date. The Annuity Starting Date is the first
day of the first period for which an amount is paid as an annuity or
any other form. The Plan Administrator shall notify the Participant
and the Participant's Spouse of the right to defer any distribution
until the Participant's Accrued Benefit is no longer immediately
distributable. Such notification shall include a general description
of the material features, and an explanation of the relative values
of, the optional forms of benefit available under the plan in a
manner that would satisfy the notice requirements of Section
417(a)(3), and shall be provided no less than 30 days and no more
than 90 days prior to the Annuity Starting Date.
Notwithstanding the foregoing, only the participant need consent to
the commencement of a distribution in the form of a Qualified Joint
and Survivor Annuity while the Accrued Benefit is immediately
distributable. Neither the consent of the Participant nor the
Participant's Spouse shall be required to the extent that a
distribution is required to satisfy Section 401(a)(9) or Section 415
of the Code.
Present value shall be determined in accordance with Section 6.7. of
the Plan.
An Accrued Benefit is immediately distributable if any part of the
Accrued Benefit could be distributed to the Participant (or surviving
Spouse) before the Participant attains (or would have attained if not
deceased) the later of Normal Retirement Age or age 62.
(b) For purposes of determining the applicability of the foregoing
consent requirements to distributions made before the first day of
the first Plan Year Beginning after December 31, 1988, the
Participant's Vested Accrued Benefit shall not include amounts
attributable to accumulated deductible Employee contributions within
the meaning of Section 72(o)(5)(B) of the Code.
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10.4 Joint and Survivor Annuity Requirements
(a) Applicability
The provisions of this section shall apply to any Participant who is
credited with at least one Hour of Service with the Employer on or
after August 23, 1984, and such other Participants as provided in
Section (f).
(b) Qualified Joint and Survivor Annuity
Unless an optional form of benefit is selected pursuant to a
qualified election within the 90-day period ending on the Annuity
Starting Date, a married Participant's vested Accrued Benefit will be
paid in the form of a Qualified Joint and Survivor Annuity and an
unmarried Participant's vested Accrued Benefit will be paid in the
normal form of an immediate life annuity. The Participant may elect
to have such annuity distributed upon attainment of the earliest
retirement age under the Plan.
(c) Qualified Preretirement Survivor Annuity.
i. Unless an optional form of benefit has been selected within the
election period pursuant to a qualified election, if a
Participant dies after the Earliest Retirement Age the
Participant's surviving Spouse, if any, will receive the same
benefit that would be payable if the Participant had retired
with an immediate Qualified Joint and Survivor Annuity on the
day before the Participant's date of death.
The surviving Spouse may elect to commence payment under such
annuity within a reasonable period after the Participant's
death. The actuarial value of benefits which commence later
than the date on which payments would have been made to the
surviving Spouse under a Qualified Joint and Survivor Annuity
in accordance with this provision shall be adjusted to reflect
the delayed payment.
ii. Unless an optional form of benefit is selected within the
election period pursuant to a qualified election, if a
Participant dies on or before the Earliest Retirement Age, the
Participant's surviving Spouse, if any, will receive the same
benefit that would be payable if the Participant had:
(i) separated from service on the date of death (or date of
separation from service, if earlier),
(ii) survived to the Earliest Retirement Age,
(iii) retired with an immediate Qualified Joint and Survivor
Annuity at the Earliest Retirement Age, and
(iv) died on the day after the Earliest Retirement Age.
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iii. For purposes of Section 10.4(c)ii., and subject to the
provision of Section 10.3 of the plan, a surviving Spouse will
begin to receive payment at the Earliest Retirement Age.
Benefits commencing after the Earliest Retirement Age will be
the actuarial equivalent of the benefit to which the surviving
Spouse would have been entitled if benefits had commenced at
the Earliest Retirement Age under an immediate Qualified Joint
and Survivor Annuity in accordance with Section 10.4(c)ii.
iv. For the purposes of this section 10.4(c), the benefit payable
to the surviving Spouse shall be attributable to Employee
contribution is in the same proportion as the total Accrued
Benefit derived from Employee contributions is to the Accrued
Benefit of the Participant.
(d) Definitions
i. Election Period
The period which begins on the first day of the Plan Year in
which the Participant attains age 35 and ends on the date of
the Participant's death. If a Participant separates from
service prior to the first day of the Plan Year in which age 35
is attained, with respect to benefits accrued prior to
separation, the election period shall begin on the date of
separation.
Pre-age 35 waiver: A Participant who will not yet attain age 35
as of the end of any current Plan Year may make a special
qualified election to waive the Qualified Preretirement
Survivor Annuity for the period beginning on the date of such
election and ending on the first day of the Plan Year in which
the Participant will attain age 35. Such election will not be
valid unless the Participant receives a written explanation of
the Qualified Preretirement Survivor Annuity in such terms as
are comparable to the explanation required under Section
10.4(e)i. Qualified Preretirement Survivor Annuity coverage
will be automatically reinstated as of the first day of the
Plan Year in which the Participant attains age 35. Any new
waiver on or after such date shall be subject to the full
requirement of this section.
ii. Earliest Retirement Age
The earliest date on which, under the Plan, the Participant could
elect to receive retirement benefits.
iii. Qualified election
A waiver of a Qualified Joint and Survivor Annuity or a Qualified
Preretirement Survivor Annuity shall not be effective unless:
(1) the Participant's Spouse consents in writing to the election
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(2) the election designates a specific alternate beneficiary,
including any class of beneficiaries or any contingent
beneficiaries, which may not be changed without spousal consent
(or the Spouse expressly permits designations by the
Participant without any further spousal consent;)
(3) the Spouse's consent is witnessed by a Plan representative or
notary public. Additionally, a Participant's waiver of the
Qualified Joint and Survivor Annuity will not be effective
unless the election designates a form of benefit payment which
may not be changed without spousal consent (or the Spouse
expressly permits designations by the participant without any
further spousal consent). If it is established to the
satisfaction of a plan representative that such written consent
may not be obtained because there is no Spouse or the Spouse
cannot be located, a waiver will be deemed a Qualified
Election.
Any consent by a Spouse obtained under this provision (or
establishment that the consent of a Spouse may not be obtained) shall
be effective only with respect to such Spouse. A consent that permits
designations by the Participant without any requirement of further
consent by such Spouse must acknowledge that the Spouse has the right
to limit consent to a specific form of benefit where applicable, and
that the Spouse voluntarily elects to relinquish either or both of
such rights. A revocation of a prior waiver may be made by a
Participant without the consent of the Spouse at any time prior to
the commencement of benefits. The number of revocations shall not be
limited. No consent obtained under this provision shall be valid
unless the participant has received notice as provided in Section
10.4(e) below.
iv. Qualified Joint and Survivor Annuity
An immediate annuity for the life of the Participant with a
survivor annuity for the life of the Spouse which is not less
than 50 percent and not more than 100 percent of the amount of
the annuity which is payable during the joint lives of the
Participant and the Spouse and which is the actuarial
equivalent of the Normal Form of Benefit, or, if greater, any
optional form of benefit. The percentage of the survivor
annuity under the Plan shall be 50% (unless a different
percentage is elected by the Employer in the Adoption
Agreement.)
v. Spouse (surviving Spouse)
The Spouse or surviving Spouse of the Participant, provided
that a former Spouse will be treated as the Spouse or surviving
Spouse and a current Spouse will not be treated as the Spouse
or surviving Spouse to the extent provided under a Qualified
Domestic Relations Order as described in Section 414(p) of the
Code.
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vi. Annuity starting date
The first day of the first period for which an amount is paid as an
annuity or any other form.
The annuity starting date for disability benefits shall be the date
such benefits commence if the disability benefit is not an auxiliary
benefit. An auxiliary benefit is a disability benefit which does not
reduce the benefit payable at Normal Retirement Age.
vii. Vested Accrued Benefit
The value of the Participant's vested Accrued Benefit derived from
Employer and Employee contributions (including rollovers). The
provisions of this section shall apply to a Participant who is vested
in amount attributable to Employer contributions, Employee
contributions (or both) at the time of death or distribution.
(e) Notice Requirements
i. In the case of a Qualified Joint and Survivor Annuity as
described in Section 10.4(b), the Plan Administrator shall
provide each Participant no less than 30 days and no more than
90 days prior to the annuity starting date a written
explanation of:
(1) the terms and conditions of a Qualified Joint and Survivor
Annuity form of benefit;
(2) the Participant's right to make and the effect of an
election to waive the Qualified Joint and Survivor Annuity
form of benefit;
(3) the rights of a Participant's Spouse;
(4) the right to make, and the effect of, a revocation of a
previous election to waive the Qualified Joint and Survivor
Annuity; and
(5) the relative values of the various optional forms of
benefit under the Plan.
ii. In the case of a Qualified Preretirement Survivor Annuity as
described in Section 10.4(c), the Plan Administrator shall
provide each Participant within the applicable period for such
Participant, a written explanation of the Qualified
Preretirement Survivor Annuity in such terms and in such a
manner as would be comparable to the explanation provided for
meeting the requirements of Section 10.4(e)i. applicable to a
Qualified Joint and Survivor Annuity.
The applicable period for a Participant is whichever of the
following periods ends last:
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(1) the period beginning with the first day of the Plan Year in
which the Participant attains age 32 and ending with the
close of the Plan Year preceding the Plan Year in which the
Participant attains age 35;
(2) a reasonable period ending after the individual becomes a
Participant;
(3) a reasonable period ending after Section 10.4(e)(iii)
ceases to apply to the Participant;
(4) a reasonable period ending after this section first applies
to the Participant.
Notwithstanding the foregoing, notice must be provided
within a reasonable period ending after separation of
service in case of a Participant who separates from service
before attaining age 35.
For purposes of the preceding paragraph, a reasonable
period ending after the enumerated events described in (2),
(3) and (4) is the end of the two year period beginning one
year prior to the date the applicable event occurs and
ending one year after that date. In the case of a
Participant who separates from service before the Plan Year
in which age 35 is attained, notice shall be provided
within the two year period beginning one year prior to
separation and ending one year after separation. If such a
Participant thereafter returns to employment with the
Employer, the applicable period for such Participant shall
be redetermined.
iii. Notwithstanding the other requirements of this section 10.4(e),
the respective notices prescribed by this section need not be
given to a Participant if
(1) the plan "fully subsidizes" the costs of a Qualified Joint
and Survivor Annuity or the Qualified PreRetirement
Survivor Annuity, and
(2) the Plan does not allow the Participant to waive the
Qualified Joint and Survivor Annuity or Qualified
Preretirement Survivor Annuity and does not allow a married
participant to designate a nonSpouse beneficiary.
For purposes of this section 10.4(3)iii., a Plan fully
subsidizes the costs of a benefit if under the Plan no increase
in cost or decrease in benefits to the Participant may result
from the Participants failure to elect another benefit. Prior
to the time the Plan allows the Participant to waive the
Qualified Preretirement Survivor Annuity, the Plan may not
charge the Participant for the cost of such benefit by reducing
the Participant's benefits under the Plan or by any other
method.
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(f) Transitional Rules
i. Any living Participant not receiving benefits on August 23,
1984, who would otherwise not receive the benefits prescribed
by the previous sub-Sections of Section 10.4 must be given the
opportunity to elect to have the prior sub-Sections of this
section apply if such Participant is credited with at least one
Hour of Service under this Plan or a predecessor Plan in a Plan
Year beginning on or after January 1, 1976, and such
Participant had at least 10 years of vesting service when he or
she separated from service.
ii. Any living Participant not receiving benefits on August 23,
1984, who was credited with at least one Hour of Service under
this Plan or a predecessor Plan on or after September 2, 1974,
and who is not otherwise credited with any service in a Plan
Year beginning on or after January 1, 1976, must be given the
opportunity to have his or her benefits paid in accordance with
Section 10.4(f)iv. of this article.
iii. The respective opportunities to elect (as described in Sections
10.4(f)i and 10.4(f)ii. above) must be afforded to the
appropriate Participants during the period commencing on
August 23, 1984, and ending on the date benefits would
otherwise commence to said Participants.
iv. Any Participant who has elected pursuant to Section 10.4(f)ii
of this article and any Participant who does not elect under
Section 10.4(f)i or who meets the requirements of Section 6.1
except that such Participant does not have at least 10 years of
vesting service when he or she separates from service, shall
have his or her benefits distributed in accordance with all of
the following requirement if benefits would have been payable
in the form of a life annuity:
(1) Automatic Joint and Survivor Annuity. If benefits in the
form of a life annuity become payable to a married
Participant who:
(A) begins to receive payments under the Plan on or after
Normal Retirement Age; or
(B) dies on or after Normal Retirement Age while still
working for the Employer; or
(C) begins to receive payments on or after the qualified
early retirement age; or
(D) separates from service on or after attaining Normal
Retirement Age (or the qualified early retirement age)
and after satisfying the eligibility requirements for
the payment of benefits under the Plan thereafter dies
before beginning to receive such benefits;
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then such benefits will be received under this Plan in
the form of a Qualified Joint and Survivor Annuity,
unless the Participant has elected otherwise during the
election period. The election period must begin at least
6 months before the Participant attains qualified early
retirement age and end not more than 90 days before the
commencement of benefits. Any election hereunder will be
in writing and may be changed by the Participant at any
time.
(2) Election of early survivor annuity. A Participant who is
employed after attaining the qualified early retirement age
will be given the opportunity to elect, during the election
period, to have a survivor annuity payable on death. If the
Participant elects the survivor Annuity, payments under
such annuity must not be less than the payments which would
have been made to the Spouse under the Qualified Joint and
Survivor Annuity if the Participant had retired on the day
before his or her death. Any election under this provision
will be in writing and may be changed by the Participant at
any time. The election period begins on the later of:
(A) the 90th day before the Participant attains the
qualified early retirement age, or
(B) the date on which participation begins, and ends on the
date the Participant terminates employment.
(3) For purposes of this section 10.4(f)iv.,
(A) Qualified early retirement age is the latest of:
(i) the earliest date, under the Plan, on which the
Participant may elect to receive retirement
benefits,
(ii) the first day of the 120th month beginning
before the Participant reaches Normal Retirement
Age, or
(iii) the date the Participant begins participation:
(B) Qualified Joint and Survivor Annuity is an annuity for
the life of the Participant with an survivor annuity
for the life of the Spouse as described in Section
10.4(d)iv. of this article.
10.5 Commencement of Benefits
Unless the Participant elects otherwise, distribution of benefits will
begin no later than the 60th day after the latest of the close of the Plan
Year in which:
(a) the Participant attains age 65 (or Normal Retirement Age, if
earlier);
(b) occurs the 5th anniversary of the year in which the Participant
commenced participation in the Plan; or,
(c) the Participant terminates service with the Employer.
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Notwithstanding the foregoing, the failure of a Participant and Spouse to
consent to a distribution while a benefit is immediately distributable,
within the meaning of Section 10.3 of the Plan, shall be deemed to be an
election to defer commencement of payment of any benefit sufficient to
satisfy this section.
10.6 Retirement With Age and Service Requirement
If a Participant separates from service before satisfying the age
requirement for early retirement, but has satisfied the service
requirement, the Participant will be entitled to elect an early retirement
benefit upon satisfaction of such age requirement.
10.7 Annuity Contracts
(a) Conflicts with Annuity Contracts
The terms of any annuity contract purchased and distributed by the
Plan to a Participant or Spouse shall comply with the requirement of
this plan.
(b) Nontransferability of Annuities
Any annuity contract distributed herefrom must be nontransferable.
10.8 Distribution Requirements.
(a) General Rules.
i. Subject to Section 10.4, Joint and Survivor Annuity
Requirements, the requirements of this section shall apply to
any distribution of a Participant's interest and will take
precedence over any inconsistent provisions of this Plan.
Unless otherwise specified, the provisions of this section
apply to calendar years beginning after December 31, 1984.
ii. All distributions required under this section shall be
determined and made in accordance with the proposed regulations
under Section 401(a)(9) of the Code, including the minimum
distribution incidental benefit requirement of Section
1.401(a)(9)-2 of the proposed regulations.
(b) Required Beginning Date.
The entire interest of a Participant must be distributed or begin to
be distributed no later than the Participant's Required Beginning
Date.
(c) Limits on Distribution Periods.
As of the first distribution calendar year, distributions, if not
made in a single-sum, may only be made over one of the following
periods (or a combination thereof):
i. the life of the Participant,
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ii. the life of the Participant and a designated beneficiary,
iii. a period certain not extending beyond the life expectancy of
the Participant, or
iv. a period certain not extending beyond the joint and last
survivor expectancy of the Participant and a designated
beneficiary.
(d) Determination of amount to be distributed each year.
i. If the Participant's interest is to be paid in the form of
Annuity distributions under the Plan, payments under the
annuity shall satisfy the following requirements:
(1) the annuity distributions must be paid in periodic payments
made at intervals not longer than one year;
(2) the distribution period must be over a life (or lives) or
over a period certain not longer than a life expectancy (or
joint life and last survivor expectancy) described in
Section 401(a)(9)(A)(ii) or Section 401(a)(9)(B)(iii) of
the Code, whichever is applicable;
(3) the life expectancy (or joint life and last survivor
expectancy) for purposes of determining the period certain
shall be determined without recalculation of life
expectancy;
(4) once payments have begun over a period certain, the period
certain may not be lengthened ever if the period certain is
shorter than the maximum permitted;
(5) payments must either be nonincreasing or increase only as
follows:
(A) with any percentage increase in a specified and
generally recognized cost-of-living index;
(B) to the extent of the reduction to the amount of the
Participant's payments to provide for a survivor
benefit upon death, but only if the beneficiary whose
life described in Section 10.8(c) above dies and the
payments continue otherwise in accordance with that
Section over the life of the Participant;
(C) to provide cash refunds of Employee contributions upon
the Participant's death; or
(D) because of an increase in benefits under the Plan.
(6) If the annuity is a life Annuity (or a life Annuity with a
period certain not exceeding 20 years), the amount which
must be distributed on or before the participant's required
Beginning Date (or, in the case of distributions after the
death of the Participant, the date distributions are
required to begin pursuant
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to Section 10.8(e) below) shall be the payment which is
required for one payment interval. The second payment need
not be made until the end of the next payment interval ends
in the next calendar year. Payment intervals are the
periods for which payments are received, e.g., bimonthly,
monthly, semi-annually, or annually.
If the annuity is a period certain annuity without a life
contingency (or is a life annuity with a period certain
exceeding 20 years) periodic payments for each distribution
calendar year shall be combined and treated as an annual
amount. The amount which must be distributed by the
Participant's required beginning date (or, in the case of
distributions after the death of the participant, the date
distributions are required to begin pursuant to Section
10.8(e) below is the annual amount for the first
distribution calendar year. The annual amount for other
distribution calendar years, including the annual amount
for the calendar year in which the Participant's Required
Beginning Date (or the date distributions are required to
begin pursuant to Section 10.8(e) below) occurs, must be
distributed on or before December 31 of the calendar year
for which the distribution is required.
ii. Annuities purchased after December 31, 1988, are subject to the
following additional conditions:
(1) Unless the Participant's Spouse is the designated
beneficiary, if the Participant's interest is being
distributed in the form of a period certain annuity without
a life contingency, the period certain as of the beginning
of the first distribution calendar year may not exceed the
applicable period determined using the table set forth in
Q & A A-5 of Section 1.401(a)(9)-2 of the proposed
regulations.
(2) If the Participant's interest is being distributed in the
form of a Joint and Survivor Annuity for the joint lives of
the Participant and a nonSpouse beneficiary, annuity
payments to be made on or after the Participant's Required
Beginning Date to the designated beneficiary after the
participant's death must not at any time exceed the
applicable percentage of the Annuity payment for such
period that would have been payable to the participant
using the table set forth in Q & A A-6 of Section
1.401(a)(9)-2 of the proposed regulations.
iii. Transitional Rule.
If payments under an annuity which complies with Section
10.8(d)(i) above begin prior to January 1, 1989, the minimum
distribution requirements in effect as of July 27, 1987, shall
apply to distributions from this Plan, regardless of whether
the annuity form of payment is irrevocable. This transitional
rule also applies to deferred annuity contracts distributed to
or owned by the employee prior to January 1, 1989, unless
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additional contributions are made under the Plan by the
Employer with respect to such contract.
iv. If the form of distribution is an annuity made in accordance
with this section 10.8(d), any additional benefits accruing to
the Participant after his or her required beginning date shall
be distributed as a separate and identifiable component of the
annuity beginning with the first payment interval ending in the
calendar year immediately following the calendar year in which
such amount accrues.
v. Any part of the Participant's interest which is in the form of
an individual account shall be distributed in a manner
satisfying the requirements of Section 401(a)(9) of the Code
and the proposed regulations thereunder.
(e) Death Distribution Provisions
i. Distribution beginning before death. If the Participant dies
after distribution of his or her interest has begun, the
remaining portion of such interest will continue to be
distributed at least as rapidly as under the method of
distribution being used prior to the Participant's death.
ii. Distribution beginning after death. If the Participant dies
before distribution of his or her interest begins, distribution
of the Participant's entire interest shall be completed by
December 31 of the calendar year containing the fifth
anniversary of the Participant's death except to the extent
that an election is made receive distributions in accordance
with (1) or (2) below:
(1) if any portion of the Participant's interest is payable to
a designated beneficiary, distributions may be made over
the life or over a period certain not greater than the life
expectancy of the designated beneficiary commencing on or
before December 31 of the calendar year immediately
following the calendar year in which the participant died;
(2) if the designated beneficiary is the Participant's
surviving Spouse, the date distributions are required to
begin in accordance with (1) above shall not be earlier
than the later of
(A) December 31 of the calendar year in which the
Participant died and
(B) December 31 of the calendar year in which the
Participant would have attained age 70 1/2.
(3) If the Participant has not made an election pursuant to
this Section 10.8(e)ii by the time of his or her death, the
Participant's designated beneficiary must elect the method
of distribution no later than the earlier of
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(A) December 31 of the calendar year in which distributions
would be required to begin under this section, or
(B) December 31 of the calendar year which contains the
fifth anniversary of the date of death of the
Participants.
(4) If the Participant has no designated beneficiary, or if the
designated beneficiary does not elect a method of
distribution, distribution of the Participant's entire
interest must be completed by December 31 of the calendar
year containing the fifth anniversary of the Participant's
death.
iii. For purposes of Section 10.8(e)ii above, if the surviving
Spouse dies after the Participant, but before payments to such
Spouse begin, the provisions of Section 10.8(e)ii with the
exception of paragraph (2) therein, shall be applied as if the
surviving Spouse were the participant.
iv. For purposes of Section 10.8(e), any amount paid to a child of
the Participant will be treated as if it had been paid to the
surviving Spouse if the amount becomes payable to the surviving
Spouse when the child reaches the age of majority.
v. For the purposes of this section 10.8(e), distribution of a
Participant's interest is considered to begin on the
Participant's Required Beginning Date (or, if Section
10.8(e)iii. above is applicable, the date distribution is
required to begin to the surviving Spouse pursuant to Section
10.8(e)ii. above). If the distribution in the form of an
annuity described in Section 10.8(d)ii(1) above irrevocable
commences to the Participant before the Required Beginning
Date, the date distribution is considered to begin is the date
distribution actually commences.
(f) Definitions
i. Designated Beneficiary
The individual who is designated as the beneficiary under the
Plan in accordance with Section 401(a)(9) of the Code and the
regulations thereunder.
ii. Distribution Calendar Year
A calendar year for which a minimum distribution is required,
For distributions beginning before the Participant's death, the
first distribution calendar year which contains the
Participant's required beginning date. For distributions
beginning after the Participant's death, the first distribution
calendar year is the calendar year in which distributions are
required to begin pursuant to Section 10.8(e) above.
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iii. Life Expectancy
The life expectancy (or joint and last survivor expectancy)
calculated using the attained age of the Participant (or
designated beneficiary) as of the Participant's (or designated
beneficiary's) birthday in the applicable calendar year. The
applicable calendar year shall be the first distribution
calendar year. If annuity payments commence before the Required
Beginning Date, the applicable calendar year is the year such
payments commence. Life expectancy and joint and last survivor
expectancy are computed by use of the expected return multiples
in Tables V and VI of Section 1.72-9 of the Income Tax
Regulations.
iv. Required Beginning Date
(1) General Rule
The Required Beginning Date of a Participant is the first
day of April of the calendar year following the calendar
year in which the Participant attains age 70 1/2.
(2) Transitional rule
The Required Beginning Date of a Participant who attains
age 70 1/2 before January 1, 1988, shall be determined in
accordance with (A) or (B) below:
(A) Non-5-percent owners
The Required Beginning Date of a Participant who is not
a "5-percent owner" (as defined in (3) below) is the
first day of April of the calendar year in which the
later of retirement or attainment of age 70 1/2 occurs.
(B) 5-percent owners
The Required Beginning Date of a Participant who is a 5-
percent owner during any year beginning after December
31, 1979, is the first day of April following the later
of:
(i) the calendar year in which the Participant attains
age 70 1/2, or
(ii) the earlier of the calendar year with or within
which ends the Plan Year in which the Participant
becomes a 5-percent owner, or the calendar year in
which the Participant retires.
The Required Beginning Date of a Participant who is not a
5-percent owner who attains age 70 1/2 during 1988 and
who has not retired as of January 1, 1989, is April 1,
1990.
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(3) 5-percent owner
A Participant is treated as a 5-percent owner for purposes
of this Section if such Participant is a 5-percent owner as
defined in Section 416(i) of the Code (determined in
accordance with Section 416 but without regard to whether
the Plan is top-heavy) at any time during the Plan Year
ending with or within the calendar year in which such owner
attains age 66 1/2 or any subsequent Plan Year.
(4) Once distributions have begun to a 5-percent owner under
this Section, they must continue to be distributed, even if
the Participant ceases to be a 5-percent owner in a
subsequent year.
(g) Transitional Rule
i. Notwithstanding the other requirements of this section and
subject to the requirement of Section 10.4, Joint and Survivor
Annuity Requirements, distribution on behalf of any employee,
including a 5-percent owner, may be made in accordance with all
of the following requirements (regardless of when such
distribution commences):
(1) The distribution by the trust is one which would not have
disqualified such trust under Section 401(a)(9) of the
Internal Revenue Code as in effect prior to amendment by
the Deficit Reduction Act of 1984.
(2) The distribution is in accordance with a method of
distribution designated by the employee whose interest in
the trust is being distributed or, if the Employee is
deceased, by the beneficiary of such Employee.
(3) Such designation was in writing, was signed by the Employee
or the beneficiary, and was made before January 1, 1984.
(4) The Employee had Accrued a benefit under the Plan as of
December 31, 1983.
(5) The method of distribution designated by the employee or
the beneficiary specifies the time at which distribution
will commence, the period over which distributions will be
made, and in the case of any distribution upon the
employee's death, the beneficiaries of the employee listed
in order of priority.
ii. A distribution upon death will not be covered by this
transitional rule unless the information in the designation
contains the required information described above with respect
to the distributions to be made upon the death of the Employee.
iii. For any distribution which commences before January 1, 1984,
but continues after December 31, 1983, the Employee, or
beneficiary, to whom such distribution is being made, will be
presumed to have designated the method of distribution under
which the distribution is
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being made if the method of distribution was specified in
writing and the distribution satisfies the requirements in sub-
Sections 10.8(g)i(1) and (5).
iv. If a designation is revoked any subsequent distribution must
satisfy the requirement of Section 401(a)(9) of the Code and
the proposed regulations thereunder. If a designation is
revoked subsequent to the date distributions are required to
begin, the trust must distribute by the end of the calendar
year following the calendar year in which the revocation occurs
the total amount not yet distributed which would have been
required to have been distributed to satisfy Section 401(a)(9)
of the Code and the proposed regulations thereunder, but for
the Section 242(b)(2) election. For calendar years beginning
after December 31, 1988, such distributions must meet the
minimum distribution incidental benefit requirements in Section
1.401(a)(9)-2 of the proposed regulations. Any changes in the
designation will be considered to be a revocation of the
designation. However, the mere substitution or addition of
another beneficiary (one not named in the designation) under
the designation will not be considered to be a revocation of
the designation, so long as such substitution or addition does
not alter the period over which distributions are to be made
under the designation, directly or indirectly (for example, by
altering the relevant measuring life). In the case in which an
amount is transferred or rolled over from one plan to another
plan, the rules in Q&A J-2 and Q&A J-3 of Section 1.401(a)(9)-1
of the proposed regulations shall apply.
10.9 Payments Prior to Break-In-Service
(a) Forfeitures
In the event a Participant receives a payment of all or a part of his
Accrued Benefit at a time when he is less than one hundred percent
(100%) vested in the Accrued Benefit, the amount in excess of his
vested percentage shall be treated as a forfeiture.
(b) Return to Employment
In the event a Participant who receives a distribution as provided in
Sub-Section (a) above returns to the employ of an Affiliated Employer
prior to incurring a five (5) year series of Breaks-In-Service, said
Participant shall be entitled to have his Accrued Benefit (including
all optional forms of benefit and subsidies relating to such benefit)
restored to the amount prior to his distribution, less the amount of
the distribution upon the repayment to the Plan of the full amount of
the distribution plus interest compounded annually from the date of
distribution at the rate determined for purposes of Section
411(c)(2)(C) of the Code. Such repayment must be made before the
earlier of five years after the first date on which the Participant
incurs 5 consecutive 1-year Breaks-In-Service following the date of
distribution.
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10.10 Payments Pursuant to Qualified Domestic Relations Orders
Upon receipt of any court order relating to the benefit payable to a
Participant hereunder, the Plan Administrator shall:
(a) notify the Participant and the Alternate Payee(s) of the receipt of
such order and the Plan's procedures for determining the qualified
status of such order; and
(b) determine the portion of the Accrued Benefit payable to Alternate
Payee(s) pursuant to such order. Within eighteen (18) months of
receipt of such order, the Plan Administrator shall determine whether
the order is a Qualified Domestic Relations Order, the Plan
Administrator shall pay the Accrued Benefit (or its present value) to
the Alternate Payee(s) entitles thereto in the manner required by
such Qualified Domestic Relations Order.
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ARTICLE XI - TRUST PROVISIONS
11.1 Establishment of Trust
(a) Appointment of Trustees
The trustees shall consist of one (1) or more individuals,
partnerships, corporations or combination thereof, as chosen by the
Employer in Section I.B.6. of the Adoption Agreement. The Employer
may change the number of said group at any time. The Trustees shall
be Named Fiduciaries for the purpose of managing the Trust Fund for
the purposes of Section 402(a)(1) of ERISA.
(b) Acceptance of Trust
Each Trustee hereby accepts the Trust created hereunder and agrees to
perform the duties on his part to be performed pursuant to this Plan
and Trust.
(c) Corpus of the Trust Fund
The Trustees shall receive any contributions paid to them in cash or
in other property presently acceptable to them. All contributions so
received together with any earnings, profits, increments, additions
thereto and appreciation thereon, less any disbursements authorized
herein shall constitute and be called the Trust Fund.
(d) Control of Trust Fund
The Trustees shall take control and manage the Trust Fund and shall
hold, invest, and reinvest the same together with the income thereof.
All contributions received by the Trustees in accordance with the
terms of the Plan and the earnings and accretions thereto, without
distinction between income and principal, shall constitute and shall
be held and administered as a single fund and the Trustees shall not
be required to segregate or invest separately any share of any
Participant except as otherwise required by the Plan but may do so in
accordance with this Section.
(e) Title to Trust Assets
The Trustees shall have title to the assets of the Trust Fund. The
Company shall have no right, title, interest or claim to said Trust
Fund except as permitted under the terms of Article V, Sections 5.4
and 5.5 hereof and Article XV, Section 15.5.
(f) Segregated Accounts and Annuities
The Trust Fund shall be deemed to also include such segregated
accounts, separate funds or annuity contracts or Policies which may
be purchased by the Trustees for the purpose of providing benefits to
a Participant, Beneficiary or group thereof, notwithstanding the fact
that such segregated account may not share in the earnings, profits,
increments or appreciation of the balance of the Trust Fund.
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11.2 Rights, Duties and Obligations of the Trustees
(a) Manner of Acting
The Trustees, except when there is a single Trustee, shall exercise
any discretion or authority granted hereunder through a majority of
its members in office at the time. Such exercise may be by a vote at a
meeting or in writing without a meeting.
(b) Non-Disqualification of Interested Parties
A Participant, Beneficiary, or person who is otherwise interested in
the Trust Fund shall not be disqualified from voting or acting upon
any matter relating to this Trust Agreement. The power of the Trustees
or any member thereof to act hereunder shall not be restricted, and no
transaction or decision involving this Trust Fund shall be deemed
invalidated in any way by reason of any personal or beneficial
interest in the Trust Fund that any Trustee may have with respect to
such transaction or decision, including any sale or exchange of trust
property to or with any Trustee in another capacity, including another
corporation, partnership or other business in which they, or any of
them, may have a personal interest as a stockholder, officer,
director, partner or otherwise, regardless of any conflict of
interest, provided, however, that nothing herein contained shall
permit the Trustees or any Trustee to engage in any activity which
would constitute a "prohibited transaction" within the meaning of
Part 4 of Title I of ERISA or Section 4975 of the Code.
(c) Standard of Care
The Trustees shall discharge their duties with the care, skill,
prudence and diligence under the circumstances then prevailing that a
prudent man acting in a like capacity and familiar with such matters
would use in the conduct of an enterprise of a like character and with
like aims, and shall diversify the investments of the Trust Fund so as
to minimize the risk of large losses unless, under the circumstances,
it is clearly not prudent to do so.
(d) Compensation and Expenses
The Trustees shall not be compensated for their services as such
unless otherwise agreed by said Trustees and the Employer in writing.
Said compensation, if any, may be paid by the Employer and to the
extent not paid by the Employer shall be payable as an expense from
the Trust Fund. All expenses reasonably incurred by the Trustees in
connection with the performance of their duties and in respect of the
assets or operations of the Trust Fund including, but not limited to,
taxes of any nature, fees, salaries, compensation, counsel and
accounting fees may be paid by the Employer. To the extent not paid by
the Employer, said expenses shall be paid from the Trust Fund as
expenses thereof.
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(e) Liability of the Board of Trustees
i. Reliance on other Fiduciaries
The Trustees shall not be answerable nor incur any liability
for any action taken pursuant to any written direction or
request from the Plan Administrator or the Employer. Evidence
of action with regard to the Plan shall be by resolution of the
Board of Directors certified by the Secretary or Assistant
Secretary of the Employer, or resolution of a majority of the
members of the group constituting the Plan Administrator as the
case may be. The Trustees shall be fully protected in acting
upon any resolution, certificate, or paper believed by it to be
genuine and to be signed or presented by the proper person or
persons and the Trustees shall be under no duty to make
investigation or inquiry as to any statement contained in any
such writing but may accept the same as conclusive evidence of
the truth and accuracy of the statements contained therein.
ii. Reliance on Delegates
Either the Employer or the Plan Administrator may duly
authorize a delegate to make determinations or perform actions,
either specifically or generally, in this regard. Upon the
appointment of a delegate by either the Employer or the Plan
Administrator, the Trustees shall be fully protected in
assuming that said delegate is duly authorized in acting,
unless otherwise informed by the Employer or Plan
Administrator.
iii. Liability of Successor
No successor Trustee shall be held liable or accountable in any
manner for the acts of its predecessor or predecessors.
iv. Responsibility for Adequacy of Trust Fund
No Trustee shall be responsible for the adequacy of the Trust
Fund to meet and discharge any payments or liabilities under
the Plan or for any loss, damage or depreciation of the Trust
Fund in connection with its exercise of discretion hereunder,
except when due to its own breach of trust committed in bad
faith or intentionally or with reckless indifference to the
interest of Participants and Beneficiaries or in violation of
the fiduciary standards as set forth in Part 4 of Title I of
ERISA or Section 4975 of the Code.
(f) Indemnification of the Trustees
Each Trustee shall be indemnified by the Employer for all costs,
expenses, including attorneys' fees, claims, or liability actually
and necessarily incurred in connection with any claims or litigation
by reason of the Trustees having followed written instructions of the
Employer or the Plan Administrator. No such indemnification shall
apply where litigation is occasioned by the fault of the
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Trustees, or is in connection with a violation of ERISA, and any
subsequent statutes of similar purpose. Any such indemnification
shall apply only after full recovery has been made under any
insurance contract protecting the Trustees with respect to each
litigation and in no event exceed the difference between the costs,
expenses and liability determined by such litigation and the amounts
payable by such insurance, had this provision not been in effect.
(g) Resignation or Removal of Trustees
i. The Trustees and each Trustee shall serve until death,
resignation or removal by the Employer.
ii. Any Trustee may resign upon written notice to the Employer or
be removed by delivery of a certified copy of a resolution of
the Board of Directors to that effect.
iii. Said removal or resignation shall be effective sixty (60) days
from the date of delivery of such written notice or resolution
unless a different time is specified by the Employer.
iv. The Employer may remove any Trustee and fill vacancies however
arising at its pleasure except there shall be at least one
Trustee at all times. Appointment of successor Trustees shall
take effect upon delivery to the Trustees (and the removed
members thereof) of an instrument so appointing the
successor(s) and an instrument of acceptance executed by such
successor(s).
v. Any successor Trustee shall become vested with all funds,
powers, rights, duties, obligations, privileges and immunities
as the Trustees have hereunder as if it had been originally
appointed.
vi. In the event there are no remaining Trustees for whatever
reason and the Employer fails to appoint successor Trustees
within thirty (30) days after the effective date of the
resignation or removal or death or incapacity of all the
Trustees, any court of competent jurisdiction of the state
under whose law the Plan is to be construed may, while such
failure continues, appoint successor Trustees upon application
therefore by any Participant or Beneficiary hereunder, or by
any removed Trustees.
11.3 Investment of the Trust Fund
(a) Authority of Trustees
The Trustees shall have full authority and responsibility for
investment of the Trust Fund, subject to the limitations set forth
herein.
(b) Investment Powers of the Trustees
The Trustees in investing the Trust Fund shall not be restricted to
securities commonly known as legal investments for trust funds,
regardless of any statutes
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or rules of law limiting the investments of trustees or trust funds.
The Trustees shall have the same power to invest funds as any
individual of full legal competence has with regard to his own funds,
including the right to deal with the Company, provided, however, that
nothing herein shall permit any Trustee to engage in any activity
which would constitute a "prohibited transaction" within the meaning
of Part 4 of Title I of ERISA or Section 4975 of the Code. Without
limiting the generality of the foregoing, the Trustees at such times,
places and prices and under such terms, conditions and circumstances
(including public and private sales and transactions) as in its
discretion they deem advisable may, subject to the restrictions
referred to above, but shall not be required:
i. To buy, sell, sell short, purchase on margin, exchange, pledge,
encumber, and otherwise acquire, dispose of, trade and deal in
secured and unsecured bonds and notes (whether unmatured, due,
past due, or defaulted), common and preferred, voting and
nonvoting stock (regardless of dividend or earnings record),
warrants, options, puts, calls, straddles, spreads, voting
trust certificates, equipment trust and receivers certificates,
fractional oil and gas and mineral interests, timber rights,
and all other forms of private and governmental securities
(both foreign and domestic) including securities of the
Employer. The Trustees are specifically empowered to invest in
securities of the Employer, or any Affiliated Employer to the
extent of ten (10%) percent of the Trust Fund, unless a
different percentage is specified by resolution of the Board of
Directors, provided, however, that the Trust Fund shall not
hold any Employer security which is not a qualifying Employer
security as provided in Section 407(a)(5) of ERISA;
ii. To buy, sell, exchange, mortgage, encumber, hold, manage,
repair, control, lease or license for any term (even though
such term extends beyond the duration of the Plan or Trust
Agreement, or commences in the future) and otherwise acquire,
dispose of, trade and deal in all forms of tangible and
intangible real and personal property, wherever located,
including, without limitation, real estate, including real
property and related personal property leased to the Employer
or any Affiliated Employer, but only to the extent permitted
under Section 407(a) of ERISA, leaseholds, machinery and
equipment, senior and junior mortgages and liens, accounts
receivable, conditional sales contracts, rental purchase
agreements and other forms of agreement evidencing indebtedness
(whether fixed or contingent), patents, copyrights, trademarks,
trade secrets, and other industrial and intellectual property,
bills of exchange, notes, trade acceptances, commodities and
futures;
iii. To make investments which entail risk or with the principal aim
of obtaining capital appreciation rather than security of
investment and current income;
iv. To borrow, raise or lend monies and guarantee payment of any
obligation for the purposes of the Trust Fund, in such amounts
and upon such terms
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and conditions as the Trustees in their absolute discretion may
deem advisable and for any such monies so borrowed to issue
their promissory note as Trustees and to secure the repayment
thereof by pledging or mortgaging all or any part of the Trust
Fund;
v. To buy, sell, exchange, mortgage, encumber, hold, manage,
acquire, dispose of or otherwise trade or deal in all types of
business ventures in all lines of endeavor, including, without
limitation, exploration for and extraction of oil, gas and
other minerals and natural resources, manufacturing, wholesale
and retail trade, exporting and importing, brokerage,
factoring, transportation, communication and hotels;
vi. To cause any investment in the Trust Fund to be registered in,
or transferred into, its name as Trustees or in the name of its
nominee or nominees or to retain them unregistered or in form
permitting transfer by delivery, but the books and records of
the Trustees shall at all times show that all such investments
are part of the Trust Fund, and the Trustees shall cause the
indicia of ownership to be maintained within the jurisdiction
of the district courts of the United States;
vii. To retain in cash or in banks and keep unproductive of income
or appreciation such part or all of the Trust Fund as it may
deem advisable;
viii. To amortize any premium paid or discount received;
ix. To vote (or refrain from voting) stock and securities, either
in person or by proxy, and otherwise consent to, or request,
participate in, protest, and oppose any action by the issuer;
x. To give general or special proxies and powers of attorney with
or without power of substitution or revocation;
xi. To participate in, consent to, protest, oppose and take any
other action in connection with and receive and retain any
securities resulting from any reorganization, recapitalization,
financial readjustment, consolidation, merger, spin-off, split-
offs, foreclosure, bankruptcy, assignment, liquidation,
dissolution, sale, lease, encumbrance or other disposition of
assets of any issuer, the securities of which are held or
acquired by the Trustees;
xii. To deposit securities in voting trusts with protective
creditors, stockholders or other committees or with any trustee
or depository designated thereby;
xiii. To exercise, sell or permit to lapse any subscription or
conversion privileges;
xiv. To abandon property which it deems inadvisable to retain;
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xv. To determine what is principal and what is income and whether
and what part of any cost, charge, tax, expense or liability
should be charged against principal or income;
xvi. To concentrate investments where prudent to do so;
xvii. To make joint investments with other trusts, persons, firms or
corporations, buy, sell, exchange, mortgage, encumber, hold,
manage, acquire, dispose of or otherwise trade or deal in
undivided and fractional interests in real and personal
property and enter into joint operation, exploration,
development and other agreements with co-owners of undivided
or fractional interests in such property and with owners of
interests in property adjacent to or in the vicinity of
property owned by the Trust Fund;
xviii. To invest in one (1) or more common trust funds.
Notwithstanding any provisions of this Plan and Trust, the
Trustee may cause any part or all of the monies of this Trust
to be commingled with the monies to be invested as part of any
one or any combination of the Funds created by any common
trust fund, and monies and assets of this Trust invested in
said Funds at any time shall be subject to all of the
provisions of said declaration of trust as it is from time to
time amended;
xix. To settle, compromise or submit to arbitration any claims,
debts or damages due or owing to or from the Trust Fund,
commence or defend suits or legal or administrative
proceedings, and represent the Trust Fund in all suits and
legal and administrative proceedings;
xx. To enter into contracts in such form as the Trustees shall
determine with one (1) or more persons, firms, associations,
or corporations, providing for rendering to the Trustees of
advice and counsel relating to and in connection with
investments;
xxi. To apply for and procure from insurance companies selected by
the Trustees such Contracts as the Trustees shall deem proper
for carrying out the purposes of the Plan; to exercise at any
time or from time to time whatever rights and privileges may
be granted under such Policies; to collect, receive and settle
from the proceeds of all such Policies as and when entitled to
do so under the provisions thereof; to make policies loans
provided that such loans and repayments thereof are in
proportion for all Participants and deal with such Policies in
any manner that may be necessary or desirable to carry out and
effectuate the terms and provisions of the Plan, provided,
however, that any Policies shall be purchased in amounts
specified by the Plan Administrator but in no event to cause
the death benefit to exceed the incidental benefit limitations
set forth herein;
xxii. To renew or extend or participate in the renewal or extension
of any mortgage upon such terms as may be deemed advisable,
and to agree to a
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reduction in the rate of interest on any mortgage or to any
other modification or change in the terms of any mortgage or of
any guarantee pertaining thereto in any manner and to any
extent that may be deemed advisable for the protection of the
Trust Fund or the preservation of the value of the investment;
to waive any default, whether in the performance of any
covenant or condition of any mortgage or in the performance of
any guarantee, or to enforce any such default in such manner
and to such extent as may be deemed advisable; to exercise and
enforce any and all rights of foreclosure, to bind in property
on foreclosure, to take a deed in lieu of foreclosure with or
without paying a consideration therefore, and in connection
therewith, to release the obligation on the bond secured by
such mortgage; and to exercise and enforce in any action, suit
or proceeding at law or in equity any rights or remedies in
respect to any mortgage or guarantee;
xxiii. To make, execute, acknowledge, and deliver any and all
documents of transfer and conveyance and any and all other
instruments and do all other acts, although not specifically
mentioned herein, that may be necessary or appropriate to carry
out the powers herein granted for the purpose of this Trust.
(c) Segregated Accounts
Upon the request of the Plan Administrator, the Trustees shall
establish segregated accounts in which to place, hold and invest the
following classes of fund:
i. voluntary contributions received from Participants;
ii. funds received from a Participant which constitute a rollover
contribution within the meaning of IRC Sections 408(d)(3),
402(a)(5), 402(a)(7), 403(a)(4), 403(b)(8), 405(d)(3) or
409(b)(3)(C);
iii. funds received directly from the Trustee of another qualified
plan on behalf of a Participant as permitted under law;
iv. the value of the vested portion of the Accrued Benefit of any
terminated Participant;
v. the Accrued Benefit of any Participant who so directs the
investment of his account (Separate Investment Funds) pursuant
to the terms of the Plan;
vi. funds which may become payable to an Alternate Payee(s)
pursuant to a Qualified Domestic Relations Order.
vii. funds which constitute a segregated 414(k) account;
Any funds segregated by the Trustees shall not participate in the
earnings and appreciation of the Trust Fund, and shall be invested
separately by the Trustees. This subsection shall not be construed as
permitting the segregation of assets in any manner not authorized
under the terms of the Plan. The Trustees shall be
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required to segregate amounts that may become payable pursuant to a
Qualified Domestic Relations Order during a determination of such
order's qualified status in accordance with Section 414(p) of the
Code.
Any of the above classes of funds which are not placed in a
segregated account shall be credited with a proportionate share of
the earnings of the trust fund.
(d) Loans to Participants
Loans to Participants may be permitted as investments of the
Trust Fund if so provided in the Adoption Agreement subject to
the following limitations:
i. Approval
Each loan must be approved by the Trustees and the Plan
Administrator upon written application of the Participant.
In reviewing any loan application, the Trustees and the Plan
Administrator shall utilize a uniform, nondiscriminatory
policy and shall not make loans available to Highly
Compensated Employees on a more favorable basis than made
available to other Employees.
ii. Security
The security provided by the Participant must be adequate in
the opinion of the Trustees. The security may consist solely
of the Participant's vested interest in the Plan and the
interest of the Participant's Spouse in his account (in
which case the amount of the loan shall not exceed the
Participant's vested interest) and/or may be in the form of
other security such as a mortgage or security agreement. In
the event the security is given in the form of a mortgage or
security agreement, the Trustee may in its discretion, lodge
a record of said mortgage or security agreement by filing
same or, if applicable, a Uniform Commercial Code financing
statement, in the public offices of the state, county or
municipality where such notices are customarily filed. If
the security consists of the Participant's vested interest
in the Plan, no more than 50% of his vested interest may be
used to secure loans.
iii. Terms and Conditions
Loans shall not be made from the Trust Fund on terms and
conditions more favorable to the Participant than could be
obtained by the Participant from a recognized financial
institution such as a bank or credit union at the time the
loan was made. To the extent such Accrued Benefit which
served as security for a loan is subject to the requirements
of Code Section 401(a)(11)(B), loans shall be made only upon
consent of the Participant's Spouse. Consent shall be
obtained no earlier than the beginning of the 90-day period
that ends on the date on which the loan is to be secured.
Such consent must be in writing, must acknowledge the effect
of the loan, and must be
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witnessed by a Plan Representative or Notary Public. Such
consent shall be binding with respect to the consenting
Spouse or any subsequent Spouse with respect to the loan. If
a valid spousal consent has been obtained then,
notwithstanding any other provision of this Plan, the
portion of the Participant's vested accrued Benefit used as
a security interest held by the Plan by reason of a loan
outstanding to the Participant shall be taken into account
for the purposes of determining the amount of the Accrued
Benefit payable at the time of death or distribution, but
only if the reduction is used as repayment of the loan.If
less than 100% of the Participant's Vested Accrued Benefit
(determined without regard to the preceding sentence) is
payable to the surviving Spouse, then the Accrued Benefit
shall be adjusted by first reducing the vested Accrued
Benefit by the amount of the security used repayment of the
loan, and then determining the benefit payable to the
surviving Spouse. On renegotiation, extension, renewal or
revision of the loan, a new consent shall be required. All
loans shall be made in accordance with applicable state
usury laws. No distributions shall be made to a Participant,
his Spouse or Beneficiary until all loans are repaid in
full.
iv. Limitations on Non-taxable Amount
No loan to any Participant or Beneficiary can be made to the
extent that such loan when added to the outstanding balance
of all other loans to the Participant or Beneficiary would
exceed the lesser of:
(A) fifty thousand dollars ($50,000) (reduced by the excess
of the highest outstanding loan balance of the
Participant during the twelve (12) month period
immediately preceding the date of the loan over the
outstanding balance of loans from the Plan on the date
the loan was made); or
(B) one-half (1/2) of the nonforfeitable portion of the
Participant's Account, but in no event less than ten
thousand dollars ($10,000).
Said loan must be amortized in level monthly or quarterly
payments and shall not be repayable, by its terms, for a
period exceeding five (5) years except if the loan is used
to acquire the principal residence of the Participant.
An assignment or pledge of any portion of the Participant's
interest in the Plan and a loan, pledge, or assignment with
respect to any insurance purchase contract purchased under
the Plan, will be treated as a loan under this sub-section.
For purposes of the above limitation, all loans of the
Affiliated Employers' Plans are aggregated.
v. Restrictions Applicable to Owner-Employees
No loans will be made to any shareholder-employee or owner-
employee. For purposes of this requirement, a shareholder-
employee means an Employee or officer of an electing small
business (Subchapter S) Corporation who
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owns (or is considered as owning within the meaning of
section 318(a)(1) of the Code), on any day during the
taxable year of such Corporation, more than 5% of the
outstanding stock of the Corporation.
vi. Default
In the event of default, foreclosure on the note and
attachment of security will not occur until a distributable
event occurs under the Plan.
11.4 Accounts to be Kept and Rendered by the Trustees
(a) Records to be kept by the Trustees
The Trustees shall keep detailed and accurate records and accounts of
all investments, receipts, disbursements and other transactions made
with respect to the Trust Fund as well as any additional records that
may be required by law or government regulation or as may be agreed
upon by the Trustees and the Plan Administrator.
(b) Availability of Records
All books and records maintained by the Trustees shall be available
for inspection by any person designated by the Employer or by the
Plan Administrator at reasonable times.
(c) Written Reports to be Filed by the Board of Trustees
Not later than seven (7) months after each Valuation Date the
Trustees shall file with the Employer a written statement setting
forth all investments, receipts and disbursements, and other
transactions effected by it since the last Valuation Date and
containing an exact description of all securities and property
purchased and sold, and the cost or the net proceeds of sale, and
showing the securities and property and investments held on such
Valuation Date and the cost and value thereof as carried on its
books. The written statement shall include the value of any asset
which is valued at other than fair market value, if requested by the
Plan Administrator. Such written statement, after being filed with
the Employer, shall be available for inspection by any Participant or
Beneficiary during normal business hours of the Employer until ten
(10) months after the Valuation Date.
(d) Conclusiveness of Report
In the absence of filing in writing with the Trustees by the Employer
of an exception or objection to any such account within sixty (60)
days, the Employer shall be deemed to have approved such account and
in such case, except as required by law, the Trustees shall be
relieved of all matters and things set forth in such account as
though such account had been settled by decree of competent
jurisdiction. Except as required by law, no person other than the
Employer may require an accounting or may bring any action against
the Trust Fund or Trustees to require an accounting.
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(e) Written Reports to be Filed Upon Removal of Trustee
In the event of such removal or resignation of the Trustees, the
replaced Trustees shall, within sixty (60) days from the effective
date of such removal or resignation, file with the Employer and Plan
Administrator a written statement and report of its accounts and
proceedings covering the period from its last statement and report to
the effective date of such removal or resignation in the manner
provided in this section 11.4 (relating to books and records) and
said statement and report shall have the same effect as if delivered
pursuant to this Section 11.4.
11.5 Exclusive Benefit
No part of the corpus or income of the Trust may be used for other than
the exclusive benefit of Participants.
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ARTICLE XII - POLICIES
12.1 Purchase of Policies
The Plan Administrator shall purchase policies on the lives of the
Participants specified in the Adoption Agreement in the manner and amounts
set forth in the Adoption Agreement. The death benefit payable under this
Plan will be a Qualified Pre-Retirement Survivor Annuity and if
applicable, any other additional incidental death benefit as selected by
the employer in the Adoption Agreement.
12.2 Procedure for Purchase
In the event the Adoption Agreement has provided for the purchase of
policies, the Trustees, upon direction from the Plan Administrator, shall
purchase policies ratably on behalf of all Participants. All policies
shall have an issue date specified in the Adoption Agreement. However, no
provision of this Article XII shall be construed as creating a right to an
insured death benefit on behalf of any Participant or Beneficiary until
and unless a policy on his life has actually been purchased, and a
Participant's death benefit shall only include proceeds of policies in
force on the date of his death.
12.3 Requirements Concerning the Purchase of Policies
Unless otherwise specified in Section III.G.3. of the Adoption Agreement,
all policies purchased hereunder shall conform to the following
requirements:
(a) Legal Reserve Carrier
All policies purchased by the Trustee shall be purchased from a legal
reserve life insurance company.
(b) Premiums
All premiums shall be paid from the Trust Fund or directly to the
insurance company by the plan sponsor. If at any time, the premium on
a policy is not paid, the Trustee shall pay premiums by policy loan
or shall elect an alternative option permitted under the terms of the
policy.
(c) Dividends
Any payments by the insurer on account of credits such as dividends,
experience rating credits, or surrender or cancellation credits shall
be applied within the taxable year of the Employer in which received
or within the succeeding taxable year, toward the next premiums due
before any further Employer contributions are so applied.
(d) Uniformity
The Trustee shall purchase policies to be as nearly uniform in nature
as possible with respect to basic options, cash surrender values and
other material features.
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(e) Ownership
The Trustee shall be the owner and beneficiary of all policies
purchased hereunder and shall be entitled to exercise all incidents
of ownership. The policy shall provide that proceeds can be payable
to the Trustee who shall be required to pay the proceeds in
accordance with the distribution provisions of the Plan.
(f) Disposition of Policies
Subject to the terms of Sections 10.5 and 10.6, all policies
purchased shall be surrendered or sold to the Participant who is
insured under the policies (for its cash surrender value, if any) as
soon as practicable after the Participant ceases employment with all
Affiliated Employers or at such time when continued maintenance of
such policies would cause a violation of the incidental benefit
limitations set forth in this Article XII or under Treasury
Regulation Section 1.401-1(b)(1)(i), provided, however, that the
settlement options provided in said policies do not differ materially
from those provided under Article X of this Plan.
(g) Supplemental Benefits
Agreements for supplemental benefits, including waiver of premium or
additional indemnity benefits, may be purchased if available from the
Insurer.
12.4 Non-Insurable Participants
In the event a Participant who is entitled to insured death benefits is
not insurable or not insurable at standard rates, the Trustees may, in
their sole discretion, provide benefits under one of the following
methods:
(a) entirely through the Trust Fund (without providing any insured death
benefits on behalf of the Participant); or
(b) through the purchase of annuity contracts; or
(c) through the purchase of policies in reduced face amounts (based upon
the amounts purchasable with the premium that would be required to
purchase the necessary face amount in insurance if the Participant
was insurable at standard rates).
12.5 Protection of Insurer
(a) Insurance Carrier Not a Party
No Insurer from which the Trustees procure a policy shall be deemed
to be a party to this Plan.
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(b) Reliance Upon Action of Trustees
Any Insurer shall be fully protected in relying upon the written
direction or certification of the Trustees or Plan Administrator. The
Insurer shall not be responsible to see that the actions of any
Trustee or the Plan Administrator are authorized under the terms of
the Plan, nor shall it be obliged to see to the distribution or
further application of monies paid by the Trustees. The Insurer shall
be entitled to rely upon a notice, certification, direction or other
communication duly executed by any party acting as a Trustee or the
Plan Administrator according to the latest written information
received at the Insurer's home office.
12.6 Conflict With Insurance Contracts
In the event of any conflict between the terms of this Plan and the terms
of any insurance contract issued hereunder, the Plan provisions shall
control.
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ARTICLE XIII - ADMINISTRATION OF THE PLAN
13.1 Appointment of Plan Administrator
The Plan Administrator shall consist of one (1) or more persons,
partnerships, or corporations or combinations thereof who shall be
appointed by the Employer by action of its Board of Directors and who
shall be set forth in Section I.B.6. of the Adoption Agreement. The Plan
Administrator shall constitute a Named Fiduciary as provided in Section
402(a)(1) of ERISA.
13.2 Manner of Acting
The Plan Administrator, except when it consists of a single corporation,
shall exercise its discretion or authority through a majority vote of
those members in office at the time. Such exercise may be by vote at a
meeting or in writing without a meeting. Any entity who is part of a group
who together comprise the Plan Administrator may perform any act necessary
including the promulgation of administrative regulations and filing of
government reports. No person need inquire into the propriety of any act
of the Plan Administrator evidenced by an instrument bearing the signature
of any individual (or individual properly acting on behalf of another
organization) who is part of the group who together comprise the Plan
Administrator.
13.3 Disqualification to Act
No individual (or individual acting on behalf of a partnership or
corporation) who is part of the group who together comprise the Plan
Administrator shall be disqualified from voting or acting on any matter
relating to the Plan because he is also a Participant, Beneficiary,
Trustee, or officer, director or shareholder of any Affiliated Employer.
13.4 Authority and Responsibility of Plan Administrator
The Plan Administrator shall have the following duties and
responsibilities:
a. To maintain records concerning Participants and Beneficiaries
including personal data, records of employment, participation,
allocations to Accounts and eligibility therefore;
b. To prepare and furnish any forms and information which is required to
be distributed to Participants under law and/or the terms of the
Plan;
c. To prepare and file all forms and other information which is required
to be filed with any government agency as required by law,
regulations and/or by the terms of this Plan;
d. To provide directions to the Trustee concerning purchase of life
insurance, funding policies, amounts, method and timing of benefit
payments and any other data or instruction that may be reasonably
required or requested by the Trustee;
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e. To promulgate and set forth administrative regulations concerning the
operation of the Plan as specifically required under the terms of the
Plan or as may be required by circumstances, provided said
regulations are not inconsistent with the terms of the Plan;
f. To construe and interpret provisions of the Plan and to correct
defects and supply omissions as may be required from time to time;
g. To provide and implement the proper operation of the Plan, provided,
however, the Plan Administrator shall not be liable to any party by
virtue of acting or refraining from acting in accordance with the
advice of said advisors. Compensation for such services, to the
extent not paid by a Participating Employer, shall be payable as an
expense of the Plan.
13.5 Requests for Documentation
The Plan Administrator, before deciding the eligibility for benefits of a
Participant or Beneficiary, in its discretion, may require submission of
proper documentation of age, death, disability or any other item as it
deems necessary for the administration of the Plan.
13.6 Removal or Resignation
The Plan Administrator or any member of the group who together comprise
the Plan Administrator may be removed at the pleasure of the Employer by
action of its Board of Directors or may resign by written notice to the
Employer. Said removal or resignation shall be effective sixty (60) days
after delivery of such notice to the other party unless some other date is
designated by the Employer. After removal or resignation the Employer may
appoint a successor Plan Administrator or member of the group who together
constitute the Plan Administrator.
13.7 Failure to Appoint Plan Administrator
If no individual or organization has been appointed to the group, or if
there are no remaining members of the group, the Employer shall be deemed
to be the Plan Administrator.
13.8 Compensation
The Plan Administrator shall perform his duties without compensation,
provided, however, that all expenses reasonably incurred by the Plan
Administrator, to the extent not paid by a Participating Employer, shall
be payable as an expense of the Plan.
13.9 Allocation of Responsibilities
Members of the group comprising the Plan Administrator may agree among
themselves to specifically allocate or delegate specific responsibilities,
duties or obligations to one (1) or more members of said group, in which
event the other
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members of the group shall not be liable for any action taken with respect
to such allocated responsibilities, duties or obligations to the extent
permitted by Section 405(c) of ERISA.
13.10 Delegation to Retirement Committee
If the Employer is designated as the Plan Administrator hereunder it may,
at its sole discretion, make a revocable delegation of its
responsibilities, duties, and obligations to a Retirement Committee by
naming a committee of not less than two (2) persons who shall be set forth
in Section I.B.6. of the Adoption Agreement. In the event a Retirement
Committee is so designated, it shall act on behalf of the Employer as if
each member thereof was a member of the group constituting the Plan
Administrator and shall have all the rights and authority attendant
thereto, except that said Retirement Committee shall act on behalf of the
Employer which shall be formally designated as Plan Administrator.
13.11 Bonding
The Plan Administrator shall arrange to be bonded in an amount only to the
extent required under applicable law.
13.12 Indemnification
The Employer shall indemnify the Plan Administrator for any expenses and
liabilities reasonably incurred in connection with or as a result of
performance of its duties, unless it shall be adjudged to be grossly
negligent or guilty of willful misconduct. The Employer may provide for
indemnification of the Plan Administrator through insurance in addition
to, or in lieu of, its obligation to indemnify the Plan Administrator.
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ARTICLE XIV - CLAIMS PROCEDURES
14.1 Claim for Benefits
It is anticipated that the Plan Administrator will administer the Plan in
such a manner as to provide benefits without requiring Participants to
file claims, however, any Participant or Beneficiary who at any time
believes he is entitled to payment of a benefit under the Plan may apply
for said benefit on a form supplied by the Plan Administrator. The Plan
Administrator may within thirty (30) days require the Participant to
submit such additional information as the Plan Administrator deems
necessary to determine the validity of the Participant's claim.
14.2 Disposition of Claim
Written notice of the disposition of the claim shall be given to the
Participant or Beneficiary within ninety (90) days after the claim for
benefits (or any additional information requested by the Plan
Administrator) is submitted. If the claim is denied, in whole or in part,
the Plan Administrator shall furnish the following to the Participant or
Beneficiary:
a. The specific reasons for the denial with references to the Plan,
administrative regulations of the Plan Administrator and/or the law as
appropriate;
b. A description of any additional material necessary for the Participant
or Beneficiary to perfect his claim and why such information is
necessary;
c. An explanation of the Plan's claim review procedure.
If the Participant or Beneficiary fails to request review of a full or
partial denial of benefits within sixty (60) days of his notice thereof,
except as required by law, his claim shall be deemed conclusively denied.
14.3 Claims Review Procedure
Any Participant or Beneficiary who desires further review of a claim
denied, in whole or in part, shall file a written request for
reconsideration with the Plan Administrator within sixty (60) days after
receipt of a written denial. The Plan Administrator, in its sole
discretion, may convene a hearing on reasonable notice to all parties or
may make its decision solely based upon any written evidence submitted by
the Participant or Beneficiary. For this purpose, the Plan Administrator
may request such additional evidence from the Participant or Beneficiary
as it deems necessary. The Plan Administrator shall file written notice of
his decision concerning the review with the Participant or Beneficiary
within sixty (60) days thereafter. Said decision shall contain the
specific reasons for said decision, with appropriate references to the
Plan, the law, and/or to administrative regulations set forth by the Plan
Administrator.
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14.4 Conclusiveness of Determination
Except as required by law, the Participant or Beneficiary shall be
conclusively bound by the final decision rendered by the Plan
Administrator, unless he notifies the Plan Administrator within ninety
(90) days of his intention to commence legal proceedings and actually
commences such legal proceedings within one hundred eighty (180) days
after such final decision.
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ARTICLE XIV -- Claims Procedures Page 91
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ARTICLE XV - AMENDMENT, TERMINATION AND MERGER
15.1 Employer's Right Reserved
While it is the intention of the Employer to continue the Plan
indefinitely and to make recurring and substantial contributions to the
Trust Fund, pursuant to the terms of the Plan, the Employer reserves the
right to amend, modify or terminate the Plan or to suspend contributions
of all Participating Employers at any time, subject to the following
limitations:
a. The Employer may
i. change the choice of options in the Adoption Agreement,
ii. add overriding language in the Adoption Agreement when such
language is necessary to satisfy Section 415 or Section 416 of
the code because of the required aggregation of multiple plans,
and
iii. add certain model amendments published by the Internal Revenue
Service which specifically provide that their adoption will not
cause the plan to be treated as individually designed. An
Employer that amends the plan for any other reason, including a
waiver of the minimum funding requirement under Section 412(d) of
the code, will no longer participate in this Regional prototype
plan and will be considered to have an individually designed
plan.
b. No amendment enlarging the duties or responsibilities of the Trustees
shall be made without their consent;
c. Except as specially permitted under law, no amendment, merger or
termination shall decrease the value of the Accrued Benefit of a
Participant or Beneficiary as of the date of execution of the
amendment, merger or termination, or if later, 15 days after any
required SEPPAA Notice is given;
d. No amendment, merger or termination shall deprive a Participant or
Beneficiary currently receiving or entitled to receive benefits of
any benefit so designated as of the date of execution of the
amendment, or if later, 15 days after any required SEPPAA Notice is
given;
e. No amendment, merger or termination shall provide for diversion of
any part of the Trust Fund other than for the exclusive benefit of
Participants or Beneficiaries, except as permitted by law.
f. No amendment to the Plan (including a change in the actuarial basis
for determining optional or early retirement benefits) shall be
effective to the extent that it has the effect of decreasing a
Participant's Accrued Benefit. Notwithstanding the preceding
sentence, a participant's Accrued Benefit
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may be reduced to the extent permitted under Section 412(c)(8) of the
Code. For purposes of this paragraph, a plan amendment which has the
effect of (1) eliminating or reducing an early retirement benefit or
a retirement-type subsidy, or (2) eliminating an optional form of
benefit, with respect to benefits attributable to service before the
amendment shall be treated as reducing accrued benefits. In the case
of a retirement-type subsidy, the preceding sentence shall apply only
with respect to a Participant who satisfies (either before or after
the amendment) the preamendment conditions for the subsidy. In
general, a retirement-type subsidy is a subsidy that continues after
retirement, but does not include a qualified disability benefit, a
medical benefit, a social security supplement, a death benefit
(including life insurance). Furthermore, if the vesting schedule of a
Plan is amended, in the case of an Employee who is a Participant as
of the later of the date such amendment is adopted or becomes
effective, the nonforfeitable percen-tage (determined as of such
date) of such Employee's employer-derived Accrued Benefit will not be
less than the percentage computed under the Plan without regard to
such amendment.
g. An employer that has adopted a standardized regional prototype plan
may amend the trust or custodial account document provided such
amendment merely involves the specifications of the names of the
plan, employer, trustee or custodian, plan administrator and other
fiduciaries, the trust year, or the name of any pooled trust in which
the plan's trust will participate.
h. An employer that has adopted a non-standardized regional prototype
plan will not be considered to have an individually designed plan
merely because the employer amends administrative provisions of the
trust or custodial account document (such as provisions relating to
investments and duties of trustees) so long as the amended provisions
are not in conflict with any other provision of the plan and do not
cause the plan to fail to qualify under section 401(a) of the Code.
15.2 Amendments to Cover Additional Employers
The Employer shall have the right, in its discretion, to amend the Plan to
render eligible for participation hereunder the employees of any other
organization (whether a sole proprietorship, partnership or corporation).
15.3 Effect of Terminations
a. Full Vesting
All Participants affected by a full or partial termination of this
Plan shall be one hundred percent (100%) vested in their Accrued
Benefits to the extent funded as of the effective date of such full
or partial termination.
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b. Continuation of Trust
In the event this Plan is terminated, the Employer shall instruct the
Trustee either to:
i. Liquidate the Trust Fund and to pay over all monies due
Participants and Beneficiaries as soon as practicable
thereafter in accordance with the provisions of the Plan;
ii. continue the Trust Fund on a wasting basis to provide for the
payment of benefits to Participants and Beneficiaries.
15.4 Restrictions on Benefits to Highly Paid Employees
a. Applicability
For the Plan Years beginning before January 1, 1992, Employer
contributions on behalf of any of the 25 highest paid employees at
the time the Plan is established and whose anticipated annual benefit
exceeds $1,500 will be restricted as provided in paragraph (b) upon
the occurrence of the following conditions:
i. The Plan is terminated within 10 years after its establishment,
ii. The benefits of such highest paid Employee become payable
within 10 years after the establishment of the Plan, or
iii. If Section 412 of the Code (without regard to Section
412(h)(2)) does not apply to this Plan, the benefits of such
employee become payable after the Plan has been in effect for
10 years, and the full current costs of the Plan for the first
10 years have not been funded.
b. Limitations Explained
Employer contributions which may be used for the benefit of an
Employee described in paragraph (a) shall not exceed the greater of
$20,000, or 20% of the first $50,000 of the Employee's compensation
multiplied by the number of years between the date of the
establishment of the Plan and:
i. If (a)i. applies, the date of the termination of the Plan,
ii. If (a)ii. applies, the date the benefits become payable, or
iii. If (a)iii. applies, the date of the failure to meet the full
current costs.
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c. Benefit Increases due to Plan Amendments
If the Plan is amended so as to increase the benefit actually payable
in the event of the subsequent termination of the Plan or the
subsequent discontinuance of the contributions thereunder, then the
provisions of the above paragraphs shall be applied to the Plan as so
changed as if it were a new Plan established on the date of the
change. The original group of 25 Employees (as described in (a)
above) will continue to have the limitations in (b) apply as if the
Plan had not been changed. The restrictions relating to the change of
Plan should apply to benefits or funds for each of the 25 highest
paid Employees on the effective date of the change except that such
restrictions need not apply with respect to any Employee in this
group for whom the normal annual pension or annuity provided by
Employer contributions prior to that date and during the ensuing ten
years, based on his rate of Compensation on that date, could not
exceed $1,500.
The Employer contributions which may be used for the benefit of the
new group of 25 Employees will be limited to the greater of:
i. The Employer contributions (or funds attributable thereto)
which would have been applied to provide the benefits for the
Employee if the previous Plan had been continued without
change;
ii. $20,000; or
iii. The sum of
(1) the Employer contributions (or funds attributable thereto)
which would have been applied to provide benefits for the
Employee under the previous Plan if it had been terminated
the day before the effective date of change, and
(2) an amount computed by multiplying the number of years for
which the current costs of the Plan after that date are met
by 20 percent of his annual Compensation, or $10,000,
whichever is smaller.
d. Special Limitations for Restricted Employee
Notwithstanding the above limitations, the following limitations will
apply if they would result in a greater amount of Employer
contributions to be used for the benefit of the restricted Employee:
i. In the case of a Substantial Owner (as defined in Section
4022(b)(5) of ERISA), a dollar amount which equals the present
value of the benefit guaranteed for such employee under Section
4022 of ERISA, or if the Plan has not terminated, the present
value of the benefit that would be guaranteed if the Plan
terminated on the date the benefit commences,
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determined in accordance with regulations of the Pension
Benefit Guaranty Corporation (PBGC); and
ii. In the case of the other restricted Employees, a dollar amount
which equals the present value of the maximum benefit described
in Section 4022(b)(3)(B) of ERISA (determined on the earlier of
the date the Plan terminates or the date benefits commence, and
determined in accordance with regulations of PBGC) without
regard to any other limitations in Section 4022 of ERISA.
e. Benefit Must Be Nondiscriminatory Per IRC 401(a)(4)
In the event of Plan termination, the benefit of any Highly
Compensated active or former Employee is limited to a benefit that is
nondiscriminatory under Section 401(a)(4).
For Plan Years beginning on or after January 1, 1992, benefits
distributed to any of the 25 most Highly Compensated active and
former Highly Compensated Employees are restricted such that the
annual payments are no greater than an amount equal to the payment
that would be made on behalf of the Employee under a single life
annuity that is the actuarial equivalent of the sum of the Employee's
Accrued Benefit and the Employee's other benefits under the Plan.
The preceding paragraph shall not apply if:
i. after payment of the benefit to an Employee described in the
preceding paragraph, the value of Plan assets equals or exceeds
110% of the value of current liabilities, as defined in Section
412(l)(7), or
ii. the value of the benefits for an employee described above is
less than 1% of the value of current liabilities.
For purposes of this Section, benefit includes loans in excess of the
amount set forth in Section 72(p)(2)(A), any periodic income, any
withdrawal values payable to a living employee, and any death
benefits not provided for by insurance on the Employee's life.
15.5 Allocation Upon Termination of Trust
a. In the event this Plan is terminated during such time that it is a
"covered" plan within the meaning of Section 4021 of ERISA, the Plan
Administrator shall file ten (10) days advance notice with the
Pension Benefit Guaranty Corporation. Upon issuance of a notice of
insufficiency (as provided in Section 4041(b) of ERISA) or upon
issuance of court order permitting allocation or distribution of Plan
assets, said assets shall be allocated in the following manner after
all expenses of the Trust Fund have first been paid:
- --------------------------------------------------------------------------------
ARTICLE XV -- Amendment, Termination and Merger Page 96
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
STEP ONE: To that portion of each Participant's Accrued Benefit
which is derived from the Participant's contributions which were not
mandatory contributions. Contributions made by a Participant to
restore distributions received from this Plan shall not be considered
Participant contributions for this purpose.
STEP TWO: To that portion of a Participant's Accrued Benefit which
is derived from a Participant's mandatory contributions, if any.
STEP THREE: In case of benefits payable as an annuity:
i. In case of the benefit of a Participant or Beneficiary which
was in pay status as of the beginning of the three (3) year
period ending on the termination date of the Plan (for purposes
of Section 4048 of ERISA), to each such benefit based on the
provisions of the Plan (or a prior plan) as in effect during
the five (5) year period ending on the termination date under
which such benefit would be smallest; and
ii. In case of a Participant's or Beneficiary's benefit not
described in subsection (a) above, which would have been in pay
status as of the beginning of such three (3) year period if the
Participant had retired prior to the beginning of the three (3)
year period if his benefits had commenced in the normal form
(as provided in Article IV hereof) as of the beginning of such
three (3) year period, to each such benefit based on the
provisions of the Plan as in effect during the five (5) year
period ending on the termination date, under which benefits
would be the least.
STEP FOUR:
i. To all other benefits, if any, of Participants guaranteed under
this title determined without regard to Section 4022(b)(5) of
ERISA; and
ii. To the additional benefits, if any, which would be determined
under subparagraph (i) if Section 4022(b)(6) of ERISA did not
apply.
STEP FIVE: To all other nonforfeitable benefits under this Plan
(determined without regard to nonforfeitability requirements) which
may be imposed by virtue of the Plan termination.
STEP SIX: To all other benefits under the Plan.
b. If the assets available for allocation under any priority category
(other than the Fifth or Sixth categories) are insufficient to
satisfy the benefits of all Participants and Beneficiaries, said
assets shall be allocated on a pro-rate basis as the basis of each
Participant's present value of Accrued Benefits as of the date of
termination (as determined under Article IV hereof);
- --------------------------------------------------------------------------------
ARTICLE XV -- Amendment, Termination and Merger Page 97
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
c. If any assets of the Plan which are attributable to Participant
contributions (other than contributions made to restore previously
distributed benefits) remain after all liabilities of the Plan are
satisfied, said assets shall be equitably allocated among the
Participants (or their Beneficiaries) who made said contributions:
d. Any assets of the Plan which remain after allocations are made in
accordance with this section 15.5, and after all liabilities of the
Plan are satisfied, shall be distributed in accordance with
Section IV.E. of the Adoption Agreement.
15.6 Merger and Consolidation
In the event that this Plan is merged, consolidated with, or transfers its
assets and/or liabilities to another plan, each Participant shall be
entitled to a benefit (if the surviving plan was then terminated
immediately after the merger, consolidation or transfer) which is equal to
or greater than the benefit said Participant would be entitled to if this
Plan was terminated immediately before said merger, consolidation or
transfer.
15.7 Withdrawal of a Participating Employer
A Participating Employer may at any time withdraw from participation in
the Plan and Trust upon certification by the Employer, the Plan
Administrator and the Trustees that such Participating Employer intends to
continue the Plan and Trust as a separate plan and trust for its
employees. In such event, the Plan Administrator shall determine the
amounts credited or creditable to the Account of each of the Participants
or their Beneficiaries in that Participating Employer of the Trust Fund
allocable to the employees of such Participating Employer and shall direct
the Trustees to deliver any such amounts, in cash or in kind, to the
trustee or trustees of such separate plan and trust. A withdrawing
Employer that does not adopt another Regional prototype plan is considered
to have an individually designed plan. Prior to any such delivery, the
withdrawing Participating Employer shall certify that such separate plan
and trust meets the applicable requirements of Section 401(a) of the Code.
The Plan Administrator and the Trustees shall be entitled to rely
conclusively upon any certification made by a Participating Employer
pursuant to this Section 15.7.
15.8 Failure to Attain Qualification
If the Employer's plan fails to attain or retain qualification, such plan
will no longer participate in this Regional prototype plan and will be
considered an individually designed plan.
15.9 Amendment by Sponsoring Organization
The sponsor may amend any part of the plan. In the case of the mass
submitter, the mass submitter shall amend the plan on behalf of the
sponsor.
- --------------------------------------------------------------------------------
ARTICLE XV -- Amendment, Termination and Merger Page 98
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
15.10 Dissolution of All Participating Employers
In the event that all remaining Participating Employers dissolve for any
reason (except by virtue of acquisition of said Participating Employers'
assets by another company which assumes all liabilities and obligations
hereunder), such dissolution shall be deemed a termination hereunder.
- --------------------------------------------------------------------------------
ARTICLE XV -- Amendment, Termination and Merger Page 99
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
ARTICLE XVI - MISCELLANEOUS PROVISIONS
16.1 Controlling State Law
To the extent not preempted by federal law, this Plan shall be construed
and enforced according to the laws of the State set forth in Section IV.C.
of the Adoption Agreement.
16.2 Disputes
If a dispute arises as to the proper recipient of any payment or delivery
of any Policies, the Trustee in its sole discretion, may withhold such
payment or delivery until the dispute is settled by the parties concerned
or final adjudication by a court of competent jurisdiction.
16.3 Gender and Number
Except as otherwise clearly indicated by the context, words in the
masculine gender shall be deemed to include the feminine gender and vice
versa. Words in the singular form shall be deemed to include the plural
form and vice versa.
16.4 Headings and Subheadings
The titles, headings and subheadings in this Plan are inserted for
administrative convenience only and shall not be considered in the
construction of any of the Plan provisions.
16.5 Heirs, Assigns and Representatives
This Plan and its terms shall be binding and conclusive upon the heirs,
executors, administrators, successors and assigns of all the parties
hereto including each Participant and Beneficiary.
16.6 No Contract of Employment
Neither participation in the Plan, establishment of the Plan or any
modification thereof, creation of any account or fund (whether
nonforfeitable), nor payment of any benefit shall give any Participant or
Employee the right to be retained in the employ of any Participating
Employer.
16.7 Treatment of Owner-Employees Under the Plan
If this Plan provides contributions or benefits for one or more Owner-
Employees who control both the business for which this Plan is established
and one or more other trades or businesses, this Plan and the plan
established for other trades of businesses must, when looked at as a
single plan, satisfy Sections 401(a) and (d) of the Code for the employees
of this and all other trades or businesses.
- --------------------------------------------------------------------------------
ARTICLE XVI -- Miscellaneous Provisions Page 100
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
If the plan provides contributions or benefits for one or more Owner-
Employees who control one or more other trades or businesses, the
employees of the other trades or businesses must be included in a plan
which satisfies Sections 401(a) and (d) and which provides contributions
and benefits not less favorable than provided for Owner-Employees under
this Plan.
If an individual is covered as an Owner-Employee under the plans of two or
more trades or businesses which are not controlled and the individual
controls a trade or business, then the contributions or benefits of the
employees under the plan of the trades or businesses which are controlled
must be as favorable as those provided for him under the most favorable
plan of the trade or business which is not controlled.
For purposes of the preceding paragraphs, an owner-employee, or two or
more owner-employees, will be considered to control a trade or business if
the owner-employee, or two or more owner-employees together:
a. own the entire interest in a unincorporated trade or business, or
b. in the case of a partnership, own more than 50 percent or either the
capital interest or the profits interest in the partnership.
For purposes of the preceding sentence, an owner-employee, or two or more
owner-employees, shall be treated as owning any interest in a partnership
which is owned, directly or indirectly, by a partnership which such owner-
employee, or such two or more owner-employees, are considered to control
within the meaning of the preceding sentence.
16.8 Non-Alienation of Benefits
(a) Except as otherwise provided in subsections (b) and (c) hereof, none
of the payments, benefits or rights of any Participant shall be
subject to the claim of any creditor, and shall not be subject to
attachment, garnishment, trustee's process, or any other legal process
available to any creditor of such Participant.
(b) No Participant or Beneficiary shall have the right to alienate,
anticipate, commute, pledge, encumber or assign any of the benefits or
payments which he may expect to receive under the terms of this Plan,
except that a loan to a Participant form the Trust Fund, to the extent
permitted hereunder, shall not be considered an alienation of
benefits. The Trustee shall have a lien upon the borrower's Account to
the extent of the entire unpaid amount of said loan plus collection
costs and interest.
(c) Distributions to an Alternate Payee(s) pursuant to a Qualified
Domestic Relations Order which provides for the creation, assignment
or recognition of a right to any benefit payable with respect to a
Participant hereunder shall be made in accordance with administrative
regulations adopted by the Plan Administrator in accordance with
Article XII hereof.
- --------------------------------------------------------------------------------
ARTICLE XVI -- Miscellaneous Provisions Page 101
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
16.9 Notices and Deliveries
All notices hereunder shall be made in writing. Any notices or deliveries
to the Trustee, Plan Administrator or any Participating Employer shall be
directed to the address set forth in Section I.B.A. of the Adoption
Agreement.
16.10 Payments to Persons under Legal Disability
Any benefit payable to or for the benefit of any person under a legal
disability, including, without limitation, minority or incompetency, shall
be paid to said person's legal guardian.
16.11 Severability of Provisions
If any provision or portion of a provision of this Plan is held to be
invalid or unenforceable, such invalidity or unenforceability shall not
affect the balance of the Plan. The Plan shall be construed and enforced
as if such provisions had not been included, provided, however, this Plan
shall be reformed only to the extent necessary so that it complies with
applicable law.
16.12 Service of Process
The Employer and each Trustee is designated as a party for service of
legal process.
16.13 Title to Trust Assets
No Participant or Beneficiary shall have any right to, or interest in, any
assets of the Trust Fund other than as provided under the terms of this
Plan. All payments of benefits shall be made from the Trust Fund and no
claim shall be made upon the Employer or any other person for such
payments.
16.14 Inalienability of benefits
No benefit or interest available hereunder will be subject to assignment
or alienation, either voluntarily or involuntarily. The preceding sentence
shall also apply to the creation, assignment, or recognition of a right to
any benefit payable with respect to a participant pursuant to a domestic
relations order, unless such order is determined to be a qualified
domestic relations order, as defined in section 414(p) of the Code, or any
domestic relations order entered before January 1, 1985.
16.15 Exclusive Benefit
The corpus or income of the trust may not be diverted to or used for other
than the exclusive benefit of the participant or their beneficiaries.
- --------------------------------------------------------------------------------
ARTICLE XVI -- Miscellaneous Provisions Page 102
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
16.16 Failure of Qualification
If the Employer's plan fails to attain or retain qualification, such plan
will no longer participate in this Regional Prototype Plan and will be
considered an individually designed plan.
16.17 Control of Trades or Businesses by Owner-employees
If this Plan provides contributions or benefits for one or more owner-
employees who control both the business for which this plan is established
and one or more other trades or businesses, this Plan and the plan
established for other trades or businesses must, when looked at as a
single plan, satisfy section 401(a) and (d) for the employees of this and
all other trades or businesses.
16.18 Segregated 414(k) Account
If Option III.C.2.c or III.C.2.d is elected, then upon reaching his Normal
Retirement Date or upon the date of Plan termination, a Participant may
elect to have the lump sum amount which is the actuarial equivalent of his
Accrued Benefit segregated in accordance with IRC Section 414(k). The
Participant's Segregated 414(k) Account shall be treated as a defined
contribution account and shall thereafter be credited with its
proportionate share of the gains and losses of the Trust Fund. At the
Participant's election, the value of his Segregated 414(k) Account may be
separated from the other assets of the trust and invested at the
Participant's direction, in which case the Segregated 414(k) Account shall
no longer be credited with any of the gains and losses of the Trust Fund,
but only with the gains and losses of the self directed account. A
Participant's Late Retirement Benefit at any point in time is equal to the
value of the Participant's Segregated 414(k) Account (determined on an
actuarially equivalent basis if paid in the form of an annuity). The lump
sum amount which is the actuarial equivalent of any benefits accrued by
the Participant after Normal Retirement Date due to additional service or
compensation which exceed the actuarial equivalent of his Normal
Retirement Benefit shall also be segregated and added to the Participant's
Segregated 414(k) Account. When determining the amount that can be
segregated in a Participant's Segregated 414(k) Account, the defined
benefit limitations of IRC Section 415(b) and 415(e) shall apply. However,
upon establishment of the Segregated 414(k) Account, the defined benefit
limitations of IRC Section 415(b) and 415(e) shall not thereafter apply to
such account.
16.19 Segregated 414(k) Account on Plan Termination
If Option IV.E.2. is elected, then as of the termination date of the Plan,
the lump sum amount which is the actuarial equivalent of each
Participant's Accrued Benefit shall be treated as segregated in accordance
with Section 414(k) of the Code. The Participant's segregated 414(k)
Account shall be treated as a Defined Contribution account and shall
thereafter be credited with it's proportionate share of the gains and
losses of the Trust Fund. When determining the amount
- --------------------------------------------------------------------------------
ARTICLE XVI -- Miscellaneous Provisions Page 103
<PAGE>
Basic Plan Document #03 - Defined Benefit
-----------------------------------------
that is segregated in a Participant's Segregated 414(k) Account, the
Defined Benefit limitations of Section 415(b) and 415(e) of the Code shall
apply. However upon establishment of the Segregated 414(k) Account, the
Defined Benefit limitations of Section 415(b) and 415(e) shall not
thereafter apply to such account.
- --------------------------------------------------------------------------------
ARTICLE XVI -- Miscellaneous Provisions Page 104
<PAGE>
Exhibit 11
Environmental Power Corporation
Computation of Earnings Per Share
December 31, 1998
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amounts
------------------ -------------------- ---------------
<S> <C> <C> <C>
Three Months Ended December 31, 1998:
- -------------------------------------
Loss available to shareholders $(1,703,240) 11,406,783 $(.15)
Effect of dividends to preferred stockholders (1,250)
------------------ -------------------- ---------------
Basic EPS - loss available to common shareholders (1,704,490) 11,406,783 (.15)
Effect of dilutive securities:
Assumed exercise of dilutive stock options
------------------ -------------------- ---------------
Diluted EPS - loss available to common shareholders $(1,704,490) 11,406,783 $(.15)
================== ==================== ===============
Three Months Ended December 31, 1997:
- -------------------------------------
Income available to shareholders $ 4,900,751 11,230,696 $ .44
Effect of dividends to preferred stockholders (1,250)
------------------ -------------------- ---------------
Basic EPS - income available to common shareholders 4,899,501 11,230,696 .44
Effect of dilutive securities:
Assumed exercise of dilutive stock options 132,491
------------------ -------------------- ---------------
Diluted EPS - income available to common shareholders $ 4,899,501 11,363,187 $ .43
================== ==================== ===============
Income (Loss) Shares Per Share
(Numerator) (Denominator) Amounts
------------------- -------------------- ---------------
Year Ended December 31, 1998:
- -----------------------------
Loss available to shareholders $(1,649,186) 11,406,783 $(.14)
Effect of dividends to preferred stockholders (5,000)
------------------- -------------------- ---------------
Basic EPS - loss available to common shareholders (1,654,186) 11,406,783 (.14)
Effect of dilutive securities:
Assumed exercise of dilutive stock options
------------------- -------------------- ---------------
Diluted EPS - loss available to common shareholders $(1,654,186) 11,406,783 $(.14)
=================== ==================== ===============
Year Ended December 31, 1997:
- -----------------------------
Income available to shareholders $ 4,613,863 11,120,893 $ .41
Effect of dividends to preferred stockholders (30,178)
------------------- -------------------- ---------------
Basic EPS - income available to common shareholders 4,583,685 11,120,893 .41
Effect of dilutive securities:
Assumed exercise of dilutive stock options 138,972
------------------- -------------------- ---------------
Diluted EPS - income available to common shareholders $ 4,583,685 11,259,865 $ .41
=================== ==================== ===============
</TABLE>
<PAGE>
Environmental Power Corp.
Exhibit 21
Subsidiaries of the Registrant:
Buzzard Power Corporation
Incorporated in Delaware December 12, 1990
Sunnyside Power Corporation
Incorporated in Utah September 21, 1987
Kaiser Power of Sunnyside, Inc.
Incorporated in Delaware March 26, 1986
Kaiser Systems, Inc.
Incorporated in Delaware March 26, 1986
Milesburg Energy, Inc.
Incorporated in Pennsylvania September 30, 1986
Coal Dynamics Corporation
Incorporated in Pennsylvania March 21, 1986
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
Board of Directors and Shareholders of
Environmental Power Corporation
We consent to the incorporation by reference in Registration Statement No.
33-70078 of Environmental Power Corporation on Form S-8 of our report dated
March 19, 1999 appearing in the Annual Report on Form 10-K of Environmental
Power Corporation for the year ended December 31, 1998.
/s/ Deloitte & Touche
- ---------------------
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FOR THE COMPANY FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,160,338<F1>
<SECURITIES> 0
<RECEIVABLES> 6,644,926
<ALLOWANCES> 0
<INVENTORY> 711,727
<CURRENT-ASSETS> 8,623,040
<PP&E> 247,599
<DEPRECIATION> 152,844
<TOTAL-ASSETS> 55,162,750
<CURRENT-LIABILITIES> 9,813,353
<BONDS> 2,866,584
100
0
<COMMON> 125,254
<OTHER-SE> (6,684,277)
<TOTAL-LIABILITY-AND-EQUITY> 55,162,750
<SALES> 45,721,473
<TOTAL-REVENUES> 45,721,473
<CGS> 19,215,459
<TOTAL-COSTS> 19,215,459
<OTHER-EXPENSES> 22,971,201
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 460,812
<INCOME-PRETAX> (2,444,131)
<INCOME-TAX> (794,945)
<INCOME-CONTINUING> (1,649,186)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,649,186)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
<FN>
<F1>CONTAINS CASH OF $797,922 WHICH IS RESTRICTED IN USE.
</FN>
</TABLE>
